7. We note, however, that because there is no cap on the mortgages that receive favorable tax treatment, there is an incentive to overinvest in housing relative to other assets.


8. Any kind of tax reform or tax simplification would be complicated. Moreover, the transition to a simplified structure is itself risky, difficult, and costly; see Congressional Budget Office (1997).


9. In addition to the more general (i.e., theoretical) studies cited throughout, the Joint Committee on Taxation routinely applies its two macroeconomic models to estimate how major tax changes would effect the overall economy (see, e.g., Committee on Ways and Means, 2009b:531,538; Joint Committee on Taxation, 2005).


10. Martin Feldstein (2006) briefly summarizes most of this literature. For more detail, see also Carroll et al. (1998, 2000a, 2000b) and Gentry and Hubbard (2004). On the effect on the equilibrium (i.e., steady-state) level of the capital stock see Joint Committee on Taxation (2005). Robert H. Frank presents evidence that somewhat higher marginal tax rates do not alter behavior or undermine productive activities (2005). Roughly similar, but a very different form of analysis, an international statistical comparison of economic growth rates found no association with the level of taxation, controlling for other potential and actual influences (Lindert, 2003).


11. The efficiency effects of tax changes are only one consideration. Below, we analyze the distributional consequences of illustrative tax structures.


12. Data on trade data are the average of imports and exports from the International Monetary Fund (2007a); data on investment are the average of inflows and outflows of portfolio and direct investment from the International Monetary Fund (2007a).


13. The total combines national and subnational governments. From 1995 to 2006, the average top individual income tax rate in the 30 OECD countries fell from 48 percent to 41.9 percent, and the comparable rate in the United States fell from 46.7 percent to 41.9 percent.


14. Another study compared 80 countries. It found that the United States had the 18th highest marginal effective tax rates on business investment for 2008, behind such countries as India, Canada, Italy, and Germany (Chen and Mintz, 2008:2-3).


15. This is a controversial matter. Other fiscal experts are concerned that a “race to the bottom” in tax rates would go too far and result in cutting back important government services. Some jurisdictions, including Ireland, Hong Kong, and the Cayman Islands, have become tax havens and offer very low or zero income tax. Policy makers have expressed concern that such jurisdictions attract tax avoidance activities. However, some economists argue that tax havens have generally positive effects on the world economy. Hines (2006), for example, argues that by helping firms reduce their taxes on reported profits in high-tax countries, havens may help increase real investment in high-tax countries. He also argues that tax havens nearly always have good governance structures.


16. However, the contrary view (see the preceding note) deemphasizes this focus on the effects of high tax rates and views corporate tax competition as really an international “race to the bottom”—a zero-sum attempt to attract mobile capital. The result, according to this view, is a restriction on every nation’s tax tools that makes all tax systems less progressive, with a lighter burden on capital and a heavier tax burden on labor, which is less mobile.


17. For a reasonable start, see Blum and Kalven (1953).


18. In 2006, at least 20 million returns, or about 15 percent of the total number filed, entailed negative tax liability. The number of tax returns with precisely zero liability was about 25 percent larger, 25 million than the number with negative liability (Internal Revenue Service, 2009:Table 2)


19. Only 4 of 30 OECD countries now have top income tax rates that exceed 50 percent.

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