Category Archives: Taxation

U.S. Capital Gains and Estate Taxation: A Status Report and Directions for a Reform

Source: Wojciech Kopczuk, Centre for Economic Policy Research (CEPR), CEPR Discussion Paper No. DP11208, March 2016
(subscription required)

From the abstract:
Recent changes in the U.S. estate taxation significantly reduced its reach and revenue, although the tax continues to contribute to progressivity of the overall tax system and is likely to play a role in influencing the long term concentration of wealth. I discuss recent changes, empirical evidence and theory applying to this form of taxation. I then discuss directions for a reform of the tax. The interaction between estate taxation and other components of the tax system is most important in the context of capital gains, with step up in basis partially compensating for high marginal rates while at the same time creating very strong deferral incentives. Modifying this interaction is long overdue and experience from the temporary repeal of the tax in 2010 is helpful in understanding challenges. I discuss options for modifying this interaction, including implications both for estate tax design and for the great majority of taxpayers who are not subject to the estate tax. Eliminating the step-up in basis would allow for increasing the efficiency of the tax system, while the additional revenue could be used to either mitigate the consequences for the affected taxpayers by reducing the estate tax burden or increasing the overall progressivity. I note that any exemption for capital gains at death does retain deferral incentives for individuals with unrealized capital gains smaller than the exemption and suggest that a lifetime exemption would have better incentive properties. I also note that the treatment of spousal transfers under any capital gains at death approach is critical for the revenue implications.
Number of Pages in PDF File: 44

How Big Pharma Uses Charity Programs to Cover for Drug Price Hikes

Source: Benjamin Elgin, Robert Langreth, Bloomberg Businessweek, no. 4476, May 23-29, 2016

A billion-dollar system in which charitable giving is profitable. …. But this is not a feel-good story. It’s a story about why expensive drugs keep getting more expensive, and how U.S. taxpayers support a billion-dollar system in which charitable giving is, in effect, a very profitable form of investing for drug companies—one that may also be tax-deductible. ….

Millionaire Migration and Taxation of the Elite: Evidence from Administrative Data

Source: Cristobal Young, Charles Varner, Ithai Z. Lurie, and Richard Prisinzano, American Sociological Review, Vol. 81, No. 3, June 2016
(subscription required)

From the abstract:
A growing number of U.S. states have adopted “millionaire taxes” on top income-earners. This increases the progressivity of state tax systems, but it raises concerns about tax flight: elites migrating from high-tax to low-tax states, draining state revenues, and undermining redistributive social policies. Are top income-earners “transitory millionaires” searching for lower-tax places to live? Or are they “embedded elites” who are reluctant to migrate away from places where they have been highly successful? This question is central to understanding the social consequences of progressive taxation. We draw on administrative tax returns for all million-dollar income-earners in the United States over 13 years, tracking the states from which millionaires file their taxes. Our dataset contains 45 million tax records and provides census-scale panel data on top income-earners. We advance two core analyses: (1) state-to-state migration of millionaires over the long-term, and (2) a sharply-focused discontinuity analysis of millionaire population along state borders. We find that millionaire tax flight is occurring, but only at the margins of statistical and socioeconomic significance.
Press Release

Premium Subsidies, the Mandate, and Medicaid Expansion: Coverage Effects of the Affordable Care Act

Source: Molly Frean, Jonathan Gruber, Benjamin Sommers, National Bureau of Economic Research (NBER), NBER Working Paper No. w22213, April 2016
(subscription required)

From the abstract:
Using a combination of subsidized premiums for Marketplace coverage, an individual mandate, and expanded Medicaid eligibility, the Affordable Care Act (ACA) has significantly increased insurance coverage rates. We assessed the relative contributions to insurance changes of these different ACA provisions in the law’s first full year, using rating-area level premium data for all 50 states and microdata from the 2012-2014 American Community Survey. We employ a difference-in-difference-in-difference estimation strategy that relies on variation across income groups, areas, and years to causally identify the role of the ACA policy levers. We have four key findings. First, insurance coverage was only moderately responsive to price subsidies, but the subsidies were still large enough to raise coverage by almost one percent of the population; the coverage gains were larger in states that operated their own health insurance exchanges (as opposed to using the federal exchange). Second, the exemptions and tax penalty structure of the individual mandate had little impact on coverage decisions. Third, the law increased Medicaid coverage both among newly eligible populations and those who were previously eligible for Medicaid (the “woodwork” effect), with the latter driven predominantly by states that expanded their programs prior to 2014. Finally, there was no “crowdout” effect of expanded Medicaid on private insurance. Overall, we conclude that exchange premium subsidies produced roughly 40% of the ACA’s 2014 coverage gains, and Medicaid the other 60%, of which 2/3 occurred among previously-eligible individuals.

Why Did The Job Cross The Road?

Source: NPR, Planet Money, Podcast, Episode 699, May 4, 2016

States across the country are at war right now. A war over jobs. They are competing with each other to get companies to move within their borders. Politicians love to call this “job creation.”

States dangle incentives like tax breaks, training programs, freshly paved roads. According to one study, states all over the country are spending $70 billion a year to “create” jobs. But is it really creating a job if it came from a few miles away across the state border?…

Distributional Analyses of Revenue Options for Alaska

Source: Aidan Russell Davis, Carl Davis, Matthew Gardner, Institute on Taxation & Economic Policy, April 2016

From the introduction:
Alaskans are faced with a stark fiscal reality. Following the discovery of oil in the 1960s and 1970s, state lawmakers repealed their personal income tax and began funding government primarily through oil tax and royalty revenues. For decades, oil revenues filled roughly 90 percent of the state’s general fund. For years, this allowed Alaska to provide education, infrastructure, and other public services to its citizens at a relatively low direct cost to most taxpayers. More recently, however, declining oil production and the plummeting price of oil have impacted the state’s undiversified revenue structure in a major way. Today the state faces a budget gap exceeding $4 billion and revenues are expected to cover just 25 percent of the state’s costs, despite major cuts in spending enacted last year. Now lawmakers must decide whether to further cut spending, draw down the state’s reserves, reduce the Permanent Fund dividend, or enact revenue-raising measures to narrow the state’s budget gap. Given the magnitude of the problem, it is unlikely that any one of these options, taken on its own, will be enough to remedy the state’s fiscal situation in the long-run. Instead, a comprehensive plan will require a combination of policy changes, likely including reforms to the state’s tax structure as well as its system of distributing Permanent Fund dividends. Before undertaking those types of reforms, however, lawmakers should carefully consider the potentially disparate impacts that various tax and dividend changes can have on Alaskans of different income levels. While two potential policy changes may appear similar in terms of their aggregate revenue impact, the reality is that those two options could have very different implications for low- versus middle- versus high-income Alaskans. This report attempts to contribute to a better understanding of these issues by analyzing key components of the revenue options in Gov. Walker’s New Sustainable Alaska Plan, as well as potential modifications to that plan that could improve its distributional impact….

New Research on the Stubborn Persistence of Tax Expenditures

Source: Conor Clarke, Tax Notes, Vol. 150, No. 12, 2016

From the abstract:
In this essay I examine new research on tax expenditures. By utilizing survey experiments, several new studies have explored when and why the public prefers spending programs organized as tax credits rather than direct expenditures, even when the substance and cost of the policies are the same. I argue that this ‘framing effects’ research can help explain why tax expenditures have continued to grow faster than government spending as a whole, and why tax expenditure budgets have failed to stop this growth.

The Cost of Kelo: Property Taxes, Public Use, and Subjective Value

Source: Thomas J. Miceli, Public Finance Review, Vol. 44 no. 4, July 2016
(subscription required)

From the abstract:
This article examines the economic implications of the definition of public use advanced by the Supreme Court in the case of Kelo v. City of New London. In its ruling, the Court asserted that the Fifth Amendment public use requirement is satisfied if the taking in question, even if for private ends, promises enhanced jobs and tax revenues for the community. This article first reviews the law and economics of public use and then argues that the Court’s justification creates the potential for an alliance between local governments and developers that will increase the risk of overuse of eminent domain. Underlying this risk is the unobservability of landowners’ subjective values, which requires local governments to rely on market value as the basis for property taxation

State Estate Taxes: A Key Tool for Broad Prosperity

Source: Elizabeth McNichol, Center on Budget and Policy Priorities, May 11, 2016

From the summary:
As the income gap between the wealthiest Americans and those at the bottom and middle has widened in recent years, many states have eliminated their estate tax ― a key tool for reducing inequality and building broadly shared prosperity. States that have eliminated their estate tax should reinstate it and those with an estate tax should keep it and, if needed, improve it.

Only the very wealthiest taxpayers pay estate taxes.Only the very wealthiest taxpayers pay estate taxes — just 2.56 percent of estates, in the states with the tax, on average. The estate tax raises revenue for public services that build a stronger economy, protects against extreme levels of income inequality, and ensures that the wealthy cannot avoid paying taxes on certain forms of wealth.

A phase-out of the federal estate tax enacted under President Bush in June 2001 effectively repealed state estate taxes by 2005 unless states acted to retain this tax. Many states kept their estate taxes intact by passing legislation to “decouple” from the federal law or by creating separate taxes, but other states failed to act, allowing their estate taxes to disappear.

That was a mistake. Estate taxes serve many important public purposes, including:
– Providing revenue for investments that promote a strong economy. …..
– An estate tax will help — not harm — a state’s economy. ….. Reducing inequality. The vast majority of taxpayers would never owe estate taxes. …..
– Closing a loophole that benefits the wealthiest. …..