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Document Type: Article/Tax Break

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Encouraging Homeownership Through the Tax Code (Article/Tax Break)
William G. GaleJonathan GruberSeth Stephens-Davidowitz

Americans are taught from an early age to aspire to homeownership, and several long-standing federal institutions and regulations support owner-occupied residential housing. The income tax deduction for mortgage interest payments is possibly the best-known federal housing policy. Evidence suggests, however, that the mortgage interest deduction (MID) does little if anything to encourage homeownership. We propose a tax credit and a subsidized saving vehicle for first-time home buyers, financed by the elimination of the MID. Relative to current policy or to the President's Advisory Panel's recommendations, our proposals would be less expensive, more progressive, and more effective in encouraging homeownership.

Published: 06/27/07
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Still Crazy After All These Years: Understanding the Budget Outlook (Article/Tax Break)
William G. GaleJason FurmanAlan J. Auerbach

The United States has gone undergone major fiscal changes in recent years. Despite the tax cuts enacted early in the decade and the increased spending enacted since then, the Congressional Budget Office (CBO, 2007b) currently projects a baseline surplus of $586 billion in the unified budget over the next 10 years. Under the baseline, the deficit will decline over the next few years, and turn to a surplus by 2012 that will continue to grow through 2017. This paper evaluates recent fiscal outcomes and assesses future fiscal prospects. First, we review recent changes in the budget outlook. There has been a sizable net deterioration in the budget outlook since 2001. For example, in January 2001, the CBO baseline projected a unified budget surplus of $573 billion in 2007. CBO's baseline now projects a deficit of $177 billion for 2007—a deterioration of $750 billion or about 5.5 percent of GDP. This deterioration is due almost entirely to changes in policy. For example, more than 90 percent of the deterioration in the 2007 outlook since 2001 is attributable, according to CBO estimates, to policy changes—tax cuts and increases in spending. The changes in the deficit since 2001 reflect differing trends in policy choices and in economic factors. Beginning in 2001 the deficit rose due to a series of policy changes, including tax cuts, a new Medicare entitlement, and increased spending on defense and homeland security. These policy changes have increased the deficit with each passing year. At the same time, the economy and technical factors that caused revenues to decline in the early 2000s have recovered strongly in recent years. In short, the economic and technical factors that elevated the deficit from 2002–05 have almost entirely reversed themselves, while the effects of policy changes continue to accumulate. As a result, almost all of the net change in fiscal projections since 2001 is due to deficit-increasing changes in policy.

Published: 05/01/07
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Roth Conversions as Revenue Raisers: Smoke and Mirrors (Article/Tax Break)
Leonard E. Burman

The Tax Increase Prevention and Reconciliation Act of 2005 will extend the low tax rates on capital gains and dividends through 2010, grant temporary relief from the individual alternative minimum tax through 2006, and extend several expiring business tax breaks. To prevent Senators from raising a parliamentary "point of order" that would kill the bill, it had to reduce federal tax revenues by no more than $70 billion. Meeting this budget target required the inclusion of several tax increase provisions in the package. One of the largest allows taxpayers to convert IRA balances into so-called Roth IRAs. The Joint Committee on Taxation reckons that this provision would raise $6.4 billion in revenues over the 10-year budget window. In fact, this provision would reduce federal revenues over the long term by much, much more than it raises in the short run: On balance, the provision would reduce net long-term federal revenues by $14 billion in present value.

Published: 05/11/06
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An Analysis of the Roth 401(k) (Article/Tax Break)
William G. GaleJ. Mark IwryGordon McDonald

This report describes the Roth 401(k) and discusses its potential effects. We find that the Roth 401(k) option will add complexity for employees and employers with little collateral social gain. The Roth 401(k) is unlikely to induce significant new private saving; almost all of the benefits are likely to accrue to high-income and wealthy taxpayers who are able to shift existing taxable assets into tax-favored savings plans. Moreover, the Roth 401(k) will increase the amount of resources that taxpayers can shelter and thus will likely have a negative effect on long-term federal budget revenue.

Published: 01/09/06
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A Preliminary Evaluation of the Tax Reform Panel's Report (Article/Tax Break)
Leonard E. BurmanWilliam G. Gale

This report summarizes the two options for reforming the tax system proposed by the President's Advisory Panel on Federal Tax Reform, offers a preliminary evaluation of the proposals, and discusses the overall effect on revenue, distribution, and growth.

Published: 12/05/05
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The National Retail Sales Tax: What Would the Rate Have To Be? (Article/Tax Break)
William G. Gale

H.R. 25 would replace federal taxes with a 23 percent tax-inclusive (30 percent tax-exclusive) sales tax on private consumption, household interest payments, and government spending, and give households payments to offset taxes on consumption up to the poverty line. This paper shows that even if there were no avoidance or evasion, setting the rate at 23 percent (tax-inclusive) would reduce revenues by $7 trillion relative to current law. The required tax rate to hold the government and revenue constant would be 31 percent tax-inclusive (44 percent tax-exclusive) if there were no evasion or avoidance and much higher under more plausible assumptions.

Published: 05/16/05
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Options for Reforming the Estate Tax (Article/Tax Break)
William G. GaleLeonard E. BurmanJeff Rohaly

Retargeting the estate tax to very wealthy households and lowering its rates would blunt much of the criticism against it while retaining many of its advantages. This brief explains how the estate tax works and examines who is affected by it under current law. It discusses how reform would affect tax revenues, the distribution of tax burdens, farms and small businesses, and charitable giving and bequests. A concluding section discusses ways to reduce the tax's complexity.

Published: 04/18/05
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Demythologizing the Russian Flat Tax (Article/Tax Break)
Clifford G. GaddyWilliam G. Gale

On January 1, 2001, Russia introduced what has frequently been called a "flat tax." In this report, we examine the limited research and information available on the effects of Russia’s personal income tax reform and reach five principal conclusions: The change in the personal income tax was not a stand-alone reform and the personal income tax component of the reform package bears little resemblance to a Hall-Rabushka flat tax; economic growth had begun well before the reforms and microeconomic data suggest that the tax rate reductions had little if any effect on labor supply; and it is likely that the significant increase in compliance following the 2001 reform is attributable to changes in the administration and enforcement of tax laws.

Published: 03/28/05
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The Automatic 401(k): A Simple Way To Strengthen Retirement Saving (Article/Tax Break)
William G. GaleJ. Mark IwryPeter Orszag

The "automatic 401(k)" is a simple concept with enormous potential. An automatic 401(k) plan would have intelligent defaults at each phase of the 401(k) savings cycle: participation, contribution levels, investment allocations, rollovers, and withdrawal options. Workers would be free to opt out of these defaults if they chose to. For example, under an automatic 401(k) workers would participate unless they actively choose not to. For workers, the automatic 401(k) helps ensure that they make appropriate financial choices even if they are not financial experts. For plan sponsors, the automatic 401(k) improves nondiscrimination results by increasing lower paid employees to participate and offers a possible way to provide fiduciary and non discrimination safe harbors. The steps involved in building an automatic 401(k) are not complicated, and the benefits could be substantial; indeed, a growing body of empirical evidence suggests that the automatic 401(k) may be the most promising approach to bolstering retirement security for millions of American families.

Published: 03/07/05
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The Outlook for Fiscal Policy (Article/Tax Break)
William G. GalePeter Orszag

The new budget projections released by the Congressional Budget Office (2005) provide an opportunity to assess fiscal policy in the first four years of the Bush administration and to discuss prospects for the next four years and beyond. This report examines the baseline CBO projections, adjusts the official data in ways that more accurately reflect the current trajectory of tax and spending policies, and discusses some of the implications.

Published: 02/14/05
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