What Do Taxpayers Really Want?
Polling data suggest that the tax code is ripe for reform, with a majority of Americans backing a total overhaul of the system. Overall, taxpayer opinions are aligned with the spirit of the reforms in this chapter.1
Over 60 percent of people feel that corporations and wealthy people are not paying enough tax; just 20 percent feel that poor people don’t pay their fair share.
Fully 53 percent of Americans think they pay about the “right” amount in taxes, 4 percent too little, and 40 percent too much.
71 percent of Americans think it is morally problematic to underreport income to evade taxes, with 19 percent reporting that it is not a moral issue; only 6 percent deem underreporting morally acceptable.
Nine out of 10 respondents think that income from investments should be taxed at least as much as wages. 57 percent of respondents think wages and investment income should be taxed the same, and 33 percent think investment income should have a higher tax rate.
More than three-quarters of respondents find the tax code either ‘complex’ or ‘extremely complex’; only one in twenty respondents find it either “simple” or “very simple.”
Consistently since the 1980s, a large majority of respondents call for a more even distribution of money and wealth in the country.
People are warming to carbon taxes. The majority of Americans find climate change ‘extremely’ or ‘very’ important, and 50 percent of American’s now support (strongly or somewhat) carbon taxes, a number that has been increasing steadily over the previous several years.
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1. For polling data, see Seth Motel, “5 Facts on How Americans View Taxes,” Pew Research Center, April 10, 2015; John S. Kiernan, “2016 WalletHub Tax Fairness Survey,” WalletHub, September 1, 2016; Gallup, “Taxes,” http://www.gallup.com/poll/1714/taxes.aspx; and Carbon Tax Center, “August 2018: Yale Maps of Public Opinion on Climate Change and Policy, https://www.carbontax.org/polls/.
The Tax Cuts and Jobs Act: A Big Step in the Wrong Direction
In late 2017, the Tax Cuts and Jobs Act (TCJA) was signed into law, after a rushed and chaotic process of tax policy-making. No hearings were held on the legislation, and revenue estimators scrambled to calculate its effects on deficits and distribution prior to hurried votes. In the end, the bill passed the House and the Senate without a single vote from the minority Democrats; it was signed into law by President Trump on December 22.
Republicans have long had a common zeal to cut taxes, and that goal was paramount in the legislation. However, while some tax cuts were permanent, others were temporary (covering the period 2018 to 2025), since budget rules meant that exceeding $1.5 trillion in new deficits would require sixty votes in the Senate, and thus the support of some Democratic senators. The main provisions of the legislation are as follows.
Individual tax rates are cut for the period 2018 to 2025.
On a temporary basis, the standard deduction is increased, personal exemptions are repealed, and the state and local tax deduction is limited to $10,000.
The threshold for the estate tax is doubled, to $11 million, temporarily.
On a temporary basis, 20 percent of pass-through business income is no longer taxable for some pass-through businesses.
The corporate tax rate is cut permanently, from 35 to 21 percent.
Foreign income of corporations is permanently exempt from taxation. Previously, foreign income was taxed at the domestic tax rate (35 percent) upon repatriation, with foreign tax credits for tax paid abroad.
There is a one-time tax on prior unrepatriated foreign earnings of US corporations. These earnings are taxed at a rate of either 8 or 15.5 percent, less foreign tax credits.
For future foreign earnings, there is a minimum tax on foreign income earned by US multinationals of half the US tax rate. This tax is payable only on returns (relative to physical assets) that exceed 10 percent. The minimum tax is assessed on a global basis, so foreign tax credits from tax paid in higher-tax countries can offset the minimum tax due from operations in low-tax countries. This makes US income less desirable than either tax-haven income (which is taxed at half the US rate, after some threshold) or higher-tax foreign income (that helps reduce minimum tax burdens on low-tax income).
Overall, the tax law is a huge step away from the principles of tax reform suggested by this chapter. In particular, the legislation has at least four essential flaws: It increases deficits, worsening our budget pressures. It increases income inequality, widening the gulf between those who have prospered in recent decades and those who have not. It makes our tax code more complex, opening new opportunities for gimmicks and shenanigans. And it fails to tackle our large problem of international profit shifting.
First, deficits are increased by $1.5 trillion dollars.14 These large deficits are dangerous, since they reduce our ability to respond to the next recession, and recessions always do arrive. Large deficits also reduce our ability to fund urgently needed priorities such as education, infrastructure, basic research funding, and healthcare.
Second, distributional analyses of the legislation show that the vast majority of the $1.5 trillion in tax cuts under the legislation go to those at the top of the income distribution, worsening income inequality. In 2018, the percent gain in after-tax income for those in the top five percent of the distribution (4 percent) is five times the gain of those in the bottom two quintiles (0.8 percent). In 2018, those in the bottom 80 percent of the income distribution have an average tax cut of a bit less than $800, whereas the top one percent have an average tax cut of over $50,000.15
By the time the law is fully phased in, the bottom 80 percent of the population will (on average) pay $15 more in tax, while the top one percent will have a tax cut of over $20,000. Individual tax cuts expire, and the inflation indexing of the tax system is also changed, resulting in stealth tax increases for individuals, since inflation pushes them into higher tax brackets.
This legislation clearly makes our tax system less progressive. It is also important to remember that deficits are not free; they translate into tax obligations for future taxpayers. Once the dust settles, it is quite likely that the legislation will make most middle-class taxpayers worse off.
Third, the legislation creates many new sources of complexity. While raising the standard deduction will reduce one source of complexity (since fewer taxpayers will itemize), the legislation adds far more complexity than it removes. New tax breaks for business income (both pass-through and corporate) will lead to large incentives for taxpayers with discretion (typically those at the top of the income distribution) to distort their compensation in favor of business or capital income. The legislation leads to a great divide between the relatively light taxation of capital income and the relatively heavy taxation of labor income.16
Finally, the legislation continues to tilt the playing field in favor of foreign income. The United States already has a very large profit shifting problem, and this legislation makes that problem slightly worse; all things considered, the international business provisions of the tax law lose revenue.17 This implies that our corporate tax base erosion problem will actually be somewhat worse under the new law, a difficult feat given how large the problem was under prior law.18
But the most disheartening feature of the legislation is that it makes future tax reforms more difficult. By giving businesses such large permanent tax cuts, it creates less incentive for the business community to come to the table in support of true tax reform. While budget pressures will undoubtedly require future tax legislation in upcoming years, and higher tax payments from some taxpayers, the TCJA provides a more difficult starting point for the grand bargain suggested in this chapter. But we must choose to persevere.19
Achieving True Tax Reform
True tax reform would look very different from the TCJA, but it is needed now more than ever. That said, moving a true tax reform through the halls of Congress will be difficult. Stil
l, there is some precedent for comprehensive tax reform in the Tax Reform Act of 1986. The passage of this reform was a feat so amazing that it was chronicled in a gripping book: Showdown at Gucci Gulch.20 Within, there are lessons for today in terms of framing, agenda setting, and the importance of persistent leadership, as discussed in the related text box.
Gucci Gulch
The passage of the Tax Reform Act of 1986 was a golden moment in the history of American taxation. The hard-won victories of the legislation, chronicled in the Showdown at Gucci Gulch, were shocking, unlikely, and all-too-impermanent … rather like the fleeting joy of a perfectly completed return.
The Tax Reform Act of 1986 derived its battle name from the pricey ensembles sported by the crowds of lobbyists that lined the halls outside the committee hearing room. The high costs of their suits and shoes were miniscule in comparison with the amount of money under the scope of the legislation: the Tax Reform Act cut the top individual tax rate from 50 percent to 28 percent, closed loopholes valued at $100 billion, subjected labor and capital to the same tax rates, and slashed the tax burdens of the poorest Americans, all during the presidency of the famously tax-hating Ronald Reagan.
Importantly, the Tax Reform Act of 1986 was intended to be revenue-neutral (not reducing tax revenues), distributionally-neutral (not shifting tax burdens among groups in the income distribution) and non-partisan. In the end, the bill cleared the Senate Committee on Finance unanimously, and it passed the Senate 97-3! This marks a stark contrast with the TCJA legislation, which increased deficits, increased after-tax income inequality, and received strictly party-line support from both the Senate Committee on Finance and the Senate.
A grand bargain on tax reform is long overdue. Reforming the tax code is an essential step in modernizing economic policy to suit our global, technologically-sophisticated economy. Tax reform can achieve three critical goals.
First, it can help lower- and middle-class workers whose economic fortunes have not kept pace with our country’s economic growth, making sure that economic prosperity is more widely shared. Progressive changes in the tax system help ensure that disruptive changes, whatever their source, benefit the vast majority of society.
Second, tax reform can remove inefficiencies that generate distortions and waste. Bright young minds should spend their time developing the next great products, furthering science, and engaging in creative endeavors, not exploiting arcane tax loopholes to divert tax revenue from the Treasury. By countering loopholes, including international profit shifting, the tax system can raise more revenue without resorting to higher tax rates.
Third, adding a carbon tax to this grand bargain is a crucial step toward a healthier planet and a healthier tax system. The carbon tax provides a new source of revenue that can be used to pay for lower tax rates, while at the same time preserving the planet for ourselves and for future generations. These three pillars of tax reform will ensure a US tax system that is ready for the twenty-first century, and that is fair, efficient, and competitive.
This tax reform will create a steady, predictable environment for business activity. While some businesses will end up paying more tax, overall the tax code will be simpler and more efficient. Tax rates will be set at reasonable levels, with the expectation that all businesses pay tax on their profits at those reasonable rates. But there is more to a partnership with the business community than taxes; Chapter 11 discusses other components of a better partnership.
Eleven
A Better Partnership with the Business Community
It is tempting in today’s discourse to blame villains for our economic problems. This simplifies the story while making it more dramatic, often generating the pleasing side effect of simple, clear-cut policy solutions. Some blame foreigners and immigrants for depressing American wages. Some blame government for hindering entrepreneurship with burdensome taxes and regulations. Some blame the greed and self-interest of corporations, as they send business activities offshore to cut costs and boost profits. Where there is someone to blame, there is typically a quick and easy policy fix: withdraw from trade agreements and build walls, cut taxes and regulations, or crack down on corporate greed through government intervention.
Is such blaming useful? Presumably there are elements of truth in all of these stories. There are distributional effects associated with trade and immigration, some taxes and regulations are quite distortionary, and corporations have moved profits offshore with impunity, more to the benefit of their shareholders than their communities. But in no case is blame constructive. Chapters 5 and 8 showed that reducing trade and immigration will generate more harm than help, and Chapter 7 discussed why tax and regulatory burdens are not our chief problem.
This chapter argues that we need a new partnership with the business community. Yet blaming corporations and their shareholders is as unproductive as blaming foreigners or government. Most business leaders take pride in what they do: creating jobs, making good products, generating innovation and progress. What is good for society and what is good for business often overlap. A healthy business community generates good job opportunities, a steady stream of innovation, and a dizzying array of affordable consumer options. A healthy, prosperous society helps business, providing thriving customer markets, a well-educated labor force, and the stable, inclusive institutions and policies that make for a good business climate.
Is New Zealand the Best Place to do Business?
According to the World Bank, New Zealand is the best place to start a business, and the easiest place to run one.1 But if you are unprepared to move across the world, don’t despair: the United States does well by many measures. The United States ranked sixth for ease of doing business, and the World Economic Forum determined that the United States is the world’s second most competitive economy.2 The US rank is buttressed by highly sophisticated businesses, a huge market, innovation, and strong institutions of higher education, overcoming the negative effects of relatively poor infrastructure and primary education.
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1. The full set of rankings can be found at its website: http://www.doingbusiness.org/rankings.
2. World Economic Forum, The Global Competitiveness Report 2017–2018, September 26, 2017.
To create the conditions necessary for a more equitable globalization, we need a better partnership with the business community. To create a strong, prosperous, open economy where a rising tide lifts all boats, the government and the business community need to come together in support of large, smart policy changes. Five key pillars support this partnership:
An embrace of the global economy
Simple, fair regulations
A simple, fair tax code and more transparency on taxes
More transparency on pay structure and labor inclusion
More robust antitrust laws
Several of these agenda items will be embraced by the business community, whereas some may meet with resistance. Companies will benefit from open markets, and from simple, fair taxes and regulations. Some companies, however, will end up paying more in tax, seeing their market dominance threatened by antitrust laws, or resenting the intrusiveness of greater transparency on tax and pay structure.
Still, all of these pillars work together to form a good partnership between the business community and society at large. Keeping the world safe for capitalism and democracy requires responding to economic challenges when they arise, not ignoring them and hoping for the best. We are in a time of economic discontent. A bold, yet balanced, response is the best way forward.
The business community has its part to play in responding to these challenges. Yet the suggestions of this chapter do not rely on the public-spiritedness of voluntary corporate actors, working like a thousand points of light to brighten a dark room. Government must work to legislate and implement responses to our economic challenges. This will require tough compromises with the business community, but it need not be an antagonistic struggle. Cooperation
can be built around the notion that tough problems require everyone at the table, building a modern foundation for a more inclusive and prosperous economy.1
Figure 11.1: Balancing a Better Business Partnership
Pillar 1: An Embrace of the Global Economy
In general, the business community has much to gain from access to an open global economy. Many companies rely on global supply chains; they have production processes that are spread throughout the globe. Imported intermediate goods are an essential part of many American businesses, and the ability to sell products in foreign markets is also essential. International capital markets provide key sources of finance for American investment. Immigration is also vital to American business success. Not only are immigrants disproportionately entrepreneurial, but immigrants also provide labor skills that are in short supply, helping American firms stay competitive.
I was recently at a forum with Oregon business leaders, and all of them spoke clearly and passionately about international trade as a factor in their business success. A railcar manufacturer sells rail cars throughout the world, but they can only do so efficiently since some of the production occurs in Mexico; otherwise, they could never compete with their foreign competitors. Local winemakers note that their wine barrels, glass bottles, and yeast are all imported, and that exports provide key market opportunities for them. Columbia Sportswear and Nike are successful companies that provide large numbers of design and marketing jobs in the United States, selling their goods throughout the world, and manufacturing their clothing and footwear abroad. A knife manufacturer sources parts locally but sells throughout the world. All of these companies have a vital interest in maintaining the free flow of international commerce. (And companies grumble about the trade restrictions already in place. Both Columbia Sportswear and Nike pay large tariffs on imported goods; this raises prices for American consumers.)
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