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

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tax reform

Tax Reform

Martin Feldstein

Harvard University and

National Bureau of Economic Research

the tax structure has become much better
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
favorable effects of previous personal tax reforms
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)
priorities for the future
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
fundamental reforms would achieve these goals
“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
two possible piecemeal reforms could also achieve those goals
Two Possible Piecemeal Reforms Could Also Achieve Those Goals
  • Tax husbands and wives separately
  • Integrate corporate and personal income tax rates
taxing husbands and wives separately
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
integrate corporate and personal income taxes
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
favorable effects of cit integration
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