When economists study taxation, they typically separate two issues: one is the distributional issue of which groups are paying more or less; the other is the ways in which taxes reduce efficient economic incentives for work, savings, investment, innovation, and so on on. Today is the deadline for when US individual income tax returns are due with the federal Internal Revenue Service as well as with state-level income tax authorities. According to the research of Stefanie Stantcheva, most of those taxpayers focus almost entirely on the distributional question, not the efficiency question.
Stancheva discusses the topic as part of an interview with David Cutler on the occasion of winning the 2020 Elaine Bennett Research Prize, which is \”awarded every two years to recognize and honor outstanding research in any field of economics by a woman not more than seven years beyond her Ph.D.\” (CSWEP Newsletter, 2021, 21:1, \”Interview with Bennett Prize Winner Stefanie Stantcheva\”). The underlying research paper by Stantcheva being discussed here is \”Understanding Tax Policy: How Do People Reason\” (November 2020, NBER Working Paper 27699). Stantcheva reports in the interview:
Consider the example of tax policy. Is it that people have different perceptions about the economic cost of taxes? Is it that they think differently about the distributional impacts that tax changes will have? Or is it that they have very different views of what’s fair and what’s not? Could the reason be their views on the government—how wasteful or efficient they think the government is? Or is it purely a lack of knowledge about how the tax system works and what inequality is?
I think of these factors as my explanatory or right-hand side variables. I can decompose a person’s policy views into these various components. What I find is that for tax policy, a person’s views on fairness, and who’s going to gain and lose from tax changes completely dominates all other concerns. This is followed by a person’s views of the government. How much do they think the government should be doing, how efficient is it, how wasteful is it, how much do they trust it? Efficiency concerns are actually quite second-order in people’s minds when it comes to tax policy.
These are all correlations. To see what’s actually causal and what could be shifting views, I show people these short ECON courses, which are two – or three-minute-long videos which explain how taxes actually work. The videos take different perspectives. Although they’re neutral and pedagogical, they don’t tell people what taxes should be or what’s fair or not. They just explain the how taxes work from one perspective. For instance, one version focuses only on the distributional impacts of taxes – who gains and who loses. The other version focuses only on the efficiency costs. Then there is the economist treatment, which shows both and emphasizes the trade-off between efficiency and equity. One can replicate this approach for the other policies such as health policy or trade or even climate change, which all have efficiency and equity considerations.
What I find for tax policy confirms the correlations. What shifts people’s views most is to see the distributional impacts of taxes, not at all the efficiency consequences of it. Even if you put it together and emphasize the trade-off, it’s still the distributional considerations that dominate and outweigh the efficiency concerns.
Distributional concerns about taxes matter to me, as well! But even if you generally agree on the idea that taxes should weigh more heavily on those with higher incomes or different wealth, it doesn\’t help to distinguish between different ways this might be be done.
For example, one might have higher marginal tax rates on those with higher income levels. One might reduce the value of tax deductions, like deductions for mortgage interest or state and local taxes, that tend to benefit those with high incomes more. One might insist that taxes be paid on currently untaxed fringe benefits, like employer-purchased health insurance, because exempting those benefits from income tax will provide greater benefit to those with higher incomes. One might want to alter rules that let people make tax-free contributions to retirement accounts, on the grounds that reducing taxes in this way will tend to benefit those with higher incomes. One might think about expansion of \”refundable\” tax provisions that help the working poor, like the Earned Income Tax Credit and the child tax credit. One might alter corporate taxes, on the theory that this would affect shareholders and top managers more than it will affect wages paid to average employees. One might alter the way in which capital gains are taxed, and one might want to distinguish between capital gains on owner-occupied housing, on family businesses, or on financial assets. One might alter the rules that let high-income people pass wealth to future generations. For example, the current rules are that when financial assets which have gained in value over the lifetime of the owner, those previous gains are not taxed when the asset is passed through an estate. One might want to change other rules on what assets can be passed to the next generation, including other aspects of the estate tax to rules about intergenerational giving, along with rules about using life insurance policies or charitable foundations to pass income between generations.
For those readers who are sunk deepest into distributional thinking I suspect the honest response to this list is something like: \”I\’m against anything that would raise my taxes by a single dime, but I\’m for anything that would only be paid by high-income, high-wealth individuals, and I don\’t care about how it affects their incentives.\” Of course, in a US economy where government debt is ascending to unprecedented levels even before we try to address the middle-term projected insolvency of Social Security and Medicare, that response is just an abdication of analysis.
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