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Urban Institute Book Considers Taxation of Capital Income, Illuminates Policy Issues

Document date: June 25, 2007
Released online: June 25, 2007

Contact: Stu Kantor, (202) 261-5283, skantor@ui.urban.org

WASHINGTON, D.C., June 25, 2007 -- Year after year, tax policy debates swirl around whether and how to tax capital income, the earnings from returns on assets and savings. The controversy arises from the concentration of assets among higher-income groups and the importance of capital to a growing economy. A new Urban Institute Press book delves into the intricacies of how the U.S. tax system deals with capital income and what switching to a consumption tax might mean.

In Taxing Capital Income, some of the nation's leading tax experts tackle three questions integral to capital income: Do we tax it? Should we tax it? Can we tax it?

Book editors Henry J. Aaron of the Brookings Institution and Leonard E. Burman and C. Eugene Steuerle of the Urban Institute write, "This volume will not settle the debate over whether to tax income or consumption, but will illuminate many practical issues that policymakers and the public should consider in evaluating proposals that call for converting income to consumption taxes."

Taxing Capital Income showcases the research and commentary of 20 tax experts in seven chapters:

  • Joel Slemrod from the University of Michigan offers three methods for calculating how effective capital income taxation is under the current income tax and concludes that the tax burden on capital is modest. Reed Shuldiner from the University of Pennsylvania elaborates why differentiating types of returns from capital is important. Jane Gravelle from the Congressional Research Service argues that the current tax burden is higher than Slemrod's estimates.
  • George R. Zodrow of Rice University concludes that a consumption tax would enhance economic efficiency and could be made fair. Alan J. Auerbach from the University of California, Berkeley, responds, questioning whether the actual gains would be as large as Zodrow supposes.
  • Eric Toder and Kim Rueben of the Urban Institute argue that switching to consumption taxation would not improve economic efficiency much and would aggravate income inequality. In two related commentaries, David A. Weisbach from the University of Chicago offers examples in favor of a consumption tax, while Joseph J. Thorndike from Tax Analysts uses historical examples to illustrate why such reform could be a tough sell.
  • Edward D. Kleinbard from Cleary Gottlieb Steen & Hamilton LLP concludes that the system for taxing capital income is broken and offers an inventive alternative called the business enterprise income tax, a hybrid income tax.
  • Julie A. Roin from the University of Chicago writes that before capital income can be taxed efficiently, a system to tax transnational capital income must be devised. Paul W. Oosterhuis from Skadden, Arps, Slate, Meagher & Flom LLP & Affiliates responds by arguing for greater enforcement of current rules, concluding that the U.S. government doesn't have the resources to handle the intricacies of foreign corporate investments.
  • Joseph Bankman from Stanford University and Michael Schler from Cravath, Swaine & Moore LLP explain potential loopholes that designers of a consumption tax would need to close, but disagree on whether they can be closed and, hence, on whether switching to a consumption tax would increase or reduce evasion and avoidance. Edmund Outslay of Michigan State University addresses the practical problems of taxing capital income under the current system, while the University of Connecticut's George A. Plesko expands on some obstacles to reform.
  • Commentaries from editors Henry J. Aaron and C. Eugene Steuerle and Harvard University's Daniel Halperin summarize the volume.

"Taxing Capital Income is a must-read for anyone interested in fundamental tax reform," writes Alan D. Viard, a resident scholar at the American Enterprise Institute. The authors "uniformly look beyond simple-minded slogans to provide a thorough and accessible analysis of the complex questions raised by reform plans."

Taxing Capital Income, edited by Henry J. Aaron, Leonard E. Burman, and C. Eugene Steuerle, is available from the Urban Institute Press for $29.50 (336 pages, ISBN 978-0-87766-737-7). Order online at http://www.uipress.org or call 202-261-5687.

Topics/Tags: | Economy/Taxes

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