Edward D. Kleinbard

Tax Expenditure Framework Legislation

Explicit federal outlays are determined through elaborate budget procedural rules (framework laws), but tax expenditures in many respects fall outside these established Congressional procedures. The preparation of the annual federal budget therefore privileges tax subsidies over outlays, even though each can substitute for the other. As a consequence, tax expenditures have become the preferred vehicle for delivering new spending programs. Moreover, the low salience of tax expenditures clouds understanding of the government’s allocative interventions among not only the public but also many policymakers. This paper considers how tax expenditures might be brought more directly into the federal budget-setting process. The analysis considers three types of tax subsidies — fixed-dollar allocations, subsidies that are open-ended but offered for a fixed term, and subsidies that are both open-ended and indefinite in term. Just as the federal budget today follows different processes for discretionary spending (appropriations) and direct expenditures (entitlements), so too it is necessary to develop different framework rules for fixed-dollar and uncapped tax subsidies.

What's a Government Good for? Fiscal Policy in an Age of Inequality

The debate surrounding the Tax Cuts and Jobs Act demonstrated the intellectual bankruptcy of U.S. fiscal policy debate. The TCJA has serious flaws as a matter of narrow tax policy, but it is more fundamentally flawed when viewed through the proper policy lens, which is overall fiscal policy – the net of government taxing and spending. The TCJA greatly exacerbates already untenable budget deficits. Its tax prescriptions are even more regressive when the spending cuts contemplated by the legislation itself are reflected. And the law’s regressivity is compounded further when plausible financing paths for these large deficits are included in the analysis. In particular, the “dynamic” growth analysis whose tax ramifications were part of the debate leading up to the law was predicated on enormous cuts to future transfer payments, and confused GDP growth with enhanced welfare. This presentation urges a more holistic approach to fiscal policy debates. Fiscal policy is an exercise in applied economics, but also in applied moral philosophy. We define ourselves as a country through the covenantal bonds we construct for our society by means of the fiscal policies we adopt. Neither perspective is well served by the metrics applied today to legislation like the TCJA. Tax policy is overstudied and overemphasized; sensible fiscal policy, by contrast, in particular the spending side of the equation, can address fundamental social problems like economic inequality, the stagnant incomes of the middle class, and disappointing economic mobility. Greater government investment in human capital leads to inclusive growth (more broadly shared growth) and faster growth than does the path that the United States now is following. Inclusive growth mediated by government investment thus yields a double dividend. A greater role for government insurance is economically efficient, by resolving the pervasive problem of adverse selection in private insurance markets and the impossibility of private markets insuring more existential fortuities. Government insurance also responds to the moral imperatives that animate the covenantal bonds through which we define our society. In the end, brute luck has more to do with the outcomes of our lives than most like to admit; well-designed insurance modulates the worst of these fortuities. The Market Triumphalist view that dominates much current debate rests on the denial of luck; what is required instead is the humility that comes with acknowledging the role of fortune, and with it a commitment to a more empathetic economy.

Capital Taxation in an Age of Inequality

The standard view in the U.S. tax law academy remains that capital income taxation is both a poor idea in theory and completely infeasible in practice. But this ignores the first-order importance of political economy issues in the design of tax instruments. The pervasive presence of gifts and bequests renders moot the claim that the results obtained by Atkinson and Stiglitz (1976) counsel against taxing capital income in practice. Taxing capital income is responsive to important political economy exigencies confronting the United States, including substantial tax revenue shortfalls relative to realistic government spending targets, increasing income and wealth inequality at the top end of distributions, and the surprising persistence of dynastic wealth. It also responds to a new strand of economic literature that argues that “inclusive growth” leads to higher growth.A flat-rate (proportional) income tax on capital imposed and collected annually has attractive theoretical and political economy properties that can be harnessed in actual tax instrument design. As a proportional tax, it applies at the same marginal and effective rates to both income and losses, thereby preserving the symmetry on which rests the theoretical analysis of returns to risk. A progressive consumption tax, by contrast, abandons this, and in doing so can burden the returns to waiting. Moreover, a flat-rate capital income tax is a progressive tax in application: because only high-ability taxpayers or those who are the beneficiaries of gifts and bequests can afford to defer consumption indefinitely, the increasing “tax wedge” on savings over time introduces a measure of top-bracket progressivity along the margin of time. In other words, what some see as the fatal flaw of capital income taxation in fact is a feature, not a bug.The separation of a taxpayer’s income into capital and labor components, and the application of separate rate schedules to each, are hallmarks of “dual income tax” instruments, of the sort explored in practice most comprehensively by several Nordic countries. Building on earlier work on dual tax systems and capital income tax structures, I propose a novel and reasonably accurate flat rate tax on capital income that builds on well-understood tax policies, that achieves integration between corporate and investor income, and that successfully distinguishes capital from labor income. I term this tax instrument the Dual Business Enterprise Income Tax, or Dual BEIT. Its virtues also include minimizing the relevance of the realization doctrine, eliminating distinctions across different forms of capital investment, and offering business enterprises a profits (consumption) tax environment in which to operate.To make the project more tractable, the two themes just advanced – the why and the how of the Dual BEIT – are each the subject of a separate paper. This is the “why” paper. Together, the two demonstrate that the Dual BEIT satisfies theoretical concerns, once those are filtered through the political economy imperatives of the quotidian world, and is straightforward to implement and administer.

U.S. Corporate Income Tax Reform and its Spillovers

This paper examines the main distortions of the U.S. corporate income tax (CIT), focusing on its international aspects, and proposes a set of reforms to alleviate them. A bold reform to replace the CIT with a corporate-level rent tax could induce efficiency-enhancing reform of the international tax system. Since fundamental reform is politically difficult, this paper also proposes an incremental reform that would reduce tax expenditures, reduce the CIT rate to 25-28 percent, and impose a minimum rent tax on foreign earnings. Finally, this paper analyzes empirically the likely impact of the incremental on corporate revenues outside the U.S.: Though a U.S. rate cut would likely lower revenues elsewhere, implementation of a strong minimum tax could more than offset that effect for most countries with effective tax rates above 15 percent.

Searching for Our Fiscal Soul (Presentation Slides)

This is an extended version of a presentation made at TEDx Livermore 2016, the theme of which was the Economics of Empathy. Searching for Our Fiscal Soul argues that democracy is an exercise in empathy towards fellow citizens we do not know, and, if we did, might not like. We express that empathy through government spending, because that is how we actualize values that are important enough that we are willing to pay for them. This is our fiscal soul in action. Whether measured against the values we all routinely recite, or against the social environments achieved by peer countries, the fiscal soul of the United States is in peril. The remedy lies in understanding the value of a complementary economy, in which government spending is properly reframed as purchasing investments and insurance that private markets do not, and cannot, reach.

The Trojan Horse of Corporate Integration

The U.S. Senate Finance Committee has invested significant resources, including hearings and staff reports, to make the case for an unusual form of corporate dividend integration – a corporate dividends-paid deduction, combined with a universal shareholder dividend withholding tax collected from the firm. This proposal would not reduce the cash tax outlays of U.S. corporations in respect of distributed or retained earnings. It would not reduce the aggregate tax burdens imposed on most shareholders, and in many plausible circumstances would raise those tax costs. It is a poorly targeted response to design weaknesses in the U.S. international corporate tax system. Its efficiency gains are undeveloped and largely overstated.This unusual form of dividend integration is really designed to offer U.S. firms a quick and dirty form of costless corporate tax reform, in which their financial accounting effective tax rate decreases, but for entirely artificial reasons. It also would offer U.S. multinational firms the ability to repatriate their permanently reinvested earnings held in foreign subsidiaries and redistribute those sums to shareholders without a nominal corporate income tax charge for financial accounting purposes, but at the cost to shareholders of raising their all-in burdens beyond what could be expected in broad-scale corporate tax reform.The dividends-paid form of dividend integration has been wheeled forward in the manner of a true Trojan horse, seemingly offering a free gift of the end of double taxation, but all the while containing in its belly the agenda of U.S. multinationals desperate to record lower effective tax rates for financial statement purposes, and to escape from under the mountain of offshore earnings that are the result of their own aggressive stateless income gaming.

The Role of Tax Reform in Deficit Reduction

Income tax reform discussions too often are exercises in tax nostalgia. The Tax Reform Act of 1986 was revenue neutral because it could afford to be. (It also was preceded and followed by major tax increases.) The fact that we must raise revenues today means that a contemporary incremental income tax reform effort will look different, not that it is impossible. Unlike in 1986, when the tax system overflowed with unintended tax shelters that could be cleaned up and traded off against lower rates, modern tax reform must tackle some of the deliberate Congressional subsidy programs baked into the tax code, which is to say, tax expenditures. Of these, the most important to address are the personal itemized deductions. They are extraordinarily costly - about

The Lessons of Stateless Income

250 billion/year in forgone tax revenues. And they are inefficient, poorly targeted and unfair. The personal itemized deductions invariably are described as political “sacred cows.” But they are sacred cows that we can no longer afford to maintain. Either we eliminate these sacred cows, or we allow them to stampede over us. Incremental income tax reform also must address the corporate income tax, but here there is no choice but a revenue-neutral approach, because the U.S. corporate rate is now a global outlier. A corporate tax reform package should be fashioned along the following lines: (1) Eliminate business tax expenditures; (2) Reduce the corporate tax rate to a rate in the range of 25-27 percent; (3) Tax multinationals on their worldwide income through worldwide tax consolidation. The resulting corporate tax system would represent a huge competitive boost for American domestic firms, would attract inward investment, and would provide a fair tax environment for U.S.-based multinationals.