Recently, there was a bit of a back and forth between Paul Ryan and the Tax Policy Center on distributional tables. Paul Ryan stated:
“So I do not like the idea of buying into these distributional tables. What you’re talking about is what we call static distribution. It’s a ridiculous notion. What it presumes is life in the economy is some fixed pie, and it’s not going to change. And it’s really up to government to redistribute the slices more equitably. That is not how the world works. That’s not how life works. You can shrink or expand the economy, and what we want to maximize is economic growth and upward mobility so that everybody can get a bigger slice of the pie.”
Howard Gleckman of the TaxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. Policy Center responded:
“And while it is certainly useful to understand how tax changes affect the overall economy, it is also valuable to know how those proposals affect the after-tax incomeAfter-tax income is the net amount of income available to invest, save, or consume after federal, state, and withholding taxes have been applied—your disposable income. Companies and, to a lesser extent, individuals, make economic decisions in light of how they can best maximize their earnings. s of households across the economic spectrum. It may be somewhat uncomfortable if you’re proposing a tax cut that would distribute trillions of dollars to a handful of high-income households and relatively little to everyone else, but it is useful nonetheless.”
I think both are correct here. It is true that static distributional tables don’t account for things like growth and there are conceptual issues with them, but I don’t think you can throw them out completely. People do care about who pays taxes. This is why we show both static and dynamic distributional tables in our tax analyses.
A broader point to make here is that there are many dimensions of tax policy that people should consider. Ryan wants us to consider how tax policy impacts the broader economy and thus impacts individuals. That is good. Tax reform should focus on increasing the size of the economy. Others think we should focus on who pays taxes and how much revenue the government collects. We definitely should. Growth, distribution, and revenue are all important aspects of tax policy. If we only focus on one, we miss important policy nuances.
Many have pointed out how Senator Marco Rubio’s plan to eliminate the tax on capital gains and dividend income would greatly benefit high-income taxpayers. This is because more capital gains and dividend income is earned by those with high incomes. However, solely focusing on that aspect, you miss other reasons why someone would propose this policy. It would eliminate the double-tax on corporate income, which would, eliminate the bias against equity-financed investment, reduce the cost of capital, and have a positive impact on saving, investment, and the economy. This is a worthwhile policy goal, but you risk overlooking the issue entirely if you only focus on the policy’s distributional impact.
Another example is Dr. Ben Carson’s tax reform plan. His plan is based on the Hall-Rabushka Flat TaxAn income tax is referred to as a “flat tax” when all taxable income is subject to the same tax rate, regardless of income level or assets. . This plan makes pretty much all the pro-growth changes to the tax code one could make, while eliminating pretty much all the progressive features of the tax system. The result: a plan that would increase the size of GDP by 16 percent in the long run. However, the plan’s laser-like focus on growth had a downside. It raised taxes on basically everyone except those at the very top. Although the plan is very pro-growth, its distributional impact would mean that it would have immense difficulty passing Congress.
Distributional Analysis for Dr. Ben Carson’s Tax Reform Plan |
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Effect of Tax Reform on After-Tax Income Compared to Current Law |
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All Returns by Decile |
Static Distributional Analysis |
Dynamic Distributional Analysis |
|
0% to 10% |
-13.10% |
2.46% |
|
10% to 20% |
-14.83% |
0.51% |
|
20% to 30% |
-9.67% |
6.30% |
|
30% to 40% |
-5.11% |
10.09% |
|
40% to 50% |
-3.17% |
12.61% |
|
50% to 60% |
-2.90% |
13.24% |
|
60% to 70% |
-2.97% |
13.40% |
|
70% to 80% |
-2.60% |
13.91% |
|
80% to 90% |
-0.95% |
15.61% |
|
90% to 100% |
16.21% |
30.30% |
|
99% to 100% |
33.44% |
44.58% |
|
TOTAL FOR ALL |
4.50% |
19.86% |
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Source: Tax Foundation Taxes and Growth Model, Oct. 2015. |
A final example is Senator Bernie Sander’s tax plan. Many people have focused on the more than $13 trillion price tag and that the plan would be a drag on growth. But within his plan, there are a few important nuances. Take for example two proposals in his plan: a new 6.2 percent employer-side payroll taxA payroll tax is a tax paid on the wages and salaries of employees to finance social insurance programs like Social Security, Medicare, and unemployment insurance. Payroll taxes are social insurance taxes that comprise 24.8 percent of combined federal, state, and local government revenue, the second largest source of that combined tax revenue. and his proposal to tax capital gains and dividends at ordinary rates for those earning over $250,000. Both of these proposals raise a bunch of revenue: $4.1 trillion and $1.2 trillion over a decade, respectively. However, their impacts on the economy are vastly different. The new employer-side payroll tax raises almost four times as much revenue, but does less economic harm than the tax increase on capital gains and dividends.
Ten-Year Revenue and Economic Impact of the Sanders Plan by Provision (Billions of Dollars, 2016-2025) |
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Provision |
10-year Static Revenue Impact |
10-year Change in Level of GDP |
10-year Dynamic Revenue Impact |
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A new 6.2% employer-side payroll tax (an employer “premium”) |
$4,148 |
-1.76% |
$3,496 |
|
Tax capital gains and dividends at ordinary income rates for income over $250,000 |
$1,186 |
-2.42% |
$265 |
Tax policy is complex and filled with trade-offs. I hope that when lawmakers and the public think about tax reform, they don’t just focus on a single aspect, but instead consider all of the important issues including revenues, distribution, and economic growth.
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