Federal Tax Reform

1.

“Americans don’t agree about much these days, but they apparently all agree that the federal tax system is unfair, inefficient and mind-numbingly complex.” @Burman [email protected], Pg 17

2.Goolsbee 2006:

“Around two-thirds of taxpayers take only the standard deduction and do not itemize. Frequently, all of their income is solely from wages from one employer and interest income from one bank. For almost all of these people, the IRS already receives information about each of their sources of income directly from their employers and banks. The IRS then asks these same people to spend time gathering documents and filling out tax forms, or to spend money paying tax preparers to do it.” Pg 2

“The costs of complying with federal income tax requirements are large, and are particularly unwelcome to many middle-class taxpayers whose tax situations are quite simple. Indeed, the data show that the costs of complying are regressive—lower, as a share of income, for wealthier taxpayers.
“This paper proposes a program known as the ‘Simple Return,’ which would make it much easier for the millions of taxpayers with a relatively simple tax status to file their taxes. The Simple Return might apply to as many as 40 percent of Americans, for whom it could save up to 225 million hours of time and more than $2 billion a year in tax preparation fees.” Pg 2

3.Brown and Gale 2012:

“In formal terms, tax expenditures are ‘revenue losses attributable to provisions of the Federal tax laws which allow a special exclusion, exemption, or deduction from gross income or which allow a special credit, preferential rate of tax or a deferral of liability’ (The Congressional Budget Act of 1974 (P.L. 93-344)).” Pg 5

“The sheer diversity of tax expenditures should be also be noted. Although Table 1 lists the largest items, the Office of Management and Budget (2012) identifies 173 total tax expenditures: 138 of which affect the individual income tax and 80 of which affect the corporate income tax (some affect both taxes). Meanwhile, the Joint Committee on Taxation (2012) lists over 200 tax expenditures.” Pgs 6-7

4.Brown and Gale 2012:

“The most radical option would be to repeal all tax expenditures. This would raise substantial revenue and increase the progressivity of the tax code.” Pg 11

“The canonical focus for income tax reform is to create a system with a broad base that taxes all sources and uses of income at the same rate so as to generate lower statutory rates. Tax expenditure reform would be essential to achieving these goals. Broadening the base entails restricting the use of exclusions and deductions. Taxing all sources and uses of income, at the same effective rate, entails restricting the use of preferential rates, credits, and deferrals. In short, tax expenditure reform has the potential to raise revenue and to make the tax system fairer, more efficient and simpler.” Pg 7

“The Great Recession and its aftermath have left the United States with a difficult fiscal situation, with a weak economy that would benefit from short-term stimulus, but also with projected medium- and long-term budget shortfalls, even after the economy recovers, that indicate the need for fiscal consolidation. Addressing these medium- and long-term problems will likely require a combination of spending cuts and revenue increases. While tax reform would be a laudable goal even in the absence of a fiscal problem, building a better tax system becomes even more imperative when revenue requirements rise and the equity and efficiency of the tax code are put under even greater scrutiny and pressure.” Pg 2

5.“Moreover, most tax expenditures do not correct market failures and instead promote an inefficient allocation of resources. The itemized deduction for mortgage interest, for example, does not correct a failure of the housing market. It actually appears ineffective at promoting homeownership by instead encouraging households to acquire bigger mortgages and larger houses (Gale, Gruber, and Stephens-Davidowitz 2007; Toder et al 2010). And it may even reduce homeownership as the subsidy is capitalized into home prices, reducing the demand among young workers (Bourassa and Yin 2007).” Brown and Gale 2012, Pg 10

6.

“A consumption tax is a tax on spending as opposed to income. Consumption taxation is theoretical[ly] appealing because, unlike the income tax, it does not disincentivize investment and saving. Under an income tax, both invested money and the return on invested money are taxed, meaning that income that is invested is ultimately taxed more heavily than income spent immediately. By taxing money when it is spent, a consumption tax avoids this problem and encourages greater capital growth. Dynamic simulation models suggest that a switch to a consumption tax might increase overall economic output by several percentage points in the long run.” Our non-verbatim summary of a conversation with Alan D. Viard on March 25, 2014

“Most economists believe that taxes on consumption, like the VAT, are growth-friendlier than income taxes because they don’t reduce the incentive to save.” Burman 2014, Pg 20

7.“Generally speaking, fundamental tax reform would involve addressing three aspects the U.S. tax structure:

Base. The base is what the system is trying to tax, typically consumption or income. The U.S. nominally has an income tax, though we are pretty far away from taxing a true measure of income.

Deviations. The U.S. income tax currently includes many deductions, exemptions, and exclusions, as do most income taxes globally. Although these features can make tax codes more complicated, combining social programs with the income tax can help cut down on paperwork. There have been proposals to merge, for example, the Free Application for Federal Student Aid (FAFSA) with the income tax. Many new value-added taxes (which are a kind of consumption tax) have few deviations, though the older generation of value-added taxes often had much bigger holes in them.

Rate structure. The rate structure determines how progressive or regressive a tax system is. The U.S. income tax system is progressive, which means that marginal tax rates rise with income. Value-added taxes typically have a flat rate, and there have been proposals for other flat rate national taxes.

“When people talk about ‘fundamental’ tax reform, they are typically talking about a combination of shifting from income to consumption taxation, eliminating many deviations, and flattening the rate structure.”
Our non-verbatim summary of a conversation with Bill Gale on March 28, 2014

8.

Our non-verbatim summary of a conversation with Alan D. Viard on March 25, 2014:

“A consumption tax is a tax on spending as opposed to income. Consumption taxation is theoretical[ly] appealing because, unlike the income tax, it does not disincentivize investment and saving. Under an income tax, both invested money and the return on invested money are taxed, meaning that income that is invested is ultimately taxed more heavily than income spent immediately. By taxing money when it is spent, a consumption tax avoids this problem and encourages greater capital growth. Dynamic simulation models suggest that a switch to a consumption tax might increase overall economic output by several percentage points in the long run.
“Several types of consumption tax have been proposed. A value-added tax (VAT), somewhat like a sales tax, uses a flat tax structure. The X tax is a progressive consumption tax that taxes businesses on value-added minus wages and individuals on wages. The personal expenditure tax (PET) is a progressive tax on household expenditures which eliminates business taxes altogether.”

“The X tax and PET are both viable forms of progressive consumption taxation, with several benefits:

They are simpler than the current system (especially the X tax).

They allow capital to be allocated more efficiently.

They remove disincentives to saving in order to deepen capital and increase long-term growth.

They would attract new foreign investment to the U.S., due to the elimination of corporate income taxes.

“Additionally, a significant part of the X tax’s burden on existing wealth falls on foreign holders of U.S. business equity.
“Overall, Dr. Viard believes the X tax to be slightly superior to the PET.”

“While some economists argue that a pure consumption tax would be much better than the existing U.S. income tax, Dr. Gale believes that most of the benefits of such a tax come from the shift from the existing income tax to a pure income tax (that taxed all income at the same rate with no exclusions or deductions), rather than the further shift from a pure income tax to a pure consumption tax. Shifting from a pure income tax to a pure consumption tax would likely have a relatively small impact on saving and investing (and therefore growth), because a pure consumption tax eventually taxes most of the returns to saving and investing, namely, the compensation for bearing risk and idiosyncratic returns. Although a pure consumption tax does not tax the return to delaying consumption, this return tends to be quite low and represents a small share of the overall return to saving and investing.
“A pure consumption tax could potentially allow for a single flat tax rate in the mid or low teens, but that would involve raising taxes on low-income families by a lot. Broadening the base and lowering rates could generate more economic growth, but there is controversy about how large those effects are.” Our non-verbatim summary of a conversation with Bill Gale on March 28, 2014

9.“Under a value-added tax (VAT), businesses pay taxes on the difference between their total sales to other businesses and households and their purchases of inputs from other businesses. That difference represents the value-added by the firm to the product or service in question. The sum of value added at each stage of production is the retail sales price, so the VAT simply replicates the tax patterns created by a retail sales tax and is like other taxes on aggregate consumption. The key distinction is that VATs are collected at each stage of production, whereas retail sales taxes are collected only at point of final sale.” Brown and Gale 2012, Pgs 12-13

10.

“A VAT is a tax on the value added to a product at each stage of its manufacture and on its final sale to the consumer. A VAT may be viable as a partial replacement for the income tax, and it seems likely that a VAT will eventually be implemented in the U.S. The VAT has been studied extensively, so more research on it may not be necessary. 160 countries have adopted a VAT.” Our non-verbatim summary of a conversation with Alan D. Viard on March 25, 2014

“Dr. Gale believes that the addition of a federal value-added tax (VAT) to the existing tax system is likely to be inevitable, because existing revenue sources are unlikely to cover the rising costs of Social Security, Medicare, and other popular social programs. Because it is regressive, a federal VAT would probably lead to other changes in the tax system, such as hollowing out the income tax for low- and middle-income households. A VAT could be earmarked to federal health spending, which could help make the public more amenable to the tax, shield the deficit from healthcare spending uncertainty, and put pressure on the healthcare system to decrease spending. State sales taxes, many of which are poorly designed, could benefit from the administrative machinery of a federal VAT, just as state income taxes have with the federal income tax.” Our non-verbatim summary of a conversation with Bill Gale on March 28, 2014

11.Brown and Gale 2012:

“In theory, the distributional burden of the VAT depends crucially on how household resources are measured. Typical distributional analyses are made with respect to current income. The VAT is regressive if households are classified by, and the tax burden is measured as a share of current income. Because the VAT is a proportional tax on consumption, and because lower-income households tend to spend a larger proportion of their income than higher-income households, the VAT imposes higher burdens – as a share of current income – on lower-income households.” Pg 15

“Second, it is straightforward to introduce policies that can offset the impact of the VAT on low-income households. The most efficient way to do this is simply to provide households either refundable income tax credits or outright payments. For example, if the VAT rate were 10 percent, a $3,000 demogrant would equal VAT paid on the first $30,000 of a household’s consumption. Households that spent exactly $30,000 on consumption would pay no net tax. Those that spent less on consumption would receive a net subsidy. Those that spent more on consumption would, on net, pay a 10 percent VAT only on their purchases above $30,000. Toder and Rosenberg (2010) estimate that a VAT coupled with a fixed payment to families is generally progressive, even with respect to current income.” Pg 16

12.

“The X tax, like the flat tax, is essentially a modified VAT, differing from a pure VAT in a few substantial ways. It would:

Tax households progressively, rather than at a flat rate, on wages earned

Allow businesses to deduct wages paid

Tax business firms on cash flow (value-added minus wages paid) at a flat rate equal to the rate paid by the highest-paid workers

Eliminate the import tax and export rebate associated with the VAT.

“By placing the tax on wages at the household level, the X tax can be more lenient on households than a VAT by using a progressive rate structure. This avoids the regressivity problem of a pure VAT. Because national consumption equals household wages plus business cash flow, the X tax is, in the aggregate, an overall tax on consumption. Households are taxed only on wages, not on investment income, under the X tax.
“In the long run, dynamic simulation modeling suggests that the X tax could have across-the-board benefits, resulting in gains to all income groups.” Our non-verbatim summary of a conversation with Alan D. Viard on March 25, 2014

“First proposed by David Bradford and recently resurrected by American Enterprise Institute’s Alan Viard and Ernst and Young’s Robert Carroll, the X tax is a progressive VAT. Just as with regular VATs, businesses pay a tax on their expenses. But under the X tax they also exempt their wage costs, and individuals then pay a progressive payroll tax.” Matthews 2012

13.“The X tax, a form of progressive consumption tax, is often proposed as a substitute for the current tax system, but Dr. Gale thinks that an X tax would be hard-pressed to raise enough revenue and would be inconsistent with existing tax treaties.” Our non-verbatim summary of a conversation with Bill Gale on March 28, 2014

14.“The PET is an older concept than the X tax. Under a PET, households file annual tax returns, reporting income, deducting all saving, and adding back in any dissaving. This results in a bottom line calculation of the total amount that a household spends in a year. Then, total spending is taxed at progressive rates.“Two countries have implemented and subsequently abandoned a PET.[…]“A pure PET has two potential political obstacles. First, it includes no tax on businesses. Second, it taxes individuals on money they borrow.” Our non-verbatim summary of a conversation with Alan D. Viard on March 25, 2014

15.“The canonical focus for income tax reform is to create a system with a broad base that taxes all sources and uses of income at the same rate so as to generate lower statutory rates. Tax expenditure reform would be essential to achieving these goals. Broadening the base entails restricting the use of exclusions and deductions. Taxing all sources and uses of income, at the same effective rate, entails restricting the use of preferential rates, credits, and deferrals. In short, tax expenditure reform has the potential to raise revenue and to make the tax system fairer, more efficient and simpler. But the diversity of tax expenditures and the situations they address requires attention to the particular details of each case.” Brown and Gale 2012, Pg 7

16.“High tax rates reduce incentives to work, save and invest, encourage tax evasion and avoidance, and magnify the distortions caused by the myriad tax preferences in the current income tax. An enduring goal of tax reforms has consequently been to broaden the income tax base to pay for lowering tax rates.” Nguyen et al. 2012, Pg 2.

17.

“While some economists argue that a pure consumption tax would be much better than the existing U.S. income tax, Dr. Gale believes that most of the benefits of such a tax come from the shift from the existing income tax to a pure income tax (that taxed all income at the same rate with no exclusions or deductions), rather than the further shift from a pure income tax to a pure consumption tax. Shifting from a pure income tax to a pure consumption tax would likely have a relatively small impact on saving and investing (and therefore growth), because a pure consumption tax eventually taxes most of the returns to saving and investing, namely, the compensation for bearing risk and idiosyncratic returns. Although a pure consumption tax does not tax the return to delaying consumption, this return tends to be quite low and represents a small share of the overall return to saving and investing.“A pure consumption tax could potentially allow for a single flat tax rate in the mid or low teens, but that would involve raising taxes on low-income families by a lot. Broadening the base and lowering rates could generate more economic growth, but there is controversy about how large those effects are.” Our non-verbatim summary of a conversation with Bill Gale on March 28, 2014

“A consumption tax is a tax on spending as opposed to income. Consumption taxation is theoretical[ly] appealing because, unlike the income tax, it does not disincentivize investment and saving. Under an income tax, both invested money and the return on invested money are taxed, meaning that income that is invested is ultimately taxed more heavily than income spent immediately. By taxing money when it is spent, a consumption tax avoids this problem and encourages greater capital growth. Dynamic simulation models suggest that a switch to a consumption tax might increase overall economic output by several percentage points in the long run.” Our non-verbatim summary of a conversation with Alan D. Viard on March 25, 2014

18.

Replacing the federal income tax with an X tax would increase national income by 3% in the short run, and by 6% in the long run, and would maintain the progressivity of the tax code. Altig et al. 2001, Pg 587 (Table 4) and Pg 591 (Figure 6).

The U.S. Gross National Income is around $17.6 trillion/year, 3% of which is ~$528 billion/year. World Bank GNI 2015

19.

Description of “Proportional income tax” simulation model:

“Eliminate all tax-base reductions

Eliminate the standard deduction, personal exemption, exemptions for dependents, itemized deductions, preferential tax treatment of all fringe benefits (the consumption-tax treatment of pension and the deductibility of nonpension benefits), and the deductibility of state income taxes at the federal level.

Flattening of tax rates

Replace progressive wage tax and proportional capital-income tax with a proportional capital-income tax with a proportional equal tax rate on wage and capital income. Eliminate double taxation of capital income.”

Altig et al. 2001, Pg 586

The model predicts 3.8% increase in national income in the short run and 4.4% in the long run for a proportional income tax. Altig et al. 2001, Pg 587, Table 4

20.

“Dynamic simulation models indicate that replacing the income tax with some form of consumption taxation would be more effective than income tax reform at increasing long-term economic output.
“It is difficult to know how confident to be in these models because there is no effective way to test their accuracy empirically. The models simulate a stylized policy experiment to compare how the economy behaves with and without a given reform. Because the models’ predictions concern the long-term evolution of the economy after a reform, these predictions could not be compared to reality until several decades after a reform was implemented. At that point, however, there would be no way to know how the economy would have progressed without the reform.
“While these models’ accuracy cannot be tested directly, the assumptions upon which the models are built are tested frequently. Commonplace research aimed at estimating the parameters that govern people’s behavior (e.g., savings behavior) are often de facto tests of simulation models’ assumptions, though researchers rarely intend this explicitly. This process is iterative: the simulation models attempt to incorporate and calibrate themselves to statistical research that has been done.
“Some of the assumptions that these models use are supported by excellent statistical evidence and are widely accepted. Others are disputed, including the critical issue of the determinants of savings behavior. For example, it is unclear how a person’s current savings decisions may change upon learning that returns from savings would be higher than expected in twenty years. The determinants of people’s response to savings incentives are a key issue. Many simulation models use simplified assumptions about how people make such decisions. Some observers, including Jane Gravelle of the Congressional Research Service, criticize the structure of these assumptions, claiming that they were adopted primarily for their simplicity and may not be realistic.
“Better evidence on long-term savings behavior would be beneficial but may not be obtainable. While it is unlikely that all relevant concerns can be addressed, studies of micro-data have produced some useful evidence, and ongoing studies will continue to refine this data.” Our non-verbatim summary of a conversation with Alan D. Viard on March 25, 2014

“Broadening the base and lowering rates could generate more economic growth, but there is controversy about how large those effects are.
“For instance, after World War II, the U.S. federal government significantly increased taxes and spending. In most simulation models, this would be expected to cause enormous economic harm, but what actually occurred was adjustment to the new levels of taxation and spending, followed by 25 years of strong growth, presumably not because of higher taxes and spending but in spite of such changes.” Our non-verbatim summary of a conversation with Bill Gale on March 28, 2014

“An increase in taxes will not necessarily slow long-term economic growth. Tax changes have two broad sets of long-term effects on the economy. The first set operates through direct changes in relative prices, incentives, and after-tax income. These changes affect the degree to which households are willing to work and save and to which firms invest and hire; these effects are known as income and substitution effects.
“The second broad effect is on national saving. A reduction in the deficit raises public saving, which typically results in higher national saving (national saving is the sum of household, corporate, and government saving). This effect is often ignored in discussions of tax policy and economic growth, but it can be quite important. Even in the absence of a financial crisis, sustained deficits have deleterious long-term effects, as they translate into lower national savings, higher interest rates, and increased indebtedness to foreign investors, all of which reduce future national income. Gale and Orszag (2004b) estimate that a 1 percent of GDP increase in the deficit will raise interest rates by twenty-five to thirty-five basis points and reduce national saving by 0.5 to 0.8 percentage points. Engen and Hubbard (2004) obtain similar results with respect to interest rates. Thus, relative to a balanced budget, a deficit equal to 6 percent of GDP would raise interest rates by at least 150 basis points and reduce the national saving rate by at least 3 percent of GDP. The IMF (2010) estimates that, in advanced economies, an increase of 10 percentage points in the initial debt/GDP ratio reduces future GDP growth rates by 0.15 percentage points. Hence (if this result is extrapolated linearly, and we do so with caution, since it would be easy to think of reasons that would make a larger debt change have more-than-proportional or less-than-proportional effects), the increase in the debt-to-GDP ratio from about 40 percent earlier in the decade to 85 percent by 2022 (Auerbach and Gale 2012) would be expected to reduce the growth rate by a whopping 0.675 percentage points. Thus a deficit reduction plan that included tax increases would help spur economic growth in contrast to continuing policy as normal.
“The net long-term effect of a tax change is the result of the two effects outlined above, which are sometimes offsetting and sometimes mutually reinforcing. Stokey and Rebelo (1995), for example, show that even the very large tax increases associated with World War II—on the order of 10 percent of GDP—apparently had no discernible impact on the long-term economic growth rate. Gale and Potter (2002), taking a very different approach than Stokey and Rebelo, find that the impact of the 2001 tax cuts on the deficit and national saving outweighed its impact on incentives, so that the net effect on growth was negative. This suggests that raising taxes by undoing the 2001 tax cuts would raise long-term economic growth.” Brown and Gale 2012 Pgs 4-5

21.“A model built by Alan Auerbach and Laurence Kotlikoff found that abolishing income taxes in favor of a consumption tax would add 9 percent to G.D.P. in the long run. Another model by John Diamond and George Zodrow found that a more modest tax overhaul considered by House Republicans last year, focused on cutting rates and eliminating deductions, would lift G.D.P. by 3 percent. Other proposals fell somewhere in the middle, and so, the Hubbard group thought, would Mr. Bush’s.
“ ‘This is four smart people who made an educated guess based on looking at other models,’ said Joel Slemrod, a public finance economist at the University of Michigan. ‘If I had to pick a number, I would have picked a lower number.’
“And that’s the thing: While most economists agree that tax policy can have significant effects on economic growth, they have a remarkable ability to look at the same body of evidence and disagree wildly on the size of the effects. Asking a handful of economists about how your tax plan will affect the economy is better than throwing darts at a dartboard, but it’s not necessarily that much better.
[…]
“The diversity of views in the economics profession makes it easy to pick and justify the forecasts you like. With last year’s Republican House tax plan, there is that outside analysis Mr. Hubbard noted, finding it would expand the economy by 3.1 percent in the long run (though only by 2.2 percent after a decade). But the congressional Joint Committee on Taxation ran not one but eight models on that plan, finding it would increase the economy by 0.1 percent to 1.6 percent over a decade.
“This is how the Joint Committee on Taxation and the Congressional Budget Office deal with the economics profession’s uncertainty about how taxes affect the economy: They provide a range of estimates, often such a broad range that it feels as if the report isn’t telling you anything at all.” Barro 2015

22.“Around two-thirds of taxpayers take only the standard deduction and do not itemize. Frequently, all of their income is solely from wages from one employer and interest income from one bank. For almost all of these people, the IRS already receives information about each of their sources of income directly from their employers and banks.” Goolsbee 2006, Pg 2

23.Goolsbee 2006:

“With the Simple Return, the IRS would take the information about income directly from the employers and banks and, if the person’s tax status were simple enough, send that taxpayer a return that the IRS had prefilled with the necessary tax information. The Simple Return program would be strictly voluntary.” Pg 5

“This paper proposes a program known as the ‘Simple Return,’ which would make it much easier for the millions of taxpayers with a relatively simple tax status to file their taxes. The Simple Return might apply to as many as 40 percent of Americans, for whom it could save up to 225 million hours of time and more than $2 billion a year in tax preparation fees. Converting the time savings into a monetary value by multiplying the hours saved by the wage rates of typical taxpayers, the Simple Return system would be the equivalent of reducing the tax burden for this group by about $44 billion over ten years. A Government Accountability Office report estimated in 1996 that a plan similar to the one proposed here could save the IRS close to $36 million per year by reducing the number of errors in tax filings and the subsequent need for investigations.” Pg 2

24.

“The sheer diversity of tax expenditures should be also be noted. Although Table 1 lists the largest items, the Office of Management and Budget (2012) identifies 173 total tax expenditures: 138 of which affect the individual income tax and 80 of which affect the corporate income tax (some affect both taxes). Meanwhile, the Joint Committee on Taxation (2012) lists over 200 tax expenditures. The items range from specialized subsidies for particular industries to broadly used initiatives – for example, mortgage interest, charitable contributions – that many consider to be core elements of social policy in the United States and that have been present since almost the inception of the income tax code in 1913. The diversity of tax expenditures sometimes makes it difficult to generalize the merits of tax expenditure reform, as many (and often the largest) provisions are not just ‘loopholes’ designed to benefit a select few but to pursue broad public purposes. That is, simply because a tax expenditure is a deviation from a normal tax code does not mean that it is undesirable or should be eliminated. Nevertheless, tax expenditures are a fruitful place to begin thinking about tax reform, since the alternative ways to raise revenue – higher tax rates and new taxes – create obstacles.” Brown and Gale 2012, Pgs 6-7

“The major tax expenditures in 1986 differ from the current major expenditures, which include deductions for home mortgage interest, state and local taxes, charitable contributions, and employer-provided health insurance. These deductions involve additional policy issues, because they relate to policy objectives that may have widespread support. Many of the gains from tax reform would result from re-designing misdirected or inappropriate tax preferences.” Our non-verbatim summary of a conversation with Daniel Shaviro on July 17, 2014

25.“Moreover, most tax expenditures do not correct market failures and instead promote an inefficient allocation of resources. The itemized deduction for mortgage interest, for example, does not correct a failure of the housing market. It actually appears ineffective at promoting homeownership by instead encouraging households to acquire bigger mortgages and larger houses (Gale, Gruber, and Stephens-Davidowitz 2007; Toder et al 2010). And it may even reduce homeownership as the subsidy is capitalized into home prices, reducing the demand among young workers (Bourassa and Yin 2007).” Brown and Gale 2012, Pg 10.

26.“A less extreme version of the idea of converting deductions to flat credits is the Obama Administration’s proposal to cap the benefits of itemized deductions at 28 percent. This effectively leaves the deductions as they are for people in tax brackets of 28 percent or less and converts the itemized deduction to a 28 percent credit for people in higher tax brackets.
“An alternative proposal would be to place an overall cap on the value of tax expenditures. Feldstein, Feenberg, and MacGuineas (2011) propose to cap the tax-reduction value of tax expenditures at 2 percent of AGI. For example, a taxpayer with AGI of $50,000 could reduce tax liability by up to $1,000 under such a proposal. If he was single and faced a 25 percent marginal tax rate, he would be able to use up to $4,000 worth of deductions and exemptions. The proposal has obvious political attractions for our elected leaders, in that they would not have to curtail specific tax expenditures. Feldstein et al. estimate that the two percent cap could have raised $278 billion in 2011.” Brown and Gale 2012, Pg 11

27.

“In principle, carbon taxation receives high marks on efficiency criteria. Indeed, the basic rationale for a carbon tax is that it makes good economic sense: unlike most taxes, carbon taxation can improve the efficient allocation of resources by accounting for externalities in the market price. Externalities can be severe. Stavins (2007) notes that the efficiency benefits of a carbon tax are often understated since the largest efficiency gains come in the form of internationally-shared reduced greenhouse gas emissions. While the United States is the largest per capita emitter of carbon dioxide, China is the largest overall emitter, and the European Union makes a significant contribution as well. Therefore, enacting a program that would lead to better cooperation with other countries, and reduce emissions across the world would be better suited to deal with the well-known problems brought about by global warming, such as rising sea levels, more frequency in extreme temperatures, among others.” Brown and Gale 2012, Pg 17-18

“On the local level, land value taxes are one of the better options for raising revenue. Where many other forms of taxation are philosophically controversial or produce recognizable drawbacks, there is a consensus amongst tax economists that land value taxes create negligible efficiency loss. Taxes on various forms of commerce can discourage those forms of commerce, but land is a constant; taxing it does not reduce the supply of it in the economy, it only influences how it is used. There is also the older argument that much of the value of a given parcel of land is a result of social construction. Land next to civic improvements or other beneficial developments is worth more, so the public is somewhat justified in recouping some of that value from the landowner.” Our non-verbatim summary of a conversation with Richard England on March 27, 2014

It is not clear whether the federal government could legally implement land value taxation:

“It is unclear whether a federal land value tax would be constitutional; property tax laws are usually governed by applicable clauses in state constitutions, often calling for uniform taxation of land or property. Some states also have amendments that allow for different ‘classifications.’ For example, almost all states have adopted a policy of use value assessment, in which rural land is taxed very lightly. Most states are committed to taxing farm and forest land proportionally less than other forms of land.” Our non-verbatim summary of a conversation with Richard England on March 27, 2014

28.

“Fundamental tax reform is politically difficult, even though most policymakers are critical of the current system and there is broad support among experts for a larger base and lower rates overall, which is the structure advocated by the Bowles-Simpson plan, the Domenici-Rivlin plan, and the 2005 report of the President’s Advisory Panel on Federal Tax Reform, among others. There is no natural political constituency for fundamental tax reform, though, because the potential benefits are widely distributed, while the potential costs are concentrated (on groups who would lose some form of favored tax status). This dynamic makes it risky for policymakers to support broad-based reforms. Though many people talk about it, there is no major constituency really pushing hard for fundamental tax reform.” Our non-verbatim summary of a conversation with Bill Gale on March 28, 2014

Wealthy elderly people would suffer losses under a significant shift to consumption taxation, which creates a one-time tax on existing wealth. Brown and Gale 2012:

“The tax on existing wealth merits additional discussion. As a tax on consumption, the VAT can be regarded as a tax on the wealth and income that households use to finance current and future consumption: wealth that exists at the time of the transition to the VAT, future wages, and extra-normal returns to capital (Hubbard and Gentry 1997). The tax on existing wealth is a lump-sum tax, since the wealth has been already accumulated. Lump-sum taxes are preferable to other forms of taxation on efficiency grounds, since they do not distort economic choices. In fact, the lump sum tax on existing wealth is a major component of the efficiency gains due to the creation of a consumption tax.” Pg 15

“There is concern that imposing a VAT would hurt the elderly, a group that has high consumption relative to its income. However, it is the case that Social Security and Medicare are the principal sources of income for a substantial proportion of low-income elderly households. Since those benefits are effectively indexed for inflation, low-income elderly households would be insulated from any VAT-induced increases in the price of consumer goods or health care services. High-income elderly households, who receive much lower shares of their income in the form of indexed government benefits, would need to pay more in taxes but could afford to do so.” Pg 16

Groups that benefit from specific tax expenditures would likely oppose their elimination:

“The real gold lies in subsidies like the mortgage-interest deduction, tax-free health insurance, tax-deferred retirement accounts and charitable deductions. Support for reform wanes quickly when the discussion turns to cutting tax incentives to housing or health care or philanthropy.” Burman 2014, Pg 18

29.Simply eliminating all tax expenditures would make the income tax system more progressive, but some real-world base-broadening proposals appear to have negative consequences for low-income households:

“The most radical option would be to repeal all tax expenditures. This would raise substantial revenue and increase the progressivity of the tax code.” Brown and Gale 2012, Pg 11

“The trouble, of course, is that the Tax Policy Center has proven beyond a reasonable doubt that base-broadening tax reform of the scale Romney is proposing raises taxes on lower-income people and lowers them on people making over $200,000 a year.” Matthews 2012

30.

“VATs tend to be regressive in practice because those at lower income levels spend a larger portion of their income than higher income earners on goods and services that are subject to the VAT.” Our non-verbatim summary of a conversation with Alan D. Viard on March 25, 2014

“Some also worry that a VAT would be too efficient in the sense that it could enable expansion in government. They point to evidence from Europe that increases in VAT revenues are followed by increases in government spending.
“This doesn’t prove that the revenues led to freer spending. It’s likely that social democracies adopt the VAT because they want to spend more, not vice versa. But VAT critics are convinced that the tax would fuel an explosion in government spending.
[…]
“Not surprisingly, there is considerable resistance to a VAT in Congress. In response to reports that Paul Volcker, the chairman of President Obama’s tax-reform panel, was considering a VAT, John McCain sponsored a Senate resolution opposing a VAT in 2010. It passed by a vote of 85-13, and there’s no sign the opposition has slackened since. The Republican Party’s 2012 platform stated, ‘In any restructuring of federal taxation, to guard against hyper-taxation of the American people, any value-added tax or national sales tax must be tied to the simultaneous repeal of the 16th Amendment, which established the federal income tax.’ Fat chance.” Burman 2014, Pg 23

31.

“Implementation of the X tax faces several political obstacles:

Though the X tax functions as a consumption tax, the wage tax on households can make it look superficially like a poorly-designed income tax. Although the X tax is designed to be lenient toward wages relative to businesses, the business portion of the tax is less visible. The apparent singling out of wages may be politically problematic.
The flat tax was also commonly misperceived as an income tax when it was first developed. Supporters of the flat tax tried to market it as an income tax because of the difficulty of explaining that it is actually a consumption tax. The X tax is structurally similar to a flat tax, but with progressivity added.

Under the X tax, some very wealthy citizens (such as Mitt Romney and Warren Buffett) would pay no household tax, because they make their income from investments rather than wages. Dr. Viard terms this the “Romney-Buffet” problem.
This may be popularly perceived as a big benefit for the wealthy, although (depending on transition relief) these citizens would actually be subject to a major tax, collected at the business firm rather than the household level, on their existing equity holdings. Currently, these citizens pay a 20% (previously 15%) tax on dividends and capital gains.

Many politicians favor a tax on imports and rebate on exports, which the X tax does not implement (unlike the VAT). From a welfare economics perspective, this is a benefit of the X tax, but it is politically challenging.”

Our non-verbatim summary of a conversation with Alan D. Viard on March 25, 2014

“The tax on existing wealth merits additional discussion. As a tax on consumption, the VAT can be regarded as a tax on the wealth and income that households use to finance current and future consumption: wealth that exists at the time of the transition to the VAT, future wages, and extra-normal returns to capital (Hubbard and Gentry 1997). The tax on existing wealth is a lump-sum tax, since the wealth has been already accumulated. Lump-sum taxes are preferable to other forms of taxation on efficiency grounds, since they do not distort economic choices. In fact, the lump sum tax on existing wealth is a major component of the efficiency gains due to the creation of a consumption tax.” Brown and Gale 2012 Pg 15.

32.“A pure PET has two potential political obstacles. First, it includes no tax on businesses. Second, it taxes individuals on money they borrow.
“Much like the X tax, a transition to the PET would impose losses on current wealth holders. In the case of the PET, however, the burden would be spread across all holders of wealth, rather than being concentrated on holders of business equity.
“The PET taxes imports, unlike the X tax. However, the import tax is not explicit; imports are taxed because they comprise part of the consumer spending on which households end up being taxed on their individual tax returns. As a result, the PET probably won’t be any more attractive than the X tax to politicians who support import taxes.” Our non-verbatim summary of a conversation with Alan D. Viard on March 25, 2014

33.Goolsbee 2006:

“In California, opponents of the ReadyReturn argued that return-free filing constituted an inappropriate government intrusion on private enterprise.” Pg 19

“Antitax groups and some in the U.S. Congress (see Americans for Tax Reform 2005) publicly oppose return-free filing. For example, Grover Norquist, president of Americans for Tax Reform, testified before the President’s Tax Reform Commission against any kind of automatic filing (Norquist 2005). At first, such opposition seems ironic, because antitax groups have long been the most vocal critics of the compliance costs of the tax system. However, these groups seem to believe that, if compliance with the tax code were to be less painful, people would be less adverse to higher tax rates. These critics typically ask rhetorically, ‘Do you trust the government to do your taxes for you?’ And they argue that return-free filing is just a way for the government to raise taxes that people will not notice and a way to expand the power of the IRS over people’s lives.” Pg 20

34.

“Dr. Gale believes that the addition of a federal value-added tax (VAT) to the existing tax system is likely to be inevitable, because existing revenue sources are unlikely to cover the rising costs of Social Security, Medicare, and other popular social programs.” Our non-verbatim summary of a conversation with Bill Gale on March 28, 2014

“The fact is, the combination of population aging and technological change that extends life virtually guarantees that federal spending on health care will increase. Unless we figure out a better way to pay for it, higher income tax rates or ballooning deficits will weaken the economy as the baby boomers reach their dotage. In that bleak scenario, spending on all the other things that government traditionally delivers would get squeezed. And at that point, opposition to a VAT – particularly one dedicated to delivering life-or-death services – could erode quickly.” Burman 2014, Pg 23

35.

“Some policy strategists think that overall limits on tax breaks would work better than picking them off one at a time.” Burman 2014, Pg 18

“An alternative proposal would be to place an overall cap on the value of tax expenditures. Feldstein, Feenberg, and MacGuineas (2011) propose to cap the tax-reduction value of tax expenditures at 2 percent of AGI. For example, a taxpayer with AGI of $50,000 could reduce tax liability by up to $1,000 under such a proposal. If he was single and faced a 25 percent marginal tax rate, he would be able to use up to $4,000 worth of deductions and exemptions. The proposal has obvious political attractions for our elected leaders, in that they would not have to curtail specific tax expenditures. Feldstein et al. estimate that the two percent cap could have raised $278 billion in 2011.” Brown and Gale 2012, Pg 11

36.“And it’s easy to get excited about the possibility of a Tax Reform Act of 2014. Tax reform is even more necessary now than it was in 1986. Everyone agrees that the tax system is complex, unfair, and inefficient. And it doesn’t come close to raising enough revenue to pay for the government, whose needs will only grow as the baby boomers retire and health care costs continue to rise. There are lots of tax reform plans out there, including the ones produced by the Bipartisan Policy Center (my favorite since I helped write it), the Bowles-Simpson panel, and an excellent report commissioned by President Bush. There’s even an action-forcing event in 2012 when the Bush tax cuts are scheduled to expire. Rather than extending what everyone agrees is a deeply dysfunctional tax code, why not remake it to meet the needs of 21st century America?
“Cue the patriotic music.
“The only problem is that tax reform is really, really hard and the political process in Washington has eroded far more than the tax code since 1986. Look at the keys to success in 1986. It was bipartisan—a real collaboration, not just two Republicans from New England or two Democrats from the south crossing party lines. In 1986, Republicans and Democrats disagreed as passionately about policy as they do now, but they didn’t hate each other. They could see the possibility of major bipartisan legislation as a win-win. Now politics is a football game—a zero-sum game where either your team wins or the other team does. Win-win is not possible. (That’s why the parties can continue finger-pointing while inaction keeps millions of Americans unemployed.)
[…]
“Then there’s the question of what bipartisan tax reform might look like. The 1986 bill was revenue-neutral and many in Congress are saying that’s what we should do again. There are two problems with that. First, we need revenue. And, second, revenue-neutral tax reform happened in 1986 only because there was a giant honey pot available to sweeten the blow. TRA86 used a giant corporate tax increase to pay for those big rate cuts for individuals. Since real people don’t think that corporations are people (sorry, Mitt Romney), they were perfectly happy for companies to pay more so individuals would pay less. Most importantly, even corporate CEOs thought this was a good idea. A key point in the 1986 drama was when CEOs came to Washington lobby for tax reform.
“This time around, there are no giant corporate loopholes to close. A corporate tax increase is not in the cards. Revenue-neutral individual income tax reform would inevitably produce many millions of losers, and they’d object strenuously. I just don’t think revenue-neutral reform is politically feasible. And, besides, we need more revenue.
“In a more enlightened time, tax reform to help tame the deficit would make a lot of sense. Closing tax expenditures creates the possibility of cutting rates and raising revenue, which could improve economic efficiency (by deterring tax avoidance) and help forestall a debt catastrophe. But almost all the Republicans in Congress have vowed to never support such an option.
“My bottom line: tax reform has never been more necessary, it’s hard to see a solution to our budget problems without it, and it’s just impossible.” Burman 2011

37.“Professor Kamin said that targeting fundamental tax reform (e.g., replacing the income tax with a value-added tax) is unlikely to be the best strategy for progressive tax reform proponents. For one, switching the tax base does not provide the largest efficiency gains. The greatest efficiency gains would come from the transition to the new tax base, but those gains would likely be cancelled out by payoffs necessary to pass the reform. Furthermore, it is possible to raise additional revenue under some version of the current tax system; it is not necessary to switch to a different system for this purpose.
“In terms of political economy, a value-added tax is much less politically feasible than implementing more minor changes to the existing system.” Our non-verbatim summary of a conversation with David Kamin on August 1, 2014

38.“There used to be a lack of non-governmental institutions in this space, but the Tax Policy Center has filled that gap. Currently, there is a significant amount of engagement from academics and think tanks on tax policy.” Our non-verbatim summary of a conversation with David Kamin on August 1, 2014

39.Tax Policy Center Funders 2015

40.“Foundations do not provide much funding for work on fundamental tax reform per se. They tend to support efforts related to taxes that are relevant to social policy, such as health care, education, and family structure.” Our non-verbatim summary of a conversation with Bill Gale on March 28, 2014

41.Peterson Foundation 990 2013-2014, Pg 7

42.Peterson Foundation Revenues and Taxes 2010:

“In order to balance our budget and reduce the amount of debt the government takes on each year, we must match the level of government revenues with the level of spending. Currently, the government spends approximately $3.5 trillion a year, which is far more than the approximately $2.1 trillion it collects in taxes. This imbalance between spending and tax revenues is expected to continue, and even grow, over the next several decades. By 2040, revenues will only cover half of total spending.”

“Our tax code does more than raise revenues. It also reflects efforts to influence private economic decisions through favorable tax provisions. As a result, it contains hundreds of ‘tax expenditures’ in the form of deductions, credits, exemptions, and exclusions. These expenditures make the process of filing taxes more difficult, amount to $1 trillion in lost revenues for the government each year, and provide the greatest share of their benefits to higher income taxpayers. Some economists argue that the expenditures have obsolete or undesirable social effects. Eliminating selected deductions and exclusions, or ‘broadening the tax base,’ would allow the government to raise more revenue.”

“Administering the tax system would be easier if the system itself was simpler. By harmonizing the tax rules regarding retirement savings, capital gains, and family and education credits, the government could reduce the amount of complexity taxpayers face while also helping to avoid errors, improve compliance, and raise revenues.”

43.

“Assuming that effective marketing would be a major obstacle, funding could be used to research how to effectively market consumption taxation to potential supporters.
“Funding could also be used for research on design issues for the X tax and the PET (e.g., how to tax financial institutions). This could accomplish three goals:

Prepare solutions to the issues, for use in case the X tax or PET is actually adopted.

Alleviate concerns in the intellectual community that the auxiliary design issues are insoluble (e.g., the common objection that there is ‘no way to tax financial institutions’ under the PET or X tax). This type of research would involve statistical analysis of micro-data, in-depth discussions with various industry segments, etc., and would likely be too resource-intensive to be done by an academic working alone.

Attract those who have latent interest in these issues to participate in research, which might eventually engage them in advocacy.”

Our non-verbatim summary of a conversation with Alan D. Viard on March 25, 2014

Since VATs are widely used in many countries, however, technical research on how they could be implemented is not necessary:

“The VAT has been studied extensively, so more research on it may not be necessary. 160 countries have adopted a VAT.” Our non-verbatim summary of a conversation with Alan D. Viard on March 25, 2014

“There is not a significant amount of additional work that needs to be done in developing intellectually plausible plans for major tax reform. This has already been a major focus of the tax policy community for many years. Technical barriers to implementation are generally not as formidable as political obstacles. If the next president were committed, say, to implementing a value-added tax (VAT) in two years, it would be technically feasible if the political process of enactment went smoothly. The main reason for a lack of political progress on tax policy is the lack of consensus.” Our non-verbatim summary of a conversation with Daniel Shaviro on July 17, 2014

44.

“Professor Kamin stated that the main obstacle to enacting tax reform is politics, rather than lack of proposals. If tax reform were a priority in politics, one would see governmental and non-governmental institutions working to make the proposed plans more concrete.
[…]
“Most abstract tax reform proposals do not get fully translated into draft legislation. This is because there are many proposals, and translating them requires resolving many details, so it is probably not a good use of time until it is clear that a proposal is viable. The lack of legislative drafts is not a major obstacle to tax reform. If there were sufficient political will for tax reform, the relevant parties would have the time to go through the drafting process.” Our non-verbatim summary of a conversation with David Kamin on August 1, 2014

“There is not a significant amount of additional work that needs to be done in developing intellectually plausible plans for major tax reform. This has already been a major focus of the tax policy community for many years. Technical barriers to implementation are generally not as formidable as political obstacles. If the next president were committed, say, to implementing a value-added tax (VAT) in two years, it would be technically feasible if the political process of enactment went smoothly. The main reason for a lack of political progress on tax policy is the lack of consensus.” Our non-verbatim summary of a conversation with Daniel Shaviro on July 17, 2014

45.Our non-verbatim summary of a conversation with Alan D. Viard on March 25, 2014

46.Our non-verbatim summary of a conversation with Bill Gale on March 28, 2014

47.Our non-verbatim summary of a conversation with Daniel Shaviro on July 17, 2014

48.Our non-verbatim summary of a conversation with David Kamin on August 1, 2014

49.Our non-verbatim summary of a conversation with Richard England on March 27, 2014