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Toward a Progressive Tax Policy - Bloomberg View

TA X E S

TowardaProgressiveTaxPolicy

JUN3,20148:03AMEDT

ByPeterR.Orszag

aA

InthehooplaoverwhetherThomasPiketty'sdataongrowingglobalinequalityarecorrect,animportantquestionabouthowto
addresstheproblemhasbeenobscured.Pikettydescribeshisownglobalwealthtaxideaasmoreofa"usefulutopia"thanapractical
policysuggestion.Isthereanythingmoreplausiblethatcanbedone?
Twosuggestionscometomind,atleastforU.S.policymakers.Thefirstisaprogressiveconsumptiontax.Thiskindoftaxisalready
embracedbymanyconservativethoughtleadersbecauseitis,comparedwithothertypesoftaxes,economicallyefficient.Butitis
efficientinnosmallpartbecauseitimposesataxonwealth.Peoplehavenowaytoconverttheirmoneyintoanythingtheyconsume
withoutpayingthetax.
AsWilliamGaleandBenjaminHarrisoftheBrookingsInstitutionhavepointedout,theefficiencybenefitsfromaconsumptiontax
occurfromacombinationofeffects,includingimposingaonetimetaxonexistingwealth.Astheynote,thistaxonwealththat
alreadybeenaccumulated"isamajorcomponentoftheefficiencygainsbecauseofthecreationofaconsumptiontax."Thedirtylittle
secretaboutconsumptiontaxesisthattheirputativebenefitscomelargelyfromPiketty'scoreidea:ataxonwealth.
Theinherentproblemwithaconsumptiontax,though,isthatitisregressive,becauselowandmiddleincomepeopleconsumea
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largershareoftheirmoneythanhighincomepeopledo.Sowhileaplainvanillaconsumptiontaxwouldtaxwealth,itwould
exacerbatethecoreproblemthatPikettyisworriedabout.
Thesolutiontothisdilemmaisaprogressiveconsumptiontax,suchastheXtaxproposedbythelatePrincetonUniversityprofessor
DavidBradford.UndertheXtax,wagesaresubjecttoaprogressivetax,andbusinesscashflowistaxedatthehighestwagetaxrate.
Theresultisaconsumptiontaxthatimposeslargerproportionateburdensonhighincomefamiliesthanonlowincomeones.This
versionofaconsumptiontaxwouldmitigatethedistributionalconcernsbutstillimposeasubstantialtaxonexistingwealth.Its
parameterscouldbeadjustedtofocusincreasinglyontheverywealthy,ratherthanthemerelywealthy.AndyettheXtaxhasbeen
promotedbytheconservativeAmericanEnterpriseInstitute,whoseeconomistsaremostunlikelytoembraceasimplewealthtax.
Threecaveatsshouldbenotedfortherecord.First,theAEIeconomistsfavorimposingaconsumptiontaxthatgivesgenerous
transitionrelieftoexistingownersofcapital,substantiallyreducingthetaxoncurrentwealthandalsoattenuatingtheefficiency
benefitsofthereform.Suchreliefisnotanecessarycomponentofthereform,however,andprogressivescouldinsistonminimizing
thetransitionreliefinthenameofeconomicefficiencyandtoaccomplishthetaxonexistingwealth.Second,theXtaxwasnot
originallydesignedtoaddressconcernsaboutthetop0.01percentratherthan,say,thetop10percent,andmodifyingittodoso
wouldrequireastretch,albeitonlyoneaboutparametersratherthan,aswithawealthtax,theentireconstruct.Finally,theAEI
economistsfavorimposingaprogressiveconsumptiontaxasanalternativetoexistingformsoftaxation.Butsuchataxcouldinstead
beaddedtotheexistingsystem.
AnotherideatoaddressgrowingconcentrationsofassetsthatwouldbemorepracticalintheU.S.thanaglobalwealthtaxwouldbeto
shifttheU.S.estatetaxtoaninheritancetax.Thedifferencebetweenthetwoiscrucial:Whileanestatetaximposesthesametax
burdenonbequestsregardlessofhowmanypeoplereceivethemandthereforeregardlessoftheimpactonwealthinequality,an
inheritancetaxcreatesanincentivetosplitlargeestatesupamongalargernumberofbeneficiaries,therebylesseninginequalityover
time.
Considerasanexamplea$50millionestate.Undertheestatetax,that$50millionissubjecttothesametaxregardlessofwhetherit
isbequeathedentirelytoonepersonordispersedamong10.Underaninheritancetax,bycontrast,the$50millioninheritedbyone
personintheformercasewouldbetaxedatamuchhigherratethanthe$5millioninheritedbyeachof10peopleinthelatter.
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NeitheraprogressiveconsumptiontaxnoraninheritancetaxmaybepoliticallyviableintheU.S.atthemoment,buteverythingin
lifeisrelative.Comparedwithaglobalwealthtax,theyseememinentlydoable.
ThiscolumndoesnotnecessarilyreflecttheopinionofBloombergView'seditorialboardorBloombergLP,itsownersandinvestors.
Tocontacttheauthoronthisstory:
PeterROrszagatporszag3@bloomberg.net
Tocontacttheeditoronthisstory:
MaryDuenwaldatmduenwald@bloomberg.net

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