The goal of the Tax Center is to use sound economic analysis to evaluate the tax and spending policies of the federal government. Right now that is not being done by any other entity.
This is probably the single most important project of any think tank in the country. It has enormous potential to guide Congress, the administration, the business community and the general public in evaluating alternatives to the current system.
Progress So Far
Our first goal was to evaluate the effects of the corporate income tax. To do that Boston University Prof. Laurence Kotlikoff and his colleagues had to develop a first-of-its-kind model of international capital flows. The reason: the most important effect of the corporate income tax is to drive capital (and jobs) offshore.
Our second goal was to evaluate the overall effects of federal taxes and entitlement spending on the distribution of income and wealth in this country. To do that, Prof. Kotlikoff and Berkley tax economist Alan Auerbach developed a first- of-its-kind model, tracing the lifetime effects of the U.S. tax system and all the major entitlement programs. This was an enormously difficult task. But once completed, it has a huge potential to affect public policy.
Findings
Here is the most surprising finding about the corporate income tax. Most of the burden is not falling on shareholders. It is falling on workers. As a result, the biggest beneficiary of abolishing the corporate income tax is labor. This finding is enormously important to both political parties, where we find politicians complaining about stagnating wages, but with no idea what to do about it.
According to Prof. Kotlikoff’s analysis, eliminating the corporate income tax would result in:
A rise in capital stock by 23 to 37 percent, with most of the increase in the form of capital inflows from abroad;
A rise in real wages of 12 to 13 percent; and
A rise in GDP of 8 to 10.
Even moving to a roughly revenue-neutral corporate “flat tax” would produce substantial gains. Prof. Kotlikoff projects that reducing the current 35 percent tax rate to 9 percent and eliminating loopholes would produce:
A wage increase of 6 percent in the short run for high- and low-skilled workers, rising to 9 percent over the long run;
An immediate and permanent GDP increase of 6 percent; and
A capital stock increase of 17 percent in the short run and 30 percent by 2040.
Here is the most surprising finding about the distribution of income and wealth. Federal policy is far more progressive than most people have been led to believe. For example, for people in their 40’s:
Federal fiscal policies cut the lifetime spending of the top 1 percent in half, while doubling the spending of the bottom fifth of the population.
The top fifth of the income distribution owns 73 percent of the wealth; but after tax and spending policies set in, they enjoy only 43 percent of the spending.
However, in achieving these results federal policies create lifetime marginal tax rates that are 50 percent or higher for almost everyone. And that is enormously costly – as future studies will show.
We have gone way beyond what is reasonable or prudent in terms of redistribution. Our focus instead should be on creating better incentives to work, save and invest.
Credibility and Objectivity
We have gone to great lengths to make sure that this analysis is viewed as completely objective and non-partisan. In pursuit of that goal, we have as advisors to the project some of the best tax economists in the country – both Democrat and Republican.
This carefulness has paid off:
In 2013, Prof. Kotlikoff was invited to write a New York Times editorial on why we should abolish the corporate income tax. This is on the same page where Paul Krugman routinely tells us that taxes are too low.
In 2014, he was invited to write a New York Times editorial explaining that the unfunded liability of the federal government is $205 trillion. This is on the same page where Paul Krugman routinely tells us there is no entitlement spending.