Taxes on Investment Income Remain Too High and Lead to Multiple Distortions(June 2006, Martin Feldstein)

June 2006, The Economists' Voice
By Martin Feldstein


자료: Taxes on Investment Income Remain Too High and Lead to Multiple Distortions

※ 메모:

Back in 1963 the highest marginal rate of personalincome tax was 93 percent... Even as recently as 1980 the top income tax rate was 70 percent on interest and dividends, and 50 percent on wages and other personal services income. Today the top statutory federal marginal income tax rate is 35 percent, although the effective marginal tax rate for many high income taxpayers is over 40 percent when the Medicare payroll tax, the phase-out of deductions, and state tax systems are taken into account. In many welloff two-earner families, at least one of the two faces a marginal social security payroll tax as well, bringing that individual’s total marginal tax rate above 50 percent.

Today’s statutory tax rates on capital income consist of:
(1) a corporate tax rate that is down from 46 percent in 1980 to 35 percent now;
(2) a 15 percent maximum tax rate on capital gains (which in 1980 could reach more than 40 percent as a result of tax add-ons and offsets);
(3) a 15 percent tax rate on dividend income; and
(4) a 35 percent maximum rate on interest income.
of which some tax custs have been made "permanent" : Recent legislation extended the lower rates on dividends and capital gains until 2010, after which they could revert to 35-plus percent if Congress does not pass new legislation.

The full tax on capital income includes not only the taxes paid by the individual investors but also the corporate income tax. When these taxes are combined, the result is still a marginal tax rate that is high—albeit not as high as in the 60s and 70s—and that is thus capable of doing a great deal of economic harm.

Two kinds of efficiency losses result from our current taxation of capital income.

• First, the taxwedge that reduces the return to saving meansthat we consume too much now and in the nearfuture and too little in the more distant future.The nature of this distortion and the magnitude of the resulting deadweight loss are still very badly understood.
• Second, specific distortions are generated because of the structure of capital income taxation. (1) We allocate too little capital to corporations and toomuch capital to noncorporate forms of business. (2) Companies pay too little in dividends and retain too much of their earnings. (3) Corporations take on too much debt and issue too little equity.
  (4) Capital gains realizations are postponed excessively.(5) Businesses that should be located in the United States place themselves abroad instead. The tax structure distorts each of these decisions in ways that cause deadweight losses.

The deadweight loss of a tax on the return to saving depends on how the tax affects future consumption and not on how the tax affects current saving. Why? Because deadweight losses depend on how taxes affect the things that people care directly about. We don’t really care directly about how much we save (though we may care about it as an indirect indicator of future consumption). We do care about how much we consume, both now and in the future. (This point is developed more formally in my 1978 article in the Journal of Political Economy.)

The right way to think about saving is that it is the amount that we “spend” today to buy future consumption.
(1) We don’t conclude that the deadweight efficiency loss from a tax on apples is zero if total consumer spending on apples is unchanged. For example, if a tax that raises the price of apples by 10 percent causes a 10 percent reduction in the number of apples consumed there will b eno change in spending on apples. But we still recognize that the reduction in the number of apples consumed causes a loss of efficiency, i.e., a deadweight loss.
(2) Similarly, a tax on capitalincome should be evaluated by looking at how it affects the level of future consumption bought by saving, not what happens to the amount of saving itself.

Distorting the Use of Capital:

1. First, the relatively higher rate of tax onprofits in the corporate sector—by the corporateincome tax and then by the taxes ondividends and capital gains—drives capital outof the corporate sector and into other activities,particularly into foreign investment andreal estate. ... The reduction of the corporate tax rate from 46 percent to 35 percent reduced this deadweight loss. By keeping more of the capital in the corporate sector, it also caused the revenue loss to be less than conventional “static” revenue estimates that ignore behavioral responses{세율인하에 따른 세수 감소는 "정태"분석에 따른 추정액보다 줄어든다}. ... Should the Congress fail to extend the current tax rates on capital gains and dividends{in 2010}, the higher rates would exacerbate the sectoral misallocation of capital, and would produce less revenue than static revenue estimates predict.
2. Second, the recent reduction in the tax rate on dividends has led many corporations to start paying dividends and many others to increase their dividend payout rates. ... the rise in dividend payouts means thatthe government collects more revenue than predicted by the traditional static analysis that the Treasury and the Congressional Staff use to evaluate the revenue impact of tax changes.
3. Third, the current tax system encourages firms to use debt finance rather than equity finance because interest payments are deductible by borrowing firms, while dividend payouts are not.