By
The opinion of Associate Dean for Academic Affairs and Boston College Law School Professor Diane Ring is sought out quite a bit this time of year – she is an expert on taxes. With research accomplished in the fields of international taxation, corporate taxation, Ring recently spoke with Chronicle about the many tax-related stories in the news and on the minds of many Americans.
What are your thoughts on the “Buffett Rule”? Is it feasible and do you foresee any unintended consequences, if it were to pass?
Like all tax policy, the details matter. The broad impetus for the proposed “rule” is the recognition that some taxpayers who have substantial income may be paying much less tax than one might have expected, or might have thought was “fair.” Even taxpayers who favor lower tax rates (and presumably “smaller” government) might be concerned with this picture.
The proposed rule, though, has generated some debate over whether this tax burden picture is factually accurate. Commentators have questioned how the taxpayer studies have measured income, which taxes are being included, and how the tax burden is calculated. However, even with these challenges to some of the high profile examples and calculations circulating in the popular press, there remains a general acceptance that enough of the story is true to be troublesome.
What should be done? Is the “Buffet Rule” the right response? Again, details matter. At present, the limited information on the proposal makes it unclear exactly how it would operate and whether it would result in very high marginal tax rates for a subset of taxpayers (your marginal tax rate is the tax rate you face on the “next” dollar of income you earn – a very high marginal tax rate is thought to discourage you from seeking to earn that next dollar even if your average tax rate is lower).
Another important factor is that taxpayers can experience small tax burdens for a variety of reasons. To the extent the proposed rule does not change how we measure income, the taxpaying public may be surprised at who escapes taxation. For example, a taxpayer holding large amounts of stock shares that have appreciated tremendously during the tax year (perhaps increasing in value by $15 million dollars) has no taxable income from the shares. The tax system does not treat this type of appreciation as current income. Instead, the tax system waits for the shareholder to do something, such as receive a dividend, or sell the stock. Although there are policy reasons underlying this feature of the tax system, it does mean that these stockholders, some of whom the public might have expected would face a larger tax bill, likely would not be impacted by the proposed rule.
For us non-millionaires, does horizontal equity matter and should we be concerned with the proposed changes to the tax code?
This question touches directly upon a subject that my BC Law colleague Kenealy Professor Jim Repetti and I have tackled in an article we have just published examining contemporary discussions of vertical and horizontal equity in the tax literature. Tax scholars often employ these notions of equity to analyze the fairness of a system. Horizontal equity asks whether similar taxpayers are being treated in a similar way, while vertical equity asks whether an appropriate distinction is being made among taxpayers who are different.
We believe that vertical and horizontal equity are the same concept and that this unified equity concept lacks independent meaning. The concept of equity in the tax system is entirely dependent on our particular notion of “distributive justice” – our vision of political philosophy that expresses how resources, goods and opportunity in society should be allocated.
Classic examples of such philosophical perspectives include a Lockean view or a utilitarian one. Simply stated, we don’t know what is fair in the tax system until we decide what to measure in asking whether two taxpayers are the same or different and how to determine the appropriate difference to be made among different taxpayers.
We might decide, for example, to measure whether persons are similar or different by measuring their income or, alternatively, their consumption. But even if we decide to measure “income”, we still need to determine how differences in income should affect the amounts of tax paid. If person “A” has twice the income this year of person “B”, should “A” pay twice the tax (this would be the effect of a “flat” tax rate, e.g., 20 percent)? Should “A” pay more than twice as much tax on the theory that having more income changes “A”’s situation in some relevant way, perhaps by lessening the sting of any tax paid? A progressive rate structure with an initial rate of 10 percent on the first $50,000 of income then a higher rate of 15 percent on income over $50,000 would have this effect.
Framed this way, the question of equity becomes a crucial and fundamental building block of our tax system that should resonate deeply with every taxpayer at every income level.
Much focus has been put on the Taxpayer Protection Pledge in recent and current election cycles. Is such a pledge sustainable over a long period of time? Is it a suitable way to decrease the size of government?
The size and the role of government are legitimate subjects of public debate, and there are a wide range of positions on the question that would produce a viable nation. But there are serious questions about the sensibility of an economic pledge that would bind political leaders without regard to specific circumstances.
Moreover, the pledge operates on only the revenue side of the equation. There is substantial evidence that a commitment not to increase taxes has not had the anticipated effect of decreasing government spending. If the country is committed to a vision of a “smaller” government, it needs to have that conversation in concrete and direct terms: What does “small” mean? What exactly will the government cease to do? Is the country behind that decision?
There are a number of interesting studies in which respondents express a desire for lower taxes and/or smaller government, but then are unable or unwilling to identify any significant part of the government budget or role that they are actually willing to see cut.
Do other countries have such internal pressures to decrease (or maintain) tax levels?
The news coverage of the crisis in the European Union over the Euro and the debt burdens of member countries provides dramatic evidence of the challenges countries face in trying to implement a comprehensive tax system, both in terms of the formal rules and the collection and administration mechanisms.
At the individual taxpayer level, there is frequently little support for politicians who press for tax revenues required to meet the expenditure policies of the state. At the corporate level, the question of tax competition among countries has produced a consistent pressure to reduce corporate taxation lest a country find its corporate tax base leaving in search of more “business friendly” revenue collectors. One sign of the fiscal challenges countries now face is the degree to which their governments have been willing in the past year to consider a variety of reforms, both regulatory and administrative, to increase actual tax revenue.
Corporate tax reform is part of the campaign platform for President Obama’s re-election. Is closing corporate tax loopholes the answer to balance the budget, or is this just a clever sound bite?
It’s hard to object to corporate tax reform – there are a substantial number of corporate provisions in the tax law and the system certainly needs reforming. That said, the question highlights a number of important tensions in the public debate over tax policy.
First, it is difficult to have a comprehensive discussion about specific tax reforms in the time and space typically allocated to these questions in the media and in public discourse more generally. A productive discussion should help separate out several distinct dimensions of tax policy including: the specific policy goals being advocated; the reason why those goals are considered desirable; and an assessment of whether the proposed reforms are likely to have the expected and intended effect.
Tackling even one of these elements can be more complicated than it appears initially. For example, if you favor a policy of increasing (or decreasing) the tax on dividends because you believe that investment income is inadequately taxed relative to other kinds of income (or overtaxed and creating a disincentive to invest), your policy view is rooted in factual assumptions about how other income is taxed (or about how the economy is responding to the current tax regime). An analysis of proposals for dividend tax reform should document the foundation for any underlying factual assumptions. Although facts are always in dispute, making it clear what those facts are and why they matter is essential.
Second, the question of balancing the budget is really two questions. Should the budget be “balanced,” and what do we mean by that? And which tool(s) can do the job? The first question is a much broader issue of economic policy and a subject of substantial debate in its own right. The second, regarding “tools”, requires us to consider the budget as a reflection of both government spending and government revenue.
To the extent the budget is a problem, both sides must be examined. Looking at revenue, it is certainly possible to collect more in income tax revenue, particularly in certain sectors of the corporate world. How much revenue would be gained would depend on the specific proposals and on any assumptions made about how business responds to taxation. But such reforms would be unlikely to have the salutary effect on the budget that advocates might imply.
But does that make reform suggestions simply “sound bites”? I would argue no. Corporate tax policy should be rational. To the extent corporate taxpayers are accurately seen as avoiding the kind of tax burden that other taxpayers face, the integrity of the entire system may be undermined. This risk is heightened if the corporate “advantages” in the tax system are not simply a matter of chance, but instead are linked to successful “lobbying.”
Being a tax expert, what is the most common question you get during tax season?
Perhaps surprisingly, there is no “most common” question that I am asked during the tax season. If I had to identify a commonality though, it would be that most questions are asked “for a relative.” But unlike the classic question “asked for a friend” to avoid embarrassment, in the tax context I find that often the person asking the question has some sense of the answer, but is seeking confirmation in order to persuade a relative on the proper reporting position for their tax return.
In this regard, the increased availability of IRS information through the Internet gives taxpayers the opportunity to access IRS publications on a wide range of topics. It’s not always easy reading, but the databases are comprehensive and quick to search.