Tax Policy Lessons from the 2000s

Tax Policy Lessons from the 2000s
Edited by Alan D. Viard
AEI Press, February 2009

Click here to view this press release as an Adobe Acrobat PDF.

Buy a copy of this book.

Media inquiries: Véronique Rodman
202.862.4870 (vrodman@aei.org)
Orders: 800.462.6420 or www.aei.org/books

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.

###

Also Visit
AEIdeas Blog The American Magazine

What's new on AEI

image The money in banking: Comparing salaries of bank and bank regulatory employees
image What Obama should say about China in Japan
image A key to college success: Involved dads
image China takes the fight to space
AEI on Facebook
Events Calendar
  • 21
    MON
  • 22
    TUE
  • 23
    WED
  • 24
    THU
  • 25
    FRI
Wednesday, April 23, 2014 | 12:00 p.m. – 1:30 p.m.
Graduation day: How dads’ involvement impacts higher education success

Join a diverse group of panelists — including sociologists, education experts, and students — for a discussion of how public policy and culture can help families lay a firmer foundation for their children’s educational success, and of how the effects of paternal involvement vary by socioeconomic background.

Event Registration is Closed
Thursday, April 24, 2014 | 12:00 p.m. – 1:30 p.m.
Getting it right: A better strategy to defeat al Qaeda

This event will coincide with the release of a new report by AEI’s Mary Habeck, which analyzes why current national security policy is failing to stop the advancement of al Qaeda and its affiliates and what the US can do to develop a successful strategy to defeat this enemy.

Friday, April 25, 2014 | 9:15 a.m. – 1:15 p.m.
Obamacare’s rocky start and uncertain future

During this event, experts with many different views on the ACA will offer their predictions for the future.   

No events scheduled this day.
No events scheduled this day.
No events scheduled this day.
No events scheduled this day.
No events scheduled this day.