Search

A longstanding concern of state and local governments is that a federal value-added tax (VAT) could severely limit their reliance on sales taxes. But a federal VAT could have even larger effects on...

We review the changing economic significance of various business entity types since the Tax Reform Act of 1986 (TRA86) and the implications of these changes for the design of tax policy. In particu...

Tax expenditures measure the cost of spend? ing programs run through the tax system. In preparing their annual lists, the Office of Management and Budget (OMB) and Congress's Joint Committee on Taxation (JCT) define tax expenditures as deviations from the "normal" individual and corporate income tax bases. OMB has recently also listed tax expenditures measured against consumption tax and compre? hensive income tax bases. Tax expenditures are "static," meaning that they assume no change in economic behavior if they are eliminated. Tax expenditure estimates may thus be much larger than revenue estimates for eliminating a par? ticular provision. The measurement of tax expenditures is controversial, mainly because there is no com? monly agreed tax baseline against which to measure departures. In spite of this and other measurement issues, most public finance econo? mists believe that measuring tax expenditures is an important part of good budget management because tax benefits can have the same effect on beneficiaries as direct spending programs, and impose similar opportunity costs in terms of higher taxes, reduced federal spending, and higher deficits. We should assess their effects on the federal budget and on achieving program objectives the same way we assess direct spend? ing programs. Non-business tax expenditures?the focus of this paper?are large relative to the size of the economy and to total tax revenues.1 They rose sharply between 1976 and 1985, from 4.2 to 6.4 percent of GDP. They dropped between 1985 and 1990 as a result of the Tax Reform Act of

During the 1990s, US income-transfer and tax policies shifted towards trying to encourage work among low-income families. Optimal tax theory, however, suggests that work subsidies are usually an inefficient way to raise the incomes of poor families unless the work effort of recipients has external benefits and/or taxpayer/voters prefer redistributing income to the working poor rather than the idle poor. This paper discusses the conditions under which work subsidies may be economically efficient and assesses empirical evidence suggesting that welfare reform and expansions of the EITC have increased work effort among low income families, but is inconclusive about whether the policy shift has enabled them to advance beyond entry-level jobs or benefited their children.

This paper focuses on the design, development, and use of the Individual Taxpayer Burden Model (ITBM)— a microsimulation model developed jointly by IBM and the 1RS to estimate the amount of time an...

The case for a carbon tax is strong. A well-designed tax could efficiently reduce the emissions that cause climate change and encourage innovation in cleaner technologies. The resulting revenue could finance tax reductions, spending priorities, or deficit reduction — policies that could offset the tax’s distributional and economic burdens, improve the environment, or otherwise improve Americans’ well-being. But moving a carbon tax from the whiteboard to reality is challenging. To help policymakers, analysts, and the public address those challenges, this report examines the what, why, and how of implementing a carbon tax and using the revenue it would generate.

A carbon tax is a promising tool for discouraging the greenhouse gas emissions that cause climate change. In principle, a well-designed tax could reduce the risk of climate change, minimize the cost of emissions reductions, encourage innovation in low-carbon technologies, and raise new public revenue. But designing a real-world carbon tax poses significant challenges. We analyze those challenges from a public finance perspective, emphasizing three tax policy design issues: setting the tax rate, collecting the tax, and using the resulting revenue. The benefits of a carbon tax will depend on how policymakers address those issues.

It is widely recognized that the current U.S. corporate income tax is flawed, particularly in its treatment of foreign‐source income. These flaws are amplified by the high U.S. statutory tax rate. Unfortunately,current reform proposals fail to resolve the fundamental contradictions in the current corporate income tax structure.The current system and the reform proposals attempt to base corporate taxation on the source of the corporate income, the residence of the corporation, or a combination of those two factors. The problem is that neither source nor corporate residence can be easily defined. Any viable reform must either find an agreed‐upon way to define those terms or must restructure the tax system in a way that avoids the need to define them.In this report, we describe the challenges facing the corporate income tax and discuss two structural reform options that could address them. One option would seek international agreement on how to allocate income of multinational corporations among countries. The other option would eliminate the corporate income tax, but would tax American shareholders of publicly traded companies at ordinary income tax rates on their dividends and accrued capital gains. We discuss the benefits and limitations of each option.

Measuring the size of government is not simple. Standard measures omit important aspects of government action such as the many deductions, credits, and other tax preferences used to influence resource allocation. We argue that many tax preferences are effectively spending. Traditional measures of government size thus understate both spending and revenues. Reductions in spending-like tax preferences are tax increases in traditional budget accounting but are effectively spending reductions; increasing marginal tax rates raises both taxes and spending in our expanded measure. Some tax increases thus reduce government, while others expand it.

The federal government is larger than conventional budget measures suggest. Many tax preferences are effectively spending programs. Adding these spending-like tax preferences to federal outlays and receipts makes the government appear about 4 percent of GDP larger. The 1986 tax reform cut these benefits, but they have since rebounded to a larger share of GDP than before. Using this broader measure of government size, many base-broadening reforms viewed as tax increases would be reclassified as spending cuts. Raising marginal tax rates would be recorded not only as a tax increase but also as a spending increase because it would boost the value of many tax preferences. Cutting tax preferences can thus reduce the size of government, while raising tax rates would increase it. Treating user fees as government receipts rather than negative spending, finally, leads to similar changes in measures of government size.

The value of the tax preference for pensions depends on the marginal tax schedule and on the tax treatment of income from assets held outside a pension account. We examine the change over time in the value of pension investing, accounting for changes in the tax schedule and in the treatment of equity and bond income. We find that changes in U.S. tax law, especially the treatment of equity income, have led to sizeable changes in the value of the pension tax preference. On balance the value of the pension tax preference to worker-savers is modestly lower than it was in the mid-1980s and substantially lower than it was in the late 1980s.

timates from the literature to simulate the effective tax rate on assets that produce effects on tax revenue and economic effi- capital gain than on assets that produce ciency of a 15 percent maximum tax rate ordinary income. This distorts the choice on capital gains. In estimating efficiency among assets, leading to overinvestment effects, marginal income tax rates are ad- in gains-producing assets, and induces justed to hold tax revenue constant. The investors to incur transactions costs to results depend on the responsiveness of convert ordinary income to capital gain. capital gains realizations and corporate One important source of conversion of dividend payouts to their respective tax income to capital gain is the substitution prices. With payouts fixed, efficiency in- of corporate retained earnings for divicreases but revenue declines except with the dend payouts. Households may prefer divhighest estimated realizations response. idends to retained earnings because such With payouts endogenous, revenue de- payouts convey useful information and clines. The s@gnof the efficiency change increase shareholder control of the firm.' depends on the realizations response. The higher effective tax rate on dividends than on retained earnings, however, reNDER the U.S. income tax, as in most duces the desired payout rate. The optiUOECD countries, capital income that mal payout rate is one at which the inpeople accrue in the form of increases in formation (and other) benefits of an extra asset values (capital gains) is taxed only dollar of dividends to shareholders exwhen the gain is realized by sale or ex- actly equals the marginal net tax costs of payouts to the weighted average share

Introduction Since 1980 there have been major changes in federal tax policy. The U.S. Congress enacted five major tax bills: the Economic Recovery Tax Act of 1981 (ERTA), the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA), the Deficit Reduction Act of 1984 (DEFRA), the Tax Reform Act of 1986 (TRA), and the Omnibus Budget Reconciliation Act of 1990 (OBRA). Congress also had previously enacted the Social Security Amendments of 1977, which increased payroll tax rates throughout the decade, and later enacted the Social Security Amendments of 1983, which accelerated the effective date of those increases and made a portion of social security benefits taxable under the individual income tax. These changes in the law have resulted in a much different tax structure today than the law in effect in 1980. The income-tax rate schedule is lower and flatter, and many tax preferences under the individual income tax have been scaled back or eliminated. The top corporate tax rate is lower, but the investment tax credit has been eliminated and other business investment incentives, which were expanded in ERTA, were subsequently scaled back. The base for payroll taxes is wider and rates are higher. Some excise-tax rates are higher today than at the beginning of the decade, offsetting in part the decline in the real value of excise-tax rates with inflation.

ferent oil and gas properties are derived by computing the required profitability on new investments, given the tax laws and an assumed after-tax discount rate. Our analysis shows that oil and gas extraction is taxed more favorably than most other business activities under both current law and the law in effect prior to the Tax Reform Act of 1986 (TRA). The effective tax rate on oil and gas investments is very sensitive to characteristics of the property and of the company developing it, but it is lower than effective tax rates on other industries in all the cases we examined. The low effective tax rates on oil and gas properties result from favorable rules for recovery of capital costs. These include expensing of most intangible drilling costs and five-year recovery of the non-expensed portion; expensing of dry holes and abandoned properties; and, for non-integrated producers, percentage depletion.2 The benefits of favorable capital recovery rules are reduced to some degree by provisions of the alternative minimum taxes