Economic Effects of Fundamental Tax ReformHenry Aaron, William G. Gale The tax system profoundly affects countless aspects of private behavior. It is a powerful policy influence on the distribution of income and it is the one aspect of government that almost every citizen cannot avoid. With tax reform high on the political agenda, this book brings together studies of leading tax economists and lawyers to assess the various reform proposals and examine the effects of tax reform in several distinct areas. Together, these studies and comments on them present a balanced evaluation of professional opinion on the issues that will be critical in the tax reform debate. The book addresses annual and lifetime distributional effects, saving, investment, transitional problems, simplification, home ownership and housing prices, charitable groups, international taxation, financial intermediaries and insurance, labor supply, and health insurance. In addition to Henry Aaron and William Gale, the contributors include Alan Auerbach, University of California, Berkeley; David Bradford, Princeton University; Charles Clotfelter, Duke University; Eric Engen, Federal Reserve; Don Fullerton, University of Texas; Jon Gruber, Massachusetts Institute of Technology; Patric Hendershott, Ohio State; David Ling, University of Florida; Ronald Perlman, Covington & Burling; Diane Lim Rogers, Congressional Budget Office; John Karl Scholz, University of Wisconsin; Joel Slemrod, University of Michigan; and Robert Triest, University of California, Davis. |
Contents
Introduction | 1 |
11 Comparing the Tax Plans | 8 |
Saving Investment and Economic Growth | 27 |
Tax Reform Capital Allocation Efficiency and Growth | 29 |
21 Current Effective Tax Rates by Industry | 40 |
22 Simulation Parameters of Current Tax System and Proposed Reforms | 52 |
23 Macroeconomic and Welfare Effects of Tax Reforms with No Adjustment Costs | 58 |
24 Macroeconomic and Welfare Effects of Tax Reforms with Adjustment Costs | 62 |
6A1 Basic Data Used in Calculations of Corporate Contributions | 240 |
6A2 Basic Data Used in Calculations of Corporate Contributions | 243 |
Fundamental Tax Reform and Labor Supply | 247 |
71 Budget Constraint for Individual with TwoBracket Tax on Earnings | 248 |
71 US Federal Individual Income Tax Schedule 1995 | 249 |
72 Federal Marginal Tax Rates on Earned Income | 250 |
73 Budget Constraint for Individual with ThreeBracket Tax on Earnings | 251 |
72 Sample Characteristics by Income Group | 253 |
25 Effects of Two Tax Reforms on an Open Economy | 64 |
26 Effects of Tax Reforms Assuming Alternative Labor Supply Responsiveness | 65 |
The Effects of Fundamental Tax Reform on Saving | 83 |
Financial Assets 197694 | 86 |
33 TaxPreferred Assets Debt and Household Net Worth 197694 | 88 |
34 Interest Elasticity of Saving and Saving Rates in the Precautionary Saving Model | 98 |
35 Interest Rate Saving and Household Welfare Effects in a Switch from Hybrid IncomeConsumption Tax to Consumption Tax | 100 |
36 Effects of Tax Reform on Pension Coverage and PensionInduced Changes in Total Saving Exploratory Calculations | 106 |
Table 3A1 Interest Rate Saving and Household Welfare Effects in Switch from Hybrid IncomeConsumption Tax to Consumption Tax Accounting fo... | 112 |
Behavioral Effects | 123 |
Fundamental Tax Reform and EmployerProvided Health Insurance | 125 |
41 Composition of Employee Compensation 1960 1980 1993 | 127 |
42 Expenditures for Health Services and Supplies by Type of Payer 1991 | 129 |
43 Covered Benefits in Group Health Plans 199293 | 130 |
44 Distribution of Estimated Expenditures on EmployerProvided Health Insurance for Sample Households 1994 | 133 |
45 Tax Subsidies to EmployerProvided Health Insurance | 135 |
46 Effect of Fundamental Tax Reform on Demand for EmployerProvided Health Insurance | 142 |
47 Distributional Analysis of Fundamental Tax Reform and the Demand for EmployerProvided Health Insurance | 143 |
Taxes Mortgage Borrowing and Residential Land Prices | 171 |
51 LoantoValue Ratios by Household Income and Age of Household Head | 175 |
52 House Values by Household Income and Age of Household Head | 176 |
53 Regressions Explaining LoantoValue Ratios Australia and United States | 177 |
54 Homeownership Rate by Household Income and Age of Household Head | 178 |
55 Average Increase in Mortgage Debt among Homeowners Arising from USA Tax by Household Income and Age of Household Head | 180 |
56 Metropolitan Statistical Areas with Highest and Lowest Average Marginal Tax Rates 1970 1980 and 1990 | 185 |
57 Effect on Housing Prices of Eliminating Property Tax and Mortgage Interest Deductions by Metropolitan Statistical Area Percent | 192 |
58 Effect of USA Tax on Housing Prices by Metropolitan Statistical Area | 193 |
59 Effect of Flat Tax on Housing Prices by Metropolitan Statistical Areas | 194 |
51 Housing Market Transitional Dynamics | 204 |
The Impact of Fundamental Tax Reform on Nonprofit Organizations | 211 |
61 Estimated Number of TaxExempt Nonprofit Organizations 1990 | 212 |
62 Revenues of Large Nonprofit Organizations 1991 | 213 |
63 Sources of Revenue of Charitable Organizations by Subsector 1992 | 214 |
64 Selected Information on Taxpayers by Adjusted Gross Income Class 1992 | 216 |
65 Actual and Predicted Changes in Itemized Charitable Giving after the 1986 Tax Act by Sample and Selected Income Group | 221 |
66 Calculations of Tax Revenue and Contributions under Different Tax Plans and Behavioral Assumptions 1996 | 229 |
67 Actual and Simulated Corporate Contributions under Elimination of the Charitable Deduction 1991 | 232 |
68 Actual and Simulated Charitable Bequests under Elimination of the Estate Tax 1993 | 234 |
73 Behavioral Parameters Used in Simulations of Hours of Work | 258 |
74 Simulation of Effects of Tax Reform on Hours Worked Various Parameters | 260 |
75 Simulation of Effects of a VAT on Hours Worked Parameter Set 1 | 261 |
76 Simulation of Alternative Tax Reforms Parameter Set 1 | 262 |
Incidence | 279 |
Distributional Effects of Fundamental Tax Reform | 281 |
81 The Distribution of Tax Liabilities and Transfer Payments by Income Percentile | 286 |
82 The Effect of the Flat Tax on the Distribution of Tax Liabilities by Income Percentile | 290 |
81 Average Effective Tax Rates under Current Law and the Flat Tax | 293 |
83 Percentage of Families in Each Income Decile with Tax Changes of Various Magnitudes | 295 |
84 Distributional Effects of the Flat Tax by Age Income Class and Homeownership Status 1994 | 296 |
85 Distribution of Current Law and flat Tax Burdens for Families Age 4050 1994 | 298 |
86 Distributional Effects of Alternative Tax Reform Proposals | 300 |
87 Distribution of Asset and Liability Holdings in the US Population 1992 Survey of Consumer Finances | 304 |
8B1 Distribution of Taxes under Alternative Incidence Assumptions | 312 |
Lifetime Effects of Fundamental Tax Reform | 321 |
91 Changes in Effective Tax Rates on Capital from Switching to Proportional Consumption VAT Wage and Income Taxes | 327 |
92 Economic Effects of Switching to Proportional Consumption VAT Wage and Income Taxes | 329 |
93 Distribution of Intergenerational Welfare Effects under Eight Tax Proposals by Age | 332 |
94 Distribution of Intergenerational Welfare Effects under Eight Tax Proposals by Income Category | 334 |
95 Efficiency Gains from Eight Tax Replacements under Various Assumptions about Intertemporal and LeisureConsumption Elasticities | 336 |
Administrative and Transitional Issues | 353 |
Which Is the Simplest Tax System of Them All? | 355 |
101 Quantitative Estimates of the Compliance Cost of the US Income Tax System | 360 |
10A1 Average Time Spent on Various Activities by Type of Return and Preparer Status 1983 Estimates | 383 |
Transition Issues in Moving to a Consumption Tax A Tax Lawyers Perspective | 393 |
Finance and International Effects | 435 |
Treatment of Financial Services under Income and Consumption Taxes | 437 |
121 Treatment of a Demand Deposit under the Income Tax | 444 |
122 Treatment of a Demand Deposit under a SubtractionType Consumption Tax | 450 |
123 CashFlow Treatment of a Demand Deposit | 452 |
Fundamental Tax Reform in an International Setting | 465 |
131 Alternative US Tax Treatment of International Transactions | 474 |
132 Foreign Activity in the United States by Country of Ultimate Beneficial Owner 1992 | 486 |
Contributors | 503 |
Participants | 505 |
| 507 | |
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Common terms and phrases
after-tax price Armey-Shelby Auerbach average behavior benefits billion calculations capital gains capital income charitable compliance costs consumption tax contributions corporate income tax coverage current tax system debt demand distribution dollars earnings Economic effective tax rates effects of tax efficiency gains EITC elasticity eliminate employer employer-provided health insurance equity estimates exemption federal financial services flat tax foreign tax credits fundamental tax reform house prices households incentives increase individual interest rates Internal Revenue Service investment itemized deductions labor supply marginal tax rate mortgage interest deduction nonprofit owner-occupied housing parameter payments payroll tax pension percent percentage points plans preenactment rate of return reduce retail sales tax revenue sales tax saving simulations Slemrod tax base tax burdens tax changes tax liability tax subsidy tax treatment taxable income taxation taxpayers tion transfer pricing transition relief U.S. Congress U.S. tax USA tax value-added tax wage tax