Chart 1a Inflation, 1965 - 1988

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Chart 1a Inflation, 1965 - 1988
Quarterly data from 1965-I to 1988-IV.
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Chart 1b Unemployment Rate, 1965 - 1988
Monthly data from Jan. 1965 to Dec. 1988.
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Chart 1c Interest Rate, 1965 - 1988
Monthly data from Jan. 1965 to Dec. 1988.
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Because of deadweight loss and distortions, it
costs the country more than a dollar to buy an
added dollar of government goods and
services (about 2.50 - 3.00 total on average,
with some taxes costing much more).
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Cost direct budget outlay economic damage of
tax and other distortions. (All at the margin.)
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Chart 8 Average And Marginal Tax Rate Illustration Chart 8 Average And Marginal Tax Rate Illustration Chart 8 Average And Marginal Tax Rate Illustration
Illustrative Tax Schedule Illustrative Tax Schedule Illustrative Tax Schedule
Income Tax Tax
0 to 10,000 0 (exempt amount) 0 (exempt amount)
10,000 to 30,000 20 of amount over 10,000 20 of amount over 10,000
Over 30,000 4,000 plus 40 of amount over 30,000 4,000 plus 40 of amount over 30,000
Income, Tax, and Rates of Two Taxpayers Income, Tax, and Rates of Two Taxpayers Income, Tax, and Rates of Two Taxpayers
Taxpayer A Taxpayer B
Income 20,000 50,000
Tax 2,000 12,000
Average Rate 10 (2,000/20,000) 24 (12,000/50,000)
Marginal Rate 20 40
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Chart 9a Individual Income Taxs Rate Schedules Chart 9a Individual Income Taxs Rate Schedules Chart 9a Individual Income Taxs Rate Schedules Chart 9a Individual Income Taxs Rate Schedules Chart 9a Individual Income Taxs Rate Schedules Chart 9a Individual Income Taxs Rate Schedules Chart 9a Individual Income Taxs Rate Schedules Chart 9a Individual Income Taxs Rate Schedules
2009 Tax Rate Schedules 2009 Tax Rate Schedules 2009 Tax Rate Schedules 2009 Tax Rate Schedules 2009 Tax Rate Schedules 2009 Tax Rate Schedules 2009 Tax Rate Schedules 2009 Tax Rate Schedules
Single Schedule X If taxable income is The tax is of the Over But not amount over over Single Schedule X If taxable income is The tax is of the Over But not amount over over Single Schedule X If taxable income is The tax is of the Over But not amount over over Single Schedule X If taxable income is The tax is of the Over But not amount over over Head of Household Schedule Z If taxable income is The tax is of the Over But not amount over over Head of Household Schedule Z If taxable income is The tax is of the Over But not amount over over Head of Household Schedule Z If taxable income is The tax is of the Over But not amount over over Head of Household Schedule Z If taxable income is The tax is of the Over But not amount over over
0 8,350 33,950 82,250 171,550 372,950 8,350 33,950 82,250 171,550 372,950 ---------- ------------- 10 835.00 15 4,675.00 25 16,750.00 28 41,754.00 33 108,216.00 35 0 8,350 33,950 82,250 171,550 372,950 0 11,950 45,500 117,450 190,200 372,950 11,950 45,500 117,450 190,200 372,950 ---------- ------------- 10 1,195.00 15 6,227.50 25 24,215.00 28 44,585.00 33 104,892.50 35 0 11,950 45,500 117,450 190,200 372,950
Married filing jointly Schedule Y-1 If taxable income is The tax is of the Over But not amount over over Married filing jointly Schedule Y-1 If taxable income is The tax is of the Over But not amount over over Married filing jointly Schedule Y-1 If taxable income is The tax is of the Over But not amount over over Married filing jointly Schedule Y-1 If taxable income is The tax is of the Over But not amount over over Married filing separately Schedule Y-2 If taxable income is The tax is of the Over But not amount over over Married filing separately Schedule Y-2 If taxable income is The tax is of the Over But not amount over over Married filing separately Schedule Y-2 If taxable income is The tax is of the Over But not amount over over Married filing separately Schedule Y-2 If taxable income is The tax is of the Over But not amount over over
0 16,700 67,900 137,050 208,850 372,950 16,700 67,900 137,050 208,850 372,950 ---------- ------------- 10 1,670.00 15 9,350.00 25 26,637.50 28 46,741.50 33 100,601.00 35 0 16,700 67,900 137,050 208,850 372,950 0 8,350 33,950 68,525 104,425 186,475 8,350 33,950 68,525 104,425 186,475 ---------- ------------- 10 835.00 15 4,675.00 25 13,318.75 28 23,370.75 33 50,447.25 35 0 8,350 33,950 68,525 104,425 186,475
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Chart 13The Kennedy and Reagan Tax Cuts

• The Kennedy rate cuts were roughly the same
  percentage rate reductions
• across the board, but rewards rose most where
  rates were highest
• Top tax rate cut from 91 to 70.
• After-tax reward rose from 9 to 30, up 230.
• Bottom tax rate cut from 20 to 14.
• After-tax reward rose from 80 to 86, up 7.5.
• Similarly for the Reagan Tax cuts
• Top tax rate cut from 70 to 50.
• After-tax reward rose from 30 to 50, up 67.
• Bottom tax rate cut from 14 to 11.
• After-tax reward rose from 86 to 89, up 3.5.
• In both cases, a greater response by upper-income
  taxpayers raised the total share of taxes they
  paid.

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Chart 13The Kennedy and Reagan Tax Cuts

• The Kennedy rate cuts were roughly the same
  percentage rate reductions
• across the board, but rewards rose most where
  rates were highest
• Top tax rate cut from 91 to 70.
• After-tax reward rose from 9 to 30, up 230.
• Bottom tax rate cut from 20 to 14.
• After-tax reward rose from 80 to 86, up 7.5.
• Similarly for the Reagan Tax cuts
• Top tax rate cut from 70 to 50.
• After-tax reward rose from 30 to 50, up 67.
• Bottom tax rate cut from 14 to 11.
• After-tax reward rose from 86 to 89, up 3.5.
• In both cases, a greater response by upper-income
  taxpayers raised the total share of taxes they
  paid.

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Tax Rate and Tax Base interact Both Matter!True
Versus Statutory Marginal Tax Rates
True Marginal Tax Rate Statutory Marginal Tax Rate x Incremental Tax Base
True Marginal Tax Rate Statutory Marginal Tax Rate x Actual Incremental Income

If the tax system hits the same income more than
once, or if tax rules overstate actual income,
then the effective marginal tax rate may be much
higher than the apparent statutory marginal tax
rate.
Example Suppose the Statutory Marginal Tax Rate
is 25, but each extra 1.00 of income is
overcounted as 1.50. Then the True Marginal Tax
Rate is 37.5 (37.5 25 x 1.5).
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Chart 18 Effective Federal Marginal Tax Rates for Social Security Recipients Chart 18 Effective Federal Marginal Tax Rates for Social Security Recipients Chart 18 Effective Federal Marginal Tax Rates for Social Security Recipients Chart 18 Effective Federal Marginal Tax Rates for Social Security Recipients Chart 18 Effective Federal Marginal Tax Rates for Social Security Recipients
Marginal tax rates as Social Security benefits become taxable, in tier 1 (50 phase-in range) or tier 2 (85 phase-in range) Marginal tax rates as Social Security benefits become taxable, in tier 1 (50 phase-in range) or tier 2 (85 phase-in range) Marginal tax rates as Social Security benefits become taxable, in tier 1 (50 phase-in range) or tier 2 (85 phase-in range) Marginal tax rates as Social Security benefits become taxable, in tier 1 (50 phase-in range) or tier 2 (85 phase-in range)
Statutory Income Tax Rate Income from savings, pensions Income from savings, pensions Income from savings, pensions Income from savings, pensions
Statutory Income Tax Rate Tier 1 (150 of statutory income tax rate) Tier 1 (150 of statutory income tax rate) Tier 2 (185 of statutory income tax rate) Tier 2 (185 of statutory income tax rate)
10 (Current Law) 15 15 NA NA
15 22.5 22.5 27.8 27.8
25 (Current Law) NA NA 46.3 46.3
28 (Pre-2001 Law) NA NA 51.8 51.8
Statutory Income Tax Rate Wage Income Wage Income Wage Income Wage Income
Statutory Income Tax Rate If not subject to earnings test If not subject to earnings test Subject to earnings test if between ages 62 and normal retirement age Subject to earnings test if between ages 62 and normal retirement age
Statutory Income Tax Rate Tier 1 Tier 2 Tier 1 Tier 2
10 (Current Law) 28.1 NA 74.3 NA
15 35.0 39.9 79.4 83.0
25 (Current Law) NA 57.1 NA 95.5
28 (Pre-2001 Law) NA 62.3 NA 99.3
Add 4 to 8 percentage points for typical state income tax rates for states that follow federal taxation of benefits. Tax-exempt bond income is included in determining whether income is over the threshold for taxing benefits. An additional dollar adds 0.50 or 0.85 to taxable income, producing effective tax rates of 50 or 85 of the statutory rate on the supposedly exempt income. Assumes self-employed payroll tax, and allows for deduction of "employer's" half of payroll tax from AGI and effect of deduction on modified adjusted gross income used to determine amount of Social Security benefits subject to income taxation. Figures would be very similar for employee beneficiaries after adding the employee and employer payroll tax rate adjusted for income tax deduction of employer's half at employer's income tax rate. Add 4 to 8 percentage points for typical state income tax rates for states that follow federal taxation of benefits. Tax-exempt bond income is included in determining whether income is over the threshold for taxing benefits. An additional dollar adds 0.50 or 0.85 to taxable income, producing effective tax rates of 50 or 85 of the statutory rate on the supposedly exempt income. Assumes self-employed payroll tax, and allows for deduction of "employer's" half of payroll tax from AGI and effect of deduction on modified adjusted gross income used to determine amount of Social Security benefits subject to income taxation. Figures would be very similar for employee beneficiaries after adding the employee and employer payroll tax rate adjusted for income tax deduction of employer's half at employer's income tax rate. Add 4 to 8 percentage points for typical state income tax rates for states that follow federal taxation of benefits. Tax-exempt bond income is included in determining whether income is over the threshold for taxing benefits. An additional dollar adds 0.50 or 0.85 to taxable income, producing effective tax rates of 50 or 85 of the statutory rate on the supposedly exempt income. Assumes self-employed payroll tax, and allows for deduction of "employer's" half of payroll tax from AGI and effect of deduction on modified adjusted gross income used to determine amount of Social Security benefits subject to income taxation. Figures would be very similar for employee beneficiaries after adding the employee and employer payroll tax rate adjusted for income tax deduction of employer's half at employer's income tax rate. Add 4 to 8 percentage points for typical state income tax rates for states that follow federal taxation of benefits. Tax-exempt bond income is included in determining whether income is over the threshold for taxing benefits. An additional dollar adds 0.50 or 0.85 to taxable income, producing effective tax rates of 50 or 85 of the statutory rate on the supposedly exempt income. Assumes self-employed payroll tax, and allows for deduction of "employer's" half of payroll tax from AGI and effect of deduction on modified adjusted gross income used to determine amount of Social Security benefits subject to income taxation. Figures would be very similar for employee beneficiaries after adding the employee and employer payroll tax rate adjusted for income tax deduction of employer's half at employer's income tax rate. Add 4 to 8 percentage points for typical state income tax rates for states that follow federal taxation of benefits. Tax-exempt bond income is included in determining whether income is over the threshold for taxing benefits. An additional dollar adds 0.50 or 0.85 to taxable income, producing effective tax rates of 50 or 85 of the statutory rate on the supposedly exempt income. Assumes self-employed payroll tax, and allows for deduction of "employer's" half of payroll tax from AGI and effect of deduction on modified adjusted gross income used to determine amount of Social Security benefits subject to income taxation. Figures would be very similar for employee beneficiaries after adding the employee and employer payroll tax rate adjusted for income tax deduction of employer's half at employer's income tax rate.
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Chart 19 Multiple Taxation of Saving One Tax on Consumption, Four Taxes on Saving
Layer 1 Tax on Earnings Income is taxed when earned. If it is used for consumption, there is usually no further federal tax.
Layer 2 Personal Income Tax on Returns If the income is saved, the returns are taxed as interest, dividends, capital gains, or non-corporate business profits.
Layer 3 Corporate Income Tax If the saving is in corporate stock, the corporate tax hits the income before it is either paid out to shareholders or reinvested to boost future earnings.
Layer 4 Transfer (Estate and Gift) Tax Another tax on already taxed assets.
(Similar taxes at the state and local levels increase the multiple taxation.)
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Chart 20a Income Tax Bias Against Saving and Two Cures Chart 20a Income Tax Bias Against Saving and Two Cures Chart 20a Income Tax Bias Against Saving and Two Cures Chart 20a Income Tax Bias Against Saving and Two Cures Chart 20a Income Tax Bias Against Saving and Two Cures Chart 20a Income Tax Bias Against Saving and Two Cures Chart 20a Income Tax Bias Against Saving and Two Cures Chart 20a Income Tax Bias Against Saving and Two Cures Chart 20a Income Tax Bias Against Saving and Two Cures
Pre-tax income needed to have either (a) 100 for consumption after taxes or (b) a 100 bond paying 4 in interest after taxes. Ordinary Income Tax Treatment, IRA-type Treatment, or Tax Exempt Bond Treatment. Pre-tax income needed to have either (a) 100 for consumption after taxes or (b) a 100 bond paying 4 in interest after taxes. Ordinary Income Tax Treatment, IRA-type Treatment, or Tax Exempt Bond Treatment. Pre-tax income needed to have either (a) 100 for consumption after taxes or (b) a 100 bond paying 4 in interest after taxes. Ordinary Income Tax Treatment, IRA-type Treatment, or Tax Exempt Bond Treatment. Pre-tax income needed to have either (a) 100 for consumption after taxes or (b) a 100 bond paying 4 in interest after taxes. Ordinary Income Tax Treatment, IRA-type Treatment, or Tax Exempt Bond Treatment. Pre-tax income needed to have either (a) 100 for consumption after taxes or (b) a 100 bond paying 4 in interest after taxes. Ordinary Income Tax Treatment, IRA-type Treatment, or Tax Exempt Bond Treatment. Pre-tax income needed to have either (a) 100 for consumption after taxes or (b) a 100 bond paying 4 in interest after taxes. Ordinary Income Tax Treatment, IRA-type Treatment, or Tax Exempt Bond Treatment. Pre-tax income needed to have either (a) 100 for consumption after taxes or (b) a 100 bond paying 4 in interest after taxes. Ordinary Income Tax Treatment, IRA-type Treatment, or Tax Exempt Bond Treatment. Pre-tax income needed to have either (a) 100 for consumption after taxes or (b) a 100 bond paying 4 in interest after taxes. Ordinary Income Tax Treatment, IRA-type Treatment, or Tax Exempt Bond Treatment. Pre-tax income needed to have either (a) 100 for consumption after taxes or (b) a 100 bond paying 4 in interest after taxes. Ordinary Income Tax Treatment, IRA-type Treatment, or Tax Exempt Bond Treatment.
Pre-tax income Tax After-tax income Interest on saving Tax on interest After-tax interest increase in cost of activity due to tax
No income tax exists Income consumed 100 0 100 -- -- -- --
No income tax exists Income saved 100 0 100 4 0 4 --
Ordinary income tax levied at 20 rate Income consumed 125 25 100 -- -- -- 25
Ordinary income tax levied at 20 rate Income saved 156.25 31.25 125 5 1 4 56.25
IRA-type treatment amounts saved tax deductible, returns on saving taxed IRA-type treatment amounts saved tax deductible, returns on saving taxed 125 0 125 5 1 4 25
Tax-exempt bond treatment no deduction of saving, returns not taxed Tax-exempt bond treatment no deduction of saving, returns not taxed 125 25 100 4 0 4 25
The 20 income tax, by taxing income when first earned and taxing the return on saving, raises the cost of consumption by 25 and the cost of obtaining additional future income by 56.25, more than twice the increase in the cost of consumption. Under IRA or tax exempt bond treatment, the tax raises the cost of obtaining additional future income by 25, the same penalty as on consumption. The 20 income tax, by taxing income when first earned and taxing the return on saving, raises the cost of consumption by 25 and the cost of obtaining additional future income by 56.25, more than twice the increase in the cost of consumption. Under IRA or tax exempt bond treatment, the tax raises the cost of obtaining additional future income by 25, the same penalty as on consumption. The 20 income tax, by taxing income when first earned and taxing the return on saving, raises the cost of consumption by 25 and the cost of obtaining additional future income by 56.25, more than twice the increase in the cost of consumption. Under IRA or tax exempt bond treatment, the tax raises the cost of obtaining additional future income by 25, the same penalty as on consumption. The 20 income tax, by taxing income when first earned and taxing the return on saving, raises the cost of consumption by 25 and the cost of obtaining additional future income by 56.25, more than twice the increase in the cost of consumption. Under IRA or tax exempt bond treatment, the tax raises the cost of obtaining additional future income by 25, the same penalty as on consumption. The 20 income tax, by taxing income when first earned and taxing the return on saving, raises the cost of consumption by 25 and the cost of obtaining additional future income by 56.25, more than twice the increase in the cost of consumption. Under IRA or tax exempt bond treatment, the tax raises the cost of obtaining additional future income by 25, the same penalty as on consumption. The 20 income tax, by taxing income when first earned and taxing the return on saving, raises the cost of consumption by 25 and the cost of obtaining additional future income by 56.25, more than twice the increase in the cost of consumption. Under IRA or tax exempt bond treatment, the tax raises the cost of obtaining additional future income by 25, the same penalty as on consumption. The 20 income tax, by taxing income when first earned and taxing the return on saving, raises the cost of consumption by 25 and the cost of obtaining additional future income by 56.25, more than twice the increase in the cost of consumption. Under IRA or tax exempt bond treatment, the tax raises the cost of obtaining additional future income by 25, the same penalty as on consumption. The 20 income tax, by taxing income when first earned and taxing the return on saving, raises the cost of consumption by 25 and the cost of obtaining additional future income by 56.25, more than twice the increase in the cost of consumption. Under IRA or tax exempt bond treatment, the tax raises the cost of obtaining additional future income by 25, the same penalty as on consumption. The 20 income tax, by taxing income when first earned and taxing the return on saving, raises the cost of consumption by 25 and the cost of obtaining additional future income by 56.25, more than twice the increase in the cost of consumption. Under IRA or tax exempt bond treatment, the tax raises the cost of obtaining additional future income by 25, the same penalty as on consumption.
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Chart 20b Equivalence Of Saving Deferred And Returns Exempt Tax On Saving Contrast With Ordinary Income Tax (Illustration assumes 7.2 pre-tax interest rate, 20 tax rate, and 10-year investment) Chart 20b Equivalence Of Saving Deferred And Returns Exempt Tax On Saving Contrast With Ordinary Income Tax (Illustration assumes 7.2 pre-tax interest rate, 20 tax rate, and 10-year investment) Chart 20b Equivalence Of Saving Deferred And Returns Exempt Tax On Saving Contrast With Ordinary Income Tax (Illustration assumes 7.2 pre-tax interest rate, 20 tax rate, and 10-year investment) Chart 20b Equivalence Of Saving Deferred And Returns Exempt Tax On Saving Contrast With Ordinary Income Tax (Illustration assumes 7.2 pre-tax interest rate, 20 tax rate, and 10-year investment)
Tax Treatment Saving Deferred Returns Exempt Ordinary Income Tax
Pretax earnings to be saved 100 100 100
Tax on saving 0 20 20
Amount saved 100 80 80
Is interest on inside build-up taxed? No, 7.2 reinvested No, 7.2 reinvested Yes, 5.76 reinvested
Account after 10 years 200 160 140
Tax due on withdrawal 40 0 0
After-tax spendable balance 160 160 140
Cost to saver of ordinary tax treatment --- --- 20 ( 160 140) (a third of the interest)
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Chart 22 Multiple Taxation of Corporate Income Chart 22 Multiple Taxation of Corporate Income Chart 22 Multiple Taxation of Corporate Income Chart 22 Multiple Taxation of Corporate Income
(a) Retained Earnings, Pre-2003 Act (b) Dividend Payout, Pre-2001 Act (c) Retained Earnings and Dividends, 2003 Act
1) Corporate Income 1.00 1.00 1.00
2) Corporate tax at top rate 0.35 0.35 0.35
3) After-tax corporate income Either retained, raising stock price (columns (a), (c)), or paid as dividend (col. (b), (c)) 0.65 0.65 0.65
4) Individual income tax at top rate (dividends as ordinary income, retained earnings as capital gain) 0.13 (tax rate 20) 0.2574 (tax rate 39.6) 0.0975 (tax rate 15)
5) Total tax 0.48 0.6074 0.4475
6) Total tax rate 48 60.74 44.75
7) Income left to shareholder 0.52 0.3926 0.5525
Top corporate rate excludes corporate surtaxes, and top individual rate ignores phase-outs of exemptions and deductions and taxation of Social Security, which may push effective top tax rates higher than statutory rates. Retained earnings are assumed to trigger a long-term capital gain with a maximum rate of 20 or 15. Short-term gains are taxed at ordinary tax rates. Top corporate rate excludes corporate surtaxes, and top individual rate ignores phase-outs of exemptions and deductions and taxation of Social Security, which may push effective top tax rates higher than statutory rates. Retained earnings are assumed to trigger a long-term capital gain with a maximum rate of 20 or 15. Short-term gains are taxed at ordinary tax rates. Top corporate rate excludes corporate surtaxes, and top individual rate ignores phase-outs of exemptions and deductions and taxation of Social Security, which may push effective top tax rates higher than statutory rates. Retained earnings are assumed to trigger a long-term capital gain with a maximum rate of 20 or 15. Short-term gains are taxed at ordinary tax rates. Top corporate rate excludes corporate surtaxes, and top individual rate ignores phase-outs of exemptions and deductions and taxation of Social Security, which may push effective top tax rates higher than statutory rates. Retained earnings are assumed to trigger a long-term capital gain with a maximum rate of 20 or 15. Short-term gains are taxed at ordinary tax rates.
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CORPORATE TAX INTEGRATION
DIVIDEND PAID DEDUCTION FOR CORPORATIONS (PARTIAL INTEGRATION)
SHAREHOLDER TAX CREDIT FOR CORPORATE TAX PAID ON DIVIDENDS (GROSS-UP METHOD, PARTIAL INT.)
PARTNERSHIP METHOD (PASS-THROUGH OF CORPORATE INCOME TO SHAREHOLDER FOR TAX PURPOSES, WITH WITHOLDING PAID BY CORP.)
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Chart 23 Present Value of Current Law Capital Consumption Allowances per Dollar of Investment Compared to Expensing (First-Year Write-Off) Chart 23 Present Value of Current Law Capital Consumption Allowances per Dollar of Investment Compared to Expensing (First-Year Write-Off) Chart 23 Present Value of Current Law Capital Consumption Allowances per Dollar of Investment Compared to Expensing (First-Year Write-Off) Chart 23 Present Value of Current Law Capital Consumption Allowances per Dollar of Investment Compared to Expensing (First-Year Write-Off) Chart 23 Present Value of Current Law Capital Consumption Allowances per Dollar of Investment Compared to Expensing (First-Year Write-Off) Chart 23 Present Value of Current Law Capital Consumption Allowances per Dollar of Investment Compared to Expensing (First-Year Write-Off) Chart 23 Present Value of Current Law Capital Consumption Allowances per Dollar of Investment Compared to Expensing (First-Year Write-Off) Chart 23 Present Value of Current Law Capital Consumption Allowances per Dollar of Investment Compared to Expensing (First-Year Write-Off) Chart 23 Present Value of Current Law Capital Consumption Allowances per Dollar of Investment Compared to Expensing (First-Year Write-Off) Chart 23 Present Value of Current Law Capital Consumption Allowances per Dollar of Investment Compared to Expensing (First-Year Write-Off)
Asset lives Asset lives 3 Yrs 5 yrs 7 yrs 10 yrs 15 yrs 20 yrs 27.5 yrs 39 yrs
Present value of first-year write-off of 1 of investment Present value of first-year write-off of 1 of investment 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00
Present value of current law write-off of 1 if inflation rate is 0 0.96 0.94 0.91 0.88 0.80 0.74 0.65 0.55
Present value of current law write-off of 1 if inflation rate is 3 0.94 0.89 0.85 0.79 0.67 0.59 0.47 0.37
Present value of current law write-off of 1 if inflation rate is 5 0.92 0.86 0.81 0.74 0.60 0.52 0.39 0.30
Assumes a 3.5 percent real discount rate, 3-20 year assets placed in service in first quarter of the year, 27.5 - 39 year assets placed in service in January. Assumes a 3.5 percent real discount rate, 3-20 year assets placed in service in first quarter of the year, 27.5 - 39 year assets placed in service in January. Assumes a 3.5 percent real discount rate, 3-20 year assets placed in service in first quarter of the year, 27.5 - 39 year assets placed in service in January. Assumes a 3.5 percent real discount rate, 3-20 year assets placed in service in first quarter of the year, 27.5 - 39 year assets placed in service in January. Assumes a 3.5 percent real discount rate, 3-20 year assets placed in service in first quarter of the year, 27.5 - 39 year assets placed in service in January. Assumes a 3.5 percent real discount rate, 3-20 year assets placed in service in first quarter of the year, 27.5 - 39 year assets placed in service in January. Assumes a 3.5 percent real discount rate, 3-20 year assets placed in service in first quarter of the year, 27.5 - 39 year assets placed in service in January. Assumes a 3.5 percent real discount rate, 3-20 year assets placed in service in first quarter of the year, 27.5 - 39 year assets placed in service in January. Assumes a 3.5 percent real discount rate, 3-20 year assets placed in service in first quarter of the year, 27.5 - 39 year assets placed in service in January. Assumes a 3.5 percent real discount rate, 3-20 year assets placed in service in first quarter of the year, 27.5 - 39 year assets placed in service in January.
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Chart 24 Expensing Versus Depreciation Depreciation Overstates Taxable Income and Depresses Return on Capital Chart 24 Expensing Versus Depreciation Depreciation Overstates Taxable Income and Depresses Return on Capital Chart 24 Expensing Versus Depreciation Depreciation Overstates Taxable Income and Depresses Return on Capital Chart 24 Expensing Versus Depreciation Depreciation Overstates Taxable Income and Depresses Return on Capital
Expensing (Full Cost Recovery) Expensing (Full Cost Recovery) Depreciation Depreciation
Revenues from machine, present value 115 Revenues from machine, present value 115
Full cost of machine 100 Full cost of machine 100
Full cost write-off for tax purposes (expensing) 100 Allowable depreciation write-off, present value 85
Real profit Taxable profit 15 Taxable profit (exceeds real profit) 30
Tax 5 Tax 10
After-tax income 10 After-tax income 5
Rate of return 10 Rate of return 5
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Chart 26 Marginal Tax Rates On Estates And
Income Contributed To Estates, 2009
90
85
81
80
GST
70
GST
70
60
Estate Tax
GST
Estate Tax
50
Marginal Tax Rate

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Payroll Tax
40
State Income Tax
State Income Tax
30
Estate Tax
Estate Tax
20
Federal
Federal
Income
Income
Tax
10
Tax
0
Estate Tax
Estate Tax and
Tax on a Dollar
Tax on a Dollar
Generation
of Interest
of Wages (self-employed)
Skipping Trust
Left in an Estate
Left in an Estate

45 Estate Tax Rate became effective in 2007.
Assumes married couple in 33 tax bracket, who
are self-employed, with a 6 state income tax.
Computed prior to Estate Tax Repeal, which is now
scheduled for 2010.
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Chart 19 Multiple Taxation of Saving One Tax on Consumption, Four Taxes on Saving
Layer 1 Tax on Earnings Income is taxed when earned. If it is used for consumption, there is usually no further federal tax.
Layer 2 Personal Income Tax on Returns If the income is saved, the returns are taxed as interest, dividends, capital gains, or non-corporate business profits.
Layer 3 Corporate Income Tax If the saving is in corporate stock, the corporate tax hits the income before it is either paid out to shareholders or reinvested to boost future earnings.
Layer 4 Transfer (Estate and Gift) Tax Another tax on already taxed assets.
(Similar taxes at the state and local levels increase the multiple taxation.)
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STEPS TOWARD NEUTRALITY ALL SAVING GETS
DEFERRAL OR RETURNS EXEMPT EQUIVALENT EXPENSING
OF INVESTMENT NO DOUBLE TAX OF CORPORATE
INCOME NO ESTATE AND GIFT TAX.
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TAX BASES OF FOUR NEUTRAL TAXES POINTS OF COLLECTION
NRST -- INCOME LESS SAVING CONSUMPTION (NOT IMPOSED ON INVESTMENT GOODS). POINT OF SALE.
VAT -- INCOME LESS SAVING CONSUMPTION (INVESTMENT EXPENSED). AT BUSINESSES, IN STAGES.
CASH FLOW TAX -- INCOME LESS SAVING CONSUMPTION. (INVESTMENT EXPENSED) INDIVIDUAL TAX FORM.
FLAT TAX -- INCOME LESS INVESTMENT CONSUMPTION. CAPITAL INCOME ON BUSINESS OR PROPRIETOR FORM (INVESTMENT EXPENSED) WAGES ON INDIVIDUAL FORM.
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Elements of Neutral Taxes

• All treat saving neutrally vs. consumption.
• All employ expensing instead of depreciation.
• All are territorial.
• All have the same basic tax base.
• Differ mainly as to point of collection.

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Chart 27 Inflow Outflow Tax
Form 1040 Individual Tax Form, Inflow Outflow Tax Form 1040 Individual Tax Form, Inflow Outflow Tax
1. Sum of Labor compensation, Pension receipts, Taxable Social security, Transfer payments (from W-2 forms). 33,000
2. Net saving () or net withdrawals (-) (from Schedule B) 3,000
3. If line 2 is net saving (), subtract dollar amount from line 1 if net withdrawal (-), add the dollar amount to line 1. 30,000
4. Other itemized deductions from Schedule A 10,000
5. Subtract line 4 from line 3. 20,000
6. Personal allowance times number of taxpayers and dependents 5,000 x 2 10,000
7. Subtract line 6 from line 5. This is your taxable income. 10,000
8. Tax from table (or, line 7 times 20). 2,000
9. Withholding, from W-2, plus estimated tax payments. 2,100
10. Amount due () or amount overpaid (-) (line 8 less line 9). If amount is due, pay Internal Revenue Service. - 100
11. If overpaid, fill in Amount to be refunded 100 or Amount to be applied to estimated tax .
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Chart 27, cont. Inflow Outflow Tax
Inflow Outflow TaxSchedule A, Itemized Deductions Inflow Outflow TaxSchedule A, Itemized Deductions
1. Sum of individual payroll tax (from W-2), state and local income tax withheld (from W-2) and estimated state and local tax less refunds from previous year, and local property taxes. 5,000
2. Gifts, contributions. 1,000
3. Qualified tuition, training expenses. 4,000
4. Total. Enter on Form 1040, line 4. 10,000
Inflow Outflow TaxSchedule B, Saving Inflow Outflow TaxSchedule B, Saving
List net saving () or withdrawals (-) from financial institutions reported on 1099 forms
First National Bank -1,000
Merrill Paine Schwab 4,000
Total (if greater than zero, this is net saving if less than zero, a net withdrawal). Enter on Form 1040, line 2. 3,000
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Why it Matters

• History tells us that
• When we have moved toward a neutral tax with
  lower rates, the economy has boomed.
• When we have increased tax biases the economy has
  faltered.
• When we have wasted tax cuts on
  non-growth-related rebates, nothing good has
  happened.

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Objective Growth

• Neutral taxation is best for growth. It can
  yield
• More saving, investment, and growth.
  Potentially
• Trillions of dollars of added capital.
• Millions of added jobs and higher wages.
• Thousands of dollars in added family income.
• U.S. would become a jobs and investment magnet.

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Objective Simplicity

• Neutral taxes are much simpler, even if collected
  on individual tax forms
• No double taxation.
• No limits on savings plans. One universal plan,
  not dozens.
• No separate taxation of capital gains.
• No depreciation schedules.
• No foreign tax and tax credit.
• No phase-outs of exemptions, credits, deductions.

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Objective Fairness

• Consumption is a fairer tax base than income it
  respects the effort of people who work and save.
• Neutral taxes can be made progressive to shelter
  the poor.
• There is no need to tax saving and investment
  more harshly than consumption to achieve
  progressivity.
• The simpler, clearer neutral tax would be seen to
  be fair.

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Objective Visibility

• Only people pay taxes.
• Businesses and things don't pay tax.
• Taxes are best levied on individuals.
• Voters need to see what government costs.
• Everyone who can do so should pay something
  toward the cost of government.
• Simplicity is no excuse for dropping tens of
  millions of people from the tax rolls.

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Recap

• Tax reform is about
• Getting the tax base right.
• Setting rates that cover the amount of government
  that people want to have.
• Raising revenue with less damage to the economy.
• Informing voters of the price they pay for
  govern-ment so that they can make informed
  decisions about how much government activity to
  support.

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The Circular Flow Diagram
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BASIC MACRO EQUATION
INCOME ( WHAT WE PRODUCE) EQUALS HOW WE USE THE INCOME
C I G (X - M) C S T
Where C consumption, I investment, G
government, X exports, M imports, S saving,
T taxes
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IN AN ISOLATED PRIVATE ECONOMY WITH NO
GOVERNMENT, SAVING INVESTMENT
C I C S
I S
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IN AN OPEN PRIVATE ECONOMY (WITH NO
GOVERNMENT) DOMESTIC AND FOREIGN SAVING CAN COVER
INVESTMENT OR EXCESS SAVING LENT ABROAD FUNDS A
TRADE SURPLUS
C I (X - M) C S
I I (X M) S (M - X) S
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IN AN ISOLATED ECONOMY WITH GOVERNMENT SAVING
MUST COVER INVESTMENT AND BUDGET DEFICIT
C I G C S T
I G S T
G - T S - I
I (G - T). S
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IN AN OPEN ECONOMY WITH GOVERNMENT, DOMESTIC AND
FOREIGN SAVING MUST COVER INVESTMENT AND BUDGET
DEFICIT
C I G (X - M) C S T
I (G - T) S (M - X)
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BASIC GDP EQUATION RECAP

• Domestic
• Y CIG CST
• S I(G-T) or (S-I) (G-T)
• Saving covers investment and the govt deficit.
• With rest of world
• Y CIG(X-M) CST
• S I(G-T)(X-M) or (S-I) (G-T)(X-M)
• If saving gt investment and govt. def., we have a
  balance of payments surplus.

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Current and Capital Accounts

• What we sell
• Exports of goods services
• U.S. financial instruments real property

• What we buy
• Imports of goods services
• Foreign financial instruments real property

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Current and Capital Accounts, Contd.

• Exports Imports of goods services
  or
• Current acct. surplus

• U.S. lending abroad -Foreign loans to U.S.
  or
• Capital account deficit or
• Net capital outflow

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Trade Absolute Advantage
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Trade Comparative Advantage
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GLOBAL VERSUS TERRITORIAL TAXATION

• GLOBAL
• U.S. taxes firms on their domestic income and the
  earnings of their foreign subsidiaries, then
  gives a tax credit for foreign taxes paid. But
  the foreign tax is deferred until the parent
  repatriates the earnings (deferral of foreign
  source income).
• TERRITORIAL
• Almost all other countries tax business activity
  within their borders, and not the earnings of
  their businesses foreign subsidiaries. This
  gives foreign firms a competitive advantage vs.
  U.S. firms trying to operate internationally.

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GLOBAL TAXATION AND CAPITAL FLIGHT

• Does deferral encourage U.S. firms to send
  capital and production abroad?
• Or does the global tax itself trap U.S. capital
  abroad?
• Without deferral, U.S. firms would have to cede
  business to competitors, not bring production
  home.
• Global taxation makes it hard for firms to use
  cash earned abroad to fund U.S. investment.

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BOTTOM LINE ON GLOBAL TAXATION

• Investment in each country is mainly set by its
  own tax and regulatory climate.
• Taxes on capital are largely shifted to labor.
• If U.S. taxes on capital force capital abroad,
  U.S. workers suffer, foreign workers gain.
• More likely, U.S. taxes on capital merely reduce
  capital here we lose, no one gains.

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Please considerEconomics is not the dismal
science --if you have a morbid sense of humor
--and a large trut fund.
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On the other hand ---(Sorry, Im an
economist, its our mantra) ----
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Political science (sic) is rather depressing,
--and actual politics is surely theGreat
Dismal swamp!!!
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