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Brookings Institution/Hamilton Project Panel on Tax Policy

Brookings Institution – The Hamilton Project

“Tackling the Tax Code: Efficient and Equitable Ways to Raise Revenue”

Tuesday, January 28, 2020

Key Topics & Takeaways

  • Financial Transaction Tax: Antonio Weiss presented his proposed FTT of 10 basis points that would apply to trading in stocks, bonds and derivatives. This proposal includes a staged implementation period over four years starting at 2 basis points to allow policymakers the ability and time to monitor market function, address avoidance techniques that will arise, and if necessary, more carefully calibrate the level of the tax. He concluded that this proposal is estimated to raise approximately $60 billion in annual revenue once it is fully phased in.

Panel 1 – Efficient and Equitable Ways to Raise Revenue

  • Timothy F. Geithner, President, Warburg Pincus
  • Robert E. Rubin, fmr. U.S. Treasury Secretary and Co-Chair Emeritus, Council on Foreign Relations
  • Lawrence H. Summers, Charles W. Eliot University Professor, Harvard University
  • Moderator: Penny Pritzker, Founder & Chairman, PSP Partners; 38th Secretary of Commerce

The first panel began by engaging in a general discussion regarding the current fiscal environment and the need to raise revenue levels. The conversation then shifted to what the panelists view as the best path forward in terms of tax policy. While Geithner, Rubin and Summers all agreed that increasingly progressive tax measures should be implemented, Rubin emphasized the need for a guiding fiscal framework as well as the fact that there has been a failure to recognize that certain progressive tax proposals may have adverse and direct effects on growth. He continued that all tax proposals should have growth estimates in order to present a holistic picture of their impact. Both Geithner and Summers agreed that any debate over specific tax policy should examine how such a policy could possibly damage the overall economy and whether the positive gains in revenue and economic growth are worth the accompanying disruption.

In discussing his view of how a new Democrat administration should craft tax policy, Summers stated that he would recommend a focus on creating both a fairer society and rapidly growing economy as opposed to a focus on reducing the deficit. He then outlined the key tenets of his research product titled “Tax Reform for Progressivity: A Pragmatic Approach.” He continued that the suite of tax reforms proposed in this paper are targeted at improving tax compliance, rationalizing the taxation of corporate profits earned domestically and abroad, eliminating preferential treatment of capital gains, and closing tax loopholes and shelters of which wealthy individuals disproportionately avail themselves. He specifically noted the need to target transfer pricing and the global companies that make use of this practice to reduce their taxes. He estimated that these proposals have the potential to raise over $4 trillion in the coming decade while significantly improving the efficiency of the economy and the equitability of society.

All three panelists acknowledged the political challenges facing progressive tax reform and the need to convince conservative policymakers, many of whom have signed pledges never to increase taxes, on the market-based merits of such proposals. The panel concluded that climate change is the existential issue of our time and that there is a pressing need for a carbon tax.

Panel 2 – From a Financial Transactions Tax to a VAT: Policy Options to Raise Revenue

  • William G. Gale, Arjay and Frances Fearing Miller Chair, Economic Studies, The Brookings Institution; Co-director, Urban-Brookings Tax Policy Center
  • Catherine L. Mann, Global Chief Economist, Citi
  • Antonio Weiss, Research Fellow, Harvard Kennedy School
  • Moderator: Jay Shambaugh, Director, The Hamilton Project; Senior Fellow, Economic Studies, The Brookings Institution

The second panel examined the proposals put forward in “Tackling the Tax Code: Efficient and Equitable Ways to Raise Revenue.” Specifically, they focused the discussion on different types of taxes not often used by the U.S. government and how such forms of taxation could positively augment the revenue system. Gale outlined his proposal for a broad-based credit-invoice value-added tax (VAT) stating that the VAT should complement, not substitute for, new direct taxes on the wealthy. Further, he stated that the VAT should be coupled with both adjustments to government means-tested programs to account for price level changes as well as a universal basic income program. He continued that VATs are a proven success, existing in 168 nations, and that they can raise significant revenue without distorting incentives and choices. Gale concluded that government spending can be adjusted to account for any unintended effects of a VAT and that any concerns about small businesses can be easily addressed via exemption.

Weiss then summarized his financial transaction tax (FTT) proposal. Weiss stated that he is proposing an FTT of 10 basis points that would apply to trading in stocks, bonds and derivatives. He continued that he does not believe that an FTT at this level would hamper market efficiency or impede price discovery. Weiss acknowledged the fact that the U.S. does not have recent experience with a significant FTT and as such, he proposed a staged implementation period over four years starting at 2 basis points to allow policymakers the ability and time to monitor market function, address avoidance techniques that will arise, and if necessary, more carefully calibrate the level of the tax. He concluded that this proposal is estimated to raise approximately $60 billion in annual revenue once it is fully phased in. Both Weiss and Gale acknowledged that an FTT has the capacity to decrease equity trading behavior but that they do not believe that this is necessarily a negative development as the resources that are being invested to capture the latest data in order to trade would be better used elsewhere in the economy.

Mann emphasized the need to have tax authorities in different countries communicate with each other in order to improve both transparency and compliance in the global economy. She continued that by creating transparency as to where multinationals actually put their wealth, tax authorities will have better line-of-sight as to where revenues are being raised and where profits are being created, fostering an environment of increased compliance.

Panel 3 – Increasing Compliance and Other Options to Raise Revenue 

  • Natasha Sarin, Assistant Professor of Law, University of Pennsylvania Carey Law School
  • Moderator: Kate Davidson, Reporter, The Wall Street Journal

Sarin focused on why increasing compliance is both progressive and important. She stated that her and her co-authors’ compliance proposals focus on three main tenets: 1.) significantly increasing Internal Revenue Service (IRS) examination resources; 2.) investing in IRS technological infrastructure; and 3.) encouraging increased cross-party reporting to better verify that income is reported accurately and that tax liabilities are appropriately assessed. She claimed that by pursuing these compliance measures and trying to target those who do not pay their taxes, over $1 trillion in revenue could be raised in the next decade. She continued that these proposals fit well within the existing enforcement infrastructure as they are just encouraging more robust investment in the IRS and the efficient use of such resources. She concluded that these proposals represent both good policy and realistic options.

Panel 4 – What is the Optimal Approach to Taxing Wealth?

  • David Kamin, Professor of Law, NYU School of Law
  • Greg Leiserson, Director of Tax Policy, Chief Economist, Washington Center for Equitable Growth
  • Michael R. Strain, Director, Economic Policy Studies; Resident Scholar, American Enterprise Institute
  • Ray D. Madoff, Professor, Boston College Law School
  • Moderator: Catherine Rampell, Opinion Columnist, The Washington Post

The fourth panel engaged in a general discussion of how best to tax wealth while also avoiding disruptions in terms of economic activity. Kamin stated that the U.S. taxes wealth very poorly at the moment for a number of reasons such as the realization rule, the weakness of the income tax system as well as stepped-up basis. He outlined his desire to improve the tax base by making it less porous so it may serve as a complement to higher taxation and the increasing of rates.

Leiserson then summarized his four approaches to reforming the taxation of wealth, which are designed as follows: 1.) a two percent annual wealth tax above $25 million; 2.) a two percent annual wealth tax with a realization-based taxation of non-traded assets for taxpayers with more than $25 million; 3.) an accrual taxation of investment income at ordinary tax rates for taxpayers with more than $16.5 million in gross assets; and 4.) an accrual taxation at ordinary tax rates with a realization-based taxation of non-traded assets for those with more than $16.5 million in gross assets. He continued that under any of the approaches outlined above, the tax paid upon realization would be computed in a manner designed to eliminate the benefits of deferral. As such, Leriserson stated that all four approaches would address the fundamental weakness of allowing taxpayers to defer paying tax on investment gains until assets are sold at no cost.

Madoff expressed concerns regarding the current state of the estate tax, explaining that it has lost significant integrity because Congress has failed to close the loopholes that make it easy to avoid huge amounts of the tax. As such, she agreed with Kamin and Leiserson on the need to examine new ways of taxing wealth.

Strain outlined his belief that the primary purpose of taxation is to raise revenue, not shape society. He continued that diminishing the fortunes of the wealthiest in America by half in a relatively short period of time would result in unintended negative consequences such as a reduction in national savings and investment. He added that such taxation would also have a corrosive effect on American entrepreneurship and innovation. He concluded that the proposals being discussed at this event, as well as those of the Democratic presidential candidates, continue the longstanding tradition of trying to find a way to provide government benefits to the vast middle class without asking the middle class to help finance them in some way.

Panel 5 – What’s Next for Corporate Tax Reform?

  • Jason Furman, Professor of the Practice of Economic Policy, Harvard Kennedy School
  • Kimberly Clausing, Thormund A. Miller and Walter Mintz Professor of Economics, Reed College
  • Moderator: Mark J. Mazur, Robert C. Pozen Director, Urban-Brookings Tax Policy Center

Furman and Clausing focused their discussion on the future of corporate tax policy. They agreed that the corporate income tax is currently underperforming and stated that both of their proposals seek improve this tax in order to grow revenues.

Furman outlined his proposal, which focuses on the domestic side of corporate taxation, by first stating that the outdated mantra of ‘broaden the base, lower the rate’ can no longer serve as the organizing principle for corporate taxation as a broader base is not inherently better and the ‘right’ base will allow for the raising of rates, revenue and efficiency. He continued that his proposal would raise the corporate tax rate from 21 percent to 28 percent and require large pass-through businesses to file as C corporations as well as close other loopholes. Further, this proposal would provide incentives for new investment by allowing businesses to expense all of their investment costs and receive a nearly 50 percent larger credit for their research and development spending. He claimed that the combination of these tax increases and additional growth would raise $1.1 trillion in revenue over the next decade.

Clausing noted that her and Furman’s proposals are intended to be complimentary, adding that her proposal is intended to ensure that the corporate tax can be collected in a global economy where companies have the discretion as to where they book their income. Clausing said that taxing multinational companies presents policymakers with conflicting goals and a tension between creating a competitive tax system and protecting the tax base. She continued that the Tax Cuts and Jobs Act of 2017 does not adequately address this tension or the key issue of profit shifting. Clausing then turned to the specific recommendations in her proposal, stating that the U.S. should partner with other nations to implement a formulary approach to the taxation of international corporate income. She claimed that by embracing formulary apportionment, this proposal would reduce the pressures of tax competition and profit shifting and allow policymakers to transcend the trade-off between creating a competitive tax system and protecting the tax base. She concluded that working towards this solution will require a significant amount of debate and thought about how to correctly implement such a system.

Of note, both Furman and Clausing agreed that corporate tax information should be made public as corporations occupy a broad role in our society, thereby justifying public attention to their affairs.

For more information on this event, please click here.

For an archive of past SIFMA hearing coverage, please click here.