Using DINA to Evaluate U.S. Capital Income Tax...

Using DINA to Evaluate U.S. Capital Income Tax Proposals

Patrick Driessen

First WID.world Conference

December 14, 2017 Author solely responsible for content

DINA from 1913 to … 2037?

• Issues on distributing income effects of U.S. capital tax and other policy proposals on recent display

• Distributional framework choices • Background on U.S. historical versus policy distributions • 3 Models: Cash-plus, DINA, and Adjusted DINA • Exercise Mechanics • The capital income tax prototypes • Results • Lessons

50 Days of U.S. agency distributions

• Unlike revenue estimates and macro analysis, no formal legislative requirement for distributions though there is political pressure

• Under one view that emphasizes meeting logistical demands, U.S. agencies

(CBO, JCT, TPC, etc.) have performed well under constraints – Healthcare mandate repeal in Senate bill (nod to DINA) – JCT separated “business” from “individual” effects for first time

• But no deficits, no comprehensive outlays, no formal accounting for foreign investors, no growth. Issues on territoriality, corporate tax incidence

• Presenting major capital income tax policy results with model that

understates baseline capital income (and overstates capital income tax rates)

• Agencies in this position because of affinity for a cash-based approach – During last two decades focused on “dynamic” scoring, corporate tax incidence,

Distributional framework choices

• Income (accrual, DINA, or realization/cash based aka “Cash-plus”) • Government outlay inclusivity (transfers, in-kind, state/local), plus

deficits/surpluses • Breadth of taxes (geography, type)

• Units of observation (households, tax units, adults)

• Welfare indicators (SWFs, pre- and post-tax, outlays, mobility) • Outstanding technical issues (lifetime tax incidence, integrating

macroeconomic effects when looking forward with policy proposals)

U.S. historical vs. policy distributions

• Historical modeling from the tax side requires managing endogeneity of tax and other law, as well as regulatory, changes

• Legislative policy distributions look forward, anywhere from 1 to 10 years (perhaps to 20 and beyond soon, depending upon budget period rule)

• PSZ ,CBO regularly offer U.S. historical distributions; JCT, OTA, and TPC not – CBO technically is involved with both historical and policy analysis

• All U.S. agencies use similar cash/realization approaches - “Cash-Plus” – Early PS research also a version of Cash-plus

• Historical/policy distributional conformity desirable

• Accrual approach, another method used for historical evaluation, likely collapses to national income or DINA-based method going forward

Cash-plus, DINA, and Adjusted DINA Models

• Capital income tax proposals good for testing models • Cash-plus concepts relatively familiar to legislators and lay people,

closer to administrative data – But see Medicare/Medicaid, fringe benefits, corporate tax incidence – For history, concerns for tax policy endogeneity, both pre- and post-tax

• DINA jumps the shark by using national income to calibrate – For pre-tax offers income classifier flexibility – Deficit allocation – All government levels, all government spending

• “Adjusted DINA” modifies DINA – BEPS link to labor bearing some corporate tax – Discounting deferred foreign earnings to lay in for territoriality – Incorporation of deemed growth for policy proposals

• For all proposals, foreign investor benefits are tracked

8 Capital Income Tax Prototypes Tested

• Corporate income tax repeal (-$400 billion) • 20% corporate tax rate (-$140 B) • Lax territoriality (-$100 B) • Corporate integration shifting liability to individuals* • Harsher worldwide taxation with corporate rate reduction* • Harsher worldwide taxation with deficit reduction* • Simple version of pending (Dec. 2017) U.S. tax legislation (-$115 B) • Pending (Dec. 2017) U.S. legislation with repeal of healthcare

mandate (-$115 B)

* Revenue neutral

Mechanics

• Baseline • Revenue Estimates + growth • Foreign investors, deficit allocation, growth allocation • Focus on post-tax (with post-tax broadly defined) • 1/99, 10/90, 60/40 (Cash-plus), 50/50 (DINA) • If growth deemed, “growth risk” analysis offered in

Adjusted DINA model

Pre-Tax Income U.S. Distributions by Model and Year*

Model

2012 2013 2014 2015

$Trillions

As a %

of PSZ

$Trillions

As a %

of PSZ

$Trillions

As a %

of PSZ

$Trillions

As a %

of PSZ

CBO $12.3 85.3%

JCT $11.7 81.1% $12.7 84.1% $13.3 84.8%

LBAA $12.5 88.8% $15.4 106.9%

OTA $13.9 88.8%

TPC $13.9 91.7%

PSZ $14.1 $14.5 $15.2 $15.7

* Author responsible for calculations. See Table 1 in text of accompanying paper. CBO is Congressional Budget Office; JCT is

Joint Committee on Taxation; LBAA is Jeff Larrimore, Richard V. Burkhauser, Gerald Auten, and Philip Armour; OTA is Office of

Tax Analysis, U.S. Treasury Department; TPC is Tax Policy Center; and PSZ is Thomas Piketty, Emmanuel Saez, and Gabriel

Zucman. LBAA is an accrual model; PSZ is DINA; and others are Cash-plus.

Cash-Plus, DINA, and Adjusted DINA U.S. Baselines, at 2013 Levels* ($ in Billions, otherwise %)

Cash-plus DINA Adjusted DINA Total Income:

Pre-tax $12,330 $14,450 $14,310

Post-tax $9,860 $14,450 $14,310

Pre-tax and post-tax

changes to DINA to

create Adjusted DINA:

Deferral discount -$40

Profit shifting -$100

Top 1% shares: Of pre-tax income 15.00% 19.60% 19.58%

Of post-tax income 12.40% 15.34% 15.28%

Top 10% shares: Of pre-tax income 37.98% 46.32% 46.31%

Of post-tax income 33.97% 38.75% 38.67%

Top 60% shares: Of pre-tax income 85.51%

Of post-tax income 83.09%

Top 50% shares: Of pre-tax income 87.23% 87.22%

Of post-tax income 80.68% 80.60%

* Author responsible for calculations, see Table 2 in accompanying paper.

Charts 1A, 1B, 1C: Annual Post-tax Income Effects of Repealing Corporate Tax, by Pre-tax Income Splits and Distributions (2013 levels, $ billions)

157 131 73 104 120 183 189

-143 -34

57 60 80 70 80 87

-500

0

500

Chart 1A. By Pre-tax 1/99 Split and Alternate Distributions

Top 1% Low 99% Foreign Investors

229 230 98

165 207 111 90

-168 -95 -29

60 80 70 80 87

-500

0

500

Chart 1B. By Pre-tax 10/90 Split and Alternate Distributions Top 10% Low 90% Foreign Investors

323 315

54

178 265

17 5

-124 -108 -87

60 80 70 80 87

-200

-100

0

100

200

300

400

Cash-plus DINA (except before deficit) DINA Adjusted DINA (pre-growth) Adjusted DINA (growth +.8%)

Distributional Approaches 60/40 Cash-plus ,50/50 DINA …

Chart 1C. By Pre-tax 60/40 and 50/50 Splits and Alternate Distributions Top Income Group Low Income Group Foreign Investors

Chart 1R: Corporate Tax Repeal - Annual Post-tax Income Growth Range Risk by Pre-tax Income Splits for Adjusted DINA (2013 levels, $ billions)

165

104

178

120

207

265

-150

-100

-50

0

50

100

150

200

250

300

Chart 1Rb. Post-Tax Growth Risk Range by High Income Group

(low number = no growth, higher number = +.8%)

Top 1% Top 10% Top 50%

57

-29

-87

-34

-95 -108

-150

-100

-50

0

50

100

150

200

250

300

Chart 1Ra. Post-Tax Growth Risk Range by Low Income Group

(low number = no growth, higher number = +.8%)

Low 99% Low 90% Low 50%

Charts 3A, 3C: Annual Post-tax Income Effects of Adopting Lax Territoriality, by Pre-tax Income Splits and Distributions (2013 levels, $ billions)

39

18

31

46

-36 -34

15 18

28

-40

-20

0

20

40

60

80

100

Cash-plus DINA Adjusted DINA (nogrowth expected)

Distributional Approaches

Chart 3A. By Pre-tax 1/99 Split and Alternate Distributions

Top 1% Low 99% Foreign Investors

81

13

32

4

-31 -34

15 18

28

-40

-20

0

20

40

60

80

100

Cash-plus DINA Adjusted DINA (nogrowth expected)

Distributional Approaches (60/40 Cash-plus and 50/50 DINA income splits)

Chart 3C. By Pre-tax 60/40 and 50/50 Splits and Alternate Distributions

Top Income Group Bottom Income Group Foreign Investors

Chart 4A: Annual Post-tax Income Effects of $200 Bils. Shift of Corporate Tax, by 1/99 Income Split and Distributions (2013 levels, $ billions)

447

-16 -16

323

-24 -24

30 40 40

-100

0

100

200

300

400

500

Cash-plus DINA Adjusted DINA (no growthexpected)

Distributional Approaches

Top 1% Low 99% Foreign Investors

Charts 5A and 5C: Annual Post-tax Income Effects of Harsh Worldwide with Corporate Tax Cut, by Pre-tax Income Splits and Distributions (2013 levels, $ billions)

14 20

86

114

2

0

20

40

60

80

100

120

Cash-plus DINA Adjusted DINA(pre-growth)

Adjusted DINA(growth +.25%)

Distributional Approaches

Chart 5A. By Pre-tax 1/99 Split and Alternate Distributions

Top 1% Low 99% Foreign Investors

85

112

15

22

2

0

20

40

60

80

100

120

Cash-plus DINA Adjusted DINA(pre-growth)

Adjusted DINA(growth +.25%)

Distributional Approaches (Cash-plus 60/40. and DINA 50/50 income splits)

Chart 5C. By Pre-tax 60/40 and 50/50 Split and Alternate Distributions

Top Income Group Low Income Group Foreign Investors

Charts 6A and 6C: Annual Post-tax Income Effects of Harsh Worldwide to Pay Down Debt, By Pre-tax Income Splits and Distributions (2013 levels, $ billions)

-39

-18

-1

-46

36

136

-15 -18 -16

-100

-80

-60

-40

-20

0

20

40

60

80

100

120

140

Cash-plus DINA Adjusted DINA(growth +.125%)

Distributional Approaches

Chart 6A. By Pre-tax 1/99 Split and Alternate Distributions

Top 1% Low 99% Foreign Investors

-81

-13

85

-4

31

49

-15 -18 -16

-100

-80

-60

-40

-20

0

20

40

60

80

100

120

140

Cash-plus DINA Adjusted DINA(growth +.125%)

Distributional Approaches (Cash-plus 60/50 , DINA 50/50 )

Chart 6C. By Pre-tax 60/40 and 50/50 Splits and Alternate Distributions

Top Income Group Bottom Income Group Foreign Investors

Charts 7C and 8C: Annual Post-tax Income Effects of Pending (Dec.2017) U.S. Legislation (with and without ACA mandate repeal) by Pre-tax Income Splits and Distributions (2013 level,$bils.)

89

24

130

5

-30

-12

6 5

22

-100

-50

0

50

100

150

200

Cash-plus DINA Adjusted DINA (growth +.8%)

Distributional Approaches (60/40 Cash-plus, 50/50 others)

Chart 7C. Without ACA Mandate Repeal, By Pre-tax 60/40 and 50/50 Split and Alternate Distributions

Top Income Group Low Income Group Foreign Investors

119

54

160

-25

-60

-42

6 5

22

-100

-50

0

50

100

150

200

Cash-plus DINA Adjusted DINA (growth +.8%)

Distributional Approaches (60/40 Cash-plus, 50/50 others)

Chart 8C. With ACA Mandate Repeal, By Pre-tax 60/40 and 50/50 Split and Alternate Distributions

Top Income Group Low Income Group Foreign Investors

Chart 8R: Pending (Dec.2017) U.S. Legislation (with ACA mandate repeal) - Annual Post-tax Income Growth Range Risk by Pre-tax Income Splits for Adjusted DINA (2013 levels, $ bils.)

-60 -46

-63

45

6

-42

-80

-40

0

40

80

120

160

Chart 8Ra. Post-Tax Growth Risk Range by Low Income Group

(low number = no growth, higher number = +.8%)

Low 99% Low 90% Low 50%

70

56

73 73

111

160

-80

-40

0

40

80

120

160

Chart 8Rb. Post-Tax Growth Risk Range by High Income Group

(low number = no growth, higher number = +.8%)

Top 1% Top 10% Top 50%

Results Summary

• Adjusted DINA offers way of modeling BEPS’s impact on labor as substitute for current U.S. agency corporate income tax distributional approach

• Adjusted DINA begins to show why investors/companies want territoriality

• Cash-plus can be misleading for integration proposals, both as to level of post-tax benefits and progressivity engendered with corporate tax change

• Tracking growth risk formalizes distributional intuition

• Generally, Cash-plus approaches show more favorable overall results, and particularly better relative and absolute results for low-income groups, for capital income tax reduction policies than DINA and Adjusted DINA models

Lessons

• A policy model that distributes deficits and outlays also should distribute growth (or non-growth) to get everything in the story

• May need more sensitivity analysis (i.e., income grouping or even going to more specific percentiles) with policy distributions than needed for historical evaluation

• Much to be done on aggregating source /home country taxation of foreign investors

• Pending U.S. tax legislation has potentially long phase-ins and phase-outs, big wealth effects, all affecting policy and historical distributions

• A consequence of U.S. tax legislation is likely greater diversion of Cash-plus from accrual and DINA-based models in historical evaluation

– And the latter two models also may diverge more from each other as well)