Tax VOX
Senate Finance Committee members meet privately with Federal Reserve Chairman Ben Bernanke on the looming economic crisis, often called the "fiscal cliff", on Capitol Hill in Washington, in this September 2012 file photo. (J. Scott Applewhite/AP/File)
Can the fiscal cliff push Congress to agree on budget deal?
This afternoon, I moderated an Urban Institute panel on taxes and the fiscal cliff. The fundamental question on the table: Will Congress have to tumble over the precipice in order to build the political consensus it needs to do a budget deal?
To put it another way, will it take the fear of a financial market collapse and a cliff-driven recession to change the karma on Capitol Hill? Or, can Congress find an easier route to fiscal sanity by ducking the coming showdown?
There are huge dangers to both options, and no clear answer. But in the current political climate, it is hard to see a road to a long-term budget agreement, whether or not Congress falls over the edge.
Lawmakers will reach taxmaggedon in just three months. The tax cuts enacted in 2001, 2003, 2009, and 2010 will expire absent congressional action. The Tax Policy Center estimates this would raise taxes by $500 billion in 2013 alone—an average tax hike of nearly $3,500 per household. At the same time, the automatic spending cuts adopted as part of the 2011 debt limit deal would kick in.
At today’s panel, Bob Greenstein, president of the Center on Budget and Policy Priorities, argued that tumbling off the cliff might sufficiently focus lawmakers’ minds to drive a fiscal agreement. While Bob was certainly not rooting for an end-of-the-year crisis, he felt that one, or at least its imminent threat, could encourage a two-part deal. Either in December (right at the edge of the precipice) or in early January, lawmakers would agree to forestall deep year-long tax hikes and spending increases in exchange for an agreed-upon target for long-term deficit reduction, including revenue-raising tax reform and cuts in entitlement programs.
In Bob’s view, the cliff is something more like a gradual—and reversible—slide. Thus, a relatively quick deal in 2013 would limit the economic consequences of any short-term spending cuts or tax hikes.
Doug Holtz-Eakin, president of the American Action Forum and former top domestic policy adviser to the McCain for President campaign, disagreed. Doug insisted toppling over the cliff would throw the economy into recession. And, he added, Congress would never raise taxes or cut spending while the economy is dead in the water. Thus, going over the cliff would be entirely counterproductive.
Doug’s alternative: Congress should extend today’s tax rules for all (including high-income households) and abandon the automatic spending cuts. Deficit reduction could still happen, he figures, once Washington feels pressure from Wall Street and the rating agencies to do a long-term fiscal deal.
To me, this creates a strange paradox. Doug is right that Congress would never agree to fiscal austerity in the midst of another recession. And Bob is right that Congress needs to understand there are consequences to its continued inaction on the deficit. So, somehow, we need to thread the needle: Make the markets think lawmakers will topple over the cliff without it actually happening.
On the other hand, the newly elected (or re-elected) president and Congress could show some actual leadership and work for a fiscal agreement everyone knows is necessary—without waiting for the next crisis. They could. But there is little evidence they will.
Sen. Tom Coburn, R-Okla., makes a phone call Wednesday outside a meeting room in Washington before private talks with Federal Reserve Chairman Ben Bernanke on the "fiscal cliff," a combination of tax increases and spending cuts that will kick in on Jan. 2, 2013, if Congress fails to act. (J. Scott Applewhite/AP)
What happens if Congress goes over the fiscal cliff? Taxes rise.
If Congressional gridlock sends the U.S. government tumbling over the fiscal cliff later this year, Americans could face an average tax hike of almost $3,500 in 2013. Nearly 9 of every 10 households would pay higher taxes. Every income group would see their taxes rise by at least 3.5 percent, but high-income households would suffer the biggest hit by far, according to a new Tax Policy Center analysis.
TPC found that if the tax hikes last the entire year—a big ”if”–those in the top 0.1 percent would pay an average $633,000 more than if today’s tax rules were extended. However, even middle income households would take a hit: they’d pay an average of almost $2,000 more, and see their after-tax income fall by more than 4 percent. Such tax hikes would be “unprecedented,” said the paper’s authors, Bob Williams, Eric Toder, Donald Marron, and Hang Nguyen.
What’s scary, of course, is that all this would happen automatically. It would merely require Congress to default to its normal state of partisan gridlock in the face of a remarkable confluence of circumstances. They include the reversion of nearly the entire tax code to what it was at the end of the Clinton Administration, new taxes to pay for the 2010 health reform law, and automatic across-the-board spending cuts that would trim just about every government program except for Medicaid and Social Security. Looming in the background: The Treasury will hit its borrowing limit sometime in the first quarter of next year and temporary funding to keep the government operating will end in March.
Taxes would rise by a half-a trillion dollars in 2013. On top of the substantial spending cuts, such an austerity budget would sharply reduce the deficit. But it also is likely to throw the still-weak economy back into recession. The Congressional Budget Office predicts that if the tax hikes and spending cuts last the entire year, the 2013 economy would contract by 0.5 percent and employment would fall by 2 million.
The tax increases would hit nearly everyone, and from all directions. The tax cuts enacted in 2001, 2003, 2009, and 2010 would expire. More than 120 million households would lose the benefits of the two-year-old payroll tax cut. Low-income working households would suffer as the Earned Income Tax Credit and the Child Tax Credit are scaled back. Upper middle-income households would lose their protection from the Alternative Minimum Tax and pay higher rates. Those at the very top would not only see rates on their ordinary income rise, but they’d also face higher taxes on their capital gains and dividend income as well as their estates.
At the same time, those high-income households will pay an extra 0.9 percent Medicare payroll tax and a new 3.8 percent tax on investment income—both included in the 2010 health law.
This mess was created by the temporary debt limit deal Congress and President Obama reached in the summer of 2011. The whole idea was to design draconian tax hikes and deep spending cuts that no one could stomach. As a result, lawmakers would come to their senses and replace the cliff with a steady and predictable glide path to fiscal responsibility. That’s not what happened.
Now what? Congress could, to stretch the metaphor, tumble over the cliff, fighting and clawing all the way to the bottom, and leaving itself–and the U.S. economy–woozy and bruised. That’s the outcome TPC has analyzed.
But there are other possibilities. Public anger and market fear could drive politicians to finally do the budget deal they’ve been avoiding for more than a decade–perhaps early next year. In that case, short-term tax increases might be fairly modest, though any long-term agreement is also likely to include higher taxes for many. Or, lawmakers could get to precipice, peer over the edge, and delay the day of reckoning into later in 2013.
If you want to learn more about the fiscal cliff and its consequences, I’ll be moderating a panel discussion at The Urban Institute on Tuesday, Oct 2 at Noon. You can watch in person or on the Web.
A 2011 1040 tax form along with other income tax forms are seen at the entrance of the Illinois Department of Revenue in Springfield, Ill., in this April 2012 file photo. Repealing the Earned Income Tax Credit and the Child Tax Credit is one way Gleckman says the government can add more Americans to the tax rolls. (Seth Perlman/AP/File)
Five ways to tax the 47 percent
Let’s say you are truly offended that 47 percent of Americans don’t pay income tax. Just complaining won’t fix the problem. All those freeloaders are still out there, dodging their responsibilities as red-blooded taxpaying Americans. So, let’s stop fooling around and do something about it.
Here is my modest proposal. Five solutions to make sure everyone pays his or her fair share:
1. Repeal tax credits, such as the Earned Income Tax Credit and the Child Tax Credit. These subsidies are the major reason many low-income working families avoid the income tax. About one-third of those who don’t pay are families with kids. Because the credits go mostly to people who earn wages and phase out slowly as income rises, they are a strong incentive to work.
This seems like a good idea. And it’s why refundable credits were once so popular with conservatives. In fact, they were the brainchild of iconic conservative economist Milton Friedman, who proposed a similar idea (called a negative income tax) 60 years ago.
Still, we could scrap the refundable credits and replace them with a direct cash payment to low-income working families. Of course, this would require a new bureaucracy to administer the program and force working people with kids to stand in a line somewhere to apply. Or, Congress could enact a big increase in the minimum wage. It won’t be easy, but we can make sure these freeloaders pay. Yet, there are still some people who would slip through our net.
2. Eliminate the standard deduction and personal exemption: This would capture another big chunk of non-payers. The only trouble is, 7 of every 10 households, or 107 million tax units, don’t itemize. Sadly for the anti-47 percent crowd, there are millions of people who take the standard deduction but still pay income taxes. For them, wiping it out would only raise their taxes. And it still leaves millions more of those The Wall Street Journal once called “lucky duckies” who don’t pay income tax.
3. Raise taxes on old people: That brings us to the roughly one-quarter of those who don’t pay income taxes who are seniors. Those 65 and older get an extra standard deduction as well as a special tax credit. True, in 2009, one-third of those over 65 were living in or near poverty and nearly 40 percent of elderly women were poor. And it is also true that, for many, their only source of income is their Social Security check, which is tax free for couples making $32,000 or less or singles making $25,000. If we start taxing the first dollar of these benefits, we can substantially reduce the number of these elderly deadbeats. Now, we just need to find a politician willing to sponsor such a plan. Bueller? Bueller?
4. Fix the economy. Many pay no income tax because they, um, don’t make any money. And many have no income because they are unemployed, victims of what you may have noticed has been a tough economy. The Tax Policy Center estimates that if the economy gets back on track, the percentage of those who don’t pay income tax would fall by about 10 percentage points. Thus, a bit more than one-third of households would fall into the deadbeat category, instead of nearly half.
5. Keep the No New Tax Pledge. There is, however, a small problem with the first three ideas: They’d violate the anti-tax hike pledge signed by nearly all Republicans in Congress. How could we get around that? Easy as pie. Just cut taxes on high-income households to offset those tax hikes on the working poor. Just sayin.
Republican presidential candidate former Massachusetts Gov, Mitt Romney speaks during a campaign rally with his running mate Rep. Paul Ryan, R-Wis., left, Tuesday, at Wright Brothers Aviation in Vandalia, Ohio. Gleckman agrees with the forecast that if Congress does not trim tax preferences, Romney would scale back his promised rate reductions. (Al Behrman/AP/File)
Romney, the middle-class and taxes
Yesterday, Kevin Hassett, an American Enterprise Institute economist and informal adviser to Mitt Romney, insisted that Romney would not raise taxes on low- and middle-income households in order to finance his promised 20 percent across-the-board rate cut. Nor would those rate cuts increase the deficit. Instead, Kevin predicted that if Congress did not trim tax preferences, Romney would scale back those rate reductions.
I think he’s right.
Kevin made his remarks at a National Assn. for Business Economics debate with Jeff Liebman, an economic adviser to Barack Obama. And by doing so, Hassett tried to rebut the Democratic talking point that the Romney tax plan would inevitably result in higher taxes for the middle-class.
Kevin, however, recast that claim somewhat : “The notion that Romney is going to raise taxes on low-income people is just a lie,” he insisted, “There is no way in hell he’s going to raise taxes on people making $20,000 by $2,000 bucks.”
For the record, I do not know anyone who said he would.
When asked to describe Romney’s definition of middle-class, Kevin demurred, though Romney himself has said it is “$200,000 to $250,000 and less.”
Still, Kevin added, “If you think the base-broadeners don’t add up, if you think he can’t get to 28 percent, then the right thing that would happen, as you know, if you’re going to have a revenue-neutral reform, is that they would have a different change in rates.”
Romney has thus far refused to describe which tax credits, deductions, or exclusions he’d cut, insisting he’d leave that to Congress.
The Tax Policy Center has found that a 20 percent across-the-board rate cut along with repeal of the estate tax and the Alternative Minimum Tax would disproportionately benefit high-income households. As a result, it would be effectively impossible for Romney to cut rates as he has promised without raising taxes on middle-income households, increasing the deficit, or raising taxes on investment income (which he has vowed not to do).
Hassett called the TPC analysis “the most partisan thing to come out of a think tank in my lifetime.”
Not surprisingly, I think that assessment is way over-the-top. However, I suspect Kevin is exactly right in his prediction of which of Romney’s incompatible promises would eventually be scrapped. While other Romney advisors hint at different changes, such taxing municipal bond interest or eliminating all tax preferences for those making $100,000 or more, these seem unrealistic at best. More likely, as Kevin suggests, the rate cuts would be scaled back.
The Hassett-Liebman event was something of a preview of the upcoming debate between Romney and Obama, though the two economists likely brought more candor, substance, and passion to the topic than their principals will.
Tax payers search through tax forms at the Illinois Department of Revenue in Springfield, Ill., in this April 2010 file photo. Low-income workers benefit far less from tax subsidies than middle-income households, and vastly less than high-income households, Gleckman writes. (Seth Perlman/AP/File )
The 47 percent: a case study
About that 47 percent: Let me introduce you to Andrea. When I met her a couple of years ago, she was a home health aide who typically worked six days-a-week and often put in 50 hours.
She loved her work, but it is not something most of us would want to do. According to the Labor Dept., aides are more likely to be hurt on the job than coal miners. Her pay: $8.40-an-hour.
Andrea was 22 and a single mom. Her daughter, Trinity, was 3. Andrea got up before 7 each morning, rode the city bus with Trinity to day care, then took another bus to her job—caring for a patient in his home. After a grueling seven-hour day, she’d take a bus to pick up Trinity, then another bus home, where she’d make dinner, help Trinity learn her letters, and work on her own GED.
At $8.40-an-hour, Andrea could earn $420 for a 50-hour week. And if she worked 50 hours, 52 weeks a year, that’s $21,840—well below the income tax threshold for a single mother with one dependent child.
For someone in Andrea’s situation, that’s no accident. I don’t know about her personal tax situation, but a typical head of household like her would owe no income tax thanks largely to the Earned Income Tax Credit and the Child Tax Credit, both subsidies passed by large majorities in Congress and intended to encourage people to work.
Without them, she’d face stiff marginal tax rates for taking a job—a penalty that would punish both her and society at large. In fact, as my former Tax Policy Center colleague Len Burman noted in a TaxVox post last year, the EITC is the single most effective government program aimed at getting people out of poverty.
Of course, people like Andrea still pay taxes. For 2012, someone making $21,840 would pay about $2,900 in Social Security and Medicare payroll taxes (including her employer’s share). Next year, if the payroll tax holiday expires as scheduled, her payroll tax would rise to roughly $3,300. She’d also likely pay other levies, including state and local taxes.
On net, someone in her situation would indeed be a federal taxpayer, though barely. In 2012, she’d receive a $2,856 income tax payment, not quite enough to offset $2,900 in payroll taxes. If the temporary payroll tax cut expires, she’d owe about $450 in net federal taxes.
Keep in mind that 60 percent of recipients claim the EITC for only a year or two, and only about 20 percent take it for five years or more. With better skills and more experience, many eventually earn enough that they no longer qualify. And, that it seems, is the point.
After spending a few days with Andrea, I’m pretty sure Mitt Romney got it wrong in his videotaped talk to a group of contributors. To Romney, people like Andrea “believe that they are victims, …believe the government has a responsibility to care for them….” He added, “I’ll never convince them they should take personal responsibility and care for their lives.” But Andrea in no way thinks she is a victim and is already taking responsibility for her life. She does not need a politician to encourage her. She has Trinity.
Romney went off the tracks by confusing the EITC and CTC with a sense of victimization and entitlement. People who benefit from these subsidies are exactly the opposite of that stereotype. Many want desperately to work, and struggle more than many of us can imagine to achieve the American Dream. For people like Andrea, those subsidies are the difference between keeping their heads above water and drowning.
Romney, like many who focus on the 47 percent, is also blinded by the deceptively simple binary status of taxpayer/no taxpayer. In truth, low-income workers benefit far less from tax subsidies than middle-income households, and vastly less than high-income households.
Let’s just take two examples: According to TPC, a household making between $20,000 and $30,000-a-year got an average EITC benefit of $866 in 2011. By contrast, those making more than $1 million got an average tax cut of $7,000+ thanks to the deductions for mortgage interest and property taxes alone. The EITC may have moved a household from federal income taxpayer to non-taxpayer. But who was really better off?
In this March 2010 file photo, David Savory (right) helps Bouchra Bouzidi (left) file her taxes as part of the Volunteer Income Tax Assistance Program (VITA) at Bunker Hill Community College (BHCC) in Boston, Mass. Williams projects that the percentage of Americans who pay no federal income tax will fall below 40 percent by the end of the decade. (Mary Knox Merrill/The Christian Science Monitor/File )
Federal income tax: Who doesn't pay it and why?
The percentage of Americans who don’t pay income tax is making headlines again. However, the story hasn’t changed since I blogged about it last year and my TPC colleagues and I analyzed why in a longer paper. In 2011, 46 percent of tax units paid no federal income tax. Half of them had no taxable income—the standard deduction and personal exemptions exceed their income. The other half get enough tax breaks to wipe out their basic tax liability.
It’s worth noting that the percentage has changed over time, rising and falling as the economy fluctuates and Congress enacts short-term stimulus tax cuts. Looking forward, we project that the percentage will fall below 40 percent by the end of the decade, even if Congress makes the Bush-era tax cuts permanent.
Mitt Romney greets supporters at a campaign rally in Fairfax, Virginia September 13, 2012. Gleckman argues that Romney should have taken a page from Reagan on taxes. (Jim Young/Reuters)
What Mitt Romney didn't learn from Ronald Reagan about taxes
If only Mitt Romney had paid attention to Ronald Reagan.
There are so many things the former Massachusetts governor could learn from the former California governor’s presidential campaigns. But I have in mind only one lesson not learned—how Reagan ran on tax reform in 1984.
Reagan only cautiously embraced the idea of rewriting the tax code in ’84 (see Alan Murray and Jeff Birnbaum’s fine retelling of the history of the 1986 Tax Reform Act—Showdown at Gucci Gulch). But he cleverly used the tantalizing prospect of reform without ever overpromising.
This is what Reagan had to say in his January, 1984 State of the Union Address:
“Let us go forward with an historic reform for fairness, simplicity, and incentives for growth. I am asking [Treasury] Secretary Don Regan for a plan for action to simplify the entire tax code, so all taxpayers, big and small, are treated more fairly. And I believe such a plan could result in that underground economy being brought into the sunlight of honest tax compliance. And it could make the tax base broader, so personal tax rates could come down, not go up. I’ve asked that specific recommendations, consistent with those objectives, be presented to me by December 1984.”
Note to Gov. Romney: Reagan cast reform in gauzy generalities of fairness, simplicity, and economic growth. He said he might broaden the tax base, but didn’t say how. He said he might cut tax rates, but didn’t say by how much. And he said he wanted the Treasury Secretary to get him a specific plan in December, not accidently a month after the 1984 election.
Romney, by contrast, not only promised to cut tax rates, he even said by exactly how much–20 percent across the board. Reagan’s popular goals of fairness and simplicity play distinct second fiddle to Romney’s focus on tax cuts for job creators. And instead of saying he’ll craft a plan of his own, Romney’s campaign says the details should be left to Congress. Given the level of public confidence in the Hill, he might as well have promised to turn it over to Snooki.
Romney’s biggest problem, though, is that he is so transparently trying to have it both ways. On one hand, explicit promises of tax rate cuts for all. On the other, stonewalling all questions about which popular subsidies he’d ditch.
This tactic is hardly unique in political campaigns. After all, why would any politician disclose that part of his agenda sure to make voters mad? Yet, it is fundamentally misleading. And it is causing Romney no end of grief.
Reagan, recall, was ambiguous about both sides of the bargain. This allowed him to remain purposefully vague about the gory details of tax reform throughout the ’84 campaign. And he was almost never challenged on it. Democratic presidential candidate Walter Mondale borrowed a line from a popular fast-food chain ad to ask “where’s the beef” in an effort to challenge his opponent’s fuzzy campaign promises. But Mondale was talking about primary opponent Gary Hart, not Reagan.
Romney isn’t so lucky. Sure, promising specific rate cuts was popular, especially during the GOP primaries. But Romney’s very act of explicitly laying out those rate cuts is driving deeply-skeptical general election voters to demand to know about the other half of the transaction.
The masterful Reagan gave himself both a powerful campaign issue and enough running room to propose, and eventually convince Congress to pass, the most ambitious tax reform of our time.
Now, on an issue that Republicans usually own, Romney is on the defensive. If before Nov. 6 he identifies which tax preferences he’d cut, he will unleash a firestorm of criticism from both Democrats and those special interests that benefit from these subsides. This will damage both his election chances and likelihood of reform no matter who wins in November. If Romney keeps silent, he’ll be unable to claim any kind of mandate for reform.
Somewhere, Ronald Reagan is looking on in sadness.
A 2011 1040 tax form along with other income tax forms are seen at the entrance of the Illinois Department of Revenue in Springfield, Ill., in this April 2012 file photo. Workers, as well as shareholders and other owners of capital, may benefit from any cut in the corporate tax, Gleckman writes. (Seth Perlman/AP/File)
Do corporate tax breaks benefit the middle class?
Who pays the corporate income tax? It is one of the most vexing questions tax experts face. Now, to keep pace with the latest research, the Tax Policy Center has revised its methodology for figuring where this tax falls. The bottom line: For the first time, TPC assumes that workers bear some of the corporate tax burden.
In newly-published assumptions, TPC figures 20 percent of the corporate income tax is borne by labor and 80 percent by capital. TPC further refines the capital share by dividing it into two chunks. Twenty percent of the levy is reflected in normal returns (essentially, equal to the return from low-risk bonds) and 60 percent in any additional returns received by shareholders.
The revision, similar to adjustments made recently by the Treasury Department and the Congressional Budget Office, will be important as TPC analyzes tax reform plans that reduce corporate rates.
That’s because, until now, TPC assumed investors ultimately paid the entire corporate tax in the form of lower returns to capital. Now, TPC concludes that labor also pays through lower wages. As a result, workers, as well as shareholders and other owners of capital, would benefit from any cut in the corporate tax. Similarly, both would take a hit if corporate taxes are hiked.
These new assumptions revise the way TPC distributes corporate income tax changes to individuals. In effect, low- and moderate-income taxpayers (who make most of their money from wages) will benefit a bit more from cuts in the corporate tax. Under TPC’s old method, almost all of the benefit of those tax cuts went to high-income households (who make much of their money from investments). However, even with the changes, high-income households still get the lion’s share of the benefit.
The revisions don’t make much difference when TPC looks at how tax changes affect various income groups–largely because corporate income taxes account for only about 10 percent of federal revenue.
Look at what happens in 2015 under current law (that is, assuming all the Bush-era tax cuts and the Alternative Minimum Tax patch expire). Under the old methodology, households in the middle 20 percent of the income distribution would pay a total effective tax rate of 18.2 percent, while they’d pay 18.6 percent under the new one. The top 1 percent would pay a 39.5 percent rate under the old model, but only 38.9 percent under the new one.
To understand the change, think about the nature of corporate income taxes. Sure, a corporate CFO writes a check to the IRS, but ultimately her firm is nothing more than a legal convenience—a mechanism for a group of people to join together to form a business. People, not a stack of incorporation papers, ultimately pay taxes.
The idea that the corporate income tax is borne by capital alone was based on a paper written a half-century ago by the influential economist Arnold Harberger. But Harberger was looking at a closed economy where capital did not flow freely around the world as it does today. Now, investors can move their money overseas when tax rates on U.S. corporate investment rise. That means workers in the U.S. have less capital to work with, which makes them less productive, and leads to lower wages. Because it is not so easy for workers to move, they end up paying some of those corporate taxes in the form of reduced compensation.
If you are interested in the details, my colleague Jim Nunns laid it all out in a technical, but very readable, paper.
These revisions to TPC’s analysis are the most important change in a bigger package of technical adjustments to its tax model. TPC makes those revisions each year to reflect updated tax data and the latest economic forecasts. But it was time to rethink the corporate tax issue as well. While this surely won’t be the last word on the subject, it better reflects the current thinking on a very thorny question.
A 2011 1040 tax form along with other income tax forms are seen at the entrance of the Illinois Department of Revenue in Springfield, Ill., in this April 2012 file photo. Ratcliffe and McKernan argue that delivering tax refunds to prepaid card accounts for low-income households would save the government money and connect low-income tax filers with mainstream financial services. (Seth Perlman/AP/File)
Can filing taxes connect low-income families to bank services?
Is there a way for low- and moderate-income households who do not have bank accounts to receive tax refunds electronically? A new Urban Institute study found these households may be willing to participate in a program that delivers their refunds directly to a prepaid card account.
We evaluated a Treasury Department pilot program called the Tax Time Account Direct Mail Pilot program. Under the pilot, a random sample of 800,000 adults who live in households with income under $35,000 and are unbanked or use alternative financial services products (e.g., refund anticipation loans/checks or payday loans) were offered prepaid card accounts to get their 2010 federal income tax refunds electronically. The pilot was designed to measure how different card features and messaging affect sign-up rates and subsequent card use. One feature—card cost—had a big influence on whether people chose to participate.
Most upper-income households already receive tax refunds through direct deposit to their bank accounts. But many low- and moderate-income families still get their refunds through the mail, often because they are unbanked: 17 million adults have no checking or savings account into which a tax refund can be deposited. Electronic delivery costs the federal government roughly one-tenth as much as a paper check. Such a system also provides faster and more reliable access to refunds. This is especially important for low-income households that benefit from refundable tax credits.
Key findings from our evaluation are:
- The prepaid card account appealed most to its primary target population – unbanked households. Pilot participants most likely to be unbanked were three times more likely to apply for the card and nearly 2.5 times more likely to directly deposit a tax refund into the account than those who were more likely to have a bank account.
- Offering the card early is important. People mailed an offer in mid-January were 85 percent more likely to participate than those contacted in early February.
- Monthly fees lower participation. A $4.95 monthly maintenance fee (versus no monthly fee) decreased card applications by 42 percent and the likelihood of directly depositing a refund by 52 percent.
- Participants were not attracted to a linked savings account, perhaps because they had to activate the account online.
- Individuals responded similarly even when the messaging in the initial offer letter changed. Their take-up and use was about the same whether the offer focused on convenience or safety.
There has been some confusion over the purpose of the pilot. It was designed to test how different features affect card take-up and use, not to measure overall participation. We used a large initial sample because direct mail take-up rates are very low—0.3 to 0.8 percent for credit cards. While overall take-up was at the low end of the expected range (0.3 percent), participation by the primary target population (those most likely to be unbanked) was at the high end (0.8 percent).
Overall, we learned three key lessons from this experiment. First, set monthly card fees as low as possible without a subsidy. Second, publicize the card well before tax-filing season and make enrollment as simple as possible, perhaps by including the card as an option on the tax form. Third, allow filers to pay tax preparation fees through the card.
Such a refund system has real potential. It could save the government money while giving unbanked tax filers access to direct deposit and connecting them with mainstream financial services. Importantly, it could become a catalyst for a broader plan to encourage saving among low- and moderate-income families.
President Barack Obama and First Lady Michelle Obama walk across the stage after President Obama's speech to the Democratic National Convention in Charlotte, N.C., on Thursday, Sept. 6, 2012. Gleckman argues that neither Obama nor Romney were specific enough in their convention speeches about their economic plans for the country. (David Goldman/AP/File)
What was missing from Obama's speech? A plan.
We now know more about Joe and Jill Biden’s dating history than we do about what Biden and Barack Obama would do in a second term. I understand the desire to turn politics into just another episode of the Bachelorette. But this seems a sad mix of TMI on one hand, and too many platitudes on the other.
Last night, Obama painted in the broadest terms his vision for America. And throughout the convention Democrats described what they say is the wide philosophical gulf between them and Republicans.
But what does that mean in terms of actual economic policy? That’s much harder to say.
Of course, convention speeches are not supposed to be State of the Union laundry lists. They are intended to frame a candidate’s vision. But for that vision to mean anything, it needs to be buttressed by real policy. And that went missing at both conventions, though in very different ways.
Romney offered a big agenda. Tax reform. Entitlement reform. A radically smaller government. But in each case, Romney presented incomplete plans: Specific tax cuts without any of the difficult offsetting reductions in tax subsidies. A promise of smaller government without ever saying what programs he’d cut.
Obama, in contrast to both Romney and his own campaign four years ago, painted a very modest agenda. And even there, left out the details. The president often talks about playing the long game. This week, he played the small game.
Obama framed his second term in the context of five “goals”—expanding American manufacturing, becoming more self-reliant in energy production, improving education, preserving national security, and reducing the deficit. I’ll bet these promises have appeared in every platform of both political parties since at least the 1970s.
Like Romney and his convention last week, Democrats did a far better job talking about what’s wrong with the other guy’s vision than describing how their own would translate into real initiatives.
Look at the heart of Obama’s acceptance speech last night:
- “When Governor Romney and his allies in Congress tell us we can somehow lower our deficit by spending trillions more on new tax breaks for the wealthy – well, you do the math. I refuse to go along with that.”
- “I refuse to ask middle-class families to give up their deductions.”
- “I will never turn Medicare into a voucher.”
Fair enough, but what would he do?
Obama reduced tax reform to a single sentence: “I want to reform the tax code so that it’s simple, fair, and asks the wealthiest households to pay higher taxes on incomes over $250,000.”
In truth, Obama has never seemed interested in broad-based tax reform and, if his speech and party platform are any indication, he won’t pursue it with any enthusiasm in a second term.
Does that mean tax reform will be a non-issue? I don’t think so. Deficit politics may leave him no choice. But he’ll come to reform without passion.
Putting aside the silly GOP hyperbole about Obama being a socialist, the fact is the president is a mainstream, slightly left-of-center Democrat who is commited to American-style solidarity. “We believe,” he said, “in something called citizenship – a word at the very heart of our founding, at the very essence of our democracy; the idea that this country only works when we accept certain obligations to one another, and to future generations.”
But how does that translate into real policy? I get that promises to subsidize manufacturers will help Obama win votes in Ohio. But it all seems so…small.
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