Earlier this week, my Tax Policy Center colleague Elaine Maag blogged about proposals by the Center for Law and Social Policy (CLASP) to improve federal assistance for low-income college students, including better targeting of higher education tax credits. But there may be even more effective ways to help these students. One idea: Cut back on tax credits and use the savings to improve Pell grants and loan programs.
As part of the same broad initiative that generated the CLASP plan, I was one member of a group of experts assembled by HCM Strategists to reimagine financial aid. Our aim was the same as CLASP’s, but our proposals took a different tack: Refocus and simplify the whole federal financial aid system including federal grant, loan and tax programs so they work more effectively and cost-effectively.
We started by acknowledging that Congress has greatly expanded federal support for higher education—doubling the amount spent on both Pell grants and tax credits—but there is little evidence that all those extra dollars have similarly expanded the number of college graduates. Almost half of all undergraduates receive a Pell grant but Pell recipients are half as likely to get a Bachelor’s degree within six years as those getting no assistance. And while federal aid has made college more accessible to minority students, it has done little to improve their graduation rates. We concluded there must be a better way and suggested four reforms:
Simplify the aid process. We would replace today’s myriad of programs with one grant program and one loan program and make it possible for students to apply with a simpler application. Grants would be targeted to those who most need aid, and students would be encouraged to take more classes each semester—a step that raises graduation rates. Loans would be consolidated into a single program with common annual and aggregate limits for undergraduates and repayment based on income levels. For all students, the financial aid form would be automatically pre-filled with IRS data, with a small set of students needing to enter more information. By consolidating the application process to rely more on tax return information, the Department of Education could also require better reporting of education costs to the IRS, information that is currently reported on a haphazard basis. ( Continue… )
I would like to propose a simple plan that would let Republicans and Democrats avoid a blunt, across-the-board sequester that fails to set priorities. It would give both parties something they want without abandoning their core principles. And it would strengthen the party making the proposal by putting the other on the spot if it fails to move toward a moderate compromise.
Republicans should offer to let the president meet the sequester’s deficit targets through his choice of spending cuts, including from entitlements. Yes, they would cede some power over a moderate share of total spending, but they would retain their primary goal: forcing Democrats to tackle the spending side of the budget.
Democrats should replace their demand that the sequester include tax increases with a simpler requirement that the rich shoulder their fair share of any spending reductions. Yes, Democrats would give up their goal of balancing spending cuts with tax increases, but they would retain their more basic aim: progressivity.
To understand why these strategies would work, we have to go back to the root causes of the impasse. Each party is fiercely fighting to compel the other to ask the middle class for the inevitable—to give up something to restore balance to the budget. But each considers it political suicide to take the lead. Just think back to the presidential campaign, when Barack Obama and Mitt Romney indicated support for Medicare cuts, only to be viciously attacked by the other. ( Continue… )
Senator Jeff Sessions (R-AL) has created quite a stir with his estimates that every household below the poverty level receives an average of $168-a-day (or about $61,000-a-year) in government welfare.
Sessions’ calculations are extremely controversial and overstate the amount of government assistance for those in poverty. But for the sake of argument, let’s assume he’s right. How would $61,000 in direct government spending and refundable tax credits for the poor stack up against tax subsidies for the rich?
It isn’t even close. Indeed, my colleagues at the Tax Policy Center figure that in 2011 households making $1 million and up got that much in average tax benefits from just two deductions–for charitable gifts and state and local taxes. Add a fistful of other preferences–such as deductions for mortgage interest and exclusions such as the one for employer-sponsored health insurance– and top-bracket households got far more in tax benefits than the poor got in means-tested assistance.
These estimates exclude low tax rates on capital gains and dividends which are, arguably, very different from, say, subsidies for mortgage interest or employer-sponsored health insurance. If you include preferential rates on investment income, households making $1 million or more got an additional $119,000 in tax benefits, on average, in 2011. ( Continue… )
As regular readers of Tax Vox know, I don’t believe there is much chance President Obama and Congress will agree on individual broad-based tax reform in 2013. Without a deal on how much this new tax system should raise, talking about a big rewrite is futile. However, Obama and Congress still have an opportunity to do something very useful: Clean up the law so it is simpler and smarter.
Making the code less complicated and more efficient may not achieve the rate-cutting, base-broadening reform many want. And it surely is not the cosmic shift to a consumption tax favored by others. But it can have important consequences for real people.
Until now, Democrats and Republicans have been like a couple that has been living in the same house since 1986. For decades, they’ve been having the same argument: She wants to put on a big addition. He wants to move. While they’ve bickered, the house has deteriorated.
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But they have an alternative: Call a cease fire and upgrade what they have: Put in energy-efficient appliances, update that pink-tiled bathroom, and give the place a fresh paintjob. Neither spouse may be fully satisfied, but they’ve made the house a lot more pleasant to live in. ( Continue… )
With 10 days to go until the dreaded sequester—the automatic across-the-board spending cuts that most lawmakers profess to hate—the Washington drama machine is starting to get in gear. Today, President Obama stood in front a group of uniformed first responders and warned darkly of layoffs if the spending cuts kick in.
Simpson and Bowles, who chaired a 2010 White House deficit reduction panel, presented a broad frameworkaimed at reducing the debt to “below” 70 percent of Gross Domestic Product in 10 years. The debt/GDP ratio has become a favorite new target for both Democrats and Republicans though, naturally, they disagree on what it should be.
Many Democrats and some progressives want to aim for about 73 percent of GDP, which is what it is today. Many Republicans and other deficit hawks are shooting for about 60 percent, which was the upper bound of member state deficits set by the creators of the Eurozone (not that it’s done them much good). For context, the Congressional Budget Office figures that under the most likely fiscal scenario, the debt will approach 90 percent of GDP by 2022. ( Continue… )
How many tax bills introduced have bipartisan support in today’s hyper-partisan Congress? Not very many but last week identical bills were introduced in the House and Senate that enjoyed rare bipartisan support. Twenty senators and 37 members of the House from both parties signed on to the Marketplace Fairness Act of 2013 (MFA)—legislation that would allow states to collect taxes on what consumers buy over the Internet.
The measure would finally resolve a decades-old dispute over whether states can collect sales taxes on mail-order and online purchases. Currently, states are barred from requiring out-of-state sellers to collect sales taxes, unless the retailers have a physical presence (or nexus) in their jurisdiction. The MFA would allow states to require sellers to collect these levies no matter where the firms are located.
The MFA is similar to bills that died in 2012 and which my TPC colleagues discussed here and here. Under the new measure, states would be permitted to require online sellers to collect tax, though the decision would be left to each state. Today, online buyers owe tax on their purchases (through use taxes) whether sellers collect the levy or not, though few taxpayers bother to comply.
Increasingly, Democratic and Republican governors have had their eye on online sales taxes. The issue has taken on increasing importance with several GOP governors proposing to repeal their state income taxes, a step that would force them to rely even more on sales levies. ( Continue… )
Our new Marriage Bonus and Penalty calculator, despite all its Valentine’s Day finery, ignores the new 0.9 percent Medicare payroll tax hike buried in the 2010 health law. The extra levy affects only a few high-income couples but in very different ways. Lucky couples will collect marriage bonuses of up to $450. But those less fortunate—if anyone making $250,000 can be considered less fortunate—will incur marriage penalties of as much as $1,350 in additional Medicare tax.
The culprit? The income thresholds for paying the tax. The new levy equals 0.9 percent of wages above unindexed thresholds—$200,000 for singles and $250,000 for married couples. Because the threshold for couples is less than double that for singles, the tax imposes a marriage penalty on couples with two high earners but gives a bonus to those with a high earner and a low- or non-earner.
Consider the simplest case of a penalty: each spouse earns $200,000. If they weren’t married, they wouldn’t owe the new tax because their separate earnings don’t exceed the singles threshold. As a married couple, their $400,000 combined earnings are $150,000 over the threshold for couples and they owe 0.9 percent of that in tax—$1,350.
The penalty stays the same if their earnings grow. As long as each has earnings above $200,000, they’ll pay $1,350 more each year. Marriage takes away $150,000 of the total exclusion the tax provides for two single workers. ( Continue… )
In two weeks, about $1 trillion in automatic spending cuts will begin to kick in, a testament to the inability of policymakers to reach a grand fiscal bargain. Allowing these cuts to happen would be terrible policy.
Here’s the background: In August 2011, Congress passed the Budget Control Act (BCA) as a last-minute solution to an impending debt ceiling crisis. BCA averted fiscal and financial disaster by allowing additional Treasury borrowing authority, but also put in place deficit-reduction measures that would cut the deficit by $2.1 trillion over 10 years.
These measures included caps on discretionary spending—cutting outlays by over $900 billion over the decade—and a requirement that Congress achieve an additional $1.2 trillion in deficit reduction. BCA stipulated that if Congress failed to cut the deficit by this amount (and it did), deficit reduction would be automatically achieved by “sequestration”—formulaic cuts in federal spending.
The cuts were originally due to begin on January 2, but fiscal cliff legislation pushed off the official commencement until March 1. On that date, the Office of Management and Budget will implement $85 billion in cuts for the remainder of the 2013 fiscal year—this translates into cuts of about 9 percent for affected non-defense discretionary programs and 16 percent for defense. If no action is taken, sequestration will reduce spending by $109 billion per year for the subsequent eight years. In all, cuts will total $960 billion, with an additional $216 billion in saving coming from lower interest payments. ( Continue… )
Economists and many policymakers generally agree that our tax and transfer systems should promote opportunity, work, saving, and education rather than consumption. The problem is these programs often penalize people for earning that extra dollar of income. Rather than promoting work and savings, these implicit taxes punish such otherwise positive behavior.
These penalties occur in TANF (formerly welfare), SNAP (formerly Food Stamps), Medicaid, the new health exchange subsidy, Pell grants, student loans, and unemployment compensation. The tax code also is loaded with disincentives to work, save, and study. They include PEP and Pease (reductions in tax allowances for personal exemptions and itemized deductions), child tax credits, and the earned income tax credit. These implicit taxes combine with explicit taxes to create incentives for many households that are often inefficient and inequitable, to say nothing of strange and anomalous.
At some income levels, families face prohibitively high penalties for moving off assistance. For instance, a single worker with children could face a steep cut in child care assistance simply for accepting a higher paying job or getting a raise. For some, the rapid phaseout of benefits can more than offset the additional take-home pay. Asset tests in means-tested programs create similar barriers to saving.
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One way couples avoid some of these penalties or taxes is to not get married. Indeed, this strategy is the major tax shelter for low- and moderate-income households with children. Our tax and welfare system thus favors those who consider marriage optional—to be avoided if it raises taxes or reduces benefits but embraced if it comes with a financial bonus. The losers tend to be those who consider marriage a social or religious necessity. ( Continue… )
Love is blind, says the adage, and that can be a good thing when it comes to taxes. That’s because married couples often pay a marriage penalty—a higher federal income tax bill than they would if they were single. But for most couples, marriage means a lower tax bill—a marriage bonus in tax-speak.
Just in time for Valentine’s Day, the Tax Policy Center has updated its marriage bonus and penalty calculator to reflect the provisions of the American Taxpayer Relief Act of 2012 (ATRA), the new tax law Congress passed earlier this year. The new calculator lets you compare the tax bills of a couple filing as singles and as a couple for either the 2012 or 2013 tax year.
My TaxVox post about TPC’s original marriage bonus and penalty calculator explained why the tax code rewards some married couples and penalizes others so I won’t repeat all of that here. Instead I’ll discuss three tax provisions that will increase marriage penalties a lot in 2013 for many high-income couples.
1. ATRA’s new top tax rate: ATRA created a new 39.6 percent top tax bracket, which starts at $400,000 for single filers and $450,000 for couples filing jointly. Consider two people, each with $400,000 of taxable income. Unmarried, neither would hit the 39.6 percent rate. Married, they would pay the top rate on $350,000. That and other rate effects would impose a marriage penalty of more than $30,000. ( Continue… )