RELATIVE DUTIES

The origins of American tax policy

Tax reform is at the forefront of contemporary policy debate. US citizens pay taxes at lower rates than their European counterparts, and a growing number of researchers agree that progressive taxes on wealth and income have the potential to rectify inequality. The historically less progressive nature of American tax policy is commonly explained as a product of the colonies' early opposition to "taxation without representation," as well as the large population of immigrants, the absence of traditional aristocracy, and the ubiquity of "country party republican" ideology which characterized the country's formation.

In an essay accompanying the publication of her 2006 book, historian ROBIN EINHORN introduces a new factor into the debate: the impact of domestic politics around slavery on early American state-building. From the piece:

"Americans are right to think that our anti-tax and anti-government attitudes have deep historical roots. Our mistake is to dig for them in Boston. We should be digging in Virginia and South Carolina rather than in Massachusetts or Pennsylvania, because the origins of these attitudes have more to do with the history of American slavery than the history of American freedom. In 1776, Congress was talking about slavery because its members were framing a national government for the new nation—what would become the Articles of Confederation. Trying to figure out how to count the population to distribute tax burdens to the various states, the members inevitably faced the problem of whether to count the population of enslaved African Americans. Since slaves were 4% of the population in the North and 37% of the population in the South, this decision would have a huge impact on the tax burdens of the white taxpayers of the northern and southern states.

Slaveholders developed three solutions to this general problem. First, they tried to guarantee that they dominated the legislative process by manipulating the representation rules. Second, they demanded weak governments that would make few of the decisions that provoked discussions of slavery. Third, they insisted on constraining the tax power through constitutional limitations on its use. Yet the real slaveholder victory lay in a fourth strategy—persuading the nonslaveholding majorities that the weak government and constitutionally restrained tax power actually were in the interests of the nonslaveholders themselves. Slaveholders persuaded many of their contemporaries that expansions of slavery are expansions of 'liberty,' constitutional limitations on democratic self-government are defenses of 'equal rights,' and the power of slaveholding elites is the power of the 'common man.' In the topsy-turvy political world we have inherited from the age of slavery, the power of the majority to decide how to tax became the power of an alien 'government' to oppress 'the people.'"

Link to the essay, and link to a 2000 academic article by Einhorn which presents the argument in greater historical detail.

• "The growth in cash transactions was critical to the evolution of the modern income tax. Because the market's cash nexus permitted more and more individuals to derive a greater portion of their income and wealth from the sale of their labor services, lawmakers were able to more easily measure and tap the growing tax base. Consequently, the national tax structure began to shift away from a reliance on indirect levies, namely import duties and excise taxes on alcohol and tobacco, toward more direct and graduated taxes on income and wealth transfers." Ajay Mehrotra looks at the economic developments behind the passage of the 16th Amendment in 1913. Link.
• In a new paper, Lucy Barnes links tax progressivity to the strength of capital-labor coalitions in European countries prior to World War I. Link.
• A 2017 paper by Raymond Fisman, Keith Gladstone, Ilyana Kuziemko, and Suresh Naidu offers the first ever evidence on the taxation preferences of US citizens, finding that Americans are more likely to support taxes on wealth than on savings. Link. See also this 2016 paper by Naidu, Felipe González, and Guillermo Marshall on the role of slave property rights in promoting early American economic development. Link.

CONTINGENT REFORM

The history and theory behind the Earned Income Tax Credit

The Earned Income Tax Credit (EITC) is the country's largest anti-poverty program. In 2018, over 20 million filers received $63 billion in EITC refunds. Because of its bipartisan popularity and its secure position in the tax code, with no distinct administrative unit managing its payouts, it is also at the center of several substantial anti-poverty programs recently floated in the House and Senate. These proposals variously expand and modify the EITC, often in concert with the Child Tax Credit, in order to offer a more robust benefit.

A look into the history of the EITC reveals that, at its formation, the credit was an unlikely candidate for a major anti-poverty vehicle. In a CONGRESSIONAL RESEARCH SERVICE paper, MARGOT KRANDLE HOLLICK lays out its legislative history, showing that its 1972 introduction by Senator Russell Long was an intervention against proposed guaranteed income programs, and that "the bill had originally included a provision that would have required states to reduce cash welfare by an amount equal to the aggregate EITC benefits received by their residents." From the paper:

"The origins of the EITC can be found in the debate in the late 1960s and 1970s over how to reform welfare—known at the time as Aid to Families with Dependent Children (AFDC). Some policymakers were interested in alternatives to cash welfare for the poor. Some welfare reform proposals relied on the 'negative income tax' (NIT) concept. The NIT proposals would have provided a guaranteed income to families who had no earnings (the 'income guarantee' that was part of these proposals). For families with earnings, the NIT would have been gradually reduced as earnings increased. Influenced by the idea of a NIT, President Nixon proposed in 1971 the 'family assistance plan' (FAP) that 'would have helped working-poor families with children by means of a federal minimum cash guarantee.'

Senator Russell Long, then chairman of the Senate Finance Committee, did not support FAP because it provided 'its largest benefits to those without earnings' and would, in his opinion, discourage people from working. Instead, Senator Long proposed a 'work bonus' plan that would supplement the wages of poor workers. Senator Long stated that his proposed 'work bonus plan' was 'a dignified way' to help poor Americans 'whereby the more he [or she] works the more he [or she] gets.'"

Link to that paper.

• A 1999 Brookings paper by historian Dennis Ventry also examines the unique political history of the EITC, writing that its emergence appealed to legislators as "both an anti-poverty and an anti-welfare program." Link.
• Brian Steensland's excellent book The Failed Welfare Revolution: America's Struggle Over Guaranteed Income Policy surveys this history in depth. Link. And link to a 2006 paper that preceded its publication, on cultures of "worth" and anti-poverty programs.
• A 2015 Duke Law Review Note titled "Earned Income Tax Credit: Path Dependence and the Blessing of Undertheorization," examines "the credit’s path-dependent past, which has resulted in a present-day EITC that manifests a diverse, uncoordinated assortment of policy purposes." Link.
• The above-linked recent proposals have focused on expanding the program's breadth, but retain in some form the "phase-in" structure originally proposed by Long, which excludes non-waged workers from claiming the return. Link to a (previously shared) critique of this structure—and work-tied benefits more broadly—by Matt Bruenig. Link to an also previously shared paper by JFI Fellow Max Kasy, which proposes expanding the EITC into a universal benefit.
• Our colleagues at the Economic Security Project have developed a proposed "Cost of Living Refund," which tackles several important issues with the EITC. It includes proposals for monthly disbursements and expanding eligibility to un-waged care work. Link to the project's website, which hosts research and model legislation.

SPATIAL PARAMETERS

On place-based and adaptable public policy

A recent report published by BROOKINGS INSTITUTE discusses the potential effectiveness of place-based policies for strengthening the economies of depressed areas. Co-authored by Harvard’s BENJAMIN AUSTIN, EDWARD GLAESER, and LAWRENCE H. SUMMERS, the report emphasizes that region-specific, flexible policies may best foster a nation-wide equilibrium:

"Traditionally, economists have been skeptical towards [place-based] policies because of a conviction that relief is best targeted towards poor people not poor places, because incomes in poor areas were converging towards incomes in rich areas anyway, and because of fears that favoring one location would impoverish another. This paper argues for reconsidering place-based policies ...

Indeed, even the most diehard opponent of place-based redistribution should see the logic of tailoring Federal policies to local labor market conditions. Standard social policy rules, like the Bailey (1976)—Chetty (2006) formula for unemployment insurance, depend on parameters that differ across space. If non-employment is particularly harmful in one location and particularly sensitive to public policies, then that diehard could still support a place-based revenue-neutral twist that reallocates funds from benefits that subsidize not working to benefits that encourage employment, without encouraging migration or raising housing prices.”

Link popup: yes to full paper. The two main policy recommendations are an expanded EITC and subsidies for employment.

ENERGY BOOM

A new carbon tax proposal and a big new carbon tax research report

Representative Carlos Curbelo (R-FL) introduced a carbon tax bill to the House last week (though it is “sure to fail” with the current government, it's unusual to see a carbon tax proposed by a Republican). According to Reuters popup: yes, “Curbelo said the tax would generate $700 billion in revenue over a decade for infrastructure investments.” A deep analysis popup: yes is available from The Center on Global Energy Policy at Columbia SIPA, which started up a Carbon Tax Initiative this year.

For a broader look at carbon taxes, earlier this month the Columbia initiative published a significant four-part series on the “economic, energy, and environmental implications of federal carbon taxes” (press release here popup: yes).

The overview covers impacts on energy sources:

“The effects of a carbon tax on prices are largest for energy produced by coal, followed by oil, then natural gas, due to the difference in carbon intensity of each fuel. Every additional dollar per ton of the carbon tax increases prices at the pump by slightly more than one cent per gallon for gasoline and slightly less than one cent per gallon for diesel.”

And examines a few possible revenue uses:

“How the carbon tax revenue is used is the major differentiating factor in distributional outcomes. A carbon tax policy can be progressive, regressive, or neither.”

Overview here popup: yes. Link popup: yes to report on energy and environmental implications; link to report popup: yes on distributional implications; link to report popup: yes on implications for the economy and household welfare.

EACH POINT ON THE CHAIN

Arguments for Value-Added Tax in the US, and using VAT to fund basic income

VAT

The Wall Street Journal lays out the basics popup: yes: “Unlike a traditional sales tax, a VAT is a levy on consumption that taxes the value added to a product or service by businesses at each point in the chain of production.”

VATs are ubiquitous—except in the United States. According to a 2013 Hamilton Project report popup: yes, “In recent years, the VAT has raised about 20 percent of the world’s tax revenue (Keen and Lockwood 2007). This experience suggests that the VAT can raise substantial revenue, is administrable, and is minimally harmful to economic growth.”  The TPC notes popup: yes that “every economically advanced nation except the United States” has a VAT. Countries adopted VATs over time: the EU first unified all its VATs in the 1970s, China adopted a VAT in 1984, Canada in 1991, and so on. Now the US is the only country in the OECD without one.

Why is there no VAT in the US? 

"Back in 1988, Harvard economist Larry Summers [...] explained popup: yes that the reason the U.S. doesn't have a VAT is because liberals think it's regressive and conservatives think it's a money machine. We'll get a VAT, he said, when they reverse their positions." (Forbes popup: yes.)

A VAT could certainly be a revenue-raising powerhouse. According to the CBO popup: yes, a 5% VAT could raise 2.7 trillion dollars in 2017-2026 with a broad base, or 1.8 trillion with a narrow base—the most massive of all the options for revenue popup: yes in their 2016 report.

And as for the regressive concerns, VAT proposals usually suggest adjusting other taxes or credits commensurately. A 2010 Tax Policy report popup: yes considers a VAT in the context of lowering payroll or corporate taxes, and the Hamilton Project suggests popup: yes adding tax credits or straightforward cash to low-income households.

VATs are appealing beyond their ability to raise a lot of money. They’re also easier to administer and document than other tax forms. A 2014 study popup: yes by Dina Pomeranz examines the way the VAT is documented in Chile, and finds that "forms of taxation such as the VAT, which leave a stronger paper trail and thereby generate more information for the tax authority, provide an advantage for tax collection over other forms of taxation, such as a retail sales tax." Beyond that, Michael Graetz argues popup: yes in the Wall Street Journal, "shifting taxes from production to consumption would stimulate jobs and investments and induce companies to base headquarters here rather than abroad." The Tax Foundation has advocated popup: yes for a VAT to replace the Corporate Income Tax for similar reasons.