 Alright, well welcome everyone. I'm thrilled to have you here for this incredibly popular talk, at least by RSVPs and regrets so either you're either here because you're super excited about it or the people who are not here wish that they were so nothing like inspiring fear of missing out among other people I would say, in terms of as far as Thursdays goes you're already winning. I'm Christy bear I'm the assistant director of the Center on finance law and policy. We hold these lunch talks every month as a chance for you have faculty to test ideas and to insight controversy to get comments from their accomplished colleagues across the university. One of the things about you event is that every sidewalk leads to a top 10 program. So we have don't we don't have just one good school we have a collection of really really good schools that make a strong team. And so these talks are a chance to kind of take advantage of that. The speaker today is Jim Heinz. He is the L heart right collegiate professor of law at the law school. He's the co director of the law and economics program at the law school. He is a Richard a this is a lot of names, the Richard a Musgrave collegiate professor of economics in the Department of Economics, the research director at the Office of tax policy research at the Ross School of business, and on top of all of those things a research at the National Bureau of economic research. So suffice it to say, Jim is like economist economist economist, and I would also add to this, that he might be clairvoyant, because this talk was booked before Congress made it so incredibly relevant. As a student, you can take one of his classes that would be impact economy, maybe international corporate tax taxation of individual income. He has been at the University of Michigan since 1997. A million years ago, he was at the department the US Department of Commerce. And what I like about Jim having had dinner with him a couple of times is that he is very good at explaining complicated things in a funny and interesting way. So the talk today is, he's going to talk about the controversial view. Here is say one. Here is say I never say that word right might say that the best way to pay for federal spending would be to raise taxes, and especially to tax the rich. So those of you who haven't been here in a little while. Welcome to along the way, ask questions by putting them in the chat, your, and you can interrupt in that way. You can also raise your hand using little icon thing. If you have a question that you're not sure if it's a good one. I'm happy to ask all of the questions that nobody's sure if they're good or not. Just send them to me only and I'll ask for you without attribution. So, to get started today. Jim, I think we're going to let you take it away. Thank you very much, Christie and thank you everybody for coming. I would like not to talk about and as Christie pointed out. Thank you to the US Congress which takes its lead from me and decided to put off resolving any budgetary or tax matters until after today's talk. I'd like to talk about government finance, and we can start with the question is government finance problem. I think everybody agrees that it is. It's not really a complicated problem in that somebody has to pay for government. Now, people want what government provides, but, you know, they usually don't want themselves to pay for it or because it's obviously costly and irksome to have to incur these costs. So, until recently, even in talking about these matters, I think there was a shared expectation that the country needs tax revenues and then we can talk about how best to get them. There is more controversy these days about the extent to which you really need to pay for government services currently. And I do want to start with the discussion of that, and then move to how best to pay for the expenses that we have. So, um, there's a. Okay, the really the need to pay for government comes from the proposition that the economy cannot provide something that it doesn't have. And that ultimately is where the need to pay for government comes from. So, the US government, the federal government has considerable expenditures. We pay for that with taxes and borrowing. The expenditures are projected to grow. Of course, we don't know for sure what the future will hold, but they are projected to grow in the future. And so our deficits. As a result, we will have to do a combination of things. And it can be any combination of these things. We have to maintain and increase tax collections, or we have to increase the level of borrowing, or we have to reduce expenditures. It's not complicated. It must. I mean, this is just the elements of accounting. You know, you have to do one of those three things. I will add quickly and I think this is generally conceded by liberals and conservatives that current deficit projections are unrealistically low. That is, when they make projections for the future. They embody very rosy assumptions. And in particular, often the way Congress drafts tax rules and spending rules. They involve automatic cuts of spending and or automatic tax increases in the future to sort of cover the costs of what's going on going forward, but nobody really expects those cuts and spending or those automatic tax increases to happen. So as a result, when you look at projections just keep in mind that from a deficit standpoint they're clearly unrealistic, they're too optimistic. This is the last 50 years this is from the Congressional Budget Office, other outfits have similar calculations. This is the last 50 years of federal government budget deficits. And the stuff below zero is a deficit. As you can see, the line has been, and this is measured as a percentage of GDP GDP is gross domestic product that's total national income. As you can see, almost all of the graph is below zero, meaning that the government has run deficits since 1971 they ran a small surplus in 1970 by the way. The only time when we haven't run deficits was right at the end of the Clinton administration, the late 1990s, second half of the 1990s, when basically a combination of tax increases and economic growth produced federal subsidies, federal surpluses. There have been big deficits, and in particular recently you can see on this picture that there are two big downward blips were actually living in the second of those two blips right now. The first was from the crash of the aftermath of the crash of 2008 when the US government basically bailed out the economy and did so with tax cuts and spending increases and that's where you get the, where you get the downward blip there. I mean the other, some of the tax cuts frankly are automatic because when the economy does badly, the government collects less revenue. And you can see the pandemic around 2021 of course, and you had massive government spending programs to try to combat the consequences of the pandemic. And so that's what you get. That's where that big downward blip is and you can see the dotted line. This is as of the summer that dotted line, but the projections going forward are that the government will not be running these massive deficits. And, you know, like we're currently doing, but that we will have significant deficits. It's just that it won't be quite like what we're currently doing. What we're currently doing just to be clear is the government deficit is 15% of total national income, meaning the amount that the government has to borrow is 15% of the total amount that the economy produces, which is, you know, enormous and clearly unsustainable. To have a budget like that for very long. I mean you can for a short period of time and that was the whole idea to have the government step in, do some things to help out, and then stop doing those things because you know they, the only way to continue doing that would be to have a tax increase to actually pay for all of that. And we didn't do that. Okay, if you look at the, again, this is the history of the last 50 years. And you can see, and this is again from the congressional budget office. And you can see where the deficits are coming from and you can kind of see the time pattern as well. So, there's a chronic gap between government expenditures which average about 20 or 21% of national income, and government revenues average between 17 and 18% of national income, they have to be equal for you not to be accumulating debt. The difference is made up for with borrowing that and so this is the source of government borrowing for the last 50 years. One of the things to notice. And again, if you look at the timeline there on the bottom is you've got the revenues that go down when the economy does poorly. And that would be around the crash of 2008. And again during the pandemic. And you have outlays that go up. Again, the most dramatic cases on this picture are in the crash of 2008 and the pandemic. But that's not the only time I mean there was there been there was a recession around 1991 1992 and you can see the outlays kind of went up then there was a big recession in the early 1980s. And you see the outlay is going up then as well. And that's because a certain amount of government spending kind of automatically goes up when the economy does badly because the government is stepping in to help people out. But it's expensive. Okay, by historic standards, at this point now we're in 2021 us governments accumulated a lot of debt. The current government debt to GDP ratio is about is at its historic high for the United States. It's about the same almost exactly the same as where we were right at the end of World War two. And in World War two, the government borrowed massively, you know, to pay for the war, in addition to having tax increases but the first question can you persist with debt to GDP ratio of this size or would you have to pay it off, you know, start to pay it down as we have in the past as we did after World War two, for example, or could you increase the amount of debt. These are good and interesting questions, I think. We could spend many hours on them and I have a suspicion that they will come up in the question and answer, but I'm for the moment going to proceed under the assumption that the government cannot just borrow its way out of spending out of its revenue needs that that there's no alternative to actually having taxes to finance expenditures. And I think realistically, that's true. Meaning, Heaven knows the US Congress has demonstrated over and again how willing it is to spend when it doesn't have taxes to pay for all of the spending. But I don't think that Congress will go in the direction of a massive increase in federal debt. And so then the question is, where are we going to get the money. Here's the federal debt, by the way, as you can see, and this is over the last 70 years. This is measured as a fraction of GDP. And as you can see, we're at a little bit over 100% right at the moment, which was the same as we were right at the end of World War two. After World War two, as you can see this federal debt went way down as a fraction of GDP. And the reason was the country paid it off. We had higher taxes back then and they use the taxes in part to pay down the federal debt from World War two. And it's kind of gone up and down and it went down, for example, at the end in the second half of the 1990s when there were, you know, the federal government was running surpluses. But it has gone up quite a bit recently, quite a bit in the last 15 years, and it's projected to go up further. And again, let me emphasize those projections are overly optimistic. I've pursued things such as an assumption that Medicare spending will automatically fall when the Medicare trust fund is exhausted, which it will be just in a few years. And that's an unrealistic assumption. I said, in my opinion, it's an undesirable thing, but whether it's desirable or not, if it were to happen. It's unrealistic. And so the deficits are going to get bigger. Okay. What should. What taxes do we need. And what will we do. Let's start with the taxes that the US government currently has the primary sources of revenue for the US government are personal income taxes, which is, and that includes by the way the tax taxes on the income of chapter S corporations and LLCs and partnerships and proprietorships, small business, you know, so called small businesses. Okay, so personal income taxes plus payroll taxes, the payroll taxes are your social security disability insurance and Medicare taxes. Those are the primary sources of federal revenue currently, there definitely are other taxes there's corporate income taxes, federal excise taxes, there's tariffs, but they don't add up to that much. And as I will mention again in a minute, the federal government does not have consumption taxes, we don't have a federal sales tax, we don't have a value added tax. The primary source of revenue is the personal income tax, and the payroll taxes. That's really different than other countries, because they're, they rely much more on consumption taxes, and social insurance taxes. So if you look at the percentage of GDP that the federal government raises with different taxes. This is, you know, the last 50 years of history again. This is from the congressional budget office individual income taxes are good chunk of the, you know, it's the biggest single source of revenue payroll taxes are also a very large source of revenue. And for most people those are the taxes that they see. Of course, if you get paid, wage or salary, a certain amount is paid by you in payroll taxes and your employer matches it. And individuals of course have to pay income tax. Again, a lot of that's withheld automatically but you're still paying the tax. There are other components of revenue including corporate taxes and these, you know, excise taxes, but they kind of don't add up to that much, and actually never really have over the last 50 years. You have to go back a long time, or more than 50 years obviously before corporate taxes or tariffs or excise taxes constituted a big fraction of the country's revenues. You contrast that with OECD countries OECD countries are the wealthiest, you know, large countries in the world about three dozen of them. And, you know, the highest income big countries are OECD countries so that's the closest group you're going to get to a comparison group to the United States. If you look at their sources of revenue, you'll notice that individual taxes are only a quarter of the total revenues for the United States, that number is 49%. So, the interesting thing is if you compare America to other countries America relies much more on the personal income tax, much more. Our social insurance taxes are kind of similar to those of other countries. The big difference is that America's consumption taxes are much smaller consumption taxes are things like sales taxes and excise taxes. And here, the real story is that other countries have value added taxes whereas the United States does not. And that is a huge source of revenue for them. Other countries rely much less on the income tax than America does. And we'll have a little more say about that minute. There's good and bad in all of these choices, but it is a pronounced difference between the United States and other countries. So, the United States famously does not have a value added tax. Americans often are not even that familiar with what value added taxes are because we don't have one value added tax is really a sales tax. It's a sales tax kind of done well, but it's a sales tax that's what it is. And if you think sales tax you have it about 99% right. Why doesn't America have a value added tax. The line that goes around is that we don't have one because liberals don't like it, because it is not progressive in the way that an income tax is. And conservatives don't like it because it's too easy to raise money for government with a value added tax. And people continue along these lines that will get a value added tax when conservatives realize it's regressive and liberals realize you can it's easy to raise money for government with one of these things. But the fact is we don't have it currently. And it is not one of the current suite of options that anybody is really talking about in Washington. Biden didn't propose it, and nobody is talking about a value added tax as a way of funding any current spending initiatives or paying off the debt. There's realistically, if your revenue needs become dramatic enough countries have no choice, but to adopt a value added tax. It does work. It does raise money for government. And the reason it raises money for government is that people, the economy ultimately does have to spend, and when it spends you can tax it with a value added tax that is why countries have it. In particular countries with a lot of revenue needs are much more likely than others to have high value added taxes, because that is what pays for your revenue needs. It sort of makes sense, but you know it's worth thinking a little bit about this, which is value added taxes again are like sales taxes and sales taxes. Think about the Michigan 6% sales tax and ignore for the moment that it doesn't apply to absolutely everything you buy, but it applies to a lot of things. So we have a 6% sales tax in Michigan. The same tax rate whether you're rich or poor. Now of course the rich spend more than the poor so they pay more tax, more of the 6%. But still, with an income tax the tax rate goes up as your income rises with a sales tax. The tax rate does not go up as your purchases increase. And so it is not progressive in the way that an income taxes. The value added the value added tax alternative is not a progressive alternative progressive in the sense of having the rich pay a higher portion than the poor portion of their total income or expenditure than the poor. So, you just have to know what you're getting when you get a value added tax. My own view is that one consequence of rising debt levels is that the more this happens, the more the country will be driven ultimately to a value added tax and that people should just be aware of it. I do think it's a little too glib these days to say that we don't really need to pay for things and can borrow without thinking about what the borrowing will lead to ultimately down the road. And I'm quite convinced that if borrowing continues I mean you know there's no way borrowing could continue at the rate it's currently going because it's you know we're in a crisis and that's why we have so much debt being generated right now but we will get a value added tax as a result of unfunded spending binge if that's what the country does. And when you get a value added tax you will not be getting a progressive tax. So, if if the country just continues to borrow. That is what it leads to and that is what it has led to in other countries. And so, you have to ask yourself whether that's really the tax system that you want I think it in my opinion it isn't, but of course people differ on this. Okay, let's think about income inequality and the tax system. The wealth are not equally distributed in the United States and it seems like things have maybe gotten worse in modern times, and the United States has a progressive income tax system that imposes burdens, based on with the concept that you have a higher tax rate on the rich because they have a greater ability to pay than lower income people do. And you can think of as implicit redistribution and and the tax system could actually do quite a bit more of that. But my point is the way to do that is not by eliminating loopholes but instead by having more tax loopholes than we currently do. This is not by the way a popular opinion up to now, the things I've been saying most, I think tax people agree with now we're getting into things that they should agree with, but but haven't yet. The tax system that we have has certain preferences that are often known as tax expenditures. People who don't like them sometimes call them loopholes. I have a great definition so it's not a word that I use much but but it's a good, it's a good way to criticize implicitly criticize something that you don't like. There's a lot of partisan bickering over tax expenditures liberals point out that tax expenditures go mostly to the rich, which is absolutely correct. There are numbers in a minute but prior to the 20 set 2018. The tax change introduced during the Trump administration. About a third of taxpayers itemize their deductions and the higher income people were a lot more likely to itemize their deductions. As a result, got advantage got the tax advantage offered in the tax code for certain things such as mortgage interest deductions and state and local taxes. Liberals don't like the fact that these deductions or loopholes if you want to call them that. Conservatives don't like the, these tax deductions either, or that, you know, both sides say they don't like them. Why don't conservatives like them conservatives don't like them because it kind of smacks of social engineering. That is the state and local deduction, for example, is a more favorable tax provision if you live in a high tax state like New Jersey or California. Then if you live in a low tax state like Wyoming. And so, you know the state and local tax deduction encourages state and local government spending, and it rewards high tax states with a deduction, compared to not having one to compare to not having that deduction. Conservatives don't like that. That is indeed part of why the 2017 tax legislation limited the ability to claim that deduction did not eliminate the deduction but captive. To hear them talk. Neither liberals nor conservatives like these tax expenditures, they don't like loopholes liberals are going to pay for government by getting rid of loopholes. The liberals are going to get government out of your business by stopping this monkeying around with the tax system, and no longer having political preferences expressed through favorable tax treatment. Neither side wants these things, they say, yet interestingly, we have lots of them. And we have for a long time. The liberal government's under liberal governments. It just keeps happening. Why is that. And, you know, again, here's some evidence for you. This is the best data that we've got is still pre 2018 I'm afraid but you can see that these are itemized deductions by by taxpayer category. And as you can see, no surprise, the deductions go mostly to higher income taxpayers, the really big deductions are the interest paid deduction which is mortgage interest on your own or occupied house. The contributions deduction which is for charitable contributions, and the taxes paid deduction which is state and local income and property taxes. And anyway, those are the big items and they tend to be a lot bigger for high income people because no surprise they have a lot more mortgage interest they pay a lot more state and local tax and they do more charitable contributions to because they got more income and they do more of everything. Are there many of these tax expenditures yes. There's a lot of controversy about what counts as a tax expenditure and I can talk at some length about that, as can a lot of people, but they add up to a lot of money. If you add them together which are not really supposed to do, but people often do. So you will get editorials about once a year the New York Times for example will have an editorial saying they're $1.4 trillion a year is lost through loop holes. And this is what they're referring to is the state and local tax deduction the charitable contribution deduction and you know all of these other things. It's not quite true that if you eliminated all of them, you could cut tax all tax rates in half but but there's no doubt they add up to a lot. Where do they go. It's almost all for in terms of dollar amounts. It's almost all on the individual tax which is not surprising because the individual tax is most of the tax collections on the there are corporate tax expenditures, but they don't. They don't add up to anything close to what the individual side does. And if you take now post the 2017 tax bill and which introduced a lot of changes. The three largest categories are the biggest one always is the exclusion of employer sponsored health insurance. Again, there's some controversy about the exact magnitude of this but everybody agrees it is the biggest single loophole or tax expenditure. What is this this is if you have a job and you have health insurance through your employer, whatever portion of the compensation, you know let's say that your employer has sponsors a plan, and there's a subsidized health insurance that you can as a condition of your employment you're allowed to have, then the subsidy portion of it is not treated as taxable income to you. That's what this big number is. What does that do. It does two things. It means that employees don't have to pay tax on that portion of their compensation. And people who get this health insurance, you know it's a bigger benefit to them that it would be if this were taxed like your wage and salary and comments. So that's, that's huge. The other thing it does and this is part of the criticism is that it encourages companies to structure compensation that way, because when they, when you take a job. You get the benefit of that they can give you more health insurance and maybe less wage and salary, and it might be worth it to you. And in particular, on an after tax basis, it starts to look really attractive because it's not subject to tax. Professor can we let Jeremy ask interrupt you. Sure. Sorry, Jim, can I just clarify is this graph we're looking at here is this corporate tax expenditures. No, this, this is individual. How does this fit into your previous graph that showed that mortgage interest and charitable contributions were the primary sources of the individual tax expense. Sorry, I wasn't crystal clear that that was itemized deductions. And these are not interest and charitable contributions were the big itemized deductions which is only a component of this. So, you know, technically speaking, so for example, the reduced tax rate on dividends and long term capital gains. It used to be a deduction and now is just a reduced rate. So it's a little bit how you define these things but the sort of economic point is. These are, these are the biggest ticket items but there are other ticket items as well. The biggest one always is this exclusion of health insurance the next biggest is the retirement related stuff. And then that's followed pretty closely by the reduced rates on dividends and long term capital gains. The retirement stuff is, you know, there's a benefits of retirement plans. Again, if your employer has a plan where you work on the job and they make a defined contribution contribution like a 401k or 403b, or, or for that matter if you have a defined benefit plan. Anyway, a retirement plan through your job. You're not taxed currently on the benefits that you accrue by working, even though it's kind of you are sort of getting compensated because you're accruing these retirement benefits but you don't take them until you actually retire. And we don't tax them until you retire. And so that's a tax benefit to you and actually it adds up to a lot of money. The third piece on here is the reduced tax rate on capital gains and dividends, which are, you know, for shareholders, and they're subject to a maximum 20% rate currently. Congress is considering legislation that would increase that although heaven knows, you know, you need to kind of go hour to hour now with Congress to know where that's going to go but, but currently there is a significantly reduced rate on that. And if you, again, there's some controversy about how to categorize some of these things but you'll get some idea of what the big ticket items are here this is billions of dollars per year, and these are JCT estimates joint committee on taxation estimates. And there's, there's a lot of there's a lot of these things, these loopholes these deductions. There's a lot of money that is not being collected, the dollars not collected. That is because of these things. Okay, that's correct. So, an easy one is there's 73 billion point $1 billion of earned income credit. So that means that people got earned income tax credits of 73.1 billion dollars a year in 2018. So that means the tax benefits for defined benefit plans is 109 billion. And what that says is that if we didn't exclude your defined defined benefit plans are things like oh if you work for 20 years and you get half your salary, if we didn't exclude that, you would have to be taxed now on the retirement benefits that you accrue now, even though you're not going to retire for another 10 years. And so, that's how much we give a web give up by not taxing them currently. And that's what that number is. Okay, who benefits from these tax expenditures from this failure to impose a more comprehensive income tax. And the answer is high income people is who benefits the liberal critique is certainly correct. You know, I will quickly add, you know, I would add that high income people also pay most of the taxes. And part of the reason why they're getting most of the benefit of these tax loopholes tax deductions is that they also they pay most of the taxes. And so, even if the loopholes were kind of evenly distributed per dollar of what you're paying, it would kind of come out about the same in terms of the distribution is what we currently have. Exactly the same. And I think it is a fair critique that these these loopholes these deductions go heavily toward high income people. What are the advantages of eliminating these tax expenditures these loopholes, of course, a lot of the advocates of this say well we could get more revenue and that's absolutely correct if if nothing else changes. Another attribute is that you would reduce the distortions that may be attributable to some activities getting favorable treatment and thereby encouraging, you know, over encouraging people to do that kind of thing. And, and that it would produce a more equitable distribution of tax burdens because the burden would fall primarily on the rich. And I guess you wonder whether, I mean, if it's, if all of this is true, why it hasn't happened. One possibility is that we have terrible politics and we can't do a lot of smart things. Another possibility is maybe it's not quite as rosy as this makes it sound. Professor Stevenson, I bet you have an idea. Yeah, I just had to say that you didn't list my argument for why I hate tax expenditures. And it's because there's not transparent accountability on our spending programs I see them just like any kind of spending program and other spending programs have to be reauthorized year after year discretionary spending programs evaluated and reauthorized and tax expenditures don't. That was just one argument you skipped so I thought I'd raise it for you. No, no, you're, you're absolutely right that people sometimes raise that argument. And yeah, I mean, again, Betsy, we can go back and forth on this more. I think these days the tax expenditures are getting a lot of scrutiny. And I sometimes wonder about our spending programs, whether they're getting the proper scrutiny, but, but you're right it's a different way of doing things. I mean the other piece I would add, there's nothing intrinsic about these expenditures being permanent in the code or for that matter the tax law being permanent. Congress chooses to have a tax, and it's a fairly recent choice only done in the 1930s to have a tax law that does not itself have to be reenacted every year. We could, but they've chosen not to, and they could do the opposite with the spending, they could make the spending more prominent too if they wanted to but they don't want to. So, and there are reasons for that. But you're right. That is one of the arguments that is sometimes advanced. How should we think about equity. The tax system provide differentiation like a child tax credit, you take two families, one has children the other doesn't they both have the same pre tax income. And the question is, should we should they pay the same taxes. There's no coherent arguments on both sides of this question. I can tell you where I come down is that they should not pay the same taxes that we should adjust the tax system for families ability to pay and that includes the number of children. So I think, I think a child tax credit is a great idea. But, and that is one tax expenditure. Now they're not all of this ilk but there's one. There's huge variation. A lot of the tax expenditures have the effect of reducing the taxation of capital income of, you know, business income and income from savings and investments. There's the challenge there is that capital taxes like the tax on capital gains is imposed on activities that are highly responsive to taxation. And if there were no kind of separate regime no lower tax rate on that stuff. It would be very hard to have a top tax rate of say 50% with no adjustment for capital gains, because the capital gains would basically disappear. And then you get no revenue at all from raising from tax trying to tax that stuff. And all you would get is economic distortion. I believe that the real function of many tax preferences in fact most tax preferences is to permit the tax system to have higher rates. One of the critiques of when people critique the, these tax expenditures these loopholes for the benefits going to the rich. They're right, the benefits do go to the rich. The question is what we make of that. And a lot of the world is gone is to say, oh well therefore we should get rid of the loopholes, because the rich are not being currently taxed at the rate that they should be and the way to do it is to get rid of the loopholes. I share the view that the rich are not being taxed at the rate that they should be, but I say, keep the loopholes and raise the rates on the rich, because they are getting the loopholes. And since they're getting the loopholes, it'll be easier to raise the rates than if not. If you do that, that actually leads to a better tax system, then you would get by getting rid of the loopholes. I could go into the mortgage interest deduction. But I will, which is often the most criticized of the loopholes. I will summarize it this way. The mortgage interest deduction is because it allows you to have higher tax rates, what you need to do is follow through with the higher tax rates. What if we eliminated all the loopholes all the tax expenditures. I think you get something like a flat tax. And really, when people criticize the system that we have with all of these credits and deductions, implicitly, I believe you're criticizing a progressive tax system. If you want a progressive tax system, then you have to have these loopholes and deductions. It's a totally coherent argument to say, I don't want a progressive tax system. And again, we can have an argument about that. It's coherent to say, no, I want a flat tax, a dollar is a dollar and every dollar should be taxed the same. But if you don't feel that way, if you think the tax burdens should be adjusted for ability to pay, and that that means much higher tax rates on high income people. I think inevitably that pushes you to a highly differentiated system with favorable tax treatment of capital gains, but less favorable tax treatment of other stuff. And, and, and plenty of other credits and deductions. How do taxpayers feel taxpayers say they want the system to be simple, but actually most of the tax breaks that are out there are quite popular. I think what has happened is the government has responded to, to, to what people, in fact, want, and that is what has produced the system that we have. What we do is we should do more of it. That is, we should expand, if anything, the deductions and credits I would completely uncap the state and local tax deduction I think that was a terrible mistake in the 2017 bill. I hope Congress takes away the $10,000 cap, but I would raise the rates at the same time. Here's how you're supposed. Here's how you should get the money that you need, raise the rates. If you raise them at the top, you also need to raise them, not at the tippy top, but you know for people 100,000 to 400,000 of income as well, because we need money, and the way to get it is with higher rates. Where does it leave us. I think there are proposals to finance government with getting rid of these loopholes, I think they're mistake. The worry is that if we're not smart about what we do with taxes we will be pressed without even knowing that it's happening into a situation where you have to adopt flat rate type taxes like social insurance taxes and value added taxes, and those folks are not progressive with an income tax you actually have a chance of having a progressive system, but, but you have to do it smartly. Thank you. Okay. So we went down and cited controversy before we start asking questions can we all have a moment to acknowledge Jim Heinz turn on your video or do a little applause or something. Thank you for bringing this to us this thought provoking provoking argument. Who wants to start with questions. Okay, go ahead Jeremy. I think one of the politics of this gym and how it affects people and how that may affect the potential for adoption I think, you know, one of the trade offs is people see higher rates and they can intuitively feel how that's going to affect them when they're trying to do their taxes. But when you're talking about deductions and expenditures, it requires more complicated mental math and it may be less obvious how an individual's tax burden will be affected. So I'm just skeptical about the argument of oh we should adopt higher rates, and more expenditures, because I feel like that that's unlikely to be to be widely acceptable. So people are going to only see the higher rates and viscerally resistant. So I, how do you sell this idea. If people perceive it as potentially increasing their own tax burden. I have a question. I mean, again, there is a certain zero sum aspect to all of this in that it can't be that anyone plan causes everyone to pay more because it's sort of a closed system so politically, how does this work. Look, politically, some of the things that are most attractive to politicians and to voters are the tax breaks. You know, are things like the charitable contribution deduction, or the state and local tax deduction, and some of them I think are easy cells that is. For example, Congress could say well we're going to reinstate a complete state and local tax deduction, but pay for it with higher rates. Will they actually do that. We'll see. I mean, look, I will say it is hard. If if a politician campaigns on a promise that no one with an income under 400,000 will pay any more tax, you've tightly constrained what you can possibly do. And, you know that you kind of put yourself into an impossible box that way. And so that's kind of the situation that we're in right at the moment so I look I completely agree. They run for office, they take office, and the first thing they do is they increase the top tax rate America to 55%. And your opponent says, you're a big tax, you know, jerk, because look at the top tax rate you went up to 55%. The top tax rate should be 55%. By the way, but but I get that that's hard. The response can be. Yeah, I'm, I'm like, trying to address our long run funding needs. And, you know, because I'm here. Medicare Part D is actually going to get some funding. And, you know, which is true. And, ultimately, there's kind of been a conspiracy of silence by both Republicans and Democrats about government finance going forward, where nobody wants to acknowledge the social security and Medicare funding shortfalls, and kind of will continue not to acknowledge them until I assume the crisis hits, but it's not a great way to run things. But that's what I would hope they would do. Hi, Jim. Thanks for the talk. There's sort of one question and one comment. What you showed us that the tax incidence is very different between OECD in the US. But compared to many OECD countries, my impression is that they don't all have state taxes and local taxes as much maybe I'm wrong. So once you took the state taxes into account, you know, sales taxes imposed and real estate taxes, how does the distribution from the US look from the OECD? Is it as different as you portrayed it? Yeah, I didn't think it's a great question and I wasn't clear when I presented it. No, it basically is as I portrayed it. I, you know, some of the numbers I was talking about included the state and local taxes. And the United States, half of our money comes from income taxes, and that in the OECD, it's, it's 24%. So that's really the biggest difference. That plus, you know, it's true, states have sales taxes like Michigan has 6% sales tax, but this is nothing like the average VAT rate around the world. So there really is a big difference. You know, the sort of politics of the regret, people in Europe and Canada and other places understand that these value-edited taxes are not progressive. Their argument is, well, you can have a flat rate tax like that and it funds progressive government expenditures, you know, expenditures that kind of do a better job of helping out disadvantaged people. And that is, that is totally one way to go, although it is more interventionist, you know, than the kind of what has been the practice in America. And the comment is, I mean, this is not necessarily a well-thought-out comment, but it's sort of in response to Jeremy's question. A high sales tax, and if you collect revenues through that or value-edited tax or what have you, does make the tax code simpler for every individual. So there is a trade-off between inefficiency and simplicity too. You're absolutely right. Professor Carrot. But unmute and start over though. So okay, a couple of quick things. One, just on the last comment, the tax system is enormously complicated if you have a lot of money. It's actually pretty simple if you don't. And so, and that's the case for, you know, you buy turbo tax and it does an okay job. Anyhow, that's actually not the main point I want to make. Two other points. One, so Jim, the problem you want to solve is, so you're convinced that we don't raise enough money. So how do we raise more money? We're going to actually we're going to have some kind of revenue target. We haven't quite figured out what it is, just how tax and spend liberal we are today, but considerably more money. And then if you're going to do that, you say, well, actually, you might, you know, if we're going to get more money in a reasonable way, that should involve raising the rates, and we should be willing to sort of engage in bargains with the lobbyists, in this tax expenditure by tax expenditure, in order to get an overall more effective system. But the thing that you need to believe is that there's political will or social will or whatever it might be to actually believe that raising revenue a lot is an important thing to do. And as you have pointed out several times and several different angles, finding the people who will run for office to say that isn't so easy. Third, third point is a point that I like to make him that nobody makes any more but I remember having this conversation with you know the likes of Herb Stein and Charlie Schultz back in the day. And certainly your namesake bus grant. The state and local deduction is actually its history is that it supports federalism right it allows different levels of government to be able to essentially tax and spend at their net rate, instead of a gross one in a country where we actually believe that we are a sovereign state that just makes a lot of sense in terms of political philosophy, and then we can get the economics right. I completely agree with you and look, there are a lot of reasons why I think it was just a mistake to cap that state and local deduction. Yeah, nobody wants to pay the bills I agree with that I just wish that people thought about the consequences of that. I mean it's simply not true that you can not pay your bills forever that that that cannot be true. And so I agree with that too. But if you acknowledge that, then what you're really doing is you're teeing up a different world going forward by not paying your bills today. And people should just think about what it is they're doing. If you want to ask your question you want me to ask for you. I'll ask for you, because you're still on mute. I was once wondering why can't we get the payroll tax rate for Social Security and Medicare increased. Yeah, I would say try it, and then you'll see why you can't. Yes, it is a little known fact that I was on the Social Security Technical Advisory Commission 31 years ago. I know I was a child and I was a funding shortfall then it has come to pass. And the last time the country addressed anything about Social Security was in 1983. And back then that's that's when they extended the retirement age, you know pushed it out, phased it out over two years, which is a benefit cut. What it is is a benefit cut. There's a big problem right now with the funding. And there are two ways to address it, you could have a tax increase, or you could have a benefit cut, or you could do a combination of the two. But there's no, there's no fourth alternative. That's it. It's either you cut the benefits, or you raise the taxes, or you do some of both. That's it. If the question is, you know the look the conservatives want to cut the benefits. I mean they don't say I want to cut the benefits but that's that and the liberals want to raise the taxes. I mean I'm not everybody but pretty much. And so then where do you go on that reasonable mind, you know they're coherent arguments on both sides of this question I have my own take, which may not be different from a lot of other peoples but but here's what I do know. It's really hard to do for the same reason that other big problems are hard to do, which is the cost is kind of distant. The pain of addressing the problem is immediate. So it is by far the easiest thing in the world, not only to kick the can down the road but to deny that there is a problem. And it's just, it's just not true. It's, you know, not a problem, but the pain is immediate the game is comes later, but it's just it's a bad way to run things. Okay, last question I know we're at time. I'm James is wondering do you've thoughts about the administrative ability of having more tax expenditures. Look, it's potentially a problem and I think that limits how many you can have so your point is you asked it nicely but your point is well taken that we have to worry about administrative ability, no doubt about it. I do think that the income, if you're going to have a progressive income tax, it actually has to have these things that that is simply, you know, you can't have a progressive system that is with rates that rise, unless you've also got these tax expenditures and and so if you don't want the tax expenditures, you have to scale back on the progressivity of the system. That's the cost, but I agree if you do have the tax expenditures you've got problems of administration. Perfect. Thanks very much for being here. Jim is writing a book. And so if you have burning questions that you didn't get a chance to ask Kelly or Tracy will one of you drop his email into the chat please, he would love to hear from you via email. Thank you to Tracy van dozen and for Kelly will often for handling the tech on the background today. Thank you again Jim for inciting controversy everywhere you go. This has been really fun. Thanks to all of you. Next month, our speaker will be Jerry Davis from the Ross School of Business and the topic will be about taming