A B C D E F G H I J K L M N O P Q R S T U V W X Y X
A
Accelerated depreciation. See depreciation.
Adjusted Gross Income (AGI). A measure of income used to determine a tax filing unit’s tax liability. AGI excludes certain types of income received (such as municipal bond interest, most Social Security income, and some alimony) while some expenses are deducted from AGI (such as Individual Retirement Account deductions, some educational expenses, and health insurance premiums for the self-employed). (See also Taxable income.)
Affordable Care Act (ACA). See Patient Protection and Affordable Care Act (PPACA).
Alternative minimum tax (AMT). The individual alternative minimum tax applies an alternative tax rate schedule to an expanded measure of taxable income and, if the resulting “tentative AMT” exceeds ordinary income tax, the difference is added to the filer’s tax liability. The TCJA limited or repealed many middle-class AMT “preference items” and raised the AMT exemption, but only through 2025. The TCJA eliminated a parallel corporate alternative minimum tax. The Inflation Reduction Act (IRA) of 2022 introduced a new minimum tax on financial statement income of the largest US corporations.
American Taxpayer Relief Act of 2012 (ATRA). Permanently extended most provisions of the 2001 and 2003 tax acts (EGTRRA and JGTRRA), but generally allowed both acts to expire for taxpayers with the highest incomes. ATRA maintained most reduced tax rates, expansion of the child tax credit and EITC, and the American Opportunity credit for higher education. It also made permanent reductions to the AMT and the estate tax.
Appropriation. Money a state or federal legislature designates for a specific purpose.
Automatic stabilizers. Features of government tax and transfer systems that provide less fiscal stimulus (higher taxes and reduced transfers) when the economy overheats and more fiscal stimulus when the economy slumps, without direct intervention by policymakers.
Average effective tax rate (ETR). A widely used measure of tax burdens, equal to tax paid divided by some measure of income. ETRs may be calculated with respect to a single tax, such as the individual income tax, or with respect to all taxes together (i.e., including payroll taxes, corporate income taxes, and estate taxes). The ETR may differ substantially from the economic incidence of a tax. (See also Tax incidence.)
B
Balanced budget. A budget in which revenues equal outlays. A balanced budget has neither a deficit nor a surplus.
Base broadening. A term applied to efforts to expand the tax base (income or other activity subject to tax), usually by eliminating deductions, exclusions, and other preferences. A broader base allows more revenue to be raised without increasing tax rates, or for rates to be cut without sacrificing revenues.
Base erosion and anti-abuse tax (BEAT). The Base erosion and anti-abuse tax is a minimum tax on US corporations (including US affiliates of foreign-resident corporations) that make deductible payments (such as interest, royalties, and certain service payments) to a related foreign subsidiary. The US firm pays the higher of its regular corporate income tax or the BEAT.
BEAT. (See Base erosion and anti-abuse tax)
Bonus depreciation. The policy of accelerating depreciation by allowing firms to deduct immediately some fraction of the cost of most capital investments, while depreciating the remaining fraction over a period time. Bonus depreciation was enacted as a temporary economic stimulus in 2002, but has remained in the law since then. The fraction has varied between 30, 50, and 100 percent. (See Depreciation and Expensing.)
Book income. A term used to describe corporate income reported through financial accounting statements following Generally Accepted Accounting Principles. Corporate book income in any year may be either higher or lower than what a business reports on its tax returns, since book income treats provisions that alter the timing of tax payments differently from taxable income.. Under the Inflation Reduction Act, book income now serves as the starting point for a minimum tax imposed on large corporations.
Bracket creep. The movement of taxpayers into higher tax brackets due to inflation. Under a progressive tax system, rising nominal income can move taxpayers into higher tax brackets, even if their real income (after adjusting for inflation) remains constant. Congress indexed tax rate schedules to inflation in the early 1980s to prevent general increases in the price level from causing bracket creep. (See Indexation of the tax system.)
Budget baseline. The baseline is the level of revenue (or spending) expected under a given set of assumptions. Traditionally, Congress and the administration use a “current law baseline” that assumes that discretionary spending grows at the rate of inflation and mandatory spending and tax revenues are determined by current law, with temporary tax provisions expiring as scheduled. Some policymakers advocate using a “current policy baseline,” which assumes, for example, that popular but temporary tax and spending programs will get extended, even if Congress has not yet taken any action.
Budget resolution. A non-binding congressional outline setting out total spending, revenue, and deficit targets for at least the next five years; most resolutions use a 10-year outlook. A budget resolution does not actually appropriate funds. It sets goals and establishes tax and spending priorities. It may also include budget Reconciliation instructions.
Budget scoring. The process of estimating the budgetary effects of proposed changes in tax and expenditure policies and enacted legislation. The budget score measures the change in revenues or spending under a new policy compared to the budget baseline. (See Budget baseline)
Bush tax cuts. A set of tax provisions that were originally enacted during the George W. Bush administration. The first installment, the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), cut individual income tax rates, phased out the estate and gift tax, doubled the child tax credit, provided marriage penalty relief, expanded retirement tax incentives, and temporarily raised the threshold for taxation under the individual Alternative minimum tax (AMT). The provisions of EGTRRA phased in slowly and were all set to expire at the end of 2010. Subsequent legislation in 2003, the Jobs and Growth Tax Relief Reconciliation Act of 2003, sped up the rate at which many of the 2001 tax cuts were phased in, temporarily reduced tax rates on long-term capital gains and dividends and indexed the AMT to inflation. The Pension Protection Act of 2006 made the retirement savings provisions of EGTRRA permanent and indexed the AMT through 2010. In 2010, President Obama signed legislation extending the Bush income tax cuts and restoring the estate and gift tax, as well as adding several new tax cuts through 2012. In 2012, most of the Bush income tax cuts, except those affecting the highest-income taxpayers, and the Obama estate tax parameters were made permanent.
C
Capital cost recovery. Income tax features intended to allow businesses to deduct over time the costs of tangible capital assets that are used to produce income. (See Depreciation.)
Capital gains. The difference between the sale price and basis of capital assets (purchase price plus improvements), net of broker fees and other costs. Most capital gains are taxable only upon sale (or “realization”). Long-term gains, those realized after holding the asset for a year or longer, face lower tax rates (up to 20 percent) than short-term gains, which are taxed at the same rates as ordinary income. Taxpayers can deduct up to $3,000 of net losses (losses in excess of gains) each year against other income; taxpayers can carry over losses above that amount and subtract them from future gains.
Capitalization. An increase or decrease in the value of an asset arising from a tax or subsidy provision. For example, the mortgage interest deduction may increase demand for housing and push up home values. That is, part of the subsidy is capitalized into home prices.
Carried interest. A share of investment profits awarded to managing partners in private equity firms (and some other businesses). Typically, private equity partnerships purchase businesses, reorganize them, and sell them at a profit. The carried interest is taxed as a capital gain and subject to lower long-term rates than ordinary income if the business is held at least a year.
Charitable deductions. Deductions allowed for gifts to eligible nonprofits. Subject to certain limits, corporations and individual taxpayers who itemize deductions can deduct gifts to charities and certain other nonprofit organizations. In part, the deduction is intended to subsidize the activities of private organizations that provide viable alternatives to direct government programs. (See Itemized deductions.)
Child and dependent care tax credit (CDCTC). A tax credit based on eligible child care expenses incurred by taxpayers who are employed or in school. The credit varies with the expenses incurred, the number of eligible children, and the taxpayer’s AGI. A separate exclusion is available for some employer-provided child care.
Child Tax Credit (CTC). A tax credit per qualifying child (currently set at $2,000 through the end of 2025). The credit is partially refundable for filers with earnings over a set threshold ($2,500). The refundable portion is limited to 15 percent of earnings above that threshold, up to $1,400 per child. The maximum refundable credit is indexed for inflation. (See Refundable tax credit.)
Circuit-breakers. Mechanisms that provide relief for an individual’s property tax obligation based on the person’s age, income level, or disability.
Congressional Budget Office (CBO): A nonpartisan, congressional agency that gives Congress budget and economic analyses and information. CBO was established by the Congressional Budget and Impoundment Act of 1974 to provide Congress with its own agency to project and evaluate federal budget issues.
Consumer Price Index (CPI). A measure of the average level of prices, inclusive of sales and excise taxes. Until 2017, adjustments to tax parameters (see Indexation of the tax system) were based on the cost of a fixed basket of goods and services called the Consumer Price Index for all Urban Consumers, or CPI-U. The TCJA changed the index to the chained CPI-U, a measure that accounts for the ability of consumers to purchase substitutes when some prices rise more than others. When prices rise unevenly, the chained CPI-U rises more slowly than the CPI-U, which is why the switch to the new index was projected to raise tax receipts over time.
Consumption tax. Taxes on goods or services. In the US, most consumption taxes are levied by state and local governments as retail sales taxes, although the federal government does levy some selective consumption taxes, called “Excise taxes.” The Value-added tax (VAT) is a consumption tax that is common in the rest of the world.
Corporate income tax. A tax levied on corporate profits. A corporation’s taxable income is its total receipts minus allowable expenses, including capital depreciation.
D
Debt held by the public. The portion of the national debt held by entities other than the federal government and the measure used by most fiscal experts to assess the US budget outlook. Investors holding this debt include US citizens, state and local governments, the Federal Reserve, domestic private investors such as banks, and international investors (including foreign governments).
Debt service. The amount needed to repay interest and principal on a debt over a period of time. For an individual, this might be the amount they owe on student loans or a mortgage. For the federal government, debt service is the interest paid on the national debt.
Deduction. A reduction in Taxable income for certain expenses. Some deductions, such as those for contributions to an Individual Retirement Account (IRA), reduce AGI. Most deductions for individual income taxpayers, such as those for home mortgage interest and state and local taxes, are only available to those who Itemize deductions. Most taxpayers choose not to itemize and instead claim the Standard deduction, because it provides a greater tax benefit. Because tax rates increase with taxable income, each dollar of a deduction generally benefits a high-income taxpayer more than a low-income taxpayer. Deductions cannot reduce taxable income below zero.
Deficit. The difference between what the government takes in (receipts) and spends (outlays) during a year, typically either a fiscal year (October-September for the US government) or a calendar year.
Defined benefit pension plan (DB plan). A retirement plan that guarantees a specified retirement payment beginning at a certain age and after a specified period of service. Employer contributions to and earnings in DB plans are exempt from both income and payroll taxes, and most withdrawals (except for return of non-deductible employee contributions) are fully subject to federal income tax.
Defined contribution retirement plan (DC plan): A retirement program in which each employee has an individual account that accumulates employee contributions, employer contributions, and investment earnings. Contributions to traditional DC plans and any increase in value are generally not included in the taxable income of beneficiaries. Employer contributions are also exempt from payroll tax. Withdrawals are fully taxable.
Depreciation. A measurement of the declining value of assets over time because of physical deterioration or obsolescence. The actual rate at which an asset’s value falls is called economic depreciation. Under the income taxes, annual depreciation deductions are usually calculated under a prescribed schedule that allows the asset’s cost to be fully recovered over its specified “useful life”. For many assets, the depreciation schedule under the tax law allows larger deductions in early years than would be expected due to economic depreciation.
Discretionary spending: Spending decided upon by Congress through the annual appropriations process.
Distortion. The economic cost of changes in behavior due to taxes, government benefits, monopolies, and other forces that interfere with the otherwise-efficient operation of a market economy. For example, employees might choose to work fewer hours because taxes reduce their after-tax wage.
Distribution table. A table that details how a proposal or policy is estimated to affect tax burdens across different income groups, demographic groups, or sets of taxpayers defined by other characteristics.
Dividends. Profits distributed by a corporation to its shareholders. Most dividends are taxed at the same lower tax rates that apply to Capital gains.
Double taxation of dividends. Most tax systems that have both corporate and individual income taxes levy tax on corporate profits twice: once at the corporate level and again at the individual level when shareholders receive profits in the form of dividends or capital gains. The reduced tax rates on capital gains and dividends are intended in part as an offset to double taxation.
Dynamic analysis. (see Dynamic Scoring).
Dynamic modeling. Computer-based simulation of how tax policy or tax reform affects the economy, taking into account how individuals, households, or firms alter their work, saving, investment, or consumption behavior, and how those effects produce feedback that alter anticipated tax revenues.
Dynamic scoring. An approach to calculating how a tax proposal would affect revenue in the short and long run by accounting for the policy’s macroeconomic effects. Unlike conventional (“static”) scoring, which holds economic inputs and outputs constant, dynamic scoring predicts how a policy would affect macroeconomic variables (such as consumption, investment, saving, and labor supply) and uses those changes to forecast changes in GDP and resulting changes in government revenues over a period of time. Dynamic scoring can also be used for proposals affecting government spending and regulation.
E
Earmarked tax. A tax that is dedicated to fund a particular spending program. The most prominent earmarked taxes are the payroll taxes dedicated to fund Social Security and Medicare, and motor fuels excise taxes, which are dedicated to the highway trust fund and mass transit programs.
Earned Income Tax Credit (EITC). A refundable tax credit that supplements the earnings of low-income workers. Originally enacted in 1975, the EITC is now the largest federal means-tested cash transfer program. Its purposes are to encourage people to increase labor force participation and help low-income households escape poverty. The credit is a fixed percentage of earnings up to a maximum amount, remains constant over a range of earnings above that amount (the “plateau”), and then phases out as income rises further. Those income ranges depend on both the taxpayer’s filing status and the number of children in the taxpayer’s family. In contrast, the credit rate depends only on the number of children. Married couples with three or more children receive the largest credit, a maximum of $7,430 in 2023. Childless workers get the smallest credit, no more than $600 in 2023.
Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA). A tax bill passed under the presidency of George W. Bush (see “Bush tax cuts”) that reduced most tax rates, increased the Child Tax Credit (and made it partially refundable), expanded tax-free retirement savings, reduced Marriage penalties, increased the Child and dependent care tax credit, and phased out the Estate tax. Most provisions were scheduled to phase in slowly between 2001 and 2010, and then expire at the start of 2011. JGTRRA (2003) accelerated some of the EGTRRA tax cuts and added others.
Economic income. A very broad income concept that includes cash income from all sources, fringe benefits, net realized capital gains, both cash and in-kind transfers, the employer’s share of payroll taxes, and corporate income tax liability. The Treasury Department’s Office of Tax Analysis developed a similar measure in the 1980s and used it for Distribution tables until 2000.
Economic Recovery Tax Act (ERTA). Tax legislation enacted in 1981 (and often referred to as the “Reagan tax cut”) that significantly reduced income taxes on individuals and businesses. The Tax Equity and Fiscal Responsibility Act (TEFRA) scaled back the cuts in 1982.
EGTRRA. See Economic Growth and Tax Relief Reconciliation Act of 2001.
Employer-sponsored health insurance. Health insurance offered by an employer to some or all employees. Employer contributions to health insurance plans are exempt from both income and payroll taxes. Economists believe that workers receive lower wages in exchange for the valuable tax-free fringe benefit. The exclusion from tax of employer-sponsored health insurance is one of the largest Tax Expenditures in the US tax code.
Empowerment zone. A federal program established in 1993 to help geographic areas of economic distress. Eligible zones qualify for special grants, business training, improved access to capital, tax benefits, and regulatory relief aimed at encouraging economic development and greater opportunity.
Enterprise zone. A geographically targeted tax, expenditure, and regulatory inducement used by state and local governments since the early 1980s, similar to a federal Empowerment zone. While they differ in their specifics, all the programs provide development incentives in an attempt to encourage private investment and increase employment opportunities in economically distressed areas.
Entitlements. Payments to individuals, governments, or businesses which, under law, must be made to all those eligible and for which funds do not have to be appropriated in advance. The largest entitlement programs are Social Security, Medicare, and Medicaid.
ERTA. See Economic Recovery Tax Act.
Estate tax. A tax levied on a person’s estate at the time of his or her death. The federal estate tax applies only to large estates, those worth over $12.1 million for people dying in 2022 (double that amount for married couples). No tax is owed on transfers to spouses or to charities, and special provisions apply to farms and small businesses. (See also Gift tax.)
Excise tax. A tax on specific goods or services, levied at federal, state, and local levels. The most common excise taxes are on gasoline, alcohol, and tobacco products. They can raise revenue to pay for the costs imposed on society by certain activities (See Externality) or serve as a user fee, like how the gasoline tax serves as a proxy for the wear and tear motorists put on transportation infrastructure.
Expensing. Allows businesses to immediately deduct the entire cost of a capital asset, rather than claiming depreciation deductions over the useful life of the asset. (See also Depreciation.)
Extenders. Temporary tax provisions that expire if Congress does not act to extend them.
Externality. The effects of private consumption and production activities on others that are not reflected in market prices. For example, some manufacturing activities may produce pollution and, absent taxation or regulation (or a costless way for those injured by pollution to seek legal recourse for damages), the manufacturer will ignore those costs in making production decisions and produce inefficiently high level of pollution. A Pigouvian tax may be imposed to force consumer prices to include the cost of externalities. There may also be positive externalities from activities that generate benefits not fully captured by firms; an example is research and development.
F
FDII. (see Foreign-derived intangible income).
Federal Reserve. The central bank of the US that controls monetary policy. The Federal Reserve System of the United States, also referred to as the Fed, is made up of 12 Federal Reserve Banks throughout the country and headed by a Board of Governors. The Fed controls monetary policy by raising or lowering interest rates or making open-market sales or purchases of government bonds and Treasury bills.
Filing status. Tax filers fall into one of five categories, depending on their marital status and family structure. A single person without children files as a single; a single parent with dependent children files as a head of household; a married couple, with or without children, files either as married filing joint or married filing separate; and a recent widow(er) may file as a qualifying widow(er), which is the same, in effect, as married filing joint. The standard deduction, bracket widths, and qualification criteria for certain credits and deductions vary by filing status.
Fiscal policy. The way in which the federal government can affect the economy through tax and spending policies. Fiscal policy can boost economic activity, at least in the short run, through tax cuts and increases in spending. Fiscal policy can also slow down the economy through tax increases or spending cuts.
Fiscal year. A government’s accounting period designated by the calendar year in which it ends. The federal government’s 2019 fiscal year (abbreviated as FY) begins on October 1, 2018 and ends on September 30. 2019. The fiscal year in most states ends on June 30.
Flat tax. A proposal for tax reform that would replace the income tax system with a single-rate (or flat-rate) tax on businesses and on individuals after an exempt amount. Many flat tax proposals are designed to be more like consumption rather than income taxes (see VAT). Flat tax proposals often are not completely “flat” because they may retain politically sensitive deductions (such as those for mortgage interest payments) or grant an exemption for a certain amount of earnings.
Foreign-derived intangible income (FDII). US corporations can claim a deduction for Foreign-derived intangible income, which is income from the sale of goods and services abroad attributable to intangible assets held in the US, such as patents, trademarks, and copyrights.
Foreign tax credit. A credit that allows U.S. residents to subtract foreign income taxes paid from the US income tax due on income earned abroad.
G
Gift tax. A tax levied on gifts in excess of a specified threshold. In 2018, no tax is levied on annual gifts of up to $15,000 per donor, per recipient. Gifts in excess of the limit are taxable, but no tax is due until lifetime taxable gifts total more than $11.2 million. Any tax still due must be remitted when the donor dies and is incorporated into the decedent’s estate tax. (See also Estate tax.)
Gini coefficient. A summary measure of how unequal the distribution of income (or wealth or other quantity) is across a given population. It ranges from 0 (perfect equality) to 1 (perfect inequality); higher values thus indicate greater inequality. The coefficient is useful for comparing levels of inequality over time or across populations. Note, however, that two populations may have the same Gini coefficient and thus the same level of inequality overall, yet have differently shaped income distributions.
GILTI. (see Global intangible low-taxed income).
Global intangible low-taxed income (GILTI). Global intangible low-taxed income is the income earned by foreign affiliates of US companies from intangible assets such as patents, trademarks, and copyrights that faces a low foreign income tax rate. A US corporation must include half of the GILTI earned by its foreign affiliates in its gross income subject to the US corporate income tax and can claim a credit for only of the foreign tax paid on GILTI.
Gross domestic product (GDP). The total value of goods and services produced by the economy. It equals the sum of aggregate consumption, investment, government purchases, and exports, less the value of imports.
H
Health savings account (HSA). A tax-favored account for deposits made to cover current and future health care expenses paid by the individual. Like defined contribution retirement plans, contributions to HSAs and any earnings are generally deductible (or excluded from income if made by an employer). Unlike defined contribution retirement plans, withdrawals from the account are also tax-free if they are used to pay for medical expenses. Enacted in 2003 as part of legislation providing prescription drug benefits under Medicare, the tax preference is only available if the individual purchases a high-deductible health insurance policy.
Highway trust fund. A federal trust fund created in 1956 to finance highway construction and certain other federal spending on transportation. The fund’s revenues and outlays are segregated from the rest of the federal budget.
Horizontal equity. (See also Vertical equity.) The concept that people of equal well-being should have the same tax burden.
Human capital. Knowledge and skills that people acquire through education, training, and experience.
I
Individual income tax. A tax on the income of an individual or household. In the US, a minimum level of income is exempt from tax and rates are progressive. Many spending-like programs (“tax expenditures”) take the form of deductions, credits, deferrals, and special rates in the income tax.
Indexation of the tax system. Annual adjustments to various parameters in the tax code to account for inflation and prevent Bracket creep. Many features of the federal individual income tax, including tax brackets, the standard deduction, and certain credits, have been automatically indexed for inflation based on the Consumer Price Index. For instance, after a year with 5 percent inflation, a $12,000 standard deduction would increase to $12,600. More broadly, the term applies to all efforts to adjust measures of income to account for the effects of price inflation.
Individual Retirement Accounts (IRAs). Retirement accounts funded by individuals through their own contributions or by rolling over benefits earned under an employer-sponsored plan. An IRA is a kind of defined contribution retirement account. In traditional IRAs, contributions and earnings are tax-free, but withdrawals are taxable. In Roth IRAs, contributions are not deductible, but earnings and withdrawals are exempt from income tax.
Inflation Reduction Act. A tax and spending bill adopted in 2022 that made available tax incentives for activities that mitigate climate change and increased the IRS budget by $80 billion to enhance tax compliance and enforcement. The law also implemented a new corporate minimum tax based on financial accounting Book income and levied a tax on Stock buybacks.
Inheritance Tax. A tax imposed on what a taxpayer receives from a person who dies, unlike the Estate tax (which is levied on the estate of the deceased before their assets are given away) Currently, the US has no federal inheritance tax, but several states do. Inheritance tax rates can differ, depending on the relationship of an heir to the decedent, with the lowest rates applying to closer relatives, such as spouses and children. (See also Estate Tax and Gift Tax.)
Intragovernmental debt. The amount one part of the federal government owes to another part of the federal government. This money is typically held in trust funds, such as those for Social Security and Medicare.
Itemized deductions. Particular kinds of expenses that taxpayers may use to reduce their taxable income. The most common itemized deductions are for state and local taxes, mortgage interest payments, charitable contributions, and large medical expenses. Individuals may opt to deduct these expenses or claim a Standard deduction.
J
JGTRRA. See the Jobs and Growth Tax Relief Reconciliation Act of 2003.
Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA). The 2003 tax act accelerated the phase-in of tax rate reductions scheduled under EGTRRA, reduced the taxation of Capital gains and Dividends, accelerated increases in the Child Tax Credit amount, and temporarily raised the exemption for the Alternative minimum tax (AMT). Most provisions were set to expire at the end of 2010, but many have since been made permanent. (See also Bush tax cuts.)
Joint Committee on Taxation. A nonpartisan committee of the US Congress charged with assisting members on tax legislation and related issues. The committee helps draft legislative proposals, estimates the revenue effects of all tax legislation considered by Congress, and examines various aspects of the federal tax code.
L
Low-income housing tax credit. A tax credit given to investors for the costs of constructing and rehabilitating housing for low-income families. Credits are allocated to state housing agencies based on population. The agencies select qualifying projects and authorize credits subject to statutory limits.
M
Mandatory spending. Expenditures on federal programs that are required by the statutory structure of the program, rather than by an annual appropriation. Examples are Social Security and Medicare.
Marginal tax rate. The tax liability due on an additional dollar of income. It is a measure of the effect of the tax system on incentives to work, save, and shelter income from tax.
Marriage bonus. The reduction in the tax liability of some married couples that arises from filing jointly instead of as individuals. Marriage bonuses result from the combination of progressive tax rates and treating a family as a single tax unit. In general, couples in which spouses have quite different incomes are more likely to receive marriage bonuses. (See also Marriage penalty.)
Marriage penalty. The additional tax that some married couples pay from filing jointly instead of as individuals. Marriage penalties result from the combination of progressive tax rates and treating a family as a single tax unit. In general, couples in which spouses have similar incomes are more likely to incur marriage penalties. (See also Marriage bonus.)
Medicaid. A federal entitlement program that reimburses states for a portion of the costs associated with providing medical and long-term care services to certain low-income individuals. States must meet minimum federal coverage requirements but can also determine additional services and categories of people to cover. States also establish payment rates for providers and administer the program.
Medicare Part A. The part of Medicare that covers hospital services, skilled nursing facility services, and some home health care. Anyone over age 65 who is eligible for Social Security, and persons under age 65 who have received Social Security disability payments for two years, are eligible. Participants pay no premiums for Part A coverage.
Medicare Part B. Supplementary medical insurance for Medicare beneficiaries that provides physician services and other ambulatory care (such as outpatient hospital services and tests). Beneficiaries must pay a premium to join; premiums cover about one-fourth of program costs. All persons over the age of 65 and other Medicare beneficiaries can enroll.
Medicare Part D. Also called the “Medicare prescription drug benefit,” Part D provides Medicare beneficiaries with supplementary medical insurance for prescription drugs. Enrollees pay an additional premium for Part D coverage.
Monetary policy. A set of actions taken by the Federal Reserve (or Fed) to influence the economy. Monetary policy can be used to stimulate growth or control inflation by slowing down the economy. The Fed influences the economy by making open-market sales, purchasing government bonds and Treasury bills, or adjusting the federal funds rate (the rate at which banks can borrow funds from one another overnight).
Moral hazard. The incentive created by insurance (explicit or implicit) to engage in risky behaviors, thereby raising the cost of insurance. The moral aspect refers to the observation that unscrupulous people covered by fire insurance were sometimes tempted to engage in arson. However, more generally, legal responses, such as engaging more in unhealthy behaviors (smoking, for example) when health services are covered by insurance, are also covered by the term.
N
National debt. The cumulative amount that the federal government owes its creditors. Total US federal debt is the sum of debt held by the public and intragovernmental debt.
Nominal income. A measure of income that is not adjusted for inflation. That is, nominal income is expressed in current dollars. (See also Real income.)
Non-filer. A person or household who does not file an individual income tax return. Most people without a filing requirement are not employed and many are also elderly.
O
OASDI (Old Age, Survivors, and Disability Insurance). The Social Security programs that pay monthly benefits to retired workers and their spouses and children, to survivors of deceased workers, and to disabled workers and their spouses and children.
Off-budget. Federal government expenditures on certain programs, agencies, and government sponsored enterprises that are accounted for separately in the budget to prevent spending changes or avoid a conflict of interest. Examples “off-budget” programs include Social Security and the US Post Office. The Federal Reserve is an “off-budget” government agency to maintain its autonomy when making policy decisions.
Office of Management and Budget (OMB): An office of the executive branch that develops the president’s budget and evaluates the effectiveness of the executive branch’s programs and policies.
Omnibus Budget Reconciliation Act of 1987. Legislation that attempted to decrease the budget deficit through tax increases and spending cuts.
Omnibus Budget Reconciliation Act of 1990 (OBRA90). This Act increased excise and payroll taxes, increased the top income tax rate to 31 percent, and introduced temporary high-income phase-outs for personal exemptions and itemized deductions. OBRA93 made these changes permanent.
Omnibus Budget Reconciliation Act of 1993 (OBRA93). This Act introduced 36 percent and 39.6 percent income tax brackets, repealed the wage cap on Medicare payroll taxes, increased the portion of Social Security benefits subject to income taxation for those with higher incomes, made more workers with children eligible for the Earned Income Tax Credit and increased their benefits, and made permanent the temporary high-income phase-outs of the personal exemption and itemized deductions. Overall, the bill was focused on deficit reduction.
Out year. In budget parlance, a future year beyond the period over which budget costs are tallied (in recent years, after a five- or 10-year period over which costs are estimated).
Outlay. The amount of federal spending on goods and services. (See also Expenditures.)
P
Pass-through business. Businesses organized as S-corporations, partnerships, limited liability corporations, or sole proprietorships that pass through any taxable profit or loss directly to the owners, who report it on individual income tax returns. Pass-through businesses are not subject to the corporate income tax.
Pass-through business deduction. The Tax Cuts and Jobs Act introduced a new provision allowing pass-through businesses to deduct up to 20 percent of qualified business income (QBI) from Taxable income.
Patient Protection and Affordable Care Act (PPACA). Also known as the Affordable Care Act (ACA), the law included a variety of health-related provisions that extended health insurance coverage to many uninsured Americans, implemented measures designed to reduce health care costs, imposed requirements on health providers and insurance companies, and levied a broad range of taxes to help pay for expanded healthcare.
Pay-as-you-go (PAYGO). PAYGO is a budget rule requiring that tax cuts, as well as increases in entitlement and other mandatory spending, be offset by tax increases or cuts in mandatory spending. PAYGO does not apply to discretionary spending (spending that is controlled through the appropriations process).
Payroll taxes. Taxes imposed on employers, employees, or both, based on some or all of a worker’s earnings. Employers and employees each remit Social Security taxes equal to 6.2 percent of all employee earnings up to a cap ($128,400 for 2018) and Medicare taxes of 1.45 percent on all earnings with no cap. Those taxes are referred to by the names of their authorizing acts: FICA (Federal Insurance Contributions Act) or SECA (Self-Employment Contributions Act), depending on the worker’s employment status. Employers also remit State and Federal Unemployment Taxes (SUTA and FUTA) that cover the costs of unemployment insurance.
Personal exemption. A per-person amount of income that is shielded from income tax. In calculating taxable income, tax filers may subtract the value of the personal exemption times the number of people in the tax unit. The personal exemption is indexed for inflation. The TCJA eliminated personal exemptions through 2025.
Pigouvian tax. A consumption tax designed to reflect the cost of negative externalities. Some spending imposes costs on others. The classic example is pollution from driving a car. Tailpipe emissions include greenhouse gases that contribute to climate change, as well as pollutants that degrade the environment and may contribute to health problems. Absent a tax, the price of gasoline does not reflect the environmental damage, and thus consumers ignore those costs in making decisions about what kind of car to buy or how much to drive. A Pigouvian tax adds an estimate of the social damage costs to the price of a good or service and improves market efficiency, since it prompts consumers to account for these costs when making economic decisions.
Poverty guidelines. Income levels used to determine eligibility for means-tested federal programs. The guidelines equal a base amount for each household plus a constant additional amount for each household member. The guidelines are indexed annually to the Consumer Price Index. (See also Poverty levels.)
Poverty levels. (Also called “poverty thresholds.”) The level of pre-tax cash income below which a family is considered to be officially “poor.” Thresholds vary by family size, age of the head of household, and number of children. When established in 1965, the thresholds were set at three times the cost of a minimally adequate diet and indexed annually for changes in the price of food. The basis for indexing changed to the Consumer Price Index for all goods and services in 1969.
Pre-filled (or pre-populated) return. A tax return supplied by the tax authority with many items pre-filled based on information reported by third parties. For example, the IRS could send taxpayers a 1040 form with wages and salaries as reported by employers, and interest, dividends, and some capital gains as reported by financial institutions. The taxpayer must then correct any errors and add missing information before certifying the return as accurate and submitting it.
Progressive tax. A tax that levies a larger percentage on the income of higher-income households than from lower-income households. (See also Regressive tax.)
Progressivity. A measure of how tax burdens increase with income. A progressive tax claims a proportionately larger share of income from higher-income than from lower-income taxpayers. Conversely, a Regressive tax levies a larger share of income from lower-income households than from higher-income ones. Taxes that claim the same percentage of income from all taxpayers are termed “proportional.”
Property tax. A tax based on the value of property owned by an individual, household, or business. In the United States, most property taxes are levied by local governments.
Public debt. (See Debt held by the public.)
Q
Qualified Business Income (QBI) deduction. (see Pass-through business deduction.)
R
Real income. The value of income after accounting for inflation. Real income is typically converted in terms of a particular year’s prices. For example, a table may show income in 2010 dollars, meaning that the incomes are shown in terms of purchasing power in 2010. (See also Nominal income.)
Receipts. (see Revenues).
Reconciliation: A process created by the Congressional Budget Act of 1974, which allows for legislation to be fast-tracked for approval and bypass the Senate filibuster threshold of 60 votes. If Congress opts to go through the “reconciliation” process, the House and Senate must set spending and tax targets. In recent years, the reconciliation process has been used to enact the Tax Cuts and Jobs Act and the Inflation Reduction Act.
Refund anticipation loan: An immediate cash loan from a private lender, typically a commercial tax preparer, backed the by the anticipated tax refund claimed on the borrower’s tax return.
Refundable tax credit. A tax credit, or portion of a credit, that is payable even when it exceeds an individual’s income tax liability. Tax credits generally may be used only to reduce positive tax liability and are therefore limited to the amount of income tax the individual would otherwise owe. Unlike other tax credits, the refundable portion of a tax credit is scored as an outlay in government budget accounts and treated as direct spending. (See, e.g., Earned Income Tax Credit.)
Regressive tax. A tax that claims a larger percentage of income of lower-income households than of higher-income households. (See also Progressive tax.)
Revenue. Federal government revenue consists of taxes, mandatory fees, licenses, fines, and Federal Reserve earnings. Federal revenues are also known as federal government receipts.
Revenue-neutral. A term applied to tax proposals in which provisions that raise revenues offset the cost of provisions that lose revenues, so the proposal creates no net revenue loss or increase.
S
SSDI (Social Security Disability Insurance). Social insurance that provides benefits to the disabled who qualify based on years of work covered by Social Security. (See also OASDI.)
Standard deduction. A deduction that taxpayers may claim on their tax returns in lieu of itemizing deductions. Typically, taxpayers with only modest deductible amounts that could be itemized choose to take the standard deduction, as it provides a greater benefit. Single filers, heads of household, and married couples filing jointly have different standard deductions. In 2020, 87 percent of tax filers claimed a standard deduction (See also Itemized deductions.)
Stimulus. An effort to increase growth in an economy during a recession by using monetary policy, fiscal policy, or both. Fiscal policy uses tax cuts and increased government spending to boost economic growth. Monetary policy can also stimulate economic growth by reducing interest rates and through federal reserve purchases of government bonds.
Sunset. Provision of a tax act that expires on a certain date unless legislation is passed to extend them.
Supplemental Security Income (SSI). Provides a floor of protection as cash for those who become disabled or reach age 65 and have very low incomes and assets.
T
Tax after credits. A filer’s calculated, final tax liability after all credits (such as the Earned Income Tax Credit, the Child Tax Credit, the Child and dependent care tax credit, and the Foreign tax credit) have been applied. If this amount is less than taxes paid via withholding or estimated tax payments, the taxpayer receives the difference as a refund. If the amount exceeds taxes paid, the taxpayer must remit the difference as a final payment.
Tax burden. The total cost of taxation borne by a household or individual taxpayer. The burden accounts not only for taxes remitted directly, but also for the burden incurred indirectly through lower wages, a reduced return on an investment, and for Distortions due to tax-induced changes in behavior. For example, in addition to the employee portion of payroll taxes, a worker may also bear the employer’s share in the form of lower compensation.
Tax credit. A reduction in tax liability for specific attributes or expenses, such as having a qualifying child or incurring expenses for paid dependent care. Unlike deductions, which reduce taxable income, a tax credit reduces tax liability dollar for dollar. Nonrefundable credits may only offset positive tax liability; in contrast, if a refundable credit exceeds the taxpayer’s tax liability, the taxpayer receives the excess as a refund. (See also Refundable tax credit.)
Tax Cuts and Jobs Act (TCJA). A major overhaul of the tax law enacted in 2017 that cut individual and corporate income tax rates, allowed businesses to immediately deduct (expense) the cost of non-real estate investments, exempted much foreign business income from US taxation, while imposing a new tax on intangible profits in low-tax countries, created a new deduction for pass-through business income, raised the standard deduction, doubled the child tax credit and eliminated the personal exemption, eliminated or curtailed many itemized deductions (including capping the deduction for state and local taxes), changed the price index used for inflation adjustments, and doubled the threshold for estate taxation. To limit the budgetary cost, expensing phases out starting in 2023 and most of the individual provisions are set to expire at the end of 2025, but the lower corporate tax rate and revised price index are permanent.
Tax expenditure. A revenue loss attributable to a provision of federal tax law that allows a special exclusion, exemption, or deduction from gross income, or provides a special credit, preferential tax rate, or deferral of tax liability. Tax expenditures often result from using tax provisions instead of direct subsidies to promote selected activities.
Tax filing threshold. The level of income at which filing units of specific size and filing status first owe a tax, before considering tax credits. The amount varies with filing status, allowable adjustments, deductions, and exemptions. Tax credits can further increase the amount of untaxed income.
Tax haven. A country that assesses little or no tax on the income of foreign multinationals. Some groups use different definitions, but nations considered tax havens include Luxembourg, the Cayman Islands, Bermuda, and Ireland. Domestically, Delaware, Nevada, and South Dakota have also been accused of serving as tax havens.
Tax incidence. A measure of the actual burden of a tax. Tax incidence may deviate from statutory tax liability because the imposition of a tax may change pre-tax prices. For example, retailers remit sales taxes, but those taxes raise the prices faced by consumers, who ultimately bear much of the burden of the tax.
Tax liability. The amount of total taxes owed after application of all tax credits.
Tax preferences. (see Tax Expenditures).
Tax Reform Act of 1986 (TRA86). Revenue-neutral legislation passed in 1986 that simplified the tax code, lowered marginal tax rates, increased personal exemptions, and reduced individual and corporate tax expenditures.
Taxable income. The final income amount used to calculate tax liability. Taxable income equals adjusted gross income (AGI) less either the Standard deduction or Itemized deductions and, starting in 2018, the deduction for Qualified Business Income.
Taxpayer Relief Act of 1997 (TRA97). Tax legislation passed in 1997 that reduced capital gains tax rates, introduced the child credit, created education credits, raised the estate tax exemption level, created Roth IRAs, and increased the contribution limit for traditional IRAs.
Territorial taxation. A business tax system that exempts most active foreign income of multinational businesses from domestic taxation. Typically, territorial tax systems have anti-avoidance rules aimed at preventing companies from shifting profits to tax havens.
U
Unemployment insurance (or Unemployment compensation). A government program that provides cash benefits to eligible jobless workers for limited periods. Supervised by the federal government, the state-run programs are funded by payroll taxes states impose on employers.
V
Value-added tax (VAT). A form of consumption tax collected from businesses on the value firms add to a product at each stage of production (instead of being collected wholly from sales to final consumers, as in a retail sales tax). VATs are almost universal outside the US.
Vertical equity. The concept that net tax burden should be higher on people with higher levels of well-being. The degree to which the tax burden should increase for people with increased well-being is a value judgment (See also Horizontal equity.)