| ||2002 ERWIN N. GRISWOLD LECTURE BEFORE THE AMERICAN COLLEGE OF TAX COUNSEL|
The Dynamic Tax Economist
*Paul W. McCracken Collegiate Professor Business Economics and Public Policy, Professor of Economics, and Director Office of Tax Policy Research, University of Michigan. Princeton University, A.B. 1973; Harvard University, Ph.D. 1980.
It's really a pleasure to be here before this august group to deliver the 11th Annual Erwin N. Griswold Lecture. I am especially honored to be the first economist to deliver the lecture, after ten lawyers.
When Jerry Cohen informed me that the text of my lecture would come out in a publication called The Tax Lawyer, it occurred to me that the perfect title and topic for my speech would simply be "The Tax Economist," allowing me to identify what I think the contribution of economics to the tax policy debate can be, what distinctive perspectives we bring to bear, and what distinctive toolkit we use to evaluate tax systems.
And then a better, even perfect, title occurred to me: "The Dynamic Tax Economist." What do I mean by adding the word dynamic to the title? Those of you who know me, and probably by now those of you who have never met me before, understand that I couldn't be implying that I myself am particularly dynamic, in the sense of the dictionary definition of "having a forceful personality."
No, my title refers to another of the dictionary definitions of dynamic: "related to the pattern of change or growth of an object or phenomenon." These days the word dynamic figures in a prominent and important debate about how the Congress ought to do the scoring of the revenue implications of proposed changes in the tax system. It refers to dynamic as in "dynamic scoring," the idea that, for budgeting purposes, the estimated revenue costs should reflect taxpayer response to tax policy, the effect of these responses on national income and its growth, and the feedback to the size of the tax base.
But, beyond this current debate about how to do revenue estimation, the behavioral response to taxation is at the core of the modern economics of taxation. The focus of the modern, which I date as starting about 1970, is its turning away from debates about equity, toward debates about the response of taxpayers to tax regimes, and the implications of these responses for the efficient functioning of the economy. This is really what dynamic means when dynamic scoring is mentioned. Dynamic is about the response of taxpayers. The time frame over which this response occurs is not central to the debate. It applies as much to firms immediately moving up their investment plans in response to a limited- time-only offer of partial expensing, as much as it applies to the gradual turnover of gas guzzling cars and SUVs due to the imposition of a higher gasoline tax.
This will be the focus of my talk today: taxpayer response to a tax system. Close attention to this topic, I believe, is a distinctive characteristic of the economist's approach to taxation in contrast to all other perspectives. It underlies how we economists evaluate tax systems in terms of two of the criteria we tend to use: equity, meaning how the tax burden is assigned among citizens, and efficiency, meaning how the tax system affects the level and growth of the economy.
I'll speak tonight about three aspects of this issue. First, what do we know about taxpayer response and how do we know it? Second, how does this knowledge enter into our evaluation of alternative tax policies? Finally, how does taxpayer response relate to some of the important tax policy issues that face us today, such as should we have another tax cut, and how should we evaluate such a proposal-with dynamic scoring or not, with distributional tables or not?
As background, keep in mind that all tax systems have three aspects. By changing relative prices, they influence and can distort the allocation of resources in the economy. Second, they are instrumental in assigning the cost of government among the citizenry. Finally, a tax system involves a vast administrative bureaucracy and billions of taxpayer hours involved in collecting and enforcing the remittance of tax monies. These three aspects loosely correspond to the three classic criteria for evaluating tax systems: efficiency, equity, and simplicity. Although I am greatly interested in the tax collection and enforcement process, as well as in tax simplicity and how to achieve it, I will this evening put that topic to one side, and focus on efficiency and equity.