More About Robert Greenstein

Robert Greenstein

Greenstein is the founder and President of the Center on Budget and Policy Priorities. You can follow him on Twitter @GreensteinCBPP.

Full bio and recent public appearances | Research archive at CBPP.org


New Obama Tax Proposals Are More Progressive Than They May Appear

January 30, 2015 at 7:20 pm

The President’s new tax proposals would raise revenues from high-income and wealthy filers and devote much of the savings to other tax proposals that would benefit low- and moderate-income filers. Estimates from the Urban-Brookings Tax Policy Center (TPC) show that the President’s proposals are quite progressive, but some readers are interpreting those estimates as meaning that low- and middle-income families get only modest benefits. There are two main reasons why that’s not the case:

1. For technical reasons, the TPC estimates classify as “middle-income” some affluent filers who would pay significantly higher taxes under the plan. This lowers the plan’s average gain for middle-class filers.

The estimates don’t count unrealized capital gains when measuring families’ incomes and ranking families on the income scale. So, affluent people who have moderate incomes other than unrealized capital gains but very large amounts of unrealized capital gains income show up in TPC’s tables in the middle of the income distribution.

That’s why the President’s proposal to tax unrealized capital gains after individuals die — a sound proposal that would affect only wealthy filers with large amounts of unrealized gains — appears in the TPC tables to hit a small number of middle-income families quite substantially.

For example, TPC’s tables show a tiny share of filers in the middle fifth of the income scale facing tax increases averaging almost $64,000 from the proposal. To face that amount of tax, such filers likely have average capital gains of more than $400,000. And if a filer’s capital gain totaled $400,000, the total value of his assets would likely exceed this amount substantially and likely be in the millions of dollars. If the capital gain were included in the filer’s income in the year in which the filer owed taxes on it under the President’s plan, the filer would likely be in the highest-income 1 or 2 percent.

By classifying these filers as middle-income, the TPC estimates essentially count the taxes they would pay under the proposal without counting as income the gains that give rise to those taxes. There are technical reasons underlying TPC’s approach. One approach that addresses this issues would be to count unrealized capital gains as income in the year in which they occur — that is, as the assets appreciate in value. But doing so is very difficult technically. A Treasury analysis of the President’s proposal took a different approach, by counting filers’ unrealized capital gains as part of their income in the year these gains would be taxed. It found that 99 percent of the new revenues would come from the top 1 percent of filers.

A related issue is that the TPC estimates assume the President’s proposal is fully phased in in 2016. This is informative because it shows the proposal’s ultimate impact. It means, however, that the estimates show more “middle-income” filers with large unrealized capital gains facing a tax increase than actually would in 2016. That reduces the average gain from the President’s plan for the middle class as a whole. It would take a number of years for the proposal to affect as many filers as the TPC tables show, because unrealized capital gains would be taxed only upon the death of the second spouse.

2. The TPC estimates don’t show the impact of the President’s proposal to make permanent the American Opportunity Tax Credit (AOTC) to help middle- and lower-income families pay for college. The AOTC is slated to expire at the end of 2017 and be replaced by the much smaller, non-refundable Hope Credit. Making the AOTC permanent would make a large difference for many middle- and low-income families, providing thousands of dollars more in aid toward college affordability. TPC’s distribution tables don’t show the benefit of making the AOTC permanent because they are for 2016, before the AOTC is slated to expire.

In short, the President’s tax proposals do substantially more for low- and middle-income people than a cursory examination of the TPC tables might suggest. (It should be noted that the TPC tables, themselves, show more significant gains for middle-income families with children.) Moreover, some of the revenues that these proposals would raise would go to investments in improving child care and access to community colleges. Those investments aren’t tax proposals so the TPC distribution tables appropriately don’t reflect them, but they, too, would significantly help middle- and low-income families.

Obama’s Education Tax Proposals Would Help Middle-Class Families, Not Hurt Them as Opponents Inaccurately Claim

January 22, 2015 at 5:29 pm

Some critics claim that President Obama’s proposal to streamline and better target tax credits for higher education represents an attack on middle-class families, particularly because of the limits it would impose on so-called “529” accounts.  That’s backward:  the plan overall would do more to help both middle-class and lower-income families afford college.

The President’s plan would scale back tax benefits that disproportionately benefit high-income filers and redirect them toward low- and middle-income students — the people who most need help affording college.  By likely enabling more people to attend college, it would help them and the economy as a whole by contributing to a better-educated workforce.

Like many current tax breaks (such as those for retirement saving and mortgage interest), tax benefits for higher education give the biggest benefits to high- and upper-middle-income families since they’re in the highest tax brackets.  This means that the tax subsidies are less effective than they could be in boosting college enrollment because they largely go to people who likely would attend college anyway, while doing too little for many people from low- and middle-income families who simply can’t afford college without help.

Further, the tax subsidies are delivered through a maze of overlapping provisions, so many eligible families aren’t aware of them.

That’s why many education policy groups (see here, here, and here) have called for streamlining and better targeting education tax breaks.  Representatives Danny Davis (D-IL) and Diane Black (R-TN) introduced a bipartisan bill in 2013 based on these principles, and former House Ways and Means Committee Chairman Dave Camp’s tax reform plan included a similar proposal.

The President’s plan also uses this framework.  It would shrink some of the education tax subsidies most heavily focused on high-income families and use the savings to strengthen and make permanent the education tax incentive best targeted on low- and middle-income families:  the American Opportunity Tax Credit (AOTC).

The AOTC is partially refundable, which means families with incomes too low to owe federal income tax can receive a partial credit.  But under current law, the AOTC will expire at the end of 2017 and be replaced by a smaller, non-refundable education tax credit called the Hope Credit.  The President’s proposal would improve the AOTC for both low-income and middle-class families by making it permanent and raising the amount of the AOTC that is refundable.

At the same time, the President’s plan would limit a number of inefficient tax benefits that are heavily tilted toward upper-income families, including those for 529 plans.  Currently, filers don’t owe taxes on the earnings from 529 plans either as they accrue or when those earnings are withdrawn to pay for higher education.

Some 80 percent of the benefits of 529 plans go to households with incomes above $150,000, Survey of Consumer Finances data show; about 70 percent go to households with incomes above $200,000.  That’s because higher-income households can most afford to save substantial amounts for college, and because tax exemptions are worth the most to them, saving them up to 40 cents (for people in the top income tax bracket) per dollar earned in these plans that’s used for higher education expenses.  Since there are no income limits on using the plans, families with multi-million-dollar incomes can amass huge 529 accounts and benefit very handsomely from this tax break.

Under the President’s plan, earnings in 529 accounts would remain tax-free as they accrue, but filers would pay tax on the gains when they withdraw the funds, so filers would still benefit from deferring taxes on those gains. And the proposal would only apply to new deposits in 529 accounts; the billions of dollars already in those accounts would be entirely exempt.

The University of Michigan’s Professor Susan Dynarski, a top expert on education tax policy, has praised the President’s 529 proposal as “smart,” commenting that the current treatment of 529s is “Incredibly expensive, poorly targeted, [and] ineffective.”

Scaling back the 529 tax subsidy for high-income filers and redirecting the funds towards low- and middle-income filers who most need support to afford higher education is sound policy that would make higher education more affordable for more low- and middle-income families.

In fact, overall, the President’s proposal would increase the total amount of resources provided in higher education tax subsidies, benefiting middle- and low-income families, and pay for that increase by reducing inefficient tax subsidies that overwhelmingly benefit people at the top of the income scale.  Since aid for families who don’t have high incomes would increase, opponents’ claims that the plan would increase student debt levels are hard to fathom. The effect is likely to be just the opposite.

Republican Leaders Deploying Untruths on 40-Hour Health Bill

January 7, 2015 at 10:28 am

Update, January 7: We’ve updated this post to reflect information in a new Congressional Budget Office analysis of the House bill.

While political leaders often stretch the truth to make their case, they usually don’t claim the opposite of the truth.  That, however, is essentially what Republican congressional leaders are doing by claiming that a measure before the House tomorrow to alter a provision of health reform will safeguard the 40-hour work week and thereby protect workers.  House Ways and Means Chairman Paul Ryan claims in today’s USA Today, for example, that the bill will enable “more people [to] work full time.”  In fact, it clearly will do just the opposite.

The issue is the Affordable Care Act (ACA) requirement that employers with at least 50 full-time-equivalent workers must either offer health coverage to employees who work at least 30 hours a week or pay a penalty.  On Thursday, the House will vote to limit this employer requirement to employees who work at least 40 hours a week.  In the same vein as Paul Ryan, House Speaker John Boehner and Senate Majority Leader Mitch McConnell have claimed the measure would protect the 40-hour work week by “removing an arbitrary and destructive government barrier to more hours and better pay created by the Affordable Care Act of 2010.”  Some news accounts have taken this claim largely at face value, essentially presenting it as a fact.

But the claim is preposterous.  Here’s why:

To date, there has been little evidence that employers are shaving employees’ work hours to avoid the ACA’s employer mandate.  One reason is that so few workers are at risk of having their hours reduced — only 7 percent of U.S. workers work between 30 and 34 hours a week (i.e., within five hours of the 30-hours threshold) and thus risk having their hours shaved to put them below the threshold.

By contrast, 44 percent of U.S. workers work 40 hours a week (and several percent more work between 40 and 44 hours a week).

As a result, it’s the Republican leaders’ proposal that would weaken the traditional 40-hour work week by placing far more workers at risk that employers will cut their hours to push them below the threshold.  As the Congressional Budget Office (CBO) states in a new report, “because many more workers work 40 hours per week (or slightly more) than work 30 hours per week (or slightly more), [the House bill] could lead employers to make changes that would affect many more workers than will be affected under current law.”

Influential conservatives such as Yuval Levin and Ramesh Ponnuru agree that the Republican proposal would place more workers at risk of having their work hours cut.

That proposal would have a second effect as well — it would allow employers with 50 or more employees who do not offer coverage to employees working 30-39 hours a week to do so without facing any penalty.  That would be a boon to affected businesses and corporations.  But it would impose a hit not only on some affected employees, but also on taxpayers.  That’s because large employers who don’t offer coverage would escape penalties for workers who are employed 30-39 hours a week, and also because the lessened availability of employer-based coverage would push more employees who work those hours into the ACA’s insurance marketplaces — generally with federal subsidies to make coverage affordable — or into Medicaid.  CBO estimates that the proposal would boost government costs — and budget deficits — by $53 billion over 11 years.

CBO also says that the bill would cut the number of people with employer-based coverage by about 1 million, raise the number of people with coverage through Medicaid, the Children’s Health Insurance Program (CHIP), or insurance exchanges by between 500,000 and 1 million, and thus raise the number of uninsured by up to 500,000.

The ACA remains controversial, and lawmakers have every right to propose changes in it.  But let’s try for a little more truth-in-advertising about what proposals would and wouldn’t do, especially when they would affect large numbers of Americans.

IRS Funding Cuts Likely Mean More Tax-Credit Errors

December 11, 2014 at 11:00 am

Even as the Treasury Department’s Inspector General noted a significant overpayment rate in the refundable part of the Child Tax Credit (CTC) this week, lawmakers chose — in the pending 2015 government funding agreement — to weaken the IRS’s ability to reduce errors in this credit and other parts of the tax code by once again cutting IRS funding to enforce and ensure compliance with the tax rules.  And, while lawmakers such as Senator Orrin Hatch (R-UT), the Senate Finance Committee’s top Republican, assailed the IRS for failing to address the errors, the Treasury and IRS have recommended a series of measures to Congress to reduce errors in the tax credits and other parts of the tax code — and Congress has failed to act on them (except for one very small measure included in the 2015 funding agreement).

Errors in the CTC and the Earned Income Tax Credit (EITC) — another working-family tax credit — need to be reduced (as do errors related to small businesses and various other groups of tax filers).  But the debate around this issue often is misleading and ignores three significant points:

1. Most overpayments result from unintentional errors, not fraud. IRS studies indicate that the majority of EITC errors stem from the interaction between the credit’s complex rules and complicated family and child-rearing arrangements, not fraud.  The EITC has very strict rules over who can claim a child, for example, which often trip up separated or divorced couples or three-generation families.  The CTC eligibility rules are similar.

Moreover, overclaims in these tax credits account for a small share of the tax compliance gap.  Underreporting of business income alone accounted for $122 billion of the $450 billion tax gap in 2006, the latest year for which such data are available.

2. IRS funding cuts have weakened tax enforcement. The IRS’s budget has taken repeated hits in recent years and will shrink further under the fiscal year 2015 budget agreement, falling to its lowest inflation-adjusted level since 2000.  Funding for IRS enforcement has been hit particularly hard; its 2015 funding level under the agreement is 20 percent below the 2010 level, adjusted for inflation. Yet the number of tax returns filed has grown significantly over the same period, and the IRS received substantial new responsibilities related to the Foreign Account Tax Compliance Act and the Affordable Care Act.

Because of these cuts, the IRS lacks the resources to pursue a substantial share of the questionable EITC and CTC claims that it identifies or to improve enforcement of other parts of the tax code.  For example, the IRS can use data matching and other techniques to identify questionable claims on tax returns related to the tax credits, but it cannot pursue many of those claims further because it lacks the staff resources to do so.  Due to budget cuts, the number of IRS staff devoted to enforcement has dropped by 15 percent since 2010.

3. Congress has failed to act on proposals designed to lower error rates. The year-end funding bill requires people who prepare their own returns to answer due diligence questions when claiming refundable tax credits, a useful but small measure.  But Congress has ignored an array of other, more significant proposals from the Treasury and the IRS (most of which are in the President’s fiscal year 2015 budget) to reduce errors in these credits.  These include:

  • Giving the IRS the statutory authority to require paid tax preparers to demonstrate basic competence in the rules governing these credits and other basic tax matters. The Treasury has found very high EITC error rates among returns filed by certain types of paid preparers (e.g., those who aren’t lawyers, CPAs, enrolled agents, or affiliated with a national tax preparation firm).  These preparers do not need to get any training whatsoever or demonstrate basic competence in the tax rules, a factor that contributes to tax-credit errors.
  • Requiring employers and other third parties to send the IRS information such as W-2’s and 1099’s earlier in the year to help it detect erroneous or fraudulent claims before it pays them.
  • Requiring paid return preparers to follow due diligence requirements in determining eligibility for the CTC, as they already must do for the EITC.

Senator Hatch said this week that “[t]he IRS’s inability to properly administer these refundable tax credits fails American taxpayers.”  In reality, it’s Congress that has failed American taxpayers by not giving the IRS what it needs to enforce the tax code.

New Data Provide Sobering Look at Concentrated Poverty in Schools

June 16, 2014 at 11:25 am

Update, June 20: We’ve updated the graph, below, to correct an error in the display of data.

New data never before systematically collected and reported show that thousands of schools across the country have very high concentrations of poor students.  States provided the data as part of the new community eligibility provision of the school lunch and breakfast programs, which allows schools serving high-poverty areas to simplify their school meal programs and serve meals at no charge to all students.  The data show how important community eligibility is.

To implement community eligibility, states are required to publish data on which schools and districts are eligible — namely, ones in which 40 percent or more of students already qualify for free meals automatically because they either have been identified as low income by another program (such as SNAP, formerly food stamps) or are considered at risk of hunger (because they are homeless, for example).  These students are called “Identified Students.”

As we’ve reported, more than one in five schools and districts nationwide — more than 28,000 schools and more than 3,000 districts — meet those criteria.  Digging deeper in the new data, we’ve now found that those 28,000 schools include more than 8,000 schools in which 60 percent or more of students are Identified Students, plus another nearly 6,000 schools in which between 50 and 60 percent of students are Identified Students, in the 44 states for which we have the percentage of Identified Students for each school (see chart).

This means that in more than 14,000 schools, a majority of the students receive SNAP or are homeless, migrant, or otherwise vulnerable.  That’s more than one in ten schools nationwide.

These numbers understate the number of needy children.  On average, for every ten Identified Students, roughly six more students come from families that qualify for free or reduced-price school meals if they complete a school meals application.

The story for school districts is equally striking, showing concentrated poverty across broader areas.  The roughly 3,000 districts that qualify for community eligibility district-wide in the states for which we have data include more than 800 districts in which 60 percent or more of students are Identified Students, plus another nearly 700 districts in which 50 to 60 percent of students are Identified Students.

To be sure, we’ve long known that many localities, ranging from large cities to rural areas, have areas of concentrated poverty.  Still, the new data are sobering.

Many of these families struggle to provide enough healthy food for their children.  Hungry or undernourished children have a harder time succeeding in school.

Schools with large shares of students facing deprivation confront tough challenges.  Community eligibility can help them meet these challenges by ensuring that all students receive the healthy meals they need to grow, learn, and thrive.