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Major Tax Issues in 2016 (Commentary)
William G. GaleAaron Krupkin

Looking specifically at taxes, Brookings Senior Fellow William Gale and Research Assistant Aaron Krupkin write that the US does not have a good tax system that raises the revenues needed “to finance government spending in a manner that is as simple, equitable, and growth-friendly as possible.” Noting that often simply discussing a tax proposal publicly can kill it, they highlight five general areas where tax policy could be improved: raising long-term revenue; increasing environmental taxes; reforming the corporate tax; treating low- and middle-income earners equitably and efficiently; and ensuring the appropriate taxation of high-income households. “Comprehensive tax reform is easy to talk about, but hard to do. The pursuit of sweeping tax simplification is a noble goal, but quixotic.”

Published: 11/25/15
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Biennial Budgeting (Testimony)
Rudolph G. Penner

In this testimony before the US House of Representatives Committee on the Budget, Institute fellow Rudy Penner discussed the problems that could arise from biennial budgeting including needing to rely more heavily on forecasts which may contain errors, fewer opportunities for oversight, and fewer opportunities to work through the complexities of the budget.

Published: 11/18/15
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Should We Tax Internalities Like Externalities? (Research Report)
Donald Marron

Does the traditional rationale for taxing externalities also apply to internalities? Yes, if the goal is maximizing efficiency. Efficient taxes reflect any harms consumers overlook, whether to others or themselves. Yes with caution, if the goal also includes equity. Internality taxes fall most heavily on consumers who overlook future costs, a group that tends to have lower incomes. No if the goal is improving the well-being of people who consume harmful products. That paternalistic goal generally implies lower taxes than do efficiency or welfare maximization. In fact, the optimal paternalistic tax is often zero.

Published: 11/10/15
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The ACA's "Cadillac" Tax Versus a Cap on the Tax Exclusion of Employer-Based Health Benefits: Is This a Battle Worth Fighting? (Research Brief)
Linda J. BlumbergJohn HolahanGordon Mermin

Opposition to the ACA’s “Cadillac” tax is growing. This excise tax applies to employer health benefits exceeding a threshold. There has been broader support over time for a cap on the tax exclusion of employer contributions to health insurance, including from many who now want to repeal the Cadillac tax. We show that the distributional effects of the excise tax and a cap on the exclusion are similar, except when firms choose to pay the excise tax instead of reducing benefits to avoid it (very few employers are expected to leave benefits at prior levels and pay the tax).

Published: 10/22/15
Availability:   PDF

Discerning the True Policy Debate over Donor-Advised Funds (Research Brief)
C. Eugene SteuerleEllen Steele

This brief summarizes discussion at a June 2015 Tax Policy and Charities Project session where the nation’s leading Donor Advised Fund (DAF) providers, nonprofit leaders, and policy experts sought to clarify and distinguish the policy issues and debates surrounding DAFs, as well as to lay out a research agenda for the DAF field. This brief also contains a useful summary comparison, prepared by Victoria Bjorklund, retired partner of Simpson Thacher, of major differences in the laws and regulations applicable to public charities providing DAFs, other public charities and private foundations.

Published: 10/21/15
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Using Supplemental Nutrition Assistance Program Data in Earned Income Tax Credit Administration: A Case Study of Florida SNAP Data Linked to IRS Tax Return Data (Research Report)
Elaine MaagMike PergamitDevlin HansonCaroline RatcliffeSara EdelsteinSarah Minton

The earned income tax credit (EITC) is the most effective antipoverty program targeted to working-age households, delivering $60 billion annually. Critics note a relatively high error rate – with errors often stemming from complicated rules about who counts as a “qualifying child”. We analyze data from the Florida Supplemental Nutrition Assistance Program (SNAP) to see if it could be useful in EITC program administration. We found that, except in limited circumstances, the information reported to SNAP is not detailed enough and not of high enough quality to conclusively verify eligibility. Congress could improve EITC administration by simplifying the qualifying child rules.

Published: 10/02/15
Availability:   PDF

Governing with Tight Budgets: Long Term Trends in State Finances (Research Report)
Norton FrancisFrank Sammartino

Changing demographics, technology, and inflation are creating an increasingly difficult environment for state budgets. An aging population puts more pressure on spending programs while reducing tax revenues from some sources. State sales tax revenue systems have not kept up as technology has changed the marketplace. Costs of government programs keep rising, particularly health care, while inflation erodes excise tax revenue. States must face these emerging pressures as they continue to recover from the Great Recession. To keep a functioning government, legislators will need to make difficult tradeoffs between revenue increases and spending cuts. This brief examines the history and outlook of state revenues and expenditures with particular attention to the effects of the last recession on state fiscal policy.

Published: 09/11/15
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The Growth Mirage: State Tax Cuts Do Not Automatically Lead to Economic Growth (Research Brief)
William G. GaleAaron KrupkinKim Rueben

Cuts in top state income taxes are intended to raise economic growth, but could instead force punishing spending cuts, as revenues fall and states confront borrowing constraints. Previous work shows no clear impact of state taxes on growth. In new research, we build on a widely cited study that identifies a robust negative relationship between tax rates and state growth. We find that the negative effects disappear when we extend the sample beyond 2000 and that the relationship is unstable over time and across taxes. Likewise, examination of recent state tax cuts reveals little evidence of tax cuts driving growth.

Published: 09/11/15
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The Fiscal Problem: Gone Today, Here Tomorrow (Research Report)
Alan J. AuerbachWilliam G. Gale

We provide new projections of the fiscal outlook over 10-year and longer-term horizons, based on the latest government estimates. The outlook has improved recently, but debt remains historically high as a share of GDP and is projected to rise further. While addressing this need not require current spending cuts, and while a financial meltdown due to debt is quite unlikely, the medium- and long-term debt outlook does raise concerns. To re-attain a debt-GDP ratio of 36 percent – the level prevailing in 2007 and the average in 1957-2007 – by 2040 would require policy changes of 3.0 percent of GDP.

Published: 09/09/15
Availability:   PDF

The Financial Consequences of Marriage for Cohabiting Couples with Children (Research Brief)
Elaine Maag

Tax and transfer programs can create significant bonuses and penalties for low- and moderate-income cohabiters with children. We find that federal tax laws can create marriage penalties that reach almost 10 percent of earnings for our hypothetical couples earning $40,000 or $50,000 a year. In contrast, a prototypical couple earning $20,000 a year could receive a marriage bonus in excess of 10 percent of earnings. Because the transfer programs we consider largely treat cohabiting parents the same as married couples, they create neither significant marriage penalties nor bonuses; however, there may be instances in which couples are misclassified and receive transfer benefits as separate households when cohabiting which could lead to marriage penalties from those programs.

Published: 09/07/15
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