Tax Policy and the Economy

September 20, 2012
Jeffrey Brown of the University of Illinois at Urbana-Champaign, Organizer

Andrew Samwick, Dartmouth College and NBER

Donating the Voucher: An Alternative Tax Treatment of Private School Enrollment

Approximately 10 percent of school-age children in the United States are enrolled in private schools, relieving public school systems and the taxpayers who support them of the financial burden of the cost of their education. At present, the tax code does not allow families who provide this financial relief an income tax deduction, even though such relief is a gift to governments for exclusively public purposes and thus is analogous to a charitable donation. Using the public use microdata sample of the American Community Survey and the NBER Internet Taxsim calculator, Samwick shows that granting families who enroll their children in private schools an income tax deduction equal to the per-pupil expenditures in their public school district would have cost the federal government an average of $7.75 billion per year over the 2006–10. This is less than one percent of federal income tax revenues. Because private school enrollment, public school expenditures, and marginal tax rates all increase with taxpayer income, the dollar benefits of this change are positively related to income. At the margin, high-income taxpayers would receive about 35 cents in federal and state tax relief for each dollar of per-pupil expenditures foregone.

Susan Dynarski, University of Michigan and NBER; Judith Scott-Clayton, Columbia University and NBER; and Mark Wiederspan, University of Michigan

Simplifying Tax Incentives and Aid for College: Progress and Prospects

The application for federal student aid is longer than tax returns filled out by the majority of U.S. households, yet research suggests that complexity in the aid process undermines its effectiveness in inducing more students into college. A 2008 journal article showed that most of the data items in the aid application did not affect the distribution of aid, and that the much shorter set of variables available in IRS data could be used to closely replicate the existing distribution of aid. This added momentum to a period of discussion and activity around simplification in Congress and the U.S. Department of Education. Dynarski, Scott-Clayton, and Wiederspan provide a five-year retrospective of what's changed in the aid application process, what hasn't, and the possibilities for future reform. While there has been some streamlining in the process of applying for aid, it has fallen far short of its goals. Two dozen questions were removed from the aid application and a dozen were added, reducing the number of questions from 127 to 116.Funding for college also has been complicated by the growth of a parallel system for aid: the tax system. A massive expansion in federal tax incentives for college, in particular the American Opportunity Tax Credit, has led to millions of households completing paperwork for both the IRS and the U.S. Department of Education in order to qualify for college funding.

Casey Mulligan, University of Chicago and NBER

Recent Marginal Labor Income Tax Rate Changes by Skill and Marital Status

Mulligan calculates monthly time series for the overall safety net's statutory marginal labor income tax rate as a function of skill and marital status. Marginal tax rates increased significantly for all groups between 2007 and 2009, and dramatically for unmarried household heads. The relationship between incentive changes and skill varies by marital status. Unemployment insurance and related expansions contribute to the patterns by skill, while food stamp expansions contribute to the patterns by marital status. Remarkably, group changes in hours worked per capita line up with the statutory measures of incentive changes.

James Hines, University of Michigan and NBER

How Important Are Perpetual Tax Savings

Federal estate taxes give very wealthy families incentives to transfer resources directly to distant generations in order to avoid taxes on successive rounds of transfers. Until recently, such transfers were impeded by the rule against perpetuities, which prevented transfers to most potential not-yet-born beneficiaries. Many American states recently have repealed the rule against perpetuities, raising concerns that the combination of tax incentives and new legal rights encourages the devotion of vast wealth to perpetual trusts designed to benefit distant generations, avoid taxes, and maintain a degree of control over the financial affairs of descendants in perpetuity. Hines analyzes the incentives created by federal transfer taxes and finds the tax benefits from establishing perpetual trusts to be quite modest, in representative cases ranging from 9-25 percent of just one component of the cost. Contrary to popular claims, tax benefits decline as investment returns rise. While the U.S. states that have repealed the rule against perpetuities and adopted other policies to encourage trusts host substantial trust assets, the evidence from tax returns suggests that perpetual trusts are not likely to account for a significant portion of this business. Consequently, tax incentives may not be responsible for an important shift of assets into perpetual trusts.

Alberto Alesina, Harvard University and NBER, and Silvia Ardagna, Goldman Sachs

The Design of Fiscal Adjustments

Alesina and Ardagna offer three results in their paper. First, in line with the previous literature they confirm that fiscal adjustment based mostly on the spending side is less likely to be reversed. Second, spending based fiscal adjustments have caused smaller recessions than tax based fiscal adjustment. Finally, certain combinations of policies have made it possible for spending based fiscal adjustments to be associated with growth in the economy, even on impact rather than with a recession. Thus, expansionary fiscal adjustments are possible.

Jeffrey Liebman, Harvard University and NBER

The Deterioration in the U.S. Fiscal Outlook

Liebman begins by reviewing the deterioration in the U.S. fiscal outlook over the period from 2000 to 2011. In 2000, the U.S. was running federal budget surpluses equal to 2 percent of GDP and projections showed surpluses persisting far into the future. Today, projections are for persistent deficits exceeding 5 percent of GDP. Liebman then discusses a variety of fiscal scenarios that could lead to stabilizing the debt-to-GDP ratio over the coming decade. He notes that while it is possible that spending reductions exceeding 2 percent of GDP will be achieved by the end of the decade, it seems more likely that the political process will produce savings of about 1 percent of GDP. Moreover, the savings achieved over the next 5 years are likely to be toward the low end of this range. This implies that scenarios in which the debt-to-GDP ratio is stabilized by end of the decade would likely include additional revenue of at least 1.5 percent of GDP. Liebman also observes that even if the United States is successful at stabilizing or reducing the debt-to-GDP ratio within the next five to ten years, longer-term fiscal challenges associated with population aging and rising health care expenditures will remain. He points out that from 1982 through 1997 the United States also faced what appeared to be an intractable budget deficit problem, which was ultimately addressed through deficit reduction legislation in 1990, 1993, and 1997. Liebman concludes that if the past is a guide, the U.S. political system will ultimately will make the needed adjustments to stabilize the debt-to-GDP ratio.

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