This paper examines the Tax Cuts and Jobs Act (TCJA) of 2017, the largest tax overhaul since 1986. The new tax law makes substantial changes to the rates and bases of both the individual and corporate income taxes, cutting the corporate income tax rate to 21 percent, redesigning international tax rules, and providing a deduction for pass-through income. TCJA will stimulate the economy in the near term. Most models indicate that the long-term impact on GDP will be small. The impact will be smaller on GNP than on GDP because the law will generate net capital inflows from abroad that have to be repaid in the future. The new law will reduce federal revenues by significant amounts, even after allowing for the modest impact on economic growth. It will make the distribution of after-tax income more unequal, raise federal debt, and impose burdens on future generations. When it is ultimately financed with spending cuts or other tax increases, as it must be in the long run, TCJA will, under the most plausible scenarios, end up making most households worse off than if TCJA had not been enacted. The new law simplifies taxes in some ways but creates new complexity and compliance issues in others. It will raise health care premiums and reduce health insurance coverage and will have adverse effects on charitable contributions and some state and local governments. Looking forward, the ultimate effects of TCJA will depend on the currently uncertain responses of other countries, the Federal Reserve Board, and future Congresses, among others.

The United States has a worldwide system that taxes the dividends its resident multinational corporations receive from their foreign affiliates, while most other countries have territorial systems that exempt these dividends. This report examines the experience of four countries – two with long-standing territorial systems and two that have recently eliminated taxation of repatriated dividends. We find that the reasons for maintaining or introducing dividend exemption systems varied greatly among them and do not necessarily apply to the United States. Moreover, classification of tax systems as worldwide or territorial does not adequately capture differences in how countries tax foreign-source income.

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This Tax Fact explores the distributional impact of taxing carbon dioxide to combat climate change and in recycling the revenues into tax cuts.

A carbon tax is a promising tool for discouraging the greenhouse gas emissions that cause climate change. In principle, a well-designed tax could reduce the risk of climate change, minimize the cost of emissions reductions, encourage innovation in low-carbon technologies, and raise new public revenue. But designing a real-world carbon tax poses significant challenges. We analyze those challenges from a public finance perspective, emphasizing three tax policy design issues: setting the tax rate, collecting the tax, and using the resulting revenue. The benefits of a carbon tax will depend on how policymakers address those issues.

It is widely recognized that the current U.S. corporate income tax is flawed, particularly in its treatment of foreign‐source income. These flaws are amplified by the high U.S. statutory tax rate. Unfortunately,current reform proposals fail to resolve the fundamental contradictions in the current corporate income tax structure.

The inclusion of employer-sponsored health insurance (ESI) in taxable income would increase income and payroll tax receipts, but would also increase Old Age, Survivors, and Disability Insurance (OASDI) benefits by adding ESI to the OASDI earnings base. This study uses the Urban Institute’s DYNASIM model to estimate the effects of including ESI premiums in taxable earnings on the level and distribution by age and income groups of income tax burdens, payroll tax burdens, and OASDI benefits. We find that the increased present value of OASDI benefits from including ESI in the wage base in 2014 offsets about 22 percent of increased income and payroll taxes, 57 percent of increased payroll taxes, and 72 percent of increased OASDI taxes. The overall distributions of taxes and benefits by income group follow the same pattern, with both taxes and benefits increasing as a share of income between the bottom and middle quintiles and then declining as a share of income for higher income taxpayers. But households in the bottom income quintiles receive a net benefit from including ESI in the tax base because their increase in OASDI benefits exceeds their increase in income and payroll taxes. Over a lifetime perspective, all earnings groups experience net tax increases, but workers in the middle of the earnings distribution experience the largest net tax increases as a share of lifetime earnings. Higher benefits offset a larger share of tax increases for lower than for higher income groups.

Measuring the size of government is not simple. Standard measures omit important aspects of government action such as the many deductions, credits, and other tax preferences used to influence resource allocation. We argue that many tax preferences are effectively spending. Traditional measures of government size thus understate both spending and revenues. Reductions in spending-like tax preferences are tax increases in traditional budget accounting but are effectively spending reductions; increasing marginal tax rates raises both taxes and spending in our expanded measure. Some tax increases thus reduce government, while others expand it.

The revenues from a carbon tax could help finance lower corporate tax rates, extending business tax preferences, or other corporate tax reforms. Such a tax swap would reduce the environmental risks of carbon emissions and improve the efficiency of America’s corporate tax system. But it would also pose a significant distributional challenge. A carbon tax would fall disproportionately on low-income families, while corporate tax cuts would disproportionately benefit those with high incomes. Policymakers may want to use some revenue to offset those impacts. They may also want to use some carbon revenues for deficit reduction.

This paper evaluates six options to achieve across-the-board reductions to a group of major exclusions and deductions in the income tax: (1) limiting their tax benefit to a maximum percentage of income; (2) imposing a fixed dollar cap; (3) reducing them by a fixed-percentage amount; (4) limiting their tax saving to a maximum percentage of their dollar value; (5) replacing preferences with fixed rate refundable credits; and (6) including them in the base of the existing Alternative Minimum Tax (AMT). We discuss issues of design, implementation, and administration, and simulate the revenue, distributional, and incentive effects of the various options.

This paper by the Urban Institute explores the impact of the RET on individual behavior. The RET may affect two personal decisions: (1) how many hours to work (including leaving the workforce); and (2) at what age to start claiming Social Security benefits. The RET may discourage a certain group of older citizens from working. This is the group of workers aged 62 to 64 who already receive Social Security benefits and who have labor income just below the RET or between the RET threshold and the point at which the RET completely taxes away the individual’s Social Security benefit. Higher earners may be affected in the opposite direction: removing the RET would allow them to receive Social Security benefits for the first time, and this might lead some high earners to cut back on their work hours. The RET may also discourage workers from taking up Social Security benefits at ages below the NRA, because it temporarily taxes away some part of Social Security benefits. These behavioral questions have important implications for the present, and future, total incomes of workers between the ages of 62 and 64 who may be subject to the RET. The goal of this paper is to examine these potential behavioral changes and the relative importance of work effort and Social Security take-up decisions to total income levels.

We review the changing economic significance of various business entity types since the Tax Reform Act of 1986 (TRA86) and the implications of these changes for the design of tax policy. In particular, we focus on the increased role of pass-through entities and the declining significance of the taxable corporate form. Our analysis suggests that significant reductions in the corporate tax rate, absent changes in the personal tax rate, will likely reverse the organizational form incentives that have existed since TRA86. Further, if the loss in revenue from a rate reduction is offset by a broadening of the tax base, most business entities, comprising most business income, are likely to face an overall increase in their tax burden.

The federal government is larger than conventional budget measures suggest. Many tax preferences are effectively spending programs. Adding these preferences to federal outlays and receipts makes the government appear about 4 percent of GDP larger. The 1986 tax reform cut these benefits, but they have since rebounded to a larger share of GDP than before. Using this broader measure of government size, many base-broadening reforms viewed as tax increases would be reclassified as spending cuts. Raising marginal tax rates would be recorded as a tax increase and a spending increase because it would boost the value of many tax preferences.

Economists frequently assume that employees ?pay for? employer-provided fringe benefits, such as contributions to retirement plans, in the form of reduced wages. This paper challenges these assumptions. Because low-income employees receive little tax benefit from saving in qualified retirement plans, they may not be willing to accept a one dollar reduction in their wage in return for an additional dollar contributed to their 401(k) plan. We find that employers reduce wages of high-income workers by 90 to 99 cents for every dollar contributed to a 401(k) plan, but they reduce wages of low-income workers by only 11 to 29 cents.

The value of the tax preference for pensions depends on the marginal tax schedule and on the tax treatment of income from assets held outside a pension account. We examine the change over time in the value of pension investing, accounting for changes in the tax schedule and in the treatment of equity and bond income. We find that changes in U.S. tax law, especially the treatment of equity income, have led to sizeable changes in the value of the pension tax preference. On balance the value of the pension tax preference to worker-savers is modestly lower than it was in the mid-1980s and substantially lower than it was in the late 1980s.

The 2008 stock market crash raises concerns about retirement security, especially since the increased prevalence of 401(k) and similar retirement saving plans means that more Americans are now stakeholders in the equity market than in the past. Using a dynamic microsimulation model, this paper explores the ability of alternate future stock market scenarios to restore retirement assets. The authors find that those near retirement could fare the worst because they have no time to recoup their losses. Mid-career workers could fare better because they have more time to rebuild their wealth. They may even gain income if they buy stocks at low prices and get above-average rates of return. High-income groups will be the most affected because they are most likely to have financial assets and to be invested in the stock market.

This article uses a microsimulation model to estimate how freezing all remaining private-sector and one-third of all public-sector defined benefit (DB) pension plans over the next 5 years would affect retirement incomes of baby boomers. If frozen plans were supplemented with new or enhanced defined contribution (DC) retirement plans, there would be more losers than winners, and average family incomes would decline. The decline in family income would be much larger for last-wave boomers born from 1961 through 1965 than for those born from 1946 through 1950, because younger boomers are more likely to have their DB pensions frozen with relatively little job tenure. Higher DC accruals would raise retirement incomes for some families by more than their lost DB benefits. But about 26 percent of last-wave boomers would have lower family incomes at age 67, and only 11 percent would see their income increase.

How Big Are Total Individual Income Tax Expenditures, and Who Benefits from Them? by Leonard E. Burman, Christopher Geissler and Eric J. Toder. Published in volume 98, issue 2, pages 79-83 of American Economic Review, May 2008

Most workers do not contribute the maximum allowable amount to employer-sponsored tax-deferred retirement plans. The share of maximum contributors increased between 1990 and 2003, as did the percentage of participants who contribute the maximum or at least 10 percent of earnings. But virtually all the growth in maximum contributors came from groups with high shares of maximum contributors in 1990. Recent increases in contribution limits can be expected to reduce shares of maximum contributors, but raise relative shares of maximum contributors among high-earning and education groups. Increases in contribution limits do little to increase retirement preparedness among lower-income groups.

This report was prepared by the Urban Institute for the U.S. Department of Labor (DOL), Employment and Training Administration (ETA). The Urban Institute is a nonprofit, nonpartisan policy research and educational organization established in Washington, D.C., in 1968. Opinions expressed are those of the authors and do not represent the official position of DOL or reflect the views of the Urban Institute, its trustees, or its funders.