That afternoon. Welcome to the urban institutes first tuesday where we celebrate the 100th anniversary of the incometax. My name is howard gleckman, the editor of the urban institute blog. A hundred years ago, delaware became the 36 state to ratify the amendment creating a modern incometax. This one was memorialized in the constitution and we have had an income tax ever since. It is the tax we love to hate. In the 100 years, it has gone from a simple richmans tax to todays tax with a top rate north of 40 . Williston churchill said we seem to think it is the worst possible tax Winston Churchill said we seem to think it is the worst possible tax. To my far right, joseph thorndike, director of the tax history project. His latest book is thei r fair share, out today, published by the urban institute press. Eugene steuerle has written about tax policy. He has also lived it. Nearly three decades ago, he was on the godfathers of what became the Tax Reform Act of 1986. He holds the fisher chair at the urban institute. Eric toder has been involved in the income tax at the treasury and irs. He is currently an urban institute fellow. Finally, nina olson is Taxpayer Advocate at the irs persian represent those of us who pay taxes at the irs where she represents those of us who pay taxes. Office released its latest report on the state of the tax code. With joe who will give us a history of the income tax. After we do a presentation, we will give everyone an opportunity to ask questions. For those watching on cspan or online, you can send in questions at publicaffairs urban. Org. I am glad to see there is a reasonable number of people here. I tell people i have the worst possible job for a cocktail party. They ask me what i do and it brings the worst combination of april 15 and a Highschool Class somewhere. It is incredibly boring for so many people. And these that is the initial impression. I have been calling it an important moment for us to recognize 100 years of struggling with a tax Everybody Loves to hate. What is striking to me is that complaint about the income tax are just as old as the levy itself. Many are exactly the same we have today. For instance, from the start, we have been calling this tax a convoluted nightmare. In 1915, two years after the first income tax was enacted, one critic said it is so complicated it is impossible to understand its meaning. Americans have called the tax intrusive and unfair and on american but all the complaining has done very little to slow its growth. The tax, the story of the income tax in United States is one of steady growth. And at some points, very quick growth. If we hate it so much, why does it grow steadily . Every proposal to replace it has been considered and rejected over the years. The answer to the puzzle is to fold. The incometax the two things quite well most important, it raises money. It turned out that this was a great with for the grant for the federal government to raise a lot of money quickly. But just as important in the long run is that the tax is also comported with notions of fairness, and least as americans have voiced that the politics. We do not have a survey data for the early period but since this started polling in the 1930s, it has been very clear americans are reasonably tolerant of the income tax and will leave it meets some standard of fairness easily defined in terms of ability to pay. Those things have done the whole job. The original tax was very small. Top rate of 7 and extension of almost 100,000, adjusted for inflation. It was designed to to make this tax system fair or fairer. Some look back and say we can learn about tax policy today. Look how light it was. It is important to remember that just five years after the tax was enacted, the top rate was 77 . Those same lawmakers who thought 7 was good in 1913 thought 77 was good five years later. There is a war in the middle and not the big difference. Wars have a tendency to change it. World war i dramatically exchange dramatically changed the tax. In the war comes along another war comes along. World war ii transforms the class tax to a mass tax. Number of homese filing increased tenfold. One scholar later observed the income tax changed its morning code for overalls its morning coat for overalls. The transformation was important for two reasons. First, it made the federal incometax the single largest source of federal revenue. It got that title some time in the 1930s. It is hard to imagine what we used to raise half of federal revenues by tax and consumer goods, especially out of hock and tobacco. That changes in the 1930s. Ut in the 1940s, the war changed that once and for all. Until the 1930s, the only daily contact or even weekly Contact People have with the federal government was the post office. The tax system change that through withholding which comes in during world war ii. We start to see the hand of the federal government in our paycheck and our lives. The transformed the way americans, about their government. They were getting benefits, things like Social Security. At the same time costs of government are more clear after the war. Ontoe 1950s, they hold these ridiculous high rates, as high as the money for as high as 94 . The reason is the president makes peace with the tax system he inherits from harry truman and is more interested in deficit reduction and that Bank Retirement than he is in a tax reduction. That does not mean there is no tax reduction in the 1950s. People who are fans of reason tax rates now and burdens on the ich point back to the 1950s here is an era of good growth and we have these really high tax rates. Tahts true but thats true but effective tax rates declined steadily during the 1950s. Colom policymakers fi figured out the deal. That would reduce the effecrtive ctive rate for most taxpayers. If you look up the actual rates being paid by people, they are dropping quite quickly. It is notionally high rates but declining tax burdens. Those high tax rates that economists loved to hate then did succumb to a Democratic Administration and then to the 1916s when the Kennedy Administration past the big tax cut Democratic Administration kennedy1960s when the administration passed the big tax cut. That is an unholy compromise. The rate reduction to the to the 1960s walked back a bit. Broadening the base and lowering the rates was not there yet. There is a general decline in public support for the income tax. Isnt that it is not serving a sense that it is not serving its fairness goal carried its fairness goal. Another fairness says those guys are getting away with murder. But they are undermining the legitimacy of the tax system. That has been a constant of american tax policy. Roosevelt made a lot of use of it and erika the vincennes has. That started to pick up steam in in franklin0s roosevelt made a lot of use of it and it picked up since then. That started to pick up street in the late 1960s. Joe had eight minutes to discuss about 65 years of tax policy. I have eight minutes to discuss 35 years. I often divide the post war era into. Three into era into three parts. The ear of ec finance the era of easy finance. Almost every major tax act is a tax cut. There is one exception amild surtax in 1960 9. In the carter administration, taxes went up almost as much as they would be lowered and then to the reagan tax cuts. Starting after 1981, we had a fiscal straitjacket era. Every Major Initiative on the budget and up to be on the tape the wayside. We decided we had to do something about getting the budget in order, tax reform in 1986, Social Security reform in 1983. Almost every initiative and up, take away side of the budget. Initiativeverett initiatalmosty ends up on the take away cited the budget. Take away side of the budget. You might wonder how this all works out. There is a balance sheet. The government that joe says we were left with after the two world wars, it is many Economic Growth that provides additional revenues. From to ronald from Ronald Reagan to today, the economy has basically doubled in size. Whether we go up a few Percentage Points a the the the tax rate, it is not the dominant source of growth. Flexibility allows congress to decide whether to give that back to people in tax cuts or to do spending increases. But media budget tightening from 19821987, today so much has been given a way that even Revenue Growth comes along. That is the broad history of what is going on during this time, the extent to which commitments from the past are eating away at the above and is degette eating away at the revens we get. I dont want to spend too much time on it and i do want to focus on the Tax Reform Act of 1986. People keep posting this as a model for what we can do today. 1981 is the last of the major giveaways of this era. Msot think most think 1981 defines the reagan administration. How are we going to deal with things . 1982 and 1984. In 1986, we try something revenue neutral. It is not about shifting. We are not going to change the size of government. What that does at that point in time, it takes off the table the two major items over which congress will essentially focus almost all of its attention size of government and progressivity of the tax system. It is hard to the traditional tax reformers, those who worry about simplicity and equal treatment of people, those issues come to the fore only when you can push aside the big debates over size of government. That is what happened that allow tax reform in 1986. E two big trade offs we had growing amount of tax shelters. These were doctors and lawyers and professionals, middle and upper middle income people finding ways mainly through partnerships to invest in yield is extraordinary amount of negative statements of income. There are not necessarily losing income. It was being accrued over here but there were getting all sorts of deductions. Reagan wanted to lower rates. It was a great compromise. Lets get rid of these tax shelters that favor those at the higher Income Distribution in exchange for lower rates. Happened wasg that inflation had moved many of the ppor of the tax of the poor out of the tax [indiscernible] and lead to a high increase in the taxes paid by families with children relative to families without children. Because of the erosion of things like puck erosion of things like personal exemptions. \ here is one where those who started favoring pro family whod unite with liberals did not want to tax the poor. That led to another compromise. People look back and say why can members of congress get along today why cant members of congress get along today . They do not remember the 1980s as much as those who live through it. Congress burst out in laughter. Democrats distrusted reagan given previous enactments, they did not expect a steady to come out of treasury. They found through proposals that dealt with principles that appealed to both sites that they could find some common area of agreement. After, ronald after there has been no president after Ronald Reagan, there has been the president s interested in getting the buk out of the tax code. That debate has dominated the public sphere. Both party seven acted many new tax provisions that have added to all of the tax subsidies, expenditures. Back into these issues of how large do we want government and to what extent do we what the system to be more progressive . That era is coming to an end. Has ended because we have gone through a time where we have the great recession, entitlements. We have so many things that have come together. The are in a new fiscal era. We are in a new fiscal era. I will let nina tell us how we can solve the problem. Thank you. As you have heard, the income tax is the dominant way we raise revenue in the United States, at least at the federal level. However, there has always been substantial opposition to the income tax. Tax experts have debated whether the right basis for imposing taxes is consumption or income. This is an old debate. Risch beginning in the 1970s, there was growing academic support for replacing income tax with a consumption tax. I will discuss the reasons for that. And some of the reasons why that might have been a bad idea and why it has not happened. To start off, it is just a definition what is a consumption tax . We all look at we tell taxes and say that is what it is but it is much more than that. If you look broadly at how people use their income, they use it to ways to spend money. Or save money. There are lots of ways to do that. There is not one consumption tax alternative, there are many. The four major ones the retail sales tax from the state practice, tax on the consumption when people buy goods is all collected from businesses. The more common version of the sales tax and use in europe, new zealand, australia and 150 countries around the world, that is a tax on value added which is basically a retail sales tax collected at each stage of production. So is the value added by each stage and it adds up to retail sales at the end. Those two taxes are collected only from. From the third version is collected partly from businesses, partly from households. That is often called a flat tax. It is simply a value added tax but instead of collecting on all value added to businesses, the businesses get a reduction to wait is paid to employees and employees pay a tax on the wages they receive. That is a popular version has been promoted in the United States. The final version and the flat tax as, a single as there is the x tax. All fromollect it household in the form of that personal income tax. You deduct in the amount you put into savings accounts. As the the try to add up everything he spent, you look at your income, subtract your net savings and that is your tax base. In all of these, capital purchases by businesses are deductible and that is what makes them consumption tax. Who is for these things . There is a long history. Daivd hume, the scott as philosopher, favre taxes on the ground there were voluntary favor consumption taxes on the ground they were voluntary. You could avoid them if you wanted to. Alexander hamilton has a similar perspective. He favored consumption taxes because he believed they cannot be raised to ruinous levels. He also probably wanted to discourage imports but that is another issue. In the mid 20th century, the most famous proponents were irving fisher, a u. S. Economist. He david a. Spending tax he favored a spendings tax. The secretary of the treasury proposed such a tax in 1942 and was laughed out of consideration. Anyway, who was a proponent of that. Then there was nicolas caldor wrote a book in 1955. The bees on that came from both the right and left. It was exempt savings and to help growth and not worry about progressivity so much. From the leftfromcaldor from the left, caldor view it as a way of getting at the waltealth. Now we go onto more modern proposals. Starting in the 1970ss. 1976, the treasury put out a tax reform proposal. There were two model taxes. The author of that study was pushing the consumption tax idea. The book caught a lot of attention. That was an individual tax with deductions for savings. In a big influence on that was a harvard professor who was an advocate of a consumption tax. This is surfaced later in a proposal that of the 1990s call the usa tax in which my colleague was one of the designers. A second idea that was popular was the flat tax, a book by professors at stanford originally published in 1982. It was not an original idea her with them. It came from a Milton Friedman book. There was an eye chapter on the tax there was a chapter on the tax. This was picked up by dick army and president ial candidate steve forbes in the 1990s. Then David Bradford cam bacl. With the proposal for the x tax, a flat tax with graduated rates. That is still popular. There is also the socalled fair tax, a retail sales tax. Then there is an interesting plan which would be a value added tax which will collect most of the revenue. Retain an income tax with a high exemption level. Some people say consumption tax promotes Economic Growth and competitiveness because you remove the tax on a return to savings. Competitiveness, because it is that the nation based, it exempts exports and taxes imports. Fairness issues and simplicity issues are not often referred to but they were stressed in the blueprints of volume. The idea that a consumption tax better measures income to pay over somebodys life time in contrast an income tax with the same present volume of lifetime income. Saying it discriminates against those whose earnings patterns are such that they earned earlier in life so they have to say more to smooth out their lifetime consumption. The other argument on grounds for some of the city was if we did not have an income tax, he would not have to worry about issues relating to the measurement of the capital income for such as how to tax capital gains, the Corporate Income tax, inflation adjustment. But there are a number of reasons why people were concerned about these approaches. One was concerns about fairness and progressivity. The ones collected from business, it was impossible to make them truly progressive. The ones collected from individuals, there was concern about you could get the rates, and of the top level to compensate for the fact you are exempting savings. There are a lot of concerns about how you could administer them and concerns about transition issues. How do you go from one tax to another . For these and other political reasons, these have never happened. Our friends on the conservative movement are always worried about at the gannett tax source about adding a new tax source. The future some brief comments. We are running into a longterm budget problems and the current income tax may not be up to the task of raising some of it can ravenous of raising some significant revenues. Globalization is a harder to tax Investment Income globalization makes it harder to tax Investment Income. The idea of replacing the income tax with a consumption tax has failed, even though it persists, but i do think we need to think seriously about rebalancing our system and may be raising more revenue from consumption t