Paul L. Caron

Friday, November 1, 2019

Weekly SSRN Tax Article Review And Roundup: Speck Reviews Glogower & Kamin's The Progressivity Ratchet

This week, Sloan Speck (Colorado) reviews a new work by Ari D. Glogower (Ohio State) & David Kamin (NYU), The Progressivity Ratchet, 104 Minn. L. Rev. ___ (2020):

Speck (2017)In The Progressivity Ratchet, Ari Glogower and David Kamin provide further reasons to dislike the headline business tax changes in the 2017 legislation commonly known as the Tax Cuts and Jobs Act, namely the “pass-through” deduction under § 199A and the general reduction in corporate tax rates to 21%. Glogower and Kamin argue that these poorly targeted tax preferences, coupled with private-sector tax gaming and political economy constraints, create the potential for what they term the “progressivity ratchet,” in which lawmakers cannot readily reverse revenue-losing tax preferences by raising nominal rates on high-earning taxpayers. To escape this predicament, Glogower and Kamin suggest restoring the relative penalty for operating in corporate solution, eliminating existing tax preferences, or better targeting those tax preferences that policymakers choose to keep.

One might view Glogower and Kamin as merely piling on, as kicking the most (or only) significant legislative achievement from a period of unified Republican government when the law already is down in public opinion polls. But Glogower and Kamin add much-needed specificity and nuance to the debate over the TCJA, as well as theoretical insights that should inform thinkers and policymakers in future iterations of tax reform. Glogower and Kamin debunk what could be called the myth of rate neutrality in the choice-of-entity context. In an existing system that taxes corporate and pass-through businesses differently, reforms that decrease average rate differentials across these categories of businesses may not mitigate inefficiencies. Instead, the consequences of such reforms depend on their particular structure and function, and we should beware “poorly targeted” tax preferences. For Glogower and Kamin, the headline business tax provisions from the TCJA meet this definition: across-the-board corporate rate cuts are too attenuated from base erosion concerns, and the pass-through deduction is shoddy compensation for reduced rates on corporate capital. These points are important. Finally, Glogower and Kamin do tremendous work by bringing political norms and values into their model. Any proposed resolution of the myriad issues raised by the TCJA requires a concrete accounting of the political mechanisms involved.

Political economy, however, isn’t particularly easy to apply or evaluate. Glogower and Kamin posit three factors that limit politicians’ ability to adjust rates: an unwillingness to raise revenue at high marginal efficiency costs, a sensitivity to high statutory tax rates, and an awareness that, at some point, high rates may place policymakers on the wrong side of the Laffer curve. The authors, of course, note that these constraints are neither universal nor static, and, for me, charting change over time could be valuable. Between 1950 and 1986, tax policy swung from demand-side to supply-side to efficiency-oriented, and that last view, as Glogower and Kamin imply, has dominated policy discourse since. An outstanding question is whether the TCJA represents a continuation (or culmination) of that intellectual project, or whether the TCJA marks a shift in the underlying political economy of taxation. It will take time for an answer to this question to emerge. But, if politics produce the ratchet so ably described by Glogower and Kamin, then their evolving contours matter a lot, and, as Glogower and Kamin show, the ways we gauge these contours have high stakes in terms of the outcomes our tax system produces.

Another potential complication arises, I think, from the harm that Glogower and Kamin see in the intersection of tax preferences, tax planning, and tax politics. For them, the progressivity ratchet is pernicious, in that it drives public-minded politicians to inferior policies. But I can imagine others who might view the ratchet as a powerful weapon to entrench their own preferences for shrinking government to something smaller than a bathtub. From this perspective, poorly targeted tax preferences could be a boon, rather than a vice, and lawmakers’ sloppiness and inattention could be weaponized against the liberal state. This happy confluence of ability and ideology is very much less than ideal, and I worry that some will read Glowgower and Kamin’s article against the grain in this way.

Finally, Treasury’s role in the progressivity ratchet warrants further exploration. Glogower and Kamin appropriately cabin their prescriptions to the legislative branch, but Treasury presumably also has some ability to “reverse” the ratchet. For example, in the regulations on specified service trades or businesses, a broad reading of “reputation or skill” might have yielded an interpretation of § 199A that better targeted the underlying tax benefit. Alternatively, regulatory projects that targeted earnings stripping could have alleviated some pressure for across-the-board corporate rate cuts. Furthermore, Treasury may be a better shepherd of progressivity than Congress, and future statutory reforms might recognize this advantage by delegating aspects of the rate structure to the executive branch. These types of considerations seem like important adjuncts to the core arguments so effectively advanced by Glogower and Kamin.

Overall, Glogower and Kamin’s rich and detailed article provides meaningful insights into the TCJA and the tax legislative process. Academics and policymakers should find their analysis essential in understanding the TCJA and in setting reform agendas for the future.

Here’s the rest of this week’s SSRN Tax Roundup:

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