Tax Policy Center Research Articles

The OECD/G20 Global Minimum Tax and Dispute Resolution: A Workable Solution Based on Article 25(3) of the OECD Model, the Principle of Reciprocity and the GloBE Model Rules The authors wish to thank the anonymous peer reviewers for their comments as well as the editor-in-chief of the World Tax Journal, Professor Pasquale Pistone, for the opportunity to publish in this

The implementation of the G20/OECD global minimum tax (“GloBE”) raises an immediate and practical challenge in terms of dispute resolution. On the one hand, the GloBE framework will require an unprecedented degree of coordination between jurisdictions with naturally a high potential for bilateral and multilateral disputes. On the other hand, it is foreseen that the GloBE rules will not be incorporated into a Multilateral Convention. Rather, the GloBE architecture will be exclusively transposed into domestic laws through so-called “model rules”. Therefore, at least in an initial phase, no ad hoc international binding dispute resolution mechanism will be available to solve GloBE disputes. In order to address this pressing challenge, this article proposes a readily workable solution to solve GloBE disputes without the need for a Multilateral Convention. The model advocated here consists in a (i) reinforced interpretation of article 25(3) second sentence of the OECD Model on the basis of a subsequent practice (article 31(3)(b) of the VCLT), (ii) a domestic dispute resolution mechanism incorporated into the model rules and mirroring article 25(3) of the OECD Model which would also (iii) apply to non-treaty situations on the basis of the principle of reciprocity and which would (iv) rely on the Convention on Mutual Administrative Assistance in Tax Matters. The authors find that the proposed framework is particularly in line with the object and purpose of the GloBE Model Rules which are to operate between jurisdictions as “mirror legislations” and in a synchronized fashion. This solution may also be combined with other mechanisms currently discussed to simplify and enhance the certainty of the GloBE framework for both MNE groups and tax administrations.

Foreword: Tax Treaty Interpretation after BEPS

This Special Issue of the Bulletin for International Taxation contains a series of articles prepared further to the two-day interdisciplinary conference organized in Lausanne on 19-20 December 2019 by the Max Planck Institute for Tax Law and Public Finance and the Tax Policy Center of the University of Lausanne. This foreword describes the background, purpose and structure of the conference as well as its main objectives, and presents the articles of this Special Issue.

Tax Preference As White Privilege in the United States, 1921–1965

Tax Preference As White Privilege in the United States, 1921–1965 Julia Ott Whiteness is also a matter of what is behind, as a form of inheritance, which affects how bodies arrive in spaces and worlds. We accumulate behinds, just as what is behind is an effect of past accumulations.1 —Sara Ahmed Inequality—in income, wealth, opportunity, consumption, health, security, political voice, and environment—presents the most pressing social challenge of our day. And it counts among the hottest areas of research in the social sciences.2 Capitalism may tend towards inequality, [End Page 92] as economist Thomas Piketty's exhaustive account suggests.3 Even so, the historical record makes it plain that public and private policies shape distributions of income, wealth, and wellbeing. This article examines the history of one particular policy that has contributed substantially to the concentration of income and wealth among the richest households—almost entirely white—in the United States: the preferential tax rate for capital gains. Since 1922, the IRS has allowed taxpayers to keep a greater portion of the gains they make from investments (so-called capital gains) than they keep from their wages and salaries (so-called earned, or ordinary, income). This is because capital gains are taxed at lower tax rate than the same amount of money is taxed when it is earned as salary or wage income (figure 1).4 For nearly a century, the reduced rates levied on gains from investment have undercut the progressivity of the U.S. tax code.5 Because the [End Page 93] Click for larger view View full resolution Figure 1. Income tax rates in the United States, 1918–2018 Source: Tax Policy Center, "Historical Highest Marginal Income Tax Rates" (March 22, 2017), https://www.taxpolicycenter.org/statistics/historical-highest-marginal-income-tax-rates; Tax Policy Center, "Historical Capital Gains and Taxes (May 5, 2017), https://www.taxpolicycenter.org/statistics/historical-capital-gains-and-taxes; Citizens for Tax Justice, "Federal Top Income Tax Rates Since 1913" (November 2011), https://www.ctj.org/pdf/regcg.pdf. wealthiest households earn the bulk of capital gains every year, this tax break benefits the rich overwhelmingly.6 Between 1922 and 2017, the top 10 percent of the income distribution received, on average, 84.2 percent of all realized capital gains, while the top 1 percent took, on average, 61.1 percent of all realized capital gains in the same period (compared to 38.2 percent and 13.0 percent, respectively, of all other income, excluding capital [End Page 94] gains) (figure 2). In every year since 1922, the tax preference for capital gains added several percentage points to the share of after-tax income taken by the top 1 percent and the top 10 percent of the income distribution (figure 3). Since 1989, the capital gains preference has been the single largest contributor to the rise in after-tax income inequality in the United States.7 This feature of the tax code also swells the bank accounts of the wealthiest because of how it affects the compensation of the highest earners. In the United States, partners in private investment funds (like venture capital, hedge funds, and private equity) often receive compensation in the form of a share of their clients' capital gains (so-called "carried interest"), and therefore, they pay the lesser tax rate. The preference for capital gains also encourages corporate executives to take stock-based compensation, anticipating that future gains will be taxed preferentially. With so much of their income and wealth dependent upon the performance of their company's stock, corporate executives focus on that performance in the short term at the expense of the long-term success of the corporation.8 They funnel corporate resources into pay-outs to shareholders like themselves in the form of dividends and buybacks intended to buoy share prices. Today, "the stock market delivers money from corporations to investors, not the other way around," in the words of economist J. W. Mason.9 The financial sector wields outsized and adverse influence over U.S. corporations, thanks in part to the tax break for capital gains for individuals and households. Given the overrepresentation of white...

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Comment

Billion Dollar Blind Spot - How the U.S. Tax Code's Small Business Expenditures Impact Women Business Owners

This latest report from the Kogod Tax Policy Center, in keeping with our mission to conduct nonpartisan policy research on tax issues specific to small businesses, provides an assessment of how the U.S. tax code’s more than $255 billion of tax expenditures targeted to help small businesses grow and access capital impact women-owned firms. The results are eye-opening. • We report that while women-owned firms have increased to now total more than 11 million (or 38% of all U.S. firms), the majority of women business owners are small businesses operating in service industries and they continue to have challenges growing their receipts and accessing capital. • At the same time, three of the four small business tax expenditures we assessed are so limited in design that they either (i) explicitly exclude service firms, and by extension, the majority of women-owned firms (Sec. 1202); or (ii) could effectively bypass women-owned firms who are not incorporated or who are service firms with few capital-intensive equipment investments altogether (Secs. 1244 and 179). • Our survey data of 515 experienced, engaged women business owners corroborates these findings, and nevertheless suggests that when women-owned firms can take advantage of tax breaks, they do. However, neither Congress nor Treasury or IRS or SBA has ever measured how the tax code impacts women business owners. • For example, we identified only three women business owners who had ever used Section 1202 - a $6 billion tax break - to raise capital for their firms. While we expect that more than three women-owned firms have used this provision since 1993, we don't have publicly-available taxpayer data to prove it. This ridiculous example highlights why we need tax research on women business owners. Similarly, our survey found that women business owners use Section 179 at significantly lower rates than existing government research finds for businesses generally. This tax break is one of the most expensive (it will cost $248 billion from 2016-2020), and yet we don’t have any research on how it benefits women business owners. • Our findings raise questions as to (i) whether the tax code’s small business tax expenditures are operating as Congress intended for these small businesses; and (ii) whether the cost of these expenditures has been accounted for in terms of their uptake by women-owned firms. In answering these questions impacting millions of women business owners, we report that policymakers and stakeholders have a billion dollar blind spot when it comes to understanding how effective small business tax expenditures are with respect to women-owned firms. This blind spot indicates Congress does not have data or research to make evidence-based tax policy decisions with respect to women business owners. Our research finds, among other things, that the tax-writing committees have yet to hold hearings specifically to address tax challenges women business owners encounter. Ultimately, this report recommends strategies for developing this research including: 1. Requesting the Congressional tax-writing committees hold hearings on the issues identified in the report; 2. Requesting the Joint Committee on Taxation develop estimates on how small business expenditures impact women-owned firms; 3. Requesting the federal Commission on Evidence-Based Policymaking develop strategies for developing the data we need to measure these expenditures in terms of women-business owners; and 4. Requesting the nomination and confirmation of a new Director of the Census Bureau.

How Firms Shape Income Inequality: Stakeholder Power, Executive Decision Making, and the Structuring of Employment Relationships

Academy of Management ReviewVol. 41, No. 4 DialogueHow Firms Shape Income Inequality: Stakeholder Power, Executive Decision Making, and the Structuring of Employment RelationshipsAsghar Zardkoohi and Leonard BiermanAsghar ZardkoohiTexas A&M University and Leonard BiermanTexas A&M UniversityPublished Online:12 Jul 2016https://doi.org/10.5465/amr.2015.0197AboutSectionsView articleView Full TextPDF/EPUB ToolsDownload CitationsAdd to favoritesTrack Citations ShareShare onFacebookTwitterLinkedInRedditEmail View articleREFERENCESAkerlof G., Yellen J. 1986. Efficiency wage models of the labor market. Cambridge: Cambridge University Press. Google ScholarBrickley J. A., Smith C. W., Zimmerman J. 2016. Managerial economics and organizational architecture (6th ed.). New York: McGraw-Hill Irwin. Google ScholarBrynjolfsson E., McAfee A. 2012. Race against the machine: How the digital revolution is accelerating innovation, driving productivity, and irreversibly transforming employment and the economy. Lexington, MA: Digital Frontier Press. Google ScholarCoase R. 1937. The nature of the firm. Economica, 4: 386–405. Google ScholarCobb J. A. 2016. How firms shape income inequality: Stakeholder power, executive decision making, and the structuring of employment relationships. Academy of Management Review, 41: 324–348. Google ScholarCoile C. C., Levine P. B. 2009. Will the current economic crisis lead to more retirements? VOX, CEPR’s Policy Portal, October 31: http://www.voxeu.org/article/crisis-will-force-workers-retire. Google ScholarDorfman J. 2015. The Fed’s low interest rates are increasing inequality. Forbes, May 12: http://www.forbes.com/sites/jeffreydorfman/2015/05/12/the-feds-low-interest-rates-are-increasing-inequality/. Google ScholarDyer J. H. 1996. Does governance matter? Keiretsu alliances and asset specificity as sources of Japanese competitive advantage. Organization Science, 7: 649–666. Google ScholarFreeman R. 2007. The great doubling: The challenge of the new global labor market. In Edwards J.Crain M.Kalleberg A. L. (Eds.), Ending poverty in America: How to restore the American Dream: 55–65. New York: New Press. Google ScholarGeyskens I., Steenkamp J. E. M., Kumar N. 2006. Make, buy, or ally: A transaction cost theory meta-analysis. Academy of Management Journal, 49: 519–543.Link , Google ScholarGreenspan A. 1998. Income inequality: Issues and policy options. The Federal Reserve Board, August 28: http://www.federalreserve.gov/boarddocs/speeches/1998/19980828.htm. Google ScholarHeathcote J., Violante G., Perri F. 2010. Inequality in times of crisis: Lessons from the past and a first look at the current recession. VOX, CEPR’s Policy Portal, February 2: http://www.voxeu.org/article/economic-inequality-during-recessions. Google ScholarJosefy M., Kuban S., Ireland R. D., Hitt M. A. 2015. All things great and small: Organizational size, boundaries of the firm, and a changing environment. Academy of Management Annals, 9: 715–802.Link , Google ScholarKahneman D. 2011. Thinking, fast and slow. New York: Farrar, Straus & Giroux. Google ScholarKahneman D., Tversky A. 1979. Prospect theory: An analysis of decision under risk. Econometrica, 47: 263–292. Google ScholarLazear E., Gibbs M. 2009. Personnel economics in practice. Hoboken, NJ: Wiley. Google ScholarLazear E., Rosen S. 1981. Rank-order tournaments as optimum labor contracts. Journal of Political Economy, 89: 841–864. Google ScholarMasten S. 1996. Case studies in contracting and organization. New York: Oxford University Press. Google ScholarMilgrom P., Roberts J. 1992. Economics, organization & management. Englewood Cliffs, NJ: Prentice Hall. Google ScholarMueller H. M., Ouimet P. P., Simintzi E. 2015. Wage inequality and firm growth. Luxembourg Income Study (LIS) Working Paper Series, No. 632. Google ScholarStiglitz J. E. 2013. The price of inequality: How today’s divided society endangers our future. New York: Norton. Google ScholarStiglitz J. E. 2015. The great divide: Unequal societies and what we can do about them. New York: Norton. Google ScholarUrban-Brookings Tax Policy Center. 2008. The Bush tax cuts: Beneficiaries. I-12-1. Google ScholarWilliamson O. 1985. The economic institutions of capitalism. New York: Macmillan. Google ScholarFiguresReferencesRelatedDetails Vol. 41, No. 4 Permissions Metrics in the past 12 months History Published online 12 July 2016 Published in print 1 October 2016 Information© Academy of Management ReviewWe would like to acknowledge helpful comments by Professor Duane Ireland and Matthew Josefy, a doctoral student.Download PDF

Using entity identification and classification for automated integration of spatial-temporal data

Big data, crucial to answering economic, social, and political questions facing our society, tend to be diverse and distrib- uted through various sites across the Internet. The creation of tools to integrate and analyze such data is of paramount interest. Yet the automation of these processes continues to be a great challenge. Our work rests on the observation that a great number of public data sources in domains ranging from economic to demographic, although of complex structure, often share key similarities, namely the presence of the Time and Location. Our proposed Data Integration through Object Modeling framework or DIOM tackles the critical problem of automating data integration from a variety of public websites by abstracting key features of multi-dimensional tables and interpreting them in the context of knowledge- centered Unified Spatial Temporal Model. Our classification-driven extractors are trained to identify and classify entities from both structured and unstructured parts of spreadsheets. The unstructured part contained in titles, headers, and footers reveals critical information, so-called Implicit Knowledge, crucial to the correct interpretation of data. Our experimental results on real world datasets from heterogeneous public data sources show increased accuracy by 25% compared to state-of-the-art approaches. For example, a lengthy process of collecting and analyzing historical data from different states led to success in repealing the Sales and Use Tax on computer and software services, introduced in Massachusetts in 2013. In the quest to fight this action perceived as detrimental to the business growth and economic health of the state, many organizations worked together to create an integrative data source for high-fidelity and talent com- petitive metrics that can be used to measure the economic competitiveness and influence policy making. Large-scale data integration is crucial for the success of such endeavors. Data from a wide spectrum of diverse websites from the Tax Policy Center, the Census Bureau, to websites like the National Science Foun- dation and the Bureau of Economic Analysis had to be extracted, integrated, and warehoused. These web data sources represent valuable public knowledge ready to be leveraged for policy decision making and economic forecasting. The extraction and integration of data proved challenging and time consuming. Yet, the appetite for leveraging new data sources appears endless, so automation becomes critical to the success of building and growing rich economic indexes. The Spreadsheet Integration Problem One obstacle in capitalizing on this wealth of knowledge is the lack of generalized automated tools for data integration. Unfortunately, while progress has been made on integration (1-3), it remains challenging and labor-intensive to integrate data of the rich variety required to answer com- plex societal questions. A large amount of information collected from these web sites is retrieved in the form of spreadsheets. We demonstrate that actual spreadsheets from domains like tax and economics

Shortchanged: The Tax Compliance Challenges of Small Business Operators Driving the On-Demand Platform Economy

The last time Congress enacted substantial tax reform — in 1986 — only 8.2% of American households owned personal computers. Today, more than 87% of American adults own a mobile phone and on-demand platforms like Uber, Etsy, Lyft, Airbnb, HomeAway, Amazon, and TaskRabbit have become household names by connecting businesses and consumers. Although millions of Americans are engaging in the on-demand platform economy every day as sellers and service providers, the tax compliance challenges this new frontier presents have gone relatively unnoticed. At the same time, these challenges will grow with this fastest growing segment of the labor economy — creating unnecessary and ongoing burdens for the small business operators who power the on-demand economy.This report, in keeping with the mission of the Kogod Tax Policy Center to conduct non-partisan research on tax issues specific to small businesses and entrepreneurs, identifies the tax compliance challenges the on-demand economy presents for its small business operators. Having spent more than a year investigating this growing problem, we report that:More than 2.5 million U.S. taxpayers are participating in the on-demand platform economy as small business owners every year, and that number is set to more than double in the next few years.At best, these small business owners are shortchanged when filing their taxes; at worst, they fail to file altogether. In addition, these taxpayers face potential audit and penalty exposure for failure to comply with filing rules that are triggered by relatively low amounts of earned income and inconsistent reporting rule adoption.The current tax administration system isn’t working for a significant percentage of these small business taxpayers or Treasury or IRS. The existing tax rules effectively create a $19,399 reporting tax loophole impacting millions of taxpayers (the difference between the income thresholds triggering Forms 1099-K and 1099-MISC reporting), resulting in widespread confusion among taxpayers.The current state of play is one of unnecessary burden, potential audit and penalty exposure for on-demand platform economy players. We can do better.

The Most Critical Issue Facing Tax Administration Today -- And What to Do About It

This very brief paper contains the text of the keynote address delivered on June 19, 2014 to a research conference in Washington, DC on Advancing Tax Administration, co-sponsored by the IRS and the Tax Policy Center. It describes a way for the IRS to stabilize its reputation with Congress and the public in view of the agency's troubles in administering the EO tax laws.

The Role of Tax Treaties in Facilitating Development and Protecting the Tax Base

The amount of taxes paid by multinational enterprises (MNEs) in host and home countries continues to make headline news. Corporate tax regimes, particularly those in many OECD countries, have never been more complex and the competition to attract and retain foreign direct investment (FDI) has perhaps never been so great. All of these political, legal, economic and competitive realities face countries at a time when they need additional budget revenues. At the June 2012 G-20 Summit in Los Cabos, leaders identified base erosion and profit shifting as key fiscal issue to be addressed. Many are expecting this to translate into a new approach to applying existing international tax standards, an increased pressure to eliminate tax breaks, enact tougher anti-abuse provisions, and less tolerance of aggressive tax planning. There has been an increased critical focus on transfer pricing, corporate restructuring and double tax treaties. Some have suggested that double tax treaties are eroding the domestic tax bases of developing countries, while others conclude that double tax treaties promote development and FDI and thereby expand the tax base. Dividing up a revenue pie has never been easy and the implementation of international tax rules to transparently and predictably allocate revenue to avoid double taxation and double non taxation has never been more adversarial between taxpayers and tax authorities and between tax jurisdictions. It was for these reasons that the Global Tax Policy Center of the Institute for Austrian and International Tax Law (Vienna University of Economics and Business) and the International Tax and Investment Center (ITIC) decided to undertake this study. The objective of our study was to look at the development impact of double taxation treaties and, more broadly, how tax policy can help generate economic growth and prosperity. Legally domestic tax laws are normally subordinate to international double taxation treaties, but in reality a double tax treaty only serves a country as well as its domestic tax regime. We've concluded that the problems affecting developing countries lie not with double tax treaties but rather in weak domestic tax legislation. Our study reviews empirical data from 20 developing countries, including LDCs, middle-to-high income developing countries, resource-rich countries, and BRIICS[1] countries. We hope that the empirical analysis and the conclusions that can be drawn from it can help guide policymakers to refocus their policy objectives to boost capital formation, expanding exports, and protect their domestic tax bases. We believe that a country with strong domestic tax legislation can advance their pursuit of the Millennium Development Goals by affectively utilizing double tax treaties and the related international tax rules to more transparently share and grow their tax base. (authors' abstract)

Book Reviews

Book Reviews

Trends and Players in Tax Policy in the Netherlands

Paper for the Rust Conference July 2013 ‘Trends and Players in Tax Policy’ organized by Institute for Austrian and International Tax Law Vienna WU Global Tax Policy Center together with the Research Council of Norway. It discusses trends in tax policy in the Netherlands as from 2000 (personal income taxes, corporate income taxes, other business taxes, value added tax, excises, recurrent taxes on capital, non-recurrent taxes on capital, compulsory social security contributions paid to government and environmental taxes), main drivers of tax reforms since 2001, drafting and reviewing tax legislation and regulations, building up tax expertise, the changing relationship between tax administrations and taxpayers, major players in tax policy, tax policy in the global economy and good governance.

The Limits of Sustainability and Opportunities in the Social Economy

Ten years after 9/11, we as a nation have had to address issues of sustainability that other generations of Americans have not faced in quite the same way. Considerable attention, and understandably so, has focused on the security of our borders and threats to our homeland. Environmental disasters have tested our maturity as well, and this entire editorial could be devoted to that topic alone. But here we focus on economic and social sustainability, because the two closely intertwine, and the path we are on is not sustainable from either point of view. We begin with economic sustainability, because that probably weighs most heavily on the minds of Americans at this time, and end with potential opportunities in the social economy. ECONOMIC SUSTAINABILITY When Standard & Poor's lowered the U.S. credit rating in August 2011, a deep and profound shudder ran through the hold of our ship. However much we might want to blame political deadlock for the downgrade--and there is plenty of blame to go around--the reality remains that we can no longer sustain the fiscal path we are on. The federal budget deficit--the difference between actual revenues and budgeted spending-is currently about $1.5 trillion. This is roughly equivalent to 10 percent of the gross domestic product (GDP), the market value of all goods and services produced in the United States. Four years ago, the federal budget deficit was about 3 percent of GDP. Economic recession and war operations aside, the federal government has been running budget deficits every year since 1970 except four, and the additive effect on the national debt is alarming. The national debt--the cumulative amount the federal spending in excess of revenues--now stands at about $14 trillion. Approximately 70 percent of GDP, the rate is much higher now than historical averages around 40 percent, a reflection of the deep recession and recent tax policy decisions. More than half of the national debt is in the form of debt securities sold to private investors, mostly from other countries, unlike public debt in the past. Fortunately, current interest rates on the securities are very low. When rates return to historical averages, the national debt will grow exponentially, putting future taxpayers at great risk, not only in having to pay off the debt, but also in owing payments to investors who may not have U.S. interests at heart. Clearly, this is not sustainable; for if sustainability means anything, it means creating preconditions to ensure the economic well-being of future generations. From a fiscal perspective, we have a revenue problem and a spending problem. The Office of Management and Budget (2012) reports that during fiscal year (FY) 2010, the last completed FY, the federal government collected $2.16 trillion in tax revenue. Forty percent ($865 billion) came from employment taxes for social security and social insurance, 42 percent ($899 billion) from individual income taxes, 9 percent ($191 billion) from corporate income taxes, and the balance ($207 billion) from excise and other taxes. Yet total federal revenues for the FY, relative to GDP, were the lowest in half a century--a mere 14.9 percent. What contributed to the historic drop in federal tax revenues? Dramatic falloffs in individual and corporate income tax revenues from the recession clearly had the greatest impact. The Bush tax cuts, coupled with other tax policy decisions, had a substantial impact as well, with arguably little payoff for the economy (Pew Charitable Trusts, 2011). A subtle but powerful factor was also at work. The U.S. tax burden was substantially lower than that of other major countries, and it has been for quite some time (Urban Institute-Brookings Institution Tax Policy Center, 2010). Having noted that, we must quickly cite the nation's daunting spending problem as well. The Office of Management and Budget (2011) reported that the federal government spent $3. …

RECONSIDERING TAX EXPENDITURE ESTIMATION

We examine the measurement of tax expenditures, as well as review issues concerning the classifi cation of tax expenditures generally. We use calculations from the Tax Policy Center’s microsimulation tax model to illustrate some of the problems with the current methodology for estimating tax expenditures. Unlike most previous work on the topic, we focus on how features of the current tax system including the alternative minimum tax and sunset rules complicate and compromise the value of information provided by the tax expenditure budget. We also present alternative measures of tax expenditures to improve the quality of information regarding the federal tax system.

Tax Policy Center

Tax Policy Center

DESPERATELY SEEKING REVENUE

In August 2009 the Congressional Budget Office warned that the budget was on an unsustainable path. Preventing federal debt from growing faster than the economy over the long-run requires large increases in revenues and/or decreases in spending. We explore, using the Urban-Brookings Tax Policy Center Model, whether incremental reforms of the current tax system could raise enough revenue to reduce the deficit to a sustainable level over the last five years of the current 10-year budget window. We conclude that feasible tax increases within the current tax structure cannot generate sufficient revenues to bring federal budget deficits under control.

Using taxes to reform health insurance: pitfalls and promises

Few people realize that one of the nation's largest health programs runs through the tax system. Reformers of all stripes propose to modify current tax rules as part of larger programs to increase coverage and control costs. Is the current system working? Will tax-based reforms achieve their goals? Several of the nation's foremost experts on taxation and health policy address these questions in Using Taxes to Reform Health Insurance, a joint product of the Urban-Brookings Tax Policy Center and the American Tax Policy Institute. Led by respected economists Henry Aaron of the Brookings Institution and Leonard Burman of the Urban Institute, contributors examine the role taxes currently play, the likely effects of recently introduced health savings accounts, the challenges of administering major subsidies for health insurance through the tax system, and options for using the tax system to expand health insurance coverage. No taxpayer or consumer of health care services can afford to ignore these issues.

Dead or Alive: An Investigation of the Incidence of Estate and Inheritance Taxes

This paper considers three questions: (1) the relative burden of wealth transfer taxes on heirs versus donors in a partial equilibrium context, (2) the distributional effects of the estate tax if its burdens are assigned to heirs, and (3) whether the incidence of a wealth transfer tax fundamentally differs depending on whether it is based on the amount transferred (an estate tax) or the amount received (an inheritance tax). The estimates presented are derived by adapting the Urban-Brookings Tax Policy Center Estate Tax Microsimulation Model to incorporate heirs' inherited and non-inherited income based on data from the Survey of Consumer Finance and tabulations from restricted IRS data matching estate tax returns to beneficiaries' income tax returns. This paper argues, contrary to existing practice, that it is more accurate to allocate wealth transfer tax burdens to heirs as a rough first approximation. It then presents the first estimates of the distribution of federal wealth transfer tax burdens based on this assumption. It finds that the 2009 federal estate tax is highly progressive by various measures of economic income if its burdens are assigned to heirs. It also finds that the estate tax contributes importantly to the progressivity of the tax system overall by partially offsetting the exclusion of inheritances from the income tax base among high-income heirs. The paper then compares the 2009 estate tax to an inheritance tax designed to have roughly the same revenue and distributional effects. It finds that their distributional effects differ at an individual level to a surprisingly large degree. The estimated correlation between the average tax rate on an inheritance under the two approaches is only 0.71 when weighted by inheritance size. Moreover, modifying the 2009 estate tax to account for the number of children of the donor does not narrow these differences. Estate and inheritance taxes thus appear to impose fundamentally different burdens that are robust to our best efforts to eliminate them.

Introducing the Issue

Introducing the Issue Isabel Sawhill (bio) and Sara McLanahan (bio) Isabel Sawhill Isabel Sawhill is senior fellow and co-director of the Center on Children and Families at the Brookings Institution and is a senior editor of The Future of Children. Sara McLanahan Sara McLanahan is director of the Center for Research on Child Wellbeing at Princeton University and editor-in-chief of The Future of Children. Notes 1. Gary Burtless and Christopher Jencks find that market income inequality in the United States is similar to that in other OECD countries but that taxes and transfers did more to redistribute these market incomes in other OECD countries in the 1990s, with the result that disposable incomes were more unequal in the United States in that decade. Gary Burtless and Christopher Jencks, "American Inequality and Its Consequences," in Agenda for the Nation, edited by Henry Aaron, James Lindsay, and Pietro Nivola (Brookings, 2003), p. 76. 2. Lawrence Mishell, Jared Bernstein, and Sylvia Allegretto, The State of Working America 2004/2005 (Cornell University Press, 2005), p. 214. 3. Authors’ calculation from Congressional Budget Office, "Historical Effective Federal Tax Rates, 1979-2003" (December 2005), table 1-C. The CBO calculations use the Census Bureau’s fungible value measure to determine the cash equivalent of in-kind government transfer payments. The CBO adjusted the resulting measure of comprehensive income for differences in the size of households in order to assign households to income quintiles. Quintiles contain equal numbers of people, but because households vary in size, quintiles generally contain unequal numbers of households. 4. Ibid. 5. Arthur B. Kennickell, "Currents and Undercurrents: Changes in the Distribution of Wealth, 1989-2004," Finance and Economics Discussion Series 2006-13 (Federal Reserve Board, 2006), www.federalreserve.gov/pubs/feds/2006/200613/200613abs.html (June 15, 2006). 6. Authors’ calculation interpolating data from Angus Maddison, "The World Economy: A Millennial Perspective" (Paris: Organization for Economic Cooperation and Development, 2001), tables A1-c and A1-d. 7. Authors’ calculation from U.S. Bureau of the Census, "Historical Income Tables—Families," Current Population Survey, table F-6, www.census.gov/hhes/www/income/histinc/f06ar.html (May 18, 2006). The Census Bureau adjusts income data for inflation using the CPI-U-RS. 8. Authors’ calculations using Urban-Brookings Tax Policy Center, "Table T06-0020. Current Law: Distribution of Gross Estate and Net Estate Tax by Size of Gross Estate" (January 23, 2006), www.taxpolicycenter.org/TaxModel/tmdb/Content/Excel/T06-0020.xls (May 18, 2006); and Board of Trustees of the Federal Old-Age and Survivors Insurance and Federal Disability Insurance Trust Funds, 2006 Annual Report (2006), tables V.A1 and V.A2, www.ssa.gov/OACT/TR/TR06/V_demographic.html (May 18, 2006). 9. Economic Growth and Tax Relief Reconciliation Act of 2001, Public Law 107-16, subtitle C, "Increase in Exemption Amounts," sec. 521(a). See also Leonard Burman and William Gale, "The Estate Tax Is Down, but Not Out," Tax Policies Issues and Options Policy Brief 2 (Washington: Urban Institute, December 2001). 10. See "School Readiness: Closing Racial and Ethnic Gaps," Future of Children 15, no. 1 (2005). 11. See Jens Ludwig and Isabel V. Sawhill, "Success by Ten: Intervening Early, Often, and Effectively in the Education of Young Children" (Georgetown University and Brookings, 2006); and William T. Dickens, Isabel V. Sawhill, and Jeffrey Tebbs, "The Effects of Investing in Early Education on Economic Growth," Working Paper (Brookings, April 2006). [End Page 16] 12. For a set of specific, evidence-based proposals on effective ways to intervene, see Robert Gordon, Thomas J. Kane, and Douglas O. Staiger, "Identifying Effective Teachers Using Performance on the Job," Hamilton Project White Paper 2006-01 (Brookings, 2006). 13. See George Borjas, Heaven’s Door: Immigration Policy and the American Economy (Princeton University Press, 2001). 14. "Childhood Obesity," Future of Children 16, no. 1 (2006). [End Page 17] Copyright © 2006 The Woodrow Wilson School of Public and International Affairs at Princeton University and The Brookings Institution

Financial Literacy Strategies: Where do We Go from Here?

The evolution of market economies has dramatically broadened the opportunities of consumers, workers, investors, and firms. Financial services have become especially free and accessible, but also increasingly complex. For the new financial freedom to help most people, they must understand their choices and the likely implications of alternative decisions. Unfortunately, many Americans have a weak grasp of basic personal finance principles. This paper emphasizes the importance of financial literacy in an increasingly complex market economy and examines the current state of financial education in the U.S. and abroad. We explore two methods of delivering financial knowledge—through broad financial curriculums and through more focused teachable moments. After examining the pros and cons of each, along with the evidence about their effectiveness, we suggest that a combination of the two perspectives, with the specific topics and behavioral strategies varying by target audience. We conclude by calling for a more rigorous evaluation of the effects of existing programs. About the Authors: Robert I. Lerman is Professor of Economics at American University and a Senior Fellow at the Urban Institute in Washington, DC. Dr. Lerman's research deals primarily with factors influencing poverty and income inequality and the policies aimed at reducing these problems. His current studies deal with asset building among low-income families, on the interaction between marital stability and earnings, and with the impact of public and private initiatives to strengthen marriage. His research has appeared in monographs, book chapters, and in a variety of journals, including the American Economic Review, Journal of Political Economy, Journal of Human Resources, Economica, National Tax Journal, and Review of Income and Wealth. Elizabeth Bell joined the Urban Institute's Executive Office Research center and the Urban- Brookings Tax Policy Center in July 2004. Her work primarily focuses on the distribution of tax incentives and spending in social welfare and private savings programs. Her current projects include examining trends in asset and liability holdings and programs that encourage asset- building for low-income families.