01 Mar 2014
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Ask the Expert: Taxing Questions

With April's IRS deadline looming, HBS professor Mihir Desai answers alumni queries on all manner of taxation
Re: Schecky Schechner (MBA 1983); Ralph Sultan (MBA 1960); Claire Martin (AMP 175)

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What would the "perfect" tax plan look like?
Sheridan Schechner (MBA/JD 1983), managing director, Barclays Capital, USA

I'd envision three simple building blocks: a consumption tax with no exclusions that eliminates the penalty to saving; a progressive income tax on labor income to achieve desired levels of redistribution without harming saving; and a carbon tax to correct for externalities associated with energy consumption. In short, no tax expenditures that litter the code with preferences and that constrain policymakers; no corporate tax; no taxes on financial transactions; and a sufficient level of redistribution to suit current preferences.

David Bradford's proposed X-Tax is interesting. And, if we constrain ourselves to the world in which we live, Michael Graetz's plan is pretty darn good.

Please comment on the US corporate tax rate.
Ralph Sultan (MBA 1960), former chief economist, Royal Bank of Canada, Canada

The United States has the worst of all worlds: a relatively high marginal tax rate that influences behavior negatively, but a considerably lower average tax rate that precludes the revenue associated with high rates.

Here's my best shot at revenue-neutral reform:

  1. A much-reduced rate, to facilitate US domestic investment and discourage transfer pricing games.
  2. A transition to a territorial regime of taxation with only US-earned profits subject to taxation and foreign activities no longer penalized.
  3. A greater congruence between the high profits corporations report to investors and the low profits they report to tax authorities.
  4. A minimal tax on the noncorporate business sector, thereby ending the relative disadvantage facing our largest public companies.

Here's an HBR article I wrote that elaborates on this.

What are your thoughts on a "Tobin tax" on financial transactions?
Claire Martin (AMP 175, 2008), VP, Renault, France

I'm skeptical for three reasons. First, empirical evidence indicates such taxes have raised little revenue and have simply relocated trading rather than limiting it. Second, we have been busy re-equitizing banks, so to impose a new tax seems like a counterproductive, political maneuver. Third, only a truly multilateral effort would succeed, and I don't see that happening. I'm all for fixing the financial sector's problems, but I'd go about it via regulation and by changing financial sector managers' incentives, as tax policy is a blunt tool for a complicated problem.

Here are three relevant links:

  1. For levels of mobility:
    http://www.hbs.edu/faculty/Publication%20Files/09-054.pdf
  2. For available empirical evidence:
    http://www.ft.com/intl/cms/s/0/b9b40fee-9236-11e2-851f-00144feabdc0.html#axzz2mwFbo8Gh
  3. For a different way:
    http://hbr.org/2012/03/the-incentive-bubble/
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