Lily L. Batchelder

Reforming Tax Incentives into Uniform Refundable Tax Credits

Each year the US federal individual income tax delivers over

Taxing Privilege More Effectively: Replacing the Estate Tax with an Inheritance Tax

500 billion worth of tax incentives intended to encourage socially beneficial activities. Currently the vast majority operate through deductions or exclusions, which link the size of the subsidy to the taxpayers marginal tax bracket. This article argues that uniform refundable credits are a more efficient approach for tax incentives intended to correct for positive externalities, absent evidence that positive externalities exist or that externalities or elasticities associated with the subsidized activity vary by income class. Moreover, some type of refundable credit should almost always be the most efficient subsidy even if externalities or elasticities rise with income. Their efficiency benefits are further magnified by their tendency to automatically smooth household income and macroeconomic demand. This article thus proposes a dramatic change in how the government provides tax incentives for socially valued activities: the default for all such tax incentives should be a uniform refundable tax credit.

Accounting for Behavioral Considerations in Business Tax Reform: The Case of Expensing

The repeal of the estate tax for one year only in 2010 creates vast uncertainty but also provides an opportunity to reconsider the taxation of million would include in income and pay a 15 percentage point surtax on gifts and bequests. This paper proposes replacing the estate tax with an inheritance tax. Heirs receiving lifetime inheritances greater than

The Shaky Case for a Business Cash-Flow Tax over a Business Income Tax

2.3 would include in income and pay a 15 percentage point surtax on the excess. The proposal would also replace stepped-up basis with carryover basis for bequests. As under the estate tax, the fraction of heirs affected would be miniscule, falling from three to two in 1,000. The proposal has a number of advantages relative to the estate tax. It would reward donors who give more broadly. It would enhance efficiency and reduce compliance costs by curbing tax planning and the rules needed to contain it. Cross-national experience also suggests it would be administrable. Most importantly, the proposal would lower taxes on heirs receiving smaller inheritances and those with moderate incomes, making the tax system better attuned to unearned advantage and ability to pay. At an individual level, the distribution of tax burdens would change considerably: only 5 percent of the estate tax rate for an heir is accounted for by her inheritance tax rate, and vice versa, and each tax would raise 14 percent of revenue from heirs facing no tax burden under the other. The proposal is revenue-neutral relative to 2009 law. A lower exemption would raise more revenue and bring the tax rate on inherited income closer to the income tax rate on non-inherited income, which is about three times higher.

Assessing President Trump's Child Care Proposals

One of the fundamental questions in business tax reform is whether to allow firms to immediately expense investments or require economic cost recovery. The conventional view is that expensing would generate stronger growth effects holding revenues constant. This view is rooted in traditional models of corporate finance that assume firms look at the net present value of expected tax payments when incorporating taxes into investment decisions. But this traditional view ignores the possibility that firms focus on more salient measures of taxes as well. If so, they may respond less to expensing than this theory suggests because expensing does not lower their financial accounting tax liability and, all else equal, requires a higher statutory rate.This paper considers whether firms undervalue expensing due to a focus on these non-economic tax metrics and, if so, what this implies about business tax reform if the goal is to increase US investment. It develops a framework for what cost recovery rules are optimal, and then uses new and existing data to parameterize this framework, holding constant long-run revenues and the relative tax treatment of debt and equity. While the empirical evidence is still nascent, it tentatively concludes that applying economic cost recovery to public and very large companies in order to pay for a lower statutory tax rate would generate more US investment and growth than expensing — reducing the relevant tax rate on such companies by more than two percentage points estimated conservatively, and possibly by much more. This estimate is sensitive to the underlying empirical parameters and could easily change. But it does cast doubt on the conventional view that expensing would generate much more US investment and growth than the alternatives. It also contrasts with estimates by non-partisan Congressional staff that expensing as part of a business cash-flow tax would generate modestly higher growth, and with far more dramatic positive growth estimates by some prominent think tanks.

Reform Options for the Estate Tax System: Targeting Unearned Income, Testimony Before the U.S. Senate Committee on Finance

Traditional economic theory holds that a business cash-flow tax is superior to a business income tax because it is more efficient and progressive. But much of the literature espousing this view does not explicitly specify the full range of assumptions underlying these claims, let alone explore and empirically justify them. This paper summarizes 11 assumptions underlying the traditional view and considers how well supported they are empirically and as a matter of political economy. It concludes that when each assumption is examined closely, the case for a cash-flow tax over a business income tax becomes considerably shakier and may well collapse.

Household Income Volatility and Tax Policy: Helping More and Hurting Less, Testimony Before the U.S. Joint Economic Committee

During the presidential campaign, Donald Trump proposed three tax benefits for child care: a credit for low-income families, an above-the-line deduction, and tax-subsidized savings accounts. While these proposals laudably bring attention to the heavy burden that child care costs place on many low- and middle-income families, they are a case study in how not to reform child care policy. They are unduly complicated, arbitrarily exclude certain low-income families, deliver support well after child care payments are due, and provide the largest benefits to higher-income families who need the least help.

The Mommy Track Divides: The Impact of Childbearing on Wages of Women of Differing Skill Levels

This testimony makes three main points. First, inheritances tend to exacerbate existing economic disparities and may be the most important barrier to intergenerational economic mobility. These tendencies are most pronounced at the top of the income distribution. While inherited income is distributed fairly evenly across most of the population, it rises sharply at the very top. Second, the estate tax system is the most important mechanism by which the current fiscal system mitigates the effect of inheritances on economic disparities and intergenerational mobility. The burden of the estate and gift taxes falls largely on heirs, not donors. Moreover, on average, it rises rapidly with the amount the heir inherits and his economic income. Nevertheless, the relationship between the heir’s financial circumstances and his or her estate tax burden is relatively imprecise. Third, upcoming legislative changes create an opportunity to better focus the estate tax system on the unearned income that inheritances represent. We should use that opportunity to reform, not repeal, the estate tax system so that it continues to tax inherited income but in a more equitable manner. Two reform options are discussed. The first would replace the estate tax system with a comprehensive inheritance tax, under which heirs would pay tax on extraordinary amounts of inherited income at roughly the same rate that presently applies to earned income under the income and payroll taxes. The second would retain the estate tax but better focus it on the amount transferred as a proxy for the amount received. It would do so through a package of simplification reforms that would limit the extent to which the tax burdens on heirs depend on their access to sophisticated tax advice.

Efficiency and Tax Incentives: The Case for Refundable Tax Credits

This testimony makes three main points. First, income volatility, especially when it involves income declines, imposes significant hardships on American families. It heightens stress about finances and may increase household living expenses. These hardships are most pronounced for middle-and low-income families, whose incomes tend to be more volatile, and who tend to have less access to low-cost borrowing. Second, currently the income tax system simultaneously helps and hurts families trying to cope with these burdens. It helps in that it softens annual income fluctuations on an after-tax basis by timing tax payments so that a larger share of a family’s income is due in taxes in its higher-income years, and smaller share in its lower-income years. It hurts because over time it imposes higher average tax rates on households with relatively volatile incomes, than it does on others whose income is the same over time but more stable. Finally, it outlines two potential reforms to make the tax system help more and hurt less when a family’s income fluctuates. The first is a limited form of income averaging that would permit taxpayers to elect to carryback unused standard deductions and personal and dependent exemptions for one year, and to average their income over two years when calculating the Earned Income Tax Credit. The second, much broader proposal would involve converting the roughly

Taxing the Poor: Income Averaging Reconsidered

500 billion per year spent on tax incentives into uniform refundable tax credits. These reforms could be implemented on a revenue-neutral basis. Both would reduce the penalties that the tax system currently imposes on families with volatile incomes, and would provide relief when families need it most – when their income has fallen.