Monday, April 4, 2005
The Boston College Law Review has published a symposium issue on The State of Federal Income Taxation Symposium: Rates, Progressivity, and Budget Processes, 45 B.C. L. Rev. 989-1424 (2004):
James Repetti (Boston College), Introduction to the State of Federal Income Taxation: Rates, Progressivity, and Budget Processes (pp. 989-92)
Abstract: This article first examines in detail the increasing concentration of income and wealth in the top one percent, and particularly within much narrower cohorts near the top of the top one percent, that has occurred over the past twenty-five years. It demonstrates the strong Matthew effect in incomes in the United States over that period. The super-rich are pulling away from everyone by so much and at a rate so fast that the fact that incomes of many households at the bottom and in the middle have stagnated, or even fallen in constant dollars, has been obscured by ever increasing per capita income....Finally, the article suggests that its time for the tax system to address these problems by substantially increasing progressivity at the top of the income pyramid. Future tax legislation ought to mitigate the Matthew effect, rather than enhance it.
Abstract: Professor Martin J. McMahon, Jr.’s Article demonstrates that the rich are getting richer and the poor poorer in the United States, that something must be done to deal with increasing income inequality, and that income tax rates should be more progressive. Increasing tax rates on the super-rich as he suggests, however, will not eliminate these problems by itself. There is no way to decrease income inequality without increasing rate progressivity on a wider range of taxpayers. To do so would be politically problematic, and it therefore seems unlikely that these problems can be solved through the federal tax system.
Abstract: Professor Martin J. McMahon, Jr.’s Article on the Matthew effect presents an important and timely argument about decreasing the income inequality in the United States through the federal tax system. His contention that the rich tend to get richer is widely supported by both economic and social theories. But Professor McMahon may be too sanguine about Congress’s ability to increase top marginal tax rates significantly without adversely affecting economic output. In particular, concerns about the validity of the long-term studies on which he relies, and the failure to account fully for the special circumstances of very high-income taxpayers, suggest that only modest rate adjustments would be desirable.
William G. Gale (Brookings Institution) & Peter R. Orszag (Brookings Institution), An Economic Assessment of Tax Policy in the Bush Administration, 2001- 2004 (pp. 1157-1252):
Abstract: This Article analyzes the economic effects of the George W. Bush administration’s tax policies. It describes the 2001, 2002, and 2003 tax cuts and the proposals to make them permanent, and then explores the consequences of making the tax cuts permanent on the fiscal status of the government, the distribution of after-tax income, long-term economic growth, and the prospects for fundamental tax reform. This article also examines the role of the tax cuts as a short-term stimulus over the past few years.
Abstract: In response to Doctors William G. Gale and Peter R. Orszag’s Article, this Commentary argues that because the economic and social consequences of making permanent the 2001 and 2003 tax cuts would be disastrous, they would need to be paid for through some form of tax increase or spending decrease. This Commentary argues that reductions in tax expenditures are equivalent to reductions in direct spending and thus should be considered together with them for deficit reduction purposes. This Commentary next notes that the Alternative Minimum Tax has become, for no clear congressional purpose, a tax on the middle class. Finally, this Commentary argues that the negative impact of the 2001 and 2003 tax cuts on future generations is morally unacceptable.
This Commentary proposes the adoption of pay-go procedural rules for tax lawmaking that favor tax cuts that decrease income inequality, in response to biases in distributional tables and distortions in the political process. It suggests that the failure to use present value analysis in the budget process has had unfortunate, unintended consequences, in particular, a congressional preference for a prepaid-type consumption tax. This Commentary argues that efforts to index the Alternative Minimum Tax (the “AMT”) should not deflect attention from the AMT’s most fundamental distributional problem—its failure to treat dividends and capital gains as preference items. It suggests that there may be some institutional advantages in global sunsets of important tax legislation, even when the legislation is not intended to expire. Finally, this Commentary considers the intersection of budget processes and progressivity in the tax expenditure budget. It argues that the Bush administration’s recent changes in the treatment of the corporate tax and its incomplete analysis of comprehensive tax bases, undermine the usefulness of the tax expenditure budget, and have made tax expenditures suddenly appear more progressive, even though they are not.
Abstract: The Bush administration’s policy of sharply cutting taxes while increasing government spending is both misguided and harmful. Presumably rationalized in private as a way of shrinking government over the long term without paying a current political price, this policy in fact increases the government’s distributional intervention by handing money to current voters at the expense of younger and future generations. Moreover, the ballooning fiscal gap may lead to an Argentina-style meltdown in the U.S. government’s position as a borrower in world capital markets, potentially yielding chronic inflation, unemployment, and bank and currency crises that may affect our economic productivity for an indefinite period.
Lawrence Lokken (Florida), A Tax Lawyer's Observations on Scary Numbers, Politics, and Irresponsibility (pp. 1335-46):
Abstract: The fiscal gap is filled by the issuance of government debt, an increasing portion of which is held by foreigners. Although foreigners still seem willing to absorb large amounts of U.S. debt, international organizations express concern over U.S. budgetary deficits. A significant source of the fiscal gap is the Social Security system. Two changes that might resolve Social Security funding issues include raising the minimum age to receive full retirement benefits to seventy years old and raising the taxable wage base. Politically, however, adopting either of these changes soon seems impossible. In addition, current Medicare costs will exceed current tax revenue in 2004 for the first time in recent history. Congress could bring long-term expenditures and revenues into balance by, for example, immediately raising the tax rate from 2.9% to 6.02% or immediately reducing benefits by 48%. If Congress defers taking action to address the problem, however, the rate increase or benefit reduction will need to be more substantial.
David I. Walker (Boston University), The Social Insurance Crisis and the Problem of Collective Saving (pp. 1346-62):
Abstract: Long-range Social Security and Medicare spending projections vastly exceed projected program revenues. If left unchecked, the resulting fiscal imbalance (estimated at $40 to $70 trillion in present value terms) would fall primarily on future generations. To avoid generational inequity, and perhaps fiscal meltdown, Professor Daniel N. Shaviro and others propose immediate fiscal austerity. This reply Commentary argues that near-term austerity is unlikely to play a significant role in overcoming the fiscal imbalance, which can be thought of as a balloon payment due in the mid-twenty-first century. Significant near-term fiscal austerity would eliminate the public debt and replace it with a public surplus. Political economy theory and U.S. public debt history suggest that this path is infeasible. This Commentary also stresses the importance of disaggregating the “Social Security and Medicare” problems. Contrary to popular belief, Medicare is by far the larger problem, and the Medicare imbalance is driven by projected spending increases, outpacing overall economic growth indefinitely. These observations suggest that a focus on Medicare cost control, rather than revenue enhancement, is called for.
Abstract: This Article explores the optimal level of income redistribution by examining the potential welfare gains from redistributive tax and spending policies. Drawing on recent research on human happiness, this Article argues that while wealthy nations are generally happier than their poorer counterparts, neither national nor individual economic growth appear to have an appreciable impact on the subjective well-being of the citizens of relatively wealthy nations. Significant causes of this finding include the problem of rivalry—that increases in the income of some depress the happiness of others—and the fact that individuals overestimate the degree to which additional consumption will improve their happiness. Studies show the level of inequality in a society also may affect levels of happiness. Ultimately, happiness research is consistent with the strongest justification for adopting a progressive tax structure—income has declining marginal utility thus redistribution can increase total welfare in a society.
Marjorie E. Kornhauser (Tulane), Educating Ourselves Towards a Progressive (and Happier) Tax (pp. 1399-1412):
Abstract: This Commentary addresses two questions raised by Professor Thomas D. Griffith’s argument that progressive taxation improves people’s subjective well-being by increasing their relative income. First, why do so many people oppose progressivity if it would make them happier? Second, can their opinions be changed in order to enhance their well-being by better aligning attitudes and true self-interests? This Commentary provides a dual-fold answer to the first question—opinion polls often overstate opposition to progressive taxation and much of that opposition is false in the sense that it is caused by ignorance, cognitive bias, and inflammatory rhetoric. After explaining why much opposition would disappear if people better understood progressive taxation, this Commentary then answers the second question affirmatively by pro-posing a national tax literacy campaign involving the government, media, and private industry. By increasing the public’s knowledge of progressive taxation, such a broad-based educational effort would transform many hostile taxpayers into supportive ones and thereby align their attitudes with their self-interest.
Abstract: This Commentary examines three issues raised in Professor Thomas D. Griffith’s Article on the connection between progressive taxation and subjective well-being, focusing on the selection of happiness as the measure of the gains of redistribution, the ability to measure happiness or subjective well-being, and the implications of using happiness analysis in determining tax policy. After arguing that the progressive taxation debate would benefit from further exploration of why happiness is the appropriate measure of success, this Commentary raises concerns about relying on self-reporting of subjective well-being and how happiness studies should be interpreted and can be improved. Finally, this Commentary notes that studies of income and happiness may inform tax policy design by helping to determine the appropriate balance between taxes and expenditures, outlining a role for the government in informing taxpayers’ perceptions of happiness, and focusing additional research necessary for an effective progressive taxation policy.