This post originally appeared on TaxVox.
Q: Since the modern federal income tax was created in 1913, how often has Congress enacted a revenue-neutral income tax reform that significantly expanded the tax base and lowered rates??
A: One. In 1986.
It is no wonder that the Trump administration—like others before it—is struggling with broad and systemic tax reform. To better understand why, think of tax legislation in three distinct flavors: tax cuts, tax increases, and revenue-neutral changes.
Most income tax bills cut taxes. The reason is obvious. Elected officials like to give something to voters rather than take something away from them.
Since the large tax increases required to finance World War II, most revenue bills reduced taxes, particularly in the period up through 1981. Significant reductions in defense spending as a share of the economy, along with inflationary increases in incomes that pushed people to pay higher individual income tax rates, made legislated tax cuts possible during what I call the Era of Easy Finance.
In a few cases, Congress did raise income taxes. Tax historians Joseph Thorndike and Elliott Brownlee have shown that almost all major income tax increases came about as a result of war. Others, generally raising annual revenues by well less than 1 percent of GDP, have been enacted, for instance, as part of several deficit reduction agreements between 1982 and 1997.
Broad-based and systemic income tax reform that keeps revenues roughly the same as current law requires a tremendous amount of work, largely because it means broadening the tax base by identifying which popular tax subsidies, now costing more than $1 trillion annually, should be targeted for elimination.
Less broad-based but still systemic reforms are also possible. Outstanding modern examples are the codification effort of 1954 and the 1969 reform best known for addressing tax issues surrounding foundations and charities.
As economic coordinator of the Treasury’s 1984 study that led to the Tax Reform Act of 1986, I remember how difficult it was for Treasury and Joint Committee on Taxation staffs to draft legislation and to estimate cost and distributional effects for those proposals. Increasing taxes on some to pay for tax cuts for others requires tax writers to agree on principles to guide and justify their actions. The political aspects of tax reform, building a political coalition to push to see these principles enacted, are even more difficult than the technical concerns.
Tax reform of the revenue-neutral variety is much harder than merely cutting taxes. To cut taxes, lawmakers simply tally a set of wants, perhaps pare them down to fit within a specified amount, and leave the financing bill for current tax cuts to future generations of unidentified taxpayers.
Finally, the design of any systemic reform must acknowledge the economic and political environment of its time. The 1986 Act, for instance, took advantage of bipartisan concerns over tax shelters, President Reagan’s focus on high tax rates, Democrats’ objections to the rising income taxation of the poor, and social conservatives’ efforts to reverse the rising burden being placed on families with children. Deficits were perceived to be a problem, though a smaller one than today in part because Congress had raised taxes and cut spending in the 1982 and 1984 budget agreements and in the Social Security Act of 1983.
President Trump and his team have promised to cut tax rates for all businesses and for the middle class, while not increasing the deficit. They can’t get there by taxing the poor. Even if they assume greater economic growth, it’s not going to be enough to pay for the historically large tax cut provisions. So what’s left?
Some seem to want simply to throw in the towel on revenue neutral tax reform and just cut taxes instead. But $1.3 trillion in additional spending is already built in for 2026 (largely due to rising interest costs and increased spending on Social Security, Medicare, and Medicaid). This is far more than the $850 billion in additional taxes projected to be collected for that year due to a growing economy. How will Congress and the president cover that existing shortfall, even before they think of more tax cuts?
That’s the box the Administration is in. And it is why tax reform is no easier than health care reform. Avoiding big new revenue losses requires systemic reform, such as increasing taxes on individuals to offset business tax cuts. Or engaging in true budget reform that includes scaling back on popular programs. Those are the requirements of our time, like them or not, and while briefly they might be ignored politically, over the longer run they can’t be dodged as a matter of either economics or arithmetic.
This post originally appeared in TaxVox.
In the March and April 2017 print editions of the Chronicle of Philanthropy, I proposed both a public and a private sector initiative for strengthening charities. These included improved tax policies as well as steps charities could take independently of any legislation. These initiatives aim to increase charitable giving of income, wealth, and time.
My organizing principle was simple: First, make tax subsidies more effective and efficient. Second, improve the way charities market themselves. Neither Congress nor the charitable sector has ever approached either task in a comprehensive way. The articles are here and here, with permission of the Chronicle.
Here, briefly, are my suggestions:
What government can do:
- Allow all taxpayers—even current non-itemizers—to claim a deduction for contributions above some minimum amount.
- Extend the deduction to gifts made by April 15 or filing of one’s tax return—similar to the extended contribution date for Individual Retirement Account contributions– rather than December 31 of the previous calendar year.
- Create a better donation-reporting system to IRS to reduce tax non-compliance, with a reward of an extra deduction for those donations; the improved tax compliance should more than pay for the extra reward.
- Make it easier for individuals to make donations from their IRA accounts.
- Reduce and simplify the excise tax on foundations.
- Encourage charitable bequests, especially if the estate tax is cut or repealed.
What charities can do, independently from government:
- Create a national campaign to promote giving, such as:
- Tell simple but powerful human-interest stories extolling generous people.
- Help donors identify worthy programs by promoting access to useful sources of information on each charity.
- Encourage people to give to charity when they settle disputes.
- Help people understand better their potential to give out of wealth, not just income, and to leave lasting legacies:
- Run endowment campaigns.
- Encourage wealth advisers to promote charitable giving.
Today charities feel under siege. They fear they are about to lose direct government support if Congress cuts domestic spending that funds the specific programs they run. And they worry that lawmakers will trim tax benefits for charitable giving by individuals and firms. Their concerns are legitimate but, in truth, over the many decades I have worked with charities on public policy issues, their advocacy has nearly always felt defensive.
Charities can easily become collateral damage from policies that are not aimed directly at them. Congress won’t decide broad issues such as size of government, tax rates, limits on tax incentives, or the share of revenues that should come from income taxes (the only tax where there is a charitable deduction) solely or primarily based on their effect on the charitable sector.
Thus charities must think longer-term as the nation is struggles to define a modern set of public policies and societal goals relevant to 21st century needs and opportunities. My suggestions are intended to extend well beyond any current political battle, no matter which party controls government at any point. Their goal is to strengthen the charitable sector, by improving both government incentives and the outreach and self-examination by non-profits themselves.
Fighting to maintain the status quo is not a strategic option. Nor should every charity expect to come out unscathed in this rapidly changing environment. But the US is facing important choices as it decides the direction and size of government in the Trump era. That debate ought to include a broad look at charities in this new environment and whether that includes strengthening, though reforming, the role of charities in American life.
This post originally appeared on TaxVox.
President Trump came into office promising to repeal the Affordable Care Act, abandon key multinational trade agreements, build a wall and send immigrants home, and reform the tax code. Many Democrats have sworn to oppose him at every turn. On the first three items, he has already faced obstacles or stalemate and even temporarily left the battleground. But are these debates really about substantive reform that improves people’s lives? Or mainly over capturing symbols that appeal to each party’s base? Those goals aren’t the same.
Reform defies easy party or ideological labels because it often focuses not on bigger or smaller government but fixing poorly-functioning operations, establishing greater equity among households, or adapting to new circumstances. With health, immigration, trade, and tax policy the need for constant real improvement conflicts with important, but often-counterproductive, fights over political symbolism.
Health Reform. When the Affordable Care Act (ACA or Obamacare) passed the Senate, backers knew it had flaws. They hoped to fix them later in the legislative process, but the death of Sen. Ted Kennedy cost Democrats their filibuster-proof majority in the Senate and made the fixes or amendments requiring a new Senate vote virtually impossible. As a result, the healthcare community and households continue to grapple with an imperfect environment: Gains from expanded insurance coverage have been offset by slower than expected take-up rates, especially among young adults, for ACA marketplace policies, ongoing uncertainty about Medicaid expansions, and failure to come to grips with the full impact of health cost growth, often outside of Obamacare, on the federal budget.
Congress and President Trump have a chance to repair those problems, but both parties find themselves in a box. Republicans can’t accept any reforms that allow Democrats to claim “Obamacare” is being preserved, while many Democrats can’t swallow changes that acknowledge the ACA’s failures.
Trade Reform. Trade is another case where political symbolism impedes needed change. No doubt, our trading partners at times violate the spirit and even treaty letter of “fair” trade (so does the US), but trade agreements are the very vehicle for limiting such violations. Rather than repairing these understandings, political symbolism demands they be torn up or abandoned. Thus, instead of reviving and revising the Transpacific Partnership, which might have enhanced US trade in Asia, the Trump Administration has scrapped it.
Any successful trade agreement must strengthen rather than weaken international commerce if it is to promote economic growth without raising consumer prices. But trade debates occur on treacherous political ground. Any shift in trade, no matter how good or bad, almost inevitably reduces demand for some US-made products and hurts the workers producing those goods, thereby creating a new group of populists who will cry “foul” that the President and Congress have once again abandoned workers.
Immigration Reform. People suffering from persecution, hunger, or lack of human rights will try to escape those horrors and find new opportunity. So it has always been and will always be. Borders are porous enough that there are tens of millions of immigrants, legal and illegal, in the United States and much of Europe. Meanwhile, immigrants grow as a share of developed nations’ total populations, partly due to relatively low-birthrates in the existing populations. We can reduce opportunities for legal entry, step up border patrols, build walls, and send even more people back to their prior country of residence. But none of those actions really address the basic economic and social forces at play, while temporary symbolic political victories leave millions of families fearful of breakup, reduce domestic output by immigrant workers, and hurt America’s image as the home of freedom for people around the globe.
Tax Reform. In taxation, the symbolic fights almost always center on the size of government and progressivity. Yet many of the tax code’s real problems are that it is inefficient, complex, and treats those with equal incomes unequally and inequitably. The Tax Reform Act of 1986 neatly focused on the latter issues by making no significant change in either revenues or progressivity. But even in its early stages, the debate over a 2017 tax reform has already been muddled by a cacophony of mutually inconsistent goals: Reduce tax rates for multinational corporations and cut taxes for the middle class while not increasing the deficit or raising anyone’s taxes.
As long as lawmakers fight mainly over symbols rather than substance, they are unlikely to achieve many real improvements in policy. And tax reform will follow along the path down which health, immigration, and trade reform already seem headed.
In a classic case of Monday-morning (or Wednesday-morning) quarterbacking, many of us tend to seek one simple explanation for why Donald Trump won the recent presidential election. New analysis from some of my colleagues at the Urban Institute shows that the real reasons are more complex and transcend sound bites.
As part of our Opportunity and Ownership Initiative, Diana Elliott and Emma Kalish have assessed ongoing election narratives with some on-the-ground facts and an interactive map. They compare county-by-county elections results with various financial and demographic characteristics of voters. Interestingly, Diana and Emma conclude that financial insecurity did not drive voting preferences.
In fact, Hillary Clinton won just 4 of the 55 counties (or county equivalents) whose residents had the highest average credit scores (720 and above). High credit scores imply bills paid promptly and the type of financial stability that comes with paying off a mortgage over time. Clinton did win the 11 counties with the lowest scores.
Race and education were strong factors: generally speaking, white consumers were more likely to vote for Trump, those with bachelors’ degrees or higher to vote for Clinton.
These results provide information not only about voting patterns but about whether different policy initiatives would help those who feel ignored or left out by government, another part of the post-election debate. Further research might also reveal whether Trump appealed to people living in regions that had suffered some decline in security or population, even if voters’ relative financial standing in November 2016 was average or better.
If you access the interactive map yourself, you can do your own analysis of many interesting—and sometimes surprising—factors and see results for particular counties and regions.
The California Secure Choice Retirement Savings Program: Why pension reform turns inefficiently to the statesPosted: December 5, 2016
This post originally appeared on TaxVox.
By: C. Eugene Steuerle and Pamela Perun
Starting as soon as it can be made operational, perhaps in 2018, as many as 7 million private-sector California workers who currently have no access to a job-based retirement plan will be automatically enrolled in a state-managed savings program. The California Secure Choice Retirement Savings program will start with employee contributions of 3 percent of earnings, though the state board managing the initiative could increase the contribution rate to as much as 8 percent. While workers will be auto-enrolled, they can opt out of the plan.
The new law is an important step toward securing better retirement coverage for those who require it most. Too many people reach old age with far too little saving to meet their long-term needs.
While an interesting idea ,the plan, however, faces limits that would be better served through federal reform. For instance, companies that operate across state borders don’t want to be bogged down with 50 different sets of state regulations. In addition, federal law currently grants employee deposits fewer tax breaks than are enjoyed by employer contributions. Only federal law changes can deal with those challenges.
However, changes to federal law that reduce tax revenues may be blocked by the constraints of the federal budget process.
Here’s the rub. At the federal level, any pension reform that might succeed in securing significantly more retirement saving will be scored as losing revenue to the federal government. Big revenues. And no major tax reform or tax cut in recent years, as well as President-elect Donald Trump’s campaign tax plan, has made pension reform a priority.
Suppose, for instance, that a national reform increases net contributions to traditional retirement plans by $80 billion, or one percent of the $8 trillion of wages and salaries that workers earned in 2016. If those savers reduce their tax on new deposits by 15 percent, revenues would decline by $12 billion in the first year and by more than $100 billion over a decade, even after accounting for taxable withdrawals.
Even if we see big new tax cuts in a Donald Trump presidency, that’s a lot of money. However, state legislators do not face the same budget process constraints as federal lawmakers. They are indifferent to the effects of state law on federal revenues, and the impact of a big tax-advantaged savings plan on state revenues are relatively modest given lower state income tax rates. Hence, for now, all incentives point toward the states acting independently, inconsistently, and inefficiently in tackling our nation’s larger retirement security problems.
There are alternatives. We have proposed an alternative strategy through a federal plan that would greatly simplify current law while broadly encouraging both employer and employee contributions.
Of course, it makes some sense to let states operate as laboratories of democracy. However, the more successful this California effort and similar ones being considered in Illinois, Oregon, and Connecticut, the greater the need for the type of coordination that only the federal government can provide. Until we get our federal budget into some sort of order, however, federal reform likely will continue to be stifled. Catch 22, once again.
Photo courtesy of Randy Bayne/via Flickr Creative Commons.
This post originally appeared on TaxVox.
I have never believed that candidates should lay out detailed policy agendas in their campaigns. While broad outlines are helpful, the specifics are too complex for the stump and often unappealing to voters. So to move beyond campaign promises that seldom add up for any candidate, here is how President-elect Trump could move forward in six policy areas even while facing extraordinary budget constraints. Each issue has a framing that gives it a better chance of garnering bipartisan support.
Workers. Many workers made it clear in this election that they feel forgotten by government. While the left and right disagree over how well our government promotes opportunity for workers, they generally agree it could do better. Trump tapped into workers’ frustrations but hasn’t yet identified how to significantly help them. How about this as a start? Simply ask agencies to assess the extent to which their programs could better promote work, even when that is not their primary mission. This applies to a wide range of programs, from wage, housing, health, and food supports to how well the military helps veterans get a job.
Budget Reform. Even if some adviser tells the President-elect that there is magic money to be had through extraordinary economic growth, tackling budget shortfalls will soon become unavoidable. Never before have so many promises been made for the future, both for unsustainable rates of spending growth and lower taxes. Indeed, all future revenue growth and then some have already been committed for health, retirement, and the interest costs alone. Engaging in more giveaways only exacerbates this problem. One way to cut the Gordian knot and convince the public to buy into longer-run budget goals is to show how interest savings generated by long-run fiscal prudence eventually allows both more program spending and lower taxes than do big deficits.
International Tax Reform. If the US is going to collect tax revenue from US-based multinationals, it will need to get a handle on this issue. It makes no sense administratively to tax these firms based on the geographical location of headquarters, researchers, patents, borrowing, or salespeople. The solution involves taxing corporations less but individual shareholders more, while still engaging corporations to withhold those taxes. Any reform must limit the firms’ ability to shift income and deductions to the most tax-advantageous locations.
Individual Tax Reform. Trump could accomplish some individual tax reform by focusing less on reducing the existing $1 trillion-plus level of tax subsidies and more on limiting their automatically-increasing growth rates. He could use the revenue to either reform the tax code or better target the subsidies. For example, he could redesign housing-related tax preferences so they truly promote homeownership.
Health Reform. Conservative and progressive health experts agree that the Affordable Care Act suffers from at least two problems: It did not sufficiently tackle the issue of rising medical costs, and many people remain uninsured. Trump could generate more bipartisan support if he aims to reform the system to cover more people while generating enough cost saving to make that goal attainable in a fiscally sustainable way.
Retirement and Social Security. President-elect Trump promised to not cut Social Security benefits while Secretary Clinton said she would raise them. But raised or cut relative to what? An average-income millennial couple is scheduled to receive about $2 million in Social Security and Medicare benefits versus $1 million for a typical couple retiring today. Younger people, who often expect no Social Security benefits, seem willing to accept changes that would slow the program’s rate of growth. That’s an opening for Trump to sell the reform as a long-term effort that opens up the budget to some of their needs, such as reducing student debt, while still protecting the current elderly. For many elderly, benefits can even be enhanced through private pension reform to increase individual retirement savings and enhancing Social Security benefits for low-income retirees.
Paraphrasing Herb Stein, who was President Nixon’s chief economic adviser, “what can’t continue won’t.” And that’s true with the nation’s unsustainable fiscal path. Eventually, we will need to take the types of steps that I’ve outlined. With some creative thinking about how to newly frame important issues, President Trump could advance some real possibilities of reform despite a season of ugly campaigning.
Photo courtesy of Gage Skidmore/via Flickr Creative Commons.
By: Joseph Rosenberg, C. Eugene Steuerle, Chenxi Lu, and Philip Stallworth. This post originally appeared on TaxVox.
Both Hillary Clinton and Donald Trump have proposed income* tax changes that would result in less charitable giving. While the effects are indirect, the Tax Policy Center estimates that Trump’s plan would reduce individual giving by 4.5 percent to 9 percent, or between $13.5 billion and $26.1 billion in 2017, while Clinton’s plan would reduce giving by between 2 percent and 4 percent, or $6 billion to $11.7 billion.
The actual reduction in charitable gifts would depend mainly upon how responsive givers would be to smaller tax incentives. However, higher-income taxpayers would be affected the most. Lower-income households would not likely reduce giving since most do not itemize deductions today and would not under either the Trump or Clinton plans.
Figure 1 summarizes the increase in the cost (reduction in incentive) of giving under the two plans. The Clinton plan only affects the cost of giving for those in the top 5 percent, while Trump’s plan raises the cost of giving for those at all income levels.
Start with Trump, who would reduce the tax benefits of charitable giving in three ways:
First, by reducing marginal tax rates he’d increase the after-tax cost of charitable giving. If you give away $100, you don’t pay tax on that $100 of income, so the after-tax cost of the donation for someone in today’s 39.6 percent top tax bracket is only about $60—the $100 gift minus $39.60 in tax savings. But by reducing the top rate to 33 percent, Trump would raise the after-tax cost of that $100 gift to $67.
Second, by raising the standard deduction to $15,000 ($30,000 for couples), Trump would sharply reduce the number of taxpayers who itemize. People who stop itemizing can no longer deduct their charitable contributions and thus lose the tax break. In 2017, 27 million of the 45 million who now itemize would opt for the standard deduction, a decline of 60 percent.
Finally, Trump would cap itemized deductions at $100,000 for singles and $200,000 for joint filers. IRS data indicate that in 2014 taxpayers with over $1 million in adjusted gross income (AGI) deducted an average of $165,000 for charitable contributions and another $260,000 for state and local taxes. Since the state and local tax deduction alone would exceed Trump’s proposed cap on itemized deduction, many high-income taxpayers would lose their tax incentive to give to charity.
While all these changes might discourage charitable giving, Trump’s generous tax cuts would also leave taxpayers more money to give to charity. This would particularly be true for very high income households: In 2017, tax cuts for people in the top 1 percent would average more than $200,000.
Clinton’s plan would do little to change the giving incentives of taxpayers for the bottom 95 percent of the income distribution. She’d slightly increase incentives for low- and middle-income taxpayers to give to charity by boosting their after-tax incomes.
In contrast to Trump, Clinton would significantly raise taxes on high-income households. She’d impose a 4 percent surcharge on adjusted gross income (AGI) in excess of $5 million, increase capital gains rates based on holding periods, create a minimum tax of 30 percent of AGI phasing in between $1 and $2 million of incomes, and put a 28 percent limit on the value of tax benefits from deductions other than the charitable deduction. On net these not only decrease after-tax incomes, but also lead some current itemizers to take the standard deduction and thereby lose the charitable deduction. The proposal with the largest effective on giving incentives is the 30 percent minimum tax (i.e., the “Buffett Rule”), which would reduce the incentive for affected taxpayers.
Overall both candidates would reduce the tax incentives for giving to charity, probably not what either really intended.
*This analysis only includes changes in the federal income tax. Both Clinton and Trump have also proposed significant changes to the estate tax that would impact incentives to donate to charity and leave charitable bequests. Clinton’s proposal to lower the estate tax threshold and increase estate tax rates would increase giving incentives, while Trump’s proposal to eliminate the estate tax would reduce them.