The Case For The Tax Cut

Studies | Taxes

No. 226
Sunday, August 01, 1999
by Bruce Bartlett


Notes

  1. These are unpublished data from the Census Bureau web site.
  2. The long-term impact of the 1993 tax increase was to raise federal revenues by 0.7 percent of GDP per year. The long-term impact of the 1997 tax cut was to lower revenues by 0.2 percent per year. The 1999 tax cut phases in very slowly and will not reach 0.5 percent of GDP until 2003. Thus it will not be until 2003 that the combined effect of the 1997 and 1999 tax cuts will have offset 100 percent of the 1993 tax increase, which was enacted for the sole purpose of balancing the budget. The budget came into balance in 1998, but the Clinton Administration did not then suggest repeal of the 1993 tax increase.
  3. Data from Joint Committee on Taxation, Estimates of Federal Tax Expenditures for Fiscal Years 1999-2003, JCS-7-98 (Washington: U.S. Government Printing Office, 1998), p. 25.
  4. The Treasury Department's analysis is contained in a letter from Linda L. Robertson, Assistant Secretary for Legislative Affairs, to Sen. William Roth on August 5, 1999. There are serious problems with the way the Treasury distributes the impact of tax cuts, which tend to make them appear skewed much more to the rich than they actually are. For a discussion, see Bruce Bartlett, "Why Treasury's Numbers Don't Add Up," National Center for Policy Analysis, Brief Analysis No. 234, June 27, 1997; and "Income Distribution," National Center for Policy Analysis, Brief Analysis No. 303, August 10, 1999.
  5. Martin Sullivan, "Keeping Score on Class Warfare: JCT and Treasury Are Miles Apart," Tax Notes (August 16, 1999), p. 968. Emphasis in original.
  6. For a discussion of the deficiencies of the 1997 legislation, see Bruce Bartlett, "Tax Aspects of the 1997 Budget Deal," National Tax Journal, Vol. 51, No. 1 (March 1998), pp. 127-141.
  7. For a thorough review of the latest research, see Willi Leibfritz, John Thornton and Alexandra Bibbee, "Taxation and Economic Performance," OECD Economics Department Working Paper No. 176 (1997).
  8. For elaboration of this point, see Bruce Bartlett, "The Futility of Raising Tax Rates," Cato Institute, Policy Analysis No. 192, April 8, 1993.
  9. The government already does this with the Earned Income Tax Credit.
  10. Treasury Secretary Lawrence Summers has dismissed efforts to abolish the estate tax as motivated by nothing but "selfishness." He later retracted the comment, but there is no reason to believe that this isn't the basic view of the Clinton Administration on this matter. Clay Chandler, "Treasury Official Slams Estate Tax Rollback Efforts," Washington Post (April 22, 1997).
  11. David Joulfaian, "The Federal Estate and Gift Tax: Description, Profile of Taxpayers, and Economic Consequences," Office of Tax Analysis Paper 80 (December 1998), . The Treasury also makes distribution of the tax cut appear more weighted toward the wealthy by attributing the estate tax to the incomes of decedents. This is wrong for two reasons. First, the tax is paid out of assets, not income. Attributing the tax to incomes, therefore, is like comparing apples and oranges. Second, most economists believe that the ultimate burden of the tax is on heirs, who tend to have lower incomes than decedents. Attributing the tax to them, therefore, would reduce the share of the tax cut going to the wealthy and increase the share going to those with more modest incomes. See Ryan Donmoyer, "Estimating Estate Tax Burden Is Troubling Issue for JCT," Tax Notes (August 2, 1999), pp. 651-2.
  12. Alan Blinder, "Inequality and Mobility in the Distribution of Wealth," Kyklos, Vol. 29, No. 4 (1976), p. 619.
  13. The top federal estate tax rate is 55 percent on estates over $3 million. Among major countries, only Japan has a higher top rate and it doesn't hit until an estate reaches more than $15 million. See American Council for Capital Formation, An International Comparison of Death Tax Rates, (June 1999), at .
  14. George Cooper, A Voluntary Tax? New Perspectives on Sophisticated Estate Tax Avoidance (Washington: Brookings Institution, 1979), p. 4.
  15. Henry J. Aaron and Alicia H. Munnell, "Reassessing the Role for Wealth Transfer Taxes," National Tax Journal, Vol. 45, No. 2 (June 1992), p. 138. For some methods whereby estate taxes can be sharply reduced or eliminated through careful planning, see Lynn Asinof, "Estate-Planning Techniques for the Rich," Wall Street Journal (January 11, 1995); Christopher Drew and David Cay Johnston, "For Wealthy Americans, Death Is More Certain Than Taxes," New York Times (December 22, 1996); Janet Novak, "Cut Your Estate Tax in Half," Forbes (October 19, 1998), pp. 160-62; Ruth Simon, "How to Pass Assets to Heirs and Save Taxes," Wall Street Journal (December 21, 1998).
  16. Again, this is a point that even liberal economists now agree with. For example, Joseph Stiglitz, chairman of the Council of Economic Advisers under Bill Clinton, has written that because of its effects on capital accumulation the estate tax "may actually increase inequality." Joseph Stiglitz, "Notes on Estate Taxes, Redistribution, and the Concept of Balanced Growth Path Incidence," Journal of Political Economy, Vol. 86, No. 2, pt. 2 (April 1978), p. S137.
  17. B. Douglas Bernheim, "Does the Estate Tax Raise Revenue?" in Lawrence H. Summers, ed., Tax Policy and the Economy, Vol. 1 (Cambridge: MIT Press, 1987), pp. 113-38. Incidentally, the editor is the same Lawrence Summers who is now Secretary of the Treasury.
  18. Travis Research Associates, Survey of the Impact of the Federal Estate Tax on Family Business Employment Levels in Upstate New York (Albany: Public Policy Institute of New York State, 1999).
  19. Robert Johnson, "Family Businesses Fret About Taxes and Estate Planning," Wall Street Journal (February 16, 1999); Jeff A. Taylor, "Planning for Death and Taxes," Investor's Business Daily (January 29, 1997).
  20. Dan Miller, The Economics of the Estate Tax (Washington: Joint Economic Committee, 1998), p. 21, available on the web at . This conclusion is based on methodology developed in Laurence J. Kotlikoff and Lawrence H. Summers, "The Role of Intergenerational Transfers in Aggregate Capital Formation," Journal of Political Economy, Vol. 89, No. 4 (August 1981), pp. 706-32. Again, it should be noted that the author of this study is the same Lawrence Summers who is now Secretary of the Treasury.
  21. Richard F. Fullenbaum and Mariana A. McNeill, The Effects of the Federal Estate and Gift Tax on the Aggregate Economy (Washington: Research Institute for Small & Emerging Business, 1998).
  22. Douglas Holtz-Eakin, "The Death Tax: Investments, Employment, and Entrepreneurs," Tax Notes, Vol. 84, No. 5 (August 2, 1999), p. 782. See also Gerald P. Moran, "Estate and Gift Taxation: The Case for Repeal," Tax Notes, Vol. 13, No. 7 (August 17, 1981), pp. 339-343; David M. Hudson, "Tax Policy and the Federal Taxation of the Transfer of Wealth," Willamette Law Review, Vol. 19, No. 1 (Winter 1983), pp. 1-60; Joel C. Dobris, "A Brief for the Abolition of All Transfer Taxes," Syracuse Law Review, Vol. 35, No. 4 (1984), pp. 1215-1234; Charles O. Galvin, "To Bury the Estate Tax, Not To Praise It," Tax Notes, Vol. 52, No. 12 (September 16, 1991), pp. 1413-19; John E. Donaldson, "The Future of Transfer Taxation: Repeal, Restructuring and Refinement, or Replacement," Washington and Lee Law Review, Vol. 50, No. 2 (Spring 1993), pp. 539-64; Christopher E. Erblich, "To Bury Federal Transfer Taxes Without Further Adieu," Seton Hall Law Review, Vol. 24, No. 4 (1994), pp. 1931-68; Edward J. McCaffery, "The Political Liberal Case Against the Estate Tax," Philosophy & Public Affairs, Vol. 23, No. 4 (Fall 1994), pp. 281-312; Edward J. McCaffery, "The Uneasy Case for Wealth Transfer Taxation," Yale Law Journal, Vol. 104, No. 2 (November 1994), pp. 283-365; N. Gregory Mankiw, "Why Shouldn't We Die Tax-Free?" Fortune (September 6, 1999), pp. 54, 56.
  23. Henry C. Simons, Personal Income Taxation (Chicago: University of Chicago Press, 1938), p. 155; Robert M. Haig, "The Concept of Income - Economic and Legal Aspects," in Robert M. Haig, ed., The Federal Income Tax (New York: Columbia University Press, 1921), reprinted in Richard A. Musgrave and Carl Shoup, eds., Readings in the Economics of Taxation (Homewood, Ill.: Richard D. Irwin, 1959), p. 67.
  24. Jacob Viner, "Taxation and Changes in Price Levels," Journal of Political Economy, Vol. 31 (August 1923), p. 498; Richard A. Musgrave, The Theory of Public Finance (New York: McGraw-Hill, 1959), p. 169; Richard Goode, The Individual Income Tax, revised ed. (Washington: Brookings Institution, 1976), p. 184; Joseph A. Pechman, Federal Tax Policy, 5th ed. (Washington: Brookings Institution, 1987), p. 120.
  25. Martin Feldstein and Joel Slemrod, "Inflation and the Excess Taxation of Capital Gains on Corporate Stock," National Tax Journal, Vol. 31, No. 2 (June 1978), pp. 107-118
  26. U.S. Treasury Department, Report to Congress on the Capital Gains Reductions of 1978 (Washington: U.S. Government Printing Office, 1985), p. 11.
  27. Taxes calculated by multiplying nominal gains by the effective tax rate on capital gains that year. Data on effective rates obtained from the Treasury Department.
  28. Congressional Budget Office, Indexing Capital Gains (Washington: U.S. Government Printing Office, 1990), p. 24.
  29. Congressional Budget Office, "Perspectives on the Ownership of Capital Assets and the Realization of Capital Gains," CBO Papers (May 1997), p. 29, available on the Internet at .
  30. Robert Eisner, "Capital Gains and Income: Real Changes in the Value of Capital in the United States, 1946-77," in Dan Usher, ed., The Measurement of Capital (Chicago: University of Chicago Press, 1980), pp. 202-203.
  31. Alan Blinder, "The Level and Distribution of Economic Well-Being," in Martin Feldstein, ed., The American Economy in Transition (Chicago: University of Chicago Press, 1980), p. 447.
  32. Victor Canto, "Index Capital Gains - Now," Wall Street Journal (July 27, 1999).
  33. This may be due to the fact that investors with modest assets tend to hold them longer than those with larger assets. Since the impact of inflation is greater the longer an asset is held, this causes those with modest wealth to suffer more. See Joint Committee on Taxation, Tax Treatment of Capital Gains and Losses, JCS-4-97 (Washington: U.S. Government Printing Office, 1997), p. 38.
  34. Standard & Poor's DRI, Capital Gains Taxes and the Economy: A Retrospective Look (Washington: American Council for Capital Formation, 1999).
  35. Bruce Bartlett, "The Marriage Penalty: Origins, Effects, and Solutions," Tax Notes, Vol. 80, no. 11 (September 14, 1998), pp. 1341-57; Congressional Budget Office, For Better or For Worse: Marriage and the Federal Income Tax (Washington: U.S. Government Printing Office, 1997); U.S. General Accounting Office, Income Tax Treatment of Married and Single Individuals, GAO/GGD-96-175 (September 1996).
  36. Nicholas Bull and Janet Holtzblatt, "Defining and Measuring Marriage Penalties and Bonuses," Office of Tax Analysis Paper 82 (April 1999), at .
  37. Dorothy A. Brown, "The Marriage Bonus/Penalty in Black and White," University of Cincinnati Law Review, Vol. 65, No. 3 (Spring 1997), pp. 787-798; idem, "Race, Class, and Gender Essentialism in Tax Literature: The Joint Return," Washington and Lee Law Review, Vol. 54, No. 4 (Fall 1997), pp. 1469-1512.
  38. Howard V. Hayghe, "Working Wives' Contributions to Family Incomes," Monthly Labor Review, Vol. 116, No. 8 (August 1993), pp. 39-43. See also U.S. Commission on Civil Rights, The Economic Status of Black Women: An Exploratory Investigation (Washington: U.S. Government Printing Office, 1990), pp. 100, 105; Maria Cancian, Sheldon Danziger and Peter Gottschalk, "Working Wives and Family Income Inequality Among Married Couples," in Sheldon Danziger and Peter Gottschalk, eds., Uneven Tides: Rising Inequality in America (New York: Russell Sage Foundation, 1993), pp. 205-207; Families and Work Institute, Women: The New Providers (Benton Harbor, Mid.: Whirlpool Foundation, 1995), p. 33.
  39. Jane H. Leuthold, "The Effect of Taxation on the Probability of Labor Force Participation by Married Women," Public Finance, Vol. 33, No. 3 (1978), pp. 280-293; idem, "Taxes and the Two-Earner Family: Impact on the Work Decision," Public Finance Quarterly, Vol. 7, No. 2 (April 1979), pp. 147-161; idem, "Income Splitting and Women's Labor-Force Participation," Industrial and Labor Relations Review, Vol. 38, No. 1 (October 1984), pp. 98-105; Aline O. Quester, "The Effect of the Tax Structure on the Labor Market Behavior of Wives," Journal of Economics and Business, Vol. 29, No. 3 (Spring/ Summer 1977), pp. 171-180; idem, "Women's Behavior and the Tax Code," Social Science Quarterly, Vol. 59, No. 4 (March 1979), pp. 665-680.
  40. Daniel Feenberg, "The Tax Treatment of Married Couples and the 1981 Tax Law," National Bureau of Economic Research Working Paper No. 872 (April 1982).
  41. Nada Eissa, "Taxation and Labor Supply of Married Women: The Tax Reform Act of 1986 as a Natural Experiment," National Bureau of Economic Research Working Paper No. 5023 (February 1995); idem, "Tax Reforms and Labor Supply," in James M. Poterba, ed., Tax Policy and the Economy, Vol. 10 (Cambridge, MA: MIT Press, 1996), pp. 119-151.
  42. Deenie K. Neff, "Married Women's Labor Supply and the Marriage Penalty," Public Finance Quarterly, Vol. 18, No. 4 (October 1990), pp. 420-432.
  43. Martin Feldstein and Daniel Feenberg, "The Taxation of Two- Earner Families," in Martin Feldstein and James M. Poterba, eds., Empirical Foundations of Household Taxation (Chicago: University of Chicago Press, 1996), pp. 39-73.
  44. James Alm and Leslie A. Whittington, "Income Taxes and the Marriage Decision," Applied Economics, Vol. 27, No. 1 (January 1995), pp. 25-31; idem, "Does the Income Tax Affect Marital Decisions?" National Tax Journal, Vol. 48, No. 4 (December 1995), pp. 565-572; idem, "Income Taxes and the Timing of Marital Decisions," Journal of Public Economics, Vol. 64, No. 2 (May 1997), pp. 219-240; David L. Sjoquist and Mary Beth Walker, "The Marriage Tax and the Rate and Timing of Marriage," National Tax Journal, Vol. 48, No. 4 (December 1995), pp. 547-548; Alexander Gelardi, "The Influence of Tax Law Changes on the Timing of Marriages: A Two-Country Analysis," National Tax Journal, Vol. 49, No. 1 (March 1996), pp. 17-30.
  45. Leslie A. Whittington and James Alm, "'Til Death or Taxes Do Us Part: The Effect of Income Taxation on Divorce," Journal of Human Resources, Vol. 32, No. 2 (Spring 1997), pp. 388-412; Stacy Dickert-Conlin, "Taxes and Transfers: Their Correlation with Marital Separation," 1996 Proceedings of the 89th Annual Conference on Taxation (Washington: National Tax Association, 1997), pp. 299-305.
  46. Robert Shapiro, "Piggy Banks, Then and Now," New York Times (August 19, 1999). Mr. Shapiro is Under Secretary for Economic Affairs at the Commerce Department.
  47. John Sabelhaus and Ken Ayotte, "The Effect of Tax-Deferred Savings Plans on Household Wealth Accumulation: Evidence from the Survey of Consumer Finances," Congressional Budget Office Technical Paper 1999-4 (March 1998); R. Glenn Hubbard and Jonathan Skinner, Assessing the Effectiveness of Saving Incentives (Washington: American Enterprise Institute, 1996); James Poterba, Steven Venti and David Wise, "The Effects of Special saving Programs on Saving and Wealth," National Bureau of Economic Research Working Paper No. 5287 (October 1995); Jonathan Skinner, "Individual Retirement Accounts: A Review of the Evidence," Tax Notes, Vol. 54, No. 2 (January 13, 1992), pp. 201-212.
  48. Tim Callen and Christian Thimann, "Empirical Determinants of Household Saving: Evidence from OECD Countries," International Monetary Fund Working Paper WP/97/181 (December 1997).
  49. Joint Committee on Taxation, Present Law and Background Relating to the Marriage Tax Penalty, Education Tax Incentives, the Alternative Minimum Tax, and Expiring Tax Provisions, JCX-39-99 (June 22, 1999), p. 46.
  50. Robert Harvey and Jerry Tempalski, "The Individual AMT: Why It Matters," National Tax Journal, Vol. 50, No. 3 (September 1997), pp. 453-73.
  51. Robert Rebelein and Jerry Tempalski, "Effect of TRA '97 on the Individual AMT," Tax Notes, Vol. 80, No. 6 (August 10, 1998), pp. 717-26; Albert B. Crenshaw, "Alternative-Tax Law Starting to Go Awry," Washington Post (December 6, 1998); Karen Hube and Tom Herman, "You May Be Richer Than You Thought (And Poorer, Thanks to a 'Stealth Tax')," Wall Street Journal (December 17, 1998).
  52. U.S. General Accounting Office, Experience With the Corporate Alternative Minimum Tax, GAO/GGD-95-88 (April 1995).
  53. Ibid., p. 41.
  54. American Council for Capital Formation, The Case for Corporate AMT Repeal (August 1996).
  55. Andrew B. Lyon, Cracking the Code: Making Sense of the Corporate Alternative Minimum Tax (Washington: Brookings Institution, 1997), p. 4.
  56. Martin Sullivan, "Business Versus Business at Ways and Means Markup," Tax Notes, Vol. 75, No. 11 (June 16, 1997), p. 1447.
  57. The classic statement of this is Robert M. Solow, "A Contribution to the Theory of Economic Growth," Quarterly Journal of Economics, Vol. 70, No. 1 (February 1956), pp. 65-94. Solow was later awarded the Nobel Prize in economics for this work.
  58. A recent estimate concluded that society gets less the one fourth of the R&D that is socially optimal. Charles I. Jones and John C. Williams, "Measuring the Social Return to R&D," Federal Reserve Board, Finance and Economics Discussion Series 1997-12 (February 1997).
  59. It is sometimes argued that businesses engage in less R&D than is socially desirable because the stock market undervalues it. However, recent research shows that the market does value R&D appropriately, although investors may not be as informed on this matter as they should be. See Louis K.C. Chan, Josef Lakonishok and Theodore Sougiannis, "The Stock Market Valuation of Research and Development Expenditures," National Bureau of Economic Research Working Paper No. 7223 (July 1999).
  60. Office of Technology Assessment, The Effectiveness of Research and Experimentation Tax Credits (September 1995). This estimate is confirmed in Bronwyn Hall and John van Reenen, "How Effective Are Fiscal Incentives for R&D? A Review of the Evidence," National Bureau of Economic Research Working Paper No. 7098 (April 1999).
  61. Jesus C. Dumagan, "Re-examining the Cost-Effectiveness of the Research and Experimentation Tax Credit," Office of Business and Industrial Analysis, Office of Policy Development, Economics and Statistics Administration, U.S. Department of Commerce, Paper ESA/OPD 95-1 (June 1995). This estimate is the same as in Bronwyn H. Hall, "R&D Tax Policy During the 1980s: Success or Failure?" in James M. Poterba, ed., Tax Policy and the Economy, Vol. 7 (Cambridge: MIT Press, 1993), pp. 1-35.
  62. Ken Brown, ed., The R&D Tax Credit: Issues in Tax Policy and Industrial Innovation (Washington: American Enterprise Institute, 1984), pp. 39-47.
  63. Economics Benefits of the R&D Tax Credit (Washington: Coopers & Lybrand, 1998).
  64. See Charles Adams, Those Dirty Rotten Taxes: The Tax Revolts that Built America (New York: Free Press, 1998).

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