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Glossary

Click the tax encyclopedia icons for more detailed definitions from the NTA Encyclopedia of Taxation and Tax Policy

A | B | C | D | E | F | G | H | I | J | K | L M | N | O | P | Q | R | S | T | U | V | W | X | Y | Z |

A

Accelerated depreciation. See depreciation.

AGI (Adjusted Gross Income). The amount of income counted to determine a filing unit's tax liability, measured before subtracting personal exemptions and the standard or itemized deductions. AGI excludes certain types of income received (e.g., municipal bond interest, most Social Security income) or payments made (e.g., alimony paid, IRA deductions, moving expenses). See also taxable income.
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Airport and Airway Trust Fund. A trust fund established in 1970 and financed by aviation excise taxes and dedicated to funding public investments in the air transport system. A substantial portion of the funding for the Federal Aviation Administration (FAA) comes from the trust fund.

Alternative minimum tax (AMT). A supplemental income tax originally intended to ensure that high-income filers do not take undue advantage of tax preferences to reduce or eliminate their tax liability. The most common "preference" items, however, are for state and local tax deductions, personal exemptions, and miscellaneous itemized deductions-not items normally thought of as preferences or shelters. Increasingly, this complicated tax applies to middle-class families, in part because its exemption was not indexed for inflation and in part because Congress did not adjust the AMT to coordinate with recent tax cuts.
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Average effective tax rate (ETR). A widely used measure of tax burdens, equal to tax paid divided by income. Depending on how taxes are measured, ETR may or may not account for the actual incidence of the tax. ETRs may be calculated with respect to a single tax, such as the individual income tax, or with respect to all taxes together (i.e., including payroll taxes, distributed corporate income taxes, and estate taxes).

B

Balanced Budget Act of 1997. Legislation designed to balance the unified budget by 2002 primarily by severely reducing the growth of Medicare spending and extending the limits on discretionary spending.

Baby Boomers. Cohort of Americans born between 1946 and 1964; 76 million strong, they represent the longest sustained population growth in U.S. history.

Base broadening. A term applied to efforts to expand the tax base, usually by removing deductions, exclusions and other preferences that are unrelated to measuring the tax base correctly. A broader base means that lower tax rates can raise an equal level of revenues can or that the same rates can raise more revenue.

Bracket creep. The movement of taxpayers into higher tax brackets with higher tax rates that occurs only because inflation raises nominal incomes. Under a progressive tax system, rising nominal income move taxpayers into higher tax brackets, even if their real income remains constant. Congress indexed tax rate schedules for inflation in the early 1980s to prevent general price increases from causing bracket creep. More recently, some analysts have expressed concern about real bracket creep brought about by rising real incomes.

Budget Scoring. The process of estimating the budgetary effects of pending and enacted legislation and comparing them to limits set in the budget resolution or legislation.

C

Capital cost recovery. Income tax features intended to allow businesses to deduct over time the costs of tangible capital assets that are used to produce income. It is similar to a depreciation allowance, except that "depreciation" usually relates the timing of the write-off to changes in asset value over time. (See depreciation.)

Capital Gains. The difference between the purchase and sale price of capital assets net of brokers' fees and other costs. Capital gains are generally taxable upon sale (or "realization"). Long-term gains, those realized after a year or longer, face lower tax rates than short-term gains, which are taxed the same as earned income. Taxpayers can deduct up to $3,000 of net losses (losses in excess of gains) each year against other income; taxpayers can carry over losses above that amount and deduct them from future gains.

Capital gains taxation. A tax on increases (or decreases) in the value of assets such as corporate stock, real estate, or a business. Such taxes are usually assessed only when gains are "realized" by sale or exchange. Unrealized gains generally are not taxed on the grounds that it would be difficult to estimate the assets’ value and could force owners to liquidate assets to pay the tax. Delaying taxation until realization, however, leads to certain distortions and creates opportunities for tax shelters.
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Carryover of basis. Transfer of basis value to a person to whom assets are transferred. The basis of an asset equals its cost, with some adjustments for items like depreciation. When an asset is sold, the realized gain equal sales price less basis (e.g., General Motors stock bought for $1,000 and sold for $3,000 has a basis of $1,000 and a gain of $2,000). The federal estate tax not only imposes no tax on unrealized capital gains in the decedent’s estate, but also allows heirs to set the basis of an inherited asset equal to the asset’s value on the data the decedent died. (In the example, the heirs gets to treat $3,000 as their basis even though no one ever paid tax on the $2,000 of gains). Carryover of basis would require heirs to assume the decedent’s basis for all inherited assets ($1,000 in the example). Under current law, beneficiaries of gifts from living donors must carry over the donor’s basis. However, the 2001 tax act temporarily eliminates the estate tax and requires carryover of basis for the estates of people who die in 2010.

Cash Balance Plans. A type of hybrid pension plan in which employers regularly set aside a given portion of salary for each employee and credit interest on the accumulated contributions.

Cash Income. A broad income concept used for distribution tables similar to the measures used by the Joint Committee on Taxation and Treasury's Office of Tax Analysis. Cash income equals adjusted gross income (AGI) minus taxable state and local tax refunds, plus total deductions from AGI (IRA deductions, student loan interest deduction, alimony paid, one-half of self employment tax, moving expenses, penalty on early withdrawal of savings, self-employed health insurance deduction and medical savings account deduction, Keogh and self-employed SEP and SIMPLE plans), non-taxable pension income, tax-exempt interest, non-taxable social security benefits, cash transfers, worker's compensation, employer's contribution to tax deferred retirement savings plans, employer's share of payroll taxes, and corporate tax liability.

Charitable deductions. Deductions allowed for gifts to charity. Since 1917, individual federal taxpayers have been allowed to deduct gifts to charitable and certain other nonprofit organizations. Corporations are also allowed a deduction under a stricter limit. Among other reasons, the deduction was intended to subsidize the activities of private organizations that provide viable alternatives to direct government programs.
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Child and dependent care credit (CDCTC). A tax credit based on eligible child care expenses incurred by some taxpayers deemed to be gainfully employed or students. The credit varies with the expenses incurred, the number of eligible children, and the taxpayers AGI. A separate exclusion is available for some employer-provided child care.
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Child Credit (CTC). A tax credit of $1,000 per qualifying child (in 2008). The credit is partially refundable for filers with earnings over a threshold ($11,750 in 2007), which is indexed for inflation. The refundable portion is limited to 15 percent of earnings above the threshold.
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CHIP. (See State Children's Health Insurance Program)

Circuit-breakers. Mechanisms that provide relief for an individual's property tax obligation on the basis of the person's age, income level, or disability.

Consumer Price Index. A measure of the change over time in the prices, inclusive of sales and excise taxes, paid by urban households for a representative market basket of consumer goods and services.

Consumption Tax. Tax on goods or services, more often levied by states and local governments (as sales taxes) than the federal government. Some propose to replace the individual income tax with a broad-based consumption tax such as a value added tax or a consumed income tax.
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Corporate Income Tax. A tax levied on corporate profits. A corporation's taxable income is its total income minus allowable expenses and capital depreciation.

Counter-cyclical policy. Fiscal or monetary policy that moves counter to economic cycles, such as cutting taxes in a time of recession or raising interest rates during inflationary periods. Fiscal incentives have traditionally been associated with the macroeconomic theories of John Maynard Keynes.

D

Deduction. A reduction in taxable income for certain expenses. Some deductions such as that for contributions to an Individual Retirement Account (IRA) reduce AGI. Most deductions, such as those for home mortgage interest and state and local taxes, are only available to those who itemize deductions. Most taxpayers choose not to itemize and instead claim the standard deduction because it provides a greater tax benefit. Because marginal tax rates increase with taxable income, deductions benefit high-income more than low-income taxpayers. Deductions cannot reduce taxable income below zero.

Deficit-Neutral. A term applied to legislative bills or proposals that pay for themselves over some budget period-for instance, by combining in a single proposal a spending increase and fully offsetting tax increases. (See also revenue-neutral.)

Defined Benefit Retirement Plan (DB plan). A retirement plan that guarantees a specified retirement payment beginning at a certain age and after a specified period of service.

Defined Contribution Retirement Plan (DC plan). A retirement program in which each employee has an individual account that accumulates employee contributions, employer contributions, and investment earnings. (Also known as individual account plans.)

Dependent. An individual supported by a tax filer for over half of a calendar year. Federal tax law stipulates five tests to determine whether a filer may claim someone as a dependent and thus qualify for an exemption: a relationship test, a joint return test, a citizen-or-resident test, an income test, and a support test. In 2008, a tax filer may reduce taxable income by $3,500 for each dependent exemption.

Depreciation. A measurement of the declining value of assets over time because of physical deterioration or obsolescence. In practice, tax depreciation is calculated by a schedule of deductions, usually over the asset’s "useful life" specified in the tax code through which the full cost of an asset can be written off. Accelerated depreciation means a speed-up in deductions so that more can be taken in earlier years.

Distortion. Changes in behavior due to taxes, government benefits, monopolies, and other forces that interfere in the market. For example, employees may choose to work fewer hours because taxes reduce their after-tax wage.

Distribution Table. A table that details how a proposal or policy affects the distribution of tax burdens across income categories, demographic groups, or sets of taxpayers defined by other characteristics.

Dividends. Profits distributed by a corporation to its shareholders. Under 2008 tax law, most dividends are taxed at the same lower tax rates that apply to capital gains.

Double taxation of dividends. A controversial feature of tax systems that have both corporate and individual income taxes and that therefore tax corporate profits twice, once at the corporate level and again at the individual level when shareholders receive profits in the form of dividends.
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Dynamic Microsimulation Models. A type of computer model conceived by Guy Orcutt in 1957 that mimics mathematically the interacting behavior of decision makers (individuals, families, firms, and the like) within a larger system. Such models start with a sample population of decisionmakers drawn from large demographic databases, age the population forward through time, and simulate economic behavior, taxes, and participation in government programs to estimate or predict various factors such as revenues, government expenditures, and distributional effects.

Dynamic Simulation. Computer simulation of how individuals, households, or firms alter their work, saving, investment, or consumption behavior in response to changes in a law or policy, and how those effects feed back on tax revenues.

E

Earned Income Tax Credit (EITC). A refundable tax credit that supplements the earnings of low-income workers. The credit is a fixed percentage of earnings up to a base level, remains constant over a range above the base level (the "plateau"), and then phases out as income rises further.Those income ranges depend on both the taxpayer’s filing status and number of children in the taxpayer’s family. In contrast, the credit rate depends only on the number of children. Married couples with two or more children receive the largest credit, a maximum of $4,824 in 2008. Childless workers get the smallest credit, no more than $438 in 2008. Originally enacted in 1975, the EITC is now the largest federal means-tested transfer program.
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Economic Growth and Taxpayer Relief and Reconciliation Act of 2001 (EGTRRA). A tax bill that reduced most tax rates, increased the child tax credit and made it partially refundable, expanded tax-free retirement savings, reduced marriage penalties, increased the child and dependent care tax credit, and phased out the estate tax. Most provisions were scheduled to phase in slowly between 2001 and 2010, and then expire at the start of 2011. JGTRRA accelerated some of the EGTRRA tax cuts and added others.

Economic Income. A very broad income concept that includes cash income from all sources, fringe benefits, net realized capital gains, both cash and in-kind transfers, the employer’s share of payroll taxes, and corporate income tax liability. Treasury's Office of Tax Analysis developed a similar measure in the 1980s and used it for distribution tables until 2000. TPC follows the Congressional Budget Office practice of adjusting income for family size for the purpose of ranking households by income. Further discussion may be found on the TPC website.

Economic Recovery Tax Act (ERTA). Tax legislation enacted in 1981 that significantly reduced income taxes on individuals and businesses. The Tax Equity and Fiscal Responsibility Act (TEFRA) scaled back the cuts in 1982.

EGTRRA. See Economic Growth and Taxpayer Relief and Reconciliation Act of 2001.

Employee Stock Ownership Plans. Retirement plans that invest in securities of the corporation that establishes the plan.

Empowerment Zone. Small rural and urban geographic areas of economic distress eligible for special grants, business training, improved access to capital, tax benefits, and regulatory relief aimed at encouraging economic development and greater opportunity.

Enterprise zones. Geographically targeted tax, expenditure, and regulatory inducements used by state and local governments since the early 1980s and by the federal government since 1993. While they differ in their specifics, all the programs provide development incentives in an attempt to encourage private investment and increase employment opportunities.

Entitlements. Payments to individuals, governments, or businesses which, under law, must be made to all those eligible and for which funds do not have to be appropriated in advance. Major entitlement programs include Social Security, Medicare, Medicaid, and TANF.

ERISA (Employee Retirement Income Act of 1974). A law enacted to protect workers from the loss of benefits provided through the workplace; the law provides some protection for workers’ vested benefits from a retirement plan when the plan or its assets are mismanaged by the plan sponsor.

ERTA. See Economic Recovery Tax Act.

Estate tax. A tax levied on a person’s estate at the time of his or her death. The federal estate tax applies only to large estates, those worth over $2 million for people dying in 2008. No tax is owed on transfers to spouses or to charities and special provisions apply to farms and small businesses. Under current law, the tax will disappear entirely in 2010, only to reappear the following year under the provisions in 2001 law. (See also Gift Tax.)
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Excise Tax. Tax on specific goods and services, levied at federal, state, and local levels. The most common excise taxes are on gasoline, alcohol, and tobacco products.
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F

Federal Poverty Levels. See Poverty Levels.

Federal Fiscal Year (FY). The period commencing October 1 and ending September 30 of the following year. For example, fiscal year 2004 runs from October 1, 2003 to September 30, 2004. Prior to 1976, the fiscal year ran from July 1 through June 30. A transition quarter was used in 1976 to bridge the gap between FY 1976 and FY 1977.

Filing Status. All tax filers submitting tax forms to the IRS fall into one of five categories, depending on their marital status and family structure. A single person without children files as a single; a single parent with dependent children files as a head of household; a married couple, with or without children, files either as "married filing joint" or "married filing separate"; and a recent widow(er) may file as a qualifying widow(er), which is the same, in effect, as "married filing joint." All filers face the same rate schedule but standard deductions, bracket-widths, and qualification criteria for certain credits and deductions vary by filing status.

Flat tax. A proposal for fundamental tax reform that would replace the income tax system with a single-rate (or flat-rate) tax on businesses and individuals. Most flat tax proposals are designed to be consumption rather than income taxes, and most are really not "flat" because they grant an exemption at least for the first dollars of earnings.
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Foreign tax credit. A credit that allows U.S. residents to subtract foreign income taxes paid from the U.S. income tax due on income earned abroad.
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Funded Systems. (See also Pay-go Systems.) Retirement systems that are funded by contributions made during retirees’ working years rather than by contributions from younger people who are working.

G

General Revenue Sharing. An entitlement program that transferred federal funds to state and local governments with few restrictions on how those governments use the funds. Congress enacted revenue sharing in 1972 but allowed the program to expire in 1986.

Gift Tax. A tax levied on gifts in excess of a specified threshold. In 2007, no tax is levied on annual gifts of up to $12,000 per recipient; gifts in excess of the limit are taxable but no tax is paid until lifetime taxable gifts total more than $1 million. Any tax still due must be paid when the donor dies and is incorporated into the decedent’s estate tax. (See also Estate Tax.)

Gini Coefficient. A summary measure of distribution of income (or wealth or other quantity) across a given population. It ranges from 0 (perfect equality) to 1 (perfect inequality); higher values thus indicate greater inequality. The coefficient is useful for comparing levels of inequality over time or across populations. Note, however, that two populations may have the same Gini coefficient and thus same level of inequality overall, yet have differently shaped income distributions.

Gramm-Rudman-Hollings law. A law enacted in 1985 requiring that budget deficits be brought down to specified amounts and the budget be balanced by 1991. Failure to meet those goals would trigger automatic spending cuts. The law was replaced in 1990 with specific deficit reduction targets (and pay-as-you-go rules) unrelated to actual size of the deficit, as it varied with economic conditions. (See also Pay-as-you-go and caps.)

H

Health savings account (HSA). A special tax-favored account for deposits made to cover current and future health care expenses paid by the individual. Withdrawals from the account are tax free as long as they are used to pay for medical expenses. Enacted in 2003 as part of legislation providing drug benefits as part of Medicare, the tax preference is only available if the individual purchases a high-deductible health insurance policy.

Highway trust fund. A federal trust fund created in 1956 to finance highway construction and certain other federal spending on transportation. The fund keeps its revenues and outlays segregated from the rest of the federal budget.

Homeowner preferences. Income tax provisions that favor investments in owner-occupied housing. The mortgage-interest deduction and the property-tax deduction are two of the largest measured tax expenditure items. A less recognized but very important preference is the non-taxation of the "rental" stream of income a homeowner receives. Part of the return to a homeowner’s investment in housing is the use of the house; in contrast, a renter who invests savings in a bank account must pay tax on the account’s interest income.

Horizontal Equity. (See also Vertical Equity.) The concept that equals should pay the same amount of taxes and receive the same amount of transfer payments. Equality in the personal income tax is measured by income received within any one year after adjustment for tax preferences.
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Human Capital. Knowledge and skills that workers acquire through education, training, and experience.

Hybrid Pension Plan. An employer-sponsored retirement program, such as a cash balance plan or pension equity plan, that combines features of defined benefit and defined contribution plans.

I

Income Concept. A measure of income, typically used as the basis for a distribution table. See cash income and economic income.

Income Supports. Benefits that are either cash or similar to cash.

Indexation of the tax system. Annual adjustments to various parameters in the tax code to account for inflation and prevent bracket creep. Since 1981, many features of the federal individual income tax, including personal exemptions and tax brackets, have been indexed for inflation based on changes in the Consumer Price Index. For instance, with 5 percent inflation, a personal exemption of $1,000 would be raised to $1,050. More broadly, the term applies to all efforts to adjust measures of income to account for the effects of price inflation.(See also bracket creep.)

IRA (Individual Retirement Account). Retirement accounts funded by individuals through their own contributions or by rolling over benefits earned under an employee-sponsored plan.
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Itemized Deductions. Particular kinds of expenses that taxpayers may use to reduce their taxable income. The most common itemized deductions are for state and local taxes, mortgage interest, charitable contributions, medical expenses, and specified miscellaneous expenses. See also standard deduction.
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J

JGTRRA. See The Jobs and Growth Tax Relief Reconciliation Act of 2003.

The Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA). The 2003 tax act that accelerated the phase-in of tax rate reductions scheduled under EGTRRA, reduced the taxation of capital gains and dividends, accelerated increases in the child credit amount, and temporarily raised the exemption for the alternative minimum tax (AMT). Most provisions expire at the end of 2010.

L

Low-Income Housing Credit. A tax credit given to investors for the costs of constructing and rehabilitating low-income housing. The credit is intended to encourage the acquisition, construction, and/or rehabilitation of housing for low-income families. A limited amount of credits is allocated to state housing agencies, which distribute the credits to qualifying projects.
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Lump-sum Payment. A one-time payment typically representing the current, full value of an account such as the payout from an Individual Retirement Account or pension plan.

M

Marginal tax rate. The additional tax that would be paid on an additional dollar of income. It is a measure of the effect of the tax system on incentives to work, save, and shelter income from tax. Provisions such as the phase out of tax credits can cause marginal tax rates to differ from statutory tax rates.
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Marriage Bonus. The reduction in tax that a married couple owes because they must file as a couple rather than separately. Marriage bonuses result from the combination of treating a family as a single tax unit and progressive tax rates. In general, couples in which spouses have quite different incomes receive marriage bonuses. See also Marriage Penalty.

Marriage Penalty. The additional tax that a married couple pays because they must file as a couple rather than separately. Marriage penalties result from the combination of treating a family as a single tax unit and progressive tax rates. In general, couples in which spouses have similar incomes incur marriage penalties. See also Marriage Bonus.
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Medicaid. A federal entitlement program that reimburses states for a portion of the costs associated with providing acute and long-term care services to certain low-income individuals. States determine which services and categories of people, beyond the minimum required by federal law, to cover. States also establish payment rates for providers and administer the program.

Medical Savings Account (MSA). Personal funds established by individuals or their employers to pay current out-of-pocket medical costs and to accumulate funds for future expenses.

Medicare Part A. (See also Medicare Part B.) The part of Medicare that covers hospital services, skilled nursing facility services, and some home health care. Anyone over age 65 who is eligible for Social Security and persons under age 65 who have received Social Security disability payments for two years are eligible. Participants pay no premiums for Part A coverage.

Medicare Part B. (See also Medicare Part A.) Supplementary Medical Insurance for Medicare beneficiaries; provides physician services and other ambulatory care (such as outpatient hospital services and tests). Beneficiaries must pay a premium to join; premiums cover about one-fourth program costs. All persons over the age of 65 and other Medicare beneficiaries can enroll.

Metropolitan Statistical Area (MSA). An economically integrated region including and surrounding a central city; areas in an MSA outside the central city are suburbs.

Microsimulation. A process of calculating the value of a variable or set of variables at the individual level conditional on a set of parameter assumptions, often using a large data set with thousands of individual observations. The TPC microsimulation model, for example, calculates income tax liability, marginal tax rates, etc., for a sample of about 200,000 individual income tax returns. Population aggregates may be calculated based on the weighted sum of individual observations. The models are particularly useful for measuring the effects of a policy on various types of households or tax units.

Moral Hazard. The incentives created by certain policies that cause affected individuals or entities to engage in costly, undesirable, or counterproductive behaviors. (For example, drivers with collision insurance may drive a bit more recklessly.)

N

Nominal Income. Income that has not been adjusted for inflation and the consequent decrease in its value. See also real income.

Noncustodial Parent. Parent who does not live with his/her minor children.

Non-Filers. Persons or households who do not file tax returns. Nonfiling tax units-that is nonfilers grouped together as they would if they filed income tax returns-are included in the TPC database to get a complete picture of all households, not just those with comparatively high incomes who file income tax returns. Most non-filers do not work; many are elderly.

O

OASDI (Old Age, Survivors, and Disability Insurance). The Social Security programs that pay monthly benefits to retired workers and their spouses and children, to survivors of deceased workers, and to disabled workers and their spouses and children.

OASI (Old Age and Survivors' Insurance). The Social Security programs that pay monthly benefits to retired workers and their spouses and children and to survivors of deceased workers.

The Omnibus Reconciliation Act of 1987. Legislation that attempted to decrease the budget deficit through tax increases and expenditure decreases.

The Omnibus Budget and Reconciliation Act of 1990 (OBRA90). This act increased excise and payroll taxes, added the 31 percent income tax bracket, and introduced temporary high-income phase-outs for personal exemptions and itemized deductions. OBRA93 made these changes permanent. The 13 titles in this legislation affect most agencies and aspects of the federal budget-a number of provisions concerned Medicaid pharmacy program providers.

The Omnibus Budget and Reconciliation Act of 1993 (OBRA93). This act introduced the 36 percent and 39.6 percent income tax brackets, repealed the wage cap on Medicare payroll taxes, increased the portion of Social Security benefits subject to income taxation for those with higher incomes, made more workers with children eligible for the Earned Income Tax Credit and increased their benefits, and made permanent the temporary high-income phase-outs of the personal exemption and itemized deductions. Like OBRA90, this bill affected many entitlement programs. Overall, the bill was focused on deficit reduction.

Out year. In budget parlance, a future year beyond the period over which budget costs are tallied (in recent years, after a 5- or 10-year period over which costs are estimated).

P

Pay-as-you-go System. (See also Funded System.) A retirement system in which benefits for current retirees are paid for by taxes on today’s workers in return for the implicit promise that those workers will receive retirement benefits paid for by future workers. Social Security operates largely on this system.

Pay-as-you-go and caps. Provisions in the 1990 Budget Enforcement Act law that replaced Gramm-Rudman-Hollings (see above). Spending subject to appropriation was made subject to a separate series of annual caps. Pay-as-you-go rules (often called PAYGO) covered the rest of the budget: mandatory spending and revenues could not together increase the deficit in any bill when pay-as-you-go rules were enforced.

PAYGO. See Pay-as-you-go and caps.

Payroll Taxes. Taxes imposed on employers, employees, or both that are levied on some or all of workers' earnings. Employers and employees each pay Social Security taxes equal to 6.2 percent of all employee earnings up to a cap ($103,000 in 2008) and Medicare taxes of 1.45 percent on all earnings with no cap. Those taxes are referred to by the names of their authorizing acts: FICA (Federal Insurance Contributions Act) or SECA (Self-Employment Contributions Act), depending on the worker’s employment status. Employers also pay State and Federal Unemployment Taxes (SUTA and FUTA) that cover the costs of unemployment insurance.
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Personal exemption. A per-person amount of income that is shielded from income tax. In calculating taxable income, tax filers may subtract the value of the personal exemption times the number of people in the tax unit. The personal exemption-$3,500 in 2008-is indexed for inflation to maintain its real value over time.

PILOTS (Payments in Lieu of Taxes). Cash and in-kind contributions that a tax-exempt entity makes more or less voluntarily to a taxing body.

Poverty Guidelines. Income levels used to determine eligibility for participation in means-tested federal programs. The guidelines equal a base amount for each household plus a constant additional amount for each household member. One set of guidelines applies to the contiguous 48 states; Alaska and Hawaii each has its own set, as do U.S. territories. The guidelines are indexed annually to the Consumer Price Index. (See also Poverty Levels.)

Poverty Levels. (also called "poverty thresholds") The level of pre-tax cash income below which a family is considered to be officially "poor." Thresholds vary by family size, age of head, and number of children. When established in 1965, the thresholds were set at three times the cost of a minimally adequate diet and indexed annually for changes in the price of food. The basis for indexing changed to the Consumer Price Index for all goods and services in 1969. For a history of poverty thresholds, see Gordon M. Fisher, "The Development and History of the U.S. Poverty Thresholds - A Brief Overview." (See also: Poverty Guidelines.)

Price Indexing. (See also Wage Indexing). Adjusting monetary values by the change over time in prices. For example, many parameters in the federal individual income tax system are price-indexed annually. A prominent proposal to reform Social Security would price-index earnings to compute benefits, instead of the current wage indexing.

Progressive tax. A tax that claims a larger percentage of the income of higher-income households than from lower-income households. See also regressive tax.

Progressivity. A measure of how tax burdens increase with income. A progressive tax claims a proportionately larger share of income from higher-income than from lower-income taxpayers. Conversely, a regressive tax takes a larger share of income from lower-income households than from higher-income ones. Taxes that claim the same percentage of income from all taxpayers are termed "proportional."

Property Tax. A tax based on the value of property owned by an individual or household. In the United States, most property taxes are levied locally.Proposition 13. California's 1978 property tax relief proposition that limited the rate at which property taxes could increase and created marked disparities in tax burdens imposed on equivalent properties over time.

R

REA (Retirement Equity Act of 1984). An amendment to ERISA that provided some minimal rights for spouses. (See ERISA.)

Real income. The value of income after accounting for inflation. Real income is usually calculated by subtracting inflationary income (e.g., capital gains due to inflation) from nominal income. See also nominal income.

Refundable Tax Credit. A tax credit payable even if it exceeds an individual’s tax liability. Tax credits may generally be used only to reduce positive tax liability and are limited to the amount of tax the individual otherwise would owe. Unlike other tax credits, the refundable portion of a tax credit is scored as an outlay in government budget accounts-that is, it is treated the same as direct spending. (See, for example, earned income tax credit.)

Regressive tax. A tax that claims a larger percentage of the income of lower-income households than of higher-income households. See also progressive tax.

Rent-seeking. The search for extraordinary profits or returns due, for instance, to scarcity, monopoly, asymmetry of information, or segmentation of market demand into different price-sensitive categories.

Revenue Neutral. A term applied to tax proposals in which provisions that raise revenues offset provisions that lose revenues so the proposal in total has no net cost. (See also deficit-neutral.)

S

SCHIP See State Children’s Health Insurance Program.

SSDI (Social Security Disability Insurance). Social insurance that provides benefits to the disabled who qualify on the basis of years of work covered by social security. See also OASDI.

SSI (Supplemental Security Income). Provides a floor of protection as cash for those who become disabled or reach age 65 and have very low incomes and assets.

Stagflation. The combination of stagnant growth and high inflation, a situation that occurred in the United States during the 1970s.

Standard Deduction. A deduction that taxpayers may claim on their tax returns in lieu of itemizing deductions such as charitable contributions, mortgage interest, or state and local taxes. Typically, taxpayers with small deductible amounts that could be itemized choose to take the standard deduction. Single filers, heads of household, and married couples filing jointly have different standard deductions. Roughly two-thirds of taxfilers claim a standard deduction. See also itemized deductions.

State Children's Health Insurance Program (SCHIP). A program that gives grants to states to cover the cost of providing health insurance for children in families with income up to the greater of 200 percent of the federal poverty level or 50 percent above existing eligibility.

Sunset. Provision of a tax act that terminates or repeals other parts of the act on a certain date unless legislation is passed to extend them.

Supplemental Security Income. See SSI.

T

Taxable Income. The final income amount used to calculate tax liability. Taxable income equals adjusted gross income (AGI) less personal exemptions and the standard or itemized deductions.

Tax-After-Credits. A filer's calculated, final tax liability after all credits-such as the earned income tax credit, the child credit, the child and dependent care tax credit, and the foreign tax credit-have been applied. If this amount is less than taxes paid via withholding or estimated tax payments, the taxpayer receives the difference as a refund. If the amount exceeds taxes paid, the taxpayer must remit the difference as a final payment.

Tax Arbitrage. Making money purely by taking advantage of differences in rates. The most common form of tax arbitrage is borrowing to buy preferred assets, even when there is no net saving, to lower one's tax bill.

Tax arbitrage. Profiting from the different tax treatment of different assets, firms, or tax regimes in different countries, sometimes when that difference is the only reason for the transaction. The most common form of tax arbitrage is borrowing funds to buy tax-preferred assets and deducting the interest paid on the debt, even when that interest exceeds the investment return before taxes.

Tax Burden. The total cost of taxation borne by a household or individual. The burden includes not only the costs of taxes paid directly but also those taxes paid indirectly through lower wages or a reduced return on an investment. For example, in addition to the employee portion of payroll taxes, a worker may also bear the employer’s share in the form of lower compensation.

Tax Credit. A reduction in tax liability for specific expenses such as for childcare or retirement savings. Unlike deductions, which reduce taxable income, a tax credit reduces tax liability dollar for dollar. Nonrefundable credits may only offset positive tax liability; in contrast, if a refundable credit exceeds the taxpayer’s tax liability, the taxpayer receives excess as a refund (or negative tax). See also refundable credit.

Tax Expenditure. A revenue loss attributable to a provision of federal tax laws that allows a special exclusion, exemption, or deduction from gross income or provides a special credit, preferential tax rate, or deferral of tax liability. Tax expenditures often result from tax provisions used to promote social programs in place of direct spending.
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Tax Filers. Any individual, family, household, or other entity that files a tax return. Tax filers differ from taxpayers in that many tax filers have no tax liability and file returns only to receive amounts withheld from their paychecks or refundable tax credits. (Note that the Tax Policy Center includes in its sample of "tax filing units" not only tax filers but also nonfiling individuals, families, and households-that is, the groupings they would be in if they filed a tax return-to get a more complete picture of how taxes affect the entire population.)

Tax Filing Threshold. The level of income at which filing units of specific size and filing status first pay a tax before considering tax credits. The amount varies with filing status, allowable adjustments, deductions, and exemptions. Tax credits can further increase the amount of untaxed income.

Tax Filing Unit. A tax filing unit consists of an individual or married couple that would-if their income exceeded the relevant filing threshold-file an individual income tax return. The tax filing unit also includes any other persons who might be claimed as dependents on the unit’s tax return. For example, a single person who files a tax return for herself is one tax unit, as is a married couple with three children that files one tax return for the whole family. In contrast, a family of three in which each parent files a return as "married filing separate" and the working child files a separate return is considered three tax units.

Tax Liability. The amount of total taxes owed after application of all tax credits.

Tax Policy Center microsimulation model. A microsimulation model developed by the Tax Policy Center and based on data from the IRS Statistics of Income public use files. TPC uses the model to estimate how proposals would affect revenue, the distribution of tax burdens, and incentives to work and save. It is very similar to the models used by the Treasury Department, the Joint Committee on Taxation, and the Congressional Budget Office.

Tax Shelter. Activity that is designed specifically to avoid or evade tax liability and that provides no other economic benefit.

TRA86 (Tax Reform Act of 1986). Revenue-neutral legislation passed in 1986 that greatly simplified the tax code, lowered marginal tax rates, and closed corporate loopholes.

TRA97 (Taxpayer Relief Act of 1997). Tax legislation passed in 1997 that reduced capital gains tax rates, introduced the child credit, created education credits, raised the estate tax exemption level, created Roth IRAs, and increased the contribution limit for traditional IRAs.

U

Unemployment Insurance (or Unemployment Compensation). A government program that provides cash benefits to some jobless workers for limited periods. Supervised by the federal government, the state-run programs are funded by payroll taxes states impose on employers.

V

Value-added tax (VAT). A general tax on the sale of all goods and services based on the value each firm adds to a product (rather than, say, gross sales). Almost all VATs effectively tax consumption rather than income (e.g., they allow complete write-offs, rather than depreciation, of capital expenses). Designed to raise large amounts of revenue while minimizing a number of economic distortions, VATs are almost universal among developed countries other than the United States.
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Vertical Equity. The concept that those with greater needs should receive more from the government and those with greater means should pay more in taxes as a proportion of their income or wealth. See also Horizontal Equity.
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Vesting. An employee's right of ownership to retirement benefits, set by provisions of the retirement program. Federal law mandates that workers must own 100 percent of their employer contributions to the worker's retirement fund within six years of their joining the program.

W

Wage Indexing. (See also Price Indexing). Adjusting amounts by the change over time in average national earnings. The Social Security system currently uses wage-indexes earnings to compute Social Security benefits.

Welfare-to-Work (WtW). A federal grant program to fund training of hard-to-employ TANF recipients and noncustodial parents. Congress only funded the grant in FY 1998 and 1999 but because funds could be used over a five-year period, some WtW programs were still operating in early 2004.