Slides 8.1 - Tax Code as Policy Tool

TAX CODE AS POLICY

Date: February 25, 2025HOUSEKEEPING

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OUTLINE

1. Tax Code and Policy

2. Tax Code as Distribution Mechanism

3. Case Study: Reagan-era tax cuts & campaign contributions

4. Money in Politics

5. Guest Speaker!

HOW TAX BRACKETS WORK

Example of taxation for an individual earning $58,000:

• The first $11,000 is taxed at 10%, which results in $1,100 owed.

• The income from $11,001 to $44,725 is taxed at 12%, leading to an additional tax of approximately $4,050.88.

• The income from $44,726 to $58,000 is taxed at 22%, adding approximately $2,891.68.

• Total tax liability: $1,100 + $4,050.88 + $2,891.68 = $8,042.56.

TWO VIEWS ON TAX CODE AND POLICY

• Podcast: "A Tax Policy Primer" (American Enterprise Institute)

  • Traditional Conservative View: Argues for cutting taxes to stimulate productivity and enhance economic growth, reflecting previously held conventional wisdom in fiscal policy.

• Reading: Fleischer article (The American Prospect)

  • Progressive View: Advocates for taxing and auditing the wealthy, and eliminating tax loopholes that disproportionately benefit high-income earners.

  • Is there common ground between these two views? Both propose reforms aimed at improving the efficiency and equity of the tax system, albeit from very different starting points.

TAX CODE AND POLICY

• The tax code is frequently employed as a tool to influence societal behavior and economic choices.

• One of the most significant elements of civilization revolves around the concept of money, particularly how individuals perceive and manage it.

• The tax code not only collects revenue for public services but also serves as a mechanism that redistributes wealth, which can significantly impact individual and family financial situations.

TAX CODE AND POLICY (Continued)

• The tax code acts as an inducement policy, where tax breaks are designed to encourage beneficial economic behaviors, such as investing in renewable energy or contributions to retirement savings.

• Conversely, tax increases can deter certain activities.

• However, the effectiveness of tax incentives is often skewed in favor of wealthier individuals who have better access to tax advisors and related resources, leaving lower-income individuals with fewer choices and higher relative burdens.

• The complexity and sheer volume of the tax code can create confusion, making it difficult for average taxpayers to navigate their obligations.

TAX CODE AS DISTRIBUTION MECHANISM

• Tax breaks function as a form of government subsidy, redistributing resources in a way that can mirror direct distribution policies, often unintentionally favoring specific demographics or industries.

• Example: For Bob, whose expected tax income is $50,000, a significant tax deduction for his farm reduces his tax liability by $20,000, resulting in a net tax bill of only $30,000.

• This dynamic not only reduces the government’s income from Bob but also highlights the need for a critical examination of tax expenditures as they frequently benefit group interests rather than general public welfare.

TAX CODE AS DISTRIBUTION MECHANISM (Continued)

• Tax breaks can act to redirect resources in a manner akin to targeted government grants or subsidies, emphasizing the political focus on assisting specific groups perceived as underserved or less deserving.

• The tax code’s complexity, with its myriad of provisions and exemptions, serves as a subtle form of wealth redistribution, evident in mechanisms such as Opportunity Zones designed to encourage investment in underdeveloped areas.

CASE STUDY: REAGAN-ERA TAX CUTS

• The 1986 Tax Reform Act was a significant bipartisan reform that fundamentally reshaped the tax landscape.

• The reform resulted in substantial tax cuts, predominantly favoring high-income earners, with the top tax rate decreasing dramatically from 50% to 33% by 1987, further widening the income disparity in the U.S.

• Political Effects: Following these cuts, there was a noticeable increase in political donations from high-income individuals, indicating a close relationship between tax policy and campaign financing (Larcenese and Parmigiani 2023).

MONEY IN POLITICS

WHOSE POLICY PREFERENCES?

• Research conducted by Gilens and Page (2014) indicates that contemporary policies primarily reflect the interests and preferences of business-oriented groups and economic elites, highlighting a skewed representation in policy-making processes.

• This bias often preserves the existing policy framework, making it challenging to implement changes, a phenomenon known as path dependence.

IMPACT OF MONEY

• The influence of financial contributions on the political landscape has grown increasingly pronounced, with candidates’ wealth significantly impacting their likelihood of electoral success (Fouirnaies 2018).

• Early fundraising efforts often dictate the outcomes of primary races (Bonica 2017), while open primaries tend to favor candidates with superior fundraising capabilities (Thomsen 2023).

• Additionally, the effect of lobbyists on policymaking is notable, as they often fill critical information vacuums for policymakers (Curry 2015).

• Business interests are frequently predominant during agency rule-making, influencing the final outcomes (Yackee and Yackee 2006).

NEXT WEEK

• Tuesday: Housing session

• Thursday: Climate change session (No class this day!)

LAGUNA NIGUEL COUNCIL MEMBER

• Stephanie Oddo