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Capitol Hill Campus: Tax Reform: Simplification is Good Policy
- 1. Tax Reform: Simplification is Good Policy Antony Davies Duquesne University September 27, 2013 www.antonydavies.org
- 2. Tax Rates versus Tax Revenues
- 3. Source: Tax Policy Center (Urban Institute and Brookings Institute), Bureau of Economic Analysis Produced by: Antony Davies, Duquesne University
- 4. Source: Tax Policy Center (Urban Institute and Brookings Institute), Bureau of Economic Analysis Produced by: Antony Davies, Duquesne University
- 5. Source: Tax Policy Center (Urban Institute and Brookings Institute), Bureau of Economic Analysis Produced by: Antony Davies, Duquesne University
- 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. Source: Tax Policy Center (Urban Institute and Brookings Institute), Bureau of Economic Analysis Produced by: Antony Davies, Duquesne University
- 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. Fair Shares: Who pays the most taxes?
- 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. 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. 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. 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. 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. The larger economic problem involves the “not yet” rich.
- 26. Average Rates Influence Tax Revenue Marginal Rates Influence People’s Behavior
- 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. 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. 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. 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. Complexity is the Enemy
- 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. Tax Reform: Simplification is Good Policy Antony Davies Duquesne University September 27, 2013 www.antonydavies.org
