Happy EITC Day!

January 27, 2012 at 1:22 pm

Today’s the sixth annual Earned Income Tax Credit (EITC) Awareness Day, an event organized by the Internal Revenue Service (IRS) and its partners to raise public awareness of the EITC.

Designed to encourage and reward work as well as offset federal payroll and income taxes, the EITC helps millions of low- and moderate-income working families to make ends meet.  In 2010, it lifted about 6 million people out of poverty, including about 3 million children. The EITC lifts more children out of poverty than any other program.

Yet according to the IRS, each year millions of eligible workers do not claim their credits, missing out on millions of dollars they earned.

To learn more about the EITC, click on the links below:

 

Economy Growing—But Much Too Slowly

January 27, 2012 at 11:38 am

Today’s initial Commerce Department estimate of economic growth in the fourth quarter of 2011 looks good at first:  the economy expanded at an annual rate of 2.8 percent, up from 1.8 percent in the third quarter.  That’s the tenth straight quarter of growth.  But a closer look at the numbers shows much that should concern us.

Economic Growth Picks up in Fourth QuarterCritically, the jump during the third quarter in final sales of goods and services— a better measure of underlying demand than GDP —didn’t continue in the fourth quarter (see first chart).  More than half of the growth in GDP in the fourth quarter came from inventory accumulation — that is, unsold goods piling up on the shelves.

Also, the fourth quarter’s 2.8 percent growth was a bit slower than analysts were forecasting and the economy continues to operate well below full capacity.  Actual GDP is a gaping 6.7 percent less than potential GDP, or what the economy is capable of producing with full utilization of workers and business capacity (see second chart).

Economy Operating Well Below Capacity

While inventory accumulation and consumer spending sustained growth in the fourth quarter, business investment in factories, offices, machines, and software slowed sharply.   A rise in the consumption of imports relative to exports and a drop in government spending were both drags on growth.

The main piece of good news in the report is that inflation remained tame in the fourth quarter.  The Federal Reserve, pointing to sluggish growth, substantial excess capacity, and low inflation, announced this week that it intends to keep interest rates very low through late 2014.  As I said yesterday, with Congress unlikely to do anything to help the economy beyond extending the payroll tax cut and emergency unemployment insurance (and even these steps aren’t assured), any hope for nurturing the expansion is in the Fed’s hands.

For a look at the economic legacy of the Great Recession, see our chart book.

At Least We Have the Fed

January 26, 2012 at 4:59 pm

The Federal Reserve signaled this week that it still has the weak economy on its radar screen and sees no imminent threat of inflation.  That’s welcome news, because an accommodative, low-interest-rate monetary policy is the only game in town right now for nurturing the struggling economic recovery.

As I posted yesterday on U.S. News and World Report’s new “Economics Intelligence” website, economic and budget policy will likely run on autopilot this year in the run-up to the November elections.  We can’t realistically expect any bold policies to bring down the jobs deficit; this Congress will have a hard enough time doing the bare minimum, namely, extending the payroll tax cut and extra weeks of unemployment insurance through the end of this year.  (Both are due to expire at the end of February.)

Fiscal and budget policy gridlock may be our friend at a time when there are worse alternatives, such as actually enacting the misguided “reforms” to the budget process now working their way through the House or pursuing the discredited idea that sharp, immediate spending cuts are the best way to boost the recovery.

That leaves it up to the Fed.  Though still subject to sniping from those who believe inflation is a more serious threat than continued sluggish economic growth, the Federal Open Market Committee stated yesterday that it will keep short-term interest rates near zero through late 2014, arguing that “economic conditions — including low rates of resource utilization and a subdued outlook for inflation over the medium run — are likely to warrant exceptionally low levels for the federal funds rate.”  The Fed may even be prepared to take further action, as the economist Tim Duy observes.

With Congress largely on the sidelines for now, we should be thankful the Fed is not listening to the inflation hawks.  And let’s hope that additional steps are indeed in the cards.

The Buffett Rule Revisited

January 26, 2012 at 12:27 pm

The “Buffett Rule” basically says that people at the top of the income scale shouldn’t face lower tax rates than middle-income people.  The Urban-Brookings Tax Policy Center has found that people making over $1 million a year who receive more than two-thirds of their income from capital gains and dividends — as some at that income level do — pay a combined individual income and payroll tax rate of just 12 percent, on average.  That’s lower than the combined income and payroll tax rate that many middle-income Americans face.

At the invitation of David Leonhardt of the New York Times, I participated this week in a back and forth with Greg Mankiw, the Harvard economist and former economic advisor to President George W. Bush, over the Buffett Rule and related issues.

Professor Mankiw makes two points.  First, Congressional Budget Office (CBO) data show that, on average, people with higher incomes face a higher federal tax rate than other people.  In other words, the federal tax code is progressive.  Second, in assessing an individual’s overall federal tax rate (i.e., the percentage of income that he or she pays in taxes), one must take into account the burden of corporate income taxes, which are effectively paid by individuals.  Let’s take each of these points in turn:

On tax progressivity. Most policymakers and opinion leaders who call for those at the top to pay somewhat more in taxes do not make the mistake of claiming that rich Americans pay a lower tax rate, on average, than ordinary Americans.  What they say, as President Obama reiterated in his State of the Union address, is that some high-income people pay a lower rate — and should not.

The federal tax code is progressive.  But Americans also pay state and local taxes, and nearly every state’s tax system is regressive.  The U.S. tax system as a whole is only mildly progressive.  A good part of the progressivity of the federal tax code is needed simply to offset the regressivity of state and local taxes.

Furthermore, the same CBO data that show the federal tax code to be progressive also show that inequality has grown very substantially in recent decades, with incomes at the very top growing by far the most.  This trend came even as federal policymakers were dramatically cutting the taxes that high-income people face.  And the federal tax system as a whole is doing less to push against increases in income inequality than it used to.

Finally, we now face a serious long-term deficit problem, to which these tax cuts have contributed, and some leading lawmakers and presidential candidates are calling for steep cuts in programs that serve families of low or modest incomes even as taxes for individuals at the top are at their lowest level in decades.

On the corporate income tax. Professor Mankiw correctly points out that CBO assumes that investors essentially pay the corporate income tax, and that corporate taxes should be taken into account in figuring high-income households’ overall tax rates.

But while the corporate tax may add significantly to the tax burdens of some high-income people, it adds much less to the tax bills of others.  That’s because many high-income taxpayers generate their business income through so-called “pass-through” entities that don’t pay the corporate tax.  And many corporations pay a very low effective tax rate, which means they pass a very low tax burden onto their shareholders.

Taking the trends both in tax rates and inequality into consideration, we believe that those at the top of the income scale — some of whom do pay tax at a very low rate — should make a contribution to the deficit reduction that the nation will need.  They should pay somewhat more in the interest of both fiscal responsibility and fairness.

Update on House Budget Process Bills

January 25, 2012 at 4:12 pm

We’ve updated our analyses of several bills that would make harmful changes in the congressional budget process in order to reflect their passage by House committees.  The full House is expected to vote on these and other budget process bills beginning next week.