Taxing Ourselves

"Joel Slemrod and Jon Bakija do an excellent job of taking what we know about how taxes affect behaviour and translating it into basic lessons. There are three different kinds of reactions people can have to taxes. There are timing reactions like, “Should I realise my capital gains today or tomorrow?” There are financing reactions like, “Should I get paid in stock options or wages?” And then there are behaviour adjustments like, “How hard should I work?” This book teaches that taxes have a large effect on timing, a moderate effect on financing and little-to-no effect on behaviour, such as how hard people work. When people talk about taxes and economic growth, they’re really talking about that third factor but that’s not really what taxes affect. Taxes don’t have much effect on how hard people work – they have more effect on things like the composition of portfolios and when they realise their capital gains. This book brought the literature together to make that point very clearly. No, not as divided. I would say that if you surveyed the economics profession they would be much more uniform than the polity about the need for a broad tax base, which means no mortgage deduction and no health insurance exemption. If you surveyed public finance economists they would advocate moving away from income taxation toward consumption taxation because of the belief that that would encourage savings. A common argument you’ll hear is that high taxes distort economic behaviour. This book would say that factor is not as big a deal as it’s made out to be. How much we should collect is really about your underlying philosophy about the proper role of government. From whom and how – you want a system that collects taxes in some proportion to how much people consume and how much they earn. Some would say only based on what people consume, others are worried that would hit the poor too hard. Most public finance economists believe in progressive taxation – the rich paying more than the poor – but I think there would be a lot of difference on how progressive. You have to separate out economists doing economics from economists as political advocates. In terms of economists doing economics, I think we will probably be less divided. In the mainstream economics profession there is a growing consensus that although taxes can affect the timing of transaction and that complexities in the code can be a drag, taxes are not a major driver of economic growth. What a book like Taxing Ourselves would say is the whole “don’t tax millionaires, they’re job creators” point is crap. The idea that people who make a million a year will create fewer jobs or start fewer businesses or any of that if they’re taxed, that’s not right. There is pretty strong consensus in the public finance community on this right now. But the authors might point out a problem with the Buffett Rule – it’s difficult to tax the top 1% because they’re very able to evade taxes. If you tax people who make a million a year, they’ll hire accountants to avoid taxation. That’s the point of Taxing Ourselves . What we should be thinking about when we tax billionaires is not, “Will it harm economic growth?” I think it won’t. But, “What do we do about the fact that those who earn a million a year are much better than average Americans at avoiding taxation.” The prospects, over the long run, are pretty good. In 1986 we did a lot to fix the tax code. After the reforms of 86 the code looked very much like public economists say it should look. That recent history is encouraging. I think we will be able to get back there again. The alternative minimum tax is a real timebomb that’s right down the road. Eventually it’s going to be clear to everyone that we need to raise taxes. And we can probably only do that in the context of broader reform, something like the “grand bargain” that Obama proposed. Republicans will realise they have to raise revenues and Democrats will realise that broadening the tax base may be the best way to do it. Maybe we’ll get some agreement about raising revenues in a way that reforms the income tax system."