U.S. Federal Tax Reform:Prospects and Possibilities James Poterba MIT & NBER CCER-NBER Meeting, 26 June 2012
The U.S. “Fiscal Cliff”: 1/1/2013   Expiration of 2001 and 2003 Tax Cuts   End of 2011-12 Payroll Tax Relief (2    Perce...
Expiring 2001 and 2003 Tax LawsTax Provision       Current Rate     “Reversion” RateTop Rate on         35%              3...
Broader Background   CBO Projects Deficit Reduction of 5.1% of GDP    (2013 vs. 2012) Under “Current Law”: Growth    Drop...
Political Economy of DeficitReduction   Two Leading Options:       “Kicking the Can Down the Road”: Near-Term        Agr...
Options for Increasing TaxRevenues   Raise Income Tax Rates   Broaden the Income Tax Base   Raise Other Existing Taxes ...
Federal Personal Income Tax   2010: Individual Income Tax Revenue =    $944.5B (6.5% of GDP)   Tax Credits & Personal Ex...
Federal Income Tax Data, 2010AGI Level   Taxable Taxable Federal            Returns Income Income Tax< $30K      23.1%   4...
Top Income Tax Returns, 2007-10  AGI Level 2007   2008   2009   2010  >$200K    4.520M 4.376M 3.924M 4.258M  > $500K   1.0...
Effective Federal Tax Rates: CBO                  Federal Individual   Total Effective                  Income Tax Rate   ...
Revenue Option 1: Raising TopTax Rates   Doubling Tax Collected from Taxpayers with    AGI > $250K Yields About 3% of GDP...
“Taxable Income Elasticity” - Amsterdam,     1600s12
Revenue Option 2: Broadeningthe Tax Base   Eliminate or Scale Back Deductions (Caps,    Lower Rates, Phase-Outs)   Some ...
Cost of Tax Expenditures (% ofGDP)   Exclusions:       Employer Provided Health Insurance: 1.0%       Pension Contribut...
Taxing Employer-Provided HealthInsurance (EHI)   Effect on After-tax Price Can Exceed 35%    Reduction with Payroll Tax; ...
Gruber (2011) Estimates of Changein Insurance Coverage from TaxingEHI   Currently 156M households with EHI, 49M    withou...
Could Imputed Rent on Owner-Occupied Homes be Taxed?   Limiting Mortgage Interest Deduction (MID)    vs. Taxing “Imputed ...
Distribution of Benefits fromCurrent Tax Treatment of HousingIncome Range   User Cost (2003)< $40K         6.8%$40-75K    ...
New Revenue Sources   Value Added Tax       “Money Machine” vs. Burden on Low-Income        Households       1% VAT Wou...
“Efficiency” of VAT (IMF) Country VAT        “Policy Compliance         Efficiency Gap”    Gap France   51%      45%     7...
Retail Gasoline Prices (IEA, 1/12) Country     Retail Price Tax France      $7.54/gal.   $4.22/gal. Germany     7.44      ...
What Lies Ahead?   Politics Will Dominate Economics   “Grand Bargain” vs. Incremental Changes   Fiscal Consolidations D...
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James Poterba(new)

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James Poterba fixes all of the USA debt tax problems without considering the most direct and simple solution of all....... STOP GOVERNMENT SPENDING

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James Poterba(new)

  1. 1. U.S. Federal Tax Reform:Prospects and Possibilities James Poterba MIT & NBER CCER-NBER Meeting, 26 June 2012
  2. 2. The U.S. “Fiscal Cliff”: 1/1/2013 Expiration of 2001 and 2003 Tax Cuts End of 2011-12 Payroll Tax Relief (2 Percentage Point Reduction: 12.4 to 10.4%) Sequester of Federal Spending Associated with 2011 Debt Limit “Compromise” JUST BEYOND THE CLIFF: Early 2013 New Debt Limit Increase is Needed
  3. 3. Expiring 2001 and 2003 Tax LawsTax Provision Current Rate “Reversion” RateTop Rate on 35% 39.6%Ordinary IncomeOther Rates on 10, 25, 28, 33 15, 28, 31, 35Ordinary IncomeRate on Long-Term 15% 20%Capital GainsTax Rate on 15% Ordinary Income –Dividend Income Up to 39.6%Phase Out of Eliminated in Will ReturnItemized Deductions Current Lawand Exemptions 3
  4. 4. Broader Background CBO Projects Deficit Reduction of 5.1% of GDP (2013 vs. 2012) Under “Current Law”: Growth Drops from 4.4% to 0.5% for 2013 Taxes Rise for 83% of Households (avg $3701) Political Tension over Relative Priority to Assign to Fiscal Consolidation and Fiscal Stimulus U.S. Long-Term Treasury Interest Rates Remain at Remarkably Low Levels (1.6% for 10-year Bonds)
  5. 5. Political Economy of DeficitReduction Two Leading Options:  “Kicking the Can Down the Road”: Near-Term Agreement that Sidesteps Long-term Issues  “Grand Compromise” Unlikely that Any Sustainable Long-Term Solution will not Involve Tax Reform and Tax Increases
  6. 6. Options for Increasing TaxRevenues Raise Income Tax Rates Broaden the Income Tax Base Raise Other Existing Taxes (Gasoline Tax?) Introduce New Taxes: VAT
  7. 7. Federal Personal Income Tax 2010: Individual Income Tax Revenue = $944.5B (6.5% of GDP) Tax Credits & Personal Exemption Have Reduced the Fraction of Households Paying Taxes 143M Tax Returns in 2010, 84.5M with Income Tax Liability Note: Virtually All Wage-Earners Pay Payroll Taxes (7.65% on Workers, Firms)
  8. 8. Federal Income Tax Data, 2010AGI Level Taxable Taxable Federal Returns Income Income Tax< $30K 23.1% 4.6% 1.7%$30-50K 22.0 10.0 5.0$50-100K 33.5 26.4 17.7100-250K 18.3 30.1 30.0> $250K 3.2 28.8 45.6(2.73M ret)
  9. 9. Top Income Tax Returns, 2007-10 AGI Level 2007 2008 2009 2010 >$200K 4.520M 4.376M 3.924M 4.258M > $500K 1.039M 899K 729K ---- > $ 2M 155K 121K 85K ----
  10. 10. Effective Federal Tax Rates: CBO Federal Individual Total Effective Income Tax Rate Federal Tax Rate 2000 2005 2000 2005Lowest Quintile -4.6 -6.5 6.4 4.3Second Quintile 1.5 -1.0 13.0 9.9Middle Quintile 5.0 3.0 16.6 14.2Fourth Quintile 8.1 6.0 20.5 17.481-90% 11.3 8.7 23.4 20.396-99% 18.0 15.2 28.1 25.799-99.5 23.1 19.4 31.8 29.799.5-99.9 25.2 20.7 33.6 31.299.90-99.99 25.6 19.9 34.2 32.1Top 0.01% 22.1 17.0 32.0 31.5
  11. 11. Revenue Option 1: Raising TopTax Rates Doubling Tax Collected from Taxpayers with AGI > $250K Yields About 3% of GDP Doubling Tax for >$1M Yields 1.2% of GDP BUT Reported Taxable Income Would Decline as Marginal Rates Rise (ETI of 0.3?) Example: Raising τ from .35 to .50 Could Reduce Taxable Income by 8%: Instead of 43% Increase, Get 32% Rate Increases Raise Efficiency Cost of Tax System (Square of Marginal Tax Rate)
  12. 12. “Taxable Income Elasticity” - Amsterdam, 1600s12
  13. 13. Revenue Option 2: Broadeningthe Tax Base Eliminate or Scale Back Deductions (Caps, Lower Rates, Phase-Outs) Some Policies Would Increase Efficiency Challenges:  Interest Group Politics  Current Beneficiaries Don’t Consider these “Benefits”: 60% of Lifetime Learning Credit and Home Mortgage Interest Deduction Users Say “No Use of Government Benefits”
  14. 14. Cost of Tax Expenditures (% ofGDP) Exclusions:  Employer Provided Health Insurance: 1.0%  Pension Contributions & Earnings: 0.9% Deductions:  Mortgage Interest: 0.8%  Lower Rates on Dividends and Capital Gains: 0.5%  State/Local Taxes: 0.3%  Charitable Giving: 0.3%
  15. 15. Taxing Employer-Provided HealthInsurance (EHI) Effect on After-tax Price Can Exceed 35% Reduction with Payroll Tax; Affects Demand Firm-Level Responses Matter: Elasticity of Demand -0.7 (Gruber-Lettau) Including EHI on Individual Tax Returns Requires Valuing Person-Specific Value of Corporate Insurance Purchases How to Handle Age- and Location-Related Cost Differences?
  16. 16. Gruber (2011) Estimates of Changein Insurance Coverage from TaxingEHI Currently 156M households with EHI, 49M without Insurance Estimated Effect with Repeal of Income and Payroll Tax Exemption: 15M more uninsured Repeal Income Tax Exemption Only: 9M additional uninsured
  17. 17. Could Imputed Rent on Owner-Occupied Homes be Taxed? Limiting Mortgage Interest Deduction (MID) vs. Taxing “Imputed Rent” Current MID Reduces Average “Marginal” User Cost About 7% (Poterba-Sinai) How Could Imputed Rent be Taxed? Set Rent as Fixed Percentage of House Value? Amount of Net Imputed Rent Depends on Depreciation Assumption Ultimately Similar to a Property Tax
  18. 18. Distribution of Benefits fromCurrent Tax Treatment of HousingIncome Range User Cost (2003)< $40K 6.8%$40-75K 5.9$75-125K 5.4$125-250 5.0$250K+ 4.6
  19. 19. New Revenue Sources Value Added Tax  “Money Machine” vs. Burden on Low-Income Households  1% VAT Would Yield About $50B/Year (3% VAT = 1% of GDP) (N.B. Personal Consumption Spending = $10.9T in 2011) Environmental Taxes  2009 Budget Projected $80B/Year from Auctioning Greenhouse Gas Permits  Gasoline Tax: $1/gallon yields $140B/year
  20. 20. “Efficiency” of VAT (IMF) Country VAT “Policy Compliance Efficiency Gap” Gap France 51% 45% 7% Germany 54 37 14 Italy 41 44 27 Sweden 55 43 4 U.K. 48 44 15
  21. 21. Retail Gasoline Prices (IEA, 1/12) Country Retail Price Tax France $7.54/gal. $4.22/gal. Germany 7.44 4.44 U.K. 7.83 4.71 U.S. 3.38 0.41
  22. 22. What Lies Ahead? Politics Will Dominate Economics “Grand Bargain” vs. Incremental Changes Fiscal Consolidations Do Happen
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