Shortened abstract: “In this article, the author addresses the destination-based cash flow tax, which was recently proposed as a tax reform option in the United States, compares it to its forebears, the flat tax and the X-tax, and concludes that, although its substance has potential merit, it does not warrant further consideration in tax policy debate.”
Having just gotten back from a few days away, our current three are letting us know they missed us. They had food and regular visits in our absence, but I guess it just wasn’t the same.
Seymour, of course, is mellowest about it. He doesn’t stir much from this chair except to eat, but he’s purring more when petted.
Then there are The Kittens, so to be known forever because we adopted them when they were 6-8 weeks old, at which time I could hold them both in one hand, although by now they are over 5-1/2 years old. (Similarly, my father had a set of female cousins, all born before 1920, who were known collectively as The Girls even when they were in their eighties.) They were pretty frantic on our return because, even though they are cats, we evidently loom large in their universe.
Gary has been meowing loudly and bringing us small mouse toys in his mouth. It was hard to sleep last night because he kept scratching at the covers so he’d have warm hands to sleep on. It was almost enough to make one doubt the common view that he’s perfect. A gently probing paw on the face at night is okay most of the time, but best if he’s calm enough to have retracted the claws fully.
Last but certainly not least – he wouldn’t like that – there is Sylvester, whose frantic mental world I’ve always wished I could imaginatively inhabit for just 5 seconds, so long as I could have a good long rest to recover right afterwards. (We like to say, it’s a shame his mom seems to have dropped him on his head early on.)
He has been meowing loudly for food, even when he isn’t hungry. When he lets me pick him up (an element of surprise helps), he gives a sudden screech, but then, so long as I begin petting his head very vigorously, the way he likes it, he just hangs there like a rag doll, all four paws extended outwards and down, for as long as I am willing to keep it up.
It’s nice to be back, fellas.
If nothing else, the two particular rules that I’ve been writing about so far are cleverly named – BEAT (for “base anti-erosion tax”) and GILTI (for “global intangible low-taxed income”). Less so for the third that I’ll get to later this month, FDII (for “foreign-derived intangible income”).
Tax article writers have already been having much fun in their titles with both names. E.g., “Get With the BEAT,” “More GILTI Than You Thought,” and “Guilty as Charged.”
By contrast, my current article title is “Does the United States Now Have a ‘Territorial’ Tax System?” I answer this question “NO” by the top of page 2, and then get on with the rest of it.
But I couldn’t help thinking of how GILTI might be renamed, without any loss of acroynmic punch. Suppose it were called “Foreign Intangible Low-taxed or Tax Haven Income.” This would support using the acronym FILTHI.
I might have to walk but I’m going just the same
To Negril, Jamaica – Negril, Jamaica, here I come
They’ve got some crazy good sunsets there,
And I’m going to see me some.”
An article on the NYU website discussing the session is available here. And if you scroll down, you’ll find a video of the full event.
But anyway, back here at NYU, after a week off (due to calendar complexities), the Tax Policy Colloquium resumed yesterday, with Jacob Goldin presenting this paper on increasing EITC take-up by individuals who are eligible for it. It draws on related empirical work (by Goldin and Taylor Cranor) suggesting that, when jurisdictions require employers to provide EITC information to their employees, this has “precise null effects on EITC take-up.” That is, Cranor and Goldin conclude in the empirical paper, not that they can’t find any effect on take-up, but that they have found, with high confidence, a lack of any effect.
In the paper that we discussed yesterday at the colloquium, Goldin assessess how EITC take-up might best be increased. He concludes that by far the most efficacious method would be to increase income tax filing by eligible individuals, in particular those who would get a net refund from filing but don’t currently do so.
A key point on which this argument relies is the near-ubiquity of assisted preparation methods (APMs) among filers who qualify for the EITC. An APM can either involve electronic software, a la TurboTax, or the aid of a tax professional, including through free VITA assistance. (Or both, as the tax professional is likely to be using electronic software.)
With APMs that use electronic software, the paper argues that the issue of computational complexity for the EITC pretty much disappears. Enter the pertinent information, and presumably the net liability or refund, including by reason of the EITC, will come out on the other end.
There is still the problem of informational complexity, given the multiple factual prerequisites for claiming the EITC. (E.g., where a child is spending time in multiple households &/or is supported in part by multiple adults, one gets the question of who is entitled to claim the EITC.) But the paper argues that the EITC has almost no marginal effect on informational complexity for a given taxpayer, since nearly all of the facts that are needed to determine EITC eligibility and its amount are also needed on the tax return for other purposes.
Here are a few other interesting issues that the paper invites one to think about:
1) Is there any way to loosen up a bit on who gets to claim the EITC? In principle, ought it to be allowed to anyone who is involved in the child’s support? Obviously the problem here is coordinating between potential claimants, so that only one claims it, and preferably it’s whomever they agreed to. Probably not realistically feasible to address this without much greater changes to how tax filing takes place, and/or how the income tax is generally administered. But there may be a decent number of cases in which, seemingly, there is both under-claiming by the person who’s supposed to claim it, and an “incorrect” claim by someone else, in circumstances where it makes little or no difference. This can lead to misleading statistics regarding both under-claiming and EITC malfeasance.
2) Is stigma a significant issue in discouraging EITC take-up? I am inclined to doubt it. After all, one gets it via one’s tax return, a refund is cash, and it’s associated with work that our society valorizes (and perhaps even over-valorizes). But on the other hand, Vanessa Williamson’s paper from week 5 suggested that people value being called ‘taxpayers.”
The main reasons for underclaiming may be (a) under-awareness of it, leading to non-filing where one would have gotten a net refund, and (b) rationally choosing not to file, e.g., because the refund would be smaller than the cost of the APM one would use. But rational non-filing is less benign when what makes it personally rational is that the refund would be garnished and used, say, to pay back arrears in child support.
3) The EITC, of course, is far more generous for taxpayers with children than those without. This seems misguided in one sense, but not another.
It makes a whole lot of sense for the fiscal system to be more generous, especially at the low end of the distribution, to households with children (or more children) than to those without them. The welfare of the children is the main reason for this, but their presence may also greatly increase the marginal utility of a dollar to their parents or other caregivers.
For reasons I’ll discuss shortly, it also may make sense to have an EITC – even taking as given that the overall amount of aid given to poorer individuals will be constant with or without it, so that the only question at issue is whether some of the aid is positively tied to wages, EITC-style.
But the case for basing such aid on wages seems to me to be primarily independent of the case for giving more aid to poor households with children than to those without.
Why would one tie the relative benefit that poor households with children receive, relative to those without children, to whether the caregivers work? One reason is that working raises the cost of childcare. But that in principle ought to be handled at a more general level, without tying it to wages earned in the way that the EITC does. Perhaps a second reason is that the reasons for encouraging low-wage work, where the alternative is no work rather than higher-wage work, might include modeling working to the kids. But the latter is a bit of a thin reed here, e.g., since why punish children in households where the caregivers don’t have market jobs.
4) Why favor increased EITC take-up? I agree with the paper that we should favor it (other than perhaps in cases where it’s rationally not claimed and this doesn’t reflect the garnishment issue. But the analysis of why we should favor it has several complications that are worth noting.
The main reason for favoring increased take-up, of course, is to increase the welfare of people in the claimants’ households. But also, the EITC can have positive labor supply effects that are part of the EITC’s underlying rationale.
Labor supply effects may arise either on the extensive margin (whether or not one works) or on the intensive margin (how much one works). I believe the EITC empirical literature suggests that the extensive effects tend to be more significant empirically. This is a good thing, given that the EITC’s extensive effects ought to be purely positive. One never has a negative EITC – it’s either positive (rising via an initial 40% wage subsidy) or zero (reflecting its being phased out at a 21% rate). The intensive effects, by contrast, can be either positive or negative. Wage-earning is encouraged at the margin during the 40% phase-in stage, and discouraged at the margin during the 21% phase-out stage.
Why encourage work, via a wage subsidy? In a standard optimal tax model, it usually turns out that the tax rate on earnings should be somewhere between 0% and 100%, rather than being negative 40% via the payment of a wage subsidy.
Note, by the way, that the wage subsidy causes the EITC to be anti-insurance, as between successful and unsuccessful job-seekers. The former are already doing better than the latter by reason of having succeeded in the mutual job quest, then they’re further rewarded by the EITC, while the latter get nothing.
The reasons for nonetheless possibly favoring a wage subsidy via the EITC include:
(a) claims about positive externalities, if working today increases the likelihood of working in the future & this benefits others, such as one’s children or for that matter other taxpayers,
(b) parallel claims about positive internalities, and
(c) concern about the overall marginal tax rate. At low income levels, even if one gets a 40% wage subsidy via the EITC, one may still have a positive MTR due to other features of the fiscal system, such as the phase-out of means-tested benefits.
But now let’s bring this back to the question of increasing take-up. Suppose people get the EITC despite not knowing it’s there. Or more precisely, suppose they know too little about it to have any well-developed understanding of how it is affecting their after-tax-and-transfer bottom line. This wouldn’t negate favoring increased take-up due to the welfare effects in claimants’ households – but does it negate reliance on the work-encouraging rationales for the EITC?
Not necessarily. Many years ago at the colloquium, we had an econometrics paper (I believe, by Nada Eissa and Hilary Hoynes) that showed apparent behavioral responses to fine points of EITC design. An attendee scoffed at the findings, saying they couldn’t be true because surely none of the people whose actions the data reflected had more than the crudest understanding of how the rules actually worked. The author’s response was: That may well be, but nonetheless our empirical finding is what it is.
My thought (and that of others in the room) at the time was that this wasn’t actually implausible. Suppose there was a work subsidy, always positive at the extensive margin whether or not at the intensive margin, that no-one knew was there (although workers knew how much $$ they ended up with, reflecting payment of the subsidy into their bank accounts). It might still increase labor supply at the extensive margin, through the following mechanism. It would cause people who worked to do better than they would have otherwise. People might have a sense of how they were doing overall when they worked vs. didn’t work, and might also have this sense as to their neighbors. The invisible wage subsidy might thus encourage work indirectly, by causing people to associate working with a better end state of affairs.
I’ve always been bemused by this term, in part because I thought it derived linguistically from knotholes in wood. But apparently it derives instead from narrow vertical holes in walls from which inside defenders could shoot arrows.
Tax experts generally don’t use the term “loophole” among themselves, because we consider it too imprecise. We’d be more inclined to discuss tax benefits that might be “unintended,” or else intended by someone but poorly rationalized, or else the product of unforeseen interactions between separate provisions or of linguistic ambiguity or formalism in the tax law, etc.
I’m fairly sure I had never once used it in an article, unless perhaps with reference to public opinion, until we used it in Tax Games 1 and Tax Games 2 given the broad readership that we were seeking (as it happened, far more successfully than we had ever imagined was possible).
But one fun thing at yesterday’s colloquium was hearing from attendees about parallel terms in other languages. Apparently the German term is “schlupfloch,” which (per Wikipedia plus the vagaries of Google Translate) is derived from the term for a small opening from which one can escape from a passage or location.
And the French term is “niche fiscale.” We of course have long since borrowed the term “niche” into English, with some broadening of its most literal sense as a shallow recess or nook (more comparable, perhaps, to “schlupfloch” than “loophole”). But in English it would now have a wholly distinct valence.
What do we learn from this? Nothing, I suppose, beyond what we literally learn from this (i.e., what the words are), but that’s enough for me.
The book is the product of in-depth survey research (via one-hour phone interviews with a broad range of respondents) regarding Americans’ views of the tax system. There are quantitative aspects to the research, but the main contribution is qualitative – exploring people’s beliefs and sentiments in a setting that encourages them to be reflective rather than, say, emphasizing partisan talking points. The interviews were conducted in 2013-2014, hence after the Obama-Romney campaign but before Clinton-Trump.
The title is a bit of a misnomer, picked (I would presume) by the publisher with an eye to sales appeal rather than descriptive precision. The book doesn’t so much document that the respondents are made to feel proud by the act of paying taxes as such, as that they view “taxpayers” as morally superior to “non-taxpayers” – even when they describe themselves as non-taxpayers. The pride attaches to the status, not the act, although it’s true that without the act one presumably can’t get the status..
The research was performed before Trump in 2016 proclaimed that not paying taxes is “smart,” rather than discreditable. So it would be interesting to see if Republican voters’ attitudes have been changed by this. I would like to hope not. Trump presents himself to his adorers as unique and special, a kind of fantasy projection for them. So perhaps they are like nerds who can cheer the violence wreaked by the protagonists in superhero films without either thereby becoming violent themselves or starting to admire violence by peers or even other political leaders. Presumably Trump supporters would still mind if a Democrat (or a “moderate” Republican?) paid no taxes on a large income. But then again, it’s way too early to judge the long-term damage to cooperative social norms generally that the current era is wreaking.
Anyway, back to the underlying common public attitude about taxpayers versus non-taxpayers. I view it as a culturally particular instantiation of a fundamental human psychological frame.
Starting with the more universal part: human beings, like lots of other social species, regularly engage in cooperative undertakings for general benefit, in which it is hard to observe others’ degree of cooperation, or else in which cooperation and thus reliance is sequential. This creates prisoner’s dilemmas that are eased by natural or cultural selection for having some degree of emotional inclination to cooperate (which may help to overcome both short-sightedness and the difficulty of faking a good attitude), while also raising the probability that defectors will be punished when they are found out, and that people will play tit-for-tat when deciding whether to cooperate.
As it happens, vampire bats show such attributes as well. When some have succeeded and others have failed in their nightly blood quests, the former will sometimes regurgitate and share a part of their booty with the latter. They keep track of who shares with them and who doesn’t, which apparently requires having relatively large brains despite the caloric cost. So vampire bats not only sometimes front-end the generosity (someone has to go first), but at the back end distinguish between cooperators and defectors, and play at least a degree of tit-for-tat.
Blood-sharer = taxpayer? Obviously, here we are in a culturally contingent application of the underlying concept. It’s one thing to say that human beings are often emotionally inclined to adopt a tit-for-tat framework that valorizes contributors while disparaging shirkers, and another to generalize about their predilection to base this on one’s status as a taxpayer or non-taxpayer. And note that the main distinction Williamson’s respondents had in mind was NOT that between users and non-users of aggressive tax shelters, so much as that between higher and lower earners (where the latter can be assumed to pay little or no federal income tax). Pending parallel qualitative surveys conducted in other countries (which would be a great and most-welcome contribution), this might be a distinctively 21st century American way of coding contributor vs. shirker.
I’m certainly as subject as anyone to feeling the emotional tug of the contributor vs. shirker / tit-for-tat psychological frame. But I regard it as preposterous to apply that frame to people who earn enough vs. don’t earn enough to pay significant (income) taxes. For example, (1) it’s a current-year rather than a long-term assessment, (2) it looks at the gross not the net (taxes alone, rather than taxes vs. benefits), and (3) it treats low-earners as shirkers rather than as (a) unfortunate and (b) mostly internalizing the downside of their bad outcomes (it’s not as if we had a generous social safety net).
The viewpoint brings to mind Romney’s infamous “47%” comment in 2012. So why did he get flogged so badly for it in the public sphere? I think his main problem was overdoing it, by smearing 47% of the population as wholly unwilling to take responsibility for their own lives. Just as, back in the day, blatant racists risked offending casual and unconscious racists when they too-clearly stated beliefs that the latter shared, so Romney made problems for himself here. Indeed, one could almost call his statement a Kinsley gaffe – defined as occuring “when a politician tells the truth – some obvious truth he isn’t supposed to say” – except that here it wasn’t an actual truth, but rather something that many people believed to be true.
Viewing “taxpayers” as better than “non-taxpayers,” where the difference lies in having enough earnings rather than in the degree of one’s tax avoidance behavior, is a normative choice, albeit one I find unappealing. So it’s not factually “untrue.” But the Williamson book suggests that people do indeed commit factual error by applying the frame solely with regard to income taxes – as distinct from, say, sales and payroll taxes.
The book further argues, I think persuasively, that this narrow-sightedness reflects differences in the degrees of “effort” associated with paying different taxes. Payroll taxes are collected so seamlessly (other than from independent contractors), and indeed so invisibly so far as the employer half is concerned, that people scarcely notice they are paying them. By contrast, income taxes, despite withholding’s role in easing or even reversing the April 15 out-of-pocket bite, are associated with such stressful acts as getting one’s financial info together, getting the return done, feeling anxiety about whether (amid all the bewildering complications) one has found all the right tricks for reducing one’s liability, etc.
Sales taxes are a funny intermediate case. Williamson finds that poor people, whose budgets even a modest sales tax can stretch, are keenly aware of them. But higher-earners treat the sales tax as invisible on small purchases, and worth noticing only on big purchases where the bite is large enough to notice. Hence, astonishingly, they seem to view flat-rate sales taxes as progressive! In effect, the heuristic of ignoring trivially small amounts leads them to view the sales tax almost as if it were a luxury tax – without, it seems, any reliance on the fact that, say, groceries but not restaurant meals are typically exempted.
Decades of Republican rhetoric has surely done a lot to spread the view that “taxes” just means income taxes, which leads to distorted views of who is a taxpayer. But the book suggests that it is also about the income tax’s being (despite withholding) a relatively high-effort and high-visibility, rather than low-effort, tax instrument.
Here’s a further subtlety from the book regarding what the notion of “effort,” for this purpose, seems to mean. Gasoline taxes are pretty much hidden – you just pay the after-tax price at the pump, and the tax isn’t even separately stated. Yet apparently people are keenly aware that, if you do a whole lot of driving, you will pay a whole lot of gasoline tax. So they notice and complain about it, even though it’s low-visibility apart from the general understanding that it’s there (and rises with mileage).
One obvious payoff to these findings is that, if you are a policymaker who likes Tax A better than Tax B, you should try to structure things so that Tax A is low-effort or relatively invisible, whole Tax B is more high-effort and visible. So perhaps the Democrats ought to go all-in on seeking to enact automatic filing a la ReadyReturn in California. The aim would be, not to win votes ex ante by promising it, or gratitude ex post by delivering it, but rather to reshape the cognitive fiscal landscape in their favor once automatic presumptive filing was in place. But this would require the Democrats to be strategic and forward-looking, which is asking quite a lot of them.
One further set of findings from the book is as follows: While people tend to have mixed feelings about progressive redistribution of market income – seeming to combine an implicit “equal sacrifice” theory, plus aversion to high-end inequality even though they immensely under-estimate its scope, with concern about work effort and high-earners’ distributive desert – they do on balance seem to favor rising marginal and average tax rates. (Which is not to say that they have a firm grasp of the distinction between these two measures.)
Yet people erroneously think that a “flat tax” would be more progressive than the then-existing (pre-2017) graduated income tax, because they exaggerate the empirical significance of “loopholes.” What they think the term “flat tax” means is unclear. No “deductions”? But presumably they don’t think it would be a tax on the gross, rather than the net, from a given business. And of course, the question of what constitutes a “loophole,” or for that matter a deduction, may not be well-understood.
Not clear how much any of this matters to actual political outcomes, given the falsity (as per Achen and Bartels) of the “folk theory of democracy,” under which voters’ policy preferences guide outcomes. But still all worth knowing, as information about our world.