Taxing Capital Income:
Do we? Should we? Can we? (Can we not?)
Friday, September 23, 2005
9:00 am - 5:15 pm
Brookings Institution
The Urban-Brookings Tax Policy Center, the The American Tax Policy Institute and Tax Analysts hosted a conference examining taxing capital income.
The conference was divided into six sessions: "Do We?"; "Should We?"; Lunch with speaker Douglas Holtz-Eakin, Director of the Congressional Budget Office; "Can We?"; "Can We? Can We Not?"; and a Wrap-up Panel featuring Henry Aaron, Leonard Burman and Dan Halperin. Paper titles for each session are listed below.
Transcript Now Available
Session One: Do We?
Presenter: Joel Slemrod, University of Michigan
Time: 9:00-10:00 am
- Does the United States Tax Capital Income?
Joel Slemrod (University of Michigan)
Whether and how the United States taxes capital income is important both for understanding the impact of the existing current system and for understanding the impact of replacing the existing system with one that exempts capital income from tax, as any consumption tax would. How profound a change moving to a consumption tax would be has recently been called into question by the related claims that we now collect little or no tax on capital income, that the differences between income and consumption-based taxation of capital income are smaller than once believed, and that there is little capital income to be taxed. These arguments also suggest that piecemeal tax changes that extend tax preferences to saving might push the tax system ?beyond? a consumption-based tax system to a net subsidy of saving and investment.
Commentators:
Reed Shuldiner, University of Pennsylvania
Jane Gravelle, Congressional Research Service
Session Two: Should We?
Presenters:
George Zodrow, Rice University
Eric Toder, The Urban Institute and the Tax Policy Center (TPC)
Kim Rueben, The Urban Institute and the Tax Policy Center (TPC)
Time: 10:15 am -12:00 pm
- Should Capital Income be Subject to Consumption-Based Taxation?
George Zodrow (Rice University)
Fundamental tax reform is once again high on the policy agenda in the United States, highlighted by the forthcoming report of the President's Advisory Panel on Federal Tax Reform. Recent discussions have focused on two familiar alternative routes for reform. The first is incremental improvements in the existing income tax; these often involve integration of the individual and business income taxes along the lines discussed in Treasury (1992), including the proposal for a ?Comprehensive Business Income Tax? (CBIT) which would tax deductions for interest expense at the business level while largely eliminating individual level taxation of capital income. The second approach reflects a conviction that such reforms, like the celebrated Tax Reform Act of 1986, are not sufficiently ?fundamental,? and advocates replacement of the income tax system with a consumption-based alternative; alternative approaches to achieving this goal include an expenditure tax system, the Hall-Rabushka Flat Tax, the Bradford X-Tax, a national retail sales tax, and a value-added tax.
- Should We Eliminate Taxation of Capital Income?
Eric Toder (The Urban Institute and TPC), Kim Rueben (The Urban Institute and TPC)
Current law taxes capital income only partially and taxes it unevenly across economic sectors and groups of taxpayers. Competing models of fundamental tax reform have sought either to broaden the tax base and make capital income taxation more comprehensive, or to eliminate all taxes on income from capital by replacing an income tax with a consumption tax that exempts income from capital. The Tax Reform Act of 1986 broadened the base of capital income taxation, while lowering tax rates, but fell far short of a comprehensive tax on accrued income. Major sections of the original U.S. Treasury Department proposal (1984) that would have moved towards a comprehensive tax on all capital income were discarded or modified before final enactment, while other provisions designed to curtain tax sheltering were added.
Commentators:
Alan Auerbach, University of California
Joe Thorndike, Tax Analysts
David Weisbach, University of Chicago
Lunch Session
Presenter: Douglas Holtz-Eakin, Director, Congressional Budget Office
Time: 12:15-1:30 pm
Session Three: Can We?
Presenters:
Edward D. Kleinbard, Cleary Gottlieb Steen & Hamilton (on financial products)
Julie Roin, University of Chicago (international)
Time: 1:45-3:30 pm
- Designing an Income Tax on Capital
Edward D. Kleinbard (Cleary Gottlieb Steen & Hamilton)
The ?Business Enterprise Income Tax,? as proposed by the author in a paper earlier this year, attempts to reform fundamentally the income taxation of business income. One of the proposal's core components is a uniform ?Cost of Capital Allowance? to govern the taxation of both issuers and investors in respect of all forms of financial capital instruments.
- Can Income From Capital Be Taxed?
Julie Roin (U Chicago)
This paper grapples with the question of whether it is possible to collect an income tax that looks much like our current income tax in a globalized world. It goes about this task by identifying some of the current obstacles to taxation posed by globalization and then suggests some legislative and regulatory changes which might ameliorate these obstacles. The fact that some or all of these suggestions may be politically unpalatable goes to prove a larger point. The effectiveness (or not) of the income tax depends on public and political support for the tax. In the absence of such support, it will quickly devolve to the most restrictive form of a wage tax, as wages are the only income subject to mandatory reporting and withholding obligations. Moreover, some of the required changes can only be effected in concert with other nations, not all of whom will see themselves as having the same interests in stemming tax avoidance as the U.S. The most substantial barriers to effective income taxation, then, may be political rather than technical in nature.
Commentators:
Michael Keen, IMF
Paul Oosterhuis, Skadden Arps
Rick Davino, GE
Session Four: Can We? Can We Not?
Presenters:
Joseph Bankman, Stanford University
Michael Schler, Cravath, Swaine & Moore LLP
Time: 3:45-4:45 pm
- Tax Planning Under The Flat Tax/X-Tax
Joseph Bankman (Stanford University), Michael Schler (Cravath, Swaine & Moore LLP)
An increasing number of academics and practitioners (including Bankman but most definitely not including Schler) now favor replacing the income tax with a consumption tax. This paper considers the possibilities for tax planning (or tax avoidance) that arise under a consumption tax, in particular in the context of the (somewhat misnamed) flat-tax or x-tax. The issue is whether such a tax will produce the same sort of undesirable behavioral effects and tax planning that bedevil the current income tax. If so, this would reduce or eliminate the principal reason for switching to a consumption tax.
Commentators:
Ed Outslay, MSU
George Plesko, MIT
Session Five: Wrap-up Panel
Commentators:
Henry Aaron, Brookings and TPC
Leonard Burman, The Urban Institute and TPC
Dan Halperin, Harvard
Time: 4:45-5:15 pm
