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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 SPENDINGTRANSCRIPT
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U.S. Federal Tax Reform: Prospects and Possibilities
James Poterba
MIT & NBER
CCER-NBER Meeting, 26 June 2012
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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
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Expiring 2001 and 2003 Tax Laws
Tax Provision Current Rate “Reversion” Rate
Top Rate on Ordinary Income
35% 39.6%
Other Rates on Ordinary Income
10, 25, 28, 33 15, 28, 31, 35
Rate on Long-Term Capital Gains
15% 20%
Tax Rate on Dividend Income
15% Ordinary Income – Up to 39.6%
Phase Out of Itemized Deductions and Exemptions
Eliminated in Current Law
Will Return
3
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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)
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Political Economy of Deficit Reduction
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
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Options for Increasing Tax Revenues Raise Income Tax Rates Broaden the Income Tax Base Raise Other Existing Taxes (Gasoline Tax?) Introduce New Taxes: VAT
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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)
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Federal Income Tax Data, 2010
AGI Level Taxable Returns
Taxable Income
Federal Income Tax
< $30K 23.1% 4.6% 1.7%
$30-50K 22.0 10.0 5.0
$50-100K 33.5 26.4 17.7
100-250K 18.3 30.1 30.0
> $250K(2.73M ret)
3.2 28.8 45.6
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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 ----
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Effective Federal Tax Rates: CBOFederal Individual Income Tax Rate
Total Effective Federal Tax Rate
2000 2005 2000 2005
Lowest Quintile -4.6 -6.5 6.4 4.3
Second Quintile 1.5 -1.0 13.0 9.9
Middle Quintile 5.0 3.0 16.6 14.2
Fourth Quintile 8.1 6.0 20.5 17.4
81-90% 11.3 8.7 23.4 20.3
96-99% 18.0 15.2 28.1 25.7
99-99.5 23.1 19.4 31.8 29.7
99.5-99.9 25.2 20.7 33.6 31.2
99.90-99.99 25.6 19.9 34.2 32.1
Top 0.01% 22.1 17.0 32.0 31.5
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Revenue Option 1: Raising Top Tax 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)
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12
“Taxable Income Elasticity” - Amsterdam, 1600s
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Revenue Option 2: Broadening the 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”
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Cost of Tax Expenditures (% of GDP) 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%
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Taxing Employer-Provided Health Insurance (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?
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Gruber (2011) Estimates of Change in Insurance Coverage from Taxing EHI 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
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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
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Distribution of Benefits from Current Tax Treatment of Housing
Income Range User Cost (2003)
< $40K 6.8%
$40-75K 5.9
$75-125K 5.4
$125-250 5.0
$250K+ 4.6
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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
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“Efficiency” of VAT (IMF)Country VAT
Efficiency“Policy Gap”
Compliance Gap
France 51% 45% 7%
Germany 54 37 14
Italy 41 44 27
Sweden 55 43 4
U.K. 48 44 15
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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
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What Lies Ahead?
Politics Will Dominate Economics “Grand Bargain” vs. Incremental Changes Fiscal Consolidations Do Happen