Wednesday, November 5, 2008
- Alice G. Abreu (Temple)
- Reuven Avi-Yonah (Michigan)
- Neil Buchanan (George Washington)
- Patricia A. Cain (Santa Clara)
- Bridget J. Crawford (Pace)
- Steven A. Dean (Brooklyn)
- David Gamage (UC-Berkeley)
- Michael J. Graetz (Yale)
- Steve Johnson (UNLV)
- Michael Knoll (Pennsylvania)
- James Maule (Villanova)
- James R. Repetti (Boston College)
- Daniel N. Shaviro (NYU)
- Samuel C. Thompson, Jr. (Penn State)
- Dennis J. Ventry, Jr. (UC-Davis)
Alice G. Abreu (Temple):
Tax policy under President Obama will be pragmatic and progressive, and gutsy. President Obama was the only candidate willing to go beyond the usual talking points of rates and base to the important question of how people pay taxes. He proposed a federal version of California’s Ready Return as early as the primary; he refused to pander by calling for a gas tax holiday and he was willing to tell voters a hard and unpopular truth: people at the top of the income distribution should pay more taxes than they are paying now. Although I don’t love his reliance on Clintonesque tax credits to achieve spending objectives, it is pragmatic. President Obama’s tax policy will not be a tax scholar’s dream, but his commitment to taxation based on ability to pay will change the tenor of tax policy debates in significant, and salutary, ways.
Reuven Avi-Yonah (Michigan):
While the general contours of Obama's tax policy are well known, there is one point that he repeatedly makes that requires elaboration. This is his promise to end tax breaks to corporations that send jobs overseas. What does this mean? It could mean ending deferral, or at least curtailing it along the lines proposed by John Kerry in 2004 (and devised by Jason Furman, who is one of Obama's top economic advisors). But any such proposal would have a tough time getting through a Congress that recently expanded deferral (by extending IRC 954(c)(6)) in the face of arguments about competitiveness. It could also mean something more modest such as Chairman Rangel's proposal to limit the deductibility of expenses allocated to deferred income, but this seems unlikely to have a significant impact given the ongoing disparity between the effective tax rate on US and foreign source income (25% vs. 4%, according to the GAO). My own favorite scheme is the one proposed by Kim Clausing and myself for the Hamilton Project -- global formulary apportionment with a sales based formula, so that booking profits overseas or moving jobs there has no impact on taxable income. Since the Obama campaign was silent about the details, time will tell how he intends to fulfill this promise.
Neil H. Buchanan (George Washington):
President Obama's attention will rightly be focused mostly on non-tax issues when he takes office. He needs to decide how to wind down our military presence in Iraq, to change our strategy in Afghanistan, engage with Iran, Russia, etc. He also must make sure that the financial system, and thus the entire economy, do not collapse before our eyes. He will have his hands full with the environment, energy, wages, unemployment, and on and on. The new president will be a very busy man. Candidate Obama did not talk about big changes in the tax system, and President Obama should follow that lead. There is no reason why the tax plan that Obama described in the campaign (targeted tax cuts for all but those earning above $250,000 per year, tax increases for those top earners) could not be adopted quickly and easily. It was a centrist platform that was specifically designed not to scare anyone, and it should not scare us now. The most important fiscal initiative that the new President must undertake, however, is a short-term stimulus package. This must not be in the form of more tax cuts. Instead, the federal government must increase its spending, ideally a combination of direct assistance to state governments and federal spending to begin to rebuild and repair our crumbling infrastructure. The economy is in serious trouble and quickly getting worse. Spending-oriented expansionary fiscal policy is President Obama's best -- indeed only -- strategy to lead us back to a situation that is stable enough to starting thinking again about less pressing matters like changing the details of the tax system.
Patricia A. Cain (Santa Clara):
Barack Obama is on record as supporting the full repeal of the Defense of Marriage Act (DOMA). As a result, one can easily imagine a new administration that will embrace fair tax policy for same-sex couples. There is much that such an administration can do even before repeal of DOMA. First, the administration could clarify through published rulings that the Internal Revenue Service will respect and recognize the community property rights of same-sex couples in California and Washington. Clarification is needed because the current administration has refused to issue public rulings, apparently out of a concern that merely addressing the issue might suggest official recognition of same-sex relationships. The problems created by this silence extend well beyond the question of whether Poe v. Seaborn applies to allocate earned community income between the two spouses or partners. Couples need to know how to treat deductible payments made from community funds and how to allocate joint tax refunds under state law on their federal tax returns. Similar rulings could be issued to clarify the appropriate tax-treatment of court ordered alimony and property divisions when same-sex couples dissolve their relationships in the eight states that currently require court supervised dissolutions for lesbian and gay couples. And with the eventual repeal of DOMA, the Treasury could then consider whether the term “spouse” ought to include “registered domestic partners” and parties to a “civil union,” when state law treats such statuses the same as marriage. I expect an Obama administration to end the silence on gay and lesbian tax issues and to move toward fairness for all families.
Bridget J. Crawford (Pace):
One of President Obama’s first priorities for tax policy likely will be the wealth transfer tax, especially the sunset provisions of the Economic Growth and Tax Relief Reconciliation Act of 2001. Portability of the estate tax exemption is a no-brainer, and I expect that will come early and without much disagreement. But in some ways, that's tinkering at the margins. If I were writing a wish list, at the top would be abolishing the joint income tax return. If that weren’t possible, next would be repealing DOMA. If equality is to have any meaning, then same-sex married couples should receive all federal tax benefits that opposite-sex married couples do. That’s real change for America.
Steven A. Dean (Brooklyn):
The big unanswered tax policy question for President Obama is not how he will allocate the tax burden across the economic spectrum, but whether he will bring an end to the era of tax deregulation. Since the 1980s, usually under the banner of tax simplification, rules that give greater autonomy to taxpayers without actually reducing the aggregate complexity of the tax law (measured in terms of resources devoted to complying with and enforcing the tax law) have been introduced by Republicans and Democrats alike. President Clinton, for example, introduced the pro-taxpayer check-the-box entity classification regulations in the name of simplification. The Treasury Department went on to spend the next decade working to put out administrative brushfires created by those rules. Will the Obama administration recognize that taxpayers do not always like simplicity?
David Gamage (UC-Berkeley):
In all likelihood, one of the first moves by an Obama administration will be to pass a massive stimulus package. Hence, despite his campaign promises, it is highly improbable that Obama will ask for significant tax increases in the first year of his administration, even on the wealthiest of taxpayers. My suggestion is that Obama include delayed tax increases in his stimulus package – tax increases that would not go into effect until a number of years have passed or the economy improves. While it is proper to increase deficit spending during a downturn, the long-term budget outlook demands that this increased debt be paid off once the economy recovers.
Michael J. Gratez (Yale):
President Obama and the new Democratic Congress face unprecedented fiscal policy challenges. First, they must endeavor to restore public confidence and return our economy to a period of growth. Here one can only hope that any new economic stimulus is well-targeted and genuinely temporary. Extending unemployment coverage and benefits should take priority. (And we should modernize our archaic system for funding unemployment insurance.)
When we emerge from the current recession, the president must tackle more fundamental issues. We need to put our fiscal house in order, restructure tax policy toward healthcare and health insurance, and shift away from tax expenditures as our principal policy instrument for financing higher education, implementing energy policy, addressing long-term care needs and the like.
What we now know, for sure, is that our longstanding reliance on a tax benefit for employers and employees as our main mechanism for covering Americans who are neither poor nor aged has not worked. Our healthcare costs are the highest in the world and more than 45 million Americans remain uninsured. Moreover, rising healthcare costs are making American businesses, workers and products less competitive in the world economy, and they are gobbling up the wage increases of American workers. The $12,000 average annual premium for family coverage amounts to 20% to 25% of median income for a family of four─ about what such a family used to spend for housing. Transforming the $200 billion annual tax expenditures for employer-provided health benefits, along with our direct government spending programs, into sensible and effective health policy is an immense challenge, but one we can no longer fail to address.
Relying, as we do, on income tax deductions and credits is about as successful a solution to our national needs as putting a bandaid on a cancer. Our political leaders must be weaned away from using tax deductions or credits as a cure-all for our nation’s ills. I believe that the only path to success in this critical policy domain is to remove most Americans from the income tax altogether.
We must also respond effectively to the internationalization of the world economy, with its ever increasing cross-border flows of goods, services, capital, and people, in combination with the dramatic revolution in technology that has occurred in the past two decades. Together, these developments pose unprecedented challenges to U.S. tax policy. While the evidence is not conclusive, it may well be that trade with developing countries, including trade in goods such as electronics and computers, is today exacerbating the inequality in wages of skilled verses unskilled laborers. But protectionist trade and tax policies are no answer.
Whatever the effects of trade in goods and services on our pre-tax distribution of incomes, it is beyond any doubt that the recent technological revolution--especially in information technology and financial products--has helped to produce a more unequal distribution of pretax incomes than any we have experienced since the gilded age of the 1920s.
The combination of technological advances and the opening of world markets for goods, services, labor, and capital have created unprecedented challenges to the U.S. economy and to tax policymakers and tax collectors throughout the world. In particular, imposing and collecting taxes on capital income have never been as difficult as they are today. And this produces major new challenges to our nation’s ability to achieve the distributional justice that we aspire to.
Going forward, we must have a tax system that will advance the competiveness of American workers and investors, not stifle it. An important goal of tax policy should be to create better conditions for American workers and businesses, both domestically and internationally. I believe that this will demand lower business income tax rates. But international tax policy and the corporate income tax are issues that are susceptible to confusion, demagoguery and demonization by politicians.
We must also maintain and finance a safety net of adequate social insurance to protect American workers’ incomes from what Franklin Roosevelt called the “vicissitudes of everyday life.” Not only from rising healthcare expenditures, but also long and short term disability, long term care needs for the elderly, temporary assistance for needy families, a secure retirement income, and adequate after-tax income for relatively low-skilled full-time workers.
Meeting these challenges will be the defining test of American public policy in the years ahead. Whether and how we perform will depend on courageous political leadership from our president and the Congress.
We will surely fail that test if our politicians don’t stop demonizing foreigners and international trade and stop treating middle-class Americans as if there is some bountiful free lunch pail coming around the next corner. With his grand and enormously successful Social Security experiment, FDR demonstrated that important and progressive public policies can be financed and sustained even with a tax that is not itself progressive. That experiment may be one we will have to try again soon.
We are a low-tax country but not a low income tax country. I have long argued that a tax on consumption of goods and services, similar to the value added taxes used by nearly 150 nations around the world, is essential if we are successfully to address the challenges we face in a fiscally responsible manner.
Steve Johnson (UNLV):
I think it would be a mistake to expect that either candidate's campaign tax planks will bear close correspondence to tax legislation actually enacted in the next 4 years. I recall how confidently the Democrats spoke of fixing the AMT mess when they gained control of both Houses of Congress in 2006. Yet fundamental AMT reform hasn't happened yet and is not on the horizon.
What will happen with the economy is quite unclear, and the condition of the economy will drive tax policy over the next few years. Amid uncertainty as to the big picture, however, I hazard a few predictions below.
Regardless of which candidate prevails, federal taxes will increase by the end of the next Administration. The 2001 tax cuts are scheduled to expire in 2011. A President McCain would be unable to save those cuts because a Democratic Congress will not vote to keep them. A President Obama would happily let them expire. The loss of the 2001 cuts will more than offset any cuts the next Administration and Congress will agree to.
High-income taxpayers surely would be hit the most by tax increases in the next 4 years. The top income tax rate, of course, would be higher than the present 35%. The capital gains rate would increase. And the cap on incomes subject to the Social Security tax likely would disappear or rise steeply.
Regardless of which candidate wins, a compromise will occur under which the estate tax will remain (even for 2010), but will have a smaller bite because of exemption increases or rate decreases. Exemption increases or rate decreases presumably would be smaller if the Democratic Party controls the White House as well as Congress.
Both parties are dissatisfied (for different reasons) with current rules as to taxation of international transactions. I suspect, though, that policy intricacies and coalition-building difficulties will be such that no really dramatic change will occur as to such rules in the next 4 years, regardless of which candidate wins.
Regardless of which candidate wins, the IRS will continue to be underfunded. The result will be as
it always is -- when the IRS increases education or enforcement in one area, it will have to pull resources away from other areas, leading to one step forward and one step back.
Michael Knoll (Pennsylvania):
With many of the Bush tax cuts sets to expire in the coming years, the tax system has been described as a jump ball. And President-Elect Obama, who was elected on a platform promising tax cuts for 95 percent of Americans and ambitious plans to increase spending, is poised to grab it. With solid Democratic majorities in the House and Senate, there will be intense pressure on him to move quickly to reverse the Bush tax cuts and to implement his promised tax and spending plans. Yet, prudence dictates not moving too quickly with his tax plan for several reasons. First, a weak economy is not the time to raise taxes on the top 5 percent. The time for tax increases will come when the economy improves. Second, the U.S. government has been running large deficits, which add to the national debt. Once the economy improves, total tax revenues will in all likelihood need to be increased – not only revenues from the top 5 percent – to reduce those deficits. Third, there is substantial dissatisfaction with the existing tax system from many corners. President Bush cut taxes first and then tried to get tax reform. He got his tax cuts, but he made little headway on tax reform having given away all the benefits. By connecting any revenue changes (most likely increases) with tax reform, President Obama will be better able to achieve both. Fourth, the U.S. tax system was designed for a nation where foreign trade and investment constituted a small part of the economy. That is no longer the case, and any major overhaul needs to address squarely the United States’ economic connections with the rest of the world.
James Maule (Villanova):
Imagine it is this time next year. Many tax experts and taxpayers, looking back at the legislative activity of the previous 9 months, will be surprised by the changes that they see in the tax law. Those who feared some sort of government confiscation of wealth will discover that their fears were groundless, and that the revocation of the Bush tax cuts for those with incomes in the top 5 percent of incomes did not leave those taxpayers in dire straits nor did they usher in some sort of wealth redistribution crisis. Those who thought that the tax law would be simplified will be proven wrong. If anything, the tax law will be even more complicated, as another pile of tax credits are rolled into the tax code. Those who hoped that an Obama presidency coupled with an overwhelmingly Democratic Congress would mean a return to tax rates of 50 percent or more will be disappointed. Those who wished for tax law changes that would contribute to a reduction or elimination of the federal budget deficit will continue to be frustrated. Those who expected a tax cut for "95% of working taxpayers" will wonder how the 95% became a smaller number.
Tax policy in an Obama administration will be defined as much by the circumstances as by the President's perspective and attitude. Almost all of the problems inherited by the new Administration will demand solutions not necessarily consistent with all of the tax changes promised during the campaign. Tax breaks designed to deal with specific issues, whether health care or unemployment, will reduce or eliminate the opportunity to provide tax breaks that were planned. Closing loopholes will continue to be as challenging a task as it ever has been, because one election will not inspire lobbyists to pack up and go home. I daresay it will encourage even more lobbyists to make their way to the nation's capital.
So how will the nation's tax law be different a year from now? It won't be what I want, or what any particular taxpayer or tax expert wants or thinks should happen. It will be some combination of compromise, a more complicated arrangement, and a system that will generate no less griping than what we now have. The identities and arguments of the critics will change, but the dissatisfaction will remain. It will be a modified version of the present system. Here's my best guess. There will be some sort of tax break for investment, either lower or eliminated capital gains rates for taxpayers with adjusted gross incomes under some selected figure, or perhaps a credit for making an investment, recapturable for dispositions over some period of time. The definition of qualifying investment will span pages of the Code. There will be an increase in the tax rates for taxable incomes over $200,000 or $250,000 or thereabouts, to what they were eight years ago, and there might even be a higher rate on taxable incomes exceeding $1,000,000. The so-called cap on wages subject to FICA will be lifted, and it very possibly will be a simple removal such that all wages are subject to that tax. There will be some sort of exclusion for unemployment benefits, but probably subject to the same sort of complex phase-in that bedevils the taxation of social security benefits. There will be more, and extended, tax breaks for small business. There almost certainly will be a clamp-down on the ability of multinational corporations and individuals investing abroad to use tax havens to shelter income. And no one should be surprised if there will be a significant increase in the amount budgeted for IRS enforcement of the tax law.
Check back in a year. Notice that I qualified everything with words like "perhaps" and "possibly." I've been around long enough to know that predicting what the Congress will do with the tax law, other than make it more complicated, is nothing more than an educated guess. And educated guesses are as likely to be wrong as right.
James R. Repetti (Boston College):
As a general matter, we need to reverse the mind-numbing complexity that has grown in our tax system over the past several years with a view to improving efficiency and equity. It is difficult to select the most important, but here are some suggestions that I believe merit immediate attention.
I. Corporate Tax Reform. We should eliminate the complex and haphazard taxation of capital that exists in our current classical corporate tax system. The current double-tax system creates significant economic distortions and inequities that could be improved by assessing a single tax on a broadened corporate income base.
To accomplish this, we should integrate the corporate and individual income taxes. The revenue loss from integration should be partly offset by broadening the tax base through the elimination of corporate tax preferences and the elimination of income deferral for controlled foreign corporations. In addition to increasing revenues, such base broadening would increase efficiency by removing existing distortions in the selection of capital investments by corporations. Also, if the form of integration replacing our existing double tax is an imputation credit or dividends-paid deduction system, there would be no reason to continue the existing preferential rates for dividend income and capital gains of individuals. Instead, such income should be taxed at ordinary rates.
II. Individual Income Tax Reform. The individual income tax should be retained. The equity advantages of a progressive income tax are clear while the efficiency arguments for a consumption tax are not persuasive when real-world taxpayer behavior and transition costs are taken into account.
Integrating the corporate and individual income taxes could significantly simplify the income tax by eliminating the need to provide preferential rates for capital gains and dividend income. An additional simplification would be to eliminate the AMT. If Congress wishes to reduce the tax benefit of certain tax expenditures, it should do so directly, rather than indirectly through the complex AMT. The only argument in support of the AMT is that its complexity may mask its effect and, as a result, cause it to have less of an impact on taxpayer behavior than a direct approach. However, this efficiency argument seems unlikely. Most taxpayers who are subject to the AMT are well aware of its existence and are likely to take subsequent action to minimize its impact in future years.
III. Estate Tax Reform. The estate tax should be retained at the 2009 rates and exemption amounts. Compared to the corporate and individual income taxes, the estate tax is more efficient because it has the least influence on taxpayer behavior during the taxpayer’s productive years. The estate tax also needs reform, however. We need to reunify the estate and gift tax credits. There is absolutely no reason to have different credit amounts for gifts and bequests. Moreover, these credits should be portable for married couples so that credit that is unused by one spouse can be used by the surviving spouse. Also, we should streamline sections 2036 and 2038 and repeal section 2037. Lastly, minority discounts should be denied where the transferee who receives a minority interest holds a controlling interest after the transfer.
Daniel N. Shaviro (NYU):
The most important long-term goal for U.S. tax policy is to achieve adequate revenue levels, thus permitting us to head off a long-term fiscal collapse (in conjunction with healthcare and entitlements reform). But achieving fiscal adequacy – unlike healthcare reform – has to be a bipartisan task, and even with a sweeping Obama victory we would be very far from the point where the Republicans are prepared to play ball a la the Reagan-O’Neill Social Security compromise of 1983.
Obama’s top tax and economics people, such as Jason Furman and Austan Goolsbee, definitely understand the long-term fiscal picture, but also the politics. So apart from the tax aspects of healthcare reform, they are going to have to focus a bit differently. Despite the worsening budgetary situation, I would expect them to establish Obama’s political bona fides by carrying through on the “middle class tax relief” that he’s promised, while mainly letting the Bush tax cuts expire, albeit with some remaining dividend relief and with the estate tax (or inheritance tax?) placed on a more politically sustainable path with a much higher exemption amount and lower rates than pre-2001.
The question is when and how they will be able to point back in the direction of revenue adequacy and getting budget deficits below the trillion-dollar level. I would not expect the Republicans to cooperate at all, at least for the next four years. (An extremist Palin candidacy that got thoroughly clobbered in 2012 might help to bring them back in the direction of sanity, but that’s further down the road.) So perhaps the four years will see a lot of marking time, apart from short-term countercyclical budget policy and possibly something more ambitious with respect to healthcare.
Samuel C. Thompson, Jr. (Penn State):
I think the new administration should consider promoting the proposals I discussed in my article, How Should Congress React to Bush's Tax Proposals?, 114 Tax Notes 1233 (Mar. 26, 2007). In the conclusion, I summarized the proposals as follows:
In summary, I propose that Congress should:
- increase the marginal rates for high-bracket taxpayers while making permanent tax relief for low-and middle-income taxpayers;
- provide permanent relief from the AMT for middle-income taxpayers;
- tax dividends at ordinary income rates with appropriate relief for low-bracket taxpayers;
- reinstate the maximum 20% rate for capital gains of high-bracket taxpayers;
- reinstate the estate tax with a $4 million exemption and an increase in the marginal rate for large estates;
- codify the economic substance doctrine; and adopt a current imputation system of taxation for CFCs.
On the first item, the rate structure: I proposed that the 39.6% rate apply to "all income exceeding $250,000 [and] not exceeding $1 million. A 45% rate should apply to * * * taxable income in excess of $1 million, but not over, say, $ 5 million; and a 50% rate should apply to * * * taxable income in excess of $ 5 million."
On the last item, ending deferral: A recent GAO study shows that there is significant avoidance of tax by aggressive transfer pricing that results in parking income in foreign subs, which are subject to low tax rates. This is fresh evidence of the need to eliminate deferral by adopting an imputation system for CFCs. Also, this would be consistent with Senator Obama's proposal to eliminate the tax incentive for companies to move capital overseas.
Dennis J. Ventry, Jr. (UC-Davis):
My tax policy wish list under President Obama begins and ends with the hope that the 44th president of the United States will abide by the words of the 32nd president, Franklin Roosevelt: “Taxes, after all, are dues that we pay for the privileges of membership in an organized society.”
Taxes raise revenue, just as they surely distort economic and social decisions. But most taxes (except, perhaps, confiscatory levies) provide benefits that far outweigh any conceivable burdens.
I urge President Obama to embrace the benefits of a taxpaying culture: its effect on civic virtue, accountability, transparency, fiscal, political, and communal responsibility, in addition to its symbolism. What we tax, who we tax, and how we tax reflect shared values. Our use of a progressive income tax reflects our belief that society has a claim on disproportionate increases in income because society facilitates those increases. Similarly, an estate, inheritance, or wealth tax reflects our belief that intergenerational concentrations of wealth make for aristocracies not democracies. In the end, my hope is that President Obama encourages us to view taxes as an opportunity rather than a burden--as a path toward collective rather than selective prosperity.