The Prescription: Fiscal Policy for Today’s Economy with Daniel Hemel

The Prescription: Fiscal Policy for Today’s Economy with Daniel Hemel

welcome to the prescription of the tax policy center’s bi-weekly webcast on fiscal policy for the coven 19 economy this is one of a series of conversations with state local and federal government officials as well as leading economists lawyers and other experts our guest today is professor daniel hamill of the university of chicago law school before joining the faculty there he was a law clerk to associate justice elena kagan on the u.s supreme court professor hamill’s research focuses on taxation non-profits organize non-profit organizations administrative law and federal courts uh thank you daniel for joining us before we can come here yes before we begin a bit of housekeeping we encourage audience members to submit questions in the q a box at the bottom of your screen please identify yourself and your organization as if you are asking your questions in person we will try to get to your questions as we have time but i caution you we have a short segment so so we may not get to all of them we have closed captions turned on if you’d like to adjust your settings click the live transcription buttons at the bottom this event is being recorded and will be posted online at tpc’s website in the near future if you’d like to join the conversation on social media please use the hashtag live urban today and if you’d like to suggest a future guest for the prescription just email us at info tax policy center dot org we always welcome suggestions okay again daniel thanks uh today we plan to discuss uh first the state and local tax or salt deductions and second other reforms for taxing the rich daniel has written about both of these topics recently and you can find links to his articles in the chat so let’s start with the state and local tax deduction which has been in the news a lot after the 27th 2017 tax overhaul that capped those salt deductions at ten thousand dollars in general um professor hamill daniel uh how long have the salt deductions been around and why are they there the salt induction has been around since in some form since 1861 the revenue act of 1861 the first congressional attempted income tax included a deduction uh for state and local property taxes um at the time congress had a kind of funny reason about intergovernmental tax immunity uh for uh allowing the deduction uh but over time uh we have evolved a number of other reasons that we’ll talk about today for keeping the deduction around are they good tax policy salt deductions the way i think about this is like i think about salt the same way i think about pepper uh is pepper good well i i’d kind of like to know what else is on my plate uh pepper is pretty good with scrambled eggs um it’s gonna be less good with ice cream uh if we have a super progressive tax code would i want assault deduction as part of that i think i would for two reasons first i think we get a measure a better measure of ability to pay if we subtract out state and local taxes um i think someone who’s making a million dollars in new york and paying a hundred thousand dollars to the state uh we should think of that person like uh having the same ability to pay more or less as someone in texas or new hampshire who’s making 900 000 um and two the salt deduction incentivizes uh states and localities to raise revenue from the rich you could think about the salt deduction as basically the federal government saying to states uh for every 63 cents that you raise from a top bracket taxpayer will kick in another 37 cents uh if we have a code that is insufficiently progressive one way to make it more progressive is to get rid of the salt deduction or to cap the salt deduction uh so it’s really what else is on the plate well in your recent article on the salt on on the salt deduction i think you your bottom line you said that you viewed the salt deduction sort of ultimately as a subsidy for civic institutions that strengthen democratic fabric what did you mean by that i mean what the assault deduction we can think about it a lot like the charitable contribution deduction if you think that we should incentivize giving to charity uh then for similar reasons we should incentivize giving states for the most part what states do is they provide health education and public benefits and almost everything else is around our roads but roads are classic public goods one difference between giving money to a state and giving money to a charity is that when you give money to a charity you have a lot more control about where exactly it goes whereas when you give money to a state uh you’re leaving it to a democratic community uh to decide how the money is allocated so i i think actually the latter is better uh so insofar as we’re choosing between the two the case for the same local deduction on the whole uh seems stronger to me than the case for the charitable contribution deduction with a few caveats so why did congress limit the state and local tax deduction uh 2017 bill capped that at ten thousand dollars and not cap on the charitable contribution and other personal deductions it seems as if they got that backwards maybe i think there were a bunch of things backwards uh about the deduction changes in the 2017 tax law i mean i i work for a public charity i work for the university of chicago you work for a public charity uh too we’re pretty effective lobbyists uh for our own interests uh so that might be the answer uh for why um the charitable contribution deduction uh wasn’t capped i think i would rather it be a refundable flat rate credit uh than a deduction uh but on the whole it’s subsidizing positive externalities um i think we got it wrong in another way uh in that both the salt deduction and the mortgage interest deduction subsidized home ownership i don’t think the federal government should be subsidizing home ownership uh but the salt deduction accomplishes other things uh whereas the mortgage interest deduction which survived uh really is just a pure home ownership and debt subsidy and if we are going to limit uh the salt deduction uh and i think some limit might make sense uh it would probably make more sense to put a floor under it rather than a cap over it uh victor thironi has proposed the idea of just having a five percent of agi limit a floor uh and only assault payments over that would be deductible that actually makes a lot of sense to me because at the margin it would incentivize state local revenue raising from the rich well the other thing the 2017 tax overhaul did was to uh double that standard deduction and as you know taxpayers can elect either standard deduction or to itemize uh say non-business deductions and that doubling of the standard deduction i think shoves more people into the standard deduction framework and fewer people trying to deduct any state and local taxes at all it was was that sensible and what do you think of the standard deduction as an alternative to itemized deductions isn’t that in effect a limitation on salt deductions also how long has that been around the standard deduction has been around since the 1940s and it plays two roles one it’s a zero bracket and i think it makes a lot of sense to have a zero bracket uh it allows some low-income people not to file at all and it makes the code more progressive it also limits itemized deductions and it really depends whether that’s good or bad based on the itemized deduction limiting the mortgage interest reduction strikes me as a good thing limiting the charitable contribution deduction is a less good thing uh if i were writing the code from scratch we’d probably just have a more generous zero bracket and allow everyone to claim a tax benefit for charitable contributions uh and probably some sort of tax benefit for state level tax payments too well who won and who lost in this latest uh cap on state and local tax deductions which taxpayers which states well it didn’t happen in a vacuum right it happened as part of uh a huge tax cut and a tax cut that primarily went to the rich uh so even most top one percenters in new york uh benefited on net from the tax cuts and jobs act uh changes uh if you look at the ten thousand dollar cap in isolation while the big losers uh were higher income taxpayers in primarily blue uh northeastern states plus maryland dc california or again um but you know they lost but they only lost temporarily uh so right now time is on their side uh it comes back uh in 2026 if congress doesn’t do anything how about new jersey new jersey has been very loud in complaining that they were targeted by the salt cap and new jersey has been claiming uh contending that they are new jersey’s givers not tankers they get like it’s only 67 cents back on the amount of money they sent to the us government and they think they lost big when they when their residents uh lost the ability uh to have the federal government share in some other new jersey tax expenses new jersey’s a high income state so if we have a progressive tax system new jersey should be a net giver uh and i think that’s a good thing um i think we should be doing more redistribution from uh new jersey and maryland uh to mississippi and west virginia than we do um i i think the new jersey argument uh does to some degree uh take the edge off uh the critique of the salt deduction that this is just subsidizing high tax states well high tax states which are largely high income states are really subsidizing the rest of the country and that’s as it should be new jersey has also made a constitutional argument uh here uh that the salt cap is unconstitutional uh and that strikes me as borderline frivolous but definitely not a winner well what do you think about those states that are trying to work around the limits my colleague kim rubin uh posted a blog uh last month uh that was a road map for for states and and the law firms especially to start paying taxes at the partnership level and sidestep these limited limitations at the individual level what do you think of self-help right so there are three versions of self-help uh there was the first uh was um the state charitable credit programs uh that treasury effectively shut down uh and i’ll admit i was active in promoting uh those state charitable credit uh programs in part because uh what had been happening pre-2017 uh was that there were states like arizona that basically allowed you to redirect state taxes from the state to private and parochial schools uh and have that count as a charitable contribution rather than a state’s local tax payment uh which allowed you to get out of amt limitations uh on the state local tax deduction and that struck me as as bad but if you were going to do that for private and parochial schools why not do that for public schools too and basically what new york and california ended up saying to the federal government is you’ve got a choice you can shut the arizona program down or we’re going to exploit that loophole too and treasury made the choice to shut it down and shut it down for everyone and i think that was on net and improvement um the second work around which a lot of states are now doing uh is to shift taxes to the partnership level uh or to the entity level uh and uh allow treasury says that you can deduct those as ordinary necessary business expenses not subject uh to the cap uh the ten thousand dollar cap i don’t think that works under section 164. i think that like treasury is taking the wrong interpretation uh of 164 here and i think pretty clearly wrong uh interpretation here uh and it just exacerbates an existing preference in the tax code uh for pass-through entities over those of us who happen to get our wages uh on a w-2 um the third workaround uh which new york uh has actually implemented and several hundred employers in new york uh are are using it um is to have the employer pay a payroll tax and then have uh employees relieved of a portion of their state tax liabilities that i think really does work uh under 1.64 um but it involves people taking a cut in their nominal pay which people don’t love to do several hundred sophisticated employers in new york are doing it but the rest of the country hasn’t really caught on so the workarounds will end with the salt limitations in 2025 but then in 2026 we need to decide what to do what is your favorite should we restore the salt deductions and just like raise tax rates on the highest income taxpayers should we convert the salt deduction into some form of a grant program should we just like eliminate itemized deductions completely what’s your favorite path before we shift to the next topic i mean my favorite path would be you know we’d have something like a 70 tax rate at the top uh and you’d probably want assault deduction there because we’d want the revenue maximizing tax rate but the revenue maximizing tax rate isn’t going to be the same in california and texas if you don’t factor in the existence of california state income taxes would it be a complete salt deduction no there would probably be something like a five percent of agi uh floor maybe we’d disallow a deduction for property taxes uh which effectively acts as a homeownership incentive as much as it is a state revenue raising incentive and we do something with transfers to make to help out lower income states uh and to make federal support for state and local governments uh less cyclical uh so effectively the uh the subsidy that comes with assault deduction uh and this is a point that len berman and tracy gordon and others uh have have made uh become the subsidy increases when people are paying more in taxes uh so in boom times and decreases in recessionary times and that’s the exact opposite of what we want to do so we change a whole bunch of things um hopefully we won’t just go back to the pre-2018 uh status quo well let’s shift to other good ways to soak the rich um why are we trying to tax the rich and high income uh more heavily what’s the goal what’s the objective here so two reasons uh one i’m a welfarist uh basically a utilitarian uh and uh i think at the top of the intro uh top of the distribution the marginal utility of income is really low uh so when jeff bezos pays a dollar uh to the federal government i think of that is like a pure one dollar gain uh to society um so we should basically tax jeff bezos until we’re at the peak of the laffer curve uh and i’m not sure where that is uh but i think it’s somewhere in the 60 to 80 range uh so that’s my my welfarist argument for taxing the rich um there’s also the question of whether we should tax capital uh as opposed to the labor income of the rich and this is a different question than whether we should tax capital gains because a lot of capital gains are really disguised uh labor income uh i think the consensus in optimal tax theory until relatively recently was that if you have the optimal labor income tax you don’t need an additional capital tax i think that’s changed uh with sort of the new dynamic public finance literature uh work by ludwig straub and yvonne warning who i think have made a pretty persuasive case uh that we do want to tax capital uh and capital is mostly owned by the rich how would you rate a president’s abidence proposals to step up tax on on capital the uh ending of the step up and basis at death uh the the taxing capital gains at the same rates as ordinary income um trying to get more realization events by eliminating the like-kind exchanges how do those stack up pretty well i i’d say it’s like slightly more than 50 of a loaf right uh uh is it better better than half a loaf but not the full love um uh stepped up basis is the the biggest loophole in our capital tax uh regime uh so dealing that would be dealing with that would be a definite improvement you’d still have a substantial deferral advantage over the course of your lifetime but we’d be collecting something from some income tax from jeff bezos on his 200 billion dollars of lifetime gains that strikes me as a good thing um and the optimal rate goes up uh if uh you have fewer holes in the base so i think moving from uh uh 23.8 percent to 43.4 would make a lot of sense i would go higher than 43.4 but like definitely a movement in the right direction uh there are loopholes uh the biggest loophole i think is life insurance uh so uh life insurance would be completely outside uh of the the biden step up basis uh regime uh getting rid of like-kind exchanges clear improvement uh no real argument for giving this big tax benefit to to real estate developers who already have lots of or real estate owners who already have lots of lots of tax benefits um we still it’s not totally comprehensive uh so section 1202 the qualified small business stock uh exclusion that should go to uh but uh we’d be like a lot closer to uh the ideal world what about some of the other ideas you wrote a fascinating article that described wealth taxes and market market taxes and something known as a retrospective tax you demonstrated that they were equivalent we don’t have time to work through your algebra here however what are these other taxes just at a high level and do you think they could work um so we’ll go in order uh a wealth tax yeah it could work uh would there be uh it could work setting aside the constitutional issues um uh would there be valuation issues sure uh but i’m not exactly sure what jeff bezos’s net worth is but i could come pretty close uh to a right answer there so it would raise revenue and it would raise revenue now uh which is a benefit over something like stepped up like getting rid of stepped up pace for really getting rid of tax free step up basis where a lot of the revenue is going to be way down the road and republicans might take charge and repeal it uh before jeff bezos ends up uh paying anything um that said uh i’m not sure if there are five votes i think there aren’t five votes on the supreme court uh to uphold a wealth tax so unless uh president biden is going to pack the court then i don’t see a clear path forward for a wealth tax now um mark to market i think could also work and would generate revenue now uh and for uh publicly traded assets would be pretty easy to administer uh and for non-publicly traded assets we could do something like wait until realization and then impose a deferral charge uh there are a few constitutional issues uh with uh marked market taxation but i don’t consider them super serious or as i consider the constitutional arguments against the wealth tax to be weighty um and then a retrospective capital gains tax would just be uh basically waiting until realization uh for everything uh including publicly traded stock but charging taxpayers for the benefit of deferral and there are a few different ways that you could do that uh but for the most part uh if like we assume normal rate of return uh they all end up more or less at the same place at the end uh except that in our current political environment a wealth tax might end up with zero uh at the end um and with the retrospective capital gains tax we do have to worry about it being repealed before we get to the end of the road so you view the wealth tax as a potentially suspect constitutionally although perhaps easily understood uh the retrospective tax at the other end is pretty robust on the law but i suspect actually will confuse uh u.s taxpayers who are so experienced and reliant on the realization doctrine that you only pay tax when you sell something that it may yet raise some additional you know concerns maybe political yeah and i should be clear if if it were just me and i were voting on a wealth tax i i think i would vote to uphold uh but uh you know that in two cents will get you i don’t know what can you buy for two cents uh these days um i think if we’re talking about how to seriously tax the rich we should think about john roberts and brett kavanaugh’s views uh unless we’re going to do something dramatic uh to the supreme court uh with retrospective capital gains taxation i should make clear i actually you would be waiting till realization so i don’t think this would be i think people would accept the idea of a deferral charge once you could explain it uh to them and there’d be a little bit of a challenge on explanation it would be really easy to administer the big problem with the retrospective capital gains tax is we could say we’re gonna do it we could enact it uh but then you know president desantis might repeal it uh in 2019 in 2029 so a lot of political uncertainty but what do you think about like your current estate tax which hasn’t been very effective at raising money you know could we replace that with an inheritance tax would that be more effective i mean i think we could fix estate tax loopholes pretty easily uh at least some of them uh and treasury probably has the regulatory authority uh to do some of that already uh and i’m not quite sure why why why it hasn’t uh yet um but grantor retained a new zeroed out grant or retained annuity trusts i think there’s probably a lot of regulatory room uh there uh family limited partnership valuation issues uh the obama administration came close uh to addressing that and really ran out of time um and we need with a 22 million dollar uh exemption for couples i guess close to 23 million dollars now uh we uh it’s pretty easy uh to to get out of the estate tax unless you’re super super super rich um so uh those exemption levels need to come down but they’ll come down in 2026 uh even if we just uh go on autopilot from here on an inheritance tax uh i think people like the idea of an inheritance tax more than an estate tax when they hear it on the other hand to make an inheritance tax equivalent to an estate tax you need to bring the exemption level down uh because most people have more than one error uh so uh i’m not sure whether a four million dollar exemption level with an estate tax ends up being more popular than an inheritance tax where to make it equivalent we have exemptions of one or two million dollars one of our audience members asks about financial transactions taxes there are a whole bunch of transactions suppose we nick them for a small fee each time i guess the ultimate uh burden would fall on those who own those assets which tend to be overwhelmingly the rich yeah i mean i would think of we should think about whether liquidity is uh whether we want more liquidity uh or whether we think that flash trading is for the most part a public bad um my my view leans toward the ladder so if you know some of the brightest minds of our generation spent less time programming computers in basements in new jersey to be trading stocks really fast that would probably be good for the world um but i i think the strongest argument for a financial transactions tax is that it would make our market stronger uh rather than that it would soak the rich so we got a couple of other we got lots of great questions in the box i don’t think we have much time left but here’s at least one what evidence is there that state fiscal policy responds to the salt deduction you know that is if there’s a complaint that states will provide fewer services to low-income taxpayers because of the loss of the deduction to their residents that seems like a problem but if that if that premise was untrue then it’s not a problem what evidence do we have on that i think we do have evidence uh douglas foltekin has a paper from the early 90s howard chernak has some more recent work so does uh brian galley that suggests that there’s an effect it’s really hard to do a controlled experiment um but we also just have evidence that taxpayers respond uh so there are a lot of high net worth people in california who set up nevada incomplete gift non-grantor trusts uh and if you want to know the details of that start googling around for ningx uh and it’s like interesting it works as a state tax avoidance move there’s absolutely no reason why you would do it except for state tax avoidance um so we have evidence out in the world uh that high income people are avoiding state income tax and that means that there’s less revenue for the states i don’t feel all that bad for california because it’s gotten a huge revenue hall uh over the course of the last year um but there’s definitely avoidance out there i mean there are a lot of new yorkers who are spending 183 days in florida and counting another question we have is someone who’s concerned that the marginal tax rates when you combine federal on state taxes can exceed 100 wouldn’t that be a pretty compelling reason to allow a deduction for state taxes yeah we’re nowhere close to there uh yeah um i think where new york city residents are getting uh at the very high end uh are now above 55. um but uh that if we had uh you know a 90 tax uh uh state inc uh federal income tax as we did uh you know under president kennedy uh and you had a 13.3 percent california income tax uh then right you would need a state tax deduction okay any last words i think we’re about out of time um any last comment you’d like to share on how we’re going about taxing high income in the rich um there are lots of different ways uh to tax high income people including raising rates um and by high income i think i would include you know the top five percent uh rather than uh the the top one percent uh so people with six figure salaries whether or not they’re above uh four hundred thousand dollars um but look the biden proposal if we end up getting half of what uh the green book proposal uh proposes um it would be the most progressive uh tax policy change in two generations okay well uh professor hamill daniel you’ve been fantastic we’ve tried to compress a lot of information into a very short slot and we’ve had a pretty big audience for a summer talk about tax so thank you to all who have attended thank you
rn

The Prescription: Fiscal Policy for Today’s Economy with Daniel Hemel

rn

Share this post

Leave a Reply

Your email address will not be published. Required fields are marked *