Tax Policy Fiscal Context and Economic Concepts Molly Sherlock Washington & Lee University January...
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Transcript of Tax Policy Fiscal Context and Economic Concepts Molly Sherlock Washington & Lee University January...
Tax PolicyFiscal Context and Economic
Concepts
Molly Sherlock
Washington & Lee University
January 23, 2015
The U.S. Fiscal PositionRevenues and Outlays: FY1970 – FY2013
Source: CRS Report R43472, The Federal Budget: Overview and Issues for FY2015 and Beyond, November 4, 2014, by Mindy Levit.
2
Persistent Budget Deficits Increasing Debt
3
Why is Spending Projected to Increase?
4
Changing Demographics are Increasing Pressure on the Federal Budget
5
6
Federal Revenue by Source: 1946-2017FY
46FY
49FY
52FY
55FY
58FY
61FY
64FY
67FY
70FY
73FY
76FY
78FY
81FY
84FY
87FY
90FY
93FY
96FY
99FY
02FY
05FY
08FY
11FY
14FY
17
0%
300%
600%
900%
1200%
FY14-FY19 are estimates
Individual Income Taxes
Social Insurance and Retirement Receipts
Corporation Income Taxes
Excise Taxes
Other
% of GDP
7
Individual Income 47%
Other 6%
Corporate Income 10%
Excise 3%
Payroll 34%
Federal Revenue by Source: FY2013
Why Tax Reform? Raise additional revenue?
U.S. fiscal position is “unsustainable” Over time… spending will have to be cut, or
taxes increased
Improve the system? What does an improvement look like?
Economic tools for evaluating tax policy
8
Economic Concepts: Equity
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Is the tax system “fair”?
Two concepts for evaluating fairness: Vertical equity
Higher burdens on those with a greater ability to pay Horizontal equity
Equal treatment of equals
Evaluating Vertical Equity
10
Evaluating Horizontal Equity
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Those with “equal ability to pay” should pay equal taxes
Measuring ability to pay Casualty losses Medical expenses
Similarly situated individuals Marriage penalties Homeowners vs. renters
12
Taxes distort behavior
A goal of tax policy Meet revenue targets
with minimal distortions
Economic Concepts: Efficiency
Balancing equity and efficiency
13
Cutting taxes on capital (investment) income
Wage credits for low-income workers
Economic Concepts: Simplicity and Revenue Sufficiency
14
What makes taxes complicated? Measuring income Taxes as social policy
The purpose of taxes is to pay for the government’s activities
Income Taxes: Computing Taxable Income
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Average Tax Rates Paid
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About those “Loopholes”FY2013 Tax Expenditures (billions)
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Provision Amount
1 Exclusion for employer-sponsored health insurance 294.3
2 Mortgage interest deduction 100.9
3 401(k) plans 72.7
4 Lower rate on capital gains 62.0
5 EITC 55.7
6 Pensions 52.3
7 State and local tax deduction (excluding property tax) 46.3
8 Tax deferral for multi-nationals 41.8
9 Child tax credit 40.8
10 Charity deduction (other than education, health) 39.8Source: US Budget, Analytical Perspectives, FY2013Note: Health insurance estimate includes $113.7 billion payroll tax expenditure; EITC and child tax credit include outlays of $52.6 and $22.4 billion, respectively
And what about those “47%”?
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