In the battle over whether to extend long-term unemployment benefits, one of the Republican talking points is: Sure, we’ll consider an extension, but it must be paid for. That’s a fine idea. Here’s another: In exactly the same way, Congress should offset the cost of restoring dozens of temporary tax breaks that expired on Dec. 31 by raising other taxes.
Here’s how Senate GOP Leader Mitch McConnell (R-KY) put it the other day: “There is no excuse to pass unemployment insurance legislation… without also trying to find the money to pay for it so we’re not adding to a completely unsustainable debt.”
Now, simply substitute the phrase…expiring tax provisions…for… unemployment insurance. Why should the rule be different?
Tax breaks are not the same, say some. But for the most part, these highly targeted subsidies are precisely the same. Most are nothing more than spending in drag. Just as the unemployment program transfers cash to a specific group, so do the scores of tax credits and other subsidies that some are hot to renew. Only the beneficiaries are different. Instead of the long-term unemployed, they are Manhattan real estate developers, auto racetrack owners, movie studios, distillers of Puerto Rican rum, multinational corporations, makers of alternative fuel vehicles, etc., etc., etc.
Every year Congress mindlessly extends them. And simply adds to the deficit.
Paying for tax cuts with offsetting revenue increases is hardly a new idea—and it is technically required by current law.
The history is instructive: Through much of the 1990s, Congress had a pay-as-you-go rule (“PAYGO”) that required that new spending be financed by cuts in other programs and all tax cuts be offset by new revenues or reductions in entitlement spending. For a while, the rule (and a booming economy) helped reduce deficits. But PAYGO eventually faded away in a haze of exceptions and waivers.
The ’90s law expired in 2002. The Senate adopted a watered-down version in 2006 that was rarely enforced. House rules require new spending to be offset by other spending reductions but specifically exempted tax cuts from offsets. In 2010, Congress restored PAYGO but with plenty of loopholes.
There are good tax policy reasons for Congress to enforce PAYGO rules for tax cuts. First, it might increase the chances Congress would seriously review the merits of these temporary provisions. No longer would extending/restoring them be free in budget terms. And once there is a cost, lawmakers might think more seriously about the trade-offs.
The second benefit is that PAYGO would reduce the incentives for lawmakers to play budget accounting games with the revenue loss from tax cuts. Because congressional scorekeepers calculate the ten-year cost of these tax breaks, sponsors can low-ball their true price by extending them one-year at a time.
Think of it this way: Say a tax break costs $1 billion-a-year. If it “expires” after just one year, the ten year cost is also about $1 billion (or a shade more or less), which at least in budget terms seems relatively manageable. However, if the same tax break is permanent, it would add $10 billion to the deficit over a decade—a cost much harder for Congress to swallow.
But if these tax subsidies must be financed, the political dynamic would change dramatically. A one-year- at-a-time temporary break might become more difficult because each year its sponsors would have to find another offset to fund an extension. And they are not easy to unearth.
There is real money at stake here: $50 billion this year alone. If lawmakers really care about the deficit and the debt (I have my doubts about many of them), they should be just as willing to make hard choices about the fate of these temporary tax reductions as temporary unemployment benefits.
By now most everyone has heard of bitcoin. But exactly what is it? And how should it be taxed?
Bitcoin is usually described as virtual currency. That’s useful shorthand, but is it really money? And should it be taxed as if it is? Or is it a capital asset? How about a commodity? And then there is the matter of using this quasi-cash to avoid taxes and regulation altogether.
The IRS says it is studying the matter but has yet to issue any guidance. Until it does, it is anyone’s guess how bitcoin should be taxed. Most users/investors will simply pick what is most beneficial to them when they file their 2013 returns.
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At the moment, bitcoin and its cousin currencies have had far more success generating buzz than facilitating commerce. Yet, the idea of online money can’t be ignored.
Curiously, the motivating force for the IRS to issue guidance may be an effort by Cameron and Tyler Winklevoss (best known until now for their legal battle with Mark Zuckerberg over Facebook) to create an exchange-traded fund to track bitcoin prices. The twins are awaiting SEC approval for their ETF but their very request raises important tax policy questions that need to be answered. ( Continue… )
Tax expenditures for homeownership, such as deductions for mortgage interest and property taxes and the partial exclusion for capital gains on the sale of a primary residence, have long been recognized as ineffective, regressive, and extraordinarily expensive—costing $121 billion in 2013 alone. Until now, most reforms—including the Bowles-Simpson deficit-reduction plan—have focused on restructuring the mortgage deduction into a flat-rate credit. But what if we largely replaced the deduction with incentives to buy a house, rather than to run up a lot of mortgage debt?
In a new Tax Policy Center paper, my TPC colleagues Gene Steuerle, Amanda Eng, and I examine three very different tax subsidies for housing. Instead of encouraging people to borrow, they would create incentives for homeownership without tying tax breaks to mortgage debt. Each would be financed by eliminating the deduction for property taxes paid and capping the mortgage interest deduction at 15 percent. Thus, none would add to the deficit over 10 years. Here, briefly, are the three options:
- A permanent First-Time Homebuyers Tax Credit, similar to the provision temporarily in effectduring the Great Recession. The credit—$12,000 for singles and $18,000 for married couples—would give new homeowners a one-time lump sum subsidy in the year they purchased a home. The credit would be refundable, allowing households with low income tax burdens to claim the full value of the credit. ( Continue… )
Am I the only one who thinks today’s commuter tax subsidies are nuts?
The issue is in the headlines because on January 1, thanks to yet another dose of congressional inaction, the amount of pre-tax dollars mass transit commuters can put aside fell from a maximum of $240 a month to $130. At the same time, people who drive to work got boost from $245 to $250 (don’t ask).
Mass transit supporters, not surprisingly, are furious. But the whole flap makes me want to ask: What’s the point of this crazy subsidy?
It can’t be to encourage energy efficiency, cut pollution, or reduce dependence on imported oil. Using tax dollars to encourage people to drive to work has the opposite effect. And even if the transit tax break is restored to its higher level, the incentive would be roughly the same whether you drive or take the bus. So it is unlikely to change behavior very much at all.
In effect, we are merely giving people a tax break to go to work. Well, some people anyway. If you are an independent contractor or work for a firm that doesn’t offer this benefit, you get squadoosh. Same if you bike or walk to work. And the less money you make, the less of a windfall you get.
As it stands, the program lards one more subsidy on top of all the other benefits we give drivers. It adds another cost to what society already pays for long commutes in gas guzzling cars–such as pollution and wear and tear on roads and bridges. And don’t tell me about the gas tax. In 2014, the Highway Trust Fund will be solvent only because of a $14 billion transfusion of general revenues, according to the Congressional Budget Office.
But we not only give outsized benefits to drivers, we give them to the richest motorists in the most expensive cities. A top-bracket lawyer can pull his BMW 760Li into the office lot, pay the monthly parking max of $250, and reduce his costs by about $100 (what the heck, it pays for a round of golf at the club).
But the transit piece may not be much of a bargain either. A woman who cleans that lawyer’s office would save a monthly maximum of $13 under the current schedule—if she’s lucky enough to make it into the 10 percent tax bracket. Even if Congress raises the maximum pre-tax limit to $245 or $250, it wouldn’t do her much good since she’s unlikely to spend that much each month. A typical commuter bus ride in the U.S. is about $2.
Then there is the question of whether this incentive changes behavior in any significant way. Would that bus rider, who may not even own a car, change her mode of transportation without the incentive? Not likely. Better to ditch the subsidy and give her a bit more cash though a more generous Earned Income Credit.
And Beemer guy? He’ll happily pocket the $100 bucks, but would he stop driving without it?
Perversely, even if the subsidies do change behavior on the margin, they may do so in exactly the wrong way by encouraging people to live in more distant suburbs. This is even true for those who take public transit which, in many cities, charges more for longer trips.
There is a good chance the transit subsidy will be restored sometime in the next few months, along with 55 other expiring tax provisions. That will equalize the give-away for those who ride mass transit and those who drive—an improvement over the situation on New Year’s Day. But the whole thing still seems pretty stupid.
Senator Ron Wyden (D-OR), who is poised to become the new chair of the Senate Finance Committee, is the sponsor of a major tax reform plan that would reduce both individual and corporate tax rates without adding to the deficit or changing the current distribution of taxes among income groups very much.
The 64-year-old Wyden, who has a history of proposing creative, ambitious, and sometimes controversial ideas, initially sponsored a tax code overhaul in 2010 with former GOP senator Judd Gregg of New Hampshire. After Gregg retired, Wyden found another GOP cosponsor in Dan Coates of Indiana. Wyden-Coates follows the broad outline of the original Wyden-Gregg plan.
For individuals, it would set three rates—15-25-35. The top bracket would kick in at $140,000 for couples filing jointly. It would repeal the Alternative Minimum Tax, nearly triple the standard deduction, and create a 35 percent exclusion for long-term capital gains and dividends (equal to a rate of 22.75 percent for top-bracket taxpayers). It would eliminate the tax advantages of many employee benefits–but not employer-sponsored health insurance–and simplify tax-preferred savings.
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While the plan would preserve most other individual tax preferences, the very large standard deduction would sharply limit the number of taxpayers who take them (even today, fewer than one-third itemize). ( Continue… )
Tax Vox proudly announces its seventh annual Lump of Coal Award for the worst tax and fiscal policies of 2013. The year was a curious mix of really bad ideas and dithering. After all, Congress’s finest moment may have been its December budget mini-deal—a decision that effectively ignored every one of the great fiscal questions facing the nation. The winners of the 2013 Lump of Coal Award are:
10. The American Taxpayer Relief Act of 2013. True, Congress and President Obama pulled the nation back from the dreaded fiscal cliff on New Year’s Day. But they did it in a spectacularly ugly way. Lawmakers pulled the trigger on the mindless spending cuts called the sequester—once thought to be too awful to contemplate. But that wasn’t all: ATRA also made permanent a massive tax cut for nearly everyone (except the very rich) that overwhelmed any deficit reduction from the sequester.
9. The Affordable Care Act’s Online Health Exchanges. Those of us who have watched the IRS struggle for decades to upgrade its computer systems probably should not have been surprised at the fumbled roll-out of healthcare.gov. Except perhaps for the NSA, which may do tech a bit too well, the U.S. government just doesn’t do computers.
8. Tax Reform. House Ways & Means Committee Chair Dave Camp (R-MI) and Senate Finance Committee Chair Max Baucus (D-MT) did a joint national tour to promote tax reform. Both released many provocative ideas for business reform. But neither would publicly say what individual tax preferences they’d eliminate or how much revenue their new tax code would produce. Neither President Obama nor congressional leaders of either party showed any enthusiasm for reform. And the year ended with Baucus preparing to resign his Senate seat to become ambassador to China. ( Continue… )
Who benefits from the tax credits, deductions and exclusions that have become such an integral part of the modern tax code? Nearly all of us. And that’s why any tax reform that eliminates or scales back many of these preferences in return for lower tax rates is so hard to do.
The Tax Policy Center has just updated its estimates of the effects of ten of the biggest tax expenditures. And we’ve found great variation among the benefits—the rich get an outsized share of the subsidy from some, while low-income households enjoy most of the benefits of others. Here is a look a just a few—all reflecting 2015 taxes:
The Earned Income Tax Credit: Almost three-quarters of the benefits of this one go to households making between $10,000 and $40,000. This should not be a surprise since the EITC is refundable and aimed at low-wage working households. For instance, those making between $20,000 and $30,000 get an average tax cut of about $900, which is three-quarters of their total tax bill. By the time a household makes $75,000, the EITC is essentially worthless.
The Home Mortgage Interest Deduction: The biggest winners are the upper middle-class and merely wealthy rather than the super-rich. The one percenters do just fine thank you, but because the value of the deduction is limited to the first $1.1 million of mortgage debt, the deduction reduces their average tax rate but just a few tenths of a percent. By contrast, a household making between $200,000 and $500,000 gets an average tax reduction of about $3,300 and can knock its average income tax rate down by almost a full percentage point. ( Continue… )
Differences in income and other characteristics mean that federal income tax burdens vary substantially across counties. While the median federal income tax burden across counties is about $3,400, approximately 10 percent of counties have average tax burdens less than $2,100 and around 10 percent of counties have average tax burdens over $6,700. Counties with high federal income tax burdens are concentrated around large cities, the California coast, southern Florida, and the corridor between Washington DC and Boston.
Income taxes comprise a substantial fraction of the country’s revenue stream. In recent years, around 45 percent of federal revenue was derived from income taxes, with federal income tax revenue amounting to about 7 percent of GDP. Income tax burdens vary for a host of reasons, including family demographic characteristics, level and composition of income, and deductions and tax benefits claimed. Since these characteristics vary by geographic location, it is natural to see variation in income tax burdens across localities. ( Continue… )
The year in taxes started with the nation toppling, briefly, over the fiscal cliff. And it ended with some interesting policy proposals on tax reform though little political progress.
Remember the fiscal cliff? While that crisis was resolved on New Year’s Day, it really began in 2001, when President George W. Bush signed the Economic Growth and Tax Relief Reconciliation Act (EGTRRA). The big tax reductions in that law were originally slated to expire by or before the end of 2010. After various extensions, they were to expire at the end of 2012, along with a variety of other temporary tax cuts related to the payroll tax, the alternative minimum tax, and tax benefits for workers and families with children.
President Obama wanted to extend EGTRRA’s middle-class tax cuts but vowed to let income tax cuts for the top two brackets to expire. Most Republicans had signed the No New Taxes pledge and wanted to extend all the Bush tax cuts though they were willing to let the payroll tax cut and other economic stimulus provisions expire. The looming expirations led to last winter’s fiscal cliff
In the end, Congress did not approve an extension of most of the tax cuts until late on New Year’s Day. Because all the Bush tax cuts had technically expired, Republicans could say they had not violated their No New Taxes pledge. After all, now they were cutting taxes for most people. President Obama signed the American Taxpayer Relief Act of 2012 (ATRA) on January 2, 2013. The law included:
- An increase in the individual marginal tax rate from 35 percent to 39.6 percent for individuals with taxable income over $400,000 and for couples over $450,000.
- An increase in the rate on long-term capital gains and qualified dividends from 15 to 20 percent for high-income taxpayers. ( Continue… )
Effective tax rates have been rising since 2009 and will continue to rise for a few more years before they flatten out, according to Tax Policy Center projections.
My TaxVox post earlier this week showed how average federal tax rates have changed over the past three decades. But that was based on a 30-year history of federal tax rates produced by the Congressional Budget Office (CBO) that ends in 2010.
While we don’t know the future for certain, TPC has projected effective federal tax rates out to 2024. There are significant differences between the CBO and the TPC estimates but splicing the two projections together gives a reasonable picture of what will happen to rates for various income groups under today’s tax law.
TPC projects that average rates will rise for all income groups from their recent lows caused by the Great Recession and the tax cuts put in place to combat it (see graph). With incomes rebounding and most of the temporary stimulus tax cuts expiring earlier this year, average rates will rise by 2 or 3 percentage points between 2009 and 2015 for all but the top 1 percent, who will see a steeper 7 percentage point jump. ( Continue… )