Yesterday, I testified before the Finance Committee of the U.S. Senate on fairness or distribution issues in the federal income tax system. You can view a stream of the entire proceedings here, and you can read my full written testimony here or here (the latter corrects an erroneous number from the testimony I actually submitted). In addition, the shorter written remarks that I prepared for my 5-minute slot, and then delivered more or less verbatim (taking exactly 4:57!), are available here.
My remarks emphasized three main points:
(1) Rising high-end income concentration may influence how one thinks about high-end tax rates, in particular as part of a broader tax reform process. In the 1986 tax reform process, people thought about high-end distributional neutrality as purely a function of making before-and-after comparisons for two groups: those earning from $100,000 to $200,000, and those earning more than $200,000. A much more nuanced approach to the high end may be necessary today (e.g., the Fiscal Commission Report looked at the top 20%, 10%, 5%, 1%, and 0.1%).
(2) The big-ticket tax expenditure items (such as home mortgage interest deductions, the employer-provided health insurance exclusion, and charitable deductions), tend to provide benefits that rise relative to income until close to the top of the income distribution, when they start falling as a percentage of income. This makes it quite difficult to achieve distributional neutrality 1986-style at the very top unless one starts addressing items such as the 15% dividend rate, which (a) doesn’t hit wage earners at the very top and (b) arguably isn’t a tax expenditure given the double corporate taxation issue.
(3) If tax expenditures are equivalent to spending through the tax code (as asserted by both the Fiscal Commission and the Ryan Budget plan, and as best illustrated by David Bradford’s weapons supplier tax credit example), then repealing them is not in substance a “tax cut,” and hence doesn’t need to be accompanied by tax rate cuts even if one has some view about tax revenues and the size of government. The ONLY reason to cut individual income tax rates, especially in the face of the long-term fiscal gap, is if the equilibrium one prefers (and can get to) includes lower rates, a point on which I am quite skeptical. More on this in my May 23 Tax Notes piece, “1986-Style Tax Reform: A Good Idea Whose Time Has Passed.”
At the hearing, the Republicans had a coordinated theme decrying the fact that, according to a Joint Committee on Taxation estimate, in 2009 51% of all households paid zero in income taxes. 51 percent is ostensibly a “tipping point” (although in fact it reflected the temporary impact of the recession), and is said to be a concern because you have no “skin in the game” if you pay no income tax, and thus ostensibly will vote under the “fiscal illusion” that government spending is free.
I would question how much political influence we should attribute to Americans who are too poor to pay income tax. Political scientists such as Hacker and Pierson would presumably say, try zero as a good baseline estimate of their influence. If I were looking at a fiscal illusion that government spending is somehow “free,” I would start my analysis with deficit financing. Plus, as I commented at one point, it is a mistake to focus on just one year and just one tax.
One of the Republican Senators at the hearing dismissed the significance of payroll taxes in this regard by noting that they are associated with providing Social Security and Medicare benefits at retirement, rather than going into general revenues. But more specifically, he called payroll taxes merely an “insurance premium.”
If payroll taxes are insurance premiums rather than taxes, and Social Security / Medicare benefits are insurance payouts rather than government spending, I suppose we will need to restate our budgetary accounts a bit.
Another coordinated theme on the Republican side of the aisle was that it's simply wrong to have the income tax system do anything whatsoever to affect distribution. It should simply be about raising revenue to pay for government outlays, period. Anything else is immoral. I replied that, if this is the case, we should definitely have a uniform head tax, under which Bill Gates would pay the same amount of tax as a homeless person. And if this is wrong (and I noted that Margaret Thatcher, who had been lauded earlier in the hearing, ran into some problems with a head tax), and we indeed want to tax something such as income based on some such notion as ability to pay, then we are all really playing the same game, and there is nothing left to complain about at a philosophical level.
I think it came out sounding a bit less harsh than that, but hopefully the point was clear.
One of the Democratic Senators invited me to take some pretty open potshots at the degree of good faith in the tax part of the Ryan budget, but I declined to impugn motives, and simply said that I felt its rate cuts were unwise and that its base-broadening remained entirely unspecified. But I granted that it's a lot easier to criticize popular but bad policies if you have my job than if you are a member of Congress.