Social_Policy

Tax reform affects many areas of policy--children, charitable contributions, federal policy toward states and localities, health care, retirement policy, and business--to mention only a few. Tax reform cannot dodge these important issues, but must come to grips with how each of these areas of policy should be treated under a reformed system. In this powerpoint testimony, Gene Steuerle outlines many of the ways that current policies violate norms of simplicity, fairness, and efficiency and suggests possible means of improvement.

The Earned Income Tax Credit (EITC), administered through the federal income tax system, is the largest cash assistance program for low-income families. Data from the 2001 National Survey of America's Families (NSAF) show large disparities in who knows about the EITC amongst families with income below twice poverty. Only a small portion (27.1 percent) of low-income Hispanic parents know about the EITCsignificantly less than their peers of other races and ethnicities.

[Marketplace] The President was in North Carolina and Pennsylvania today. He's been stumping like a candidate to win support for his changes to Social Security and cuts in the budget. In Detroit, Mr. Bush said it's time to eliminate the programs that don't deliver on their promises. Commentator and tax expert Len Burman likes this 'good government test'. So he wonders why hundreds of programs are getting a pass.

If funds from education savings plans are not used for schooling, the penalties more than offset the tax benefits for lower-income families. But higher-income families gain even if their children do not go to college. A new breed of tax-advantaged savings vehicle has emerged for the college bound. Earnings on both the federal Coverdell Education Savings Account (ESA) and the state-level 529 savings plan are tax-free if the funds are used for postsecondary education.

Tax programs that provide deductions to homeowners or credits to both builders and owners, greatly exceed direct federal outlays on housing. The beneficiaries of these tax programs tend to be middle-to-upper income families who own their homes while the recipients of outlays tend to be lower income families who rent. In effect, the federal government pays those with more income to own their homes while paying those with less income to rent.

Low-income parents use paid preparers more frequently than other parents. This high reliance may be a good thing. Among low-income parents who know about the Earned Income Tax Credit (EITC) those who receive help are more likely to receive the EITC than their peers who prepare their returns independently. Although use of a paid preparer could obfuscate one's knowledge of important tax benefits if the paid preparer does not explain their calculations, this does not appear to be the case.

To encourage saving for retirement, private pensions such as employer sponsored 401(k) plans or IRAs receive favorable tax treatment by the federal government. A major goal of such tax provisions is to increase personal saving. A measure of the value of these tax benefits is provided by the Treasury Department, and the National Income and Product Accounts contains a measure of personal saving.

The main purpose of a tax system is to provide revenues to support government functions. It is not to cut taxes. At the same time one wants to create a tax system that supports efficient and fair government and to distort as little as possible the behavior of individuals who are subject to tax. The role of both tax cuts and tax increases is to move toward some optimal level of taxation needed for this time and place. People now use the tax system for a wide variety of reasonsreally too many. [ NewsQuarterly]

The individual alternative minimum tax (AMT) was originally intended to assure that high-income people paid at least some tax, but the AMT was poorly designed and affects more and more middle-income people every year. The AMT raises a lot of tax revenue, however: reforming or eliminating it could cost $500 billion or more over the next decade. Consequently, some suggest that the best option would be to make the AMT the regular tax system, rather than an alternative. This paper examines the implications of basing a reformed tax system on the AMT rules.

The gains in efficiency, equity, and simplicity from systematic tax reform could be substantial. However, to achieve those gains requires attention to many details. Tax reform efforts have failed often, but they have also succeeded, especially when rising problems created the opportunity and demand for reform, and tough issues were tackled in a spirit of bipartisan cooperation.