President Biden Would Saddle The U.S. With Highest Tax Rate On Corporate Income In The Developed World

Adam N. Michel (Cato Institute), President Biden Would Make the U.S. a Tax Rate Outlier:

President Joe Biden proposes raising the corporate income tax rate, capital gains tax rate, and personal income tax rates, among other tax increases. These hikes would make the United States an international outlier, with some of the highest tax rates in the developed world.

In his fiscal year 2025 budget request to Congress, President Biden proposed about a dozen new or higher taxes that would raise close to $5 trillion in additional revenue over a decade (according to their optimistic forecasting). I detailed the specifics in an earlier piece, “What Does Biden Plan for the Tax Code?”

The Biden tax hikes would primarily fall on capital income, leading to less domestic investment, fewer jobs, and slower economic growth. ... Figure 1 shows that Biden’s proposal to increase the federal corporate income tax rate from 21 percent to 28 percent would increase the United States’ combined state and federal corporate tax rate to 32 percent. ... Figure 2 shows net personal dividend tax rates. Under Biden’s proposal, capital gains and dividends would be taxed at a top income tax rate of 39.6 percent, plus a higher net investment income tax rate of 5 percent. ..

Figure 3 combines the taxes in Figure 1 and Figure 2. It shows the total integrated tax rate on corporate income that is first taxed by the corporate income tax and then taxed a second time when it is distributed as a dividend to shareholders. Under Biden’s corporate and investment tax increases, distributed profits in the United States would face a 66 percent integrated tax rate, seven percentage points higher than any other country in the OECD. 

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New CBO Report Confirms Reduced Inequality And Increased Progressivity Of Federal Tax System

Following up on last month's post, The U.S. Tax System Is Getting Even More Progressive:  Tax Foundation, New CBO Report Shows Pandemic Response Sharply Reduced Inequality, Increased Progressivity in 2020:

The pandemic led to one of the largest fiscal responses in U.S. history, impacting households across the income distribution. A new report from the Congressional Budget Office (CBO) [The Distribution of Household Income in 2020] finds that these temporary policies, along with other fixtures of our tax and transfer system, reduced income inequality in 2020 by more than any other year since 1979 when the CBO began measuring household income. The analysis also shows that the federal tax system is markedly progressive, even when excluding the most recent pandemic policies, echoing our own research on this topic [America’s Progressive Tax and Transfer System: Federal, State, and Local Tax and Transfer Distributions] and other recent academic evidence [Gerald Auten & David Splinter, Income Inequality in the United States: Using Tax Data to Measure Long-Term Trends]. ...

On net, [pandemic] policies made the federal tax code more redistributive and reduced income inequality to a 14-year low. The bottom quintile saw the largest gains in income after taxes and transfers compared to 2019, rising by about 15 percent. Since 1979, the bottom quintile’s income has increased by 126 percent.

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Cato Institute: 2026 Tax Increases In One Chart

Cato Institute, 2026 Tax Increases in One Chart:

In 2017, Republicans cut and reformed taxes for individuals and businesses. The vast majority of the changes for individuals expire at the end of 2025, which will increase taxes in 2026 by about $400 billion a year. There is broad bipartisan support to extend about three‐​quarters of the tax cuts.

The following table provides a summary of current policy, the tax changes that will take effect automatically in 2026, and an abbreviated recommendation for how to address the changes. ...

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Red States With Lower Tax Burdens Saw Net Migration Gains While Blue States With Higher Tax Burdens Saw Net Migration Losses

Tax Foundation, How Do Taxes Affect Interstate Migration?:

Each year, the IRS releases migration data showing the movements of income taxpayers based on changes in their mailing address between filing one year’s income tax return and the next. The most recent data generally show location changes that occurred between when taxpayers filed their tax year 2019 returns in calendar year 2020 and when they filed their tax year 2020 returns in calendar year 2021. These data, therefore, capture many of the interstate moves made during the COVID-19 pandemic.

The IRS data show that between 2020 and 2021, 26 states experienced a net gain in income tax filers from interstate migration ... while 24 states and the District of Columbia experienced a net loss.

Of the 10 states with the largest net migration gain, 7 voted for Donald Trump in 1010. Of the 10 states with the largest net migration loss, 9 voted for Joe Biden in 2020. 

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The Estate Tax is Irrelevant To More Than 99 Percent Of Americans

Steve Wamhoff (Institute on Taxation and Economic Policy), The Estate Tax is Irrelevant to More Than 99 Percent of Americans:

The Reach of the Estate Tax Is at a Historic Low
The federal estate tax is one way that Congress decided, over a century ago, to ensure that families passing massive fortunes down through generations contribute to finance the public investments that made those fortunes possible.

Families lucky enough to accumulate enormous wealth are the greatest beneficiaries of the public investments we all finance through taxes. The wealthiest Americans acquired their position because their corporations use public roads to ship goods, their companies employ the workforce created by our public education system, their customers buy products derived from government-funded research, and their investments are possible because of the courts that define property rights and the public safety personnel who enforce those rights.

All Americans benefit from these public investments, but it is beyond doubt that Jeff Bezos, Elon Musk, Michael Bloomberg, and other billionaires have benefited more than others. The federal estate tax is one part of our tax system that provides a mild corrective to this imbalance and to the economic inequality that has rocketed upwards over the past several decades.

And yet today the estate tax is the weakest it has been in its century-plus history. Policy changes enacted under presidents of both parties have cut down the reach of the estate tax, but the current provisions — part of the Tax Cuts and Jobs Act signed into law in 2017 by President Trump — have weakened the tax more than ever.

In 2019, the most recent year for which data are available, only 8 of every 10,000 people who died left an estate large enough to trigger the tax. This is the lowest share of estates affected by the tax shown in all the annual data provided by the IRS (with the exception of 2010, when the estate tax was effectively temporarily repealed).

Other Key Findings:

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Manhattan Institute Charts: Spending, Taxes, And Deficits

Brian Riedl (Manhattan Institute), 2023 Chart Book Examines Spending, Taxes, and Deficits: 

As interest rates soar and the budget deficit doubles to $2 trillion, the Manhattan Institute’s Brian Riedl has released the 2023 edition of his book of charts examining the federal budget, spending, taxes, and deficits.

The 133-page chart book begins by broadly examining the rising budget deficits and national debt and then dives deeper to show the policies driving the $119 trillion in new deficits projected over the next three decades (and how drastically the picture worsens if interest rates remain elevated). Next, the chart book tallies the costs of common spending and tax proposals and determines whether those costs can be offset by proposed tax increases and defense cuts. The report also provides a full accounting of President Biden’s fiscal record thus far. Finally, it examines trends in tax revenues and tax progressivity, common budget myths, and offers a full accounting of the fiscal records of Presidents Bush, Obama, and Trump.

These charts—most of which rely on publicly available data from the Congressional Budget Office, Office of Management and Budget, Census Bureau, and U.S. Treasury—nevertheless defy conventional wisdom about spending, taxes, and deficits.

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The Hamilton Project: The Past, Present, And Future Of U.S. Tax Policy

The Hamilton Project, Taking on Tax: The Past, Present, and Future:

Tax law is scheduled to change significantly at the end of 2025, setting the stage for rigorous policy debates. If policymakers use the opportunity effectively, Congress can both improve tax policy and help to stabilize the fiscal trajectory. That will require maintaining focus on the priorities of raising additional revenue, making the tax system more progressive, and ensuring that tax policy is efficiently aligned with high-level fiscal policy goals.

On Wednesday, September 27, 2023, The Hamilton Project at the Brookings Institution convened leaders and experts to discuss the past and the future of tax policy in the United States. The event featured fireside chat between former Speaker Paul Ryan, Peter Orszag of Lazard, and moderator Catherine Rampell of The Washington Post. The forum also included two discussions featuring Kimberly Clausing (University of California, Los Angeles), Wendy Edelberg (The Hamilton Project), Ben Harris (Brookings), Kyle Pomerleau (American Enterprise Institute), Nirupama Rao (University of Michigan), and Natasha Sarin (Yale University).

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New State Business Tax Climate Index: Blue States Are Worst, Red States Are Best

Tax Foundation, 2024 State Business Tax Climate Index:

The Tax Foundation’s State Business Tax Climate Index enables business leaders, government policymakers, and taxpayers to gauge how their states’ tax systems compare. While there are many ways to show how much is collected in taxes by state governments, the Index is designed to show how well states structure their tax systems and provides a road map for improvement.

All 10 states with the worst business tax climates voted for Joe Biden in 2020, and 8 of the 10 states with the best business tax climates voted for Donald Trump.

Wall Street Journal Editorial, State Tax Masochism by the Sea:

A Tax Foundation ranking of state business tax climates shows why more companies are fleeing the coasts.

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The Limits Of Taxing The Rich

Brian Riedl (Manhattan Institute), The Limits of Taxing the Rich:

Budget deficits have risen to nearly 6% of GDP and are projected to rise to 10% of GDP over three decades. If Congress continues to enact additional tax cuts and spending expansions, these deficits will grow even larger. To close these baseline deficits and finance additional expansions, most progressives reject most spending cuts as well as middle-class tax increases. Instead, just “tax the rich” has become an easy and popular answer. However, while there is surely room to raise some revenue from corporations and wealthy families, the plausible revenue estimates from these proposals fall far short of closing these budget gaps.

This report models an aggressive tax-the-rich agenda that pushes tax rates for corporations and wealthy families toward revenue-maximizing levels. It shows that such policies could raise, at most, 2% of GDP—and likely far less, when accounting for the macroeconomic losses that would result from layering so many new taxes on top of one another. Consequently, a sustainable economic and tax agenda would limit upper-income-tax increases to 1% of GDP.

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Cato Institute: Tax Expenditures And Tax Reform

Chris Edwards (Cato Institute), Tax Expenditures and Tax Reform:

The federal income tax is continually changing. A Republican Congress cut taxes in 2017, and then a Democratic Congress raised taxes in 2022. Presidential candidates will likely propose reforms in 2024, and policymakers will decide whether to extend the Republican tax cuts after 2025.

When Congress changes taxes, “tax expenditures” usually come into play. These are generally thought of as breaks, preferences, or loopholes in the tax code that distort the economy and increase complexity. Despite occasional efforts to simplify the code, the number of tax expenditures on one official list has risen from 53 in 1970 to 205 in 2023.

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Cato Institute: CBO 30-Year Budget Projections Show Mandatory Spending Growth Rate Cannot Be Tamed With Tax Increases

Cato Institute, Did Tax Cuts Cause Rising Deficits?:

The current federal budget deficit and the accumulated debt result from Congress spending more than they are willing to raise in taxes. Ultimately, the question of which is more to blame—steady taxes or ballooning spending—will depend on our priors: should the government consume an ever‐​increasing share of private resources, or should its growth be constrained?

However, the recently updated CBO long‐​term budget outlook makes clear that the causes of the future budget deficit is not a question of normative judgment. Tax increases cannot fix the underlying growth of health and retirement spending. Even if tax revenues permanently increased to the levels collected when the United States had a budget surplus in 2000, projected deficits would still rise above 9 percent of GDP by 2053. Tax cuts are not to blame for the demographic and benefit‐​formula‐​fueled growth in mandatory spending. ...

Figure 1 shows historical and projected revenue and outlays from 1970–2053. In 2022, federal revenue as a percent of GDP was at a two‐​decade high, and this year’s revenue as a share of the economy is projected to be 18.4 percent of GDP, a whole percentage point above the historical average. Over the next three decades, revenues will remain above the historical average, climbing to 19.1 percent by 2053. After recovering from the pandemic spike, outlays are projected to climb past their current highs, rising from more than 24 percent of GDP in 2023 to 29.1 percent of GDP in 2053.

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Red States Feed At The Federal Trough, Blue States Supply The Feed

Washington Post, The States That Pay the Most in Taxes and Get the Least Benefits:

To which states does the federal government giveth, and from which does it taketh away? That is: Which states contribute the most to the federal budget in taxes, and which get the most back in terms of benefits? Or, as Joseph McClane from Rockville, Md., put it: “Which states are not pulling their weight?”

On behalf of everyone wondering about this, we called the fine folks at the Rockefeller Institute of Government, a nonpartisan Albany think tank affiliated with the State University of New York. ...

Eight of the 10 states that get the most money back from the federal government per dollar they pay into the system voted for Trump in 2020. Nine of the 10 states that got the least voted for Biden. The typical red state gets back 19 cents more for each dollar sent to Washington than its blue-state friends.

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Cato Institute: The Federal Tax System Is Highly Progressive

Cato Institute, The State of Taxes: How the Feds Fund (and Don’t Fund) Spending:

Government data shows that the federal tax system is highly progressive. The highest‐​income Americans pay a disproportionate share of income taxes and face the highest average tax rates across all federal taxes. ...

The lowest‐​income half of Americans paid an average income tax rate of 3.1 percent, while the top 1 percent of income earners paid a 26.0 percent rate. Across all taxpayers, the average income tax rate was 13.6 percent.

High‐​income earners also pay a disproportionate share of the income taxes relative to income earned. Figure 1 shows that as a share of adjusted gross income (AGI), the top half of income earners paid 97.7 percent of federal income taxes. The top 1 percent earned 22.2 percent of total income and paid 42.3 percent of all the income taxes. The top 10 percent earned 49.5 percent of the income and paid 73.7 percent of the income tax.

The U.S. Treasury’s Office of Tax Analysis also estimates that the entire federal tax system is highly progressive, even after accounting for payroll, corporate, and other taxes. Figure 2 shows that average tax rates climb as incomes increase. The lowest 20 percent of income earners, measured by adjusted family cash income, face average tax rates that are either negative or close to zero. A negative tax rate means that the taxpayer is a net beneficiary of the tax system, likely receiving refundable tax credits, such as the Earned Income Tax Credit (EITC) and Child Tax Credit (CTC).

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Tax Policy Center: More Black Couples Incur A Marriage Tax Penalty Than White Couples

Janet Holtzblatt, Swati Joshi & Nora Cahill (Tax Policy Center), Marriage Costs Black Couples More Than White Couples At Tax Time:

We find that 46 percent of Black married couples incurred a marriage penalty under 2018 tax law, compared to 43 percent of white couples.

Conversely, Black couples were less likely to receive a bonus than white couples (36 percent to 43 percent).

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Tax Policy Center: Itemized Deductions Benefit Whites More Than Blacks And Hispanics

Benjamin R. Page, Tracy Gordon & Aravind Boddupalli (Tax Policy Center), Providing Changemakers The Data They Need To Tackle Racial Inequities In The US Tax Code:

[A]cross all income categories, itemized deductions disproportionately benefit White taxpayers (figure 2). Overall, itemized deductions boost the after-tax incomes of units classified as White by 0.7 percent, whereas those classified as Black gain an average of 0.4 percent, and those classified as Hispanic an average of 0.2 percent. Those differences occur in large part because itemized deductions primarily benefit higher-income households, among whom Black and Hispanic households are underrepresented.

We also found White taxpayers and Black taxpayers benefit relatively more from itemized deductions than Hispanic households, even within the same income categories. For example, among those in the top income quintile (which receives almost 90 percent of the benefits of itemized deductions), itemized deductions raise the after-tax incomes of White taxpayers by an average of 1.1 percent, compared to 1.0 percent for Black taxpayers, and 0.6 percent for Hispanic taxpayers (figure 3).

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Americans Moved To Low-Tax States In 2022

Following up on my previous post, New U.S. Census Data: Major Migration From Blue States To Red States:  Tax Foundation, Americans Moved to Low-Tax States in 2022:

Americans were on the move in 2022 and chose low-tax states over high-tax ones. That’s the finding of recent U.S. Census Bureau population data and commercial datasets released this week by U-Haul and United Van Lines. ...

This population shift paints a clear picture: people left high-tax, high-cost states for lower-tax, lower-cost alternatives.

7 of the 10 states with the most outbound migration voted for Joe Biden in 2020, and 8 of the 10 states with the most inbound migration voted for Donald Trump.

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New State Business Tax Climate Index: Blue States Are Worst, Red States Are Best

Tax Foundation, 2023 State Business Tax Climate Index (interactive map tool):

The Tax Foundation’s State Business Tax Climate Index enables business leaders, government policymakers, and taxpayers to gauge how their states’ tax systems compare. While there are many ways to show how much is collected in taxes by state governments, the Index is designed to show how well states structure their tax systems and provides a road map for improvement.

9 of the 10 states with the worst business tax climates voted for Joe Biden in 2020, and 8 of the 10 states with the best business tax climates voted for Donald Trump.

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Tax Policy Center Hosts Virtual Event Today On The Future Of Business Taxes Post-Inflation Reduction Act

The Tax Policy Center hosts a virtual event on The Future Of Business Taxes Post-Inflation Reduction Act today at 12:30 PM ET (registration):

The recently enacted Inflation Reduction Act (IRA) put in place some significant changes to business taxation, including incentives for clean energy and a minimum tax on large corporations’ book incomes. But how effective will those measures be in achieving their goals? And what should Congress do next, with so many unanswered questions about the future of corporate taxation and climate change?

Join the Urban-Brookings Tax Policy Center for an event examining the IRA and the short-term future of corporate taxation. The event will feature keynote remarks by Treasury Assistant Secretary for Tax Policy Lily Batchelder and two expert panels. The first panel will examine the new corporate tax provisions, and the second panel will examine expanded green-energy incentives.

Keynote Speaker: 

• Lily Batchelder (Assistant Secretary for Tax Policy, U.S. Treasury)

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Seniors Are Moving From High-Tax States To Low-Tax States

Chris Edwards (Cato Institute), Taxes and Interstate Migration of Seniors:

Americans are moving from high‐​tax states to low‐​tax states. The smart states know this and are cutting income tax rates, as discussed in the forthcoming Fiscal Policy Report Card on America’s Governors.

One group that states want to attract with tax cuts are seniors and retirees. Just this year, 10 states cut their taxes on retirement income, which means income from Social Security, defined‐​benefit (DB) plans, and defined contribution (DC) plans, such as 401(k)s. Currently, about three‐​quarters of the states fully exempt Social Security benefits from taxes. About a dozen states fully exempt DB and DC benefits from taxes, and about half the states partly exempt it. ...

Seniors are moving from high‐​tax to low‐​tax states, as shown in the chart. On the horizontal axis is the sum of state and local sales, property, and individual income taxes as a percentage of income in 2019. On the vertical axis is the ratio of in‐​migration to out‐​migration for households age 65 and older, based on IRS data for 2020. The ratio is above one for states enjoying net in‐​migration and below one for states suffering net out‐​migration. Each state is a dot.

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The Effect Of Tax Reform And COVID-19 On Tax Flight Among U.S. Millionaires

Cristobal Young (Cornell; Google Scholar) & Ithai Lurie (U.S. Treasury Department; Google Scholar), Taxing the Rich: The Effect of Tax Reform and the COVID-19 Pandemic on Tax Flight Among U.S. Millionaires:

Taxing the rich is one of the central policy debates in this time of rising inequality. Elite taxation can change the distribution of income in society, support equitable growth, and finance public goods and services that improve the quality of life for everyone. None of these goals are well served, however, if taxes lead to high levels of tax flight among U.S. millionaires. Progressive taxation, especially at the state level, ultimately depends on the embeddedness of the tax base. In other words, are the rich “mobile millionaires,” readily drawn to places with lower tax rates? Or are they “embedded elites,” who are reluctant to migrate away from places where they have been highly successful?

Supply-side economics has long argued that taxes on the rich cause avoidance behavior and reduce the incentive to work, invest, and innovate. Amid the growing red state/blue state rivalry in the United States, tax incentives for migration have become a new focus of debate. Why would rich people continue to live in New York, New Jersey, or California when they could save large sums in taxes by moving to places such as Florida, Texas, or Nevada? Of course, taxes also fund public goods that the rich consume—not even the richest city dweller can get to work without public infrastructure—but top earners have greater ability to opt out of many public services such as schools and social services. From this view, the rich seem motivated and mobile—sensitive to taxation and readily capable of exit.

Yet there are myriad social dimensions that rich households face when migrating to avoid taxes. Top earners are often the “working rich,” with many roots in the places where they built their careers. Others are business owners with complex ties between customers, suppliers, and workers that are not easily relocated. Top earners are often married, have school-aged children, and have lived in their state for many years—social factors that tie people to places. These ties represent place-specific social capital, a form of embeddedness that makes migration costly.

Our new working paper, Taxing the Rich: How Incentives and Embeddedness Shape Millionaire Tax Flight, examines the joint effect of incentives and embeddedness on the mobility of the rich in the United States. Drawing on administrative tax data from IRS tax returns of top income earners, we study two large-scale “natural experiments,” which are contrasting real-life situations that social scientists investigate to determine cause-and-effect relationships. The first is the federal Tax Cuts and Jobs Act of 2017, which changed tax incentives to favor low-tax states. The second is the COVID-19 pandemic, which began in early 2020 in the United States and which deeply disrupted people’s socioeconomic attachments to places. ...

In a typical year, a small number of millionaires circulate between states: Roughly 2.7 percent of the millionaire population moves across state lines, exchanging one state for another. How much did the 2017 tax reform influence this migration? In our working paper, we examined migration rates for every income group, starting from those with the lowest incomes to those making $5 million a year or more. We also examined migration rates for those living in low-tax states, who were incentivized to stay, and high-tax states, who were incentivized to move. Migration patterns before and after the tax reform law passed were essentially identical. (See Figure 1.)

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Penn Wharton: Decomposing The Decline In Estate Tax Liability Since 2000

Penn Wharton Budget Model, Decomposing the Decline in Estate Tax Liability Since 2000:

We estimate that the federal estate tax would have generated 9 times more revenue in 2019 without the tax changes in 2001 and 2017.

Key Points

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Brookings: Rethinking The Corporate Income Tax — The Role Of Rent Sharing

William G. Gale (Brookings Institution; Google Scholar) & Samuel I. Thorpe (Brookings Institution), Rethinking the Incidence of the Corporate Income Tax:

Debates about corporate income tax cuts follow a familiar script. Republicans claim that rank-and-file workers benefit. Democrats argue that affluent shareholders reap the gains.

In a new project [Rethinking the Corporate Income Tax: The Role of Rent Sharing], we find that, workers do benefit, but it is the most affluent employees — managers and executives — who receive the lion’s share of benefits, not rank-and-file staff.

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IRS Audits Of Poorest Families Soar While Millionaire Audits Continue To Languish

The Transactional Records Access Clearinghouse at Syracuse University has released a new report, IRS Audits Poorest Families at Five Times the Rate for Everyone Else:

A large increase in federal income tax audits targeting the poorest wage earners allowed the Internal Revenue Service to keep overall audit numbers from further declines for Americans as a whole during FY 2021. That resulted in these low-income wage earners with less than $25,000 in total gross receipts being audited at a rate five times higher than for everyone else.

To its credit last year, the IRS did manage to slightly raise the audits of millionaires. During FY 2021 IRS revenue agents and tax examiners audited 13,725 of taxpayers reporting $1 million dollars or more in positive income. This was up from the abysmally small numbers audited during FY 2020 (11,331), but still slightly below how many millionaire returns were audited during FY 2019 (13,970).

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Tax Policy Center Hosts Virtual Event Today On Taxing Business Income: Evidence From The Survey Of Consumer Finances

The Tax Policy Center hosts a virtual event on Taxing Business Income: Evidence from the Survey of Consumer Finances today at 12:30 PM ET (registration):

Legislated changes in business income taxes over the past 20 years have led to a dramatic reduction in the federal income tax base and revenues. As a result, a significant share of income is never subject to tax. For example, more than half of non-corporate business income in the National Income and Product Accounts does not show up on tax returns.

On January 11, the Urban-Brookings Tax Policy Center will host an event on this divergence between economic and taxable income and its implications for tax policy. Results from new research using the Survey of Consumer Finances will be presented with an eye towards understanding which forms of income do not show up on tax forms, where in the income distribution that divergence is occurring, and the revenue implications of broadening the business income tax base.

William G. Gale, Swati Joshi, Christopher Pulliam & John Sabelhaus, Estimating Income Tax Liabilities With Data From the Survey of Consumer Finances:

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New State Business Tax Climate Index: Blue States Are Worst, Red States Are Best

Following up on Thursday's post, New U.S. Census Data: Major Migration From Blue States To Red States, which noted that 9 of the 10 states with the largest population losses voted for Joe Biden in 2020, and 8 of the 10 states with the largest population gains voted for Donald Trump:  Tax Foundation, 2022 State Business Tax Climate Index (interactive map tool):

The Tax Foundation’s State Business Tax Climate Index enables business leaders, government policymakers, and taxpayers to gauge how their states’ tax systems compare. While there are many ways to show how much is collected in taxes by state governments, the Index is designed to show how well states structure their tax systems and provides a road map for improvement.

8 of the 10 states with the worst business tax climates voted for Joe Biden in 2020, and 8 of the 10 states with the best business tax climates voted for Donald Trump.

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Economic Freedom Of North America 2021

Fraser Institute, Economic Freedom of North America 2021:

Economic Freedom of North America 2021 is the seventeenth edition of the Fraser Institute’s annual report. This year it measures the extent to which—in 2019, the year with the most recent available comprehensive data—the policies of individual provinces and states were supportive of economic freedom, the ability of individuals to act in the economic sphere free of undue restrictions. There are two indices: one that examines provincial/state and municipal/local governments only and another that includes federal governments as well. The former, our subnational index, is for comparison of individual jurisdictions within the same country. The latter, our allgovernment index, is for comparison of jurisdictions in different countries. ...

Figure 1.2b shows the subnational scores for the US states. After a one-year absence in last year’s report, New Hampshire is again in the top spot with 7.83, followed closely by Tennessee (7.82), then Florida (7.78), Texas (7.75), and Virginia (7.59).3 The least free state was again New York with 4.33, far behind California (4.68), Vermont (4.86), West Virginia (5.00), and New Mexico (5.01).

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Manhattan Institute Charts: Spending, Taxes, And Deficits

Brian Riedl (Manhattan Institute), 2021 Chart Book Examines Spending, Taxes, and Deficits:

The Manhattan Institute’s Brian Riedl has released the 2021 edition of his book of charts examining the federal budget, spending, taxes, and deficits. The 118-page chart book begins by broadly examining the rising budget deficits and national debt – well beyond the temporary recession deficits – and then gradually dives deeper to show the policies driving the $112 trillion in new deficits projected over the next three decades. Next, it tallies the cost of common spending increase and tax relief proposals, and determines whether those costs can be offset by the proposed tax increases and defense cuts – including a full accounting of the long-term cost of President Biden’s proposals. Finally, the report examines trends in tax revenues and tax progressivity, common budget myths, and offers a full accounting of the fiscal records of Presidents Bush and Obama.

These charts — most of which rely on publicly-available data from the Congressional Budget Office, Office of Management and Budget, Census Bureau, and U.S. Treasury — nevertheless defy conventional wisdom about spending, taxes, and deficits.

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Corporate Taxes: Rates Down, Revenues Up

Chris Edwards (Cato Institute), Corporate Taxes: Rates Down, Revenues Up:

U.S. Treasury Secretary Janet Yellen recently complained about a “30-year race to the bottom on corporate tax rates,” and is pushing for a higher U.S. rate and a global minimum rate. Yellen wants to make sure that corporate taxes “raise sufficient revenue to invest in essential public goods and respond to crises.” Economist Gabriel Zucman approved of the proposed tax hike, saying corporations should “pay more in taxes, instead of them paying less and less."

Zucman’s claim about “less and less” is incorrect when looking across the major economies in recent decades. ... The chart below shows the average corporate tax rate and average corporate tax revenues as a percent of GDP for 22 countries. The average rate fell from 47 percent in 1980 to 25 percent in 2019. As a consequence, Yellen or Zucman might think that corporate tax revenues would have fallen. But corporate tax revenues are up substantially since the 1980s. Corporate tax revenues for the 22 countries rose from 2.2 percent in 1980 to 3.0 percent in 2019.

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Glogower, Gamage & Richards: Why A Federal Wealth Tax Is Constitutional

Ari Glogower (Ohio State; Google Scholar), David Gamage (Indiana; Google Scholar) & Kitty Richards (Roosevelt Institute), Why a Federal Wealth Tax is Constitutional:

A federal wealth tax can help level the playing field of our unequal society and promote shared economic prosperity. When wealth taxes have been proposed in national campaigns of recent years, they generated strong public support and broadened the conversation over the future of progressive tax policies. However, critics of wealth taxation argue that a wealth tax could be struck down by the Supreme Court because of constitutional provisions that delineate Congress’s power to tax. Namely, critics undermine federal wealth tax proposals by relying on the “apportionment rule,” which requires certain taxes to be apportioned among the states according to their populations.

Ari Glogower, David Gamage, and Kitty Richards contend that the apportionment rule, a vestigial relic of the founders’ compromise on slavery, does not interfere with Congress’s ability to legislate a tax on an individual’s net wealth.

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The Unique And Dominant Role Of Tax Policy In Wealth Concentration

Institute for Policy Studies, Wealth Concentration: The Unique and Dominant Role of Tax Policy (Jan. 2021):

[H]ow does the influence of tax policy on wealth concentration interact with the influence of other factors? Has tax policy, over the last century, been the dominant factor in the country’s move from an extremely unequal society to a more egalitarian one and back again? Or are other factors equally or more important?

There are no clear answers, at least from our analysis. But we believe our analysis of the relationship between tax payments of the top .01 percent as a percentage of wealth, and the share of American household wealth held by the top .01 percent, indicates that tax policy plays a unique and dominant role in the concentration of wealth. No other factor is as visibly and as directly connected to the concentration of wealth as tax policy. ...

Using the methodology we developed in The Case for a U.S. Wealth Tax, which we’ve included
here as Appendix I, we estimated the change in tax payments as a percentage of wealth for the
top .01 percent throughout the period 1929 to 2018.

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Americans Increasingly Are Leaving High-Tax States For Low-Tax States

Cato Institute, Will High‐​Tax “Superstar Cities” Finally Need to Consider — Gasp! — Their Residents?:

As my Cato colleague Chris Edwards documented here a couple weeks ago, interstate migration data from the U.S. Census Bureau indicate that state tax policy affects where Americans, especially wealthy ones, are choosing to live and work. The following charts ...  confirm Chris’ initial impressions: in 2018 there was a strong, statistically significant (p‐​values < 0.01) relationship between (1) personal state tax burdens — as measured by either the Tax Policy Center or the Tax Foundation — and (2) net interstate migration (ratio of inflows to outflows):

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What’s Wrong With A Wealth Tax

Allison Schrager & Beth Akers (Manhattan Institute), What’s Wrong with a Wealth Tax:

In the coming months, Americans can expect calls to tax the wealth of the richest citizens. There are four oft-cited justifications for such a measure: inequality is rising, and there is a need to restore fairness; more revenue is necessary to bring exploding deficits under control, and taxing the wealthy is the least harmful way to do so; extreme wealth disparities harm economic growth; and the rich use their wealth to rig the political system, so democracy requires leveling the playing field.

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The Economic Effects Of Wealth Taxes

John Diamond (Rice University) & George Zodrow (Rice University), The Economic Effects of Wealth Taxes:

In this paper, we estimate the economic effects of the wealth tax proposed by Senator Warren using a computable general equilibrium model of the U.S. economy under the assumption that all revenues are used to increase income transfers (excluding Social Security payments) that accrue primarily to lower income groups.

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Brookings: Taxing Wealth Transfers Through An Expanded Estate Tax

The Brookings Institution:  Taxing Wealth Transfers Through an Expanded Estate Tax, by William G. Gale, Christopher Pulliam, John Sabelhaus, and Isabel V. Sawhill:

American political leaders are currently focused on policies to address the health and economic implications of the COVID-19 pandemic. Nevertheless, it is not too soon to consider policy changes that could be beneficial to implement after the crisis has passed.

The U.S. faces two related and persistent threats to long-term, shared prosperity: growing inequality and rising federal debt. Inequality, especially wealth inequality, has risen sharply over the past 40 years. Children from different socioeconomic backgrounds do not have the same opportunities to achieve the American Dream. The Black-white gap in social mobility is especially concerning. The government’s budget outlook has long been a concern, with the federal debt projected to rise continually relative to the size of the economy, because of an aging population, rising healthcare costs, and inadequate revenues. The pandemic has made each problem more difficult to solve.

Policy makers should be looking for ways to address both issues. One place to start is by raising taxes on the most well-to-do households. During the Democratic primary, there were several proposals for a wealth tax, which would target the richest Americans and raise substantial amounts of revenue. Although a wealth tax would face difficult questions regarding its administrability and constitutionality, proposals for such taxes have re-energized the debate about taxing the wealthy. In some ways, the discussion has shifted from debating whether the rich should pay more in taxes toward determining the best way to achieve that goal.

In this policy brief, we consider the virtues of expanding the estate tax. Coupled with the gift and generation-skipping tax, the estate tax directly targets the intergenerational transfer of wealth. Whether it is ultimately borne by decedents or inheritors, the estate tax is extremely progressive. Inheritances are a major contributor to growing wealth inequality—large inheritances tend to flow to already wealthy heirs. The top ten percent of households by wealth receive 56 percent of all intergenerational transfers, while the bottom half receives only eight percent.

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New Tool Examines How U.S. Taxes And Spending Affect Income Inequality

Economic Policy Institute, New Tool Examines How U.S. Taxes and Spending Affect Income Inequality:

Today, the Economic Policy Institute is launching a website aimed at shedding light on how the U.S. tax and spending system affects household income up and down the income distribution.

The U.S. Tax & Spending Explorer allows users to take a deep dive into the ways that the federal government affects the inequality of households’ incomes through taxes and through spending on social insurance and safety net programs. The explorer also examines so-called “tax expenditures,” sometimes referred to as the hidden federal budget. ...

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Journalist’s Resource Guide To The 2020 Democratic Policy Proposals: Carbon Taxes

Journalist's Resources Guide to the 2020 Democratic Policy Proposals: Carbon Taxes:

In the lead-up to the 2020 elections, the Journalist’s Resource team is combing through the Democratic presidential candidates’ platforms and reporting what the research says about their policy proposals. We want to encourage deep coverage of these proposals — and do our part to help deter horse race journalism, which research suggests can lead to inaccurate reporting and an uninformed electorate. We’re focusing on proposals that have a reasonable chance of becoming policy. For us, that means at least 3 of the 5 top-polling candidates say they intend to tackle the issue. Here’s what the research says about carbon pricing.

Candidates Favoring Carbon Pricing

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Migration to Low‐​Tax States Continues

Chris Edwards (Cato Institute), Migration to Low‐​Tax States Continues:

The Census Bureau has released estimates of state population changes between July 2018 and July 2019. One component of population changes is migration between the states. The new Census data show that Americans are continuing to move from high‐​tax to low‐​tax states.

This Cato study examined interstate migration using IRS data and found that people are moving, on net, from tax‐​punishing places such as California, Connecticut, Illinois, New York, and New Jersey to tax‐​friendly places such as Florida, Idaho, Nevada, Tennessee, and South Carolina. The Census data confirms the trends.

In the chart, each blue dot is a state. The vertical axis shows the one‐​year Census net interstate migration figure as a percent of 2018 state population. The horizontal axis shows state and local household taxes as a percent of personal income in 2017. Household taxes include individual income, sales, and property taxes. The red line is a fitted regression line.

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Corporate Tax Dodging Happens Because Congress Allows It to Happen

Institute on Taxation and Economic Policy, Corporate Tax Dodging Happens Because Congress Allows It to Happen:

As usual, corporate spokespersons and their allies are trying to push back against ITEP’s latest study showing that many corporations pay little or nothing in federal income taxes. One way they respond is by stating that everything they do is perfectly legal. This is an attempt by the corporate world to change the subject. The entire point of ITEP’s study is that Congress has allowed corporations to avoid paying taxes, and that this must change.

Anyone who reads ITEP’s corporate study will find detailed explanations of how Congress must change the law to ensure that corporations pay. Alright, we get it, the study is a little long. For your convenience, we also provided a two-page executive summary, and you will find that the recommendations on the second page all involve Congress changing those very laws that corporations use to avoid taxes.

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Wharton: Weighing The Costs And Benefits Of A Middle Class Tax Cut

Knowledge@Wharton, A Middle-class Tax Cut: Weighing the Costs and Benefits:

Wharton’s Jennifer Blouin speaks with Wharton Business Daily on Sirius XM about the potential for “Tax Cuts 2.0” by the Trump administration.

In the run-up to the 2020 Presidential elections, the possibility that the Trump administration might offer a middle-class tax rate cut to 15% has set economists and other experts weighing the costs and benefits of such a move as well as its political implications.

To be sure, a tax rate cut to 15% for middle-income individuals would impose a higher burden on the federal debt, which is already weighed down by the 2017 tax cuts for corporations and individuals, according to experts at the Penn Wharton Budget Model (PWBM), a non-partisan research organization. Still, it would also inject a short-term boost and steady economic gains over the long run, they said.

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Penn Wharton: Warren's Wealth Tax Would Raise $1.5 Trillion Less Revenue, Reduce GDP And Wages

Penn Wharton Budget Model, Senator Elizabeth Warren's Wealth Tax: Projected Budgetary and Economic Effects:

Penn Wharton Budget Model (PWBM) projects that Senator Warren’s proposed wealth tax, if implemented in 2021, would raise between $2.3 trillion (including macroeconomic effects) and $2.7 trillion (not including macroeconomic effects) in additional revenue in the 10-year window 2021 - 2030 while reducing GDP in 2050 by about 1 to 2 percent, depending on how the money is spent.

• Senator Elizabeth Warren has proposed a wealth tax equal to 2 percent of net worth above $50 million and 6 percent of net worth above $1 billion, which her campaign estimates would raise $3.75 trillion over 10 years.
• PWBM estimates that the proposal would raise about $2.7 trillion over fiscal years 2021-2030, not including macroeconomic effects. Including macroeconomic effects, PWBM estimates that the proposal would raise about $2.3 trillion over the same period.
• PWBM projects that the proposal would reduce GDP by 0.9 percent in 2050 under the standard budget scoring convention that additional revenues reduce the deficit. If the revenues were instead spent on public investments, PWBM projects GDP in 2050 would fall between 1.1 and 2.1 percent, depending on the productivity of the investment. Average hourly wages in the economy in 2050, including wages earned by households not directly subject to the wealth tax, would fall between 0.8 and 2.3 percent due to the reduction in private capital formation.

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OECD: Trump’s Tax Cuts Push U.S. Tax Burden To Near World's Lowest

Wall Street Journal, Trump’s Tax Cuts Push U.S. Burden Lower in World:

President Trump’s 2017 tax cuts reduced the U.S. tax burden to one of the lowest among major world economies, according to a Thursday report [Revenue Statistics 2019] by an intergovernmental organization.

U.S. tax burdens dropped by the largest amount among those countries in 2018, and the U.S. now has lower taxes than all but three countries in the Organization for Economic Cooperation and Development, the report said.

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Close The Tax Gap By Ensuring Pass-Throughs Pay More Taxes They Owe

Samantha Jacoby (Center on Budget and Policy Priorities), Policymakers Should Ensure Pass-Throughs Pay More of Taxes They Owe:

High-income taxpayers drive much of the “tax gap” — the gap between what taxpayers owe and what they voluntarily pay on time — finds a new paper from Professor Natasha Sarin and former Treasury Secretary Lawrence Summers [Shrinking the Tax Gap: Approaches And Revenue Potential], citing new IRS data for 2011 to 2013. That’s unsurprising, because the tax gap’s single largest source is the underreporting of pass-through income (income from sources such as S corporations, partnerships, and sole proprietorships), which overwhelmingly flows to wealthy households. IRS auditors looking to curb tax evasion as well as policymakers looking to close tax loopholes should make pass-throughs a prime target. ...

Taxpayers who didn’t file a return and those underpaying the IRS accounted for 20 percent of the gross tax gap, and income underreporting the other 80 percent, the latest IRS data show. Pass-throughs accounted for nearly half (44 percent) of the underreporting gap, counting both underreported income and self-employment taxes.

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Most Wealth Taxation Is Voluntary; We Need To Make It Mandatory

Washington Post op-ed:  Most Wealth Taxation on the Rich Is Essentially Voluntary. That Must Change., by Jared Bernstein:

As a result of the Democratic primary, we’re having a robust debate about taxing wealth. The debate invokes tricky technical and legal issues, but it’s an overdue one: There are good reasons the United States needs to start taxing wealth.

You may think we already tax wealth, but that’s mostly not the case. As my colleagues at the Center on Budget and Policy Priorities, Chuck Marr, Samantha Jacoby and Kathleen Bryant, point out in an important new paper [Substantial Income of Wealthy Households Escapes Annual Taxation Or Enjoys Special Tax Breaks], for the very wealthy, taxes are essentially voluntary.

How can that be, when the rest of us have taxes withheld from our paychecks every few weeks, and then often pay more when we file our income taxes every April? Because wealth accumulation isn’t taxed unless you decide to sell the asset, and even then, it’s taxed at a favorable rate, compared with regular income.

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Claims That Taxes On The Rich Will Slow Economic Growth Are Fundamentally Flawed

Josh Bivens (Economic Policy Institute), Analyses Claiming That Taxes On Millionaires and Billionaires Will Slow Economic Growth Are Fundamentally Flawed:

In recent weeks, a number of policy analyses [by the Penn Wharton Budget Model and the Tax Foundation] of progressive economic policies—a surtax on high-incomes, a wealth tax, and Social Security expansion—have claimed these policies would damage economic growth. Policymakers should give these analyses very little weight in debates about these issues, for a number of reasons.

First, and most important, is the fact that all of these analyses are grounded in an economic view of the world that sees growth as constrained by the economy’s productive capacity (or the supply side of the economy) and not by the spending of households, businesses and government (the economy’s demand side). These estimates have other problems too—they are not even particularly convincing supply-side estimates and even if the economy’s growth really was constrained by supply, these estimates would still be misleading about the effects of these policies on welfare. But the biggest reason why policymakers should give these analyses zero weight is because they assume that growth is almost never demand-constrained. ...

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Tax Justice Is Gender Justice: Advancing Gender And Racial Equity By Harnessing The Power Of The U.S. Tax Code

The Atlantic, Tax the Patriarchy:

The Rube Goldberg mess of the United States tax code picks winners and losers as it raises trillions of dollars for the federal government. It advantages unearned income over earned income. It advantages big, mortgaged homes over little, rented apartments. It advantages the richest of the rich over the merely rich. And, in many cases, it advantages men over women.

That last claim is the contention of three new reports produced by the National Women’s Law Center and several other research and advocacy groups. They analyze the tax code through the lens of gender and conclude that many provisions reflect, amplify, and entrench long-standing disparities between men and women.

But it need not be so. The tax code has profound power to close the gender wage-and-wealth gap, as well as to support equality in the workplace and help families thrive at home. As the country debates taxing billionaires out of existence, it might consider taxing the patriarchy out of existence, too.

National Women's Law Center, Tax Justice Is Gender Justice: Advancing Gender and Racial Equity by
Harnessing the Power of the U.S. Tax Code:

The tax code sets the rules that shape our economy, reflecting and perpetuating notions of who and what our society values. It’s an opportunity to fight inequality. But today’s tax code contains outdated and often biased assumptions about family structures, marriage, participation in the paid workforce, and more that work together to perpetuate structural barriers against women, families with low incomes, and people of color. The tax code can be a barrier for realizing gender justice – but it can also be a tool. It’s time we take advantage.

Ariel Jurow Kleiman (San Diego), Amy Matsui (National Women’s Law Center) & Estelle Mitchell (National Women’s Law Center), The Faulty Foundations of the Tax Code: Gender and Racial Bias in Our Tax Law:

This report ... examines the outdated assumptions and gender and racial biases embedded in the U.S. tax code. It highlights tax code provisions that reflect and exacerbate gender disparities, with particular attention to those that disadvantage women with low incomes, women of color, members of the LGBTQ community, people with disabilities, and immigrants.

• Examined policies include the joint filing of spousal income, treatment of informal caregiving, incentives for business formation and wealth accumulation, and IRS enforcement patterns. 
• Although perhaps facially neutral, many of these policies likely provide disproportionate benefit to men, may heighten pressure for women to leave the formal labor market, and reflect biased assumptions about gender, race, and family structure. 
• This report offers recommendations for better data and analysis so that policymakers, advocates, and the public can fully understand the impact of the current tax code and proposed tax policies.

Katy Milani (Roosevelt Institute), Melissa Boteach (National Women’s Law Center), Steph Sterling, (Roosevelt Institute) & Sarah Hassmer (National Women’s Law Center), Reckoning With the Hidden Rules of Gender in the Tax Code: How Low Taxes on Corporations and the Wealthy Impact Women’s Economic Opportunity and Security:

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NY Times: Warren Wealth Tax Would Slow Economic Growth By 13% According To Penn Wharton Budget Model

New York Times, Warren Wealth Tax Could Slow Economy, Early Analysis Finds:

Senator Elizabeth Warren’s proposed wealth tax would slow the United States economy, reducing growth by nearly 0.2 percentage points a year over the course of a decade, an outside analysis of the plan estimates.

The preliminary projection from the Penn Wharton Budget Model, which was unveiled on Thursday in Philadelphia, is the first attempt by an independent budget group to forecast the economic effects of the tax that has become a centerpiece of Ms. Warren’s campaign for the Democratic presidential nomination.

The assessment found that if the tax raised as much new federal revenue as Ms. Warren intends, and if the proceeds went toward reducing the federal debt, annual economic growth would slow from an average of 1.5 percent to an average of just over 1.3 percent over a decade.

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Taxing High Incomes: A Comparison Of 41 Countries

Tax Foundation, Taxing High Incomes: A Comparison of 41 Countries:

• This report compares top effective marginal tax rates on labour income in 41 OECD and EU countries.
• The top effective marginal tax rate is the total tax paid on the last dollar earned by a high-earning worker, taking social security contributions and consumption taxes into account in addition to income taxes. It is a measure of the degree of progressivity and redistribution in the tax system. As such, it is of great policy interest.
• The highest marginal tax rate is found in Sweden, 76 percent, and the lowest in Bulgaria, 29 percent.
• In general, the Nordic and the Western European countries have the highest effective tax rates.

Top Effective Marginal Tax Rates in 2019 and Their Composition

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Taxing The “Rich” Won’t Pay For Politicians’ Promises

Manhattan Institute, Issues 2020: Taxing the “Rich” Won’t Pay for Politicians’ Promises:

The Narrative

"I believe that we should be asking the very wealthiest people in this country to start paying their fair share of taxes. That way, we will not only lower the deficit, but we will bring in enough revenue to invest in our economy and create the millions of new jobs we desperately need."[1]
— Bernie Sanders

"My vision for Medicare-for-All does not include a middle-class tax hike. I’m not prepared to do that."[2]
— Kamala Harris

"If we have enough money to pay for tax breaks for corporations. We have enough to invest in Medicare-for-All, Green New Deal and cancel student debt."[3]
— Ilhan Omar

Reality

Politicians claim that agendas costing approximately $40 trillion over 10 years can be financed mostly by taxing wealthy families and corporations. Essentially, they promise a European-style welfare state without Europe’s burdensome taxes on middle- and lower-income earners. This is not possible.

Combining popular proposals to tax the wealthiest Americans and corporations would likely raise $3.9 trillion over the decade. This revenue could not even eliminate half the $15.5 trillion budget deficit that is already projected over the next decade, much less pay for $40 trillion in more spending. The overwhelming majority of new tax revenue to finance such expenditures would have to be raised from the middle- and lower-income earners.

Key Findings

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The Financial Transaction Tax: A Progressive Tax With Beneficial Effects

Public Citizen, A Progressive Tax With Beneficial Effects:

A Small Levy on Financial Transactions Would Steer Clear of Struggling Americans, Raise Meaningful Revenue, and Possibly Retire An Abusive Wall Street Industry

A small tax on financial transactions, such as a one-tenth of 1 percent levy on the purchase of stocks and bonds, would likely end the viability of high-frequency trading while raising consequential sums for the U.S. Treasury. Opponents of this proposal have claimed it would hinder the ability of middle-class families to save for retirement. In contrast, we conclude that the costs of a modest financial transaction tax (FTT) would be little to nothing for middle-income families and would be easily manageable for average families in top income bracket.

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IMF: The Rise Of Phantom Foreign Direct Investments And The Fall Of Global Tax Enforcement

Jannick Damgaard, Thomas Elkjaer & Niels Johannesen (IMF), The Rise of Phantom Investments: Empty Corporate Shells in Tax Havens Undermine Tax Collection in Advanced, Emerging Market, and Developing Economies:

According to official statistics, Luxembourg, a country of 600,000 people, hosts as much foreign direct investment (FDI) as the United States and much more than China. Luxembourg’s $4 trillion in FDI comes out to $6.6 million a person. FDI of this size hardly reflects brick-and-mortar investments in the minuscule Luxembourg economy. So is something amiss with official statistics or is something else at play?

FDI is often an important driver for genuine international economic integration, stimulating growth and job creation and boosting productivity through transfers of capital, skills, and technology. Therefore, many countries have policies to attract more of it. However, not all FDI brings capital in service of productivity gains. In practice, FDI is defined as cross-border financial investments between firms belonging to the same multinational group, and much of it is phantom in nature—investments that pass through empty corporate shells. These shells, also called special purpose entities, have no real business activities. Rather, they carry out holding activities, conduct intrafirm financing, or manage intangible assets—often to minimize multinationals’ global tax bill. Such financial and tax engineering blurs traditional FDI statistics and makes it difficult to understand genuine economic integration.

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