Lawrence Summers

How to target untaxed wealth

Lawrence Summers
Dec 17, 2012 12:39 UTC

Sooner or later the American tax code will be reformed — probably sooner. Raising revenue will be the main motivation, but at a time of sharply increasing economic polarization, issues of fairness will be prominent too. There are also legitimate concerns about the complexity of current tax rules and their adverse effects on the economy.

So far, the debate has focused on scaling back provisions of the tax code that have favored activities traditionally deemed to be valuable. For example, there is talk of reducing deductions for charitable contributions, taxes paid to state and local governments, home mortgages, employer-provided health insurance and many less important provisions.

There are reasonable arguments to be made in each case. But taking only the “limit tax incentives” approach to tax reform has several major defects. First, if reform is designed to avoid perverse outcomes — such as the crushing of charitable contributions or more pressure on state budgets — then it will raise limited amounts of revenue. Second, this approach will address very little of the complexity in the code and is not likely to do much for recovery, since it will do little to increase demand. Third, it will do little to address concerns about fairness: The richest taxpayers actually make relatively little use of deductions and credits.

What is needed is an additional element, one that has largely been absent to date: the numerous exclusions from the definition of adjusted gross income that enable the accumulation of great wealth with the payment of few or no taxes. The issue of the special capital gains treatment of carried interest – performance fee income for investment managers – is only the tip of a very large iceberg. There are far too many provisions that favor a small minority of very fortunate taxpayers. Because these provisions effectively permit the accumulation of wealth to go substantially underreported on income and estate tax returns, they force the federal government to consider excessive increases in tax rates if it is to reach any given revenue target.

All parties — whether their primary concern is preserving incentives for small businesses, closing prospective budget deficits or protecting the social safety net — should be able to come together around the idea that it should not be possible to accumulate and transfer large fortunes while avoiding taxation almost entirely.  Yet this is all too possible today.

The fierce urgency of fixing economic inequality

Lawrence Summers
Nov 21, 2011 11:00 UTC

By Lawrence Summers
The opinions expressed are his own.

The principal problem facing the United States and Europe for the next few years is an output shortfall caused by lack of demand. Nothing would do more to increase the incomes of all citizens—poor, middle class and rich—than an increase in demand, which would bring with it increases in incomes, living standards, and confidence. A more rapid recovery than now appears likely would reverse, at least partially, a growing disillusionment with almost all institutions and doubts about the future.

It would be, however, a serious mistake to suppose that our only problems are cyclical or amenable to macroeconomic solutions. Just as evolution from an agricultural to an industrial economy had far reaching implications for society, so too will the evolution from an industrial to a knowledge economy. Witness structural trends that predate the Great Recession and will be with us long after recovery is achieved: The most important of these is the strong shift in the market reward for a small minority of persons, relative to the rewards available to everyone else. In the United States, according to a recent CBO study, the incomes of the top 1 percent of the population have, after adjusting for inflation, risen by 275 percent from 1979 to 2007. At the same time, incomes for the middle class (in the study, the middle 60 percent of the income scale) grew by only 40 percent. Even this dismal figure overstates the fortunes of typical Americans; the number unable to find work or who have abandoned the job search has risen. In 1965, only 1 in 20 men between ages 25 and 54 was not working. By the end of this decade it will likely be 1 in 6—even if a full cyclical recovery is achieved.

To highlight the disturbing trends in a different way, one calculation suggests that if income distribution had remained constant in the U.S. over the 1979-2007 period, incomes of the top 1 percent would be 59 percent or $780,000 lower and the incomes of the average member of the bottom 80 percent of the population would be 21 percent or over $10,000 dollars higher.