Tax Reform

Will Tax Competition Restrain Bloated State Budgets?

Governor Andrew Cuomo announced yesterday “a dramatic drop in state income tax revenue of $2.8 billion.” More high earners appear to be leaving New York than expected in response to the 2017 federal tax reform. “Cuomo said the law’s cap on deductions for state and local taxes at $10,000 was to blame and suggested it is, anecdotally, triggering high-earners to leave New York.”

How Can Republicans Entrench the Tax Cuts?

The peculiarity of Congressional 10-year budgeting has left its mark on the tax debate. In the UK, if something like the Republican bill had passed, it would be regarded as a significant tax cut, pretty much across the board. And rightly so.

As JCT analysis has shown, in 2019, 44 percent would see tax cuts of more than $500, 17 percent tax cuts between $100 and $500, with just 8.1 percent seeing tax increases greater than $100. Even by 2025, just before most of the individual income tax cuts would expire, 56 percent would see tax cuts of more than $100, with just 13.5 percent seeing tax increases of $100 or more. And this includes as “tax rises” the reduction in subsidies paid out as the removal of the individual mandate penalty leads to fewer people opting for health insurance.

As Chris Edwards has explained, even on the JCT’s own figures (which attribute most of the burden of corporate income taxes to the rich), the biggest financial winners in terms of a reduction in the proportion of federal income and corporate taxes they bear will be the middle-class.

A Tax Bill Provision Only Athletic Directors Could Hate

It’s obviously too early to spike the football, but there is a provision in both the Senate and House tax bills that everyone should be able to endorse, except maybe colleges and their athletics departments: eliminating the 80 percent federal tax deduction college sports season ticket holders get when they pay “seat license” fees—often called “charitable gifts”—charged by schools

Problems with a “Fiscal Trigger”

Fiscal rules can theoretically improve policy by eliminating “time inconsistency” among lawmakers. But the proposed fiscal trigger being discussed in the Senate tax reform bill would be a terrible fiscal rule.

You can see the thinking. Several senators worry about tax cuts blowing a big hole in the public finances. If they do not have the desired impact on economic growth, resulting in less revenue than expected, the budget deficit will grow and drive the national debt even higher. Concerned senators therefore seek a mechanism whereby if revenues are lower than expected, tax cuts will be partially reversed.

It’s welcome that some senators take the US federal government’s burgeoning national debt seriously. But there are obvious flaws with this plan (though we do not know details as yet), some of which have been discussed widely already.

First, how exactly will deviations in revenues be judged? An economy is a complex organism, and it is difficult to disentangle how much any change in revenue relative to forecasts is due to changes in tax rates as against other factors. Just look at the debate in the UK. Last week, the Daily Mail newspaper published a report that tax receipts following corporate tax cuts there had been much higher than expected. But experts from the Institute for Fiscal Studies pointed out that much of this was due to a faster recovery of corporate profits in the financial sector and the effects of Brexit, which had little to do with the changing rate. Under a trigger which merely judged revenues against forecasts, a host of things that affect revenues (both upwards and downwards) could be chalked up as the effects of tax policy, potentially resulting in damaging tax rises.

Then, as J.D. Foster notes, there are likely to be other tax policy changes and changes in growth forecasts in future years too. How will these be disentangled and the effects of this specific Act isolated? Will the trigger apply to just a particular revenue stream, such as corporate income tax revenues, or more broadly to capture all the spillovers of any investment boost? If the former, the probability that the trigger will be activated is highly dependent on the accuracy of any analysis of the incentives to incorporate versus operating as a passthrough. In other words, there are huge unknowns here.

Lots for Economists to Like in the House GOP Tax Plan

Debating the implications of the GOP tax plan, most analysts speak past each other. That’s because there are 3 prisms through which changes can be assessed: the implications for efficiency and growth, the impact on the public finances, and the distributional impact across income groups.

Trump’s Tax Reform Proposals

The Trump administration has released proposals to guide the Republican push for major tax reform. The proposals are mainly supply side in nature, meaning cuts to marginal tax rates and other changes designed to increase economic growth. Major tax reforms are needed desperately, so kudos to Trump for taking charge and thinking boldly, particularly on business tax reforms. There are, however, a few misguided parts in his new plan.

Here are thoughts on the proposed business tax reforms:

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