As we move towards the end of the video, we should discuss the effects of the plan which
is really why we're doing it and we've already made some of those clear.
Under this plan, there's gonna be much less emphasis put on where the corporation is chartered
or on where it books its profits and so you're going to see a lot less manipulation of those
concepts.
Maybe still a little as people try to skirt the 15% corporate tax, but nowhere near what
you're seeing at today's 35% rate.
Instead, you're going to see tax based on where the shareholders live.
You should expect to see more profits booked in the United States, you should expect to
see more corporations having U.S. charters and you should expect to see more investment
in the United States.
More capital flowing into this country, to build factories and pursue business opportunities
here.
All of that of course creates demand for American workers, makes them more productive and drives
up their wages.
There's really a reform that's...It also addresses those closed economy distortions, the bias
in favor of debt, of borrowing instead of issuing stock and the bias in favor of pass-throughs
instead of corporations will be smaller than they are under today's system.
We've really addressed all of those concerns to some extent or another.
Now one of the issues that always comes up when you try to cut the corporate income tax
or any other major tax is, first of all, are you giving the federal government a revenue
hit that would be problematic with today's deficit and are you giving those benefits
to high income people to the exclusion of other income groups?
Maybe you should say a bit, Eric, about how our plan shapes up in terms of the total taxes
that will be coming in and who those taxes will be collected from.
Eric: Okay.
We think the total taxes that are coming in will be about the same as what's been projected
by the Congressional Budget Office.
Obviously, there'll be less corporate revenue coming in if you cut the corporate rate, but
the corporate tax is becoming less important.
The Congressional Budget Office is projecting that from 2.5% of the economy, in a decade
it's going to be down to 1.5% of the economy.
Alan: The companies are doing all these things that we've talked about.
Eric: Based on all of these things that are happening.
They're inverting, they're shifting income and they're switching to the partnership,
our flow-through form.
There is less of a loss than there used to be.
A second thing that's going on is the accrual tax is raising a lot of money, because a lot
of gains, particularly gains transferred at death are going untaxed.
We also have some other provisions to tax the interest income of non-profits, so we
would recover some of the revenue loss or some of the benefit they get from having the
corporate rate cut from 35% to 15%.
If we look at all our provisions, we come very close to revenue neutral, even if we
don't assume any behavioral responses.
However, there probably will be behavioral responses.
There is a lot of evidence of corporations shifting profits to low tax locations in response
to tax differentials.
When we reduce those differentials, a lot of those shifted profits will come back to
the United States.
Using some reasonably conservative assumptions, we get a reasonable size, maybe a quarter
of the corporate revenue loss comes back in a revenue reflow and that makes a difference
to our bottom line numbers because we're raising revenue in other places.
Alan: Everything really changes, doesn't it?
Today when we talk about companies booking their profits in low tax countries, we always
mean that they're taking them out of the United States and sending them to some other country.
Under our plan, of course we'll be one of the low corporate tax countries and so when
companies are booking their profits into low tax countries, that means they're coming here
instead of going somewhere else.
So it really just changes the whole equation, you know?
It's the opposite of what we're looking at today.
Eric: The second issue is, what is the distributional effect of these changes and I think it's important
to understand the distributional effect of a tax on corporate profits, which is largely
a tax on economic activity in the United States, what remains of it, and a tax on shareholders,
which is a tax on the worldwide income of wealthy Americans.
There are two reasons why the corporate tax is less progressive than the shareholder tax.
One is it causes some investment to be shifted overseas.
That causes there to be less capital per worker in the United States and pushes some of the
burden of the corporate tax on to labor.
The second thing is of course, many of the owners of corporate shares are pension funds,
retirement funds and so forth and the income profile of people who have income from those
assets is much lower, much more broadly based than those who have income from individual
share ownership outside of retirement plans.
When you lower the corporate tax and increase the tax on shareholder income, you're going
to end up with a modest net increase on high income investors and a modest tax reduction
on people throughout the rest of the income distribution.
So we think our system is actually making this...our reform is actually making the system
more progressive, which at first blush if you're just looking at a cut of the corporate
rate, no one would say that, but you have to look at the totality of what we're proposing.
Alan: Yeah.
The reason why the corporate tax has any progressivity at all is because many of the shareholders
who own the corporations are in fact well-off and of course, we're not letting any of them
off the hook because the shareholders are in fact gonna be taxed.
They're gonna be taxed directly in a more transparent manner.
Anybody who wants to look at the detailed estimates that Eric and his colleagues at
the Tax Policy Center did, can find those in our report.
I think it really provides a very compelling picture of how it stacks up on the revenue
and the distribution and really addresses those concerns quite thoroughly.
Now the one thing people ask when they hear this plan, whether they like it or not is
they say, "What are the prospects that this could really be adopted?"
Here I think it's important to distinguish between the short run and the long run.
This is a much more radical, much more sweeping, we think much more beneficial than the reforms
that are now being considered.
I think we're fully aware that this is not something that's going to happen either in
2016 or in 2017, that the Congress and the president, whoever the next president may
be, they're not going to be ready right now to take a step quite this dramatic, but I
don't think we want to just stop at the short run.
What do you think might happen in the long run Eric?
Eric: Well, I think as the system evolves...the current system is unsustainable in the long
run.
It's only going to get worse and people will eventually have to look at more fundamental
reforms.
I would say actually they are looking at more fundamental reforms today.
Alan: They're starting to.
Eric: Senator Hatch has a plan for corporate integration.
It's not our plan.
I think it has some flaws, but it's very interesting that he's thinking more broadly.
Senator Cardin has a plan to eliminate a good portion of the individual and corporate income
taxes, replace it with a value added tax.
That accomplishes many of the same benefits that our plan does.
He doesn't want to call it a value added tax...
Alan: Yes, no one does.
Eric: ...because that's political poison, but that's essentially what it is and it's
shifting the burden of consumption.
Alan himself has developed a plan for shifting the entire tax to a progressive consumption
basis.
That plan has really been taken up by Paul Ryan in his tax reform ideas in a modified
form.
Alan: In a modified form, but yes.
Alan: Again, we're not endorsing any of these plans exactly the way they are, but I think
it's encouraging that people are thinking of very fundamental changes and the political
pressures with all the talk about income inequality, it's come out in this campaign that everybody
is worried about what's happening to wages in this country and what's happening to incomes
in the middle of the distribution, that we need to maintain revenues, that we can't make
the system less progressive and to think of a plan which would solve the basic issues
that we have, the basic distortions that the corporate tax is producing and yet maintain
revenue and maintaining progressivity I think will be very attractive when people look at
it.