Macroeconomic Updates

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• 1 DJ Dodson // May 7, 2009 at 5:45 am

  Professor Brandl,
  Consumption and value added taxes might be a nice wedge to push for a real simplification of the tax system. However:
  * How will consumption and value added taxes, in some simplified manner, tax intellectual and other properties that give rise to great wealth?
  *How will the appetites of our politicians be satisfied if we take away their ability to deal in loopholes (and pork - for example: Why is Chrysler even an issue…?)
  D J Dodson - MBA-MA ; UT-Austin 1995

• 2 Chris // May 7, 2009 at 10:00 am

  Wouldn’t it be more effective to adjust the items that are taxed under a consumption tax rather than trying to adjust for income? That raises the question of why you are adjusting taxes for lower income individuals. Is the adjustment to allow for a subsistence level with regards to basic needs such as food and shelter? If so, then I think that it would be better to not tax those items with the consumption tax.

  Also, wouldn’t a consumption tax have a huge impact on America relative to the rest of the world? Would foreign purchasers be subject to this consumption tax? If not, then aren’t you running into the same kind of issues that you have now with income tax shelters? It could lead to a situation where income moves out of the country, purchases are made, then those items come back.

• 3 Michael Brandl // May 7, 2009 at 1:53 pm

  My responses to the excellent questions posed:

  D.J.: remember a consumption tax is not a property tax. Thus, spending is taxed but not property. Thus, IP and other properties would not be taxed nor would the wealth that these things generate.

  Your second point is the more thorny issue. You are exactly correct in that there has been a great deal of political motivation (rent seeking we economists call it) in the creation of the current tax code. This is yet another reason why do to away with it. Will this be politically difficult to do? Yes…but if President Obama is serious about change, this is one change he should seriously consider.

  Chris: The problem with “adjusting” taxes on “certain” goods brings us back to D.J.’s second point: how do you keep people from gaming the system. For example: should food be excluded from a consumption tax? If yes…what about caviar? Umm…do you see the problem? Much easier to do this: if you make under a certain income level (say $35k a year) you will fill out some forms demonstrating your income level. The federal government then cuts you a check (say $3500). Wealthy people will find it not worth the time to disguise their income to get a “relatively small” amount of money from the Federal government. The size of the IRS shrinks (sorry IRS employees) and the number of tax accountants decreases (sorry…my sister is one!) But overall the US economy is more efficient.

  Yes, foreign purchasers have to pay it, just like our sales taxes…again they (if they are short term visitors and thus not enjoying public goods) can apply for a rebate if they are willing to go through the hassle of filling out government forms and providing documentation.

  Finally, goods coming into the US are already taxed via customs…again look at the cost v. benefit of avoiding the tax.

  Excellent questions…keep the discussion going.

  -M. Brandl

• 4 Chris Benten // May 11, 2009 at 8:46 pm

  A couple of thoughts come to mind:
  1) Corporations are taxed but if they are moving money overseas to avoid taxation, I thought that is illegal. I heard that a bone to the corps to help with the “pain” is credits for R&D. Somehow taxing of corporations needs to be more transparent.

  2) While doing research for one of my MBA papers showed that the lower income families payed a much higher percentage of total taxes (income, sales, etc) than high income families. Consumption taxes are gaining a foothold with luxury taxes on high-dollar toys. I think this will expand. Personally I think a progressive tax system is the best but the loopholes need to be closed and the AMT needs to kick in to ensure everyone pays some level of tax. I do not mind paying taxes. I like a national defense, roads, etc.
  Social Security/Medicaid is a monster that needs to be dealt with and only gets more expensive the longer we wait (do not get me started).

  3) Texas needs an income tax. Property taxes and the power of school districts is out of control.

  Chris
  MBA 07

• 5 Wadie // May 20, 2009 at 9:39 am

  Perhaps the administration should consider why domestic multinationals feel compelled to shift earnings to foreign subsidiaries.

  According to Scott Hodge’s article on taxfoundation.org, “the average combined federal and state corporate tax rate in the U.S. is 39.3 percent, second among (industrialized) countries to Japan’s combined rate of 39.5 percent.1 Lowering the federal rate to 30.5 percent would only lower the U.S.’s ranking to fifth highest among industrialized countries.”

  In the eyes of our home grown corporations, this tax reshuffling enables them to escape what they perceive as a punitive tax code burden at the home office. Many C-level executives are crying foul at the administration’s desire to “close the loophole”. Their argument is that closing the loophole without broader tax reform (i.e. – lowering the effective corporate tax rate) will force their hand in putting themselves on the auction block to foreign acquirers. Ultimately, you will have an administration pushing legislation on behalf of nationalism and patriotism and forcing domestics into the arms of parents overseas. Talk about a classic case of unintended consequences.

  I believe we should close the loop, but only as a detail within a broader overall reform. Why is our corporate tax rate so high? What is the overall effect of additional state taxes on the total? What will be the effect of bringing the rate down on our international competitiveness?

  I think it’s time to simplify the code. This might also be a good time to revisit that old question of double taxation on flow-through of profits. Let’s not pinpoint small details that the populace can rally behind, only to see the results throw egg on our faces. As Mr. Obama so correctly describes, the time is ripe for real and lasting change. Let’s get it right.

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