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Tax Reform

Learn from Martin Feldstein of Harvard University about the significant improvements in tax structure over the years, benefits of lower tax rates and strategies for future reforms.

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Tax Reform

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  1. Tax Reform Martin Feldstein Harvard University and National Bureau of Economic Research

  2. The Tax Structure Has Become Much Better • Reduced individual marginal tax rates • Top rate down from: 91% in 1960, 70% in 1980 • Reduced corporate tax rate • Rate down from 52% in 1960, 46% in 1980 • Fewer tax deductions and exclusions • Major changes in Tax Reform Act of 1986 • Lower tax on dividends and capital gains

  3. Favorable Effects of Previous Personal Tax Reforms • Lower tax rates improve: • Work incentive • Form of compensation • Saving incentive • Lower tax on corporate income, dividends and capital gains improve: • Saving incentive • Form of investment (corporate vs other) and finance (bias against dividends and in favor of debt finance)

  4. Priorities for the Future • Reduce marginal tax rates that distort individual incentives • Reduce corporate income tax distortions that now • Reduce saving by lowering net return • Reduce dividend payout because of double taxation • Increase corporate use of debt finance

  5. “Fundamental Reforms” Would Achieve These Goals • Value added tax (or national sales tax), Flat tax, Consumed Income tax • BUT • Distributional problems eliminate pure VAT and pure Flat Tax • VAT and Consumed Income Tax involve major transition problems

  6. Two Possible Piecemeal Reforms Could Also Achieve Those Goals • Tax husbands and wives separately • Integrate corporate and personal income tax rates

  7. Taxing Husbands and Wives Separately • Lowers marginal rate on 2nd earners • Common practice in most other countries • Can be done in revenue neutral way • Can be applied to wage and salary income only or to all income

  8. Integrate Corporate and Personal Income Taxes • “Gross-up and credit” method has been widely used in other countries • Total earnings imputed to individual taxpayers • Corporate tax regarded as withholding at source • Individual receives tax refund if personal rate less than “credit rate” • Credit rate is 35% with complete integration but could be less to achieve revenue neutrality • Could be combined with other corporate tax reforms, e.g., investment expensing

  9. Favorable Effects of CIT Integration • Lowers tax rate on equity investment and saving • Reduces anti-dividend bias in current law • Reduces current bias in favor of debt finance

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