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Posts Tagged ‘Budget’

Understanding President Obama’s Revenue Targets

Posted in Budget, Politics, Taxes, tagged , , , on November 16, 2012 | 1 Comment »

President Obama and administration officials have offered two different revenue targets for the fiscal cliff debate: $1 trillion and $1.6 trillion (sometimes reported as $1.5 trillion). You might be wondering (I was) where those numbers come from.

The $1 Trillion

President Obama wants to extend the majority of the Bush-era individual income tax cuts—enacted in 2001 and 2003 and extended in 2010—except for those that affect only households with incomes more than $200,000 (single) or $250,000 (joint). In addition, he wants to return the estate tax to its 2009 structure, rather than the one that applies today. Together, those changes would increase revenue by $968 billion over the next decade, according to Treasury estimates, relative to a current policy baseline (i.e., a baseline that has income and estate taxes in their 2012 form).

That $968 billion, which rounds to $1 trillion, has the following components, all applying only to taxpayers with incomes above the president’s thresholds:

The $1 Trillion

All of the provisions in this list are part of the fiscal cliff, which is why the President has emphasized them—and the trillion-dollar figure—in his comments about dealing with the cliff. The larger number—the $1.6 trillion—arises in discussions about the larger fiscal deal that might accompany the cliff negotiations.

The $1.6 Trillion

In his budget last February, President Obama proposed $1.56 trillion in tax increases. In round numbers: $1.6 trillion, sometimes misreported as $1.5 trillion.

That figure includes the $968 billion noted above plus another $593 billion in tax increases.

The largest of those, by far, is the president’s proposal to limit the value of itemized deductions and certain exclusions for upper-income taxpayers. Under that proposal, upper-income taxpayers would benefit only 28 cents on the dollar for their charitable deductions, mortgage interest, employer-provided health insurance, etc., even if they are in the 36% or 39.6% tax brackets.

That provision would raise $584 billion. The rest of his tax provisions, including both cuts and increases, then net out to just $9 billion.

As rough justice, therefore, you can think of the president’s $1.6 trillion target as being almost entirely composed of his proposed tax increases on high-income households: $968 billion + $584 billion = $1.552 trillion. That ignores dozens of his other proposals, of course, but gives a good sense of what’s in his overall revenue aspiration.

P.S. For details on any of these proposals, please see TPC’s comprehensive analysis of the president’s tax proposals.

P.P.S. The President’s budget actually proposed $1.69 trillion in revenue increases. That’s the figure reported in Treasury’s summary of the proposals (known as the Green Book) and in TPC’s analysis of the president budget. The difference between that and the budget’s $1.56 trillion figure reflects some arcane budget presentation decisions. For example, the president proposed a $61 billion fee on banks that the Treasury reports as revenue, but the budget does not include in its tax section.

P.P.P.S. 2010’s health reform included new taxes on upper incomes that go into effect on January 1. Including those taxes, the top capital gains rate under the president’s proposal would rise to 23.8% and the top dividend rate to 43.4% (not including the effects of Pease).

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Almost Everything You Need to Know About the Fiscal Cliff

Posted in Budget, Taxes, tagged , , on November 2, 2012 | Leave a Comment »

The WSJ’s David Wessel explains almost everything you need to know about the fiscal cliff. And, as a bonus, shows off the beauty of the Potomac Gorge:

If you want to dive deeper on the tax side of the cliff, check out this post and this video.

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How Much Money Can You Raise by Capping Deductions?

Posted in Budget, Politics, Taxes, tagged , on October 17, 2012 | 4 Comments »

Governor Romney has proposed roughly $5 trillion in tax cuts, but he doesn’t want to reduce overall tax revenues. He hopes to generate some revenue by boosting the economy, but even if that works, he will need trillions of dollars of “base broadeners” — i.e., offsetting tax increases. Like most politicians, he’s been vague about what those base broadeners might be. But in the past few weeks, he has discussed the idea of capping the amount of itemized deductions taxpayers can take, perhaps to $17,000, $25,000, or $50,000.

How much revenue could you raise by doing this? My colleagues at the Tax Policy Center just released some estimates of this. As noted by Bob Williams:

Eliminating all itemized deductions would yield about $2 trillion of additional revenue over ten years if we cut all rates by 20 percent and eliminate the AMT [DM: two key aspects of Romney's tax proposal]. Capping deductions would generate less additional revenue, and the higher the cap, the smaller the gain. Limiting deductions to $17,000 would increase revenues by nearly $1.7 trillion over ten years. A $25,000 cap would yield roughly $1.3 trillion and a $50,000 cap would raise only about $760 billion.

Capping itemized deductions at $25,000 would thus produce about one-quarter of the revenue needed to offset Governor Romney’s tax cuts, and completely eliminating them (which he has not suggested) would cover about 40% of the revenue needed.

As you might expect, high caps are quite progressive, i.e., they:

[I]mpose proportionally more of the tax increase on higher-income households, as new TPC estimates show. With tax rates 20 percent below today’s rates, about 83 percent of the revenue gain in 2015 from a $17,000 cap would fall on the top quintile and about 40 percent on the top 1 percent. Raising the cap to $25,000 would boost those shares to nearly 90 percent on the top quintile and fully half on the top 1 percent. A $50,000 cap would virtually exempt the bottom four quintiles from higher taxes: less than 4 percent of the tax increase would fall on them, while nearly 80 percent would hit the top 1 percent. (Phasing down the caps at high-income levels [DM: which Romney has mentioned as a possibility] would, of course, concentrate the revenue gains even more at the high end, but how much would depend on the details.)

More here.

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Five Things You Should Know about Mitt Romney’s “$5 Trillion Tax Cut”

Posted in Budget, Politics, Taxes, tagged , , on October 12, 2012 | 7 Comments »

You’ve probably heard claims that Mitt Romney wants to cut taxes by $5 trillion. Here are five things you should know about that figure:

1. $5 trillion is the gross amount of tax cuts he has proposed, not the net impact of all his intended tax reforms.

Governor Romney has been very specific about the taxes he would cut. Most notably, he would reduce today’s individual income tax rates by one-fifth (so the 10 percent bracket would fall to 8 percent, the 35 percent to 28 percent, etc.) and reduce the corporate income tax rate from 35 percent to 25 percent. In addition, he would eliminate the alternative minimum tax (AMT), the estate tax, the taxes created in 2010’s health reform act, and taxes on capital gains, dividends, and interest for incomes up to $200,000 ($100,000 for singles). The $5 trillion figure reflects the revenue impact of all those cuts.

But Romney has also said that he intends his reforms to be revenue-neutral, with the specified revenue losses being offset by a combination of economic growth and unspecified cuts in deductions and other tax preferences. The net impact of his reforms would undoubtedly be less than $5 trillion, perhaps much less if he’s aggressive in going after tax breaks or willing to compromise on some of his other tax reform goals (e.g., not raising taxes on investment income). Without any details about what he would do, however, we can’t measure the net revenue impact of his ideas.

2. $5 trillion is a 10-year extrapolation from a TPC estimate for 2015.

TPC has estimated that the gross tax cuts proposed by Romney would amount to $456 billion in 2015. Budget debates in Washington often focus on ten-year periods, so commentators have coalesced around a natural, if imprecise, extrapolation: multiply by 10 and round up because of a growing economy. Result: $5 trillion over ten years.

3. $5 trillion does not include the impact of permanently extending many expiring tax cuts, including those from 2001 and 2003.

In budget parlance, the $5 trillion is measured against a current policy baseline, not a current law one. TPC’s current policy baseline assumes that many expiring tax cuts, including the 2001 and 2003 cuts, the AMT patch, the current version of the estate tax, and the tax credits enacted or expanded in 2009 will all be extended permanently. Romney proposes to extend all of these except the 2009 credits. Because it is measured against current policy, the $5 trillion figure does not include the revenue impact of any of those extensions (but does include a small revenue increase from expiration of the credits).

The current law baseline assumes all tax cuts expire as scheduled yielding almost $5 trillion more revenue than does current policy. Relative to current law, Romney’s tax proposal would thus be roughly a $10 trillion gross tax cut. (The same issue arises with President Obama’s tax proposals, which we estimate amount to a $2.1 trillion net tax increase relative to current policy, but a $2.8 trillion net tax cut relative to current law.)

4. $5 trillion includes more than $1 trillion in gross tax cuts for families earning $200,000 or less.

Governor Romney’s specified tax cuts would go primarily to high-income taxpayers for a simple reason: they pay a large share of taxes and thus get a large benefit from a proportional reduction in tax rates. But that doesn’t mean that all the tax cuts go to top earners. Middle- and upper-middle income taxpayers would also get a gross tax reduction because of the reduction in tax rates, the elimination of taxes on capital gains, dividends, and interest for low and middle incomes, and, for some, the elimination of the AMT. Those gross tax cuts amount to more than $1 trillion over ten years.

5. $5 trillion includes around $1 trillion in gross tax cuts for corporations.

Cutting the corporate income tax rate from 35 percent to 25 percent would lower corporate tax revenues by roughly $1 trillion over the next decade. Little-discussed in the current debate is whether and how Governor Romney would offset this revenue loss.

As he has rightly noted, corporate taxes are ultimately borne by people, including workers and shareholders. Most of the corporate rate reductions would ultimately benefit high-income taxpayers since they own more investment assets and earn higher labor income. But about two-fifths of the benefit would go to low-, middle-, and upper-middle income workers and investors.

Bottom line: Governor Romney has proposed about $5 trillion in specific, gross tax cuts over the next decade relative to current policy, most but not all of which would go to high-income taxpayers. He has also promised to offset a substantial portion of those cuts—presumably in the trillions of dollars—by reducing deductions and other tax breaks, primarily for high-income households. Lacking any specifics, however, we can’t know what net tax cut, if any, he proposes.

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How Much Would the Fiscal Cliff Raise Taxes?

Posted in Budget, Taxes, tagged , , on October 1, 2012 | 5 Comments »

Roberton William, Eric Toder, Hang Nguyen, and I are out with Toppling Off the Fiscal Cliff: Whose Taxes Rise and How Much?,  a detailed look at all the tax increases in the looming fiscal cliff. We have two basic messages.

First, the cliff is big, amounting to more than $500 billion in 2013, a 20+ percent increase.

Second, you can’t tell the players without a scorecard. Over the past dozen years, the snowball of temporary tax cuts (and, for 2013, the introduction of some new taxes) has grown to epic proportions. As a result, the cliff isn’t just about the 2001-03 tax cuts that grab most of the headlines. There are also the temporary cut in payroll taxes, the “extenders”, the expanded credits enacted in 2009, the current version of the estate tax, the AMT patch, and the start of new health reform taxes.

To make sense of it all, we had to divvy the pending tax increases up into nine categories. This chart shows how they would affect tax rates for households at different income levels:

Bottom line: People of all incomes will see their tax go up if we go completely over the fiscal cliff. But there are significant differences in which provisions matter most.

Of course, the full paper includes much more. Here’s the abstract:

The fiscal cliff threatens an unprecedented tax increase at year end. Taxes would rise by more than $500 billion in 2013—an average of almost $3,500 per household—as almost every tax cut enacted since 2001 would expire. Middle-income households would see an average increase of almost $2,000. Policymakers are rightly concerned about the potential impact on families and the economy of such a sudden tax increase and are considering proposals to delay, repeal, or offset parts of the cliff. To inform that discussion, this report provides a detailed look at the revenue, distributional, and incentive effects of these increases. Almost 90 percent of Americans would see their taxes rise if we topple off the cliff. For most households, the two biggest increases would be the expiration of the temporary cut in Social Security taxes and the expiration of the 2001/2003 tax cuts. Households with low incomes would be particularly affected by the expiration of tax credits expanded or created by the 2009 stimulus. And households with high incomes would be hit hard by the expiration of the 2001/2003 tax cuts that apply at upper income levels and the start of the new health reform taxes. Taken together, the scheduled changes would significantly increase the marginal tax rates that can influence behavior. Average marginal tax rates would increase by 5 percentage points on labor income, by 7 points on capital gains, and by more than 20 points on dividends.

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About the Famous 47% Figure (and Its 46% Cousin)

Posted in Budget, Politics, Taxes, tagged , , on September 18, 2012 | 1 Comment »

My most popular blog post, by a long shot, was this one in July 2011 explaining why almost half of Americans paid no federal income tax. If you are interested in some context behind Governor Romney’s now famous remarks about the 47 percent (TPC calculated it as 46 percent for 2011), please check it out.

One item I didn’t mention in that post is that the number of taxpayers not paying federal income tax should decline over time. As the economy recovers, higher incomes will boost the fraction of households that pay federal income tax.

 

 

 

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Merle Hazard Goes Surfing on the Fiscal Cliff (Animated)

Posted in Uncategorized, tagged , , on September 11, 2012 | 1 Comment »

Our buddy Merle Hazard — of  “Inflation or Deflation?” and “Bailout” fame — is back  with a new, animated version of his surf-music take on the Fiscal Cliff.

P.S. I should get back to real blogging soon.

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Understanding TPC’s Analysis of Governor Romney’s Tax Plan

Posted in Budget, Politics, Taxes, tagged , , on August 8, 2012 | 2 Comments »

The Tax Policy Center’s latest research report went viral last week, drawing attention in the presidential campaign and sparking a constructive discussion of the practical challenges of tax reform. Unfortunately, the response has also included some unwarranted inferences from one side and unwarranted vitriol from the other, distracting from the fundamental message of the study: tax reform is hard.

The paper, authored by Sam Brown, Bill Gale, and Adam Looney, examines the challenges policymakers face in designing a revenue-neutral income tax reform. The paper illustrates the importance of the tradeoffs among revenue, tax rates, and progressivity for the tax policies put forward by presidential candidate Mitt Romney. It found, subject to certain assumptions I discuss below, that any revenue-neutral plan along the lines Governor Romney has outlined would reduce taxes for high-income households, requiring higher taxes on middle- or low-income households. I doubt that’s his intent, but it is an implication of what we can tell about his plan so far. (We look forward to updating our analysis, of course, if and when Governor Romney provides more details.)

The paper is the latest in a series of TPC studies that have documented both the promise and the difficulty of base-broadening, rate-lowering tax reform. Last month, for example, Hang Nguyen, Jim Nunns, Eric Toder, and Roberton Williams documented just how hard it can be to cut tax preferences to pay for lower tax rates. An earlier paper by Dan Baneman and Eric Toder documented the distributional impacts of individual income tax preferences.

The new study applies those insights to Governor Romney’s tax proposal. To do so, the authors had to confront a fundamental challenge: Governor Romney has not offered a fully-specified plan. He has been explicit about the tax cuts he has in mind, including a one-fifth reduction in marginal tax rates from today’s level, which would drop the top rate from 35 percent to 28 percent and a cut in capital gains and dividend taxes for families with incomes below $200,000. He and his team have also said that reform should be revenue-neutral and not increase taxes on capital gains and dividends. But they have not provided any detail about what tax preferences they would cut to make up lost revenue.

As a political matter, such reticence is understandable. To sell yourself and your policy, it’s natural to emphasize the things that people like, such as tax cuts, while downplaying the specifics of who will bear the accompanying costs. Last February, President Obama did the same thing when he rolled out his business tax proposal. The president was very clear about lowering the corporate rate from 35 percent to 28 percent, but he provided few examples of the tax breaks he would cut to pay for it. Such is politics.

For those of us in the business of policy analysis, however, this poses a challenge. TPC’s goal is to inform the tax policy debate as best we can. While we strongly prefer to analyze complete plans, that sometimes isn’t possible. So we provide what information we can with the resources available. Earlier this year, for example, we analyzed the specified parts of Governor Romney’s proposal and documented how much revenue he would have to make up by unspecified base broadening (or, possibly, macroeconomic growth) and how the rate cuts would affect households at different income levels.

The latest study asked a different question: Could Romney’s plan maintain current progressivity given revenue neutrality and reasonable assumptions about what types of base broadening he’d propose? There are roughly $1.3 trillion in tax expenditures out there, but not all will be on Governor Romney’s list. He has said, for example, that raising capital gains and dividend taxes isn’t an option and has generally spoken about lowering taxes on saving and investment. Based on those statements, the authors considered what would happen if Romney kept all the tax breaks associated with saving and investment, including not only the lower rates on capital gains and dividends, but also the special treatment for municipal bonds, IRA and 401ks, and certain life-insurance plans, as well as the ability to avoid capital gains taxes at death (known as step-up basis). The authors also recognized that touching some tax breaks is beyond the realm of political possibility, such as taxing the implicit rent people get from owning their own home.

Given those factors, the study then examined the most progressive way of reducing the other tax breaks that remain on the table—i.e. it rolls them back first for high-income people. But there aren’t enough of those preferences to offset the benefits that high-income households get from the rate reductions. As a result, a revenue-neutral reform within these constraints would cut taxes at the high-end while raising them in the middle and perhaps bottom.

What should we infer from this result? Like Howard Gleckman, I don’t interpret this as evidence that Governor Romney wants to increase taxes on the middle class in order to cut taxes for the rich, as an Obama campaign ad claimed. Instead, I view it as showing that his plan can’t accomplish all his stated objectives. One can charitably view his plan as a combination of political signaling and the opening offer in what would, if he gets elected, become a negotiation.

To get a sense of where such negotiation might lead, keep in mind that Romney’s plan is not the first to propose a 28 percent top rate. The Tax Reform Act of 1986 did, as did the Bowles-Simpson proposal and the similar Domenici-Rivlin effort (on which I served). Unlike Governor Romney’s proposal, all three of those tax reforms reflect political compromise. And in all three cases, part of that compromise was eliminating some tax preferences for saving and investment, which tend to be especially important for high-income taxpayers. In particular, all three reforms resulted in capital gains and dividends being taxed at ordinary income tax rates.

TPC’s latest study highlights the realities that lead to such compromises.

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Has the Government Been Growing or Shrinking? Employment Edition

Posted in Budget, Economy, Macroeconomics, Politics, tagged , , , on August 5, 2012 | 1 Comment »

My recent post on government size prompted several readers to ask a natural follow-up question: how has the government’s role as employer changed over time?

To answer, the following chart shows federal, state, and local employment as a share of overall U.S. payrolls:

In July, governments accounted for 16.5 percent of U.S. employment. That’s down from the 17.7 percent peak in early 2010, when the weak economy, stimulus efforts, and the decennial census all boosted government’s share of employment. And it’s down from the levels of much of the past forty years.

On the other hand, it’s also up from the sub-16 percent level reached back in the go-go days of the late 1990s and early 2000s.

Employment thus tells a similar story to government spending on goods and services: if we set the late 1990s to one side, federal, state, and local governments aren’t large by historical standards; indeed, they are somewhat smaller than over most of the past few decades. And they’ve clearly shrunk, in relative terms, over the past couple of years. (But, as noted in my earlier post, overall government spending has grown because of the increase in transfer programs.)

P.S. Like my previous chart on government spending, this one focuses on the size of government relative to the rest of the economy (here measured by nonfarm payroll employment). Over at the Brookings Institution’s Hamilton Project, Michael Greenstone and Adam Looney find a more severe drop in government employment than does my chart. The reason is that they focus on government employment as a share of the population, while my chart compares it to overall employment. That’s an important distinction given the dramatic decline in employment, relative to the population, in recent years. 

P.P.S. As Ernie Tedeschi notes, this measure doesn’t capture government contractors. So any change in the mix of private contractors vs. direct employees will affect the ratio. This is another reason why focusing on spending metrics may be better than employment figures.

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Has Government Gotten Bigger or Smaller? Yes.

Posted in Budget, Economy, Macroeconomics, Politics, tagged , , on July 31, 2012 | 8 Comments »

Politicians and pundits constantly debate the size of government. Is it big or small? Growing or shrinking?

You might hope these simple questions have simple answers. But they don’t. Measuring government size is not as easy as it sounds. For example, official statistics track two different measures of government spending. And those measures tell different stories:

The blue line shows how much federal, state, and local governments directly contribute to economic activity, measured as a share of overall gross domestic product (GDP). If you’ve ever taken an intro economics class, you know that contribution as G, shorthand for government spending. G represents all the goods and services that governments provide, valued at the cost of producing them. G thus includes everything from buying aircraft carriers to paying teachers to housing our ambassador in Zambia.

At 19.5 percent of GDP, G is down from the 21.5 percent it hit in the worst days of the Great Recession. As Catherine Rampell of the New York Times pointed out last week, it’s also below the 20.3 percent average of the available data back to 1947. For most of the past 65 years, federal, state, and local governments had a larger direct economic role producing goods and services than they do today.

There’s one notable exception: today’s government consumption and investment spending is notably larger than it was during the economic boom and fiscal restraint of the late 1990s and early 2000s. From mid-1996 to mid-2001, government accounted for less than 18 percent of GDP. Relative to that benchmark, government is now noticeably larger.

The orange line shows a broader measure that captures all the spending in government budgets—all of G plus much more. Governments pay interest on their debts. More important, they make transfer payments through programs like Social Security, Medicare, Medicaid, food stamps, unemployment insurance, and housing vouchers. Transfer spending does not directly contribute to GDP and thus is not part of G. Instead, it provides economic resources to people (and some businesses) that then show up in other GDP components such as consumer spending and private investment.

This broader measure of government spending is much larger than G alone. In 2011, for example, government spending totaled $5.6 trillion, about 37 percent of GDP. But only $3.1 trillion (20 percent of GDP) went for goods and services. The other $2.5 trillion (17 percent) covered transfers and interest.

Like G, this broader measure of government has declined since the (official) end of the Great Recession. Since peaking at 39 percent in the second quarter of 2009, it has fallen to 36 percent in the second quarter of 2012.

Also like G, this measure has grown since the boom of the late 1990s and early 2000s. In the middle of 2000, government spending totaled just 30 percent of GDP, a full 6 percentage points less than today.

The two measures thus agree on recent history: government has shrunk over the past three years as the economy has slowly recovered from the Great Recession and government policy responses have faded. But government spending is still notably larger than at the turn of the century.

The story changes, however, if we look further back in time. Although governments spent more on goods and services in the past, total spending was almost always lower. Since 1960, when data on the broader measure begin, total government spending has averaged about 32 percent. It never reached today’s 36 percent until 2008, when the financial crisis began in earnest.

Much of the recent increase in overall spending is due to the severity of the downturn. But that’s not the only factor. Government’s economic role has changed. As recently as the early 1960s, federal, state, and local governments devoted most of their efforts to providing public goods and services. Now they devote large portions of their budgets to helping people through cash and in-kind transfers—programs like Medicare and Medicaid that were created in 1965 and account for much of the growth in the gap between the orange and blue lines.

Government thus has gotten bigger. But it’s also gotten smaller. It all depends on the time period you consider and the measure you use.

P.S. Keep in mind that this discussion focuses on a relative measure of government size—the ratio of government spending to the overall economy—not an absolute one. Government thus expands if government spending grows faster than the economy and contracts if the reverse is true.

P.P.S. Measuring government size poses other challenges. Eric Toder and I discuss several in our paper “How Big is the Federal Government?” Perhaps most important is that governments now do a great deal of spending through the tax code. Traditional spending numbers thus don’t fully reflect the size or trend in government spending. For more, see this earlier post.

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