The Six Best Fiscal Cliff Videos

Are you suffering fiscal cliff fatigue yet?

I am, but that doesn’t mean I don’t enjoy a good fiscal cliff video. Here are six of the best, some wonky, some wacky.

1. David Wessel, Wall Street Journal: Standing on an actual Potomac cliff

2. Salman Khan, Khan Academy: For beginners

3. The Simpsons: The most popular fiscal cliff video by far

4. Felix Salmon, Reuters: Legos and Clifford the dog (get it?)

5. Merle Hazard: Surfing on the fiscal cliff

And if you will forgive a little self-promotion:

6.  Me, Urban Institute and the Tax Policy Center: What happens to taxes?

Understanding President Obama’s Revenue Targets

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).

Purple America – The Best Election Maps

For all the talk of red states and blue states, much of America is really purple.

That simple observation has inspired some great alternatives to the standard red and blue maps depicting electoral outcomes.

Princeton’s Robert Vanderbei, for example, has created an animation that makes three improvements on the standard red/blue map: he maps counties not just states; he uses shades of purple to reflect the mix of Democratic and Republican votes; and he uses green for third parties.

Here’s his animation for the 1960 to 2008 elections; keep an eye out for Ross Perot. (Vanderbei also has a static version of the 2012 results.)

Michigan’s Mark Newman also adopts the purple view, with another wrinkle. Traditional maps emphasize geographic area, not the location of electoral votes (or population). Using some fancy math, he resizes and reshapes states to reflect their relative electoral import. The result resembles a smooshed butterfly, with blue areas (mostly cities) amid a red web:

Can a Candidate Win Any Number of Electoral Votes from 0 to 538?

Let’s take a break from the presidential campaign to consider a recreational math question posed by New York Times correspondent Binyamin Appelbaum. On Twitter, he wondered:

Is there any number of electoral votes between 0 and 538 that is impossible to amass, assuming electors are faithful?

Put another way, could a presidential candidate win any number of electoral votes from 0 to 538?

The answer is intuitive if you know a key piece of electoral college trivia. But there’s still a fun question of how best to actually prove that intuition.

My best attempt below. Stop reading now if you want to figure it on your own.

Continue reading “Can a Candidate Win Any Number of Electoral Votes from 0 to 538?”

Five Myths about the 47 Percent

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.

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

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.




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

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.

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

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.

Financial Repression and China’s Extractive Elite

Financial repression and extractive institutions are two of the big memes in international economics today.

Financial repression occurs when governments intervene in financial markets to channel cheap funds to themselves. With sovereign debts skyrocketing, for example, governments may try to force their citizens, banks, and others to finance those debts at artificially low interest rates.

Extractive institutions are policies that attempt to redirect resources to politically-favored elites. Classic examples are the artificial monopolies often granted by governments in what would otherwise be structurally competitive markets. Daron Acemoglu and James Robinson have recently argued that such institutions are a key reason Why Nations FailInclusive institutions, in contrast, promote widely-shared prosperity.

Over at Bronte Capital, John Hempton brings these two ideas together in an argument that Chinese elites are using financial repression to extract wealth from state-owned enterprises. In a nutshell, he believes Chinese authorities have artificially lowered the interest rates that regular Chinese citizens earn on their savings (that’s the repression), and have directed these cheap funds to finance “staggeringly unprofitable” state enterprises that nonetheless manage to spin out vast wealth for connected elites and their families.

I don’t have the requisite first-hand knowledge to judge his hypothesis myself. But both his original post and recent follow-up addressing feedback are worth a close read.