Tax Policy Lessons from the 2000s
Edited by Alan D. Viard
AEI Press, February 2009
FOR IMMEDIATE RELEASE: February 3, 2009
The American tax system stands at a crossroads. In addition to longstanding arguments over the tax code and budget deficits, there are new concerns raised by Washington's expensive plan to repair the troubled economy, proposals to address global warming, and the scheduled expiration of the 2001 and 2003 tax cuts at the end of 2010. As they make pivotal decisions on these issues, what lessons can the Obama administration and the new Congress draw from analysis of past experience?
Edited by Alan D. Viard, a resident scholar at the American Enterprise Institute, Tax Policy Lessons from the 2000s (AEI Press, February 2009) brings together the most up-to-date research available on tax policy with trenchant analysis by America's leading economists. Among the book's most significant findings:
Environmental taxes, long avoided by the United States, may soon be part of our response to climate change, writes Gilbert E. Metcalf of Tufts University. Such taxes need not be unduly regressive if properly designed. Metcalf challenges the idea that environmental taxes both improve the environment and raise revenue--the "double-dividend hypothesis"--and explains that either direct carbon taxation or a cap-and-trade system is preferable to a regulatory approach.
The common view that taxes have little impact on labor supply is incorrect, according to Nada Eissa of Georgetown University, who finds that taxes influence workers' decisions to enter or leave the labor force. "A careful reading of the evidence suggests that labor market entry and exit is very sensitive to taxes, especially for female household heads but also for married women," Eissa writes.
Economists have come to recognize that the "elasticity" of taxable income--the responsiveness of reported taxable income to changes in tax rates--is a central parameter for tax policy design. Seth H. Giertz of the University of Nebraska finds that reductions in top tax brackets yield large reductions in deadweight loss per dollar of revenue given up, while reductions in lower brackets produce less of an efficiency gain per dollar of revenue given up.
Policymakers can best weigh the advantages and disadvantages of deficit-financed tax cuts by considering how such tax cuts affect the economy and the well-being of current and future generations. John W. Diamond of Rice University and Alan D. Viard confirm that deficit-financed tax cuts increase long-run output "if the financing mechanism is less distortionary than the tax that is initially reduced, and if the financing begins relatively soon after the tax cut is adopted." They caution, however, that financing tax cuts with deficits "generally reduces the well-being of later generations while increasing that of earlier generations."
The 2003 dividend tax cut triggered a large and immediate increase in dividend payments by firms, finds Dhammika Dharmapala of the University of Connecticut. The biggest increases occurred in firms whose stockholders were most affected by the tax cut. Dharmapala documents an investment shift following the cut, in which Americans moved their investments out of foreign firms whose dividends did not qualify for the cut and into foreign firms whose dividends did qualify. He concludes that the shareholder-level approach taken by the reform "may be less effective in a financially integrated world economy than measures directed specifically at U.S. firms."
The partial expensing ("bonus depreciation") provision adopted in the 2002 stimulus package yielded a modest increase in equipment investment, according to Alan J. Auerbach of the University of California at Berkeley and Kevin A. Hassett, director of economic policy studies at the American Enterprise Institute. Auerbach and Hassett also find strong evidence that the 2003 dividend tax cut increased dividend payouts and weaker evidence that it had an impact on investment.
Drawing on a decade's worth of theoretical models, statistical studies, and observations, the authors provide a map of the progress that has been made and the work that is yet to be done. Tax Policy Lessons from the 2000s is an invaluable guide for policymakers facing important decisions about environmental taxation, marginal tax rates, dividend taxation, and the taxation of business investment.
Alan D. Viard is a resident scholar at the American Enterprise Institute.
Contributors: Alan J. Auerbach, Steven J. Davis, Dhammika Dharmapala, John W. Diamond, Nada Eissa, Daniel Feenberg, Seth H. Giertz, Kevin A. Hassett, Laurence J. Kotlikoff, Gilbert E. Metcalf, Douglas A. Shackelford, Matthew D. Shapiro, Alan D. Viard, and Roberton C. Williams III.