One Economic Study's Take On The 2017 Tax Bill's Impact

Economic studies of the macroeconomic impact of tax cuts are more art than science and shouldn't be considered solidly reliable. But that doesn't mean that they should be ignored either.

Lower tax rates on business income does not have a significant dynamic effect on the economy. They just take money away from the government and give it, ultimately, to the owners of those businesses.

Changing incentives to better incentives can have a big impact (although incentives that change the timing of deductions for corporate expenditures for capital investments may only change the timing of corporate expenditures for capital investments, particularly if they are set to expire at a certain time).

We assess the business provisions of the 2017 Tax Cuts and Jobs Act, the biggest corporate tax cut in US history. We draw five lessons. 

First, corporate tax revenue fell by 40 percent due to the lower rate and more generous expensing. 

Second, firms with larger declines in their effective tax wedge increased investment relatively more. In aggregate, we suggest a loose consensus from the literature that total tangible corporate investment increased by 11 percent. 

Third, the business tax provisions increased economic growth and wages by less than advertised by the Act’s proponents, with long-run GDP higher by less than 1% and labor income by less than $1,000 per employee. 

Fourth, provisions that increase foreign investment by US-based multinationals also boost their domestic operations. 

Fifth, some of the expired and expiring provisions, such as accelerated depreciation, generate more investment per dollar of tax revenue than others.

Gabriel Chodorow-Reich, Owen M. Zidar & Eric Zwick, "Lessons from the Biggest Business Tax Cut in US History",  NBER Working Paper 32672 (July 2024).

As noted here, in contrast, the tax cuts to pass-through firms underperformed. The lost corporate tax revenue was a decline from a baseline of corporate tax revenue of 2.9% of GDP in 2017 (i.e. they reduced federal tax collections by 1.16% of GDP per year, so far, for six years with more to come). There has been a long-run increase in GDP of 0.9% — which is a substantial sum in an economy of more than $27 trillion. But who really knows how it would have changed in the absence of the 2017 tax bill to any meaningful level of precision.

A Comprehensive Entity Taxation Reform Proposal

The Corporate Double Taxation Problem

The U.S. has about 1.4 million entities taxed as C-corporations, as of 2020 (the most recent year for which full tax statistics are available) of which only 644,000 had tax taxable income and only about 433,000 had any net tax liability. Thus, almost a million C-corporations are small, closely held entities that pay bonuses to management annually calculated to eliminate any corporate level tax liability after any available corporate tax credits. But C-corporations that pay significant corporate income taxes in at least some years are economically extremely important as they include all publicly held corporations and many large, privately held businesses in the U.S. For example, in 2020, corporations has $33,400 billion of gross revenues and owned $124,500 billion of assets.

One of the widely acknowledged issues with U.S. federal income taxation of corporate earnings is the double taxation of C-corporation income. U.S. C-corporations pay tax once when income is earned at the corporate level at a rate that is currently a flat 21%. Then, when dividends are distributed to shareholders, shareholders are taxed on their dividend income but C-corporations don't receive a deduction for this payment.

This double taxation issue has been an important driver of the preference for pass through entity taxation in the U.S., and it creates a strong tax incentive for U.S. corporations to retain rather than distribute their income. And, since U.S. corporate income tax rates have generally been lower the the maximum U.S. individual income tax rate, it creates a tax preference for C-corporations that retain their income due to deferral of income taxation at the shareholder level. 

It also creates a strong tax incentive for C-corporations to finance their operations with debt rather than equity, which from a macroeconomic perspective causes C-corporations, mostly publicly held companies, to have excessively high debt to equity ratios, which makes the U.S. economy more vulnerable to business failures, and less robust, in recessions.

The favorable tax rates for corporate income, capital gains income, and "qualified dividends" in U.S. tax are also rough justice attempts to mitigate the double taxation of corporate income.

Options To End Corporate Double Taxation In the U.S.

There are various ways to end the double taxation of C-corporation income.

1. One could exempt dividend income from taxation, but that would distort how progressive marginal income tax rates for individuals work and would create a perception of unfairness. This would also continue to preference for debt over equity in corporate finance with the macroeconomic costs that come with it. And, it would be unfair to people who would be taxed on capital gains income from stock but not on dividend income from stock.

2. One could exempt corporate income from taxation. But this would create a massive tax incentive for corporations to retain income indefinitely. This would also massively favor equity investment over debt investments and would lead to a surge in preferred stock replacing corporate bonds.

3. One could replace federal corporation income taxes as a withholding tax on ultimate dividend payments for which shareholders receive a tax credit when receiving dividends. This is the most common approach in developed country economies that works quite well there, even though it retains some of the bias for debt financing over equity financing. But in the U.S., in light of federalism considerations, where there is no coordination in corporate taxation between federal corporate income taxes and state corporate incomes taxes, with some states not having these taxes at all, and other states having significant ones, this is difficult to implement gracefully.

4. One could have some sort of simplified pass-through taxation regime similar to what is done now with mutual funds, real estate investment trusts, and publicly traded partnerships. This would be close to neutral at the macroeconomic level between debt and equity financing. Pass-through taxation is predominant for U.S. closely held entities, many millions of which are taxed this way, mostly through limited liability companies, limited liability partnerships, limited liability limited partnerships, limited partnerships, and S-corporations. As of 2020, there were 4.9 million corporations taxed on a pass-through basis (primarily S-corporations, REITs and RICs), another 4.3 million entities taxed as partnerships, and 2.8 million single person limited liability companies taxed as sole proprietorships, for a total of 12 million entities using pass-through taxation regimes (a figure that ignores trusts and estates which have another form of pass-through taxation). But this is administratively very complex and it causes tax audits of the pass-through entities to impact far more people. It is also less fair, as the amount of taxable income allocated in this system to shareholders may not exactly match the amount distributed to them creating "phantom income" in some cases, and windfalls in others. The phantom income problem is particularly problematic in entities where substantial corporate profits are retained for future operations, rather than being distributed.

5. One could continue the imperfect status quo of mitigating the harm caused by corporate double taxation by taxing some combination of corporate income, capital gains from the sale of corporation shares, and dividends from corporation at reduced income tax rates, doing rough justice in terms of equity between total tax rates on shareholder received income from corporations and income from other sources, but presenting the problems discussed above.

6. One could allow a deduction for corporate taxable income for dividends paid. This is already done, in full and in part, depending upon ownership percentages, for dividends paid by C-corporations to other C-corporations that own a significant part of their stock. It has the virtues of being simple, being easy to administer, being easy to integrate between varied state and federal corporate tax systems, almost perfectly eliminating double taxation of corporate income, and ending the preference at the corporate level for equity financing over debt financing. This is the model I explore below, considering its viability in terms of tax rates, which I conclude are very viable. With the appropriate corporate tax rates, it also basically eliminated an incentive to retain earnings in order to defer income tax liabilities.

The Federal Tax Revenue Impacts Of A Corporate Dividends Paid Deduction

U.S. C-corporations paid $374 billion of corporate income taxes in 2020 at a flat corporate income tax rate of 21% from $2,700 billion of corporate net income, reduced by $193 billion of corporate tax credits.

U.S. taxpayers received $328 billion of ordinary dividends and $248 billion of qualified dividends from C-corporations in 2020, for a total of $576 billion.

So, U.S. C-corporations paid 21.3% of their taxable income to shareholder as dividends in 2020 (this isn't quite right, because it excludes dividends from C-corporation to other C-corporations, many of which are partially or fully income tax free, and includes dividend income from foreign corporations that are subject to U.S. corporate income taxes, but neither of those amounts are material).

If dividends paid were deductible from the income of C-corporations, total C-corporation income in 2020 would have been $2,124 billion. So, a revenue neutral transition from non-deductible corporate dividends to deductible corporate dividend payments would require a flat 26.7% corporate tax rate.

If C-corporations were taxed at a flat 41% corporate tax rate (slightly more than the 40.8% of federal taxes due at the highest marginal income tax rate plus the Obamacare tax on investment income), but were allowed to deduct corporate dividend payments and take all existing corporate tax credits, corporations would have paid $678 billion in federal income taxes in 2020 (an increase of $304 billion per year). This would be equivalent to a 32.3% flat corporate income tax rate without a deduction for dividends paid by corporations but with all existing corporate tax credits. A 41% federal corporate tax rate with a dividend paid deduction would be an 81% in federal corporate income tax revenue from current record low corporate tax rates (although this is moderately overstated because corporate tax credits would grow significantly with higher corporate tax rates, although it would still be at least a 31% increase).

The increased federal corporate income tax revenues in this scenario would be partially offset by reduced state corporate income tax revenues due to the reduction in the state corporate income tax base, unless states decided to disallow the dividend paid deduction for state corporate income tax purposes.

This would also make a variety of anti-evasion and double taxation mitigation provisions of the tax code obsolete. These would include the accumulated earnings tax, the personal holding company tax, the separate dividend paid deduction for dividends paid by C-corporations to certain other C-corporations, the special tax rates applicable to qualified dividends, and the special tax rates applicable to capital gains in C-corporation stock. 

These changes (except the special rate applicable to capital gains and qualified dividends) would have a negligible federal tax revenue impact. The end of the tax treatment of capital gains would increase federal tax revenues by $162 billion, and the end of favorable taxation of qualified dividend would increase federal tax revenues by about $84 billion.

In all, these reforms would increase federal income tax revenues by about $550 billion a year, which would be a roughly 11% increase in federal tax revenues, more than two-thirds of which would be paid mostly by those in the top 1% and more than three-quarters of which would be paid by those in the top 10% of income earners. 

This would reduce the federal budget deficit by more than 46%, which would also tend to reduce interest rates in the U.S. economy, including interest rates of home mortgages.

Bottom line: 

An increase of the federal income tax rate on corporate income from 21% to 41%, accompanied by a deduction for dividends paid, the end of favorable tax treatment for capital gains and qualified dividends, and the elimination of other tax code provisions whose purposes are made obsolete by this change, is a good idea.

This would be a viable and sensible tax reform that would be more fair, would be less prone to loopholes and tax planning reductions, would raise modestly more federal revenue in line with historic norms for revenue from corporate income taxes, and would make the U.S. economy more robust from a macroeconomic perspective. It would also reduce tax complexity, be easier to administer, make audits simpler for entities currently taxed on a pass-through basis, and be transaction driven. It would achieve great benefits without radical changes to the overall income tax system in a politically palatable manner.

Other Desirable Reforms In Entity Taxation

* Dividends paid by U.S. corporations to people not otherwise subject to U.S. income taxation should be subject to a final 41% foreign dividend payment tax collected by the entity paying the dividends. This is lost federal tax revenue that could be easily curtailed under the existing tax regime, and is especially important in a corporate dividends paid deduction regime.

* Pass-through taxation should be greatly curtailed. Entities with limited liability should be taxed as C-corporations. Limited partnerships with some unlimited liability general partners and some limited liability limited partners, should be taxed as a general partnership of the general partnership and a C-corporation consisting of the limited partners. S-corporation taxation should be abolished. This would greatly reduce the administrative complexity of the tax system, and would make it much simpler for small businesses to craft their organizational documents, to prepare and file tax returns, and to deal with tax audits. It also removes a huge exception to limited liability for entity income related tax liabilities. State laws causing transferees of limited liability company membership interests to lose their voting rights and right to information about the company and arguably the right to bring derivative actions, which were adopted to gain partnership taxation tax treatment (now obsolete for that purpose) should also be repealed. A fringe benefit of curtailing pass-through entity taxation is that it would greatly increase the privacy of entity owners, particularly in entities that did not distribute dividends to their owners.

* Investments in publicly held, marketable securities and commodities should be taxed annually on a mark-to-market basis, on that the theory that gains that could easily be realized shall be deemed to be realized for tax purposes. 

* The proceeds of loans secured by unmarketable or liquid capital assets, such as closely held entity shares, would be taxable as ordinary income when received, and deductible as an ordinary expense when repayments of principal were made by the borrower, to prevent circumvention of capital gains taxations that are de facto realized.

* Equity investments in unmarketable closely held entities should be deemed to be sold at fair market value at death and taxed at that time, rather than receiving a tax free step up in basis, unless a carryover basis election is filed by the executor of the decedent's estate disclosing the carryover basis and representing that the asset is eligible for the election.

This package of additional reforms would raise something on the order of $50 billion of federal tax revenues each year, which combined with the primary package, would increase federal tax revenues by about $600 billion a year, and would reduce the federal budget deficit by 50%.

A Quick And Dirty Fix To Regressivity In Federal Income Taxation

 

A friend of mine observed with respect to the meme above that:

That's comparing net worth to income. (Not that there's anything wrong with a net worth tax on billionaires). His net worth increased $87b in 2021, so $11b comes to 13%. While low, it's not obscenely so. Presumably it's due to unrealized capital gains. Taxing unrealized capital gains would be a bad idea in general, except for in the case of billionaires.

I responded:

I did catch that and let it slide because the basic point the Musk is undertaxed is still true. 

Taxing unrealized capital gains honestly isn't such a bad idea in the case of publicly held securities that can be converted to cash in the blink of an eye. Taxing unrealized capital gains in assets that are less liquid is much more problematic.

As you say, the amount he is being taxed on his income is actually about 13%. 

The top federal income tax rate on ordinary income is about 37% plus 1.45% employer and 1.45% employee Medicare taxes (or the equivalent for self-employment tax) or 3.8% for Obamacare on investment income. The top rate on ordinary income in California for people making more than $1 million a year is 14.4%. 

So, if capital gains and dividends were taxed as ordinary income and unrealized gains in publicly traded securities were taxed, and assuming that his income is almost all investment, he could be paying 55.2% instead of 13% of his income in taxes without even increasing top tax rates on ordinary income for the rich. 

This would be about $36 billion more in taxes collected each year. 

By comparison, that is nine times as much as the total revenues of the U.S. federal government from oil and gas leasing each year, and is about twice as much as total federal gift and estate tax revenues each year. 

Yet it would come from increased tax collections due to a couple of minor tweaks in the taxation of capital gains and dividends in publicly held companies, from a single taxpayer alone. 

Across the board, these small changes would generate immense increased tax revenues and increase equity and reduce income inequality.

To recap: 

What are these simple proposals that would profoundly increase tax collections from the rich, make our income tax system much less regressive, and reduce income inequality, without creating serious economic problems due to flawed tax incentives and laws?

1. Tax capital gains and dividends at the same tax rates as ordinary income. The tax expenditures associated with these preferential tax rates for capital gains and dividends has been calculated by the U.S. Treasury Department. These preferential tax rates cost U.S. taxpayers about $162 billion a year. About 68% of capital gains income is earned by the top 1% of taxpayers and 74% of capital gains income is earned by the top 10% of taxpayers according to the Congressional Research Service.

2. Tax unrealized capital gains in publicly held securities on a mark-to-market basis (see also here). The associated tax revenues associated with this change are harder to estimate. The step up in basis of capital gains at death and carryover basis capital gains taxation of gifts during life, combined cost taxpayers about $55 billion a year, so that's an order of magnitude estimate, although probably an underestimate.

Increasing tax collections on the unearned income of the wealthy from publicly traded securities would raise more than $200 billion a year, out of $5,000 billion of total federal tax revenues. This would be a 4% increase in total tax revenues.

Improving Government

Government has a mix of problems. Sometimes it regulates too much, sometimes too little, sometimes it owns too much, sometimes too little, sometimes it is just operated in the wrong way. This post is a grab bag of ideas about improving it.

* Sidewalks should be publicly owned and maintained. Individual responsibility of property owners for this doesn't work because low rates of non-maintenance (including lack of prompt snow removal) makes the network of sidewalks much less valuable.

* Bicycles should usually not share roads with cars and trucks. They should use sidewalks or dedicated, protected bike paths and lanes.

* Amtrak has failed and should be shut down outside the Northeast Corridor.

* The U.S. Postal System worked well for a long time, but in the era of widespread parcel delivery services and e-mails and texts, it no longer does. Strong Veteran's preferences and higher pay than private sector equivalents don't justify it. Free mail for incumbents in Congress don't justify it. Delivering junk mail is not a good enough reason for a massive public enterprise. Fewer and fewer letters of significance are delivered that way. Money orders are no longer economically important and can be provided by private commercial banks and money services. Subsidizing rural living isn't a good reason for it.

* Occupational licensing is required when it shouldn't be. When it is required, requirements like a lack of a criminal record are often inappropriate for people who have been non-recidivist for a long enough time (about five to seven years) when the risk of future crime fades to the background level. Worse yet is construction trade licensing at the local level when it should be at the state level, fostering a high level of non-compliance. Independent legal para-professions should be allowed much more liberally, although licensing that might be appropriate. There should be a common database of licensing discipline since many disqualifying acts for one profession should also apply to others.

* Zoning and land use regulation should be dramatically paired back and places like Colorado finally realize that this is true and driving high housing prices. Deregulating is better than mandating affordable housing or rent control. Development fees to mitigate externalities of government costs caused by development, however, make sense. 

* Involuntary landmark designation is almost always a bad idea and an unfunded mandate. If it is important enough historically to preserve the government should buy it and rent it.

* Building codes are critical and non-compliance with permit requirements is far too high. But building codes are also too restrictive and the processing of building permits is much too slow. A system of private building code compliance auditors similar to the CPA system might be better.

* We should do a better job of discouraging people from building disaster prone housing in flood zones, fire zones and other "stupid zones".

* We should do a better job of encouraging off site manufacturing of buildings and large building modules.

* Property taxes are a decent way to finance local government (and shouldn't exempt non-profits and governments other than the one imposing them) but are a bad way to finance public K-12 education which is the main way that they are used now.

* Electing coroners, treasurers, clerks, surveyors, secretaries of state, engineers, and judges (even in routine judicial retention elections) is a horrible idea.

* Electing sheriffs and district attorneys and attorneys-general isn't as horrible an idea, but is still a worse idea than having elected officials appoint them, directly or indirectly.

* State and local school and college boards would be better not elected by the general public. Local school boards should be elected by student's parents. College boards could be elected by alumni or appointed by the elected official who make their funding decisions. State school boards should be appointed by the state officials who fund state K-12 education.

* Shorter ballots are better. In the England, there is one nation election in which you vote for a single legislator on a partisan ballot in a single district, irregularly, but not less than every five years absent a world war, for a government that does everything that the state and federal governments do in the U.S., with no primary elections since parties nominate their own candidates internally, and there is one set of partisan local council elections for one or two posts, and there are few referenda a lifetime, and they are democratic enough, despite having a monarchy and a house of lords. Very modest public electoral input is enough.

* I don't favor a system quite as simple as England's. But we should still have much shorter ballots.

* Rare recall elections make sense for officials who serve longer terms and perhaps for judges and other public officials who are now elected but shouldn't be.

* State constitutions and local charters should have less detail and so that changes to them should be things that require voter approval and not housekeeping measures.

* Some referenda on tax and debt issues is appropriate, but Colorado, with TABOR overdoes it. New taxes, and not new revenues from existing taxes, should get public votes. Maybe bond issues that commit a government to substantial tax obligations from general revenues but not renewals of them.

* Citizen initiatives have their place in overcoming systemic flaws in the legislative system and making elections interesting to voters. But it should be a bit harder and more structured and generally should avoid spending and taxing decisions that need to be made globally.

* Colorado mostly does the probate process right, although probate procedure could use more structure. Most states make the process too intrusive.

* When there is a single post in a candidate election, dispensing with primaries, having a majority to win requirement, and having runoff elections would be preferable to first past the post elections and to instant runoff elections.

* There would be merit to electing state legislatures and state congressional delegations by proportional representation.

* There would be merit to making state legislatures unicameral.

* The electoral college should be abolished in favor of a direct popular vote.

* The franchise should be expanded. The voting age should be reduced to sixteen. Non-citizens should be allowed to vote. Felons, even felons in prison, should be allowed to vote (in their pre-incarceration place of incarceration).

* HOAs are horrible but sometimes necessary institutions. They should be abolished or replaced where possible, and be restructured with fewer powers and less discretion where not possible. HOA covenants are routinely unreasonably restrictive.

* Municipal ordinances related to zoning and land use should have fines or other civil penalties, not criminal penalties.

* Arbitration on the U.S. model is usually a bad idea and should be banned in many circumstances.

* We should have a more pro-active way of intervening in cases where people are mentally ill or cognitively impaired, and the system for adjudicating these cases is too cumbersome.

* Single judges should not handle parenting time and parental responsibilities cases, and the best interests of the child standard should have more detailed substances to guide it. Alimony should also be less discretionary.

* There should be a right to counsel in all cases involving "persons" such as child custody cases, protective proceedings, and immigration cases.

* Forum shopping in the federal courts needs to be better restrained, and allowing a single forum shopped judge to issue national injunctions is problematic.

* After some rocky starts, regulation and technical private management of junk faxes, junk telephone calls, and even junk email has made some real progress. Social media junk is less well regulated.

* Privacy regulation often does more harm than good. Juvenile justice privacy does more harm than good in most cases, educational privacy goes too far, and Europe's GDPR goes too far. Secrecy around ownership of closely held companies is too great and the exception under the Corporate Transparency Act is far too complicated. There are places for privacy regulation but it needs to be cut way back. Secrets are often harmful in hard to quantify ways.

* Cryptocurrency serves few, if any, legitimate purposes, is an environmental disaster, and should be discouraged.

* Programs to help the poor need to have much less paperwork and red tape; means testing is rarely a good choice unless it is integrated into the tax system.

* Some tax credits for poor and middle income people, like the Earned Income Tax Credit and the Obamacare insurance premium subsidies, are far too complicated.

* State and local government funded free wi-fi for all would make lots of sense.

* There is a logic to allowing vouchers for religious private K-12 schools, but on balance it does too much to support religious institutions at public expense. Charter schools, i.e. public schools with autonomy from school boards, are a better approach. School choice of some kind does make sense among public ordinary and charter schools, ideally, statewide, rather than only within a school district.

* Boarding schools attached to high schools in more urban areas would be a better alternative to highly subsidized tiny rural high schools.

* We do a horrible job of managing the business of health care. The requirement that doctors be the sole owners of medical practices also forces them into being small business owners when they are ill suited to that part of their jobs and leads to bad systems and poor health care administration and bad financing arrangements. Almost every other country, in many varied models, does a better job. The current system results in overpaid health care providers (doctors, nurses, drug companies, medical equipment companies, private hospital system owners, etc.), for inferior results. Our drug prices and medical equipment prices and ambulance prices and ER prices are all vastly higher than in other countries and this isn't mostly driven by private pay medical education or medical malpractice lawsuits.

* We need to create more medical school slots. We have too few doctors and are compensating for that with too many senior paraprofessionals like nurse practitioners, physician's assistants, and midwives. We should also allow more non-M.D.'s to provide the care that psychiatrists do since the knowledge base for psychiatrists doesn't overlap heavily with that of M.D.'s and where it does overlap can be taught separately.

* The substance of pass-through taxation in taxing closely held business income once at roughly individual tax rates while allowing limited liability, is good, but the actual pass-through tax mechanism is not. Subchapter K of the Internal Revenue Code is not a good approach for taxing closely held limited liability entities, it complexity, it phantom income, and more don't work well. A double taxation reducing or limiting variation on the C-corporation model would be much better.

* We do a poor job of taxing hot assets in international taxation.

* We lack adequate guidance for remote worker labor and tax regulation, and haven't updated our laws adequately to reflect the era of independent contractors.

* We over regulate many prescription drugs and under regulate supplements and herbal remedies and the like. Homeopathic remedies and other supplements need to be regulated more like drugs. Prescription drug approval when approved elsewhere should be easier. Prescription approval for experimental drugs for the terminally ill, or in a pandemic, should be easier. More non-abuse prone prescription drugs should be available over the counter or with pharmacist approval.

* Prostitution should be decriminalized or legalized to a greater extent.

* We vastly under-regulate firearms and explosives and military equipment.

* We do a poor job of commercial air travel security, imposing too much of a burden and delay for too little benefit in a security theater way, at an excessive cost and a greatly excessive externality cost. We also do a crap job of managing luggage charges and checked luggage, and we are more inefficient than we need to be in how quickly commercial aircraft are loaded and unloaded.

* Uber, etc. revealed that we over-regulate taxis, but that we do need some regulation to assure riders are safe from dangerous or dangerous to them drivers.

* Buses and intracity rail won't thrive until we make them feel safer and comfortable.

* Public energy utilities do mostly a good job, except in Texas which opted out of the national energy grid.

* Clean water and good sewage treatment should be expanded urgently to places like Indian Reservations and Flint, Michigan.

* To better disentangle church and state, the charitable income tax deduction (but not the gift and estate tax deduction) for contributions to religious organizations (but not the tax exemption for churches) should end, the parsonage exemption should end, the property tax and sale tax exemptions for churches should end, the investment income of churches should be taxed as a corporation, and the ban on politics by churches should end.

* There should be more power to compel road maintenance below some standard.

* There should be a power to compel HOAs to do their jobs for all members, similar to landlord-tenant maintenance claims.

Optimal Taxation

Economists are not building on a strong shared foundation of understanding.

Optimal tax theory—the branch of public economics that focuses on the design of welfare-maximizing tax systems—has produced two especially stark results regarding the ideal treatment of capital. First, Anthony Atkinson and Joseph Stiglitz concluded in a seminal 1976 article that the optimal capital tax is zero and that all revenue should be raised from taxes on labor income. Four years later, Stanley Fischer analyzed a model similar to Atkinson and Stiglitz’s and concluded that the welfare-maximizing system would tax only capital—not labor—and would potentially tax capital at a rate as high as 100 percent.

From the Tax Profs Blog.

Undeserving

Many groups and causes are given perks and preferences, some governmental, and some in business practices. Many don't deserve them.

1. Senior citizens are often targeted for tax breaks and other perks on the theory that they are poor. But, they are the most most affluent age demographic with the lowest poverty rate. They have Social Security, Medicare, and Medicaid nursing home assistance for those who are not upper middle class or more affluent They don't need more.

2. Legacies in college admissions. Our nation was founded on the idea of stamping out hereditary privilege.

3. People who inherit wealth. People who did nothing to earn it shouldn't get tax breaks. Also, our nation was founded on the idea of stamping out hereditary privilege.

4. Clergy.

5. Religion and the religious people.

6. Veterans who were not disabled in their service. They voluntarily made a choice in exchange for promised benefits. We should keep our promises to them. But we don't owe them more than that.

7. Small businesses. Big business should not be placed at a disadvantage vis-a-vis small business. There is nothing virtuous about being a small business and generally small businesses are small because they are not as good as what they do as big businesses, otherwise they would quickly become big businesses.

8. Farmers. Most farmers are wildly inefficient and continue to farm only because the activity is subsidized.

9. Local businesses and farmers and products. Our prosperity and lifestyle is founded upon long distance commerce, not upon buying local or making your own food or goods.

10. Domestic businesses and domestic products. Our prosperity and lifestyle is founded upon international trade.

11. Law enforcement.

12. People claiming to be aggrieved solely because their property values are harmed by something.

Social Security's Fate

Krugman in an op-ed in the New York Times explains that in a worst case scenario of no action, the Social Security Trust fund keeps it solvent for another 12 years and then benefits get slashed by 20% as the trust fund can no longer buffer the shortfall of current receipts relative to current expenses while bearing the full weight of the Baby Boom generation.

Put another way, to keep 100% of current anticipated benefits, Social Security revenues need to increase by 25% in 2035, or somewhat less than that if revenues start to increase sooner. 

This is happening 25 years sooner than actuaries predicted it would in 1981 when major reforms to the system were put in place.

[I]n 1981 a bipartisan commission set out to secure Social Security’s future. It tried to do so with two measures. First, it increased the payroll tax rate; the idea was to make Social Security a bit more like a “real” pension fund by taking in more than it was spending, building up a serious trust fund that could help defray costs once the baby boomers hit the system. It also set in motion a gradual rise in the age of eligibility for full benefits, which started at 65 and will reach 67 for those born after 1960.

All of this was supposed to secure the system’s finances until 2060. It did in fact buy the system a number of decades, but the Social Security Administration currently expects the trust fund to be exhausted by 2035. 

The main reason for the shortfall, as I understand it, is that taxable wages have grown more slowly than expected, which in turn is largely the result of rising inequality: A growing share of overall income has gone to people with really high earnings, and much of that income isn’t subject to the payroll tax with its limit.

The Impact Of Interest Rates And COVID

I think Krugman is probably overlooking, in furtherance of advocacy, the impact of sustained very low interest rates on federal Treasury Bonds in the last fifteen years and have only just returned to the rates that they were at prior to the Financial Crisis of 2007-2008, the only time period in recent history in which Treasury bond interest rates were below 4% for more than a very brief time period since at least the 1960s. 

This has left the Social Security trust fund with lower than its anticipated earnings as of 1981 when Treasury bond interest rates were at record highs that peaked at more than 15%. 

But Treasury bond interest rates look likely to be above 4% going forward and this could significantly improve the financial outlook for the Social Security trust fund.

Ten Year Treasury Bond Interest Rates (Source)

The twelve year to insolvency estimate also probably don't fully reflect the probable impact of COVID-19 on Social Security's benefit obligations, however. Current estimates show only a modest COVID impact on the Social Security trust fund, but that assumes that excess deaths cease in 2023 which currently seems unlikely, even though they are waning a bit.

The lion's share of people suffering premature deaths from COVID are already receiving Social Security benefits or imminently about to do so. 75% of the 1,113,560 COVID deaths to date (as we are nearing the three year anniversary of the first significant numbers of deaths from COVID) are of people 65 years of age or older. Another 18% are of people age 50-64 year old. So, 93% of COVID deaths have been of people age 50 years old or older, and deaths in the 50-64 year old age range are still strongly biased towards the high end of this age range. There have been 73,435 COVID deaths of people under age 50 in the last three years and even among those deaths, 62% have been of people in their 40s. Just 2.5% of COVID deaths have been of people less than 40 years old. 

As an aside, the number of deaths for women are lower than the number of deaths for men at all ages under age 85. Women account for 56% of COVID deaths at age 85 and up, but this is because they make up 64% of the population age 85 and older due to their longer life expectancies. The death rate of women from COVID is lower than the death rate of men from COVID at all ages. Overall 55% of COVID deaths are men and 45% are women, and more than 55% the people who died of COVID under age 85 are men.

Also, rather than ceasing to be a problem after the year 2023 as Social Security actuaries have assumed, COVID-19 looks like it will continue to be a leading causes of death for people age 50 and up for the foreseeable future, in part, because the COVID vaccines and actual infection with COVID only seem to provide full immunity for a matter of three to six months, even though they are quite effective at preventing death from COVID as shown in the chart below:

As of February 24, 2023 the U.S. is experiencing COVID deaths at a rate of about 125,000 per year. There is also no assurance that some new variant won't lead to a new spike in COVID deaths like four previous spikes after the initial spike of COVID deaths in the U.S. over the last three years.

Notably, COVID deaths aren't being substituted for many deaths from other causes in the same demographic. The main source of the discrepancy between excess deaths and COVID deaths is due to deaths outside hospitals that are probably due to COVID in people who weren't tested for COVID when they were sick.

COVID-19 and rising interest rates on Treasury bonds combined will probably push the twelve year date for the Social Security trust fund to run out by a number of years, even if there are no changes to the system.

Potential Policy Solutions

Modest tweaks to the Social Security program could greatly mitigate this issue, such as: 

(1) increasing the retirement age which is currently age 67 for people born in 1960 or later who are currently 62 to 63 years old, and will hit their increased retirement age sometime in the year 2027.

(2) increasing the maximum income subject to Social Security payroll taxes from the current $160,200, 

(3) expanding the wage base to include non-payroll, non-self-employment income, as the 3.8% Obamacare tax on investment did for Medicare, 

(4) increasing the payroll tax from its current 7.65% for employees and 7.65% for employers (a combined 15.3%),  with a nearly equivalent self-employment tax rate that adjusted for the lack of an employee/employer FICA tax split (which works out to about 14.13% of unadjusted self-employment income), 

(5) allowing some of the Social Security Trust fund to be invested in something other than Treasury Bonds which almost by definition have the lowest return on investment of anything it could be invested in, as almost all state and local government pension plans in lieu of Social Security do), 

(6) capping high end benefits for high wage earners more than the current system does or means testing benefits above a certain level, or 

(7) using new revenue sources like a tax on tax favored retirement plan assets with high benefits, a tax on tax favored retirement plan distributions, or earmarking new or existing gift and estate tax revenue for this purpose. 

 

Krugman notes that there is nothing sacred about funding Social Security, which isn't truly comparable to a private pension plan, with something other than payroll taxes. 

Krugman doesn't mention it, but the fact that the number of workers supporting each person receiving Social Security benefits is projected to fall to a record low of 2.1 people working per person receiving benefits also argues against a plan to increase revenues solely with payroll taxes.

Life Expectancy At Age 65 Is Tied To Income

Krugman also notes that the link between income inequality and life expectancy inequality impacts what seems fair since people in the top half of incomes live five and a half years longer on average than people in the bottom half of income (whose retirements actually cost the system less per year since Social Security benefits are still tied, albeit in a progressive fashion, to lifetime earnings). 

People in the bottom half of incomes had an average life expectancy at age 65 which was one year longer in 2006 than it was in 1977. People in the top half of incomes had an average life expectency at age 65 which was six years longer in 2006 than it was in 1977. 

This disparity was only about 3% for people who reached age 65 in 1977, but has grew steadily through 2006 to a 34% disparity, and shows every sign of continuing to grow. 

This is so despite the fact there all senior citizens in the U.S. are part of Medicare, a national single payer healthcare system for almost everyone aged 65 plus in the United States. 

This is also true despite the fact that low income people receive a far larger share of the taxes they paid back in Social Security benefits than higher income people do, effectively making up for a larger share of their income during their working years. Middle class people are less reliant upon Social Security benefits in their retirements than working place people.

Biden's Tax Proposals

President Biden's State of the Union address proposed some new taxes with few details. One of those was a Billionaire's minimum tax fleshed out slightly more at CNBC:

Biden renewed his call for levying a tax on billionaires and corporate stock buybacks to reduce the federal deficit.

“The tax system is not fair; it’s not fair,” Biden said. “The idea that in 2020, 55 of the largest corporations in America, of Fortune 500, made $40 billion in profits and paid $0 in federal taxes? $0? Folks, it’s simply not fair.”

The idea was popularized by progressives like Sens. Elizabeth Warren and Bernie Sanders in the 2020 campaign. Biden has vowed to not raise taxes on Americans earning under $400,000 annually.

“Now because of the law I signed, billion-dollar companies have to pay a minimum of 15%, God love them,” Biden said to jeers by Democrats. “15%! That’s less than a nurse pays!”

Biden previously proposed a 20% tax on billionaires in March of last year as part of his federal budget. In Tuesday’s State of the Union address, Biden called on Congress to “finish the job.” The proposal did not gain much traction then and is unlikely to go anywhere in the Republican-controlled House.

Another is a fourfold increase in a stock buy-back tax, which according to CNBC via Wonkette, is as follows:

As part of last summer's Inflation Reduction Act, Congress created, for the first time ever, a tax on stock buybacks — the practice of companies buying back big chunks of their stock so that the dividends for investors will be higher. . . . Unfortunately, it's looking like the one percent tax on buybacks in the IRA hasn't done much to slow companies' fondness for the practice, so during the State of the Union, Biden called for the buyback tax to be "quadrupled." As CNBC notes, 

While he didn’t provide details on a new tax proposal, a quadrupling could take the tax from 1% tax to 4%, and the White House could push for the tax to be gross rather than net of any shares issued for employee pay and [mergers and acquisitions].

Actually passing any such increase would be tricky, because Republican House, and as CNBC points out, the buyback tax last summer had to be pared back from two percent to one percent to get the vote of Sen. Kyrsten Sinema. Expect the call to increase the buyback tax to feature in 2024 campaigning even if it doesn't get any traction in the current Congress. Oh, and we bet Rep. Ruben Gallego will talk about Sinema's opposition to it in his bid to replace her.

As CNBC details, oil companies have been plowing much of their recent record profits into buying back stock, and tech companies that have been doing layoffs have nonetheless found some spare cash for buybacks — $40 billion last year, in the case of Meta (aka Facebook). Apple spent $90 billion on buybacks in fiscal 2022, too.

One law firm explains the existing stock buy-back tax here. It begins by summarizing the tax as follows:

The new 1% excise tax was enacted last summer as part of the Inflation Reduction Act of 2022 (“IRA”) and generally applies to any US corporation whose stock is traded on an established securities market and that repurchases more than $1 million of stock over the course of a tax year (a “covered corporation”).

Some other tax proposals aimed at people making more than $400,000 a year are likely to echo his proposals from March of 2022:

The “billionaire minimum income tax” calls for a 20% levy on households with a net worth of more than $100 million, affecting the top 0.01% of earners, according to a White House fact sheet.

The 20% tax applies to “total income,” including taxable earnings and so-called unrealized capital gains, or asset growth, with installment payment options and a credit to avoid paying tax on the same wealth twice, the U.S. Department of the Treasury outlined. . . . Senate Democrats floated a similar billionaire tax in October to help fund their domestic spending agenda. However, the proposal failed to gain broad support within the party. . . .

Moreover, if the levy had survived negotiations, it may have faced legal challenges, according to some policy experts, and the overburdened IRS may have struggled to enforce the law.

Biden’s version of the billionaire tax may create administrative challenges for certain taxpayers, such as business owners who fall above the $100 million threshold, according to Howard Gleckman, senior fellow at the Urban-Brookings Tax Policy Center.

“Their assets are in their businesses,” he explained. “And it’s very difficult to value those assets.”

Many European countries have abandoned similar taxes due to the burden of assessing individual wealth, Gleckman said.

The budget includes other revenue raisers affecting individuals, such as hiking the top marginal tax rate, higher levies on capital gains for earners above $1 million and treating property transfers like a sale, among others.

As a practical reality, however, getting Congressional support for either measure when Republicans control the House and Democrats have only a thin, not veto-proof majority in the Senate, in which a former Democrat and a conservative Democrat, at least, are skeptical of the proposals.

The billionaire's minimum tax is a weird structure that makes sense politically but is clunky and would be hard to administer. The stock buy-back tax changes the rate on an existing new tax and might be more workable and politically attractive. Higher marginal tax rates for high income earners on ordinary income and capital gains respectively are easy to understand and implement at least.

It isn't clear to me if "treating property transfers like a sale" refers to limiting tax free 1031 exchanges of investment real estate, or to ending the carryover basis for capital gains tax purposes of gifts of appreciated assets and instead treating those gifts as "deemed sales", or to ending the step up in basis of capital gains at death and treating those transfers at death as "deemed sale" (which is what Canada does).

Simply refusing to extend tax breaks from Trump's 2017 tax bill is less flashy and won't happen until after the Presidential election in 2024, but is another option that is much easier to pass if gridlock in the legislative process continues. 

For example, Section 199A which provides a 20% deduction for the passthrough income of passthrough entities expires at the end of the year 2025:

Under current law, almost all the provisions of the Tax Cuts and Jobs Act that modify the individual income tax are scheduled to expire after December 31, 2025. The pass-through deduction is one of these provisions: as currently written, it will no longer be available to households beginning in 2026.

Hastening the currently scheduled expiration of some of these provisions might be a politically easier way for Biden to raise additional tax revenue.

There are myriad other ways to improve tax revenues from the affluent in a manner that advances sound tax policy. For example:

International Taxation

* Do not allow a deduction for payments made by U.S. taxpayers for intangible property owned by foreign taxpayers, regardless of location, including interest, and royalties on account of intellectual property.

Business Expenses

* Do not allow a business expense deduction for meals, lodging, or entertainment, unless the beneficiaries are employees or contractors who have this in kind form of compensation reported on their W-2 or 1099.

* Limit net operating loss carry forwards to three years, do not allow net operating losses to reduce income other than income from that business, and do not allow NOL carry forwards to reduce more than 50% of current taxable income from operating profits from the same business in any given year.

Retirement Savings and Social Security

* Set the maximum income that can be considered in a defined benefit plan's benefit formula equal to the Social Security/self-employment income tax cap, which would be increased to the current defined benefit plan cap. Make Social Security benefits tax free. Increase Social Security benefits to reflect this increased revenue if it can be done on an actuarially sound basis.

* Set a global cap on contributions from defined benefit plans and defined contribution plans (other than contributions in lieu of FICA taxes by governmental defined benefit plans) that can be made per year per person from all sources combined on a tax preferred basis of $10,000 per year, indexed, with defined benefit plans reporting an amount on an information return each year.

* Set an indexed $2,000,000 per beneficiary maximum dollar amount of combined defined contribution plan assets, which is reduced by a formula to take into account defined benefit plan benefits (but not below zero). If a firm has defined contribution plan assets in excess that amount, the excess is a required minimum distribution in the following year.

Capital Gains During Life

* Eliminate Internal Revenue Code § 1031 like kind exchanges for real property.

* Tax capital gains as ordinary income.

* Do not allow capital losses to be applied to income other than capital gains.

Whole Life Insurance

* Tax the increase in the cash value of a life insurance policy with cash value prior to death, which is not attributable to premiums in excess of premiums for comparable term life insurance premiums as taxable income (so that whole life insurance can't be used to generate tax free investment income).

Non-Profits And Municipal Bonds

* Eliminate the income tax exemption for all forms of municipal bonds that are currently tax exempt prospectively (i.e. for municipal bonds issued after the law's effective date).

* Tax the income of tax-exempt entities (e.g. charities and churches) from interest, dividends, capital gains, rent, royalties, and other sources of income from ownership of property at a flat rate equal to the highest individual income tax rate. In the case of payments of interest, dividends, and royalties paid by U.S. taxable limited liability entities or U.S. for profit businesses, withhold this at the source.

* End the charitable deduction for income tax purposes (but not gift and estate tax purposes). Allow a deduction for advertising expenses paid to charitable entities by businesses for advertising.

Gift, Estate, and Capital Gains Taxes At Death

* Treat assets owned by a decedent at death in estates that owe some estate taxes as if they were sold for fair market value on the date of death, subject to (1) a marital deduction - which would get a carry over basis, (2) the exclusion of gain on the sale of a personal residence that would have applied immediately prior to death (or half of that amount for a married decedent), (3) a limited step up in basis to fair market value at death to assets selected by an executor with a fair market value at death of death equal to the value of the assets which are exempt from estate taxation at death, and (4) an ability to elect a carry over basis at death for select assets.

* Eliminate the special step up in basis for capital gains tax purposes for community property.

* Allow a carry over basis at death election for assets to which the marital deduction does not apply for residences in which the recipient resides at the time of death, for vacant land, for farm real estate, for collectible tangible personal property like jewelry and art, for closely held business interests, and for property which cannot be liquidated at fair market value due to restraints upon alienation. The carry over basis must be disclosed on an asset by asset basis to the IRS and the recipient for each such asset for which an election is made.

* Reduce the exclusion from gift and estate taxation to $2,000,000 per per, person lifetime, indexed, inheritable by a surviving spouse. Make all transfers exempt from gift and estate taxation on this basis also exempt from generation skipping transfer taxation.

* Set the estate tax rate at the maximum individual income tax rate.

* Set the gift tax rate and the generation skipping transfer tax rate at the equivalent on a tax exclusive basis to the maximum individual income tax rate on a tax inclusive basis.

* Treat split-interest trusts (charitable remainder trusts, charitable lead trusts, grantor retained interest trusts, qualified personal residence trusts, etc.) as incomplete transactions until the death of the grantor or the completion of the trust term, whichever comes first, with the gift deemed to be made and valued at that time.

* Disallow minority interest discounts (including lack of marketability discounts for a sale of less than a 100% interest in closely held entity) and ignore control premiums in gifts of entity interests.

* Disallow the annual exclusion for gifts of interests in entities, including purchases of entity interests up to the amount of an annual exclusion gift made that are made within one year of receipt of the annual exclusion gift.

* Disallow the annual exclusion for gifts to trusts with Crummy powers.

* Treat taxes paid for the benefit of an irrevocable trust (for gift and estate tax purposes) that is taxed as a grantor trust as a gift taxable gift to the trust.

President Biden's State Of The Union Policy Initiatives In A Nutshell

President Biden's State of the Union address this evening focused on a bipartisan bread and butter moderate agenda, as well as touting a great many of the successes he's had in the first two years of his term that haven't received much attention. Incidentally, his factual claims (especially of "good news" he takes credit for) faired well when subjected to fact checking, although who gets credit for good news is always a subjective matter to some extent.

Stripped of the anecdotes and themes ("finish the job"), as usual, there was a list of major policy initiatives for his next two years which he announced. 

I've reviewed the transcript of his speech and distilled those policy initiatives from it. Agenda items in a State of the Union address are much more likely to happen than policies merely mentioned in a political party platform in the United States.

Health Care

Cap the costs of insulin at $35 a month for all Americans, not just those on Medicare. Preserve recent ACA premium subsidies and expanded ACA Medicaid after 2025. Extend the Medicare Trust Fund by two decades. Increase access to home health care and support for family caregivers. 

End the pandemic public health emergency. Monitor new COVID variants and support new COVID vaccines. Greatly increase funding for cancer research.

Taxes And Public Finance

Increase taxes on those making more than $400K per year and corporations with a "billionaire minimum tax", a 4x tax on corporate stock buybacks and closing loopholes that the very wealthy used to avoid paying taxes. Restore the full child tax credit. 

Lift the debt ceiling. Cut the deficit by $2 trillion without cutting Medicare or Social Security. 

Business Regulation

Strengthen anti-trust legislation, prevent online platforms from giving their own products an unfair advantage. 

Stop big tech from collecting data on kids and teens and targeting advertisements at them. Impose stricter limits on the data big tech collects on everyone. 

Pass the Junk Fee Prevention Act limiting hotel surcharges, cable and cell phone company switching fees, concert and ticket service fees, and charging families to sit together on planes.

Worker's Rights And Economic Security

Pass the PRO Act to make it easier to unionize. Guarantee all workers a living wage. Give workers paid family and medical leave and affordable child care. Increase access to affordable and quality housing. 

Education

Provide preschool to 3- and 4- year olds. Give public school teachers a raise. Increase access to mental health care at school. Connect students to career opportunities in high school. 

Reduce student debt and increase Pell Grants for working and middle class families. Provide two years of community college. 

Veteran's Benefits

Provide veterans and their spouses with job training and placement upon reentry to civilian life. Provide rent so veterans don't become homeless. Reduce suicides by veterans.

Crime And Law Enforcement

Prosecute criminals who stole pandemic relief money. Triple anti-fraud "strike forces" going after them, double the statute of limitations on these crimes, and crack down on identity fraud by criminal syndicates.

Stop fentanyl production, sale and trafficking with greater enforcement including higher penalties for fentanyl trafficking, more resources for interdiction at the border, and by working with carriers like FedEx to inspect more packages for drugs.

Give law enforcement the training they need. Fund more first responders and other professionals to address substance abuse and mental health issues. Use more resources to reduce violent crime and gun crime such as more community intervention programs and more housing, education and job training. 

Hold police officers and departments that violate the public trust accountable. He's banned federal law enforcement officers from using chokeholds, restricting no knock warrants, and other key elements of the George Floyd Act that didn't pass and he wants to finish the job on police reform. 

Ban assault weapons.

Immigration

Reform immigration, if not with his comprehensive plan, at least with more equipment and officers at the border, and a path to citizenship for Dreamers, those on temporary status, farm workers, and essential workers.

Abortion, Gay Rights and Democracy

Codify Roe v. Wade. Pass the Equality Act to protect LGBTQ Americans, especially transgender young people.

Don't tolerate political violence. Protect the right to vote rather than suppressing it. Honor the results of our elections. Uphold the rule of law. Restore trust in our institutions of democracy. Give hate and extremism in any form no safe harbor.

Foreign Policy

The U.S. will stand with Ukraine as long as it takes. 

The U.S. will work for more freedom, more dignity, and more peace, not just in Europe, but everywhere.

Seek competition and not conflict with China and unite the U.S. to compete with it. Invest in industries that define the future that China wants to dominate. Work with allies to protect advanced technologies so they are not used against us. Modernize our military. Work with China to advance American interests and benefit the world. Protect the U.S. from Chinese threats to our country and sovereignty.

Can You Help The Working Class In A Conservative Way Without Raising Taxes?

The Republican Party has a greatly shifted base with new interests, and the conservative political establishment is still struggling to figure out how to reconcile its historical policy positions with this new mix of constituencies.

How does a party that historically represented the rich and big business adapt to a world where conservatism’s constituencies are not just middle class but blue-collar, downscale and disappointed with the modern American economy?

How does the Republican Party, which is still the party of free markets and tax cuts, represent and support its working-class constituents?

Broadly speaking, the national conservative answer has been to combine the Trumpian emphasis on trade and industrial policy with the reform-conservative emphasis on family policy, with some trustbusting impulses added in as well. It’s a vision in which conservative governance supports skilled blue-collar jobs, domestic industry and parents of young children, while seeking to weaken the power of the Ivy League and Silicon Valley. 

. . .

[I]nflation, if it lingers, will force ambitious policymakers to make hard choices, and for conservatives those choices are constrained by the right-wing anathema against raising taxes on the rich.

There are exceptions to this ban, and Cotton and Rubio make the most of them. You can tax the rich if they’re wealthy liberal institutions, and so Cotton funds his training voucher in part with a tax on the endowments of wealthy private colleges. You can tax the upper class by cutting off their tax breaks, and so Rubio funds some of his family policies by ending the state and local tax deduction, a policy that especially benefits higher‌ earners in bluer states.

From Ross Douthat at the New York Times. 

Optimal Tax Policy

Matt Yglesias has made a mediocre post on optimal taxation. I'll try to hit some points that do a better job.

1. Taxes should not distort economic decisions that would have been made in their absence unless we are distorting those economic decisions on purpose in furtherance of intended policy goals. For example, the tax system: 

* should not prefer debt over equity financing (e.g. dividends and interest on loans should result in comparable combined taxation), 

* should not prefer subordinated debt over insurance mechanisms for protecting investors from risk (e.g. mortgage insurance as well as second mortgage interest should have similar tax treatment for home owners),

* should not prefer renting over owning (e.g. there should be a rent deduction comparable to the deduction for mortgage interest and property taxes)

* should not prefer tangible capital or financial capital over human capital (e.g. education expenses should be deductible), and

* should not prefer income from property over income from labor (e.g. capital gains and qualified dividends and "carried interests" should not received favorable tax treatment).

2. Intentional distortions of economic decisions to mitigate negative externalities with taxes should involve tax burdens comparable in magnitude to the harm caused by the externality. These taxes should also, ideally, be earmarked to mitigate the externalities caused. For example:

* Vehicle taxes should approximate the wear and tear on infrastructure that the vehicle creates (a per mile odometer tax adjusted for vehicle weight and owed when a car is registered may make sense).

*  Carbon taxes should approximate the harms caused by fossil fuel pollution.

3. Intentional distortions of economic decisions to encourage conduct with positive externalities with tax subsidies should involve subsidies comparable to the benefit the positive externality generates. These subsidies should be treat as expenditures in the budget process. Tax subsidies should be used only when direct spending is significantly less efficient and should regularly be reviewed for efficiency in generating the desired benefit. There are lots of dubious tax expenditures in the Internal Revenue Code that should be scrapped.

4. Taxes should be linked to means of determination that are transaction driven and hard to dispute, to the extent feasible, rather than based upon theoretical values.

* Cash flow based taxation for businesses (with what are now capital expenditures being deductible, loan proceeds being income, principal payments on loans being an expense, and no depreciation, amortization or depletion deductions) would be preferable to the current system of capital investments and loan proceeds that are not taxable and depreciation, amortization, and depletion deductions that are expenses without cash outlays. This eliminates the need to track capital gains tax basis and maintain depreciation and amortization schedules.

* C-corporation, trust and estate style taxation of distributions to beneficial owners when actually made is preferable in taxation of entity income to passthrough taxation. Pass through taxation should be limited to income allocable to unlimited liability owners of a company (treating a limited partnership as a partnership between a general partnership and a corporation made up of the limited partners).

* Taxes requiring property valuation should be disfavored in cases where there is not a well established market price for the thing valued, but can be attractive when a market price is easily established from many current and comparable transactions.

5. Taxes should be hard to defer with a preference for paying now rather than later. Indefinite tax deferral has a comparable economic impact to non-payment of taxes. For example:

* The deferral of gain in like-kind exchanges of investment real estate pursuant to IRC § 1031 should be eliminated.

* Multiple year carry forwards or carry backs of losses should be disfavored.

* A corporate entity level tax (or immediate passthrough taxation) is necessary to prevent taxation of income earned at the entity level from being indefinitely deferred.

6. Taxes should be paid to the geographic governmental subdivisions closest to where the underlying economic activity that gives rise to what is taxed occurs. In the case of intangible income, this should usually be the place the the transactions generating it occur and not the places where it is received. In a related point, taxes should be designed to address the fact that there are multiple levels of taxation in a federal system and that we have an open economy that includes interstate and international business. For example:

* Intellectual property royalties and sales taxes from the sale of intangible serviecs like streaming software should be subject to taxation when sales generating the royalties take place, or where the goods or services are delivered if this is not as "hot" and subject to manipulation.

* Retirement income should be taxed by the jurisdiction where the retirement funds were earned.

7. Taxation of non-profits should minimize the interactions between the tax collection system and non-profits. But this should not open up loopholes that undermine the taxation of the for profit tax sector. For example:

* Charitable deductions should be eliminated for income tax purposes, so that tax officials are not tracking who contributes charitably to whom and whether the charity is worthy. This is already the case for the tens of millions of taxpayers who do not itemized their deductions (especially homeowners in states with low taxes and renters).

* The 501(c)(3) tax exemption should remain but investment income and payrolls should continue to be subject to taxation. This would protect non-profits from most kinds of audits intrusions.

* The exclusion of charitable gifts from gift and estate taxation should be retained since the gift and estate taxes are taxes in lieu of income taxation on the person receiving it and non-profits are not taxable on the income that they receive.

* The minister's housing exemption should be repealed.

* Sales tax exemptions particular to non-profits should be repealed. This way vendors don't have to treat non-profits differently from other customers.

*  Property tax exemptions for non-profits owning ordinary taxable property should be repealed although special valuation rules or taxes in lieu of property taxes may need to be established for property that has a very thin market in which the transactions that do take place are often not at arms-length like churches.

* The exclusion from income for municipal bond income should be repealed.

8. The overall tax system should not be regressive. It should be flat or progressive. High rates of marginal taxation of lower incomes should be avoided, and for this purpose, the phase out of means tested benefits should be considered. In a related point, taxes should not tend to push someone from not being in poverty to being in poverty. For example:

* Integrating a universal basis income into the tax system can avoid the complication of phase outs of means tested benefits.

9. The taxes used to pay for public spending should be commensurate with the characteristics of the tax. For example, these characteristics include the geographic equity, business cycle patterns, changes with economic growth, and magnitude of what they pay for, to the extent feasible.

10. Taxes should be imposed in a manner sensitive to tax related transaction costs so that the transaction costs are not unreasonable relative to the revenue generated by taxes. One important subset of transaction costs is tax planning for the purposes of reducing taxation in ways not in furtherance of intentional policy goals. Loopholes are undesirable in part because they encourage wasteful tax planning.

* One of the big offenders here is the Medicaid Cost Recovery System which is basically the poor man's estate tax, impose an immense planning and economic burden on the assets of people who die after having received state subsidized, means tested nursing home care.

11. Aggregate taxation levels from all types of taxes should be sufficient to pay for all long term average public spending, both on goods and services that are more desirable to purchase governmentally than privately and also on transfer payments as necessary for reasonable equity in society without eliminating incentives to earn income or be profitable in activities that are socially desirable on a net basis. We shouldn't run annual deficits in ordinary times but should use debts to buffer the economy in bad times, and should set aside rainy day funds in good times. 

On balance, in the U.S. we err on the side of underinvesting in public spending, resulting in less efficient private sector attempts to address the same issues that could be addressed with public funding, which means higher taxes to pay for that and to reduce the long term average annual budget deficit (not the national debt itself) would be a good thing.

12. Taxes should be designed and administered in a manner that keeps the "tax gap" between taxes imposed and taxes collected small. For example:

* Third-party information reporting should be established in areas where the tax gap is large.

* Excessively complex provisions like the "earned income tax credit" should be redesigned or eliminated to reduce the vast number of audits it creates. The Obamacare tax credit is similarly absurdly complex.

Criticism of Proposals From Matt Yglesias

1.  Yglesias is a proponent of a "Land Value Tax", which purports to be good because the supply of land is fixed so it is hard to evade and investments in its can't increase or decrease the supply of land. But, a Land Value Tax doesn't tax land, which is fixed in supply, it taxes "Land Value" which is not fixed in supply. Land value, in reality, is indirectly a product of the buildings built in the neighborhood of the land being valued. But it does puts arguably counterfactual theoretical analysis (since few sales actually involve land alone) between market comparable values and the quantity being taxed. 

It also arguably puts too much pressure on the owners of vacant land to develop it despite the fact that it doesn't generate any revenue, or in the alternative leads to tax sales, because the development value of vacant land doesn't generate income and hence doesn't generate an ability to pay this tax.

A better way to think about property taxes is as a tax in lieu of an income tax on the fair market rental value of use property that isn't taxed in an income tax since income taxes usually don't tax imputed income from property ownership. 

In this analysis, it isn't obvious that it makes sense to impose property taxes on real property that is a factor of production (like agricultural land) as opposed to use property, any more than it does to impose sales taxes on both the full amount of wholesale sales and the full amount of retail sales, effectively giving rise to double taxation.

Any kind of property tax or Land Value Tax is also a troublesome way to finance a good or service like public education that needs to be delivered to people statewide or nationwide, partially though local taxes, since there is so much variation in tax base of real estate in different areas. Only a couple of very low population rural states have statewide property taxes.

2. Yglesias makes a half-hearted case in support of consumption taxes while also favoring strongly progressive consumption taxation and arguing the the source of income should matter. His proposal looks a bit like a value added tax or sales tax analysis. But, mechanically, it is difficult to make that kind of consumption tax progressive or even flat, and the alternative to a VAT or sales tax is usually an exemption for income from property (sometimes in the form of a generalized IRA with no contribution or withdrawal limits whose gains aren't taxed until withdrawn, effectively deferring income taxation but not eliminating it).

Essentially all consumption taxes are regressive and are especially regressive with respect to the very rich, in whose case even basically consumptive purchases are easy to reclassify as investments. He admits himself that:

The economic case that consumption taxes increase economic growth in the case of real world consumption tax proposals are also based upon pretty feeble macroeconomic analysis that isn't rigorously and unequivocally supported empirically.

He and I agree that a carbon tax or greenhouse gas emissions tax makes sense, even if the right dollar amount per ton is not something that can be scientifically determined down to the last dollar (Biden is proposing $51 a ton, he points to studies that suggest something more like $258 per ton.) The best is the enemy of the good and I'd be glad to see anything done.

He thinks that:

With respect to alcohol taxes, the current amounts are so small that they barely justify the costs of collection and vastly higher alcohol taxes would have a pretty regressive effect (although less than one might expect because really poor people don't drink much alcohol).

With respect to Marijuana taxes, he's smoking something, because marijuana is already extremely heavily taxed at the federal, state, and local levels, for example, due to IRC § 280E.

With respect to sweeteners, the studies that have been done to date are a mixed bag and we don't really understand the causes of obesity well enough to be making tax policy based upon it. And, there is a basic cost-benefit issue since even a high sweetener tax would still generate not that much revenue for high collection costs.

He may have had better proposals in the gated portion of his post, but if so, he didn't put anything in his introductory discussion to suggest that they were coming.