Largely as a consequence of the pandemic, trillions of dollars have been flowing out of the Treasury’s coffers. The Congressional Budget Office (CBO) projects the federal budget deficit for 2020 alone will exceed $3 trillion, three times higher than pre-pandemic estimates. Meanwhile, President-elect Joe Biden has suggested that trillions of dollars more should be spent to deal with the pandemic and then to address many of the nation’s social needs that will continue to exist beyond the current economic slowdown.
To determine how the longer-term budgetary effects of the pandemic have been playing out so far, and how similar pandemic-related expenditures might also affect the long-term direction of government spending, we compare the CBO’s September 2020, mid-pandemic, projections of real dollar changes in 2030 versus 2019 under current law to what CBO projected pre-pandemic in January 2020.
For the most part, we see fairly modest differences in budget forecasts of where increases in future spending would occur. Almost all of the pandemic-related boosts in spending are temporary, and the long-term trends remain dominated by the growth patterns that Congress and previous presidents had already built into the law, not by long-term societal needs and inequities highlighted by the pandemic.
The one exception is for interest costs. They still rise significantly under the September 2020 projections, but by about $100 billion less than in January 2020, largely reflecting CBO’s forecast of a lower interest rate environment due to Federal Reserve policy and the effect on saving and investment of a world-wide economic slowdown.
Comparing the mid-pandemic to the pre-pandemic forecast, lower interest rates would more than offset the additional interest costs associated with higher levels of debt, resulting in overall lower federal debt service as late as 2030. To be clear, lower interest costs due to a world-wide slump and slower projected economic growth are not good news.
Until recently, a growing economy would provide enough revenue to give a president significant leeway to chart new paths for spending. Such opportunity will likely elude President-elect Biden, however. When 2030 is compared to 2019, Social Security, health, and interest on the debt alone are projected to comprise 91 percent of the total real spending growth of about $1.4 trillion.
These three sources of additional costs would absorb 122 percent of the total revenue growth of about $1.1 trillion, assuming current law would remain unchanged after September 2020. Already this 122 percent figure is an understatement of what is likely to occur over the coming decade, as the new, largely temporary COVID-19 relief adopted in late December, along with the relief likely to be enacted in early 2021, will add to longer-term interest costs, assuming rates don’t fall further. Moreover, President-elect Biden made campaign promises to increase taxes only for those with very high incomes. That implies that, unlike CBO’s measure of current law, he could feel compelled to accept a lower “current law” revenue base by extending the middle-class individual income tax cuts included in the 2017 Tax Cuts and Jobs Act (TCJA) that are scheduled to expire after 2025.
Under January pre-pandemic projections, Social Security, health, and interest on the debt would constitute a very similar 94 percent of the total growth in spending and 127 of the total growth in revenues.
Although annual deficits by 2030 are large and growing, they remain close to the pre-pandemic projections. Of course, the accumulated debt will be much larger than formerly predicted. Thus, so far, the long-term impact of the pandemic and the nation’s responses to it reinforce and accelerate pre-existing budgetary trends, both in terms of overall spending projections and ever-larger gap between revenue and those expenditures.
President-elect Biden’s first priority will be to address the pandemic and the short-term economy, thus further increasing government spending. The open question: Once the pandemic is controlled, how will Congress and the incoming President adjust long-term spending and tax policy? Higher debt levels alone may make it harder for the President to shift the nation’s fiscal path. Yet, absent significant reductions in the built-in growth rates in health and retirement programs, a substantial increase in revenues, or both, our current fiscal trajectory will increasingly hamstring the nation’s ability to address other priorities.
This column originally appeared on TaxVox on January 19, 2021.
At New Year’s I usually try to pass on a note of hope that goes beyond the policy issues I usually address. This year I’ve had a lot of trouble coming up with a message, watching as a rising tide of nastiness has been sucking the life out of the very soul of our nation. The attack on the Capitol represents a culmination of President Trump’s attempt to weaponize nastiness; hopefully, it’s also the nadir of the dysfunctional government we’ve come to expect. But, as one of my wise friends, Frances Michalkewitz explained, a culture of nastiness has been expanding for some time now. The challenge for us is what can we do about it. I don’t have all or even most of the answers, but here are some thoughts.
You might think that I pose an unfair challenge. Like children growing up in the same family with an abusive father, we can easily divide into two camps: those who seek to appease and become more dependent on the abuser, and those who live in continual anger at both him and those who live in denial of what he has wrought. Both approaches threaten to take us further down dark alleys and extenuate the pain. Our psychological health and that of those around us requires more: an ability to turn outward, avoid letting the negativity eat away at us, follow a moral compass, and strengthen our bonds with other parts of humanity. That, indeed, may be unfair, but it’s the best opportunity we have to deal with whatever grievance we feel.
We certainly can stop voting for nasty people. If we can’t be independent and switch political parties, at least punish the nasty people in the primaries. I’ve been amazed over my career at how much individuals, even when they switch jobs, location, or family, largely behave as they did before. We can’t let those who have shown themselves to be nasty sway us with their campaign promises; we must also look to their records and how they have acted toward others in the past.
While voting is a way to change the political dynamic, it often requires limited effort. To further make an impact, we also must try to tend with cultural forces that aren’t amenable to government regulation.
We can spend less time with media that uses nastiness or promotes a sense of superiority among its audience as a way to entertain us, boost ratings, and garner attention or profits. While there is no doubt that modern media plays a vital role in expanding the culture of nastiness, we are the ones who provide the incentives for it to be that way. When we spend more time watching nasty people or reading their Twitter feeds, whether with their real or fake personalities (as on reality TV), we effectively pay for them entertain us with their nastiness. Let’s take away their paychecks or, for some, the positive reinforcement that fuels their nasty and often nihilistic behavior.
Language needs attention as well. Whenever we make any claim about any group, whether Black or White, Republican or Democrat, male or female, police or social worker, we tend to speak in generalizations. It’s an unavoidable limitation of language that we generalize to simplify and summarize, but no one in any group is average, so that adjectives or summary conclusions applied to a group are almost certainly incorrect for some members of that group. That resentment follows shouldn’t be surprising. This is a much larger subject; the point here is to recognize how any generalization will be received by its members.
As Gabby Giffords recently explained, there’s no magic recovery in store for us as a nation. Of course, fight for justice. But much of our power, particularly over culture, lies within what we do, not what we try to force others to do. We need to remember what our parents and grandparents taught us about seeking, as Lincoln so eloquently expressed it, the better angels of our nature. Random acts of kindness, more donations to charity, welcoming for everyone, getting to know and befriend those different from us, and challenging ourselves to learn new things. When it comes to culture, the good more displaces than defeats the bad.
Less nastiness. That’s my New Year’s resolution for myself and my hope for you. Let’s win this battle.
In the coming months, the US Supreme Court will rule for the third time on the constitutionality of the individual mandate that is a central element to the 2010 Affordable Care Act (ACA). This case was brought by several Republican state attorneys general, who argued that because Congress effectively eliminated the tax-based mandate, the entire law is an unconstitutional intrusion into states’ rights.
Yet every party to this conflict—the Court, Republicans, and Democrats—has twisted itself into knots by failing to understand how a modest penalty for not obtaining insurance can adhere to both Republican support for individual responsibility and Democratic efforts to expand health insurance without violating the Constitution. Congress easily could clear this up by changing the nature of the tax penalty.
Keep in mind that the ACA’s mandate was never a true mandate but rather a modest tax on those who choose to not get insurance. When the ACA was enacted, the penalty tax, or fee, was equal to 2.5 percent of household income up to a maximum of $695 per adult. In the 2017 Tax Cuts and Jobs Act (TCJA), Congress set the penalty tax to zero.
Long before the ACA, I suggested that the simplest way to enforce a mandate is to make some federal tax benefit—say, a higher standard deduction, separate or enhanced Child Tax Credit—dependent upon having health insurance. Or, in contrast to a $695 penalty on those without health insurance, simply adding a $695 deduction for those with health insurance.
Paul Van de Water of the Center for Budget and Policy Priorities and I outlined the administrative benefits of this idea here. Since eligibility for almost every government tax benefit already is based on taxpayers engaging in certain behavior, such a step likely would make the debate over when a mandate is a tax, a tax a mandate, and at what rate does one convert into the other, disappear.
Instead, the political system has tied itself into knots over the current mandate. The Court gets further into metaphysics, Republicans indirectly argue for larger government, and Democrats fail to pursue a simple legislative solution that could expand health coverage.
Let’s start with the Court. You may remember that Chief Justice Roberts opined in 2011 that Congress could not force people to purchase health insurance but could tax those who fail to do so.
When Congress set the individual mandate penalty rate at zero as part of the TCJA, it eliminated the requirement in practice, but it did not repeal the ACA, or even the tax. The Court now must decide whether a zero-rate mandate is no longer a tax but still an unconstitutional mandate. This will test whether the Court wants to engage in a debate more metaphysical than the type Roberts accused economists of, such as the lack of distinction between a tax and a mandate. During oral arguments earlier this month Roberts seemed to decline, telling lawyers for the states that want the law reversed that it is “not our job” to legislate repeal of the Act.
The semantic, legal distinction between taxes and mandates never made much sense. Our Constitution clearly allows Congress to tax all of us to fund benefits for only some of us. What is the logic of saying that Congress can impose an income tax to pay for, say, low-income housing assistance or farm subsidies for a relative few, but can’t use a tax to encourage people to obtain insurance?
For their part, the attorneys general who want the ACA thrown out effectively have been arguing for bigger government. When it comes to health care costs, either we pay ourselves or someone else pays for us. Thus, if Republicans gut incentives for people to insure themselves, they encourage the substitute—more government subsidies and regulation.
When you take into account Medicare, Medicaid, tax subsidies, and insurance for government employees, government already covers about 65 percent of total healthcare costs. The desire for more individual responsibility was a key reason why Mitt Romney, then the Republican governor of Massachusetts, first enacted a mandate as part of his insurance reform.
A mandate also is important if government is going to require insurance companies to sell to all comers, with no underwriting for pre-existing health conditions. Without some government-imposed nudge, many people would not insure themselves until they got sick, increasing the burden on providers and government and raising insurance premiums to unsustainable levels. Indeed, Republicans have already raised the cost of ACA exchange subsidies since, by gutting the mandate, they encourage more healthy people not to purchase insurance until they get sick.
Regardless of these efficiency issues, it’s simply unfair when people who buy insurance have to cover the costs of those who have equal ability to purchase insurance, but do not.
Let’s not let Democrats off the hook. They were unwilling to tie insurance coverage to other government benefits because they didn’t like the appearance, even if the claw back of net benefits led to exactly the same result as the penalty they imposed.
Instead of wallowing in this pointless debate over taxes versus mandates, policymakers should be focusing on the real health issues facing the nation. Legislators could make the Supreme Court case forever moot by adopting a practical solution consistent with both conservative and progressive principles. Because ACA reform has been proposed by President-elect Biden, this issue could come before Congress soon. Despite all the ruckus over the mandate, this is actually an area where Republicans could find common ground with Democrats.
This column originally appeared on TaxVox on December 14, 2020.
The New York Times account of President Trump’s tax returns reveal far more than his personal ability to avoid taxes. They show how the tax law can make it easy for the very wealthy to avoid taxation. And they reveal more than deficiencies in the tax law. Bankruptcy laws allow wealthy investors to shift losses to others even while they retain gains elsewhere, bank lending practices favor the rich, and for the last three decades monetary has subsidized highly-leveraged wealthy investors by driving borrowing costs ever lower and creating a huge wealth bubble that has saved even the most inefficient of investors.
Whether the president engaged in questionable or even illegal tax practices is only a small part of this story. But by focusing on his personal behavior, Congress may miss an opportunity to address the broader issues of fairness and equity and economic growth. Poor tax and economic policy can spur inefficient investment and concentrate opportunity on too few people.
One way the very rich avoid tax is through the discretionary nature of the individual income tax for investors. That is, the income from appreciated property (capital gains income) is not included in taxable income until the underlying asset is sold, a discretionary step taken by the investor. In the early 1980s I calculated that less than one-third of the net income from capital showed up on tax returns. Studies comparing income declared on individual income tax returns with wealth reported in estate tax returns implied that taxpayers reported a rate of return often hovering around 2 percent, when the value of stocks and other assets rose by an average of around 10 percent per year. Close to one-third of wealthy people in each of the years examined declared a return on their income tax returns of less than 1 percent on their wealth.
While owners of corporations often do indirectly pay corporate income tax, large real estate investors typically use pass-through business and have long been close to exempt from both corporate and individual taxation. In the heyday of the tax shelter era of the 1980s, when real estate investors were making money while shielding other income with huge losses, members of the Senate Finance Committee wondered aloud whether Treasury would collect more revenue if the tax law simply exempted the investments from tax.
Further, if property is held until death, no income tax ever is owed on any accrued but unrealized gains.
Meanwhile, while gains can be deferred or excluded from tax at death, property owners can immediately deduct almost all expenses on their tax returns.
Interest costs are among the most important of those deductible costs, and the nominal interest costs written off are often a multiple of the real costs of borrowing. For example, if annual inflation is 2 percent and annual borrowing costs are 4 percent, the taxpayer deducts twice the real expense of the borrowing. The most highly leveraged investors receive the most benefits.
Investors in real estate can also take advantage of “like-kind” exchanges that allow them to swap real estate properties with another owner and defer the recognition of any capital gains income from the investment.
In this “Heads-I-Win, Tails-You-Lose” world, owners can declare bankruptcy of one company that is performing poorly while maintaining ownership of others that may be thriving. Earn $5 million on an investment in one company, lose $6 million in another; declare company bankruptcy in the second case, and the owner can come out ahead, while others bear the cost.
Bank lending practices, such as the Deutsch Bank loans to Trump, provide a third source of protection. Employees and officers of large financial institutions can make big money even for bad investments. They can earn promotions and bonuses by boosting the institution’s cash flow, at least until everything blows up. And, of course, those bonuses and promotions usually can’t be recaptured.
Finally, by creating real interest rates on short term debt that are close to zero, monetary policy can make the real cost of borrowing also close to zero or even negative after the taxpayer deducts nominal interest costs in excess or real interest payments. As one result, the ratio of household wealth to income rose remarkably from the early 1990s to today, generating at least an additional $25 trillion of nominal wealth over and above a normal growth rate. Recent efforts by the Federal Reserve to buy up all sorts of debt to keep the financial system functioning has further protected wealthholders even in the midst of the current COVID-19 crisis.
Taken together, all these policies have contributed significantly to increases in wealth inequality while they protected even the most inefficient investors. Trump’s tax returns may be just the tip of the iceberg, only one piece of visible evidence on a set of economic policies that may continue to lead to years of sluggish growth.
This column originally appeared on TaxVox on October 19, 2020.
Congress has responded to the COVID-19 pandemic-induced economic slowdown by putting hundreds of billions of dollars directly into people’s pockets. Much of this came from the Economic Stimulus Payments ($1,200 per adult/$500 per child) administered by the IRS and expanded unemployment benefits. The evidence so far suggests that many households are saving much of that money, along with higher shares of their private income. And that suggests those payments are having weaker economic benefits than they otherwise could.
A recent report by the Bureau of Economic Analysis (BEA), found that the saving rate of US households rose from about 8 percent in pre-pandemic February to 13 percent in March to 33 percent in April. Annualized, that would be equal to $4.7 trillion in increased savings, far more than the increase in net transfers made so far by government through the various COVID-19 relief bills.
Before taking into account changes in government transfers, disposable personal income (net of taxes and related social insurance contributions) fell across March and April by about $1.6 trillion (all numbers here are at a seasonally adjusted annual rate, so that, roughly speaking, a $100 billion decline in one month, if permanent over the year, would add up to an annual decline of $1.2 trillion). Thanks largely to delaying the income tax filing deadline from April 15 and those COVID-19 relief bills, government transfers less taxes rose by about $3.4 trillion over those two months. Despite the devastating losses in wage and other income suffered by millions, disposable personal income overall rose by about 13 percent or about $1.8 trillion (on an annual basis). Still, outlays (basically all forms of personal spending) fell at an annual rate of about $3 trillion, or nearly double the $1.6 trillion decline in disposable personal income before those net transfers.
There are many reasons why people were not spending in the pandemic months of March and April. At first, in March, people were afraid to travel, shop, or eat out. Then governments closed many businesses and imposed stay-at-home orders, leaving people without places to spend, and often without jobs. Those abnormal pressures weakened the normal recession-fighting ability of fiscal and monetary policy to boost consumer demand.
Even in a classical economic downturn, recovery often takes time simply because people become extra cautious with whatever money they have. Yale economist and Nobel laureate Robert Shiller recently noted how the tendency of some people to embrace austerity may have extended the length of the Great Depression. When people spend less, they save more, and with less spending on goods and services, the demand for workers to produce those goods and services falls as well.
Admittedly, the BEA numbers, which only cover income and items such as checks or refunds paid by the end of April, tell a very incomplete story. The stimulus funds delivered by rebate payments or unemployment benefits no doubt lessened the severity of the downturn. Many households did or eventually will spend their rebate payments and increased unemployment and other benefits, though for some it may take a while. Without a continuation of these transfers, the declines in personal income will soon exceed the net increase in transfers provided by government. The jury, therefore, is still out on just how well these recent congressional actions will stabilize the economy in the short term and stimulate demand over the medium term.
Still, the data raise important policy questions. My colleague Howard Gleckman has questioned the value of government distributing payments to almost everyone, not just those who are most in need. As he notes, many types of consumer spending (e.g., travel, entertainment) are just not available at the current time.
Low-income households and the unemployed probably will spend funds quickly, if for no other reason than to pay for rent, food, and utility bills. Many people, however, suffered little or no decrease in income and have reduced their consumption for reasons other than immediate financial shortfalls. Even after months pass, they are unlikely to take two cruises at the end of the year to make up for the one they gave up this spring. These households may simply deposit those government payments and save them for the longer-term.
Congress should study both the successes and failures of the early government payments to boost demand as it considers the next round. It needs to carefully consider how well each dollar of spending or tax reduction meets the two primary objectives of the day: caring for those who are hurting and stimulating the economy.
Here are four rules that should guide these deliberations:
- Government purchases likely stimulate the economy more than many forms of transfers and tax reductions;
- Almost any speed-up of test and vaccine production and delivery leads to faster economic recovery;
- Reinforcing a normal tendency for consumption rates to rise as income and wealth falls, government spending on households whose incomes have declined and whose bills are due will be more effective than providing windfalls for those who have not lost income and already are saving more than usual; and
- Not every cause, no matter how worthy for other purposes, deserves equal attention as a response to our current health and economic crises.
Using these four guideposts can ensure the effectiveness, efficiency, and equity of future federal responses to the current health and economic crisis.
This column originally appeared on TaxVox on June 8, 2020.
The COVID-19 Crisis Reveals the Need to Let Eligible Workers and Retirees Take Partial Social Security BenefitsPosted: June 11, 2020
Workers often face uncertainty about their jobs, but not since the Great Depression have so many been unemployed or worried about becoming unemployed.
Some have been laid off temporarily but don’t know if their job will come back. Others find themselves without a job and searching in a labor market with few openings. These problems hit older workers especially hard, as research shows they have the toughest time getting a new job and, once reemployed, have great difficulty restoring their former pay level. Their problems will be with us for some time as we recover from the COVID-19 pandemic and recession.
I have a simple suggestion to help older workers that would cost the government little money because it mainly changes how and when older workers receive their Social Security payments, with adjustments that keep their value actuarially fair. The goal is to give people much more flexibility to adapt to changing financial needs and employment prospects.
Social Security could make it easier for those eligible for old age benefits after age 62 to opt in and out of benefit receipt and collect partial benefits, with each delay in benefit receipt boosting future annuity payments through delayed retirement credits and related adjustments, similar to what is already sometimes allowed.
Older workers hoping to get back in the labor market can then adjust as their opportunities and needs change. This approach would grant older workers, whether retired or not, flexibility to use some of their Social Security benefits to buy a very good annuity at variable levels over time.
The ability for some eligible beneficiaries to opt in and out of the system and a mandated system of partial benefits for others already exists, though the process is confusing.
Consider those older than the full retirement age (or FRA, age 66 and 2 months for those born in 1955). Technically, they can receive benefits, suspend them, and resume collecting. But Social Security doesn’t broadcast this ability, so few know it exists.
For every year these workers delay collecting benefits until age 70, they receive an 8 percent increase in their annuity, plus inflation adjustments. Thus, if I were born in 1955 and delay benefit receipt 46 months after the full retirement age, from 66 and 2 months to age 70, I can get about a 31 percent higher annual benefit every year after age 70. But I could also take benefits at age 66 and 2 months, stop receiving them completely for two full years at ages 67 and 68, then start receiving them again at age 69, thereby increasing my future annual annuity by 16 percent.
Why not make this system simple and transparent? Why not allow workers simply to take a partial benefit that works the same way? And why not give them the option not just to opt in and out of the system periodically, but also to cut back on some benefits in exchange for later actuarial adjustments?
For instance, we could allow people to take half their benefit in a given year and receive half the delayed retirement credit, then receive no benefit the next year in exchange for a full delayed retirement credit, and switch again to a full benefit in a third year. This would allow people to adjust over time according to their needs and work prospects—a particularly valuable option during the ups and downs of recession and recovery.
The language surrounding credits and adjustments for delayed benefit receipt confuses even financial advisers. It derives from a long history in which delayed benefit receipt was defined by an earnings test that took back Social Security benefits as beneficiaries earned more. Congress removed the earnings test for those past the FRA, but as the FRA increases toward age 67 for those born in 1960 and later, more older workers are quickly becoming subject to it and fewer for the delayed retirement credit.
A variation on a historically much stricter earnings test remains for those retiring between age 62 and the FRA. In essence, in 2020, Social Security is reducing benefits by one-half of earnings above $18,240 for beneficiaries between age 62 and the FRA, although a different formula applies to the year when the FRA is reached. But benefits lost in those early years are offset by a little more than 7 percent per year increase in later payments.
The point to remember is that those between age 62 and the FRA essentially are often forced to take something similar to a delayed retirement credit. The amounts involved are fixed by an earnings-related formula, not their financial needs. One survey found three out of five respondents incorrectly viewed the earnings test as a permanent tax on work, so it also deters work, especially for those in their early 60s.
Getting $.07 or $.08 every year of remaining life on every $1.00 deposited, plus an inflation adjustment, is a great annuity rate for those with average or better life expectancies, better than anything available in the private market, especially now that the Federal Reserve has cut interest rates to nearly zero. The main losers in the mandated system are those younger than the FRA with chronic health problems that would lead to an early death; they would be better off not purchasing an annuity.
This simple reform would enable people to make adjustments according to their own financial needs in times of reduced income or unemployment and to buy the decent annuities the system offers over time and in variable amounts.
Although congressional action would be necessary to allow beneficiaries to take partial benefits before the FRA, the Social Security Administration needs no authority to clarify the existing opportunity to opt in and out for those older than the FRA. The sooner it can adapt, the sooner workers—including those forced to retire earlier than planned during economic downturns—can adapt according to their own needs and future opportunities.
As our population gets older, we are moving into a world where the worker-to-beneficiary ratio in Social Security falls from 4:1 in 1965 to 3:1 in 2010 to close to 2:1 in 2040. At the same time, older people recently have increased their rate of participation in the labor market, and their employment rate actually increased during the last recession (PDF).
Even if the COVID-19 crisis had not swelled the number of older workers and retirees in need of greater flexibility, Congress could make this convoluted system of actuarial adjustments salient and transparent for millions of current and future Social Security beneficiaries.
This column originally appeared on Urban Wire on May 29, 2020.
The CARES Act Charitable Deduction For Non-Itemizers Was A Lost Opportunity To Help Beneficiaries Of Non-ProfitsPosted: May 29, 2020
According to the Joint Committee on Taxation, Congress spent about $1.5 billion in the Coronavirus Aid, Relief, and Economic Security (CARES) Act to create a one-year charitable deduction of $300 for the 90 percent of taxpayers who claim the standard deduction.
Unfortunately, little of this $1.5 billion will benefit the recipients of charitable services. At best, they may get $100 million or so in extra services. The rest of the money simply reduced taxes for those non-itemizers who will claim the deduction without significantly changing their overall amount of giving.
This was a missed opportunity. With a better designed tax subsidy, Congress could have increased the incentive to give to charity. Or, it could simply have given $1.5 billion directly to charities, with a requirement that they spend it on beneficiaries.
Don’t get me wrong. In the grand scheme of things, this is small potatoes in a $2 trillion package. My colleague, Howard Gleckman, has outlined the failures and successes of this and other charitable provisions of the CARES Act.
Still, the $300 deduction sets a poor precedent, especially for the more universal deduction at a much higher foregone revenue cost that many charities have been pursuing. This type of proposal very likely will be a topic of Congressional attention in the near future, at least when Congress addresses the post-2025 expiration of the 2017 individual reforms that led to a significant cut back in the value of the charitable deduction.
The CARES Act version has several flaws: First, it provides deductions for what people do anyway. Second, the law creates no way for the IRS to track newly deductible gifts, and cheaters will be among the biggest winners. Finally, it caps at a very low level the amount of giving eligible for the new subsidy. The Tax Policy Center estimates indicate that over 90 percent of both itemizing and nonitemizing donors make annual contributions in excess of $300. Thus, most donors get no extra incentive for any extra gifts because their deduction is limited to less than their normal annual giving without a tax deduction.
By extension, those who benefit from the work of non-profits could lose out of tens of billions of dollars of services annually, and hundreds of billions over a decade, if Congress builds on the CARES Act in creating a more universal deduction. This is because reduced federal revenues will likely mean less federal spending directed through non-profits.
There are better designs.
Instead of subsidizing the first dollars of giving, Congress could concentrate its rewards on the last dollars contributed. It could set a contribution floor at, say, 1 percent or 2 percent of AGI, below which donors would get no subsidy. Excluding those who do not give, the average level of giving for donors is about 3 percent. So this approach concentrates the tax incentive on taxpayers who give an average or greater share of their income to charity. At the same time, Congress could cap deductions for donations at a high level, such as the 50 percent of adjusted gross income (AGI), the long-time limit that was applied to itemizers (the CARES Act raised the cap to 100 percent of AGI for 2020).
The signals Congress sends are very important. When it comes to charitable giving, the most effective message is: You should donate more than you traditionally have been giving—whether or not you itemize. The symbolism of a subsidy made universally available to all taxpayers giving away more than a small amount may increase charitable giving even more than implied by the financial reward provided by the tax incentive.
My simple suggestion is to put the beneficiaries of non-profits first. Members of Congress should ask the Joint Committee on Taxation to estimate the amount of giving that various options could generate at each of several alternative revenue costs. This additional analysis would allow Congress to focus on the efficiency of the tax incentives under consideration. Beyond examining alternative floors and caps, as noted above, Congress should include other options, such as instituting a better information reporting system that, by reducing revenue losses to those who cheat on their tax forms, would add to the revenues that could be devoted to an enhanced charitable incentive. Allowing deductions for the previous tax year up to the time of filing, a provision that once passed the House of Representatives, would also increase giving substantially relative to any revenue cost.
Once Congress decides how much it wants to spend in terms of foregone revenue, it should then choose the option that maximizes the benefits for those whom charities aim to help, rather than an option that promotes the self-interest of either taxpayers or the non-profits themselves.
This column originally appeared on TaxVox on May 19, 2020.
Did the Treasury Department’s decision to put President Trump’s name on the coronavirus stimulus checks slow the mailing of those checks? Of course it did, despite Administration claims to the contrary.
The decision surrounding Trump’s name triggered a series of time-consuming steps. The White House consulted with top Treasury officials who, in turn, talked to top IRS officials, who, after some delay because of the political sensitivity of the matter, communicated with the agency’s staffers who had to carry out the operation. These civil servants had to redesign the basic check, mock up the display of the president’s name, and rejigger computer software needed to produce the checks. Then they had to have the redesign reviewed at the IRS, Treasury, and, likely, the White House to both insure against technical glitches and make sure the president was satisfied.
Did this take time? Of course, it did. Does it matter a lot? Well, that’s a different question.
It certainly took attention from other, more important, matters. Senior Trump Administration officials, including the Treasury Secretary and the Commissioner of the IRS, were spending time on marketing the president rather than on, say, reviving the economy or preventing occurrences of tax fraud likely to accompany any rush to get the payments out.
Did it slow down the payment of checks to people? Here’s how a Treasury spokesperson carefully answered that question:
“Economic Impact Payment checks are scheduled to go out on time and exactly as planned — there is absolutely no delay whatsoever…In fact, we expect the first checks to be in the mail early next week which is well in advance of when the first checks went out in 2008 and well in advance of initial estimates.”
Nothing in that statement says that the additional process did not slow down the mailing of the checks relative to when they could have been mailed out. The comparison with 2008 is irrelevant.
Meanwhile, the IRS released another statement, to wit:
Thanks to hard work and long hours by dedicated IRS employees, these payments are going out on schedule, as planned, without delay, to the nation.”
Well, the same calculations take place in all aspects of life as well.
Consider the brag about checks going “out on time” or “on schedule.” If I tell my wife I will be home by 7 PM and then take an extra walk around town but still get home by 7 PM, did my stroll delay my arrival? Of course, it did. In fact, it is likely that IRS expected to be ahead of the original “schedule” before it had to add the president’s name to those checks.
Think of it this way: Suppose the IRS staff worked all night to add the president’s name to the checks. That all-night session may have avoided delay relative to the prior schedule. But, if the staff didn’t have to add his name, working that extra night could have been devoted to getting the checks out earlier.
Maybe figuring out the extent of any delay isn’t at the heart of the issue. There are more important matters to worry about in these days of COVID-19. Even if somehow all this extra effort caused no delay, it’s demeaning to ask career professionals in places like IRS to devote their time and attention to promoting the president’s reelection. This request has nothing to do with helping the taxpayers they pledge and, as the IRS release indicated, “work hard” to serve. Worse yet, this accommodation of the president’s wishes reinstates a bad precedent for political interference in the operations of the IRS. These actions have real consequences, none of them good.
This column originally appeared on TaxVox on April 30, 2020.