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Tax Policy Fiscal Context and Economic Concepts Molly Sherlock Washington & Lee University January 23, 2015 The U.S. Fiscal Position Revenues and Outlays: FY1970 – FY2013 Source: CRS Report R43472, The Federal Budget: Overview and Issues for FY2015 and Beyond, November 4, 2014, by Mindy Levit. 2 Persistent Budget Deficits Increasing Debt 3 Why is Spending Projected to Increase? 4 Changing Demographics are Increasing Pressure on the Federal Budget 5 Federal Revenue by Source: 1946-2017 % of GDP 12% Individual Income Taxes 9% 6% Social Insurance and Retirement Receipts 3% Corporation Income Taxes Other Excise Taxes FY15 FY10 FY05 FY00 FY95 FY90 FY85 FY80 FY76 FY71 FY66 FY61 FY56 FY51 FY46 0% FY14-FY19 are estimates 6 Federal Revenue by Source: FY2013 Corporate Income 10% Excise 3% Individual Income 47% Payroll 34% Other 6% 7 Why Tax Reform? Raise additional revenue? U.S. fiscal position is “unsustainable” Over time… spending will have to be cut, or taxes increased Improve the system? What does an improvement look like? Economic tools for evaluating tax policy 8 Economic Concepts: Equity Is the tax system “fair”? Two concepts for evaluating fairness: Vertical equity Higher burdens on those with a greater ability to pay Horizontal equity Equal treatment of equals 9 Evaluating Vertical Equity 10 Evaluating Horizontal Equity Those with “equal ability to pay” should pay equal taxes Measuring ability to pay Casualty losses Medical expenses Similarly situated individuals Marriage penalties Homeowners vs. renters 11 Economic Concepts: Efficiency Taxes distort behavior A goal of tax policy Meet revenue targets with minimal distortions 12 Balancing equity and efficiency Cutting taxes on capital (investment) income Wage credits for low-income workers 13 Economic Concepts: Simplicity and Revenue Sufficiency What makes taxes complicated? Measuring income Taxes as social policy The purpose of taxes is to pay for the government’s activities 14 Income Taxes: Computing Taxable Income 15 Average Tax Rates Paid 16 About those “Loopholes” FY2013 Tax Expenditures (billions) Provision Amount 1 Exclusion for employer-sponsored health insurance 294.3 2 Mortgage interest deduction 100.9 3 401(k) plans 72.7 4 Lower rate on capital gains 62.0 5 EITC 55.7 6 Pensions 52.3 7 State and local tax deduction (excluding property tax) 46.3 8 Tax deferral for multi-nationals 41.8 9 Child tax credit 40.8 10 Charity deduction (other than education, health) 39.8 Source: US Budget, Analytical Perspectives, FY2013 Note: Health insurance estimate includes $113.7 billion payroll tax expenditure; EITC and child tax credit include outlays of $52.6 and $22.4 billion, respectively 17 And what about those “47%”? 18
