Off the Charts Blog | Center on Budget and Policy Priorities

Rep. Kevin Brady, who chairs the Joint Economic Committee, argued in the Wall Street Journal recently that the distribution estimates which the Joint Committee on Taxation (JCT) and the Tax Policy Center (TPC) produce on how tax proposals would affect different income groups have “serious limitations.”  Brady essentially implied such estimates should be downplayed or ignored in crafting tax-reform legislation. 

Brady’s criticisms, however, are far off base.  And JCT and TPC distribution estimates are critical to a tax-reform process.

At this time of wide and rising income inequality, tax reform shouldn’t make the tax code less progressive.  In the same vein, fiscal commission co-chairs Erskine Bowles and Alan Simpson have made it a core principle of their work that deficit reduction must increase or maintain the tax code’s progressivity.  They used detailed TPC estimates to try to ensure their proposals met that test.

Chairman Brady tosses out a litany of ill-considered complaints.  He says that JCT and TPC distribution tables do not include all of the information relevant to assessing tax reform proposals.  That is true, but irrelevant:  no single set of tables could.  Distribution tables are one of the key pieces of information that policymakers need, and other essential information for evaluating tax-reform proposals and options also is readily available to policymakers from JCT and TPC.

Brady also claims that distribution tables simplistically show taxpayers only by broad income category “without regard to other factors.”  In fact, both JCT and TPC provide information for different types of households (e.g., married, single, with and without children, and elderly).

Chairman Brady also complains that distribution tables ignore the changing tax burden of income groups over time.  But TPC and the Congressional Budget Office (a non-partisan agency like JCT) do produce estimates of the changes over a number of years in the share of taxes that the different groups have paid as well as changes in effective tax rates.  Furthermore, when assessing proposed tax changes, TPC and JCT routinely produce estimates for more than one year.  JCT provides the effects of a tax change for every other year throughout the ten-year budget window.

Brady also contends that the distribution tables aren’t meaningful because they show average, rather than median, income and tax burden figures for each income category. Medians and averages do show different data, and they can be misused, as we have noted ourselves.  But, Brady is wrong to suggest that the large differences between averages and medians that show up when one looks at the entire U.S. population undermine confidence in distribution tables that divide the population into smaller income categories.

Brady also attacks the JCT and TPC tables on the grounds that the percentage of filers within any income group who are at the exact average for the group is very small.  This is another observation that is true but irrelevant.  (Moreover, this is just as true for median figures as for averages.)  Although neither the average income and tax burden nor the median figures will apply to every household in an income category, such figures give policymakers essential information on the broad impact of tax policies on people within different income ranges.

Finally, Chairman Brady asserts that the “most important defect” of the distribution tables is that they don’t reflect the growth effects of tax reform.  That’s true — and appropriate.  The official revenue estimates of tax changes exclude so-called “dynamic” effects, because the macroeconomic estimates of the effects of tax changes are highly uncertain.

As CBPP’s Paul Van de Water has explained, “Economists don’t agree on the size of macroeconomic feedbacks from reducing marginal income tax rates or other tax changes.”  Incorporating highly uncertain macroeconomic effects — either in revenue or distribution estimates — would undermine the credibility of the estimates and of the budget process itself.  “[B]ecause the estimates of macroeconomic feedbacks are so uncertain,” Van de Water warns, “observers would almost surely view the revenue estimates on which they are based as biased and politically motivated.”

We’d certainly favor more information, particularly on distribution issues.  But policymakers should not let Chairman Brady’s overblown concerns and distorted descriptions convince them that JCT and TPC distribution data are fundamentally flawed and should be ignored.  Distribution estimates are critical to tax reform efforts, and the information that JCT and TPC give policymakers is solid — and very important.

The Senate Finance Committee will release the fifth of its tax reform option papers later today, this one on international taxation, Tax Notes reports.  Here’s why that’s important.

Among its options the committee will likely list is a move toward a “territorial” tax system that exempts or largely exempts the foreign profits of U.S.-based multinational corporations from U.S. tax.  As we’ve explained, that would create greater incentives for those companies to invest and book profits overseas rather than at home — and that, in turn, risks reducing wages at home by encouraging investment to flow overseas, increasing budget deficits by draining revenues from the corporate income tax, and raising taxes on smaller companies and domestic businesses.

We’ve also explained that as they examine international reform, policymakers should consider:

• The need to lessen the current foreign tilt of the tax code and growing tax avoidance by multinationals (see chart);
• The Organisation for Economic Co-operation and Development’s warning about growing tax avoidance by multinationals that undermines competition; and
• The fact that even a less than “pure” territorial tax system — that is, one that has safeguards against inappropriate profit-shifting to overseas tax havens — carries serious risks.

As our paper describes, a better first step on international tax reform would be President Obama’s fiscal year 2014 budget proposals to reform international taxation, which would reduce incentives for corporations to shift profits and investments overseas and raise $157 billion over ten years.  A key provision would prevent companies from deducting their interest expenses associated with loans that support overseas investments as long as they are deferring U.S. tax on the income that those investments generate.

We explained recently that corporate tax reform could become a trap if policymakers start by setting a tax rate so low that they have trouble scaling back deductions and other preferences enough to offset the costs.  If so, that reform not only could fail the key test of reducing long-term deficits, but it actually could expand them.  A new paper by Treasury Department analysts on the biggest business subsidy in the tax code, “accelerated depreciation,” highlights the danger.

This tax break, which cost $22.5 billion in 2012, allows businesses to deduct over time the cost of investments like new equipment more quickly than those assets actually lose value.  The analysis confirms that ending accelerated depreciation (so that businesses’ deductions had to more closely reflect the rate at which assets deteriorate) saves much less revenue in the second ten years (and even less in the ten years after that) than in the first ten years — the timeframe that Congress uses to assess legislation.  (See graph.)

In other words, a corporate rate cut that policymakers could pay for in the first ten years by ending accelerated depreciation would add billions to deficits over the long run.

Policymakers should resist the temptation to rely on just such timing gimmicks to enact corporate tax reform that includes costly new cuts in tax rates.  Like ending accelerated depreciation, many other corporate tax reforms would raise more revenue in the first ten years than they would continue to deliver in subsequent decades.

That’s why in corporate tax reform, as with tax reform generally, policymakers should prioritize fiscal responsibility and not make rash promises to slash rates that they can’t keep when faced with the political difficulty of cutting specific corporate tax breaks.

The New York Times’ latest “Room for Debate” feature asks whether secret overseas tax havens are a “Global Tax Dodge or Economic Boon.”

In my contribution, I explain that the U.S. tax code, by encouraging multinationals to use accounting techniques to shift their profits to foreign tax havens, invites corporate tax avoidance:

The extent of this profit shifting was made clear by a recent Congressional Research Service analysis that found that U.S. multinationals reported 43 percent of their overseas profits came from tax havens like Bermuda, even though few of their actual foreign investments (7 percent) or foreign workers (4 percent) were in those countries.

Elements of the U.S. tax code that encourage profit shifting not only help tax havens thrive but also drain U.S. revenues and create a bias against domestic firms and firms that don’t have access to sophisticated tax expertise.

A new Washington Post analysis of how the tax code encourages multinational corporations to shift investments and U.S.-earned profits to foreign tax havens — that is, very low-tax countries — is a must-read for policymakers considering corporate tax reform:

Companies now have an unprecedented ability to move their capital around the world, and the corporate tax code has not kept up with the changes.

Just the opposite, in fact. Experts say the U.S. code has encouraged companies to shift their income overseas, where it is more lightly taxed by the U.S. government. Many firms, in turn, have discovered that just as they can move their manufacturing to other parts of the world, so, too, can they shift their income to far-flung tax havens such as the Cayman Islands.

The result is lower revenue here that could pay for infrastructure, education and other services that support domestic growth — and that make life easier for U.S. firms.

As the Post notes, a recent Congressional Research Service analysis finds that U.S. multinationals report much of their profits in tax havens where they have few actual investments or workers (see first chart).

Shifting a large amount of U.S.-earned profits to foreign tax havens is one way that multinationals achieve a much lower overall tax rate for their foreign income (from tax haven and non-tax haven countries combined) than their domestic income, as the second chart shows.  (Various other tax breaks enable them to pay a lower share of their domestic profits in tax than the top statutory corporate tax rate of 35 percent.)

Sound corporate tax reform would minimize opportunities for such tax avoidance and stop the tax code from encouraging investment offshore, rather than at home.  It also would shrink deficits by strengthening corporate tax revenues.

A number of multinationals are pushing for a “territorial” tax system, which would mean even lower taxes on their foreign profits.  But, as a tax expert told the Post, their interests are not necessarily the same as those of the economy as a whole:

“When you get U.S. businesses coming to Washington and talking about ‘We need to do this and that for the U.S. economy,’ what does that even mean?” said Doug Shackelford, a professor of taxes at the University of North Caro­lina’s Kenan-Flagler Business School. “Who are they referring to? Is it U.S. workers? Is it U.S. shareholders?”

A territorial tax system might be good for corporate shareholders, but that doesn’t mean it would be good for America’s workers. Indeed it would risk lowering wages by increasing the incentive for multinationals to invest offshore.