Extending the traditional treatment of the corporate tax to an economy with a progressive personal tax fundamentally changes the analysis. While the corporate tax system (CTS) does increase the total tax rate on corporate source income for some investors, the exclusion of retained earnings implies that the CTS lowers the tax rate for high-income investors. Analyzing such an economy requires replacing the traditional "equal-yield" equilibrium condition with a more general portfolio balance model. In this model, introducing a CTS can actually increase the corporate share of the capital stock even though the relative tax rate on corporate income rises.

Martin Feldstein, Joel Slemrod, Shlomo Yitzhaki; The Effects of Taxation on the Selling of Corporate Stock and the Realization of Capital Gains: Reply, The

This study provides the first econometric analysis of the effect of taxation on the realization of capital gains. The analysis thus extends and complements the earlier study by Feldstein and Yitzhaki [1978] of the effect of taxation on the selling of corporate stock. The present analysis, using a large, new body of data obtained from individual tax returns, supports the earlier finding that corporate stock sales are quite sensitive to tax rates and then shows that the effect on the realization of capital gains is even stronger.

This paper examines data from U.S. federal tax returns to shed light on whether the timing of death is responsive to its tax consequences. We investigate the temporal pattern of deaths around the time of changes in the estate-tax system periods when living longer, or dying sooner, could significantly affect estate-tax liability. We find some evidence that there is a small death elasticity, although we cannot rule out that what we have uncovered is ex post doctoring of the reported date of death.

Firms are, for the most part, absent from the modern theory of optimal taxation. Their disappearance dates from the foundational models developed by Peter A. Diamond and James A. Mirrlees (1971) in which firms are simply mechanical vehicles for combining productive inputs into output in cost-minimizing proportions. i In contrast, firms play a central role in all modern tax systems, mostly for a reason eloquently stated by Richard M. Bird (1996): “The key to effective taxation is information, and the key to information in the modern economy is the corporation. ” In most countries, firms remit the majority of tax revenues to the government, either with regard to taxes legally owed by businesses or through withholding of taxes legally owed by employees or other businesses. ii Even when businesses are not required to remit taxes, they are often required to file information reports that can facilitate monitoring of tax liabilities. The lack of a theoretical framework that features firms handcuffs rigorous welfare analysis of a number of important policy issues. One such example is the comparative evaluation of a uniform retail sales tax (RST) versus a value-added tax (VAT). In the standard model, these two taxes—both remitted entirely by businesses—are equivalent consumption

Amid the academic debate about whether a tax based on consumption or income is superior, it has long been recognized that the U.S. federal tax system is in reality a hybrid of an income and consumption tax, with some elements that do not fit naturally into either system. In recent decades, tax-law changes that altered the nature of the hybrid were generally not discussed as part of a plan to establish either a pure income tax or a pure consumption tax, but as attempts to establish a “level playing field” or to improve “incentives to save.” As of 2003, the outline of an explicit plan to move toward a consumption tax is emerging. Under the original Bush administration proposals in 2003, dividends would become taxexempt if corporate tax had been paid on the earnings supporting the dividends, and a new tax-exempt Lifetime Savings Account, with no restrictions on use, would be created. The proposed expansion of tax-exempt savings accounts was not passed, although it will likely be reintroduced in some form. What did become law were two provisions to expand expensing of qualified property: (i) an increase in the fraction of equipment investment that can be immediately written off from 30 percent (which became law in 2002) to 50 percent, and (ii) an increase through 2005 of the limit on the expensing of new depreciable assets by small businesses allowed under IRC Section 179. The 2003 tax law also reduced the rate of tax on dividends and realized capital gains received by an individual shareholder to be no more than 15 percent, compared to a top rate on “ordinary” income of 35 percent. The acceleration of depreciation, the reduction of personal tax on dividends, and an expansion of tax-favored savings accounts can be seen as part of a strategy to shift the tax base from income to consumption. If the ultimate destination of this set of tax reforms is a consumption tax base, then the most glaring omission from the discussion to date concerns interest deductibility. The continuation of interest deductibility, in spite of other moves toward a consumption tax base, raises two issues. The first is that interest deductibility plus expensing for businesses, plus exemption of financial returns of individuals produces not a zero tax on capital income, as under a consumption tax, but rather a subsidy. The second is that this tax structure allows a range of tax arbitrage opportunities among individuals and across corporations and individuals. For example, even under pre-2002 tax law, when high-tax-bracket investors borrowed from those in low (or zero) tax brackets they generated an arbitrage gain equal to the difference between the tax rates. Reducing the tax rate on interest income, but not interest deductions, to zero vastly expands this opportunity. These tax arbitrage opportunities reduce tax revenue without necessarily providing * Gordon: Department of Economics, University of California–San Diego, 9500 Gilman Drive, La Jolla, CA 92093 (e-mail: [email protected]); Kalambokidis: Department of Applied Economics, University of Minnesota, 217f Classroom-Office Building, 1994 Buford Avenue, St. Paul, MN 55108-6040 (e-mail: [email protected]); Rohaly: Urban Institute, 2100 M Street N.W., Washington, DC 20037 (e-mail: [email protected]); Slemrod: Office of Tax Policy Research, University of Michigan, 701 Tappan Street, Rm. A2120, Ann Arbor, MI 48109-1234 (e-mail: [email protected]). 1 The Tax Reform Act of 1986, which in many ways moved the definition of taxable income closer to economic income, may be an exception (see Charles E. McLure, Jr., 1988). 2 Jonathan Weisman (2003) reported that the Bush administration was debating whether to push “a plan for stealth tax reform in ‘five easy pieces’—lower marginal income tax rates, including capital gains tax rates; eliminate taxes on dividends; accelerate the speed with which businesses can write investment expenses off their tax bills [ultimately to the point of 100 percent first-year expensing of business capital investment]; expand the Roth individual retirement account to all personal saving; and exclude export and other foreign trade income of American companies from taxation.”

This paper critically surveys the large and growing literature estimating the elasticity of taxable income with respect to marginal tax rates using tax return data. First, we provide a theoretical framework showing under what assumptions this elasticity can be used as a sufficient statistic for efficiency and optimal tax analysis. We discuss what other parameters should be estimated when the elasticity is not a sufficient statistic. Second, we discuss conceptually the key issues that arise in the empirical estimation of the elasticity of taxable income using the example of the 1993 top individual income tax rate increase in the United States to illustrate those issues. Third, we provide a critical discussion of selected empirical analyses of the elasticity of taxable income in light of the theoretical and empirical framework we laid out. Finally, we discuss avenues for future research.

In an effort to bolster economic performance in light of a looming downturn in economic activity, on February 13, 2008, President George W. Bush signed the Economic Stimulus Act of 2008. More than two-thirds of the $152 billion bill consisted of economic stimulus payments to be sent beginning in May to approximately 130 million households. To qualify, recipients had to have a valid Social Security number, an income tax liability, or at least $3,000 of “qualifying income” that included earned income and some benefits from Social Security, Veterans Affairs, or Railroad Retirement, and have filed a 2007 federal tax return. For the most part those who filed as single individuals received between $300 and $600, while those who filed jointly received between $600 and $1,200. Additionally, parents with children under 17 who were eligible for a Child Tax Credit and had a Social Security number received an extra $300 per child. The tax rebate phased out at higher levels of income, as the payment was reduced by 5 percent of the amount of adjusted gross income over $75,000 for singles, or over $150,000 for married couples. The Treasury remitted payments either by direct deposit, mainly in the first half of May, or by mail, mainly from mid-May through mid-July. The effect of these stimulus payments depends on how much was spent. This paper reports new survey evidence on the propensity of consumers to spend the 2008 rebate. It also relates the survey evidence to aggregate data and to evidence about spending from the 2001 tax rebate.

Charitable Bequests and Taxes on Inheritances and Estates: Aggregate Evidence from across States and Time by Jon M. Bakija, William G. Gale and Joel B. Slemrod. Published in volume 93, issue 2, pages 366-370 of American Economic Review, May 2003