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Join Blake Oliver, CPA, and Scott Hodge, President Emeritus and Senior Policy Advisor at the Tax Foundation, for an engaging and insightful webinar that delves into the complexities of tax policy as discussed in Scott's new book, "Taxocracy." Discover how tax policies impact everyday expenses like housing, healthcare, and education, and learn surprising historical tax facts such as the 18th-century British “window tax” and its relevance to today's proposed wealth taxes.
(Originally recorded on July 25, 2024, on Earmark Webinars+)
Chapters
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(Originally recorded on July 25, 2024, on Earmark Webinars+)
Chapters
- (00:46) - Introducing 'Taxocracy'
- (04:10) - Education and Tuition Costs
- (11:24) - Principles of Tax Policy
- (15:27) - Corporate Tax Rates Debate
- (22:44) - Tariffs and Economic Impact
- (28:03) - Impact of Trade Wars on Consumer Goods
- (29:24) - Tax Policies and Their Consequences
- (32:49) - Unintended Consequences of Tax Policies
- (35:18) - Creative Tax Avoidance Strategies
- (38:31) - The Role and History of the Tax Foundation
- (42:34) - Challenges and Future of Tax Reform
- (50:20) - Global Tax Systems and Their Benefits
- (52:19) - Conclusion and Final Thoughts
https://earmarkcpe.com
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Apple: https://apps.apple.com/us/app/earmark-cpe/id1562599728
Connect with Our Guest, Scott Hodge
LinkedIn: https://www.linkedin.com/in/scottahodge/
Connect with Blake Oliver, CPA
LinkedIn: https://www.linkedin.com/in/blaketoliver
Twitter: https://twitter.com/blaketoliver/
Creators & Guests
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Attention: This is a machine-generated transcript. As such, there may be spelling, grammar, and accuracy errors throughout. Thank you for your understanding!
Blake: Hello and welcome back to earmark. I'm Blake Oliver and today I am delighted to welcome Scott Hodge, president emeritus and senior policy advisor at the Tax Foundation. With over two decades of experience as the organization's president. Scott is a renowned expert on tax policy, federal budgets, and government spending. He's authored numerous studies, books, and opinion pieces and is here today to discuss his new book, tax Ocracy. Scott, welcome to the program.
Scott: [00:01:54] Well, thanks, Blake. Great to be with you. And let me hold up the book so people know. Go to Amazon and get one of these.
Blake: [00:02:00] Perfect. Yes, tax Ocracy is the title and I love that title. It it it just brings to mind this concept of bureaucracy. Mhm. What is tax ocracy.
Scott: [00:02:12] Yeah. Well it does bring together two things that people, uh, I guess dread in their dealings with government taxes and bureaucracy and, and really tax ocracy means ruled by taxes. And in so many ways our daily lives are ruled by taxes, whether it's, uh, how we get our health care to the kind of house that we buy now, even the kind of car we buy, uh, so many elements of our daily lives are wrapped up in taxes, whether we know it or not. And, and unfortunately, um, uh, it has big impact on the economy as well. And so it's time, I think, to look toward reforming the tax code so that it has minimal impact on both our lives and the broader economy.
Blake: [00:02:53] So how does that work? How does how do taxes affect our daily lives, like you said?
Scott: [00:03:02] Yeah, yeah. Just look simple. Things like how we get our health care. It's really a kind of an interesting, uh, story. It's a legacy of World War two, where they had wage and price controls. And so the unions asked for different ways in which workers could get benefits without paying taxes. And that's how it was allowed to avoid the wage and price controls by giving fringe benefits such as health insurance. And ever since much of many of us, most of us get our health insurance through our employers. And that's a legacy of World War Two. And that has a big, uh, effect on the price of health care, because what we have is this third party payer system where, you know, the people selling the good doctors, uh, hospitals and so forth are really responsible to the insurance company and employers, not we the patients who should be the consumers. And similarly, you know, we look at things like, um, uh, housing, you know, where we have the mortgage interest deduction. And the interesting story there is, of course, the mortgage interest deduction is supposed to be there to help, uh, encourage people to buy homes and make it more affordable and so forth.
Scott: [00:04:12] Honestly, it has the opposite effect. A lot of economic research shows that the mortgage interest deduction is built into the price of homes, which oftentimes in very competitive areas like Washington, New York, uh, in Arizona, California can actually raise the cost of housing and make it less affordable. And the same thing might go for, let's say, college tuition. You know, we have a lot of programs that are aimed at trying to make college more affordable tax credits, for instance. Well, universities are pretty good at absorbing those benefits, and they know how to price them into their tuition so that they could take advantage of that. And while we feel like we're getting a deal through these tax credits, we're actually paying a higher price. So it's kind of in many ways, it's like going to Neiman Marcus with a 10% off coupon. We're paying higher price, but we feel a little bit better because we got that coupon and government, a lot of tax credits and deductions make us feel that way, and it's really kind of an illusion.
Blake: [00:05:13] Wow. So okay so with tuition right. We've got these tax breaks like give me tell me about the tax break for tuition. I think that one is very relevant to our audience. Could be because we have a lot of folks who go into debt to get, say, a masters of accountancy or a masters of tax in order to become a CPA. Right. Like, how does tax affect that decision?
Scott: [00:05:35] Well, there's been a variety of attempts to use the tax code over the years to provide incentives or at least offset some of the costs that people incur when they go to college, whether it's for tuition or books or so forth. And for a while they were competing things. There was a tax deduction, which was about $4,000, and then there was a tax credit, which is about 22,000, or it could actually be increased to 2500. What was interesting about that story is that people get confused by them. Most people don't understand the difference between a deduction and a credit deduction obviously lowers your taxable income. A credit lowers your taxes dollar for dollar. But people thought the $4,000 deduction was more valuable. So eventually Congress finally did the right thing and eliminated that that deduction because too many people were taking it rather than the more valuable $2,500 tax credit. But like many things and we see similar things through the spending side of the budget, whether it's, um, you know, various, uh, sorts of grants and so forth that, that students can get. But universities know everything about your finances when you apply to them. So imagine going to Best Buy to buy a television set. And the sales clerk knows everything about your finances, how much your parents make, how much your house is worth, whether or not you have any, uh, coupons or whatnot. And they can price that television based on your finances, well, you wouldn't have a whole lot of negotiating power, would you? And the interesting thing about it, what if Best Buy could decide, nah, we don't want you as a customer go somewhere else. And that's what universities do so they can price in all of these government benefits that are that are there to try to help us make college more affordable. And all it does is jack up the price.
Blake: [00:07:27] So tuition is more expensive. Yeah, housing is more expensive. Health care and health care are all more expensive, right. Because we think we're getting a deal, but we're actually just increasing the price. Like explain to me how that works from economic theory, because I know the work of the Tax Foundation is very rooted in economics and economic thinking. Like, like, why does that happen?
Scott: [00:07:53] Yeah. Well, there's sort of opposite sides here where, um, tax credits and deductions um, get, uh, I would say captured by the seller of things. Um, but, you know, tax increases, let's say that we're going to, uh, tax cigarettes or tax, um, uh, pollution in some fashion. Um, those actually get passed on to consumers. So it's kind of interesting how taxes work. So if government's trying to subsidize something or, um, uh, incentivize it, it's the sellers of the good that tend to capture the value of that credit or deduction. Probably the same thing is going on with electric vehicles right now, where obviously the automakers know what the value of that $757,500 credit is. And so they're going to bake that into the price. And yes, at the end of the day, we consumers may get a little bit of that. But that's really been baked into the price. And the and the sellers know how much they're going to benefit from that. On the flip side, let's say we were going to, you know, try to, um, uh, disincentivize, you know, some other types of things. Well, what we'll see. And this is a good thing for like, uh, example for tariffs where, uh, Trump wants to, to increase tariffs by 10% across the board. Well, that's going to get passed on to consumers through a 10% increase in prices across the board. And so we have to be very cautious when we try to use the tax code, either to incentivize something or to discourage it, because either way we're going to see some rather unintended consequences.
Blake: [00:09:40] But we do that all the time. It seems like this is Congress's number one way to influence how people act is right. Let's let's give a tax credit or a tax deduction for somebody. If we want them to do something, we want them to give more to charity. Let's let's give them a tax deduction. Right, right. And and so people do give more to charity. But what you know what's the unintended consequence of that. We we don't think about that.
Scott: [00:10:06] No we don't. And on the we don't think about the flip side of it either. And that we have this untaxed economy out there of nonprofit and tax exempt organizations. So, you know, a lot of us, when we think of charity, we think of that charitable deduction and how much we give to the United Way or something we can deduct from our taxes. But the flip side of that is that the the donors, is that right? The recipient organizations are tax exempt. So that money is is completely exempt from the tax code. So it's deduct deductible for the giver and deductible for the recipient or tax exempt for the recipient organization. So it's completely outside the tax system. Completely. And I actually did a paper on this recently looking at the total size of the untaxed economy. And right now it's about $3.5 trillion with major large businesses that are masquerading as nonprofits. Things like nonprofit hospitals, um, credit unions, uh, universities are big businesses nowadays getting, you know, millions and billions of dollars for, you know, TV contracts and royalties and other things that are all outside the tax code. And that has a big disincentive effect. It also has a big effect, because you see a lot of businesses now that are tax exempt, competing directly with tax paying businesses and for profits. And this is a real problem with credit unions right now who are competing directly with, um, with community banks and in some cases are actually now buying community banks and taking them off the tax rolls, so to speak, and making them into non-profits as well. So there are a lot of, uh, very unintended consequences that come from this, either using the tax code to encourage things or to discourage things.
Blake: [00:12:01] So what do we do about this? Like if you could redesign the tax code, Scott, what would you eliminate? These deductions, these credits? Um, because they're they're actually I mean, your view is they're they're ultimately harmful.
Scott: [00:12:19] Yeah. They are. Yeah, yeah. Let me put on my king for a day ahead. If I could. Uh, in my book, I actually outline a couple of different ways that we can get from here to there. Uh, first of all, we should base tax policy on principle. And there are really a couple of key principles that we ought to build into tax policy. One is, uh, you know, taxes should be what we call economically neutral, uh, meaning they shouldn't be used to either punish some reward, others shouldn't be used for social or economic engineering. They should just be neutral. Uh, for behavioral effects. They should be simple. That's pretty simple. They should be transparent. We ought to know how we're being taxed and where our dollars are going to. And lastly, taxes should be stable or predictable. We shouldn't have to wonder if this tax policy is going to change. And those of you in the in the accounting profession go through this, I'm sure like crazy where taxes are constantly changing and so your clients never know how to predict, you know, their business, uh, um, plans or their individual plans going into the future. So stability is a really important thing. So once you've got those principles, let's look at the economics.
Scott: [00:13:29] And one of the things economics or economists have found is that, uh, the things in the economy, some things are more sensitive to tax policy than others. Uh, capital is the most, uh, really the most sensitive, uh, factor in the economy. So that's why economists often think that the corporate income tax is the most harmful tax for economic growth, because capital is the most sensitive thing in the economy. Now, individuals individual income taxes are second most harmful for economic growth because, hey, we can move or we can decide how much we want to work, save or invest based on the on the level of taxation and then consumption taxes and property taxes are thought to be less harmful than the others. So if we want to design a good tax system, we want it to be neutral. We want it to be simple, but also we want to move away from income based taxes to more consumption bases, where we're removing some of the more harmful effects of tax policy. And we're getting it out of our daily lives because it's no longer being driven by politics. It's simply being driven by economics.
Blake: [00:14:38] So you would move more from an income tax system to a consumption based system. So. Right. That means levy like sales taxes. Um, what kind of what kind of consumption taxes are we talking. Yeah.
Scott: [00:14:52] You know, when we think of consumption taxes, we often think of sales taxes or value added taxes, which are used by about 200 countries across the globe. But there are different ways that you can get from here to there. Um, you know, the old fashioned flat tax. Maybe you've heard of the flat tax. Uh, that was a consumption tax because one of the things that it did, well, it did two things that were really important. One is that it doesn't tax our piggy banks. So if you exempt savings and investment from taxation, really all you've got left is the money that we spend our consumption. So that's one way to get to a consumption tax. The other thing that's really important is to allow companies or businesses to fully expense their capital investments. Uh, and that moves us toward a cash flow tax for businesses. So if you don't tax savings and investment and you allow companies full expensing or go to a cash flow system, you've really gone to a a real consumption base, but you've done it in a different way rather than through something like a value added tax or a sales tax. And there are many different options that are similar to that that I outlined in tax Ocracy. Uh, in hopefully in a simple way that people can understand the benefits of each one, but also each one is going to have its challenges, both politically and economically, to get from here to there.
Blake: [00:16:19] Right. And we are seeing in this election season, uh, as we record this, it is late July of 2024. We're headed into the presidential election. And one of the big issues is corporate tax rates, right. It's currently at 21%. Do I have that right? That's right. Yeah. Republicans want to bring it down to 20% or lower. And it looks like Democrats want to push it higher. And so this is a this is a big deal right.
Scott: [00:16:51] This is a really important deal both economically and I think for us competitiveness. Um, you got to remember that it was about six years ago before the 2017 Tax Cuts and Jobs Act. The US had the highest corporate tax rate in the industrialized world at nearly 40%. And so the Tax Cuts and Jobs Act brought that down to 21%. And if you add on state based or the state level taxes, it brings us competitively right in the middle of most industrialized countries, at around 25 to 26% or all in. Well, that's pretty competitive. And it also that bill changed some of the ways that come big companies account for foreign profits to make the US a much more competitive place. Now if we were to raise the corporate tax again as well, President Biden. But now, uh, Kamala Harris has proposed to do so, uh, it would reduce US competitiveness, and I think that it would be a very dangerous thing to do, because what we saw before the Tax Cuts and Jobs Act is companies parking profits offshore because it was too expensive to bring it back, or in some cases moving their headquarters to low tax countries, uh, much like New Yorkers or Californians moving to Texas or Florida in order to avoid high taxation? Now the benefits actually, there's some challenges if if Republicans want to lower the corporate tax rate to that, I have to kind of raise some caution flags, because Trump has talked about lowering the corporate rate from 21 to 15%.
Scott: [00:18:31] Yes. That would make the US much more competitive. Yes, it would be a A US would be a very attractive place to do business in. However, the danger is that you'd have one a huge gap or gulf between the tax rates paid by C corporations and the rates paid by Passthroughs, uh, such as LLCs and S corporations. And that's a worry. You don't want to have such a huge gap between the top individual rate or even after the, uh, what we call the 199 cap, a deduction, the 20% deduction for pass thrus, there's still a big gap between the way different businesses are taxed. And you don't want to have that. You don't want to have people arbitrage that you don't want to create disincentives or dislocations. And so it's really important that we start thinking about how can we reform the tax system so that all businesses are treated roughly the same. And um, and that's where we ought to be moving. I like the idea of trying to lower that corporate tax rate, but don't do it at the expense of pass through businesses who are only paying one level of tax and have different reasons for being a pass through. And we want to keep things as simple as possible.
Blake: [00:19:48] So that's a great point. I, I hadn't considered that, but I mean, it would create a lot of work for accountants because their clients would suddenly want to become C corporations if the tax rate became very low. But like that is not that's not productive for our country or for our economy, right. Just changing entities to get the latest tax break.
Scott: [00:20:09] Well, there's an interesting story to this Before the 1986 tax reform, you had a situation where the individual tax rate was very high, as high as 70% or more, and the corporate rate was around 46%. And so a lot of wealthy people sort of parked. They created their lives around their C Corp, around their business. Uh, and then the 86 act changed that. So it lowered the individual tax rate where it was in some cases lower than the corporate rate. And they expanded the definitions of S Corp. And you saw this explosion of LLCs and S Corp's ever since 1986. And what's interesting is today there's more business income taxed on a 1040 than there is on the 1120 corporate form. Believe it or not. And that's because one, we've made it more beneficial, if you will, to be a pass through. But we also then lower that differential between the corporate and individual rates. I don't want to we didn't we don't want to go back to that. We want to to try to rationalize this. And if you get back to this situation where the corporate rate is too low, people are just going to flip into corporate and then, um, you're going to be back to that 1983, 1986, uh, all over again. And I worry about the implications of that.
Blake: [00:21:37] The hosts of the All In podcast, which is the number one technology podcast, have been talking about taxes lately and the election, and they make this argument at least one of the hosts does. I think it's, uh, Friedberg. Uh, David Freiberg makes the argument that the ideal corporate tax is 20%, because it shouldn't be higher than that, because you go higher than that. And historically, people start to figure out ways to get around it. So, so and so there's sort of this natural limit to how much tax you can actually collect in terms of GDP. You go higher than that 20% rule of thumb. And people hire advisors. They hire accountants and and lawyers and they figure out how to get around it. Whereas if it's lower, they may not mind. Do you agree with that statement?
Scott: [00:22:33] Yeah, yeah. I mean, I'd be I'd be interested in seeing some of the empirical work on that, but it sounds intuitively right. Um, do you.
Blake: [00:22:41] Have a number like what's the ideal, you know, corporate tax?
Scott: [00:22:45] Well, the global average right now is in the low 20s. So, uh, the world seems to be settling that to that level. It was interesting because many, uh, on the left, you know, like the white House will argue that we're on this race to the bottom, and it's really not been the case with corporate tax rates. The globe. Yes. Uh, countries have been cutting their tax rates quite a bit over the last 30 plus years, but they've settled in at that low 20s rate. And it's really just a handful of countries now that are outliers that are above 30%. And even as you know, we talked about at the outset, the US now at 21% is now right there in the middle. And so I think that we want to, uh, we don't want to go backwards in time, where we're now an outlier rather than competitive.
Blake: [00:23:38] So keeping the tax rate at 21% or even lowering it a little bit is something that I really like as part of the Republican platform. But there is something that I really have trouble with, which is this idea of raising tariffs. No on imports and lowering income taxes. And like somehow we're going to raise enough money with tariffs and that's going to be fine. What. And the Tax Foundation has done some excellent analysis on this. And we actually covered this on my weekly show, the Accounting Podcast. I'd love for you to explain this to me and our listeners. What what's the problem with tariffs and this idea?
Scott: [00:24:24] Yeah. You know, it's interesting I mentioned earlier that, uh, individual income taxes are second most harmful tax and we should move to a consumption base. Um, and many would say, well, a tariff is like a consumption tax. So why don't we switch out, you know, a consumption tax for the income tax. It doesn't work that way. Um, both economically and um, and financially, because the tax bases are different and the individual income tax base is so large, it's so much larger than our trading base that you couldn't raise the tariff rate high enough to fully offset eliminating the income tax with a tariff. You did. You would absolutely cripple the economy. Um, second of all, if you were to implement a 10% across the board, uh, tariff, it would automatically increase the price of all imported goods by 10%. So the price level would rise by 10%.
Blake: [00:25:25] So why does that happen? Why does it raise the prices?
Scott: [00:25:28] Yeah, it could because it's an automatic adjustment that 10%, uh, it's an add on cost. It's like, what if the oil prices went up by 10%, then all prices go up by 10% because of that added input cost. And the tariff is an input cost to those who import those goods. And so all of those goods would rise. Chances are domestically produced goods would rise at the same time. And so the overall price level in America would go up by 10%, and then you'd have inflation on top of that at whatever rate. So tariffs don't necessarily impact inflation per se but they impact the price level. So that's that's argument number one against doing it. It's a $300 billion a year tax increase, $3 trillion over the next ten years, which is getting there in the ballpark of what President Biden was proposing in his massive tax increase. So it's a huge, huge tax increase. And when we modeled this using our macroeconomic tax model, we found that it would be extremely economically harmful. And knocking about a percentage point off the growth rate over ten years. I think eliminating somewhere around 680,000 jobs, um, and affecting incomes across the board.
Scott: [00:26:49] But importantly, uh, our model showed that that that tariff, that level of a tariff would reduce the overall benefits of extending the Tax Cuts and Jobs Act, um, by about two thirds. So it would wipe out almost all the economic benefits of the of expanding the Tax Cuts and Jobs Act. Then you've got the problem of retaliatory tariffs. And what we know, having seen this during the Trump years is that other countries will come back and say, well, you raised our taxes by 10%. We're going to raise your tariffs by 10%. And so now you've got this tariff war Once you factor that into your economic models it looks like it would have it would completely wipe out all of the benefits of extending the Tax Cuts and Jobs Act. So all of those tax cuts that were built into that, the benefits that get washed away by those higher prices and the economic consequences that would befall importers, manufacturers, consumers and so forth, it is not good policy. It didn't work during the 1930s with Smoot-Hawley tariffs. It didn't. It has never worked.
Blake: [00:28:00] My understanding I'm no economist, but my understanding of like the Great Depression is that it was caused in large part due to trade wars.
Scott: [00:28:07] Yeah. Yeah, yeah.
Blake: [00:28:09] And by tariffs by countries retro retro exacting retribution on each other.
Scott: [00:28:14] Right. Yes. Yeah. Yeah. It's beggar thy neighbor. And it's it's really. The economists have been studying this for decades, if not hundreds of years. There's just there's no one on the on the side of tariffs at this point. And, uh, except for a few, uh, extremists who want to ignore all of that and have a different sort of agenda, and much of their agenda is that they want to return to, you know, kind of a mercantilist society where we close our borders, we make stuff here, put them on a boat and send them abroad. And I don't think that we want to give up the international trade that has made us so successful.
Blake: [00:28:57] Yeah. Well, you know, here I am talking to you remotely across the country, and I've got my MacBook in front of me. I've got my iPhone here, I've got my 4K portable display all made in China. Do I want the cost of all of this wonderful technology to go up and to maybe not even be affordable anymore? It's just it's amazing that the the, the wonderful consumer economy we've developed over these last few decades could disappear if we get into that kind of trade war and we can't make all this stuff here.
Scott: [00:29:33] Nor nor do we want to, and all the intellectual property that's gone into those tools that you're using were designed here. They were designed in Silicon Valley, or they're designed elsewhere. Um, Seattle, North Carolina, outside of Washington, DC. Um, and they're baked into those things that are made more cheaply by other people. You know, for instance, I was talking to someone at Apple and some of their factories in China require 240,000 people to make all that stuff. There is nowhere in America you could find 240,000 people to just make widgets all day. That's incredible. And, um, and so, you know, some of it's just a function of the type of goods and the kind of people that you need to make them. And why do we want to penalize that? I don't know.
Blake: [00:30:28] So if I'm that really weird single issue voter who only votes on tax policy, uh, and there might only be one of them, that might be me. Uh, it's really tough for me to consider voting. Yeah. Trump because okay, great. I like low corporate tax rates, but I think this tariffs plan is insane, right? Is there anything on the, uh, Harris side that you like? Uh, about the plan? I mean, they want to raise corporate tax rates, which we agree is is not a great idea. No. What, do they have any good ideas for taxation?
Scott: [00:30:59] I'm afraid not. Uh, all of their taxes are extremely punitive to three groups of people businesses, investors, and, um, what I call successful people, high, high impact people. These are success taxes. So they want to raise the corporate tax rate. They want to raise the corporate minimum tax rate. They want to increase the capital gains rate on millionaires and raise that up to the individual tax rate or the ordinary rate, which they want to increase to 39.6%. And then, of course, you've got on top of that, they want to increase the net investment in tax to 5% and then apply that to all pass through business. Um, now Biden had a wealth tax that he was proposing. It'll be interesting to see whether, um, uh, Kamala Harris adopts that or not or whether she just kind of moves away from that. Um, that's a bad idea. Um, when, uh, when Norway increased their wealth tax, uh, in 2022, they saw an exodus of millionaires and billionaires move out of the country to places like Switzerland and saw a huge impact, both economically and, of course, to the nation's budget, when all that wealth and income left the country. Why do we want to do that? Um, now, Kamala Harris did propose when she was running for president a number of years ago. Um, a financial transactions tax, um, which, uh, would be quite experimental here in the United States. But we've seen this abroad. Uh, Sweden in, uh, imposed a financial transactions tax in the 1980s and saw more than half of all trading in Sweden, moved to the London Stock Exchange. Um, France had a similar thing where they had a financial transactions tax on large companies, those with more than $1 billion a year in, uh, euro a year in income. Well, all the trading started moving away from big companies to small companies because of the incentives. So we know that these things are going to have a pretty big impact. And so these kind of proposals sound good on paper to many people. Um, but tax the rich.
Blake: [00:33:13] Is broadly popular.
Scott: [00:33:15] Taxing the rich is always popular. Taxing companies is always popular. Um, but what we find is that ultimately, uh, these taxes are paid by or the economic burden of them, uh, are borne by, uh, average workers and, uh, average citizens. And in some way there's going to be a big impact on them. You know, the financial transactions tax, uh, in, in Sweden, um, while the trading moved to London, the real impact was on people in the financial market in Sweden who were put out of a job. And why would we want to do that?
Blake: [00:33:53] And that brings us back to this concept of unintended consequences. And you have some really interesting, fascinating, even funny examples of unintended consequences of tax policy throughout history in your book. Yeah. What is your favorite?
Scott: [00:34:11] Oh, gosh. Um, I don't know. There, there there are so many. Um, you know, I think you look at the way that, uh, taxes have impacted our, our buildings and our, our houses. You know, uh, if anybody's been to France, you know, you see those beautiful mansard roofs all through, uh, Paris? Uh, well, that came about as, as a result of tax policy where taxes were levied on the height of a building up to the roof line. Well, what, what very creative architects did was built a sort of tax free attic, stepped back from the roof line, and that's how we got to mansard roofs. And then when Haussmann redesigned Paris, that became the the design. And it just kind of got built into their overall, uh, esthetic.
Blake: [00:35:00] Now, did those exist before or was that like the invention of that style?
Scott: [00:35:05] Yeah, yeah, it was a tax free. Uh, it became essentially a tax free living space.
Blake: [00:35:10] That's amazing.
Scott: [00:35:11] Yeah. So and, you know, if you go to places like, um, uh, you know, Holland or, uh, Denmark and you see these tall, narrow buildings along the canals, well, that's because they used to tax by the width of the building, so. Well, how do you counter that? You build a tall, skinny building. Um, and so, you know, we see this throughout history. Go to, uh, Egypt and Greece and you see a lot of unfinished buildings. And that's because, uh, property taxes are assessed differently on finished versus unfinished business buildings. And so people leave their, their house unfinished and to pay a lower property tax, and they live.
Blake: [00:35:54] In an unfinished home. Yeah.
Scott: [00:35:56] You'll see rebar sticking out of the top of the roof and say, well, yeah, we're going to finish that. One of these days when the kids grow up, we'll build an apartment up there or something. Or in Egypt they say, well, it doesn't rain very often, so why put windows in your house? Um, and and so yeah, then they pay a lower priority for me.
Blake: [00:36:14] Wow.
Scott: [00:36:16] That's amazing. Well, it just it shows you the creativity of people. Yeah. To avoid taxes. I mean there's in tariffs. Oh get to tariffs. There are so many insane stories about tariffs. Um there was a for a while uh, converse would put fuzz on the bottom of their tennis shoes. And that way they qualified as bedroom slippers, which are taxed at a lower tariff rate than tennis shoes. So they would import them and get them at a lower price. Um, you. Wait, wait.
Blake: [00:36:48] So fuzz on the bottom of the shoes. So I assume.
Scott: [00:36:51] It would wear off when you go on the street. But the fuzz then put it into the category of bedroom slipper. Amazing. Yeah. And then another one is we had the chicken tax, which, uh, back in the 1960s, the Europeans, um, put a, a tariff higher 25% tariff on imported American chickens. Well, President Johnson would have none of that. So he retaliated with 25% tariffs on a whole bunch of European goods, including, uh, delivery vans like Volkswagens, you know, Volvos and stuff. Well, today that's still going on. So you have this differential between a 25% tariff on delivery vans or SUVs or pickup trucks and 5% on cars. So, uh, Daimler Chrysler was importing their delivery vans in pieces, reassembling them in in South Carolina to avoid the tax. Um, Ford imported their delivery vans, um, with fake windows and seats to qualify as passenger vans, and then they'd ship them to a warehouse. They take all that stuff out and then put panels back in so that it would be a delivery van, and that way it, at least on paper, uh, was was taxed like a passenger van. Now, they got caught on that and paid about $1 billion fine. But how.
Blake: [00:38:19] Long did it take them to get caught.
Scott: [00:38:20] Now? Quite a many years. They were actually.
Blake: [00:38:23] And as we know, the time value of money is significant. So they may have saved money with that strategy. That's just that's incredible. It's like, uh, I'm sure many of our listeners who are tax professionals will appreciate those stories, because behind each one of those examples is a brilliant human, a brilliant lawyer or tax pro who figured out how to do this right?
Scott: [00:38:45] And they call it tariff engineering. And so they will literally engineer things to avoid a tax. And so you do have people who spend a lot of time studying this stuff and studying the tax code in order to, to avoid it. And, and that's the harder thing to measure in an economic, you know, you can look at the tax and say, well, it only raises this much or but it's harder to measure the economic impact of all of that energy and effort to try to avoid a tax. It's just crazy.
Blake: [00:39:25] There's very few people or organizations that do that, and that is one of the things that the Tax Foundation does. Yeah. Tell me about the the Tax Foundation and like, why did you spend 20 years of your career leading this organization?
Scott: [00:39:43] I know my wife asked the same thing. Um, the Tax Foundation has actually been around since 1937, and we were formed by a group of business leaders and actually in New York City, we're now, uh, we're headquartered in Washington, D.C.. Um, but they were very worried at the time in which the New Deal was on. And Roosevelt was increasing the size of government, increasing taxes, and increasing regulations, largely on businesses at the time. And they wanted to they wanted an independent organization out there that would study the economics and provide real advice on how to set tax policy, fiscal policy in an economically sound way toward a pro-growth direction. And then the tax foundation was created. And ever since we've been doing that, and I took over in 2000 and led the organization for 22 years. I stepped aside two years ago to write text Ocracy because I wanted to kind of put all that stuff that had been in my head for 20 years into a book and hopefully, hopefully raise people's tax IQ, help them tax literacy is a real problem in the United States. Um, too many people look at tax day and they say, oh, I want a big refund. Well, wait a minute, you don't want to do that. You don't want to give the government a tax, an interest free loan for a year. And so I thought it was really important to try to teach people about the economics of tax policy. But through stories, through anecdotes, through funny little vignettes that tell a story and have a real economic lesson to them that we can then apply to today's tax code, understand the economic implications of today's tax code and then through that, develop these principles and and economic rules of thumb that can help us reform the tax code in a way that gets it out of our daily lives. And ultimately, we want tax policy to allow us to reach our full potential to help increase everyone's standard of living and well-being. That's ultimately what we should be doing, not trying to micromanage our well-being. Mhm.
Blake: [00:42:04] That word those two words tax reform they are popular. Yeah. We I rarely meet anyone who is against tax reform unless they are a tax professional that just loves some particular aspect of the tax code and is totally out for themselves. And there really aren't that many people. Most even tax people I talked to want to see reform. It's gotten out of control. I think the tax code has gotten so complicated that now it's very difficult to be a tax pro, even for just individuals. It's very complicated, not to mention businesses. And so I think there is some sort of, at least in the accounting profession, an understanding that we need to have something change. But when I talk to people, old timers, uh, the attitude is, is pretty much like, well, it's never going to happen because we've tried we've seen it so many times, and all that happens is that it tends to get more complicated. So like, what is the the hope for, uh, simplification because like in the short time, a few decades now that I've been paying attention, the issue seems to be that every time you want to reform the tax code, uh, somebody's tax break, like the mortgage interest deduction gets put on the table, and then that's so unpopular that it torpedoes everything. Right. And nothing gets changed. So like, that's the problem, right?
Scott: [00:43:37] Yeah. And it really comes down to a lack of education. So in order to get to tax reform, we're going to have to do a lot of educating on the unintended consequences of these things that people have a better understanding. Like, yeah, that mortgage interest deduction is a great thing for me. Oh, but I understand that it actually makes housing less affordable and less available for everyone. So maybe if we phased it out, we'd all be better off. And so there are three things actually, at the end of the book, technocracy that I outlined, that we're going to have to change our attitudes on. We taxpayers are going to have to, uh, come to grips with the, the with the idea of giving up those credits and deductions for a better, simpler tax system. Um, you know, it's it's just going to have to have to be the way it is. And secondly, corporations are going to have to come to grips with the fact that the tax department should not be a profit center. You know, chasing deductions like things that were in the Inflation Reduction Act. And then lastly, members of Congress, lawmakers, politicians are going to have to come to the grips of the fact that the IRS is not the best place to deliver benefits, or the tax code is not the best vehicle to deliver benefits, whether it's tax credits or other things. And so those are big challenges because, um, you know, many of us have gotten used to these things and we see them. Oh, my gosh. You know, um, I in fact, a good example of that real quickly.
Scott: [00:45:17] Many years ago, I was asked to to lecture to this large group of philanthropists and wealthy people, donors to to nonprofits. And my task was to argue in favor of eliminating the the charitable deduction. And I said at this time, the top marginal rate was like 90, you know, 39.6%. And I said, well, how many of you want to increase the value of the charitable deduction? They all raise their hand. Oh, great. How many of you want to lower the value of the charitable deduction? No one raised their hand. I said, okay, well I'm going to raise the top marginal rate to 50%. And that way you can deduct $0.50 out of every dollar that you give to charity. You. Great. We've just now lowered the cost of charity and charitable deductions. And I said, well, how many would be in favor of that? Well, not many people raise their hand. I said, well, what if I lowered the tax rate to 25%? Now the cost of giving is now $0.75 on the dollar. But you get to keep extra money out of your pocket. How many are in favor of that? You could see them trying to work through this. Do I want to lower the tax rate or do I want to higher hire deduction? And that's the kind of quandary that most people are in. And we're going to have to kind of work through that and explain to people as best to have lower rates. A simple system, keep more of your own money and not try to be influenced by the tax code.
Blake: [00:46:39] I'm with you, but I am not optimistic, given that we can't seem to get the idea into people's heads that tariffs or taxes, right?
Scott: [00:46:47] Yes.
Blake: [00:46:48] Right. Like like we have President Trump saying I'm going to increase tariffs and everyone's saying great. But if he came out and said I'm going to increase taxes, people would not be happy about that. Yeah. Yeah. Like good point.
Scott: [00:47:00] Very good.
Blake: [00:47:01] Point. Right. That's how that's how basic this problem is with.
Scott: [00:47:05] Very good very good point. And the same thing works for the corporate income tax or something. I would just tax those court. They're rich. They can afford it. Right. Well, interesting economic study done in Germany a couple of years ago, looking at who bears the economic burden of the corporate income tax. And they found that over time, 51% of the economic burden of the corporate income tax fell on workers through lower wages. And this was the most interesting aspect of that study to me, is that the impact was on the marginal workers the most. It was women, low skilled workers and younger workers who were most impacted by that economic burden of the corporate tax through lower wages. Well, gosh, those are the people that we would want to help most in the economy. And we are actually doing the opposite by trying to raise corporate taxes. And so we it's a real challenge to get people to look at the second order effects or what we economists call the incidence of taxation. Um, and not just look at who's paying the bill, you know, writing the check. And so, yes, corporations write a lot of checks, but who's what's the economic burden? Well, it's falling on workers, or sometimes it gets passed through to shareholders or consumers. And the same thing goes with tariffs. Tariffs are not paid by those foreign countries. They're paid by us.
Blake: [00:48:31] They're paid by us. Corporate taxes to are ultimately paid by us.
Scott: [00:48:38] Have to be I mean it's it's no different if you were to raise the price of oil, which affects the input cost of so many businesses, they're going to have to raise their prices right there, or they're going to have to do without workers or, or other things. Well, same thing goes with taxes. I mean, how can how can we look at it any differently? So taxes are an input cost for companies. Yes. They can do things to try to avoid it. They can put fuzz on the bottom of the tennis shoe or they can they can change the design of something, but they can also do without people and, um, or they can do without machinery, which makes people more productive, which raises their value and their, their, their living standards. So we have to be extremely cautious about just saying we're going to tax corporations because we're essentially taxing capital and we're taxing the things that make people more productive, which makes us all better off and all raises our living standards.
Blake: [00:49:42] So there is the ideal. There's where we ought to go. Yeah. Then there's also where we will go, which maybe some would argue inevitable because these are these policies are governed by forces outside of anyone's individual control. Where do you see taxation headed in the United States?
Scott: [00:50:04] Yeah, it's a big it's a great question because next year is a definitive year. The Tax Cuts and Jobs Act, or at least many of the most the individual elements of the Tax Cuts and Jobs Act expire at the end of next year. And we're only now getting people to realize this on Capitol Hill and say, what do we do if we do nothing? It would be an automatic tax increase of about $3 trillion over a decade on individuals. On the other hand, if we extend them, as many people want to do, and really we think economically needs to be done, there's a deficit impact of that. And so there's now the talk of how do we offset these policies in a way that doesn't diminish economic growth while we're trying to do the right thing here for lower tax rates for the benefit of economic growth? And so, you know, it's a really tough tradeoff on on the kinds of policies that are needed to extend these pro-growth tax cuts, but do it so in a way that doesn't undermine the growth you're trying to achieve. Um, we probably should be having a much bigger discussion about fundamental tax reform rather than just extending the current tax cuts, which would be good. But I think that this should be a catalyst for a bigger discussion. And, you know, there are countries that have better tax systems in the United States, believe it or not. Um, tiny little Estonia, we hold up as being the model for really what is one of the best, most neutral, economically neutral tax system in the world? Uh, we talked about corporate taxation.
Scott: [00:51:41] Uh, businesses, all businesses, uh, in Estonia pay what's called a distributed profits tax, meaning they can they can reinvest all their profits as long as they want. And they only pay 20% tax on that when they distribute those profits to shareholders. And there's no individual dividend tax on that. So it's only a one layer of tax one time. They do have a 20%, uh capital gains rate. So that's a little bit different. But the individual rate is 20%. The value added tax rate is 20%. So you can kind of see the symmetry. But that that corporate or business structure, this distributed profits tax is basically a cash flow tax. It's very very pro growth, very good for startup businesses. Um, Estonia has really become a haven for a lot of tech companies. Uh, in the Eastern Europe, um, and other countries such as Poland, Georgia. Now, uh, Ukraine is looking at this kind of a system, and I'm hoping that it sort of takes off because, um, it's a simple system. And for especially countries that had formerly been communists, that have a lot of problems with with corruption, the Estonian style system minimizes the amount of corruption. Number one, the tax code is only 80 pages long, and there's so few deductions, credits or or exemptions that there's no room in there for influence peddling or corruption. And so that's why a lot of these countries are looking at it, because it's so simple that it can't be corrupted.
Blake: [00:53:16] So simple it can't be corrupted. I like that as a solution. I am Blake Oliver. I've been speaking with Scott Hodge, the writer, the author of Tax Ocracy and the president emeritus and senior policy advisor at the Tax Foundation. Scott, it's been a real pleasure. Thank you so much.
Scott: [00:53:36] It's been so much fun. Thank you so much for having me on the show.
Blake: [00:53:39] And before we go, tell us one more time. Where can folks where should folks go and buy your book?
Scott: [00:53:47] Yeah, anywhere you buy books online. Amazon, elsewhere. Tax accuracy is right there. And if you like to listen to it in the car, an audio version of Tax Accuracy will be arriving on on Amazon on August 13th. Um, so look for that there. And so you can either read it at home or listen to it on that long commute you've got.
Blake: [00:54:09] That's my birthday. So I guess I know what I'm getting for my birthday. There you go. The audiobook version. Uh, Scott, thanks for chatting with me today and thanks to everyone who joined us live. As a reminder, you can join me live for these earmark interviews. Go to earmark CPE com slash webinars or download the app and check out the new events space in the app to register for future upcoming live streams. Great talking with you, Scott.
Scott: [00:54:38] Thank you.