Taxes in America

Leonard E. Burman is Paul Volcker Professor of Behavioral Economics at the Maxwell School of Syracuse University and Institute Fellow at the Urban Institute. Joel Slemrod is Professor of Economics in the Department of Economics and the Paul W. McCracken Collegiate Professor of Business Economics and Public Policy in the Stephen M. Ross School of Business, at the University of Michigan.

PREFACE

Who are we?
Why did we team up to write this book?
What's the book about?
Why did we write a second edition?
Who provided invaluable assistance on this project?

PART I HOW ARE WE TAXED?

1 The View from 30,000 Feet
a. Why is everyone always so worked up about taxation?
b. Why was everyone especially worked up in 2018? (Hint: a lot has changed)
c. What is a tax?
d. What are the major kinds of taxes?
e. How are taxes like ducks?
f. Are there "hidden" taxes?
g. Are there ways to raise revenue other than taxes?
h. Why not just borrow the money instead of raising taxes?
i. How can taxes be like regulations?
j. How can regulations and spending programs be like taxes?
k. How have taxes changed over time?
l. How do state and local taxes vary?
m. How does the composition of tax vary across federal, state, and local governments?
n. Is the United States really the highest taxed country in the world?
o. Federal taxes in the United States have been at about 18 percent of GDP for 50 years. Does that mean that this is the natural rate of taxation?
p. Why is the long-term fiscal outlook so dire?

2 Personal Income Taxes
a. What's the difference between personal taxes and business taxes?
b. Who really bears the burden of tax?
c. Are there cases in practice where it does matter who writes the check?
d. Can taxes affect asset prices?
e. What is the personal income tax?
f. Isn't the income tax a fraud?
g. What are exclusions, deductions, exemptions, and credits?
h. What is the standard deduction?
i. Why are there itemized deductions? Isn't it unfair that most people don't benefit from them?
j. Who benefits from the itemized deduction for state and local taxes (SALT)?
k. Why could raising the standard deduction and limiting the SALT deduction depress home prices and charitable giving?
l. At what income level do people start owing income tax?
m. Is it true that half of households owe no income taxes?
n. Is this bad for democracy?
o. Do we tax capital income the same as labor income?
p. What is economic income?
q. Why do economists think my home earns me rent?
r. Why don't we tax economic income?
s. How do we tax capital gains and dividends?
t. What are the arguments for and against lower capital gains tax rates?
u. What is the "Angel of Death" loophole?
v. What is carried interest?
w. If we want to favor capital gains and dividends, does it make sense to do it via lower rates?
x. What is the AMT?
y. What is the "Buffet Rule"?
z. What are hidden tax brackets?
aa. Does Uncle Sam really want you to live in sin?
bb. How does inflation affect the income tax?
cc. Why did TCJA change the inflation index for adjusting tax brackets and other parameters?
dd. What are payroll taxes and how are they different from income taxes?
ee. Aren't other taxes also dedicated to Medicare and Social Security?
ff. Is it true that most taxpayers owe more payroll than income tax?

3 Business Income Taxes
a. How do we tax corporations' income?
b. Why do economists say that we "double-tax" corporations' income?
c. What are the other ways business income is taxed?
d. Why tax corporations?
e. Which people bear the burden of the corporate income tax?
f. What are the impacts of double-taxing corporate income?
g. What would happen if we just eliminated the corporate income tax?
h. How can some companies get away with paying no income tax despite billions in profits?
i. Why is it troublesome that some companies view their tax departments as profit centers?
j. Income earned by corporations is double-taxed, and tax avoidance opportunities abound. Make up your mind-is corporate income taxed too much or too little?
k. What is depreciation?
l. What are expensing and bonus depreciation?
j. Should businesses' interest expenses be deductible?
k. Why do many corporate executives prefer tax cuts to expensing?
l. Are there implicit spending programs run through the corporate income tax?
m. Are multinational corporations taxed differently than domestic companies?
n. Should we try to tax corporations on their worldwide income?
o. What is a territorial system?
p. Will shifting from a worldwide to a territorial system bring American jobs home?
q. What is transfer pricing? Why is it important to multinational corporations (and taxpayers)?
r. What are tax havens?
s. What is a global minimum tax and why does it matter in a territorial system?
t. What is formulary apportionment? Would that be a better option than trying to enforce transfer pricing rules?
q. How does the U.S. corporate tax rate compare to the rate of other countries?
r. Did our relatively high corporate tax rate hurt our companies' competitiveness and the country's competitiveness?

4 Taxing Spending
a. What is a consumption tax?
b. Why tax consumption rather than income?
c. A consumption tax sounds great. What's the catch?
d. What is a retail sales tax?
e. What is a use tax?
f. What is a luxury tax?
g. What is an excise tax?
h. What is a sin tax?
i. What is a Pigouvian tax?
j. What is a VAT?
k. The credit-invoice VAT sounds really complicated. Why do it that way?
l. Are small businesses subject to the VAT?
m. Why doesn't the United States have a VAT?
n. How much money would a VAT raise?
o. What is the typical VAT rate in other countries?
p. How would a federal VAT interact with state and local sales taxes?
q. Does a VAT promote exports?
r. The destination-based cash flow tax (DBCFT) is a mouthful. What is it?
s. Why could imposing a border adjustable tax (BAT) hurt importers and help exporters?
t. A DBCFT sounds like a VAT with a longer and unpronounceable acronym. How is it different?
u. What is the "Angel of Death" loophole?
v. Wouldn't a flat tax be super simple and fair?
w. There are flat taxes all over Eastern Europe. Are they the same as the flat tax advocated for the United States?
x. What is the X tax?
y. What is a consumed income tax?
z. Are tax breaks for saving and retirement indirect steps toward a consumption tax?
aa. Do these tax breaks actually encourage saving?
bb. If the economy runs on consumption, why would we want to encourage saving?
cc.What's the difference between Roth and traditional IRAs?
dd. Do consumption taxes disproportionately burden the old?

5 Other Kinds of Taxes
a. What is the estate tax?
b. How is estate tax liability calculated?
c. Why tax estates when the assets that went into them were already subject to plenty of tax?
d. What are the estate tax's effects on work and saving?
e. How does the estate tax affect small businesses and family farms?
f. Should the United States adopt a wealth tax?
g. What is the difference between an estate tax and an inheritance tax?
h. What is a financial transaction tax?
i. What is the property tax?
j. What is a lump-sum tax?
k. Do economists have other goofy ideas about ideal tax systems?
l. Do these ideas explain why people don't like economists?

PART II THE COSTS AND BENEFITS OF TAXATION

6 Taxes and the Economy
a. How do taxes affect the economy?
b. Why do economists think that raising funds costs much more than the tax sticker price?
c. Do some taxes help the economy?
d. What is the Laffer Curve?
e. Which is a better economic stimulus, cutting taxes or spending more?
f. What kinds of taxes provide the most stimulus?
g. What are built-in stabilizers?
h. How do taxes affect prosperity and growth?
i. How do taxes affect working and saving?
j. How do taxes affect entrepreneurship?
k. How do taxes affect research and innovation?
l. What is "trickle-down" economics?
m. Why do smart, serious people disagree about optimal tax policy?
n. Why not run deficits forever?
o. Are the benefits of tax cuts diminished, or eliminated, if they increase deficits?
p. If people care about their children, won't they just save more to make up for any deficits? That is, dodeficits matter at all?
q. Will the Tax Cuts and Jobs Act boost the economy and make most Americans better off?

7 The Hidden Welfare State
a. Are a trillion dollars in middle-class entitlement programs really hidden in the tax code?
b. What exactly is a tax expenditure?
c. Why do we call tax expenditures entitlement programs? They're tax cuts.
d. Who benefits from tax expenditures?
e. Why has the use of tax expenditures been growing in recent years?
f. How should policymakers decide whether to run a subsidy through the tax system?
g. How should tax expenditures be designed?
h. Does the mortgage interest deduction encourage homeownership?
i. Why does tax-free health insurance push up health care costs?
j. Was the Affordable Care Act (Obamacare) actually a giant tax law?
k. Are all tax expenditures run through the income tax?
l. Is the whole concept of tax expenditures based on the fallacious assumption that government owns all your money?

8 The Burden of Taxation
a. What makes a tax system fair?
b. What is the benefit principle?
c, Do special fairness concerns come into play when tax laws change?
d. How is the tax burden distributed?
e. Why can analysts draw different conclusions about whether a particular tax change is progressive?
f. What is the burden of deficits?
g. Is progressive taxation class warfare?

9 Running a Tax System: Administration and Enforcement
a. How much does it cost to run the U.S. tax system?
b. How does tax remittance and collection work?
c. Who gets audited and why? What's the DIF?
d. What is information reporting?
e. How can the United States "require" foreign financial institutions to report on U.S. taxpayers?
f. What is tax withholding?
g. Why do people cheat on their taxes? Why do they comply?
h. How much cheating is there?
i. How much more tax could the IRS collect with better enforcement?
j. Should states be able to tax Internet and mail-order sales from other states?
k. Why not audit everyone?
l. Why not ramp up the penalty for evasion?
m. Are refundable tax credits especially prone to tax evasion?
n. Do most people get tax refunds?
o. How many people use tax preparers? Do they help or hinder compliance?

10 Simplicity and Complexity
a. How complicated is the U.S. income tax?
b. How is tax complexity measured, and how should it be measured?
c. Do fewer tax brackets promote simplicity?
d. Why is there a trade-off between simplicity and other goals such as fairness?
e. How fast are we moving toward e-filing?
f. If almost everyone uses tax software or paid preparers, should we stop worrying about complexity? Should we start worrying about democracy?
g. Could most taxpayers be spared any filing requirement (as in the United Kingdom)?
h. Could the IRS fill out our tax returns for us?
i. Would simplifying tax compliance be unfair to H&R Block and Intuit?
j. What is a data retrieval platform?
k. Did the TCJA simplify the income tax?

11 The Behavioral Economics of Tax Policy (or Tax Policy for Imperfect Humans)
a. What is behavioral economics?
b. Why does behavioral economics matter for tax policy?
c. Why do sticks (fees) work better than carrots (bonuses) at changing humans' behavior?
d. Do excise taxes depress spending more than equivalent sales taxes?
e. Should we tax internalities like externalities?
f. The tax on people without health insurance (the "individual mandate") was the least popular feature of Obamacare. Is it possible that many who were coerced to seek insurance were made better off?
g. Does tax complexity cause people to make costly mistakes?

PART III A TOUR OF THE SAUSAGE FACTORY

12 Misperceptions and Reality in the Policy Process

a. What does the public know about taxes?
b. What does the public think about taxes?
c. How are new taxes enacted?
d. Was the TCJA like the Tax Reform Act of 1986?
e. What are regulations and why are they important?
f. How does the tax sausage get made? (House and Senate rules)
g. Who estimates the revenue impact of tax changes?
h. How do they do it? Do they ignore behavioral responses to taxation?
i. What is dynamic scoring?
j. Must taxes be raised?
k. Can we solve the problem by raising tax rates only on those with high incomes?

13 Snake Oil
a. Wouldn't a flat tax be super simple and efficient?
b. How about offering a new tax system on an elective basis?
c. What is the "starve-the-beast" theory?
d. Does the taxpayer protection pledge protect taxpayers?
e. What is the "two Santas" theory?
f. Should we eliminate the IRS?
g. The FairTax sounds, well, fair. Is it?
h. How did the Tax Cuts and Jobs Act become the law that must not be named?

14 Tax Reform
a. Tax reformers talk about a broad base and low rates. What does that mean?
b. Was the so-called Tax Cuts and Jobs Act real tax reform or just a giant tax cut?
c. Is the broadest base always the best base?
d. Does the framing of taxes matter?
e. What is a revenue-neutral tax change?
f. Are there some sensible tax reform ideas?
g. What have we learned?

NOTES

GLOSSARY

INDEX