The Center for New Revenue is considering a contest, with $1,000 in total prizes, for papers illustrating the policy problems with a tax or public policy discontinuity. The target is cliffs, gaps, notches, or discontinuities that occur when an additional dollar of income (or a smidgen of something else) creates a marginal tax rate that is over 100 percent: Some people call this phenomenon the “skyline” tax rate, referring to what marginal income tax rates look like when shown on a graph. This iteration is not an actual plan yet. Comments appreciated.
Here are examples:
“[A]s a consequence of a tax code provision penalizing parachutes greater than 3 times taxable income, CEO parachute contracts frequently contain “cutback” provisions limiting the parachute to this threshold. When their companies are acquired, CEOs exercise options in bulk to raise their taxable income and boost their threshold.” https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3075467
Illinois’s marijuana ad valorem tax rate for smokeable product with 34.999 percent THC concentration is 10 percent; concentration of 35 percent jerks the rate up to 25 percent. Spraying raw plant material with potent concentrates, or diluting concentrates with CBD or terpenes might let sellers come in just under 35 percent THC. https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3481584
And there’s this late 20th century notch, from NTA President Drew Lyon, https://books.google.com/books?id=D_FgitCMcg8C&pg=PA214#v=onepage&q&f=false:
How might contest entrants show problems with a cliff? Maybe by showing actual economic distortion that the cliff creates? Maybe by showing strange and useless behavior by taxpayers seeking to stay on the correct side of the cliff?
I think this would be fun – and promotion of good policy by shining the light on bad policy.
If this goes forward, the Center for New Revenue will be looking for judges – economists, lawyers, and maybe government officials and media people.