A Taxing Blog

Thursday, October 02, 2003
Repatriation of Foreign Profits  
Edmund Andrews of the NYT reports: Senate Panel Backs Bill to Give Tax Windfall to U.S. Companies. The bill would allow companies that have earned profits overseas a one-time chance to bring back that money at a super-low tax rate of 5.25%. The normal corporate tax rate is 35%.

This is probably very bad policy. In the short run, the repatriation of funds could boost the domestic economy a bit, as Bill Archer suggests. The problem is the long run incentives it creates. It creates a precedent that suggests that Congress might do this again in the future. Thus companies will have even more of an incentive in the future to hoard profits overseas and wait for a tax holiday to reinvest in the US.

It's similar to reducing the capital gains rate to 5% on a "one-time" basis, say for a single day at the end of October. On that particular day, we would see a huge jump in revenue as people sell stocks that they've been holding. And there would be efficiency gains, as the "lock in" effect of the realization rule would be lessened. But there would be a long-term loss in efficiency as people would then hold on to stocks even longer as they wait for another tax holiday.

Moreover, this seems to be yet another part of a Republican agenda of using deceptive budget moves that defer the hard decisions. No doubt the tax holiday will boost revenue this year; the negative consequences will come after the election.

I don't pretend to know much about international tax issues, but this one seems obvious to me. Please email me if I'm missing something here.

(I suspect part of the problem has to do with the difficulty of enforcing anti-deferral regimes, as well as the difficulty of enforcing the transfer pricing rules, but I don't yet know enough to have an opinion on that.)

Wednesday, October 01, 2003
Distributive Justice?  
William Gale posts Distribution of Federal Taxes and Income, 1979-2000.. Here's a snippet:

The pretax income of high-income groups rose so fast that, despite their increasing share of tax burdens, their after-tax income rose substantially faster than other groups. After-tax income tripled among the top 1 percent, and roughly doubled in the top 5 and 10 percent. After-tax income rose by 15 percent or less in the bottom 60 percent of the distribution. The ratio of after-tax income among the top 1 percent to those in the middle quintile rose from about 8 to 1 in 1979 to more than 20 to 1 in 2000.

We shouldn't have been surprised to see this reversed a bit in 2001, as Jeff pointed out on Monday: as the lucky duckies' income fell, so does their tax obligation.

The implicit argument of the headline, I think, was the idea that perhaps their after-tax income of the super-rich should have dropped by a greater percentage than their pre-tax income (to make up for the ridiculous rise in after-tax income of the last 20 years.) So maybe the headline should have been "Real Lucky Duckies Still A Lot Luckier Than You."

Weisbach on the Integration of Tax and Spending Programs  
Chicago Taxprof David Weisbach and co-author Jacob Nussim post The Integration of Tax and Spending Programs. Here's the abstract:

This paper provides a theory for deciding when a spending program should be implemented through the tax system. The decision is traditionally thought to be based on considerations of tax policy. The most common theories are the comprehensive tax base theory and the tax expenditures theory, both of which rely on tax policy to make the determination. We argue instead that the decision should be based solely on consideration of organizational design. Activities should be grouped together in a way that achieves the best performance, much like a corporation decides how to divide its business into divisions. Tax policy is entirely irrelevant to the decision. This paper begins the process of applying organizational design theory to the tax and spending problem, considering theories of hierarchies based on the needs for specialization in and coordination of activities. The paper then analyzes whether food stamps and the earned income credit should be implemented in through the tax system based on this analysis.

This paper --- and the next two that will follow --- promise to be extremely important. My own thinking has changed recently on this issue. I used to think that the Comprehensive Tax Base literature had it right; we should have a simple, broad tax base with as few loopholes as possible. The problem is that politics dictates that we will have expenditures for special programs, and I agree with Weisbach that it's more useful to assume that we will have targeted expenditures than to assume that we won't (or should not). The remaining question, then, is how to figure out whether we should use the tax system or a direct government program to effect the expenditure.

One advantage of using tax expenditures, as I pointed out last week, is that it often preserves more decision-making capacity for the private sector, particularly for programs where the tax break relies on getting capital from the private sector. I expect Weisbach will explore this concept in the next papers, where he promises to include agency costs and public choice problems in the analysis.

Monday, September 29, 2003
NY Times Headline  
The headline of the NY Times article that Victor cites below ("Top 1% in '01 Lost Income, but Also Paid Lower Taxes") confuses me. Should we be surprised that if you lose income, you pay less taxes? Did the NY Times think that they should have paid the same taxes as the year before(or pay more)? I guess they are referring to the fact that the share of taxes paid by the wealthiest one percent dropped as well but that is just a consequence of progressive rates and decling income.

I guess one message to be derived is that those of us in the remaining 99% should hope that the wealthiest 1% increase their income significantly so that the percentage of taxes paid by our group will be reduced (grin).

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