BFI NewsAug 08, 2013

The Facts About Taxes

Conference to Air Evidence on Economic Impact

Everyone, it’s safe to say, agrees that we need a simpler, saner tax system. Yet few issues in the political world are met with more heated debate. Any attempt at reform is met with political wrangling rooted in deeply held beliefs about the economic impact of any tax cut or credit.

Emotional appeals and partisan maneuvering hinder efforts to create a tax system that promotes growth and minimizes economic distortions. Policy decisions should start from a foundation of facts, says James Heckman, the Schultz Distinguished Service Professor of Economics. “It’s time to ground these debates in the best evidence about the real impact of taxation.”

The institute is bringing that evidence to center stage. Heckman, the 2000 Nobel laureate in economics, and institute research director Lars Peter Hansen collaborated with some of the world’s leading tax experts to organize a daylong conference exploring the best evidence on the impact of taxation.

Economists of all stripes will gather in Chicago on Sept. 27 at “The Empirical Foundations of Supply-Side Economics.” Their goal is to build a consensus summarizing what we know about how taxes influence incentives and economic choices.

“Supply” in this case references taxation’s impact on labor supply, investment in human capital, and corporate investment. Richard Blundell, Ta-Chung Liu Distinguished Visitor at the Becker Friedman Institute and the Ricardo Professor of Political Economy at University College London, will present work examining individuals’ response to taxes. Specifically, his paper looks at how the balance between earnings taxes, tax credits, and income support programs create short and long term incentives for employment and human capital development.

“The key to upward trends in employment and earnings in the long run will be to focus policy on entry to the labor market entry and on retirement. These margins are precisely where labor supply is shown to be responsive to tax policy incentives,” says Blundell. “Human capital has a key role too, by improving the pay-off to work and by ensuring earnings hold up over a person’s lifetime.”

As director of the Institute for Fiscal Studies in London, Blundell was a lead author of the Mirrlees Review, a comprehensive study of available evidence leading to recommendations for an optimal tax system. As a Becker Friedman Visiting Scholar in spring 2013, he shared some of that evidence, and helped inspire and organize this event to share it more widely.

Presenting the macroeconomic side of the equation is Alan Auerbach, the Robert D. Burch Professor of Economics and Law at the University of California, Berkeley. His work examines the effects of capital income taxes and the design of corporate income tax systems. Auerbach will present arguments for additional taxes on inheritance between generations, the potential social good that could be promoted via a shift from income taxes to a consumption tax, and the pros and cons of sweeping systemic reforms versus small-scale incremental reforms.

Popular notions of a consumption tax system often view it as a less progressive option than the income tax system we have today. Auerbach says that he hopes to clarify that misconception by laying out a factual groundwork for a consumption tax system in his talk. Similarly, he hopes to debunk the misunderstanding that taxes levied on corporations are paid exclusively by the very wealthy.

For the most complete view of available evidence, discussants from diverse fields and viewpoints will respond to both presentations.

The conference will conclude with a panel discussion synthesizing empirical observations about taxation and beginning to develop a consensus on knowledge that can guide policymakers. Panelists include former Obama economic policy advisor, Austan Goolsbee, Robert P. Gwinn Professor of Economics at the University of Chicago, and American Enterprise Institute Senior Fellow Kevin Hassett, among others.

“This conference will identify a lot of the questions that we need answered, and ideally set the research agenda for examining how taxes impact life in a global economy,” says Heckman. The final panel in particular will be valuable for policymakers, practicing economists, the media, and concerned taxpayers, he notes.

Hansen, the David Rockefeller Distinguished Professor of Economics and statistics, says the conference is a prime example of the Becker Friedman Institute’s mission in action. “We get the top economic minds in the world into one room to think seriously about the most challenging questions we face in a 21st century economy,” he noted.

In that light, Heckman believes the event could have important ramifications for the public at large, particularly as we head toward another election cycle. “Voters can’t make informed decisions about what their elected leaders are proposing without understanding the facts that underlie those proposals,” says Heckman. “Building this foundation of facts makes a real contribution to intelligent democracy.”