Thursday, April 11, 2019

Professor Liscow on the Effects of Tax Policy Changes

April 15 is Tax Day in the United States, and this year many filers are seeing for the first time the effects of the Tax Cuts and Jobs Act of 2017, the largest piece of tax reform legislation in more than three decades. We asked Associate Professor of Law Zachary Liscow ’15 about some of the impacts of the new tax policy as Americans finish filing their taxes.

Zachary LiscowQ: Given all of the variables that influence the economy, how will we know the true effects of new tax policies on economic growth (positive or negative)?

ZL: It is very hard to know. One must do a fair amount of guesswork to discuss the effect of the new tax law on economic growth. We'll never really know the exact true effects of the new tax law. But some of the best evidence (this paper in the American Economic Review and this paper forthcoming in the Journal of Political Economy) comes from looking across a large number of tax changes and comparing economic performance after tax cuts to similar economic times without tax cuts. They find that reductions in taxes do tend to increase growth for a period of time after the tax reduction. However, those growth impacts are driven by tax reductions to middle- and lower-income households. Tax cuts to richer households appear to have less impact on growth, as it seems that tax cuts are a bigger inducement to work and consume for lower- and middle-income households than for richer households.

Q: Though the economy is relatively strong, income inequality continues to rise. How do you see changes in tax policy affecting income inequality over the long term?

ZL: These tax cuts were not good for reducing income inequality. The cuts were heavily targeted on the rich. Furthermore, the 2017 Tax Act is considerably increasing the national debt, which may limit the ability to adopt programs that address income inequality in the future. Future changes to tax law may undo these regressive distributional impacts and then work on addressing inequality.

Q: What are some of the legal or policy remedies for addressing income inequality?

ZL: There are many types. I'll review a few. One set involves changing the basic structure of the tax code: We could tax the rich households more and poor and middle-class households less. We could also tax the type of income — in particular, income from capital (e.g., capital gains and dividends) — that richer households tend to earn at higher rates.

A second set of policies is on providing people with the basic services that they need to get ahead in life, like healthcare, education, transportation, childcare, and housing, along with a healthful environment.

A third is setting basic legal rules of the road in economic policy, such as those on competition policy, labor market policies like unionization and the minimum wage, and criminal justice.

A final set of policies is on structural power in the political process, such as campaign finance, lobbying rules, media regulation, and voting laws; changes there could improve the voice of lower-income people. The best policies to pursue among these will turn on questions of first principles, often difficult-to-answer empirical questions, or one’s view of political change, among other considerations.