Capital Taxation in the 21st Century
Alan J. Auerbach
April 15, 2015
The Setting: Two Economic
Challenges
• Increasing Inequality
The Setting: Two Economic
Challenges
• Increasing Inequality
• Increasing Fiscal Pressure
Increasing Inequality
Top 1% Income Share of Total Income (Percent)
20
18
16
14
12
10
8
6
4
2
0
Source: The World Top Incomes Database
Australia
Canada
France
Germany
Italy
Japan
United Kingdom
United States
Top 1% Income Share of Total Income (Percent)
20
18
16
14
12
10
8
6
4
2
0
Source: The World Top Incomes Database
Australia
Canada
France
Germany
Italy
Japan
United Kingdom
United States
Top 1% Income Share of Total Income (Percent)
20
18
16
14
12
10
8
6
4
Australia
Canada
France
Germany
Italy
Japan
United Kingdom
United States
2
0
Source: The World
Top Incomes Database
Shares of Market Income, US, 1979 and 2007
40
35
30
Percent
25
20
15
10
5
0
Lowest
Quintile
Source: CBO (2011)
Second
Quintile
Middle
Quintile
1979
Fourth
Quintile
2007
81st - 99th Top 1 Percent
Percentiles
Shares of Net Income, US, 1979 and 2007
40
35
30
Percent
25
20
15
10
5
0
Lowest
Quintile
Source: CBO (2011)
Second
Quintile
Middle
Quintile
1979
Fourth
Quintile
2007
81st - 99th Top 1 Percent
Percentiles
Inequality: Effects of Taxes and Transfers, US
0.6
Gini Coefficient
Market Income
0.5
+ Transfers
+ Transfers - Taxes
0.4
0.3
1979
Source: CBO (2011)
1982
1985
1988
1991
1994
1997
2000
2003
2006
US Life Expectancy at Age 50 by Lifetime
Earnings, Males
45
40
35
30
25
20
15
10
5
0
Quintile 1
Quintile 2
Quintile 3
1930 cohort
Source: NAS (forthcoming)
Quintile 4
1960 cohort
Quintile 5
US Life Expectancy at Age 50 by Lifetime
Earnings, Females
45
40
35
30
25
20
15
10
5
0
Quintile 1
Quintile 2
Quintile 3
1930 cohort
Source: NAS (forthcoming)
Quintile 4
1960 cohort
Quintile 5
Source: Stewart et al. (2015)
Increasing Fiscal Pressure
Net General Government Debt, 2007 and 2014
(Percent of GDP)
160
140
120
100
80
60
40
20
0
Australia
Canada
France
Germany
Italy
-20
Source: IMF World
Economic Outlook Database
2007
2014
Japan
United
Kingdom
United
States
Old-Age Dependency Ratios, 2015 and 2050
0.9
0.8
0.7
0.6
0.5
0.4
0.3
0.2
0.1
0
Australia
Canada
Source: US Census Bureau,
International Data Base
France
Germany
2015
Italy
2050
Japan
United
Kingdom
United
States
Fiscal Gaps, 60% Terminal Debt-GDP Ratio
12
10
Percent of GDP
8
6
4
2
0
Australia Canada
-2
-4
Source: Auerbach (2015)
France Germany
Italy
Japan
United
United
Kingdom States
The Setting: Two Economic
Challenges
• Increasing Inequality
• Increasing Fiscal Pressure
The Setting: Two Economic
Challenges
• Increasing Inequality
• Increasing Fiscal Pressure
• A logical solution: progressive tax increases
and expenditure reductions
The Setting: Two Economic
Challenges
• Increasing Inequality
• Increasing Fiscal Pressure
• A logical solution: progressive tax increases
and expenditure reductions
– Particular focus on taxation of capital income and
wealth, as wealth more concentrated than income
The Setting: Two Economic
Challenges
• Increasing Inequality
• Increasing Fiscal Pressure
• A logical solution: progressive tax increases
and expenditure reductions
– Particular focus on taxation of capital income and
wealth, as wealth more concentrated than income
– But another major challenge stands in the way
Statutory Corporate Tax Rates
70
60
Percent
50
Australia
Canada
France
Germany
Italy
Japan
United Kingdom
United States
40
30
20
10
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
2011
2013
0
Source: OECD Tax Database
Statutory Corporate Tax Rates
70
60
Percent
50
40
G-7 Maximum
G-7 Median
G-7 Minimum
30
20
10
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
2011
2013
0
Source: OECD Tax Database
Fighting Back
• Initiatives to reduce tax evasion, particularly
among high-wealth individuals
– US FATCA legislation
• Initiatives to reduce corporate shifting of
income and expenses among countries
– OECD BEPS project
Will Such Approaches Work?
• Placing arbitrary rules on companies may
restrict their ability to shift profits and
expenses, but this may lead to more serious
distortions
– If can’t shift profits without moving productive
activities, companies may move the activities
themselves
– Example: US inversions
Will Such Approaches Work?
• Basic problem: “solutions” without logic
• Trying to tax income where it is earned, where
– This location is hard to determine
– To the extent that it can be determined, doing so
has negative economic consequences
More Fundamental Alternatives
• Can we do better by changing how we attempt
to tax capital and profits?
Global Wealth Taxation
• Assessment at individual level, so gets around
mobility of corporate activities; but…
Global Wealth Taxation
• Assessment at individual level, so gets around
mobility of corporate activities; but…
– Measuring and tracking wealth is challenging, and
requires international coordination and cooperation
– High taxes on wealth can impose large incentives
not to save
– Doesn’t get at pernicious uses of wealth
Consumption-Based Taxation
• Attractive from an enforcement perspective,
since easier to track and measure than capital
income or wealth
• And, does not discourage saving
• Raises revenue, but in the form of a VAT,
doesn’t get at the problem of inequality
Consumption-Based Taxation
• But consumption-based taxation can be
progressive
– Can even extend to intergenerational wealth
transfers, or other uses of wealth
Consumption-Based Taxation
• Can also use as a model for corporate tax
reform (Auerbach et al. 2010; Auerbach 2010)
– A destination-based corporate tax
– Eliminates business opportunities to reduce taxes
by shifting locations of expenses and income
– Does not require international cooperation
– Progressive (no tax on labor or shifting to labor)
– Encourages domestic investment and production
Why Not?
We Can Do Better, and Need to