1. Chart 1a Inflation,
* Quarterly data from 1965-I to 1988-IV.

2. Chart 1b Unemployment Rate, 1965 - 1988
** Monthly data from Jan to Dec

3. Chart 1c Interest Rate,
** Monthly data from Jan to Dec

12. on average, with some taxes costing much more).
Because of deadweight loss and distortions, it costs the country more than a dollar to buy an added dollar of government goods and services
(about $ $3.00 total
on average, with some taxes costing much more).

13. economic damage of tax +
Cost =
direct budget outlay +
economic damage of tax +
and other distortions.
(All at the margin.)

19. Chart 8 Average And Marginal Tax Rate Illustration
Illustrative Tax Schedule
Income
Tax
$0 to $10,000
0% (exempt amount)
$10,000 to $30,000
20% of amount over $10,000
Over $30,000
$4,000 plus 40% of amount over $30,000
Income, Tax, and Rates of Two Taxpayers
Taxpayer A
Taxpayer B
$20,000
$50,000
$2,000
$12,000
Average Rate
10% (2,000/20,000)
24% (12,000/50,000)
Marginal Rate
20%
40%

20. Individual Income Tax’s Rate Schedules
Chart 9a
Individual Income Tax’s Rate Schedules
2009 Tax Rate Schedules
Single — Schedule X
If taxable income is: The tax is: of the
Over— But not amount
over — over —
Head of Household — Schedule Z $0
8,350
33,950
82,250
171,550
372,950
$ 8,350 %
$ %
4, %
16, %
41, %
108, %
11,950
45,500
117,450
190,200
$11,950
$1, %
6, %
24, %
44, %
104, %
Married filing jointly — Schedule Y-1
Married filing separately — Schedule Y-2
If taxable income is: The tax is: of the
Over— But not amount
over — over —
16,700
67,900
137,050
208,850
$16,700 %
$1, %
9, %
26, %
46, %
100, %
68,525
104,425
186,475
$8,350
$ %
4, %
13, %
23, %
50, %

21. Chart 13 The Kennedy and Reagan Tax Cuts
The Kennedy rate cuts were roughly the same percentage rate reductions
across the board, but rewards rose most where rates were highest:
Top tax rate cut from 91% to 70%.
After-tax reward rose from 9% to 30%, up 230%.
Bottom tax rate cut from 20% to 14%.
After-tax reward rose from 80% to 86%, up 7.5%.
Similarly for the Reagan Tax cuts:
Top tax rate cut from 70% to 50%.
After-tax reward rose from 30% to 50%, up 67%.
Bottom tax rate cut from 14% to 11%.
After-tax reward rose from 86% to 89%, up 3.5%.
In both cases, a greater response by upper-income taxpayers raised the total share of taxes they paid.

25. Chart 13 The Kennedy and Reagan Tax Cuts
The Kennedy rate cuts were roughly the same percentage rate reductions
across the board, but rewards rose most where rates were highest:
Top tax rate cut from 91% to 70%.
After-tax reward rose from 9% to 30%, up 230%.
Bottom tax rate cut from 20% to 14%.
After-tax reward rose from 80% to 86%, up 7.5%.
Similarly for the Reagan Tax cuts:
Top tax rate cut from 70% to 50%.
After-tax reward rose from 30% to 50%, up 67%.
Bottom tax rate cut from 14% to 11%.
After-tax reward rose from 86% to 89%, up 3.5%.
In both cases, a greater response by upper-income taxpayers raised the total share of taxes they paid.

26. Tax Rate and Tax Base interact; Both Matter
Tax Rate and Tax Base interact; Both Matter! True Versus Statutory Marginal Tax Rates
True
Marginal
Tax Rate =
Statutory x
Incremental
Tax Base
Actual Incremental
Income
If the tax system hits the same income more than once, or if tax rules overstate actual income, then the effective marginal tax rate may be much higher than the apparent statutory marginal tax rate.
Example: Suppose the Statutory Marginal Tax Rate is 25%, but each extra $1.00 of income is overcounted as $ Then the True Marginal Tax Rate is 37.5% (37.5% = 25% x 1.5).

28. Effective Federal* Marginal Tax Rates for Social Security Recipients
Chart 18
Effective Federal* Marginal Tax Rates for Social Security Recipients
Marginal tax rates as Social Security benefits become taxable, in tier 1 (50% phase-in range) or tier 2 (85% phase-in range)
Statutory Income
Tax Rate
Income from savings, pensions **
Tier 1 (150% of statutory income tax rate)
Tier 2 (185% of statutory income tax rate)
10% (Current Law)
15% NA
22.5%
27.8%
25% (Current Law)
46.3%
28% (Pre-2001 Law)
51.8%
Wage Income ***
If not subject to earnings test
Subject to earnings test if between ages 62 and “normal retirement age”
Tier 1
Tier 2
28.1%
74.3%
35.0%
39.9%
79.4%
83.0%
57.1%
95.5%
62.3%
99.3%
* Add 4 to 8 percentage points for typical state income tax rates for states that follow federal taxation of benefits.
** Tax-exempt bond income is included in determining whether income is over the threshold for taxing benefits. An additional dollar adds $0.50 or $0.85 to taxable income, producing effective tax rates of 50% or 85% of the statutory rate on the supposedly exempt income.
*** Assumes self-employed payroll tax, and allows for deduction of "employer's" half of payroll tax from AGI and effect of deduction on modified adjusted gross income used to determine amount of Social Security benefits subject to income taxation. Figures would be very similar for employee beneficiaries after adding the employee and employer payroll tax rate adjusted for income tax deduction of employer's half at employer's income tax rate.

29. Multiple Taxation of Saving
Chart 19
Multiple Taxation of Saving
One Tax on Consumption, Four Taxes on Saving
Layer 1– Tax on Earnings
Income is taxed when earned. If it is used for consumption, there is usually no further federal tax.
Layer 2 – Personal Income Tax on Returns
If the income is saved, the returns are taxed as interest, dividends, capital gains, or non-corporate business profits.
Layer 3 – Corporate Income Tax
If the saving is in corporate stock, the corporate tax hits the income before it is either paid out to shareholders or reinvested to boost future earnings.
Layer 4 – Transfer (Estate and Gift) Tax
Another tax on already taxed assets.
(Similar taxes at the state and local levels increase the multiple taxation.)

30. Chart 20a Income Tax Bias Against Saving and Two Cures
Pre-tax income needed to have either (a) $100 for consumption after taxes or
(b) a $100 bond paying $4 in interest after taxes.
Ordinary Income Tax Treatment, IRA-type Treatment, or Tax Exempt Bond Treatment.
Pre-tax
income
Tax
After-tax income
Interest on saving
Tax on interest
After-tax interest
% increase in cost of activity due to tax
No income tax exists
Income consumed
$100 $0 --
Income saved $4
Ordinary income tax levied at 20% rate
$125
$25
25%
$156.25
$31.25 $5 $1
56.25%
IRA-type treatment: amounts saved tax deductible, returns on saving taxed
Tax-exempt bond treatment: no deduction of saving, returns not taxed
The 20% income tax, by taxing income when first earned and taxing the return on saving, raises the cost of consumption by 25% and the cost of obtaining additional future income by 56.25%, more than twice the increase in the cost of consumption.
Under IRA or tax exempt bond treatment, the tax raises the cost of obtaining additional future income by 25%, the same penalty as on consumption.

31. Chart 20b Equivalence Of Saving Deferred And Returns Exempt Tax On Saving; Contrast With Ordinary Income Tax
(Illustration assumes 7.2% pre-tax interest rate,
20% tax rate, and 10-year investment)
Tax Treatment
Saving Deferred
Returns Exempt
Ordinary Income Tax
Pretax earnings to be saved
$100
Tax on saving 20
Amount saved
100 80
Is interest on inside build-up taxed?
No, 7.2% reinvested
Yes, 5.76% reinvested
Account after 10 years
200
160
140
Tax due on withdrawal 40
After-tax spendable balance
Cost to saver of ordinary tax treatment
---
20 (= 160 – 140)
(a third of the interest)

33. Chart 22 Multiple Taxation of Corporate Income
(a) Retained Earnings,
Pre-2003 Act
(b) Dividend Payout,
Pre-2001 Act
(c) Retained Earnings and Dividends, 2003 Act
1) Corporate Income
$1.00
2) Corporate tax at top rate
$0.35
3) After-tax corporate income:
Either retained, raising stock price (columns (a), (c)), or paid as dividend (col. (b), (c))
$0.65
4) Individual income tax at top rate (dividends as ordinary income, retained earnings as capital gain)*
$0.13
(tax rate 20%)
$0.2574
(tax rate 39.6%)
$0.0975
(tax rate 15%)
5) Total tax
$0.48
$0.6074
$0.4475
6) Total tax rate
48%
60.74%
44.75%
7) Income left to shareholder
$0.52
$0.3926
$0.5525
* Top corporate rate excludes corporate surtaxes, and top individual rate ignores phase-outs of exemptions and deductions and taxation of Social Security, which may push effective top tax rates higher than statutory rates. Retained earnings are assumed to trigger a long-term capital gain with a maximum rate of 20% or 15%. Short-term gains are taxed at ordinary tax rates.

34. CORPORATE TAX INTEGRATION
DIVIDEND PAID DEDUCTION FOR CORPORATIONS (PARTIAL INTEGRATION)
SHAREHOLDER TAX CREDIT FOR CORPORATE TAX PAID ON DIVIDENDS
(GROSS-UP METHOD, PARTIAL INT.)
PARTNERSHIP METHOD
(PASS-THROUGH OF CORPORATE INCOME TO SHAREHOLDER FOR TAX PURPOSES, WITH WITHOLDING PAID BY CORP.)

35. Chart 23
Present Value of Current Law Capital Consumption Allowances per Dollar of Investment Compared to Expensing (First-Year Write-Off)
Asset lives: 3
Yrs 5
yrs 7 10 15 20
27.5 yrs 39
Present value of first-year write-off of $1 of investment:
$1.00
Present value of current law write-off of $1 if inflation rate is: 0%
$0.96
$0.94
$0.91
$0.88
$0.80
$0.74
$0.65
$0.55 3%
$0.89
$0.85
$0.79
$0.67
$0.59
$0.47
$0.37 5%
$0.92
$0.86
$0.81
$0.60
$0.52
$0.39
$0.30
Assumes a 3.5 percent real discount rate, 3-20 year assets placed in service in first quarter of the year, year assets placed in service in January.

36. Chart 24
Expensing Versus Depreciation: Depreciation Overstates Taxable Income and Depresses Return on Capital
Expensing (Full Cost Recovery)
Depreciation
Revenues from machine, present value
$115
Full cost of machine
$100
Full cost write-off
for tax purposes
(expensing)
Allowable depreciation write-off, present value
$85
Real profit =
Taxable profit
$15
Taxable “profit” (exceeds real profit)
$30
Tax $5
$10
After-tax income
Rate of return
10% 5%

37. 22

38. Chart 26 Marginal Tax Rates On Estates And
Income Contributed To Estates, 2009
90%
85%
81%
80%
GST
70%
GST
70%
60%
Estate Tax
GST
Estate Tax
50%
Marginal Tax Rate
45% *
Payroll Tax
40%
State Income Tax
State Income Tax
30%
20%
Estate Tax
Estate Tax
Federal
Federal
Income
Income
10%
Tax
Tax 0%
Estate Tax
Estate Tax and
Tax on a Dollar
Tax on a Dollar
Generation
of Interest
of Wages (self-employed)
Skipping Trust
Left in an Estate
Left in an Estate *
45% Estate Tax Rate became effective in 2007.
Assumes married couple in 33% tax bracket, who are self-employed, with a 6% state income tax.
Computed prior to Estate Tax Repeal, which is now scheduled for 2010.

39. Multiple Taxation of Saving
Chart 19
Multiple Taxation of Saving
One Tax on Consumption, Four Taxes on Saving
Layer 1– Tax on Earnings
Income is taxed when earned. If it is used for consumption, there is usually no further federal tax.
Layer 2 – Personal Income Tax on Returns
If the income is saved, the returns are taxed as interest, dividends, capital gains, or non-corporate business profits.
Layer 3 – Corporate Income Tax
If the saving is in corporate stock, the corporate tax hits the income before it is either paid out to shareholders or reinvested to boost future earnings.
Layer 4 – Transfer (Estate and Gift) Tax
Another tax on already taxed assets.
(Similar taxes at the state and local levels increase the multiple taxation.)

40. STEPS TOWARD NEUTRALITY:
ALL SAVING GETS DEFERRAL
OR RETURNS EXEMPT EQUIVALENT;
EXPENSING OF INVESTMENT;
NO DOUBLE TAX OF CORPORATE INCOME;
NO ESTATE AND GIFT TAX.

41. TAX BASES OF FOUR NEUTRAL TAXES & POINTS OF COLLECTION
NRST -- INCOME LESS SAVING =
CONSUMPTION (NOT IMPOSED ON INVESTMENT GOODS). POINT OF SALE.
VAT -- INCOME LESS SAVING =
CONSUMPTION (INVESTMENT EXPENSED).
AT BUSINESSES, IN STAGES.
CASH FLOW TAX -- INCOME LESS SAVING = CONSUMPTION. (INVESTMENT EXPENSED)
INDIVIDUAL TAX FORM.
FLAT TAX -- INCOME LESS INVESTMENT = CONSUMPTION. CAPITAL INCOME ON BUSINESS OR PROPRIETOR FORM (INVESTMENT EXPENSED); WAGES ON INDIVIDUAL FORM.

42. Elements of Neutral Taxes
All treat saving neutrally vs. consumption.
All employ expensing instead of depreciation.
All are territorial.
All have the same basic tax base.
Differ mainly as to point of collection. 29

43. Chart 27 Inflow Outflow Tax
Form 1040: Individual Tax Form, Inflow Outflow Tax
1. Sum of: Labor compensation, Pension receipts, Taxable Social security, Transfer payments (from W-2 forms).
$33,000
2. Net saving (+) or net withdrawals (-) (from Schedule B)
$ 3,000
3. If line 2 is net saving (+), subtract dollar amount from line 1; if net withdrawal (-), add the dollar amount to line 1.
$30,000
4. Other itemized deductions from Schedule A
$10,000
5. Subtract line 4 from line 3.
$20,000
6. Personal allowance times number of taxpayers and dependents: $5,000 x =
7. Subtract line 6 from line 5. This is your taxable income.
8. Tax from table (or, line 7 times 20%).
$ 2,000
9. Withholding, from W-2, plus estimated tax payments.
$ 2,100
10. Amount due (+) or amount overpaid (-) (line 8 less line 9). If amount is due, pay Internal Revenue Service.
-$ 100
11. If overpaid, fill in: Amount to be refunded $100 ; or
Amount to be applied to estimated tax

44. Chart 27, cont. Inflow Outflow Tax
Inflow Outflow Tax:Schedule A, Itemized Deductions
1. Sum of individual payroll tax (from W-2), state and local income tax withheld (from W-2) and estimated state and local tax less refunds from previous year, and local property taxes.
$ 5,000
2. Gifts, contributions.
$ 1,000
3. Qualified tuition, training expenses.
$ 4,000
4. Total. Enter on Form 1040, line 4.
$10,000
Inflow Outflow Tax:Schedule B, Saving
List net saving (+) or withdrawals (-) from financial institutions reported on 1099 forms:
First National Bank
-$1,000
Merrill Paine Schwab
+$4,000
Total (if greater than zero, this is net saving; if less than zero, a net withdrawal). Enter on Form 1040, line 2.
$3,000

45. Why it Matters History tells us that:
When we have moved toward a neutral tax with lower rates, the economy has boomed.
When we have increased tax biases the economy has faltered.
When we have wasted tax cuts on non-growth-related rebates, nothing good has happened. 25

47. 27

49. Objective: Growth Neutral taxation is best for growth. It can yield:
More saving, investment, and growth. Potentially:
Trillions of dollars of added capital.
Millions of added jobs and higher wages.
Thousands of dollars in added family income.
U.S. would become a jobs and investment magnet. 30

50. Objective: Simplicity
Neutral taxes are much simpler, even if collected on individual tax forms:
No double taxation.
No limits on savings plans. One universal plan, not dozens.
No separate taxation of capital gains.
No depreciation schedules.
No foreign tax and tax credit.
No phase-outs of exemptions, credits, deductions. 31

51. Objective: Fairness
Consumption is a fairer tax base than income; it respects the effort of people who work and save.
Neutral taxes can be made progressive to shelter the poor.
There is no need to tax saving and investment more harshly than consumption to achieve progressivity.
The simpler, clearer neutral tax would be seen to be fair. 32

52. Objective: Visibility
Only people pay taxes.
Businesses and things don't pay tax.
Taxes are best levied on individuals.
Voters need to see what government costs.
Everyone who can do so should pay something toward the cost of government.
Simplicity is no excuse for dropping tens of millions of people from the tax rolls. 33

53. Recap Tax reform is about: Getting the tax base right.
Setting rates that cover the amount of government that people want to have.
Raising revenue with less damage to the economy.
Informing voters of the price they pay for govern-ment so that they can make informed decisions about how much government activity to support. 34

55. The Circular Flow Diagram

56. BASIC MACRO EQUATION INCOME (= WHAT WE PRODUCE) EQUALS HOW WE USE
THE INCOME
C + I + G + (X - M) =
C + S + T
Where:
C = consumption, I = investment, G = government,
X = exports, M = imports, S = saving, T = taxes

57. IN AN ISOLATED PRIVATE ECONOMY
WITH NO GOVERNMENT,
SAVING = INVESTMENT
C + I =
C + S I S

58. C + I + (X - M) = C + S I I + (X – M) S + (M - X) S
IN AN OPEN PRIVATE ECONOMY
(WITH NO GOVERNMENT)
DOMESTIC AND FOREIGN SAVING CAN COVER INVESTMENT
OR EXCESS SAVING LENT ABROAD FUNDS A TRADE SURPLUS
C + I + (X - M) =
C + S I
I + (X – M)
S + (M - X) S

59. C + I + G = C + S + T I + G S + T G - T S - I I + (G - T). S
IN AN ISOLATED ECONOMY WITH GOVERNMENT
SAVING MUST COVER INVESTMENT AND BUDGET DEFICIT
C + I + G =
C + S + T
I + G
S + T
G - T
S - I
I + (G - T). S

60. C + I + G + (X - M) = C + S + T I + (G - T) S + (M - X)
IN AN OPEN ECONOMY WITH GOVERNMENT,
DOMESTIC AND FOREIGN SAVING MUST COVER
INVESTMENT AND BUDGET DEFICIT
C + I + G + (X - M) =
C + S + T
I + (G - T)
S + (M - X)

61. BASIC GDP EQUATION RECAP
Domestic
Y = C+I+G = C+S+T
S = I+(G-T) or (S-I) = (G-T)
Saving covers investment and the gov’t deficit.
With rest of world
Y = C+I+G+(X-M) = C+S+T
S = I+(G-T)+(X-M) or (S-I) = (G-T)+(X-M)
If saving > investment and govt. def., we have a balance of payments surplus.

62. Current and Capital Accounts
What we sell: =
Exports of goods & services =
U.S. financial instruments & real property
What we buy:
Imports of goods & services +
Foreign financial instruments & real property

63. Current and Capital Accounts, Cont’d.
Exports – Imports of goods & services or
Current acct. surplus =
U.S. lending abroad -Foreign loans to U.S or
Capital account deficit or
Net capital outflow

64. Trade: Absolute Advantage

65. Trade: Comparative Advantage

66. GLOBAL VERSUS TERRITORIAL TAXATION
U.S. taxes firms on their domestic income and the earnings of their foreign subsidiaries, then gives a tax credit for foreign taxes paid. But the foreign tax is deferred until the parent repatriates the earnings (deferral of foreign source income).
TERRITORIAL:
Almost all other countries tax business activity within their borders, and not the earnings of their businesses’ foreign subsidiaries. This gives foreign firms a competitive advantage vs. U.S. firms trying to operate internationally.

67. GLOBAL TAXATION AND CAPITAL FLIGHT
Does deferral encourage U.S. firms to send capital and production abroad?
Or does the global tax itself trap U.S. capital abroad?
Without deferral, U.S. firms would have to cede business to competitors, not bring production home.
Global taxation makes it hard for firms to use cash earned abroad to fund U.S. investment.

70. BOTTOM LINE ON GLOBAL TAXATION
Investment in each country is mainly set by its own tax and regulatory climate.
Taxes on capital are largely shifted to labor.
If U.S. taxes on capital force capital abroad, U.S. workers suffer, foreign workers gain.
More likely, U.S. taxes on capital merely reduce capital here; we lose, no one gains.

71. 38

72. Please consider: Economics is not the dismal science -- if you have a morbid sense of humor -- and a large tru$t fund. 39

73. On the other hand --- (Sorry, I’m an economist, it’s our mantra) ----40

74. Political science (sic) is rather depressing, -- and actual politics is surely the Great Dismal swamp!!! 40

75. 40