Tax Reform: Simplification
is Good Policy
Antony Davies
Duquesne University
September 27, 2013
www.antonydavies.org
Tax Rates versus Tax Revenues
Source: Tax Policy Center (Urban Institute and Brookings Institute), Bureau of Economic Analysis
Produced by: Antony Davie...
Source: Tax Policy Center (Urban Institute and Brookings Institute), Bureau of Economic Analysis
Produced by: Antony Davie...
Source: Tax Policy Center (Urban Institute and Brookings Institute), Bureau of Economic Analysis
Produced by: Antony Davie...
Source: Tax Policy Center (Urban Institute and Brookings Institute), Bureau of Economic Analysis, Barro and Redlick (2009)...
Source: Tax Policy Center (Urban Institute and Brookings Institute), Bureau of Economic Analysis
Produced by: Antony Davie...
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
1954
1956
1958
1960
1962
1964
1966
1968
1970
1972
1974
1976
1978
1980
1982
198...
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
1954
1956
1958
1960
1962
1964
1966
1968
1970
1972
1974
1976
1978
1980
1982
198...
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
1954
1956
1958
1960
1962
1964
1966
1968
1970
1972
1974
1976
1978
1980
1982
198...
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
1954
1956
1958
1960
1962
1964
1966
1968
1970
1972
1974
1976
1978
1980
1982
198...
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
1954
1956
1958
1960
1962
1964
1966
1968
1970
1972
1974
1976
1978
1980
1982
198...
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
1954
1956
1958
1960
1962
1964
1966
1968
1970
1972
1974
1976
1978
1980
1982
1984
1986...
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
1954
1956
1958
1960
1962
1964
1966
1968
1970
1972
1974
1976
1978
1980
1982
1984
1986...
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
1954
1956
1958
1960
1962
1964
1966
1968
1970
1972
1974
1976
1978
1980
1982
1984
1986...
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
1959
1961
1963
1965
1967
1969
1971
1973
1975
1977
1979
1981
1983
1985
1987
1989
...
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
1959
1961
1963
1965
1967
1969
1971
1973
1975
1977
1979
1981
1983
1985
1987
1989
...
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
1959
1961
1963
1965
1967
1969
1971
1973
1975
1977
1979
1981
1983
1985
1987
1989
...
Fair Shares:
Who pays the most taxes?
Income Category
Income Before Taxes &
Transferes (per household)
Federal Taxes (per
household)
Average Tax Rate
(ignore tr...
Income Category
Income Before Taxes &
Transferes (per household)
Federal Taxes (per
household)
Average Tax Rate
(ignore tr...
Data Source: Congressional Budget Office
Whom Do You Want to Tax?
Income Category Minimum Income
Average Tax Rate
(ignore ...
How much government spending do
people fund with their tax dollars?
Top 1% 56 days
2% to 5% 44 days
5% to 10% 31 days
Chil...
How much government spending do
people fund with their tax dollars?
Top 1% 59 days
2% to 5% 46 days
5% to 10% 33 days
Chil...
The larger economic problem involves the “not yet” rich.
Average Rates Influence Tax Revenue
Marginal Rates Influence People’s
Behavior
You are earn $50,000
Tax bill: $25,000 x 5% + $25,000 x 10% = $3,750
Average tax rate: $3,750 / $50,000 = 7.5%
Accept a $5...
After taxes, the raise is worth $500.
When deciding whether to accept the raise, the 7.5% average
rate is irrelevant. What...
Source: Clifford Thies, Shenandoah University
0%
25%
50%
75%
100%
125%
150%
0 20,000 40,000 60,000 80,000 100,000 120,000 ...
Source: Clifford Thies, Shenandoah University
0%
25%
50%
75%
100%
125%
150%
0 20,000 40,000 60,000 80,000 100,000 120,000 ...
Complexity is the Enemy
Why Does Complexity Matter?
• Special interests can hide the fact that they
are co-opting the tax code.
• Cost of complian...
Tax Reform: Simplification
is Good Policy
Antony Davies
Duquesne University
September 27, 2013
www.antonydavies.org
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  • TANSTAAFL – unemployment one year later rises as SS andmedicare tax rates rise.
  • Not only has revenue been rising faster than inflation on a per-capita basis, but the Federal government appears to have little control over revenue.Hauser’s law.
  • Not only has revenue been rising faster than inflation on a per-capita basis, but the Federal government appears to have little control over revenue.
  • Not only has revenue been rising faster than inflation on a per-capita basis, but the Federal government appears to have little control over revenue.
  • Not only has revenue been rising faster than inflation on a per-capita basis, but the Federal government appears to have little control over revenue.
  • Not only has revenue been rising faster than inflation on a per-capita basis, but the Federal government appears to have little control over revenue.
  • Not only has revenue been rising faster than inflation on a per-capita basis, but the Federal government appears to have little control over revenue.
  • Not only has revenue been rising faster than inflation on a per-capita basis, but the Federal government appears to have little control over revenue.
  • Not only has revenue been rising faster than inflation on a per-capita basis, but the Federal government appears to have little control over revenue.
  • Not only has revenue been rising faster than inflation on a per-capita basis, but the Federal government appears to have little control over revenue.
  • Not only has revenue been rising faster than inflation on a per-capita basis, but the Federal government appears to have little control over revenue.
  • Not only has revenue been rising faster than inflation on a per-capita basis, but the Federal government appears to have little control over revenue.
  • Data is for 2007 – the last year available as of May 2012.
  • Data is for 2007 – the last year available as of May 2012.
  • Data is for 2007 – the last year available as of May 2012.
  • Data is for 2007 – the last year available as of May 2012.
  • Data is for 2007 – the last year available as of May 2012.
  • Data is for 2007 – the last year available as of May 2012.
  • Data is for 2007 – the last year available as of May 2012.
  • Data is for 2007 – the last year available as of May 2012.
  • (foregone economic growth, accounting costs, lobbying costs, lost tax revenue) (Fichtner and Feldman, Hidden Costs of Tax Compliance)
  • Capitol Hill Campus: Tax Reform: Simplification is Good Policy

    1. 1. Tax Reform: Simplification is Good Policy Antony Davies Duquesne University September 27, 2013 www.antonydavies.org
    2. 2. Tax Rates versus Tax Revenues
    3. 3. Source: Tax Policy Center (Urban Institute and Brookings Institute), Bureau of Economic Analysis Produced by: Antony Davies, Duquesne University
    4. 4. Source: Tax Policy Center (Urban Institute and Brookings Institute), Bureau of Economic Analysis Produced by: Antony Davies, Duquesne University
    5. 5. Source: Tax Policy Center (Urban Institute and Brookings Institute), Bureau of Economic Analysis Produced by: Antony Davies, Duquesne University
    6. 6. Source: Tax Policy Center (Urban Institute and Brookings Institute), Bureau of Economic Analysis, Barro and Redlick (2009) Produced by: Antony Davies, Duquesne University
    7. 7. Source: Tax Policy Center (Urban Institute and Brookings Institute), Bureau of Economic Analysis Produced by: Antony Davies, Duquesne University
    8. 8. 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 1954 1956 1958 1960 1962 1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 Federal Revenue as a % of GDP Data Source: Internal Revenue Service, Bureau of the Census
    9. 9. 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 1954 1956 1958 1960 1962 1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 Federal Revenue as a % of GDP 18% Data sources: Internal Revenue Service, Bureau of the Census Data Source: Internal Revenue Service, Bureau of the Census
    10. 10. 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 1954 1956 1958 1960 1962 1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 Top Federal Marginal Income Tax Rate Data sources: Internal Revenue Service, Bureau of the Census Data Source: Internal Revenue Service, Bureau of the Census
    11. 11. 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 1954 1956 1958 1960 1962 1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 Top Federal Marginal Income Tax Rate Data sources: Internal Revenue Service, Bureau of the Census 17% Data Source: Internal Revenue Service, Bureau of the Census
    12. 12. 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 1954 1956 1958 1960 1962 1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 Top Federal Marginal Income Tax Rate 17% 18% Data sources: Internal Revenue Service, Bureau of the Census Data Source: Internal Revenue Service, Bureau of the Census
    13. 13. 0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 1954 1956 1958 1960 1962 1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 Capital Gains Tax Rate Data sources: Internal Revenue Service, Bureau of the Census Data Source: Internal Revenue Service, Bureau of the Census
    14. 14. 0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 1954 1956 1958 1960 1962 1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 Capital Gains Tax Rate 17% Data sources: Internal Revenue Service, Bureau of the Census Data Source: Internal Revenue Service, Bureau of the Census
    15. 15. 0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 1954 1956 1958 1960 1962 1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 Capital Gains Tax Rate 17% 18% Data sources: Internal Revenue Service, Bureau of the Census Data Source: Internal Revenue Service, Bureau of the Census
    16. 16. 0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50% 1959 1961 1963 1965 1967 1969 1971 1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 Average Effective Corporate Tax Rate Data sources: Internal Revenue Service, Bureau of the Census Data Source: Internal Revenue Service, Bureau of the Census
    17. 17. 0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50% 1959 1961 1963 1965 1967 1969 1971 1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 Average Effective Corporate Tax Rate 17% Data sources: Internal Revenue Service, Bureau of the Census Data Source: Internal Revenue Service, Bureau of the Census
    18. 18. 0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50% 1959 1961 1963 1965 1967 1969 1971 1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 Average Effective Corporate Tax Rate 17% 18% Data sources: Internal Revenue Service, Bureau of the Census Data Source: Internal Revenue Service, Bureau of the Census
    19. 19. Fair Shares: Who pays the most taxes?
    20. 20. Income Category Income Before Taxes & Transferes (per household) Federal Taxes (per household) Average Tax Rate (ignore transfers) Average Tax Rate (include transfers) Bottom Quintile $15,000 $200 1% -55% Second Quintile $28,700 $2,900 10% -41% Middle Quintile $48,900 $7,200 15% -17% Fourth Quintile $79,900 $14,100 18% 0% 81% to 90% $120,700 $24,700 20% 11% 91% to 95% $164,800 $37,000 22% 16% 96% to 99% $262,200 $65,600 25% 21% Top 1% $1,209,200 $353,000 29% 28% Data Source: Congressional Budget Office Distribution of Federal Taxes (all taxes combined) Top 1% person’s income = 25 x Middle-income person’s income Top 1% person’s tax bill = 49 x Middle-income person’s tax bill
    21. 21. Income Category Income Before Taxes & Transferes (per household) Federal Taxes (per household) Average Tax Rate (ignore transfers) Average Tax Rate (include transfers) Bottom Quintile $15,000 $200 1% -55% Second Quintile $28,700 $2,900 10% -41% Middle Quintile $48,900 $7,200 15% -17% Fourth Quintile $79,900 $14,100 18% 0% 81% to 90% $120,700 $24,700 20% 11% 91% to 95% $164,800 $37,000 22% 16% 96% to 99% $262,200 $65,600 25% 21% Top 1% $1,209,200 $353,000 29% 28% Data Source: Congressional Budget Office Distribution of Federal Taxes (all taxes combined) After accounting for transfers, the top 20% (on average) are the only people paying federal taxes.
    22. 22. Data Source: Congressional Budget Office Whom Do You Want to Tax? Income Category Minimum Income Average Tax Rate (ignore transfers) Federal Taxes Income After Taxes & Transfers (per household) Federal Tax Revenue Bottom Quintile $0 1.3% $200 $23,300 $4,540,000,000 Second Quintile $20,000 10.1% $2,900 $40,500 $68,440,000,000 Middle Quintile $40,000 14.7% $7,200 $57,100 $170,640,000,000 Fourth Quintile $65,000 17.6% $14,100 $79,700 $328,530,000,000 81% to 90% $100,000 20.5% $24,700 $107,100 $291,460,000,000 91% to 95% $140,000 22.5% $37,000 $138,800 $218,300,000,000 96% to 99% $200,000 25.0% $65,600 $206,200 $314,880,000,000 Top 1% $340,000 29.2% $353,000 $866,700 $388,300,000,000 New Income Tax Revenue $1,785,090,000,000 New Deficit $1,400,000,000,000
    23. 23. How much government spending do people fund with their tax dollars? Top 1% 56 days 2% to 5% 44 days 5% to 10% 31 days Children 112 days 10% to 20% 41 days 20% to 40% 47 days 40% to 60% 24 days 60% to 80% 10 days 80% to 100% 18 hours Deficit Day 2012 2012
    24. 24. How much government spending do people fund with their tax dollars? Top 1% 59 days 2% to 5% 46 days 5% to 10% 33 days Children 97 days 10% to 20% 43 days 20% to 40% 50 days 40% to 60% 25 days 60% to 80% 11 days 80% to 100% 18 hours 2013 Deficit Day 2013
    25. 25. The larger economic problem involves the “not yet” rich.
    26. 26. Average Rates Influence Tax Revenue Marginal Rates Influence People’s Behavior
    27. 27. You are earn $50,000 Tax bill: $25,000 x 5% + $25,000 x 10% = $3,750 Average tax rate: $3,750 / $50,000 = 7.5% Accept a $5,000 raise? The person’s average rate is 7.5% His marginal rate is 90% Income Bracket Marginal Rate $0 to $25,000 5% $25,001 to $50,000 10% $50,001 to $75,000 90%
    28. 28. After taxes, the raise is worth $500. When deciding whether to accept the raise, the 7.5% average rate is irrelevant. What matters is the 90% marginal rate. Average rates look backward. Marginal rates look forward. Income Bracket Marginal Rate $0 to $25,000 5% $25,001 to $50,000 10% $50,001 to $75,000 90%
    29. 29. Source: Clifford Thies, Shenandoah University 0% 25% 50% 75% 100% 125% 150% 0 20,000 40,000 60,000 80,000 100,000 120,000 140,000 160,000 ImplicitMarginalTaxRate EarnedIncome Implicit Marginal Tax Rates definedas: 1 - (change in Income - Taxes + Subsidies) / (change inEarnedIncome) A person earning $25,000 gets a $1,000 raise. After changes in taxes, credits, and benefits, the person is $1,400 worse off than before the raise. $25,000 140%
    30. 30. Source: Clifford Thies, Shenandoah University 0% 25% 50% 75% 100% 125% 150% 0 20,000 40,000 60,000 80,000 100,000 120,000 140,000 160,000 ImplicitMarginalTaxRate EarnedIncome Implicit Marginal Tax Rates definedas: 1 - (change in Income - Taxes + Subsidies) / (change inEarnedIncome) A person earning $20,000 should reject any opportunity to earn more money that does not bring him to at least $45,000.
    31. 31. Complexity is the Enemy
    32. 32. Why Does Complexity Matter? • Special interests can hide the fact that they are co-opting the tax code. • Cost of compliance is $600 billion • Makes criminals out of honest people • Lose ability to incent behavior.
    33. 33. Tax Reform: Simplification is Good Policy Antony Davies Duquesne University September 27, 2013 www.antonydavies.org

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