The Center's work on 'Federal Tax' Issues

The Center analyzes major tax proposals, examining their likely effects on the economy and on the government’s ability to address critical national needs, especially over the long term. We place particular emphasis on the effects of tax proposals on households at different income levels. In addition, we analyze trends in the level of federal revenues, income distribution, and tax burdens.


4 Reasons Why the House Has the Wrong Approach to Tax Extenders

November 20, 2014 at 4:09 pm

Congress is expected during the lame-duck session to address “tax extenders,” a set of tax provisions (mostly for corporations) that policymakers routinely extend for a year or two at a time.  While the Senate has pursued temporary extensions, the House has taken a far different approach that’s flawed on both policy and priorities grounds, as our updated paper explains.

The House has: made a number of extenders permanent; permanently expanded one of the biggest extenders, the research and experimentation credit; and permanently extended some temporary tax breaks that aren’t extenders — such as “bonus depreciation,” which lets businesses take larger upfront tax deductions for purchases like machinery.  (A temporary measure to help revive a weak economy, bonus depreciation is largely ineffective.)   But it hasn’t offset any of the considerable costs.

The House approach would:

  1. Undo a sizeable share of the savings from recent deficit-reduction legislation. At a combined ten-year cost of $312 billion, the nine extenders provisions that the House Ways and Means Committee has passed this year would give back two-fifths of the $770 billion in revenue raised by the 2012 “fiscal cliff” legislation.  (The full House has already approved seven of these, costing $235 billion.)  House Republicans also are pushing to make permanent an expanded version of bonus depreciation in an extenders package; adding this to the nine Ways and Means provisions pushes the total ten-year cost to $588 billion, or roughly three-quarters of the revenue raised in the “fiscal cliff” legislation.
  2. Constitute a fiscal double standard. Failure to pay for making the extenders permanent would contrast sharply with congressional demands to pay for other budget initiatives, from easing the sequestration budget cuts to extending emergency unemployment benefits for long-term unemployed workers.  While demanding that spending measures be paid for, the House is pushing for permanent, unfinanced tax cuts that would cost much more.
  3. Bias tax reform against reducing deficits. If policymakers make the extenders permanent before they enact tax reform, a tax reform plan wouldn’t have to offset their cost to be revenue neutral.  This would free up hundreds of billions of dollars in tax-related offsets over the decade that policymakers could then channel toward lowering the top tax rate.  The resulting package would lock in substantially larger deficits than under revenue-neutral tax reform that paid for the extenders or let them expire.
  4. Place corporate tax provisions ahead of other, more important tax provisions scheduled to expire. Most notably, key elements of the Earned Income Tax Credit and Child Tax Credit will die at the end of 2017 unless policymakers act, pushing more than 16 million people in low-income working families, including 8 million children into — or deeper into — poverty.  When policymakers consider which expiring tax provisions to continue, they should give top priority to making those key low-income provisions permanent.

“Dynamic” Estimates Are Highly Uncertain, Subject to Manipulation

November 17, 2014 at 5:10 pm

An American Action Forum event today to promote “dynamic scoring” for tax and spending legislation unintentionally illustrates what Chye-Ching Huang and I explain in a newly updated paper:  estimates of the macroeconomic effects of policy changes — which is what dynamic scoring would include — are highly uncertain and subject to manipulation, so they shouldn’t be part of official cost estimates.

In reasonably balanced remarks, Senator Orrin Hatch (R-UT) said that “we should not expect dynamic scoring to produce outsized miracles from either the supply side or the demand side.”

But Tax Foundation President Scott Hodge, in giving his organization’s estimates of the effects of several tax proposals, promised just such miracles.  According to Hodge, cutting the corporate income tax rate or allowing full expensing of investments (that is, allowing firms to deduct the investments’ full cost from their taxable income up front, rather than depreciating it over the investments’ lifetime) would more than pay for itself by boosting economic growth and, in turn, tax revenues.

That’s highly implausible.  But it shows how advocates can manipulate assumptions or cherry-pick dynamic-scoring estimates to buttress their agenda.  Ways and Means Committee Chairman Dave Camp (R-MI) did the same thing when he cited only the most optimistic of many “dynamic” estimates in touting the benefits of his tax reform proposal, as our paper and the graph below show.

Transition Tax to Pay for Infrastructure Isn’t a Repatriation Tax Holiday

November 13, 2014 at 1:52 pm

As policymakers mull corporate tax reform, it’s important to distinguish between two proposals that are often confused:   a repatriation tax holiday and funding infrastructure through broader corporate tax reform, such as through a transition tax on offshore profits.

A repatriation tax holiday encourages U.S. multinationals to return overseas profits to the United States by offering them a temporary, much lower U.S. tax rate on those profits.  It’s voluntary, saves money for companies, and increases deficits.

Lawmakers tried this in 2004 and it was a complete policy failure:  contrary to their promises, companies generally didn’t use the repatriated funds for more U.S. investment and job creation.  Many of the companies that lobbied most aggressively for the holiday actually announced major layoffs around the same time.

The Administration and many in Congress therefore oppose another holiday.  As an Administration spokesperson said several months ago: “The President does not support and has never supported a voluntary repatriation holiday because it would give large tax breaks to a very small number of companies that have most aggressively shifted profits, and in many cases, jobs, overseas.”

In the context of tax reform, however, one key question is what to do with multinationals’ existing foreign-held profits that have yet to be taxed in the United States.  House Ways and Means Chairman Dave Camp has proposed a mandatory transition tax on those existing profits as part of moving to a new tax regime.  The transition tax itself could raise revenues.  The concept is sound, and a transition tax would be good policy if designed carefully — in fact, a robust transition tax should be part of any responsible international tax reform.

Because the revenues from a transition tax would be one-time in nature, it would make sense to dedicate them to a burst of infrastructure investments.  This would address a glaring economic need and spur needed job creation.  It would also be more fiscally responsible than using them to pretend to “pay for” a permanent cut in the corporate tax rate — a gimmick that would increase long-run deficits.

Indeed, the President has proposed dedicating any one-time revenues generated by tax reform to infrastructure investments, not permanent corporate rate cuts.  The President alluded to that idea last week when he talked about paying for infrastructure with tax reform.  One source of temporary revenues in tax reform could be a mandatory transition tax on offshore profits.

The repatriation tax holiday is a failed idea that we should not repeat.  A transition tax to finance infrastructure as part of corporate tax reform, however, merits serious consideration.  Our paper has more on the problems with repatriation tax holidays and how a transition tax should be designed.

Letting Tax-Credit Provisions Expire Would Push Millions Into Poverty

November 12, 2014 at 1:55 pm

As Republicans and Democrats look for areas where they can work together, they should be able to agree to make permanent three key provisions of two pro-work tax credits:  the Child Tax Credit (CTC) and Earned Income Tax Credit (EITC).  More than 16 million people in low- and modest-income working families, including 8 million children, would fall into — or deeper into — poverty in 2018 if these three provisions expire as they are currently scheduled to do after 2017, our new paper (with state-by-state data) shows.  Some 50 million Americans, including 31 million children, would lose part or all of their credits.

The EITC and CTC encourage and reward work, and there is growing evidence that income from these credits leads to improved school performance, higher college enrollment, and increased work effort and earnings in adulthood.

Both credits have enjoyed bipartisan support, and their underlying provisions are permanent parts of the tax code.  But several key features of the credits will expire at the end of 2017 unless lawmakers act.

The stakes are high for millions of workers in low-wage jobs, from custodians to health care workers.  If these provisions expire:

  • Not one penny of earnings of a full-time, minimum-wage worker would count toward the CTC. For example, a single mother working full time at the minimum wage and earning $14,500 would thus lose her entire $1,725 CTC.  That’s because the earnings needed to qualify for even a tiny CTC would jump from $3,000 to $14,700.  The earnings needed to qualify for the full CTC (of $1,000 per child) would jump from $16,330 to more than $28,000 for a married couple with two children, so many low-income working families that would still qualify for the CTC would see their credit cut dramatically.
  • Many married couples would face higher tax-related marriage penalties due to a cut in their EITC. To reduce marriage penalties, the income level at which the EITC begins to phase out is now set $5,000 higher for married couples than for single filers.  After 2017, it would be set $3,000 higher, which would shrink the EITC for many low-income married filers and increase the marriage penalty for many two-earner families.
  • Larger families would face a cut in their EITC. After 2017, the maximum EITC for families with more than two children would fall more than $700 to match the maximum for families with two children.

Some 65 percent of the families that would lose part or all of their credits include at least one full-time, year-round worker.  About 450,000 veteran and armed forces families with children would lose all or part of their CTC in 2018; a similar number would lose all or part of their EITC.  Also, 15 percent of the families that would lose all or part of their credits include at least one member with a disability.

For more on the impact on specific types of families if the provisions expire, see this interactive calculator.

Latest CRS Findings Refute Scare Talk About Medical Device Tax

November 6, 2014 at 12:51 pm

With congressional Republicans reportedly planning a renewed push to repeal the medical device tax, a Congressional Research Service report updated this week is especially notable.  It confirms what we’ve been saying for some time:  The 2.3-percent excise tax, which will raise $26 billion over the next decade to help pay for health reform, has only a very limited economic impact, contrary to the dire predictions of industry lobbyists.

  • “The effect on the price of health care,” CRS says, “will most likely be negligible because of the small size of the tax and small share of health care spending attributable to medical devices.” (page ii)
  • “The drop in U.S. output and jobs for medical device producers due to the tax is relatively small, probably no more than 0.2%.” (page 7)
  • “It is unlikely that there will be significant consequences for innovation and for small and mid-sized firms.” (page 8)
  • “The tax should have no effect on production location decisions, since both domestically manufactured and imported medical devices are subject to the excise tax.” (pages 18-19)

In short, the scare talk about the medical device tax doesn’t square with reality.  Moreover, proponents of repeal need to explain how they would replace the billions in lost revenue.