What are the consequences of the new US international tax system? How does the tax system affect US competitiveness? How would formulary apportionment work? What are inversions, and how will TCJA affect them? What is a territorial tax and does the United States have one now?
What is the TCJA repatriation tax and how does it work? What is the TCJA base erosion and anti-abuse tax and how does it work? What is global intangible low-taxed income and how is it taxed under the TCJA? What is foreign-derived intangible income and how is it taxed under the TCJA? Comprehensive Tax Reform What is comprehensive tax reform? What are the major options for comprehensive tax reform?
Broad-Based Income Tax What is a broad-based income tax? What would and would not be taxed under a broad-based income tax? What would the tax rate be under a broad-based income tax? National Retail Sales Tax What is a national retail sales tax? What would and would not be taxed under a national retail sales tax? What would the tax rate be under a national retail sales tax?
What is the difference between a tax-exclusive and tax-inclusive sales tax rate? Who bears the burden of a national retail sales tax? Would tax evasion and avoidance be a significant problem for a national retail sales tax? What would be the effect of a national retail sales tax on economic growth?
What transition rules would be needed for a national retail sales tax? Would a national retail sales tax simplify the tax code? What can state and local sales taxes tell us about a national retail sales tax? What is the experience of other countries with national retail sales taxes?
How would a VAT be collected? What would and would not be taxed under a VAT? What would the tax rate be under a VAT? What is the difference between zero rating and exempting a good in the VAT? Who would bear the burden of a VAT? Is the VAT a money machine? How would small businesses be treated under a VAT? What is the Canadian experience with a VAT? Why is the VAT administratively superior to a retail sales tax?
What is the history of the VAT? How are different consumption taxes related? Other Comprehensive Tax Reforms What is the flat tax? What is the X-tax? What are the benefits of return-free filing?
What are the drawbacks of return-free filing? How would the tax system need to change with return-free filing? Who would qualify for return-free filing? Would return-free filing raise taxes? What was the experience with return-free filing in California? What other countries use return-free filing?
What are the sources of revenue for local governments? Specific State and Local Taxes How do state and local individual income taxes work? How do state and local sales taxes work? How do state and local property taxes work? How do state and local corporate income taxes work? How do state estate and inheritance taxes work?
How do state earned income tax credits work? How do state and local severance taxes work? How do state and local soda taxes work? How do marijuana taxes work? Fiscal Federalism and Fiscal Institutions How does the deduction for state and local taxes work? What are municipal bonds and how are they used?
What types of federal grants are made to state and local governments and how do they work? Yet in the near future, Americans will need to reconsider such further reductions in tax rates for high-income taxpayers, as the economic and budget outlook after the terrorist attack and the current slowdown become clearer. Careful consideration will have to be given to the policy adjustments necessary to maintain a sound long-term fiscal position particularly in light of ongoing anti-terrorism costs.
An alternative set of proposals would aim to stimulate business investment. This could include an investment tax credit or accelerated depreciation schedules or expensing, a form of accelerated depreciation for new investments. Of the business-oriented tax proposals currently under discussion, such temporary investment incentives are the most consistent with the principles delineated above.
These incentives would provide a relatively strong bang-for-the-buck because they are targeted on new investments and because they are temporary, thus minimizing the impact on interest rates. As discussed below, these features place them in sharp contrast to corporate income tax rate cuts. It is important that any investment incentives be temporary for four reasons. First, making the incentive temporary would encourage firms to shift investments into —and therefore maximize the stimulus effect in Second, a temporary incentive involves significantly lower budgetary cost—and therefore less harmful pressure on interest rates—than a permanent incentive.
Third, the costs and benefits of permanent tax incentives for investment are complicated, and debate over whether such permanent incentives would be advisable would divert policy-makers from the immediate task at hand. Finally, allowing permanent investment incentives would open the door to other permanent components of the stimulus package, which would undermine its effectiveness.
The precise form of a temporary investment incentive should reflect administrative and other issues. For example, some practitioners believe that accelerated depreciation or partial expensing may be slightly easier to implement than an investment tax credit. Moreover, whatever their form, it is also important to note that such incentives are not fool-proof. Their impact on investment may be limited, especially when firms already have significant cash-on-hand, there is excess capacity, and aggregate demand is falling.
The various concerns should serve to reduce expectations about the impact of temporary incentives for business investment. None of them suggest, however, that either a permanent incentive for investment or a corporate tax rate cut would be more effective as a stimulus.
Some commentators and business leaders are advocating reductions in the tax rate on corporate income as the best method for stimulating the economy. Advocates claim the tax cut would raise stock market values thereby stimulating consumer spending , reduce costs of goods to households, and increase investment. A corporate tax rate cut is a poor stimulus for three reasons.
First, it is an inefficient way to stimulate new investment because it provides a windfall to the income earned on investments made in previous years.
Firms would benefit if they are profitable, even if they are making no current investments or are reducing their current investments. Second, the corporate tax rate cut provides little, if any, immediate assistance to firms that are currently facing losses and therefore are not currently paying corporate income taxes.
These are, however, the firms that are disproportionately in need of assistance during the downturn. This decline in the surplus would put upward pressure on long-term interest rates, which in turn would erode most or direct positive effects of a corporate tax cut on the stock market and on new investment. Some have claimed that cutting the corporate rate would raise stock values and thus stimulate consumer spending.
This chain of reasoning is problematic for several reasons. First, even if it were valid, the corporate tax rate cut would imply a very small short-term stimulus relative to its long-term cost.
Other tax reductions noted above could achieve a much larger short-term stimulus per dollar spent. As noted above, however, the decline in the surplus would raise interest rates. A second claim is that the tax cuts would be immediately passed along to consumers in the form of lower prices for goods and services. But most evidence suggests that the corporate tax is borne by owners of capital in general or owners of corporate capital, not by consumers.
In addition, recall that firms that are currently losing money do not pay corporate income taxes. Thus, if savings were passed to consumers, survival would become even more difficult for those firms already hit hardest by recent events. The estimated effects for these variables are statistically indistinguishable from zero. They are, in fact, more in line with recent empirical research showing that income tax holidays and windfall gains do not lead individuals to significantly alter the amount they work.
Auerbach focuses on the net national saving rate - the share of net output that is consumed by neither government nor households - as a summary measure of the nation's rate of capital accumulation. He uses a "dynamic" model that takes account of any feedback on the economy in the way of extra economic growth, and thus additional government revenues, stimulated by a cut in marginal tax rates.
His simulations suggest that the Bush tax cut may increase saving in the short run, depending on assumptions. Also, it is likely to increase economic output in the short run, because of its additional salutary effects on labor supply. With lower tax rates, individuals are encouraged to work more and those with higher incomes are able to save more.
These dynamic feedback effects are significant: they offset as much as 10 to 40 percent of the revenue losses imputed by static calculations of the impact of the tax cuts. But they are not large enough to offset the negative impact of tax cuts on national saving. In the longer run, saving and output are likely to fall once the revenue losses generated by the tax cut are confronted through necessary policy changes.
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