Most analysts believe that capital owners bear a major share of the burden of the corporate tax. Because capital income is concentrated among high-income individuals, the corporate tax is a highly progressive revenue source. Mainstream views on who pays the corporate income tax have evolved over time, reflecting new analytical approaches and changes in the economy. Increased international mobility of capital over the past few decades has increased the share of burden analysts assign to labor income, reflecting the increased ability of corporate capital to move overseas to shift the tax burden to less mobile factors of production. But the growth in the importance of intangible capital as a business asset has increased the share of profits that represent economic rent instead of the normal return needed to attract capital, thereby increasing the share of the tax paid by shareholders and other corporate stakeholders, such as top management.

Ed Kleinbard’s Business Enterprise Income Tax (BEIT) would eliminate many of the distortions in current US taxation of investment income, including choices between debt and equity finance and among dividends, stock buybacks, and retained earnings; business choices among alternative assets and between investing in the United States and overseas; decisions on exchanging asset ownership; and choices among how firms are organized. But, similar with other proposed reforms, BEIT is less effective in taxing economic rents earned by the wealthiest individuals. BEIT fits with Kleinbard’s overall view that average citizens would benefit from a larger government funded by moderately progressive taxes.

This paper estimates the effective tax rate on entrepreneurial income, defined as the return to an individual who starts a successful new business and then sells their interest once it becomes an established enterprise. The rate depends on both the tax imposed on the appreciation of the firms value during its growth phase and on the effects of the tax system on the value of equity in ongoing business enterprises. Under reasonable assumptions, this rate is lower than the rate the entrepreneur would pay on ordinary income. Preferential taxation of entrepreneurial income has consequences for both economic growth and income distribution.

Harry Grubert made important contributions to our thinking about international tax policies. He identified the numerous margins on which corporate tax systems could distort behavior in a global economy and estimated the relative costs of these distortions. His views evolved over time from support of worldwide taxation of U.S. multinationals to favoring a territorial system with a minimum tax on super-normal returns and a shift in taxation from the corporate to the shareholder level. His research greatly influenced corporate reforms in the Tax Cuts and Jobs Act of 2017 (TCJA), although he no doubt would have differed with many of the Act’s details.

The Tax Cuts and Jobs Act of 2017 was the largest tax overhaul since 1986. Our assessment — based on a variety of sources — suggests that the act will do the following: stimulate the economy in the near term but have small impacts on longterm growth; reduce federal revenues; make the distribution of after-tax income less equal; simplify taxes in some ways but create new complexity and compliance issues in others; and reduce health insurance coverage and charitable contributions. Its ultimate effects will depend on how other countries, the Federal Reserve Board, and future Congresses respond.

This chapter explains the National Research Program (NRP), the Internal Revenue Service (IRS) latest initiative for measuring noncompliance with the Federal income tax. Most of the gross tax gap is not detected by IRS, and is therefore never assessed or paid. The chapter explains the historical Taxpayer Compliance Measurement Program (TCMP) data on individual compliance trends. Like the former TCMP studies, NRP will provide strategic measures of payment compliance, filing compliance, and reporting compliance. Commissioner Mark W. Everson has indicated one of his main goals is to 're-center' the IRS to ensure a more balanced approach to carrying out the agency's dual missions of taxpayer service and enforcement. Abusive offshore financial transactions include various arrangements designed to circumvent tax laws or evade taxes. Noncompliance rates for United States individual taxpayers exhibited little apparent improvement or deterioration based on TCMP surveys conducted between 1973 and 1988.

A longstanding concern of state and local governments is that a federal value-added tax (VAT) could severely limit their reliance on sales taxes. But a federal VAT could have even larger effects on revenues from other sources and on spending through changes in incomes, relative prices, and asset values. To provide the plausible range of budgetary effects, we examine both a narrow- and comprehensive-based VAT, with consumer prices fully adjusting and not changing, over both short- and long-run time horizons. We find that the plausible range of effects includes an improvement in the fiscal position of states and localities.

We propose reducing the corporate tax rate to 15 percent and replacing the foregone revenue with a tax at ordinary income rates on the accrued, or mark-to-market, income of American shareholders of publicly traded corporations, accompanied by an imputation credit for U. S. corporate income taxes paid. The proposal would dramatically reduce the tax significance of the source of corporate profits and the residence of corporations, both of which can be easily manipulated. Lowering the corporate tax rate to 15 percent would encourage a flow of capital into the United States and reduce incentives to shift reported profits overseas and to engage in inversion transactions, while continuing to impose tax on foreigners who earn economic rents from investing in the United States. The proposal includes provisions for averaging of mark-to-market income, transition relief for firms that move from closely held to publicly traded status, and other measures to address the challenges of mark-to-market taxation. We estimate that the proposal would be approximately revenue-neutral and would make the distribution of the tax burden slightly more progressive.

This paper develops and applies a conceptual framework to estimate the distribution among income groups of benefits from the federal income tax exemption of interest on state and local bonds. The current method for distributing the benefits of tax‐exemption used by the Tax Policy Center and federal agencies errs by failing to account for implicit taxes and subsidies that result from the tax‐exemption of selected sources of investment income. In this paper we take account of how the exemption might affect relative returns to different financial instruments and relative costs of private and public sector goods and services. The benefit that holders of tax‐preferred assets receive is over‐stated by the failure to account for the implicit tax these investors pay in the form of reduced pre‐tax returns. And the benefit that holders of taxable assets receive is understated by the failure to account for the implicit subsidy these investors received in the form of increased pre‐tax returns. We show how adjusting for responses by private markets and state and local governments affects the distribution of benefits among income groups. Across a range of possible assumptions, we find that the exemption still primarily benefits higher‐income individuals. However it is important to note that all holders of capital receive some of this benefit, not just holders of municipal debt. The assumption of how state and local government budgets change in the presence of the exemption matters greatly in terms of how much and whether other households benefit from the exemption. Finally, we apply this framework to estimate the distributional effects of the President’s proposal to limit the tax savings from the tax exemption of municipal bond interest to 28 percent of interest received. Tax payers facing marginal tax rates higher than 28 percent primarily bear the burden of this change – however other households could either face a net burden from the change or a benefit depending on how states respond to the federal change and how relative prices of private and public goods change.

The mortgage interest deduction is one of the most expensive federal tax preferences. The Joint Committee on Taxation (2013) estimated that the deduction will cost about $380 billion from fiscal years 2013 through 2017. Homeowners also benefit from the deduction of real property taxes and the exemption of the first $250,000 ($500,000 for couples) of capital gains on the sale of principal residences.Defenders of the mortgage interest deduction claim that it stimulates homeownership, which they argue has many broader benefits to society beyond the benefits to the owners themselves. I argue instead that the case for these external social benefits is unproven and that, even if these benefits exist, the mortgage interest deduction is an ineffective tool for increasing homeownership. Instead, the deduction mostly serves as an incentive for middle-income and upper income people to acquire larger and more expensive homes than they otherwise would have purchased. These increased investments in homes that the tax subsidy generates divert resources from business investments with a larger social yield but without a comparable tax subsidy. If promoting homeownership is the goal, a subsidy directed to people who might be choosing between buying and renting would be a more effective tool for doing so.Does Owning Instead of Renting Provide Net Social Benefits?Proponents of homeownership subsidies cite social benefits of homeownership. An extensive body of research (DiPasquale and Glaeser, 1999; Galster, 1983; Glaeser and Sacerdote, 2000; Glaeser and Shapiro, 2003; Rossi and Weber, 1996) has found that owner-occupied homes are better maintained than rental properties, homeowners have higher rates of voting and other forms of civic participation than renters, and crime rates are lower in areas with more homeowners. The studies do not establish, however, whether homeownership causes these benefits or whether people who are civic-minded or less likely to commit crimes are more likely to buy homes (Gale, Gruber, and Stephens-Davidowitz, 2007). Some analysts also suggest that promoting homeownership among low-income people may help them accumulate wealth and thereby promote social mobility (Lerman and McKeman, 2008). Homeownership also comes with downsides, however. Homeownership may limit job mobility because of the much greater costs associated with buying and selling homes than with moving from one rental property to another. Events in the past few years have shown that excessive home mortgage debt can expose individuals and the broader economy to significant risk. Although it is important to maintain financial arrangements that enable people to obtain long-term loans to buy homes, doing so does not mean that federal policy should tilt the playing field toward owning instead of renting.Does the Mortgage Interest Deduction Increase Homeownership?Even if one accepts that the federal government should promote homeownership, it does not follow that the mortgage interest deduction is a good way to do it. The current deduction provides no subsidy to the 65 percent of taxpayers who do not itemize deductions on their tax returns or the many households that have no tax liability at all. It provides only a modest subsidy to itemizers in the 15-percent tax bracket. The subsidy value is greatest among upper middle-income taxpayers, those who are most likely to own a home without a subsidy. Studies have found no evidence that the change in the value of the mortgage deduction over time (as marginal tax rates have changed) has affected homeownership rates in the United States (Glaeser and Shapiro, 2003), and no drop in homeownership occurred when the United Kingdom reduced its mortgage interest subsidy (Gale, 2001, 1997). Culturally similar countries, including Canada, New Zealand, and Australia offer no mortgage interest deduction but have homeownership rates similar to those in the United States (Mann, 2000).The subsidy very well might help upper middle-income taxpayers in high-rate brackets to afford larger mortgages and thereby purchase more expensive homes. …

The nation’s persistent budget deficits and rising national debt have driven policymakers to make tax expenditures a logical focus of future efforts at deficit-reducing tax reform. In this chapter, Daniel Baneman, Joseph Rosenberg, Eric Toder, and Roberton Williams examine how revenues might be raised by reforming individual tax expenditures. They first review how tax expenditures have changed over the past 25 years and provide estimates of the distribution of tax savings resulting from tax expenditures today. The authors then examine three comprehensive approaches for reducing the impact of tax expenditures: (1) the replacement of six major tax expenditures with a combined 15 percent credit, (2) a cap on the total of seven major tax expenditures to 4 percent of AGI, and (3) a “haircut” that reduces the value of a set of tax expenditures by 35 percent. Among many results, they estimate that taxpayers who are affected by these changes experience a reduction in after-tax-income on average of just below 2 percent, and that the AGI limit raises significantly more revenue than the other two options.

The increase in international capital mobility over the past two decades has put pressure on the tax treatment of corporate equity income. Corporate-level taxes distort investment flows across locations and create opportunities for tax avoidance by shifting income across jurisdictions. Outward flows of capital shift part of the burden of the corporate-level tax on equity income from capital to labor, thereby making its incidence less progressive. Individual-level taxes on corporate equity income lower the after-tax return to savings but have less distorting effects on investment location and are more likely to fall on owners of capital than workers. This logic suggests there may be both efficiency gains and increases in progressivity from shifting taxes on corporate equity income from the corporate to the shareholder level. We estimate the distributional effects of a tax reform that raises shareholder-level taxes on corporate equity income and uses the revenue to cut the corporate tax rate. We find that taxing capital gains and dividends as ordinary income (subject to a maximum 28% rate on long-term capital gains) would finance a cut in the corporate tax rate from 35% to about 26%, assuming no behavioral response. While the distributional effect depends on what one assumes about the incidence of the corporate income tax, our results suggest that even if the corporate income tax were paid entirely by capital income, the reform would make the tax system more progressive.

401(k) plans – the main retirement savings vehicle for millions of workers – allow participants to save on a tax-deferred basis. This tax incentive is more valu­able to workers in high-income families than work­ers in low-income families because they face higher marginal income tax rates. Not surprisingly, then, studies of the distributional effects of 401(k)s find that they mainly benefit high-income workers. However, these studies assume that employer contributions to 401(k)s do not affect the total compensation that each worker receives – that is, every worker “pays for” employer contributions in the form of lower wages. This brief challenges this assumption, testing whether employer contributions may actually increase total compensation for low-income workers, who may be more reluctant than high-income workers to accept wage reductions in exchange for retirement saving contributions. The brief is organized as follows. The first section provides background on 401(k)s, specifically their tax treatment and the rationale for employer contribu­tions. The second section explores the traditional theory of how fringe benefits affect workers’ total compensation and why the theory might not uni­formly hold for employer contributions to 401(k)s. The third section describes an experiment to test this theory and presents the results. The final section con­cludes that additional employer 401(k) contributions appear to reduce wages only modestly for low-income workers, resulting in higher total compensation for these workers. These results suggest that traditional analyses may understate the benefits that 401(k)s provide for rank-and-file workers.

When policymakers look to trim fat from the federal government they too often ignore half the problem: the vast and complicated set of spending programs administered by the IRS. These programs are often referred to as tax expenditures, but this paper argues that they should be viewed just like any other type of government spending. In fiscal year 2011 we will spend over $1 trillion on tax expenditures. Despite their big price tag, these programs fly under the radar of media and popular opinion. As a result, they are more likely than direct outlays to be ineffective initiatives or giveaways to the politically powerful. This paper explains what IRS-administered spending programs are, and summarizes the obstacles to subjecting them to the same scrutiny as other government spending. It then offers four recommendations for working these programs into the budget process: (1) requiring a bipartisan commission or a designated agency to create rules for identifying provisions that should be treated as “IRS-administered spending programs,” (2) directing CBO to display alternative projections of federal revenue and spending that count all IRS-administered spending programs as revenue raised and then spent, (3) requiring the IRS to inform taxpayers of the benefits they receive from such programs, and (4) allowing taxpayers to claim these benefits separately from remitting taxes due. Finally, this paper offers a framework of questions and principles that policymakers should bear in mind in giving these programs the critical evaluation that they deserve. Specifically, policymakers should consider whether each IRS-administered spending program furthers any public goals and, if so, whether it is structured as effectively as possible to achieve its objectives. If a program seeks to encourage consumers to act in their own interest, policymakers should consider replacing or supplementing it with default rules and “nudges” that facilitate better decisions. If a program seeks to encourage consumers to make choices that benefit others, policymakers should target its subsidies on the choices that benefit others the most and the taxpayers who are most likely to respond. Responsiveness can often be increased by offering the same subsidy to everyone, framing the subsidy as a match, or delivering it earlier in time. More fundamentally, such subsidies should not depend on the claimant’s marginal tax rate or itemizing status. This implies that IRS-administered spending program that seek to influence or reward socially-desirable choices should almost always be delivered in the form of refundable credits, instead of non-refundable credits, deferral, deductions, or exclusions.