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Author: Gale, William G.

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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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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
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Financial Transaction Taxes in Theory and Practice (Occasional Paper)
Leonard E. BurmanWilliam G. GaleSarah GaultBryan KimJim NunnsSteven Rosenthal

In response to the financial market crisis and Great Recession, there has been a resurgence of interest in financial transaction taxes (FTTs) around the world. We estimate that a well-designed FTT could raise about $50 billion per year in the United States and would be quite progressive. We discuss the effects of an FTT on various dimensions of financial sector behavior and its ambiguous effects on economic efficiency.

Published: 06/30/15
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The Relationship Between Taxes and Growth at the State Level: New Evidence (Research Report)
William G. GaleAaron KrupkinKim Rueben

The effects of state tax policy on economic growth, entrepreneurship, and employment remain controversial. Using a framework that in prior research generated significant, negative, and robust effects of taxes on growth, we find that neither tax revenues nor top income tax rates bear stable relations to economic growth or employment across states and over time. While the rate of firm formation is negatively affected by top income tax rates, the effects are small in economic terms. Our results are inconsistent with the view that cuts in top state income tax rates will automatically or necessarily generate growth.

Published: 05/01/15
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Effects of Income Tax Changes on Economic Growth (Research Report)
William G. GaleAndrew Samwick

This paper examines how changes to the individual income tax affect long-term economic growth. The structure and financing of a tax change are critical to achieving economic growth. Tax rate cuts may encourage individuals to work, save, and invest, but if the tax cuts are not financed by immediate spending cuts they will likely also result in an increased federal budget deficit, which in the long-term will reduce national saving and raise interest rates. The net impact on growth is uncertain, but many estimates suggest it is either small or negative. Base-broadening measures can eliminate the effect of tax rate cuts on budget deficits, but at the same time they also reduce the impact on labor supply, saving, and investment and thus reduce the direct impact on growth. However, they also reallocate resources across sectors toward their highest-value economic use, resulting in increased efficiency and potentially raising the overall size of the economy. The results suggest that not all tax changes will have the same impact on growth. Reforms that improve incentives, reduce existing subsidies, avoid windfall gains, and avoid deficit financing will have more auspicious effects on the long-term size of the economy, but may also create trade-offs between equity and efficiency.

Published: 09/09/14
Availability:   PDF

Student Loans Rising: An Overview of Causes, Consequences, and Policy Options (Research Report)
William G. GaleBenjamin H. HarrisBryant RenaudKatherine Rodihan

The share of households with student loans rose from 9 percent in 1989 to 19 percent by 2010, while inflation-adjusted median student debt rose by more than 50 percent. Rising debt burdens can affect numerous outcomes. For those in school, loans may affect completion rates, choice of major, and academic performance. After students graduate, debt can impact career choice and pursuit of a graduate education. Loan burdens can also affect decisions later in life, such as homeownership, marriage and saving. The costs of having higher student loan debt should be weighed against the well-documented economic returns to acquiring more education.

Published: 05/14/14
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Forgotten But Not Gone: The Long-Term Fiscal Imbalance (Research Report)
William G. GaleAlan J. Auerbach

Over the past few years, the U.S. long-term fiscal situation has improved somewhat and short-term deficits have come down. Perhaps as a result, policy makers have largely turned their attention away from dealing with fiscal issues. The fiscal problem may well be forgotten, but it’s not gone. Current debt/GDP ratios are the highest in U.S. history except for a few years surrounding World War II. The ratio is projected to rise further over the next decade, even if everything goes right from an economic and political viewpoint. And reasonable projections indicate continuing growth in the debt/GDP ratio, to unsustainable levels, over the long term. Even if boosting the economy is a short-run priority, policy makers should also be offering concrete plans for an eventual, substantial fiscal consolidation.

Published: 03/06/14
Availability:   PDF

Fiscal Myopia (Research Report)
Alan J. AuerbachWilliam G. Gale

While political leaders remain tied up in discussions of government shutdowns and debt ceiling increases, we focus on the medium- and long-term budget outlook, where more serious challenges lie. With the passage of the American Taxpayer Relief Act, the imposition of the sequester, and changes in health care cost projections, some observers are claiming that fiscal issues have been resolved. The release of several new reports provides an opportunity to re-examine these issues. Our overarching conclusion is that, while the nation faces many other pressing economic and social issues, we are still far from attaining a sustainable fiscal policy.

Published: 10/01/13
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Don't Let Them Fool You, We Still Have Debt Problems  (Commentary)
William G. Gale

Your uncle, Sam, has ignored his chronic health condition – let's say he's diabetic – for a long time. Then he suddenly has a heart attack, followed by a long, slow painful recovery. As he is recovering, he is feeling good about his health – after all, he got though a crisis. But he is not actually healthier than he was before. He's still diabetic, and now he has to deal with the cautions of being a heart attack victim as well. I think of a situation like that whenever I hear or read people saying that our debt problems are behind us.

Published: 06/01/13
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