Feeds:
Posts
Comments

Posts Tagged ‘Taxes’

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.

Read Full Post »

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.

Read Full Post »

Fiscal Cliff, the Video

Posted in Taxes, tagged on October 2, 2012 | 3 Comments »

Here’s something new: a video version of TPC’s report on the fiscal cliff:

Thanks to the Urban Institute’s crack communications team for pulling this together on short notice.

Read Full Post »

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.

Read Full Post »

So You Think You Can Fix the Corporate Tax System?

Posted in Taxes, tagged , on September 26, 2012 | Leave a Comment »

Almost everyone in Washington wants to lower the corporate tax rate. President Obama wants to go from today’s 35 percent down to 28 percent. Governor Romney and Ways and Means Chairman Camp want to get to 25 percent.

There’s just one problem: paying for it. To offset the costs of cutting rates, policymakers will need to roll back tax preferences, each of which has powerful defenders.

To illustrate the challenges, the Committee for a Responsible Federal Budget just released a nifty corporate tax reform calculator that shows how your revenue goals and willingness to cut tax preferences affect what tax rate you have to accept.

Bottom line: going low is harder than it sounds.

Read Full Post »

Five Myths about the 47 Percent

Posted in Politics, Taxes, tagged , on September 23, 2012 | 3 Comments »

Each Sunday, the Washington Post runs an opinion piece debunking five myths about a topic in the news. Bill Gale and I penned today’s, addressing five myths about the 47 percent of households who pay no federal income tax in any given year. Here is the Cliff Notes version:

Myth #1: Forty-seven percent of Americans don’t pay taxes. “This oft-heard claim ignores the many other taxes Americans encounter in their daily lives.”

Myth #2: Members of the 47 percent will never pay federal income taxes. In fact, households often move in and out of the 47 percent, primarily because of changes in their income.

Myth #3: Many high-income people game the system to pay no income tax. Gaming certainly happens, but “it has essentially nothing to do with who does and doesn’t pay income taxes … the vast majority of people who pay no federal income tax have low earnings, are elderly or have children at home.” They aren’t scheming millionaires.

Myth #4: The 47 percent vote Democratic. Many low-income folks don’t vote at all; many seniors vote Republican.

Myth #5: Tax increases are the only way to bring more of these households onto the [income] tax rolls. Rolling back tax breaks like the child credit would, of course, be one way to reduce the ranks of the 47 percent, if one were so inclined. But don’t forget economic growth. Faster job creation and growing incomes would help move some households up the income scale and out of the 47 percent.

The full version is here.

Read Full Post »

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.

 

 

 

Read Full Post »

Who Pays the Corporate Income Tax?

Posted in Taxes, tagged , on September 13, 2012 | 1 Comment »

Corporations pay income taxes in an administrative sense: they write checks (or send electrons) to the IRS. But corporations can’t actually bear the burden – they are just legal entities, not living and breathing human beings.

So who ultimately bears the burden of corporate income taxes? Shareholders? Employees? Customers?

Economists have struggled with this question for decades. When Mick Jagger dropped out of the London School of Economics in the 1960s, for example, he allegedly complained that “economists can’t even tell if corporations pay taxes or pass them on.”

We’ve made some progress since then. Over at the Tax Policy Center, my colleague Jim Nunns summarizes what economists have learned over the past five decades and describes TPC’s new approach to distributing the corporate income tax.

As Jim reports, our best estimate is that workers bear 20 percent of the corporate income tax,  shareholders bear 20 60 percent, and investors as a whole bear 60 20 percent.

Workers bear some of the corporate income tax because capital can move around the world. All else equal, the corporate income tax encourages some capital to locate abroad rather than in the United States. That reduces worker productivity (since they have less capital with which to work) and thus reduces worker wages and benefits. As a result, some of the corporate tax burden falls on workers.

Investors in general bear the majority a portion of the corporate income tax for a similar reason. When you tax corporations, you encourage capital to flow out of corporate equities and into other investments, including corporate debt and non-corporate businesses. That flow reduces the rates of return that investors earn in those other asset classes as well. Much of the corporate income tax thus gets passed on to investors in general, not just corporate shareholders.

Shareholders alone, finally, bear the portion of the corporate income tax that falls on “super-normal returns” — i.e., the returns they get in excess of a normal rate of return.

If any readers know Mick Jagger, please send him a link to the study. Maybe it will finally give him some satisfaction.

P.S. For another overview, see this TaxVox post by Howard Gleckman.

Update 9/16: I accidentally reversed the all capital vs. shareholder shares in the original version of this post. Apologies.

Read Full Post »

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.

Read Full Post »

Cutting Tax Breaks to Pay for Lower Rates Isn’t Easy

Posted in Budget, Politics, Taxes, tagged , , , on July 10, 2012 | Leave a Comment »

Broader base, lower rates.

That’s the bumper sticker for most tax reform proposals. To varying degrees, everyone from President Obama to Governor Romney to Bowles-Simpson has embraced it. Whatever your revenue goal, you can get there with lower tax rates if you are willing to slash tax breaks and thus broaden the tax base.

But cutting tax breaks to pay for lower tax rates is harder than it sounds. There may be more than $1 trillion in annual tax breaks out there, but that doesn’t mean there’s that much easy revenue available to policymakers.

In a new paper today, my Tax Policy Center colleagues Hang Nguyen, James Nunns, Eric Toder, and Roberton Williams document four particular challenges in cutting tax breaks to pay for lower rates:

1. Lower rates reduce the value of most tax preferences. Nearly all tax expenditures are in the form of deductions, exclusions, exemptions, deferrals, or preferential rates, all of which are valuable only to the extent they allow taxpayers to avoid regular statutory tax rates. If tax rates are cut, the value of these tax preferences goes down as well. Thus, cutting tax rates reduces the amount of offsetting revenue that cutting tax preferences can raise.

2. Some tax preferences may be hard to curtail for political or administrative reasons. For example, cutting back widely used and popular preferences such as the deductions for mortgage interest and charitable contributions may be politically difficult. And it would be administratively impractical to require homeowners to include in their income each year the rental value of their homes, although leaving that income untaxed is a tax expenditure (with a sizable cost associated with it). If such preferences can’t be curtailed as part of a realistic tax reform, it becomes harder to find the revenue needed to pay for lower tax rates.

3. Cutting back on tax preferences may alter the distribution of the tax burden in ways that are deemed unacceptable. Finding a combination of lower rates and cutbacks in tax preferences with acceptable distributional effects can prove quite difficult.

4. A tax reform that includes wholesale, immediate repeal of a significant portion of tax preferences would significantly disrupt existing economic arrangements in ways that might be deemed unfair. Instead, some preferences might be only partially curtailed, and some cutbacks might phase in, possibly over an extended period of time. In addition, taxpayers would likely change their behavior to lessen the impact of these cutbacks. All of these “real world” effects would likely reduce, perhaps substantially, the revenue gains from cutting tax preferences.

The chart above illustrates the first of these points. It shows how big tax breaks are in three scenarios: current law (in which all expiring tax cuts actually expire), current policy (most get extended), and current policy with reduced rates (rates get reduced by another 20 percent). The top income tax rate in 2015 under these scenarios is thus 39.6 percent, 35 percent, and 28 percent, respectively (before accounting for Medicare taxes and the health reform tax on investment income).

Most official estimates of tax preferences use the tax rates in current law. Under those rates, TPC estimates that the value of most deductions, fringe benefits, and small credits in 2015 is $590 billion. Under the lower rates of current policy, however, those preferences are worth only $525 billion. And under the still lower rates of current policy with reduced rates, they are worth only $446 billion.

Cutting tax rates thus materially reduces the amount of  money available from rolling back tax breaks.

For more, see Howard Gleckman’s take on the report.

Read Full Post »

« Newer Posts - Older Posts »

Follow

Get every new post delivered to your Inbox.

Join 77 other followers