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Making Sense of Tax Reform

Paper Session

Sunday, Jan. 6, 2019 1:00 PM - 3:00 PM

Atlanta Marriott Marquis, International 4
Hosted By: American Economic Association
  • Chair: Alan J. Auerbach, University of California-Berkeley

Taxing Business Under the TCJA: The Good, The Bad, and the Ugly

William Gale
,
Brookings Institution

Abstract

The effective tax rate on new investments by U.S. businesses depends sensitively on numerous factors, including: organizational form, financing, dividend payouts, asset type, industry, and the country where income is earned. Effective tax rates vary substantially across investments, generating inefficient resource allocations and added tax complexity. Tax reform should set a uniform effective tax rate (zero in a consumption tax, positive in an income tax) on new investment. This paper examines the sources and magnitude of uneven taxation in post-TCJA tax code, 1986-style reforms, integration proposals, territorial and world-wide systems, and the destination-based cash-flow tax.

How Tax Reform Could Affect Commercial Real Estate

John V. Duca
,
Oberlin College and Federal Reserve Bank of Dallas
David Ling
,
University of Florida

Abstract

Major changes in taxes can affect commercial real estate (CRE), as in the boom and bust of the 1980s and 1990s, respectively, through possibly altering not only the present value of tax depreciation for commercial real estate, but also interest rates and employment, all of which affect the present value of existing properties. Simulating a system of equations that empirically incorporates some of the features of the DiPasquale and Wheaton (1992) four-quadrant model of CRE markets, we assess scenarios of how recent federal tax legislation could affect commercial office prices and construction.

Revamping Itemized and Standard Deductions: Explicit and Implicit Base Broadening in the TCJA

Alan D. Viard
,
American Enterprise Institute

Abstract

The Tax Cuts and Jobs Act (TCJA) curtailed several itemized deductions, including capping the state and local tax deduction. However, a key part of the base broadening in the TCJA is the implicit base broadening associated with a large-scale switch from itemized deductions to the standard deduction. That switch was partly due to the curtailment of itemized deductions, but was primarily due to a near-doubling of the standard deduction. Switching to the standard deduction is a form of base broadening because it effectively scales back all of the tax preferences provided by itemized deductions. The economic effects of the implicit base broadening are similar to those of explicit base broadening. I examine the magnitude of this implicit base broadening and discuss the economic effects of the TCJA's explicit and implicit base broadening.

Tax Reform, Homeownership Costs, and House Prices

David E. Rappoport
,
Federal Reserve Board

Abstract

The effective cost of homeownership depends on the tax code. I derive a sufficient statistic formula for the effect of tax reform on house prices, and use it together with nearly 4 million simulated tax returns to measure the potential response of house prices to the Tax Cuts and Jobs Act of 2017. The price decline from the disincentives to itemize federal deductions is five-fold the price increase from the increase in disposable income, so my simulation suggests that house prices can decline about 2 percent on average, and up to 7 percent, in my sample of 269 metropolitan areas.
Discussant(s)
Christine Dobridge
,
Federal Reserve Board
Eric Toder
,
Urban Institute
Eugene Steuerle
,
Urban Institute
James Poterba
,
Massachusetts Institute of Technology
JEL Classifications
  • H2 - Taxation, Subsidies, and Revenue
  • R3 - Real Estate Markets, Spatial Production Analysis, and Firm Location