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James Poterba(new)
 

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

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) James Poterba(new) Presentation Transcript

    • 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 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
    • 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
    • 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)
    • 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
    • Options for Increasing TaxRevenues Raise Income Tax Rates Broaden the Income Tax Base Raise Other Existing Taxes (Gasoline Tax?) Introduce New Taxes: VAT
    • 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)
    • 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)
    • 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 ----
    • 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
    • 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)
    • “Taxable Income Elasticity” - Amsterdam, 1600s12
    • 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”
    • 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%
    • 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?
    • 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
    • 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
    • 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
    • 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
    • “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
    • 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
    • What Lies Ahead? Politics Will Dominate Economics “Grand Bargain” vs. Incremental Changes Fiscal Consolidations Do Happen