Tuesday, September 8, 2009

Silly--and sensible--and probably hopelessly idealistic--ideas from Harvard, along with some useful observations

The Height Tax, and Other New Ways to Think about Taxation
Q&A with: Matthew Weinzierl at Harvard Business School

The silly:

Martha Lagace: Are you and Professor Mankiw really serious? Could you give us a brief background for your idea of taxing according to personal characteristics such as height?

Matt Weinzierl: We wrote our paper to ask why there is such a disconnect between theory and intuition. After all, the implication of our paper is that if we are uncomfortable taxing height as a society, we ought to think twice about whether we're comfortable taxing ability (as we currently do with our progressive income tax).

The sensible:

Most people view taxes as a burden rather than as a rich topic of study and an immensely powerful policy tool.

The probably hopelessly idealistic (but we can dream, can't we?):

If more voters were to understand the importance of our tax system and the logic behind how it is structured, perhaps we would end up with a system that engendered more agreement and satisfaction.

Some useful observations:

Q: What are the most important trends in public finance that businesspeople and managers should keep in mind?

A: A few trends stand out in policymaking.

First, income tax schedules have "flattened out" in most developed countries, so that marginal tax rates don't rise nearly as much at high incomes as they did 30 years ago. This has important implications for the geographical location of talent and innovative activity.

Second, tax rates on capital income (such as corporate profits, dividends, and capital gains) have fallen while loopholes and deductions have generally been tightened, so that the overall tax burden on capital income has not necessarily fallen. Businesspeople naturally pay attention to both the statutory rates of tax on corporate income and the specifics of the definition of corporate income when thinking about taxes. But they may also find it valuable to think about why these trends coexist and whether falling rates signal a trend toward lower taxation of capital income.

Third, value-added taxes, or general sales taxes, are increasingly important policies, having filled in for lower personal income tax revenue in many developed countries over the past few decades. These taxes are generally seen as efficient by tax economists, but they can bear heavily on the poor if not balanced with other changes to the system. Will the trend toward these taxes continue, or will dissatisfaction with income inequality force a reversal?

On the research side, let me note three developments:

First, powerful mathematical and numerical methods are allowing public finance researchers to include dynamic elements in their models that have substantially broadened the range of policies under consideration. These are very new, so their influence on policy is still relatively small, but I expect that they will have impact over the longer term.

Second, greater awareness of human psychology is leading to research in what is called behavioral public finance, such as how salient different types of taxes are to people.

Professor Weinzerl's current project is researching tax competition among U.S. states, a very important policy topic.

Companies have a lot of choices about where to locate, and states can't afford to ignore those choices, especially in the current economic climate. A state like New York, with relatively high tax rates, will need to work very hard to deliver public value in exchange for those high tax rates, or companies with a choice will locate elsewhere.

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