There’s one piece of tax reform that would have a real impact with little resistance

Corporate tax reform may be the issue with the highest degree of consensus among Republicans and Democrats. But when it comes to most issues regarding personal taxes, it’s been hard for those on both sides of the aisle to agree.

That said, in a recent Harvard Business School (HBS) study on competitiveness, professor Mihir Desai explained there is one key area where both sides seem to agree: a minimum tax on the highest earners.

While personal tax reform “cuts a little closer to home” than corporate tax reform, according to Desai, changing the tax brackets at the highest level is something that would have a real revenue impacts without too much resistance.

A new top tax bracket

Desai, who is both a business and law professor at Harvard, explained that there is a distinct opportunity for a new top tax bracket, especially given the changing composition of the current brackets.

In 1935, the top bracket included just one person, John D. Rockefeller. In 1980, the top bracket included 0.1% of the population and now is 1%, according to Desai.

“What’s happened over time is the top bracket is capturing more and more people,” he said. “Twenty years ago it was 0.1% of the population in the top rate. But higher incomes have grown faster than median incomes, so now 1% of the population is in that top rate.”

The top 1%, Desai explained, is a politically powerful group that spans a broad range of income levels, making it difficult to enact any reform.

Desai explained that the HBS survey found high consensus for a new top bracket for households that make more than $1 million per year. “You feel like, ‘Why am I taxing the $400,000 person at the same level as the $1 million person?’”

He added that shifting this could actually raise a meaningful amount of money.

Only a minimum tax on households making more than a million dollars a year received a positive net approval rating, overall and across political affiliations.

Other reforms to the personal tax system received sharply partisan reactions, as shown below.

Source: Harvard Business School US Competitiveness Study
Source: Harvard Business School US Competitiveness Study

Other proposals with high level of consensus

Desai explained that another proposal that was positively received in the survey was the deductibility of dividends at the corporate level (with taxation on the individual level).

“You can do it in a more progressive way and avoid double taxation,” he explained.

A carbon tax also has received a high degree of support.

“There is political will to do a carbon tax, which in many ways is a great tax,” Desai said. “It can raise serious amounts of revenue. Instead of actually distorting our behavior and making us do things we shouldn’t do, it probably makes us do what we should do, which is consume less energy, because it internalizes all the prices of energy consumption.”

Raising revenue

Meanwhile, education and health savings accounts that allow for tax savings are also controversial, according to Desai, as they have encouraged positive behavior but give an outsized benefit to certain population groups.

In effect, what it does, is it seems like a good idea, which we want to reward savings, but what it really creates is a real patchwork set of savings incentives,” Desai said. “We end up in a world again where we have high rates and then a small base, because everyone’s deducting all these savings. That’s a really inefficient system, because again, you have rates making you do crazy things and then you’re not raising that much revenue from it.”

Meanwhile, it gives an out-sized benefit to the well-off, he explained, because they can understand the system and they’re the ones that can really have the savings to benefit from it.

“It would be much better to see a unified set of savings incentives or, alternatively, switch to taxes like carbon taxes or consumption taxes which allow you to not tax savings in the same way that an income tax does,” Desai said.

Ultimately, any tax reform should be based on efficiency, equity and complexity, Desai explained.

Avoiding complexity is particularly key, because adding too many work-arounds “penalizes people who can’t understand the system.”

For more on the HBS US competitiveness project, please see below:

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Harvard Business Dean: The post-crisis monetary policy is ‘running out of runway’

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America’s outdated education system isn’t producing the workers companies need

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