If We Give Everybody Cash, Let’s Tax It

Giving people cash is a great way to soften COVID-19’s economic blow. But it’s sparked a classic debate. Should the federal government give money to everyone? Or target it to people with low incomes?

Targeting has the potential to deliver the biggest benefit per dollar spent. But eligibility requirements add complexity and will inevitably screen out some people who need help. Universality is simpler and recognizes that we are all in this together.

Happily, we can combine the best features of both approaches: Let’s give cash to everyone, and then tax it later. By distributing money today, we get the speed and inclusiveness of universality. By taxing it later, we can recapture some of the benefits from those who needed them least.

One approach is simply to tax the assistance just like any other income. A person with little income this year would keep the full government payment of, say, $1,000. But a billionaire in California would net only $500. At tax time next year, Uncle Sam would get $370 back and California would get $130. The billionaire would receive half as much as the person with little income. And states with income taxes would get a much-needed boost in revenues.

Ben Ritz of the Progressive Policy Institute has proposed another approach: structuring the money as a pre-paid tax credit and then clawing back some of it at tax time. The clawback system could be designed to accomplish any distributional and fiscal goal you want. For example, you might phase out the credit entirely for folks earning more than $150,000. Another possibility would be to link the credit amount to some measure of income loss, not just income level, by comparing the income changes across tax years.

Any of these approaches would reduce the fiscal cost of the cash payments and thus, for the same overall cost, allow them to be bigger for those who get them. Taxing the payments as income, for example, might create a 11 percent offset in new federal revenues. (That figure is based on a report Elaine Maag and I did on carbon dividends, an idea for universal payments linked to a carbon tax.) A taxable payment of $1,125 would then have the about same net fiscal cost as an untaxed $1,000 payment. Under Ritz’s proposal, a more aggressive clawback approach could allow even bigger payments for the same overall cost.

The payments described here should not be treated as income in determining eligibility and benefits in safety net programs. They should be treated as income if we were enacting universal payments in normal times. But times are decidedly not normal. There is no reason for these temporary payments to reduce the efficacy of the existing safety net.

I favor targeting assistance to people with low incomes or sudden income loss if it’s easy to do so. There’s clearly more bang per buck in directing aid to those who likely need it most. Australia has already enacted one program along those lines. But if we go with universal payments, let’s make the payments taxable.

Should Congress Use The Income Tax To Discourage Consumer Drug Ads?

Senator Jeanne Shaheen (D-NH) and a score of Democratic cosponsors want to use the tax code to discourage direct-to-consumer advertising by drug companies. Their bill, the End Taxpayer Subsidies for Drug Ads Act, would prohibit firms from taking tax deductions for any consumer advertising of prescription drugs.

Limiting tax deductions is a blunt and arbitrary way of approaching a legitimate concern. Consumer drug ads play an important role in debates about the costs of prescription drugs, the risks of misuse and overuse of some medications, the balance of authority between doctors and patients, the limits of commercial speech, and a host of other issues. For overviews, see here, here, and here.

But the bill is not well crafted to address those issues. The problem starts with the legislation’s name: Allowing drug companies to deduct advertising costs is not a subsidy. Many other deductions are: The charitable deduction in the personal income tax, for example, subsidizes charitable giving. And the mortgage interest deduction subsidizes borrowing to buy a home.

But the business deduction for advertising costs is not a subsidy. Continue reading “Should Congress Use The Income Tax To Discourage Consumer Drug Ads?”

Designing Carbon Dividends

Carbon dividends are the hottest idea in climate policy. A diverse mix of progressive and conservative voices are backing the idea of returning carbon tax revenues to households in the form of regular “dividend” payments. So are a range of businesses and environmental groups. Two weeks ago, six House members—three Democrats and three Republicans—introduced carbon dividend legislation.

Here is the idea: A robust carbon tax would cut emissions of carbon dioxide and other gases that are threatening our climate. It also would indirectly increase taxes on consumers and raise significant revenue. Carbon dividends would distribute that revenue back to households through regular payments, thus softening the financial blow of the tax while still reducing emissions. (Of course, the revenue also could be directed to other purposes.)

While the premise is simple, the details of implementing carbon dividends are complex. Policymakers face a range of philosophical, political, and practical issues. In a new report, How to Design Carbon Dividends, my Tax Policy Center colleague Elaine Maag and I explore those issues. Our work was funded by the Climate Leadership Council, an advocate for carbon dividends (full disclosure: I am a senior research fellow with the organization).

Two distinct philosophic views animate carbon dividend proposals. One sees dividends as shared income from a communal property right. Just as Alaskans share in income from the state’s oil resources, so could Americans share in income from use of atmospheric resources.

The second sees dividends as a way to rebate carbon tax revenues back to the consumers who ultimately pay them.

Though these ideas can be complementary, they have different implications for designing carbon dividends. Continue reading “Designing Carbon Dividends”

Three Things You Should Know about the Buyback Furor

Record stock buybacks—driven in part by the corporate tax changes in the Tax Cuts and Jobs Act (TCJA)—have sparked a media and political furor. Unfortunately, they’ve also created a great deal of confusion. To help elevate the debate, here are three things you should know.

1. Repatriated overseas profits are the main way TCJA is boosting buybacks

By slashing corporate taxes, TCJA will boost after-tax profits and cash flow. Companies will use some of that cash to buy back shares. But that is not the main way TCJA is fueling today’s record buybacks.

The big reason is the “liberation” of around $3 trillion in overseas profits. Our old system taxed the earnings of foreign affiliates only when the domestic parent company made use of them. To avoid that tax, many companies left those earnings in their affiliates. They could reinvest them in their foreign operations or hold them in U.S. financial institutions and securities, but they couldn’t use them for dividends to parent company shareholders or stock buybacks.

By imposing a one-time tax on those accumulated profits, the TCJA freed companies to use the money wherever they wanted, including in the United States. And multinational firms are leaping at the chance. Cisco, for example, says they are repatriating $67 billion and buying back more than $25 billion in stock.

Cisco’s response reflects a broader trend. Repatriated profits will account for two-thirds of this year’s increase in stock buybacks, according to JP Morgan. Stronger earnings, due to both improved before-tax profits and lower taxes, make up only one-third.

2. Buybacks do not mechanically increase stock prices

Buybacks can help shareholders. But it’s not as simple as much commentary suggests. Continue reading “Three Things You Should Know about the Buyback Furor”

How Should Tax Reform Treat Employee Stock and Options?

The tax treatment of employee stock and options raises a classic Goldilocks problem. We want to tax this compensation neither too much or too little. In a recent policy brief, I consider three questions about how to strike that balance.

Do companies get excessive tax deductions for employee stock and options?

This concern rocketed to prominence in 2012 when Facebook went public. Its employees earned billions from their stock options and restricted stock units. The company, in turn, got billions in tax deductions, reducing its income taxes for years.

Those deductions outraged some observers who asked how Facebook could get billions in tax write-offs when its financial statements showed much lower compensation costs. Lawmakers on both sides of the aisle denounced the “stock option loophole” and proposed limiting these deductions.

While there are good reasons for Congress to worry about companies gaming the tax code, this is not one. The tax deductions that companies receive for employee stock and options are, with few exceptions, just like those for cash wages, salaries, and bonuses. Continue reading “How Should Tax Reform Treat Employee Stock and Options?”

Eight Thoughts on Business Tax Reform

On Tuesday, I had the chance to testify before the Senate Finance Committee on business tax reform. Here are my opening remarks. They are a bit on the glum side, emphasizing challenges and constraints lawmakers face.  Moving from optimistic rhetoric about tax reform to legislative reality is hard. You can find my full testimony here.

America’s business tax system is needlessly complex and economically harmful. Thoughtful reform can make our tax code simpler. It can boost American competitiveness. It can create better jobs. And it can promote shared prosperity.

But tax reform is hard. Meaningful reforms create winners and losers. And you likely hear more complaints from the latter than praise from the former. I feel your pain. At the risk of adding to it, my testimony makes eight points about business tax reform.

  1. Thoughtful reform can promote economic growth, but we should be realistic about how much.

More and better investment boosts economic activity over time. The largest effects will occur beyond the 10-year budget window. If reform is revenue neutral, revenue raisers may temper future growth. If reform turns into tax cuts, deficits may crowd out private investment. Either way, the boost to near-term growth may be modest. Dynamic scoring will thus play only a small role in paying for tax reform.

  1. The corporate income tax makes our tax system more progressive.

The corporate income tax falls on shareholders, investors more generally, and workers. Economists debate how much each group bears. Workers are the most economically diverse. But they include highly paid executives, professionals, and managers as well as rank-and-file employees. The bulk of the corporate tax burden thus falls on people with high incomes even if workers bear a substantial portion.

  1. Workers would benefit from reforms that encourage more and better investment in the United States.

In the long run, wages, salaries, and benefits depend on worker productivity. Reforms that encourage investment and boost productivity would thus do more to help workers than those that merely increase shareholder profits.

  1. Taxing pass-through business income at preferential rates would inspire new tax avoidance.

When taxpayers can switch from a high tax rate to a lower one, they often do. Kansans did so when their state stopped taxing pass-through income. Professionals use S corporations to avoid payroll taxes. Investment managers convert labor income into long-term capital gains. Congress and the IRS can try to limit tax avoidance. But the cost will be new complexities, arbitrary distinctions, and new administrative burdens.

  1. Capping the top rate on pass-through business income would benefit only high-income people.

To benefit, taxpayers must have qualifying business income and be in a high tax bracket. Creating a complete schedule of pass-through rates could reduce this inequity. But it would expand the pool of taxpayers tempted by tax avoidance.

  1. Taxing pass-through business income at the corporate rate would not create a level playing field.

Pass-through income faces one layer of tax. But corporate income faces two, at the company and again at taxable shareholders. Taxing pass-throughs and corporations at the same rate would favor pass-throughs over corporations. To get true tax parity, you could apply a higher tax rate on pass-through business income. You could levy a new tax on pass-through distributions. Or you could get rid of shareholder taxes.

  1. It is difficult to pay for large cuts in business tax rates by limiting business tax breaks and deductions.

Eliminating all corporate tax expenditures except for deferral, for example, could get the corporate rate down to 26 percent. You could try to go lower by cutting other business deductions, such as interest payments. But deductions lose their value as tax rates fall. To pay for large rate reductions, you will need to raise other taxes or introduce new ones. Options include raising taxes on shareholders, a value-added tax or close variant like the destination-based cash flow tax, or a carbon tax.

  1. Finally, making business tax cuts retroactive to January 1, 2017 would not promote growth.

Retroactive tax cuts would give a windfall to profitable businesses. That does little or nothing to encourage productive investment. Indeed, it could weaken growth by leaving less budget room for more pro-growth reforms. Another downside is that all the benefits would go to shareholders, not workers.

Can Trump Make Mexico Pay for the Wall?

Mexico won’t willingly write the check for Donald Trump’s wall. So the president is hunting for a way to make Mexico pay.

That search isn’t going well.

Last week, press secretary Sean Spicer floated one idea: the destination-based cash flow tax. The DBCFT taxes imports and exempts exports. We import about $50 billion more from Mexico each year than we export. So the DBCFT could raise substantial revenue from trade with Mexico. Maybe Trump could earmark that money to pay for the wall?

Such earmarking sounds superficially plausible. But it has fundamental budget and logic flaws.

The budget problem is that Congress has other plans for that money. The DBCFT is the centerpiece of the House proposal for tax reform. House leaders insist reform will be revenue neutral. Any new money from the DBCFT will offset money lost from cutting business taxes. That leaves nothing for Trump’s wall.

Broader point: You can’t pay for anything with revenue-neutral tax reform (or, for that matter, with revenue-losing “tax relief”).

Trump may be more concerned with messaging than with these budget niceties. So he could still try to rhetorically link the DBCFT to paying for the wall.

But that leads to the logic problem. We run trade deficits with many countries. If the DBCFT makes Mexico pay for the wall, what does it make China pay for? Germany? Japan? Vietnam? And what about countries like Hong Kong, where America has a trade surplus? Are we paying them for something? And what happens when the wall has been paid for? Does Mexico become exempt from the DBCFT? Or does it start paying for something else?

These questions have no sensible answers. The DBCFT treats Mexico like every other nation, so it can’t make Mexico pay for the wall.

Some observers initially thought Spicer was suggesting a new tariff on Mexican imports. Most economists rightly hate that idea and fear it could spark retaliation against American products. And it seems clear that Spicer really meant the DBCFT. But let’s give that interpretation some credit. A tariff, unlike the DBCFT, could raise new revenue specifically from trade with Mexico.

But a tariff still faces a fundamental economics problem. A tariff doesn’t work like Las Vegas. Just because it targets Mexican products doesn’t mean the tax stays there. Instead, businesses will raise prices, passing some tax on to American customers. Consumers would pay more for cars, TVs, and avocados. Businesses would pay more for auto parts, trucks, and telecommunications equipment. Some burdens would decline over time as businesses shift to suppliers outside Mexico. But some shift of the burden to Americans is inevitable. A tariff would thus make American consumers and businesses, not just Mexicans, pay for Trump’s wall. And that’s without any retaliation.

If President Trump wants to target Mexico alone, he needs another strategy. Neither the DBCFT nor a tariff can make Mexico pay for the wall.