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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

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SLIDE 1

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

Patrick Driessen First WID.world Conference December 14, 2017

Author solely responsible for content

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SLIDE 2

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
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SLIDE 3

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,

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SLIDE 4

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)

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SLIDE 5

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

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SLIDE 6

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
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SLIDE 7

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

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SLIDE 8

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

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SLIDE 9

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

Model 2012 2013 2014 2015 $Trillions As a %

  • f PSZ

$Trillions As a %

  • f PSZ

$Trillions As a %

  • f PSZ

$Trillions As a %

  • f 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.
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SLIDE 10

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.

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SLIDE 11

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

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

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

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

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SLIDE 12

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

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

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%

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SLIDE 13

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

20 40 60 80 100 Cash-plus DINA Adjusted DINA (no growth 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

20 40 60 80 100 Cash-plus DINA Adjusted DINA (no growth 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

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SLIDE 14

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

100 200 300 400 500

Cash-plus DINA Adjusted DINA (no growth expected) Distributional Approaches Top 1% Low 99% Foreign Investors

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SLIDE 15

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 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

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

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SLIDE 16

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

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

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

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SLIDE 17

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

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

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

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SLIDE 18

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

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

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%

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SLIDE 19

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

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SLIDE 20

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)