Tax VOX
A 2011 1040 tax form along with other income tax forms are seen at the entrance of the Illinois Department of Revenue. (Seth Perlman/AP/File)
Do capital gains taxes hinder growth?
f you’re discussing tax policy with someone who asserts that his or her point is “just common sense,” this could indicate one of two things: Either no deep thought is required—as the person would have you believe. Or no deep thought has been applied.
The “common sense” notion that capital income taxes hinder growth seems to be more a case of the latter.
Long term capital gains are taxed only when the asset is sold and at roughly half the rate on wages and salaries. Dare to suggest that the rate on investment profits could be raised a bit—so that perhaps the rate on labor income could lowered—and you’re liable to be reprimanded for failing to understand something as plain as the nose on your face: To tax capital income is to tax the reward for saving and thus to discourage saving. Less saving means less investment and less investment means slower growth, fewer jobs, and lower wages.
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Everyone knows that.
Everyone, that is, except the people who study the issue. ( Continue… )
House Budget Chairman Paul Ryan speaks at the Conservative Political Action Conference at National Harbor, Md., Friday. Paul Ryan’s budget would generate a huge windfall for high-income taxpayers, Gleckman writes. (Kevin Lamarque/Reuters)
The $5.7 trillion question in Paul Ryan's budget
House Budget Committee Chair Paul Ryan’s (R-WI) fiscal plan promises to balance the federal budget in 10 years, make major cuts in income tax rates for both individuals and corporations, and raise the same amount of revenue as current law. If House Republicans want to do all three, they will have to eliminate trillions of dollars in popular tax preferences.
The Tax Policy Center estimates that cutting individual rates to 10 percent and 25 percent, repealing the Alternative Minimum Tax and the tax increases included in the Affordable Care Act, and cutting the corporate rate from 35 percent to 25 percent would add $5.7 trillion to the deficit over the next decade. Thus, if House Republicans want to cut these taxes and still collect the revenues they promise, they’d have to raise other taxes by $5.7 trillion.
The tax cuts described in Ryan’s budget would generate a huge windfall for high-income taxpayers. On average, households would get a cut of $3,000. But those in the top 0.1 percent of income, who make $3.3 million or more, would get a whopping $1.2 million on average–a 20 percent increase in their after-tax income.
By contrast, middle-income households would get an average tax cut of about $900. Those in the bottom 20 percent (who make $22,000 or less) would get $40 and one-third of them would get no tax cut at all. ( Continue… )
Smoke rises in this time-exposure image from the stacks of the La Cygne Generating Station coal-fired power plant in La Cygne, Kan. A carbon tax could significantly reduce emissions, Gale writes. (Charlie Riedel/AP/File)
Carbon tax: A win-win for the economy and the environment
Looking for a way to improve the operation of the economy, lower our dependence on foreign oil, reduce pollution, slow global warming, cut government spending, and decrease the long-term budget deficit? Then you should support a carbon tax, which could help the nation address all these issues simultaneously. A new paper I’ve written with Samuel Brown and Fernando Saltiel, Carbon Taxes as Part of the Fiscal Solution, argues the tax would even be a good idea if we didn’t have a budget problem.
Although a carbon tax would be new for the U.S. government, it already has been implemented in several European countries (though not always in the manner advocated by economists), Australia, and three Canadian provinces. California recently initiated a cap-and-trade system, which auctions carbon permits to companies and functions much like a tax.
A carbon tax makes good economic sense: Unlike most taxes, it can correct a market failure and make the economy more efficient. Although there are substantial benefits from energy consumption, there are also big societal costs that people don’t pay for when they produce and consume energy – including air and water pollution, road congestion, and climate change. Since buyers of fossil fuels don’t directly bear many of these costs, they ignore them when they decide how much and what kind of energy to buy. And that results in too much consumption and production of these fuels. Economists have long recommended a tax on fossil fuel energy sources as an efficient way to address this problem.
A carbon tax could significantly reduce emissions. Tufts University economist Gilbert Metcalf estimated that a $15 per ton tax on CO2 emissions that rises over time would reduce greenhouse gas emissions by 14 percent.Another study estimated that the European countries’ carbon taxes have reduced emissions significantly. ( Continue… )
House Budget Committee Chairman Rep. Paul Ryan (R) of Wisconsin, arrives on Capitol Hill in Washington Tuesday. The Paul Ryan tax plan provides little hope that a grand bargain is near, Gleckman writes. (Carolyn Kaster/AP)
How would Paul Ryan's tax plan work?
House Budget Committee Chair Paul Ryan (R-WI) has proposed a controversial plan to balance the budget in 10 years, entirely by cutting planned spending by $4.6 trillion. While Ryan includes lots of specific spending cuts, his tax agenda is far less clear.
In some respects, the former GOP vice presidential candidate mimics the tactics of the 2012 campaign: Promise tax reform built around wildly ambitious but gauzy rate reductions without a word about how to pay for them.
His plan aspires to collapse today’s seven-bracket individual income tax to a two-rate system that would raise the same amount of money as current law. It would set a top rate of 25 percent, down from today’s 39.6 percent, though it calls this merely a goal. He’d repeal the Alternative Minimum Tax and slash the corporate rate from 35 percent to 25 percent. He’d do all this while maintaining revenues at levels projected in the Congressional Budget Office baseline—19.1 percent of Gross Domestic Product in 2023.
Interestingly, this 19.1% target assumes a revenue base that includes the tax hikes on high income households from Obamacare and the New Year’s Day fiscal cliff deal (the American Tax Relief Act). ( Continue… )
Protesters march on the Texas capitol, Tuesday, in Austin, Texas to demand that lawmakers expand Medicaid to include an additional 1.5 million poor people. Texas and other states considering Medicaid expansion should first look to the example of Build America Bonds, Gleckman writes. (Eric Gay/AP)
Medicaid expansion: A deal states cannot refuse?
States trying to decide whether to expand their Medicaid programs to cover more low-income uninsured might want to take a look at the fate of a more obscure federal program—cash subsidies to state and local governments that sell certain kinds of bonds, especially Build America Bonds.
If they do, they’ll see what happens to a federal promise of aid when that commitment gets caught up in bigger fiscal issues.
For months, states have been mulling the Medicaid expansion–one of the most controversial provisions of the 2010 Affordable Care Act. Obamacare made what sounded like an offer governors couldn’t refuse: Agree to cover 16 million more low-income people under Medicaid and the feds will pick up the full cost of the expansion from 2014 through 2016 and pay 90 percent through 2020.
Bubbling just beneath the surface of the debate over whether states should take the deal is an issue of trust: Would the feds keep their part of the bargain? After all, there is nothing in the ACA to prevent a future Congress from reneging on this promise and, as part of a deficit cutting agreement, slashing the federal contribution to, say, 75 percent. That’s still a better deal than the usual federal Medicaid match that averages about 60 percent, but lots less generous than 90 percent. ( Continue… )
Congressional Budget Office (CBO) Director Douglas Elmendorf speaks at a news conference on Capitol Hill in Washington. A new CBO estimate shows that shifting to a new inflation measure would raise taxes by nearly as much as it would slow Social Security spending over the next decade, Gleckman writes. (Yuri Gripas/Reuters/File)
How should the government measure inflation?
Changing the way government adjusts spending and taxes for inflation is one of those issues that continues to hang around the edges of the budget debate. Republicans and many economists argue for shifting to a more accurate inflation measure, called the chained Consumer Price Index (CPI). President Obama would support a version as part of a fiscal grand bargain. Because Social Security benefits would likely grow more slowly under this measure, many Democrats and social insurance advocates strongly oppose the idea.
But a new Congressional Budget Office estimate shows fiscal effects that chained CPI backers might not want to see. It turns out that shifting to the new inflation measure would raise taxes by nearly as much as it would slow Social Security spending over the next decade. Indeed, after 2021, the adjustment would raise taxes more than it would cut projected Social Security benefits.
CBO figures chained CPI would raise taxes by nearly $124 billion over 10 years. It would reduce projected Social Security spending by $127 billion and cut planned spending for all programs by a total of $216 billion. Note that CBO counts a nearly $18 billion cut in refundable tax credits as a spending reduction. If you prefer to include it among the tax hikes, the overall revenue increase would reach $142 billion over 10 years.
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Back in 2011, the Tax Policy Center figured the shift would raise taxes by an average of about $140 per household. Most households within a vast income range (from $20,000 to $200,000) would see their after-tax income fall by about 0.2 percent on average. Those making more would see their incomes drop by about half as much. ( Continue… )
John Boehner speaks about the sequester following a meeting with Barack Obama and congressional leaders at the White House in Washington March 1, 2013. Gleckman argues that the sequester will be old news by next week, when Congress must look forward to the potential government shutdown looming at the end of this month. (Kevin Lamarque/Reuters/File)
The sequester won't last. Here's why.
I suspect that by early next week, the sequester will be old news. We’ll be on to the next crisis—the impending government shutdown scheduled for just a month from now. And there may be good reason for that—any deal to avoid the shutdown will almost surely replace the effects of the sequester, at least for the rest of this fiscal year.
Indeed, when Congress and President Obama decide over the next month how they are going to keep the government running through Sept. 30, lawmakers will have the opportunity to adjust the across-the-board spending cuts any way they want. In fact, much of the debate will be over just how much of the sequestered funds will be restored in that six month spending bill.
And that won’t be the end of it. Congress will then have exactly the same argument over the fiscal 2014 budget. Lawmakers are supposed to finish that fiscal blueprint by the end of September, though they almost certainly will not. The point is, the sequester is not written on stone tablets. Like every other budget gimmick Congress invents, this one can be rewritten, waived, and otherwise adjusted. And like every one before it, it probably will be.
The result is that many of the dreaded consequences of the sequester will never happen. Or, they’ll be overwhelmed by the effects of a government shutdown. Take, for example, federal employee furloughs. The sequester forces as many as one million workers to take limited time off without pay—on average for about 14 days spread over the next seven months. But those furloughs can’t take start until April 1. ( Continue… )
A college student holds a banner at a "Tear Up Your Debt" demonstration, during which students tear up mock tuition bills and loan papers to protest rising student loan debt in New Brunswick, N.J. Federal funds can be an important tool to help students get to college, Rueben writes, but we need to use those dollars in a smarter way. (Marko Georgiev/The Record (Bergen County)/AP/File)
Financial aid: finding better ways to help college students
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… )
The US Capitol Building is pictured in Washington. 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, Steuerle writes. (Jason Reed/Reuters)
How to avoid the sequester and give both parties what they want
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… )
A jogger runs past the US Internal Revenue Service building at the end of the day in Washington. Many tax preferences are economically indistinguishable from direct spending, Gleckman writes, and often add far more to the deficit. (Ann Hermes/The Christian Science Monitor/File)
Welfare, subsidies, and tax credits: words that shape the deficit debate
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… )
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