An Updated Agenda for Progressive Taxation βy WILLIAM VICKREY

An Updated Agenda for Progressive Taxation βy WILLIAM VICKREY*Sincc thc publicatiOn Of thc ン4g′71dc in1947, rcmarkably littlc Of its rccommcnda―tions havc sccn irnplcmentatiOn, while inspitc of sporadic mOves toward“simpliflca―tion,''thc bulk Of thc intcrnal rcvcnuc codcand rcgulations has increascd exp10sivclyWhilc many of the original recommcnda‐tions rcmain valid, ncw circumstances caHfor a frcsh lookI.Capital GainsThc pcrennial ignis fatuus of spccial con―ccssiolls to capital gains, ostcnsibly for thcpurpoSe ofincreasing invcstmcnt,is again inthc ncws Herc thc sOvcrcign rcmcdy is thcusc of cumulativc asscssment,nrst propOscdas a form of averaging in 1939,undcr、vhichneutrality is achicvcd among various fOrmsof invcstmcnt and accOunting systcms bymaking thc uitimatc tOtal discOuntcd taxburdcn substantia‖y indcpendcnt of thetime at which a gain is rcalizcd or incomcrcported∞肌お∫宙蹴:ilfttittm鯛犠balancc from the prcviOus year's rёturn ln―tercst ls then added at an appropriatc rateto this prcvipus tax balance to gct a ncwcumulatcd tax balancc,and this interest andthe currcnt ycar's taxablc incOme arc addcdto thc prcvious cumulatcd incOmc to gct ancw cumulatcd incomc A giobal tax on thiscumulatcd incOmc is then calculated ac_cording tO tablcs apprOpriatc tO thc periodiDおε“ssα″ぉ:Emil Sunlcy,Jr、Dcloittc and TOuchc:糖認sR事し鷲胤li響よr呟M¨On caЯncゝ*ProfessOr Of EcOnOmics Emcntus,c。lumbia Uni‐vcrsity,Ncw YOrk,NY 10027257over、vhich thc incomc、vas curnulatcd, andthc cumulated tax balancc is subtractcd t。get thc tax currcntly duc Thc rcsult is that瓶鮒F乱Iょhli『麗r::il孤:li躍lProwing thc postponcd tax at the appropriatcratc Of intcrest, which can bc varied frOmycar to year as an additional flscal policymeasurcWithout cumulativc asscssmcnt, cvcn fuHtaxation of gains as Ordinary incOmc lcavcsgai1ls favorably trcatcd by cOmparisOn tOinvestmcnts yiciding taxabic incomc On anannual basis Thc advantagc t0 10ng_tcrmcapital gains can bc substantial, cspeciaHyas rnost invcstOrs rcalizing iarge capital gainsicvcrage their invcstmcnt by using it as col―latcral for borrowing Considcr an invcstorwho with a 30 percent marginal tax rateuses S10,000 of his o、vn to acquirc fOrS20,OCXl a capital assct that apprcciatcs at10 pcrcent per ycar, On margin, bOrro、vingS10,000 at 10 pcrcent intcrcst payablc anddeductiblc annualy Next cOmbinc the taxsaving at 30 pcrccnt of this intcrcst with a 7pcrcent increasc in thc 10an principal tOnnancc thc intercst chargc lf aftcr 20 yearsthc asset is s01d fOr S133,200, thc taxpaycrwould realizc a nct gain of$59,900 after taxand 10an rcpayment,comparcd to a nct gainof Only S39,900 from a 10-percent invcst―ment taxed annua‖y with rcinvestmcnt Ofthc aftcr―tax yicldslncrcasing, rathcr than dccrcasing, thctax ratc as thc hOlding periOd lcngthcns、vould thus prOduce a morc ncarly ncutraltax lt would aisO help rcducc Opportuniticsfor tax avofdancc by systematicaHy turningover more frequcntly thosc asscts showinglosscs and dcfcrring thc rcalization of gains,and it 、vould obviatc the nccd fOr rcstric―tions on thc deductibiliけOf 10SSes that of―tcn puts thc I RS in thc position Of playing3∂ノ4E4P/PERS"ArD PRO(]ZJZ]∠)ノ´イ('SMAγ′"2躍鍵sξSTTIIttT:i『‰1盤ibusinCSS gcneratcd for``tax tcchics"In anycaSC, thC “lock―in'' cfFcct can bc substan―11よj「1禅:黒il]『1畔∬認電ξTt尉Or bcqucst)to bc includcd in taxablc in―cOmcII. In■ationA supernCially appcaling argument is of‐tcn madC fOr making somc alowancc forthc fact that much of nonlinal capital gainsrcpresCnt innation rathcr than apprcciationin rCal Valuc HoヽVcvcr, to ano、v for this bySOIllC fOrm of indcxing prclccdurc,if applicdOnly lo Capital gains,、vould bc grossly dis―criminator/ against returns to capital inothcr fOrms, highly rcgrcssive, and wouldOpen thc dOOr to tax avoidancc on a grandscale by arbitrage bet、vccn indexcd assetsand nOnindcxcd liabiliticsStrictly, onc might argue for an across―thc board adJustmcnt of aH incomc fromcapital so as to climinate the efFects ofin■ation ln practice, howcvcr, unicss thcratc of inflation is cxtremcly high,thc cfFcctof any such aaustmcnt is likely to bc adistinctly inferior tax Not only 、vould thcrequircd calculations bc a substantial bur―dcn, but the disincentive efFects of thc taxwould bc worsened, or thc progrcssivity ofthc tax wOuld bc impaircd,or bothNominal accrued incomc is, indccd, thcsum of rcal accrued income plus a perccnt―agc of nct worth cqual to the ratc of inna―tion ヽVhile this may not bc 、vhat is mcantby a theorctical conccpt of nct incOme,it isin many respects a supcrior tax base,bcingbrOadcr and hencc rcquiring 10、ver marginalratcs tO achicve a givcn lcvel of revenuc andprogrcsslvltyHI Corporation lncome TaxRathcr than cutting capital gains tax,cut―ting thc cOrporation incomc tax oFcrs farbcttcr prospects for encouraging invest―mcnt Unlike the capital―gains tax,which islargcly a tax aftcr or beloヽv thc rrlarkct,afFccting thc nct rcturn to individuals with―Out dircctly affccting ratcs Of rcturn or prc―vailing costs of obtaining capital funding、thc corporatc incomc tax iS abovc thc mar―kct, raising thc ratc of rcturn rcquircd onncw cquity invcstments abOVC the markctlcvcl of capital rcturns by the amount of thctax lt has a doublc cFcct on thc economy,not only removing purchasing powcr fromthc income strcam,but in addition discour‐aging nc、v invcstmcnt that、vould add to thisincomc strcam This mCanS that it is impossiblc to talk realistically about thc incidcnccof thc tax without spcci″ing thC Changcs,ifany, in macrocconomic policy that wouldaccompany a changc in thc tax For instancca revcnuc―ncutral rcduction in thc corpora―tion tax accompanied by an cquivalcnt in―crcasc in thc uppcr brackcts of the individ―ual incomc tax would havc a stirnulatingcfcct on thc cconomy Tllus, this moveshould makc an attractivc proposition forthose whoヽvould like to stimulatc the econ―omy but fccl constrained by inhibitionsagainst  incrcasing  thc  nominal  budgetdencitlf thc economy werc at fun employment,this stirnulus would tcnd to producc infla―tion unicss countcred in somc way lf it iscountercd by a monctav contraction icad―ing to an incrcase in intcrest ratcs sumcicntto ofFsct the stimulating cfFcct of thc rcduc―tion in thc corporatc tax on invcstmcnt,thcrcsult 、vould bC to incrcasc thc rcturns tocapitali thc burdcn of thc corporate incomctax could thcn bc considcrcd to fa1l oncapital gcncraHy, in the mcdium long runOn thc othcr hand, if thc inlationar/ ten―dency is countercd by a furthcr incrcasc inpersonal incomc taxes and a reduccd bud―gctaw dcncit, thc result could bc a rcduc―tiOn in consumcr spcnding, an increasc ininvcstment, and ultimatcly an incrcasc in、vagcs(in the future 、vhcn labor has morccapital to、vork with and thus has a highermarginal productivity) In this sccnario thcburdcn of the tax、'ould bc on futurc wagc―carncrsln a contcxt of Substantial uncmploy―mcnt, if tl,c rcduction in thc tax 、vcrc sofoolishly managcd as to retain thc samclcvcl of cmploymcnt, thc rcsults ヽvould be

comparable to thc full―cmploymcnt cascHo、vcvcr, if a rcvenuc―ncutral rcplaccmcntof thc corporatc tax by incrcascd uppcr‐brackct individual incomc taxcs is carricdout 、vithout monctav stringcnり, cmp10y―mcnt and totai national incomc would bcincreased, so that the burden of thc taxcould bc considcrcd to involvc not only anirnpact on individual incomes but an cvcnmorc inlportant cxcess burden fronl its im‐pact on invcstment and cmploymcnt  in―dced, if the revcnuc―ncutrality is spccincdin tcrms of currcntly cxpcctcd tax bascs,thcincrcasc in activity would turn a budgetedrcvcnuc ncutrality into a rcalized budgctavgain ln thc not too long run, thc abolitionofthc corporatc incOmc tax might even turnout to bc rcvcnuc―cnhancing cvcn in theabscncc of countcwailing incrcascs in toppersonal incomc tax ratcsln addition to its doubly dcprcssingmacrocconomic impact,thc tax has seriousdistortionally ettccts on the alocation ofcapital bctwccn invcstmcnts that can bc n―nanccd v′lth debt and thosc that rcqulrccquity inancing Also it cncouragcs thincquity nnancing,with conscqucnt intrcasedincidencc of costly rcorganizations andbankruptcics;and it lubricates mergers andtakcovcrs of dubious merit Thus,whilc re―ducing capital gains ratcs increascs distor―tionary impacts,rcducing corporate incomctaxcs mitigates thcm ln spitc of an of thesedcfccts, it has a fatal political popularity,due to thc tcndcncy of al of thc partiesconcerned to bclieve strongly that it is paidby someonc other than themselvcs; and insome scenarios, the impact would be fcltmainly by futurc gcnerationsAn important considcration is that a sud―dcn substantial cut in thc tax、vould icad tosubstantial、vindfan gains An intriguing、vayof avoiding thc crcation oF such 、vindfals,suggcsted by Harold Watts(pers comm)isto oFcr corporations an opportunity to con―tract out of futurc corporation incomc taxcsby issuing to thc Trcasurv nc、v shares cqualto somc pcrccntagc of the sharcs outstand―ing at sOrnc base datc, the sharcs bcingnonvoting as 10ng as thcy arc hcld by thcTrcasuw ln a rccession context, trcatingthc market valuc of thc sharcs as a rcvcnucFEDrR42_T/4ヽ′0たノεy′οR T/ノE′990ヽcithcr immcdiatcly or upon salc,might sewcto rclax budgctary COnstraints and authorizea nscal stimulus to thc economy Altcrna_tivcly, one nlight sirnply tolcratc thc in_cquity of thc windfans for thc sakc of theconscqucnt stimulus to thc ccononly, cx_pccting to recoup at icast somc of thc、vindヽfans through capital―gains taxationEvcn this will bc dittcult and pcrhapscvcn irnpossiblc pOliticany,unicss somc sub_stantial tax can bc kcpt that will bc pcr―ccived as bcing a tax On the souncss mon_stcrs Onc way to do this 、vould be tOconvcrt the tax into a、vithholding at sourccof thc individual incomc tax, as indccd itwas to somc cxtcnt in a rough sort of waybcfOre 1936 Pcrhaps thc cleancst way ofdoing this、vould bc lo split thc individualincomc tax into a nat ratc normal tax fromwhich corporatc dividcnds would bc ex―empt,and a graduatcd surtax,thc corporatctax bcing imposcd at thc samc ratc as thcnorrnal tax lnstead of thc a、vb″ard Britishproccdure of``grossing up"nct dividends toincludc the tax notionany withheld,a cleanerresult can bc achicved by aHowing the nor―mal tax paid on nOncorporate incomc to bedcductcd in computing thc basc for thegraduatcd surtaxⅣ.Undistributed ProntsThcre remains thc problcm of dcferral ofsurtax through the accumulation of undis―tributcd pronts in corporations The neatand equitablc ans、vcr to this problem isagain thc usc of cumulative asscssmcnt Ab―scnt such asscssment,a verv rough countcr―vailing tax could bc lcvied annua‖y on thcaccumulatcd surplus of corporations at aratc equal to a suitabic rate of intcrcstapplicd to thc surtax rate payable by a typi―cal sharch01der Thus、 for a surtax ratc of30 pcrccnt and an interest ratc of 8 pcrccnt,thc annual ratc on accumulated surplus、vould be 2 4 perccntV Transnational lnconicWith thc incrcasc in the openness of thcU S cconomy,thc problcm of how to trcatincomc lo、ving across,urisdictiOnal bound―MAy′"2/Eレ4P/PERS ИND PROCEED′NCS2″Vl Determining lncome SOurCeヽVhilc dctCrmining the source Of an itCmof incomc is in many Cascs fairly cICar―cut,whcre thc Operations of a business c10SSintcrnational boundariCS many qucst10nsTl点rt穏驚古器#絶量鳳伊臓:ヽ:i欄子上操∬蔦∴I凝Ftta掛ボ麟卜蛛翻TBI′=TB,(S./S′+κゥ/Kノ+"4ブ/レシ1)/3MI誕i騰聾∫i灘i五灘桑b弊llyttξ∫AT討:品:lt板昇(r:聟『:;:c::lTBゥ=β:[(aS,+bκり+Cに')/(αSi+わκl+ε嘱)l灘l舗憮辮|闘慧lsar::ぼpttwi「:鷺L』°til

2N02FFDEん4′´T4χ′0′´′(y′οR T/′E′'90=26′sourcc―bascd incomc taxation is thal of dc―limiting thc unit to bc considcrcd in thcfacc of thc multiplicity of intcrdcpcndcntowncrships to be dcalt with On thc、vholc itwould probably bc bcticr to avoid prctcnd‐ing that onc is icvying an incomc tax andinstcad ic、1' a spCCinc cxcisc On thc grossamount of fccs,rcntals,and royalticsヽ■l Tax‐Exempt BondsThe cxistcncc of tax―cxempt bonds is aphenomcnon pcculiar to thc Unitcd Statcs,a rcmnant of a doctrinc of state sovcrcigntythat at Onc timc 、vas held to rcquirc thccxcmption of salarics Of state cmployccsfrOm the fcdcral incomc tax Currcntly itsclimination is strongly rcsisted by statcs andlocalities becausc of thc rcsulting incrcascin tho cost Of thcir bOrrowing ヽVhile somcprogress has indccd bccn madc in curbingabuses oF the privilcgc through flnancingcapital facilitics uscd by privatc irms byissuing public bonds,furthcr issucs for pub―lic purposcs continuc to bc cxcmptThis is an incncicnt way for the fedcralgovcrnment to grant aid to thc statcs Evcnif one couid justiFy such a subvention bascdon the amount of statc and locai govcrn―mcnt borro、ving,rathcr than on actuai nscalnccd, thc cost is cxccssiVC TO makc bondsattractivc to a suttciently large body of pur―chascrs the intercst ratc must bc sct at alevel attractive tO middlc―brackct taxpaycrs,and the loss Of fcderal tax revenuc fromしonds hcld by uppcr‐bracket taxpayers wi!1be largcr than thc saving in intercst to theissucrs by thc diIIcrcntial in marginal rates´、lso、 cncouraging high―incomc taxpaycrs toinvcst in rclatively saFc local govcrnmcntbonds unduly contracts the supply of badlynccded vcnturc capitalA substantial improvcment in thc situa―tion can bc securcd by converting thc cx―cmption on both nc、v and outstanding bondsintO a taxablc tax crcdit cqual to a pcrcent―agc of thc intercst sumcicnt to prcscpνe thcmarkct valuc of thc bOnds lf tax―cxcmptbonds yicld 8 perccnt and comparablc tax‐ablc bOnds yicld 10 percent, a taxpaycr rc‐ceiving S80 on a formcrly cxempt bond、vould obtain a credit Of 25 perccnt of this,which、′ould bring thc total taxabic incomcto S100 1f hc isin a 20-pcrccnt brackct thccrcdit wilithcn ofFsct thc tax on this amount,lcaving him whcrc hc was with thc cxcmp_tion A taxpaycr in a 35-perccnt brackctwould bc lcft with a nct tax of$15VllI IIome OwncrshipRivaling thc corporation incomc tax in itsciash bct、veen political popularity and eco_nomic rationality is thc discrinnination in―hercnt in thc failure to includc thc imputedincOmc from homc owncrship in the incomctax basc Whilc administrativc difncuitics inobtaining an equitablc appraisal of this im―putcd rcnt arc serious,this obJcction ccr―tainly docs not app!y to eliminating thedcductibility of propcrty taxcs by owncr―occupants lt is no ans、ver to say that land―lords can deduct thcsc taxcsi thcy must alsorcport as incomc the rcnts thcy coHect tocovcr thc tax Thc dcduction also involvcsdiscrimination against those paying sepa―ratcly for garbage co‖cction, watcr supply,scwcr scrvice,and thc likclt is somewhat anomalous that morc at―tcntion seems to havc bccn given to thedcduction of interest on mortgagcs than tothe deduction for taxes Eliminating thc in―tcrest deduction incrcascs thc discrimina―tion bctwccn mortgagcd owncrs and owncrsfrcc and clcar,while mortgagcd owncrsゃvithothcr earning asscts would be givcn an in―centive to scll othcr assets to pay ofF thcmortgagc, dccrcasing thc supply of vcnturccapitalThc prcscnt systcm in、vhich thc politicalclout of thc homc―owning constitucncy hasprcservcd thc dcductibility of mortgagc in―tcrcst,ヽvhilc dcductibility is dcnied to othcrforms of consumcr crcdit intercst, is cvcn、vorse ヽVhile home o、vncrs arc bcsieged bylcnders urging thcm to takc out secondmortgagcs or “homc―cquity loans" to con‐solidatc thcir debts at morc favorabic ratcsOf tax―dcductibic intercst. rcntcrs arc de―nicd this opportunity and not only must payhighcr intcrcst rates but pay taxcs()n thcincomc uscd to pay thcsc chargcsThis income tax discrimination againstrcntcrs is the morc serious in that it comcsMAγ′992´E4′/′εRS/ND ttRO([εD′N6Sof thc diSCrinlination against rcntcrs wouldmakc this WCll WOrtl,WhileIX.InCO:lle[Om LFisurcヽVhilc dircct CValuatiOn of incomc fromicisurc would bC tOO Sublcct市c a matter to換淋崎幾1晨撫鰐重∬よ吼lC瓢[窒К潔乳「::器歴SI pOlllto、vncr―occupantS)andヽVhat corresponds toRE「ERENCE百藉l慕縮鱗Ч‰∬鳳マ臨∬