There is a bipartisan bill proposed by Mitt Romney and Michael Bennet being billed as “basic income plan for kids.” Here is Vox coverage, but I also found interesting this National Review article by Robert Verbruggen outlining the broader debate over its merits merits of the child tax credit. To summarize the debate over the child tax credit:
- Traditional economic conservatives see it as an overstep of government, and think it should be abandoned.
- More status-quo conservatives want it retained, particularly as long as it is partially refunded to resemble a tax break instead of welfare.
- Less status-quo oriented conservatives want it made to be fully refundable and paid for by consolidating other welfare spending, particularly those that generate “benefit cliff’s.”
- Others want it made it fully refundable, as it is a pro-family enabling device, and lay some blame on FDR for the reason the US doesn’t already have this.
The second point contained this idea, which was one I had not heard before:
It used to be that parents would pay to raise children and then reap the rewards when their kids cared for them in old age; now, thanks to Social Security and Medicare, parents still pay to raise kids, but in retirement they rely collectively on the income of the next generation. We’ve socialized the benefits of having children but not the costs, and the child credit helps to compensate parents for some of the costs. Put bluntly, raising children should count as a tax payment, and should be subtracted from the taxes parents otherwise owe.
In the July Contemporary Economic Policy is “Who Pays No Tax? The Declining Fraction Paying income Taxes and Increasing Tax Progressivity” by David Splinter (Joint Committee on Taxation). Here is the abstract:
Using federal individual income tax data, this paper presents the first long‐run estimates of the fraction paying no income tax. Between 1985 and 2015, the fraction of working age adults paying no tax increased from 20% to 36%. A decomposition shows that almost all of this increase resulted from changes in tax policy, especially from more generous tax credits. Increasing tax progressivity over the last three decades also resulted from more generous tax credits. The substantial federal tax changes enacted in 2017 are forecasted to temporarily increase both the fraction paying no tax and individual income tax progressivity.
One interesting takeaway from the paper is the historical context of these figures. Of course, the income tax started out vary narrow, but after it broadened it has hovered in that 30-35% range much of the time. Here is the fraction paying no tax from Splinter’s Figure 1:
Splinter uses a shift-share decomposition to attribute the fluctuations in the share of non-payers to tax policy changes, demographic changes, and income distribution. The big driver, as noted in the abstract, turns out to be the tax policy changes (converting 2015 tax burdens into 1985 counterfactual tax burdens with changes to the EITC, new tax credits, and indexing of personal exemptions and standard deductions. These policy changes seem to account for much, about 13 of the 16 points, of the increase from 1985 to 2015. Working age distributions and household formation don’t do much work.
For all the attention put on top marginal income tax rates, it is also quite interesting to observe the correlation between the fraction paying no tax and individual income tax progressivity (as measured by the Kakwani Index), as in Splinter’s Figure 6:
And yes, you are reading correctly that the TCJA increased individual income tax progressivity, as the big-ticket potentially regressive elements were in revisions to corporate income and estate taxes.
David Splinter has several interesting pieces along these lines for subjects related to income inequality and income mobility, so his website is worth checking out. Here is Vox coverage last year of his back-and-forth with Saez and Piketty.
That’s the title of a paper in this month’s issue of The Review of Economic Studies by Pablo Fajgelbaum, Eduardo Morales, Juan Carlos Suarez Serrato, and Owen Zidar. Here is the abstract:
We study state taxes as a potential source of spatial misallocation in the U.S.. We build a spatial general equilibrium framework that incorporates salient features of the U.S. state tax system, and use changes in state tax rates between 1980 and 2010 to estimate the model parameters that determine how worker and firm location respond to changes in state taxes. We find that heterogeneity in state tax rates leads to aggregate welfare losses. In terms of consumption equivalent units, harmonizing state taxes increases worker welfare by 0.6% if government spending is held constant, and by 1.2% if government spending responds endogenously. Harmonization of state taxes within Census regions achieves most of these gains. We also use our model to study the general equilibrium effects of recently implemented and proposed tax reforms.
One of the tax reforms studied is the deduction on State and Local Taxes, which was reduced (n.b. not eliminated) in the Tax Cuts and Jobs Act:
Eliminating SALT would increase dispersion in tax payments, since places with high state taxes and high-income taxpayers would pay even higher taxes. Consequently, we find that eliminating SALT reduces welfare by roughly 0.6% and aggregate real GDP by approximately 0.3% if government spending is held constant, and by 0.8% and 0.4%, respectively, if government spending responds endogenously. Southeastern states experience the largest gains. The hardest hit states are those with a large share of high income people and high tax rates, especially in the Northeast.