Symposium on Tax Policy in an Unequal Economy

The audience watches Prof. Clausing give her remarks.

“The Symposium on Tax Policy in an Unequal Economy,” held at American University, was IMPA’s inaugural event. It featured presentations and a panel discussion on taxation policy in the United States. The objective was to facilitate a dialogue between policy practitioners and economists on the accurate modeling of significant economic developments, such as changes in market power and inequality, in the assessment of policy proposals. The discussions emphasized the pivotal role played by models in the policy process and recognized the contributions of the new IMPA model. The symposium took place on Monday, April 17th, 2023, at American University in Washington, DC.

Models and Policymaking

Professor Stiglitz gave the opening remarks. He explored how policy models have influenced debates on various economic proposals, from the response to the Great Recession to the enactment of the Tax Cuts and Jobs Act (TCJA) in 2017. These models shape the debates by evaluating the potential beneficiaries, costs, and aggregate effects of new policies, thereby guiding the decision-making process for policy adoption. However, the predictions made by many major models regarding the effects of these policies did not materialize in the real world. Professor Stiglitz asserted that this discrepancy stems from flawed assumptions made by these models, leading to incorrect conclusions. He exhorted economists to ensure that their assumptions preserve the relevant aspects of the economy. For instance, market power significantly influences firms’ responses to tax policy changes. When tax policy models assume negligible market power, the projected effects of tax reforms differ greatly from those of models incorporating market power.

Professor Stiglitz highlighted how academia has long recognized these issues, yet major policy models have failed to address them. He commended IMPA for proposing a tax policy model that genuinely incorporates market power, demonstrating the sensitivity of predicted effects of capital income taxes to varying degrees of market power and other relevant factors. He argued that all policy models should enhance transparency by explicitly discussing their assumptions and the impact of these assumptions on their policy recommendations. This approach would facilitate future model comparisons and improve the quality of policy debates that rely on these models.

Capital Taxation and Market Power

Professor Kimberly Clausing presented her research on capital taxation and market power. She emphasized the increasing presence of market power in the United States and globally, highlighting its various policy implications such as rising inequality, increased benefits of antitrust policy, and altered effects of capital taxes. She advocated for corporate taxation as an effective means to address the surge in market power rents. Proposing a graduated corporate income tax, she illustrated how taxing above-normal profits resulting from market power can help mitigate the expansion of market power without distorting decisions related to employment and investment.

The Tax Debate

The panelists facing the audience.

The event concluded with a panel comprised of both policy practitioners and academic economists, who engaging in a discussion on the role of models in policymaking debates. The panel focused on tax policy, the limitations of existing policy models (such as those by the Congressional Budget Office and the Penn Wharton Budget Model), and the potential benefits of alternative models that incorporate realistic levels of market power across different markets. They underscored the significance of these assumptions when evaluating issues like taxation policy and the minimum wage.

The panel deliberated on various crucial topics, including the vital role played by policy models in shaping debates surrounding significant economic policies like the TCJA, as well as the necessity for transparency in constructing and explaining models. Professor González explained the IMPA model’s assumptions and main results. For instance, he explained that introducing market power into an otherwise standard policy model has important effects on wealth inequality, which in turn has fundamental implications for the design of tax policies like the TCJA. The panel acknowledged that having alternative models with transparent assumptions can establish a more robust platform for policy debates and their consequences.

Panel participants

  • Kimberly Clausing, Eric M. Zolt Professor of Tax Law and Policy, UCLA School of Law.
  • Michael Linden, Executive Associate Director, Office of Management and Budget.
  • Kitty Richards, Former Director of State and Local Fiscal Recovery Funds.
  • Ignacio González, Co-Director of IMPA and Assistant Professor of Economics, American University.

Closing Remarks

Concluding the conference, Professor Simon Johnson addressed the challenges posed to policymakers by emerging technologies, such as automation and artificial intelligence. He underscored the relevance of these technologies to the conference discussions, as they have the potential to accelerate the already increasing trends of market power highlighted by previous speakers. Professor Johnson emphasized the significance of IMPA’s work and its new model, as it effectively illustrates the effects of market power and income distribution when analyzing tax policies. He contended that policy debates should move beyond mere 10-year predictions and instead adopt a more long-term perspective, comparing the assumptions of different models side by side. He argued that the work by IMPA is particularly urgent, given the rapid pace of market power expansion, necessitating a better assessment of policies like the TCJA rather than relying on models that have struggled to keep pace with significant trends.