Tackling the Tax Code: Efficient and Equitable Ways to Raise Revenue

Edited by Emily Moss, Ryan Nunn & Jay Shambaugh (The Hamilton Project)


Alexander Hamilton, for whom our project is named, was appointed Secretary of the Treasury at age 34 by President George Washington. He carried with him into office what biographer Ron Chernow called “a panoramic vision of a diversified economy that would provide opportunity for people from all walks of life.”

The American War of Independence against Great Britain left us with crushing debts. On assuming office, devising our nation’s first tax system was among Hamilton’s most urgent and difficult assignments. This tax system funded the government and paid off the states’ Revolutionary War debts, which in turn gave our young, vulnerable nation a chance to prosper.

Thanks to Hamilton’s foresight and political courage, America’s course toward bankruptcy was reversed, we established our creditworthiness, and a strong and successful nation was built. When Hamilton left his post five years later, interest rates in the United States were as low as any in the world.

This book is about taxes. It poses a simple question: Given that the United States needs more revenue, how should we raise it? The answers come from some of our nation’s foremost tax policy scholars and experts. The Hamilton Project commissioned them to come forward with proposals to address our government’s pressing need for revenue under the economic conditions that prevail today.

The ideas in the chapters that follow focus on the central and most enduring questions about raising taxes—who pays them, what effects do they have on the economy, and how much revenue can they raise—questions that have animated our political discourse across three centuries. While every effort to raise taxes provokes opposition, principled and otherwise, our current economic circumstances demand we take up those questions again.

There are a number of reasons to consider sources for more revenue. First, we have immense fiscal imbalances in the United States. In June, the Congressional Budget Office reported that “large budget deficits over the next 30 years are projected to drive federal debt held by the public to unprecedented levels—from 78 percent of gross domestic product in 2019 to 144 percent by 2049.” Even in today’s low interest rate environment, unsound fiscal conditions will at some unpredictable moment in the future constrain the ability of policymakers to address national challenges if the debt grows continuously and today’s mix of revenues and spending remains unchanged.

Second, these imbalances are driven not by ambitious new spending programs but by previous health care and pension commitments as well as declines in federal revenues. As contributing author William Gale of the Brookings Institution writes, “much of the projected increase in spending is due to rising net interest payments—burdens created by deficits from previous years” (p. 198). To be clear, savings in government programs can be derived from thoughtful reforms, and federal budgets must reflect the necessity of stabilizing our fiscal position in the years and decades to come.

The yawning gap between spending and income is due in large part to reduced tax collections. As Larry Summers, former Secretary of the Treasury, and Jason Furman, former chairman of the President’s Council of Economic Advisors, wrote earlier this year, “the federal government [in 2018] took in revenue equivalent to just 16 percent of GDP, the lowest level in half a century, except for a few brief periods in the aftermath of recessions. Without the Bush and Trump tax cuts (and the interest payments on the debt that went with them), last year’s federal budget would have come close to balancing.”

Third, we cannot get back on track to restore long-term economic growth, address growing economic inequality, provide affordable health care coverage, combat climate change, and much more without restoring the nation’s tax base. Simply put, we need additional revenues to pay for investments that will make our economy grow and enable more Americans to share in that growth.

Fourth, most of these new revenues must come from those best able to pay, especially since tax cuts benefiting the highest earners account for so much of the declining share of taxes paid at the federal level. Since the late 1960s, the share of federal revenue paid by working Americans in the form of payroll taxes has increased from just over 20 percent to 35 percent. Yet corporate tax collections have plummeted from more than 25 percent to less than 10 percent of revenues, and the top rate paid by wealthy filers has fallen from 70 percent during Lyndon Johnson’s presidency to 37 percent today. And over the last two decades, Congress has hollowed out the estate tax to such an extent that only 0.2 percent of estates pay any tax at all.

This has consequences beyond the bottom line. The tax system does far too little to address the concentration of income at the highest levels or fund investments that enhance economic and social mobility for workers and their families.

In short, to stabilize our fiscal trajectory, whether to make our revenue system more progressive and growth-friendly or to fund new priorities, there is an urgent need to reconsider our current tax system.

In the chapters that follow, we present our contributors’ new proposals for a value-added tax, a financial transactions tax, wealth and inheritance taxes, fixing the broken corporate and international tax systems, and giving the Internal Revenue Service the resources it needs to ensure that tax laws, both old and new, are better enforced and administered and to remove loopholes and unnecessary deductions and shelters.

Overall, these proposals are carefully designed and built on the best available evidence and analysis. Each was subject to peer review, independently and in conferences, where we invited authorities in tax policy, economists, and others to exchange their views with the authors. We are grateful to all for contributing their expertise and making each proposal better.

Tax policy is enormously complex. There are economic differences between—and disparate impacts from—taxes on capital, consumption, and labor. Straightforward computational questions can lead to contentious debates. What should be unobjectionable policy goals—for example, raising revenues in the least costly and most progressive and efficient ways—can be difficult to realize in practice. We hope this book evokes an informed debate and prepares policymakers to act.

Beyond substance, higher hurdles lie in wait. In every budget and tax debate in which we’ve participated, some policymakers argue that tax increases will cost jobs and impede economic growth. Others argue that their hands are tied by pledges not to raise taxes signed as they campaigned for elected office. Critics of President Bill Clinton’s economic program warned that raising the top rate would wreck the economy and prevent any deficit reduction from taking place. In fact, the opposite happened: economic growth was strong and surpassed expectations while large deficits turned into large surpluses. This can happen again.

This volume is about more than raising revenues and stabilizing our fiscal position. It is about preserving our market-based economy and providing for a strong and effective government that promotes not only growth but widespread economic well-being and reduced inequality for all Americans. In the coming debate over our nation’s future, this is the narrative we hope policymakers and the broader public will choose to embrace, so that we may succeed in our time as Americans did in Hamilton’s time, at the dawn of our national life.

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  1. Introduction, by Emily Moss, Ryan Nunn, and Jay Shambaugh
  2. Chapter 1: The Economics of Federal Tax Policy, by Emily Moss, Ryan Nunn, and Jay Shambaugh
  3. Chapter 2: Leveling the Playing Field between Inherited Income and Income from Work through an Inheritance Tax, by Lily Batchelder
  4. Chapter 3: Taxing Wealth, by Greg Leiserson
  5. Chapter 4: A Proposal to Tax Financial Transactions, by Antonio Weiss and Laura Kawano
  6. Chapter 5: Raising Revenue with a Progressive Value-Added Tax, by William Gale
  7. Chapter 6: Taxing Multinational Companies in the 21st Century, by Kimberly Clausing
  8. Chapter 7: How to Increase Growth While Raising Revenue: Reforming the Corporate Tax Code, by Jason Furman
  9. Chapter 8: Tax Reform for Progressivity: A Pragmatic Approach, by Natasha Sarin, Lawrence Summers, and Joe Kupferberg

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