We’ve heard about income on the campaign trail, but what about wealth?

October 20, 2016

With the election nearing, the presidential candidates are making their final appeals to voters. We’ve heard candidates’ stances on several pocketbook issues—the minimum wage, child care costs, taxes—but neither Clinton nor Trump have spoken much about wealth.

Different from income, wealth—what a family owns minus what it owes—is a key means for families to weather emergencies, afford a down payment or college tuition, and secure a comfortable retirement. Yet for many decades now, some Americans have been falling behind. Twenty percent of families hold only about $4,000 or less in wealth. The median family has about $80,000—no more than what the median family in the 1980s possessed (adjusted for prices), despite an economy in which average income and average wealth has about doubled since then.

Young families and families of color have fallen especially behind. People in their 20s and 30s today appear to be on a slower wealth-building trajectory than their parents’ generations. African American and Hispanic households on average have not gained at all in recent decades relative to white families on key wealth accumulation measures such as homeownership and retirement savings.

Right now, federal wealth building incentives happen mainly in the tax code through subsidies that give little support to low- and middle-income families: Less than 10 percent of two major housing tax subsidies goes to the bottom 60 percent of earners, and less than 15 percent of three major retirement savings tax subsidies do so.

Both candidates’ tax plans would, as a side effect, reduce these largely inefficient tax subsidies—Clinton’s by limiting the value of itemized deductions and Trump’s through moving more taxpayers to take the standard deduction, capping itemized deductions, and lowering rates. Since many of these deductions likely subsidize savings that would have occurred anyway, limiting them would likely have little effect on saving. But would the candidates replace them with policies that help families save more and borrow smarter?

There are many avenues beyond tax policy to encourage wealth-building: lifting asset limits in safety net programs, incubating innovative consumer financial products while curbing harmful or unproductive ones, and supporting state initiatives to expand automatic enrollment in retirement accounts, to name a few. Unfortunately, they haven't gotten much attention in debates or stump speeches in this election cycle. Before Election Day, it would be informative—and refreshing—for these issues to be put more in the limelight. 


In the news: Hillary Clinton's urban agenda

October 19, 2016

In Next City, senior fellow Solomon Greene discusses how Hillary Clinton's “Breaking Every Barrier” agenda could help struggling communities in American cities. (For more information, check out Greene's earlier analysis of Clinton's plan and how it could connect housing to opportunity.)


How would the candidates deal with the natural disasters that lurk ahead?

October 17, 2016

During this election season, we’ve already seen several natural and environmental hazards wreak havoc. The Louisiana floods this past August and the current wake from Hurricane Matthew are the most recent examples of the 39 major disaster declarations in 2016—so far. Government aid has come to Louisiana while damage is still being assessed along the southeastern seaboard.

We’ve also seen the two major presidential candidates talk about these recent disasters, visit them in some cases, and invariably offer their “thoughts and prayers.” Neither candidate has an explicit policy platform on disaster management. To be fair, few presidential candidates in recent history have brought up disaster planning and assistance in their stump speeches.

What should happen during and after disasters?

A new president needs to know two fundamental things about disaster management: how it works administratively between the various levels of government and how much it costs the federal government.

Neither candidate has said much about the latter or about the ongoing trend of increasing federal resources for disaster relief and recovery.

With regard to intergovernmental management, though, some past comments give insight. After Katrina, for example, then-Senator Clinton argued for a reorganization of the Department of Homeland Security so that FEMA could better equip itself to its former capacity under former President Clinton’s FEMA Chief James Lee Witt—an organization described by most disaster experts as competent and efficient in the face of disasters like Hurricane Andrew.

After 9/11, Clinton was also involved in congressional disaster recovery appropriations.

After Hurricane Sandy, private citizen Trump accused the Obama administration of excessive, politically motivated relief handouts. 

What should happen before disasters?

There is even less in either candidate’s past statements to suggest that they have considered how best to prepare for disasters. Disaster preparedness and mitigation—improving infrastructure, homes, and communities before disasters—has received bipartisan support. A promising policy improvement would be to allocate relatively more resources to mitigation than recovery compared with current policy.

Trump noted recently that revisiting infrastructure due to phenomena like rising sea levels is “probably not the worst thing [he’s] ever heard.” Clinton said recently that disasters pose a threat to local infrastructure and national security. Going further back to the Democratic primary, Clinton also referenced “resilience and mitigation” as a growing need that required bipartisan action.

What should our next president focus on?

We’ve talked before the increasing quantity of disasters and the magnitude of disaster damages. Though there are many natural hazards like earthquakes that are unrelated to climate change’s effects, the severity and frequency of others—tornadoes, hurricanes, wildfires, droughts, and severe storms and floods—are likely to continue increasing.

Having some basic commitment to increasing mitigation in proportion with recovery resources is a start for either candidate. Getting into a few weeds about infrastructure spending is even better. But working out the details of the property insurance—especially National Flood Insurance Program—and disaster planning and awareness at the local levels is going to get us further down the path.

Clinton has stated a link between climate change and disasters, while Trump has (arguably) dismissed climate change, its effects on disaster rates, and the impacts of disasters on communities. If scientific evidence provides any indication of what is to come, whoever is elected will have to reckon with these crises—and how to pay for them.


From TaxVox: What Trump’s and Buffett’s tax returns say about how the wealthy are taxed

October 13, 2016

This post originally appeared on TaxVox.

The individual income tax has never taxed the very wealthy much. Donald Trump may have claimed huge losses starting in the early 1990s, but, like other rich investors, he wouldn’t have paid much tax regardless. Despite paying some tax, Warren Buffett’s release of his 2015 tax return affirms that conclusion.

There are two major reasons: first, paying individual income taxes on capital income is largely discretionary, since investors don’t pay tax on their gains until they sell an asset. Second, taxpayers can easily leverage capital gains and other tax preferences by borrowing, deducting expenses, and taking losses at higher ordinary rates while their income is taxed at lower rates. Such tax arbitrage is, in part, what Trump did.

To be fair, some, like Buffett, live modestly relative to their means and still contribute most of what they earn to society through charity. Some pay hefty property and estate taxes and bear high regulatory burdens. And salaried professionals and others with high incomes from work, whether wealthy or not, may pay fairly high tax rates on their labor income. Still, there are many ways for the wealthy to avoid reporting high net income produced by their wealth.

The phenomenon is not new. In studies over 30 years ago, I concluded that only about one-third of net income from wealth or capital was reported on individual tax returns. Taxpayers are much more likely to report (and deduct) their expenses than their positive income. In related studies, I and others found that rich taxpayers reported 3 percent or less of their wealth as taxable income each year.

But your favorite billionaire did not get that way by earning low single-digit returns to his wealth. Buffett’s 2015 adjusted gross income (of $11.6 million) would be around one-fiftieth of 1 percent of his wealth, which in recent years has been estimated to be near to $65 billion. Yet, over the past five complete calendar years, Buffett’s main investment, Berkshire Hathaway, has returned an average of over 10 percent annually.

The wealthy effectively avoid paying taxes on those high returns either by never selling assets and thus never recognizing capital gains, deferring income long enough that the effective tax rate is much lower, or by timing asset sales so they offset losses, as Trump likely has been doing to use up his losses from 1995.

When you die, the accrued but unrealized gains generated over your lifetime are passed to your heirs completely untaxed, though estate tax can be paid by those who, unlike Buffett, don’t give most away to charity.

“Tax arbitrage,” the second technique, is simple in concept though complex in practice. It allows an investor to leverage special tax subsidies just as she’d arbitrage up any investment—in this case, to yield multiple tax breaks. If you buy a $10 million building with $1 million of your own money and borrow the other $9 million, you’d get 10 times the tax breaks of a person who puts up $1 million but, because she doesn’t borrow, buys only a $1 million building.

The law limits the extent to which most people can use deductions and losses from one investment to offset income from other efforts, but “active” investors are exempt from most of those restrictions. In real estate it is quite common for the active individual or partner to use the interest, depreciation, and other expenses from a new investment to generate net negative taxable income to offset positive income generated by other, often older, investments.

The main trick is simply to let enough income from all the investments accrue as capital gains. For example, take a set of properties that generate $1 million in rents and $500,000 in unrealized appreciation. If expenses are $1,200,000, net economic income would be $300,000 ($1,000,000 plus $500,000 minus $1,200,000); but net taxable income would be a negative $200,000 ($1,000,000 minus $1,200,000) since the unrealized appreciation is not taxable income.

Real estate owners enjoy other tax benefits as well. They can sell a property without declaring the capital gain by swapping the asset for another piece of real estate—a practice known as a “like-kind” exchange. Often, when a property changes hands it ends up being depreciated more than once.

At the end of the day, tweaks to the individual income tax system, including higher tax rates, are unlikely to increase dramatically the taxes paid by the very wealthy. Instead, policymakers need to think more broadly about how estate, property, corporate, and individual income taxes fit together and how to reduce the use of tax arbitrage to game the system. 


From TaxVox: How much do you know about Clinton’s and Trump’s tax plans?

October 12, 2016

This post originally appeared on TaxVox.

Hillary Clinton and Donald Trump have proposed major changes to US tax policy, but they have dramatically different visions of what the tax code should look like, who should pay, and how much. How much tax you’ll owe and the size of the future national debt could depend on who wins in November. 

But how much do you know about what the candidates want to do about taxes? Test your knowledge with the Tax Policy Center’s Presidential Candidate Tax Quiz.

Our eight-question quiz asks about the tax changes Clinton and Trump have proposed, how those changes would affect the amount of tax different income groups pay, and how those changes would affect federal revenue. (If you want to study before taking the quiz, here are a couple of cheat sheets that might help: federal taxes are progressive and the federal government gets most revenue from income taxes and payroll taxes.)

After you answer each question, we’ll explain why you got it right or wrong and at the end of the quiz, we’ll give you a final score. Share it with your friends on Twitter and Facebook.

All questions and answers are based on our updated analyses of Donald Trump’s and Hillary Clinton’s tax proposals. Whether you aced the quiz or need to study up, be sure to check out those reports for more details on each candidate’s proposals.


In the news: Better housing policy could save us all money. Why are we ignoring it?

October 12, 2016

This post originally appeared on WashingtonPost.com.

Housing for America’s lowest-income families rarely ever makes the front page and has been noticeably absent from both candidates’ stump speeches. Yet 81 percent of respondents in a recent MacArthur Foundation poll said housing affordability is a problem in America, and 63 percent said presidential candidates aren’t paying enough attention to the issue. Housing is both a cost-saving safety net and a platform for individuals and families to improve their health, education and economic outcomes. When people cannot afford housing, it undermines families’ ability to reach the next rung on the economic ladder and prevents older adults from aging safely and securely.

Today, nearly 20 million renter households qualify for federal rental assistance, but only one in four receives it. There is simply not enough money appropriated by Congress to cover everyone who qualifies for rental assistance. In contrast, all qualified homeowners filing an itemized tax return receive the mortgage interest deduction, regardless of their income. The United States needs a more balanced housing policy that invests equally in homeownership and rental housing.

Over the next 15 years, the demand for rental housing will continue to grow. The number of senior renters is projected to double from 5.8 million to 12.2 million households. More than a quarter will pay more than 50 percent of their income for rent. The federal government has to be an essential part of solving this affordability challenge. Developing housing that America’s poorest families can afford to rent just isn’t possible without government subsidies.

Given the current and growing need, we must create a new generation of rental assistance focused on the most vulnerable households. We must leverage housing as a platform for service delivery and access to opportunity by targeting expanded rental assistance to families with children earning less than 30 percent of area median income, people with disabilities and older adults on fixed incomes.

Targeting these vulnerable populations pays dividends. Stable housing generates cost savings in other federal programs: Evidence suggests that for homeless families that face affordability challenges, rental assistance is more effective than costly services, such as psychosocial interventions and therapies. In fact, targeting housing assistance to extremely low-income families is the most cost-effective strategy for reducing childhood poverty in the United States. In addition, connecting housing to services for older adults, such as health-care coordination, has led to reductions in Medicare spending. Permanent supportive housing for people with disabilities has demonstrated reductions in homelessness and in costly emergency room visits and hospitalizations often covered by Medicaid.

Housing affordability is a long-term, systemic problem that has become a crisis, especially for America’s poorest families and individuals. This problem touches nearly every community in the United States. It will only worsen as demand for affordable rental housing increases and the supply of federal rental assistance does not.

Increasing investment in federal rental assistance has bipartisan support, yet neither candidate nor political party has made it an explicit part of their policy platform. Now is the time to move it to the top of the agenda.


Most US immigrants are already skilled

October 11, 2016

While the subject of immigration and refugees has been often raised in this year’s presidential campaigns, it has largely focused on potential threats imposed by immigrants, approaches to immigration enforcement for unauthorized immigrants, and on security checks for refugees admitted to the country.

For example, in Sunday’s presidential debate, the only immigration topic raised was on the number of Syrian refugees who should be admitted to the United States, and whether refugees are properly vetted to prevent admission of potential terrorists.

Meanwhile, following a recent National Academies report on the economic and fiscal impacts of immigration, immigration experts and stakeholders have been debating broader reforms to the US immigration system, including questioning the proper skill mix of immigrants admitted to the United States.

The National Academies report concludes that immigrants have little effect on the long-term wages and employment of US-born workers’ wages and employment, and to the extent there are short-term effects from lower-skilled immigrants, these are limited to some small negative impact on the wages of prior waves of immigrants and US-born workers without a high school diploma.

The report also finds that the effect of high-skilled immigrants is to increase both employment and wages of all native-born workers (both high and low skill) and that these immigrants often expand the economy.

And the topic did come up once on the campaign trail, in Donald Trump’s immigration speech in Arizona in late August where Trump, influenced by the immigration position of his running mate, Mike Pence, called for selecting immigrants based on their likelihood for success and their “merit, skill, and proficiency.”

Indeed, the country is long overdue for a serious discussion about the selection priorities established in our legal immigration system, which most stakeholders agree is not serving our national interests. But in doing so, policymakers should take note that the education levels of US immigrants have shifted over the past several decades such that most are already skilled.

As shown in the graph below, the educational attainment of recent US immigrants has increased rapidly over the past 40 years. In 1970, over half of recent immigrants had less than a high-school diploma. In 2012, 53 percent of new immigrants had some college education, and 16 percent had a graduate degree.

This figure includes all foreign-born individuals: those who entered through the legal employment-based system, those entering through family sponsorship, those on longer-term temporary visas, refugees and asylum seekers, and unauthorized immigrants.

Educational attainment of recent immigrants

Comparing immigrants’ educational attainment with that of US natives shows that immigrants are more likely than US-born individuals to have a college degree and are more likely to have less than a high school diploma. As a result, the average educational attainment of immigrants has not quite converged with that of US-born workers.

But in looking just at those ages 25-34, who are in their early working years, US-born residents and new immigrants now look very similar in their average years of schooling.

Average years of educational attainment, US-born and immigrants

Whenever a future Congress and future president are ready to seriously discuss the skill mix the country desires in new immigrants, it is vital that the conversation starts with an accurate understanding of where we stand. 


Why we should all pay attention to Hillary Clinton’s mental health plan

October 7, 2016

Democratic presidential nominee Hillary Clinton recently released a comprehensive agenda on mental health. The plan was well received by the nation’s leading mental health groups, including the American Psychiatric Association, the National Alliance on Mental Illness, and Mental Health America. Outside of that community, however, Clinton’s plan was barely noticed, despite the fact that unattended mental illness, trauma, and their consequences are profoundly intertwined with many issues dominating the news today.

Why such an ambitious plan on such an important subject would go largely unnoticed is fairly obvious; in an election consumed by huge political questions and outsized characters, few in the media had the time or will to pay attention to the details. But they should, because mental illness has been woefully ignored in America for decades, is costing us billions of dollars annually, and along with addiction, is at the center of a major public health crisis that is affecting us all.

The situation is especially dire for people with serious and persistent mental illnesses, who die up to 20 years earlier than other Americans. They are far more likely to land in jails, emergency rooms, or on the streets than in a respectful, well-coordinated, recovery-oriented health system.

Each week police across the country are called to handle psychiatric emergencies—crisis situations that often end with people Tasered, shot, or dead. Suicide rates are rising and fewer psychiatrists are accepting insurance payments of any kind. It’s no wonder that one expert recently concluded that “the US is now probably the worst place in the developed world to have a severe mental illness.”

Clinton’s multifaceted plan addresses many well-known problems with our current mental health system: the need for better early intervention and prevention (including suicide prevention); the need to fully integrate care for mental health and addiction disorders into regular primary care; the need to address longstanding critical shortages in behavioral health providers, including greater use of certified peer support specialists and telemental-heath; the need to expand and improve community-based treatment options; the need to train law enforcement and other first responders in safe appropriate de-escalation and crisis response skills; and the need to sustain the recovery of people with mental illness with better employment and housing supports.

Anyone working within or alongside the mental health system in this country, and certainly anyone touched by mental illness–including friends, families, neighbors, teachers, employers, coworkers, service providers, and community civic- and faith-based leaders–would no doubt have important additions to this extensive list.

While comprehensive, Clinton’s proposal risks being just another plan. It reads like a list of ingredients but with no accompanying recipe or picture of the final dish. We have seen many such plans before: the US Surgeon General’s landmark report in 1999, the President’s New Freedom Commission on Mental Health in 2003, and the Institute of Medicine’s Quality Chasm report in 2006.

We have also had dozens of public awareness campaigns, spent billions of dollars, and made huge investments in brain research, and still people with serious mental illnesses are no better off. The next plan needs to be different: at its foundation, it needs a unifying vision that can drive real improvements in the lives of real people all across the country.

In a future post, I will shine a light on some places that have made it work and ask whether these examples can point the way to solutions for one of our nation’s most vexing problems.


In the news: Social Security must be fair for everyone, not just retirees

October 6, 2016

This post originally appeared on WashingtonPost.com.

No one should assess Social Security policy in isolation. What is fair in Social Security must relate to what is fair for the national budget as a whole.

Congressional Budget Office projections indicate that by 2026 we’ll be 21 percent richer, and that tax revenues will rise at a slightly higher rate. That means we stand before an ocean of opportunity. But of the expected $850 billion in additional real revenues, about 150 percent (or about $1.3 trillion) is committed entirely to increasingly expensive payments to Social Security, health care, and interest on the debt. And as a result of these commitments, almost anything that represents investment—in our children, infrastructure, or the basic functions of government—takes it on the chin.

Even as revenues grow, the number of workers available to pay for Social Security benefits is falling rapidly, meaning that either benefits must be cut, taxes increased, or both. Every delay puts more of the cost on the young.

Social Security maintains a design built around an economy and family structure of the past. People aged 65 now live about six years longer and retire even earlier than they did in 1940 when the system first paid benefits. That means families like Clinton’s, Trump’s, and mine will be getting hundreds of thousands of dollars more in lifetime benefits than they would have when the system was first created, while many future elderly will still be left in poverty.

So what must be done? Slow down and reorient the growth in benefits scheduled for future retirees. A typical couple retiring today gets more than $1 million in lifetime Social Security and Medicare benefits; millennials are unrealistically scheduled to get $2 million. That growth can be slowed without being stopped and shifted more toward those who are truly old with low- to moderate-incomes.

While Social Security’s long-recognized shortfalls inevitably mean someone must pay, those with above-median incomes are the ones with the money.

Still, no Social Security benefits need to be cut for those currently retired. To do better for those elderly with median or lower lifetime incomes, we should raise minimum benefits and give credit for raising children. We should also fix absurd rules around spousal and survivor benefits and other sources of inequity.

The current system discourages work in late-middle age, something that is no longer easily affordable and which reduces economic growth, personal income, and tax revenues. Congress should reduce Social Security’s natural disincentives for work both by adjusting the retirement age as we live longer and saving a larger share of lifetime benefits for later ages, when health needs rise and work is less possible.

As lifespan increases, Social Security now promises a typical newly retired couple aged 62 an average of more than 28 years of benefits (today, one of them is likely to make it to 90 years of age). That’s more than enough; there are greater societal needs than the desire for more retirement years.

Finally, the tax issue. While some broadening of the Social Security tax base is possible, government needs to concentrate on raising revenue for high priorities apart from Social Security: our growing national debt, and vital investments such as education, infrastructure, and support for working families. Campaigns are about giveaways, but true reform requires looking at what must be done and how, whether we want to or not.


For infrastructure, candidates’ plans still leave many holes in the wall—some bigger than others

October 6, 2016

Americans feel the wide gap between needed infrastructure investment and the funds available for it. Families in Cedar Rapids, Iowa face flooding, children in Flint, Michigan are still drinking bottled water, and Washington, DC commuters face regular breakdowns in public transit.  

So it’s no surprise that the presidential candidates have started talking infrastructure. Clinton released her plan almost a year ago. Trump’s announcements last month about his plan to “build the next generation” of infrastructure provides us with the first opportunity to compare.

How much of an investment?

The shared sentiment in both plans is that the infrastructure gap is a major current and future crisis, and that it’ll take a lot of money to fix. Clinton proposes $300 billion in total investment over five years starting in the first 90 days of her term. She supplemented that proposal with related ones of different costs, such as expanding residential solar energy production.

Trump is thinking even bigger. He proposes to “at least” double Clinton’s proposed investment—a value that would come closer to meeting the expected gap and match former candidate Bernie Sanders’s infrastructure proposal.

Both candidates’ platforms would ostensibly yield the expected usual returns from infrastructure investments: jobs, improved services, broader service access, reduced transactional costs, improved household finances and health, and the overall productivity benefits to the country.

But Clinton and Trump’s proposal similarities end at the big-ticket purchase.

What does this investment get us?

Clinton has prioritized fixing existing transportation (filling in the potholes), expanding public transit and consumer broadband, and modernizing freight transport, airports, energy grids, and water supply and waste distribution. Included in this list of individual infrastructure pots is a more global reconsideration of how current formulas allocate federal funding to better target local needs. She also proposed earmarking $50 billion of the $300 billion to traditionally underserved communities after the Flint water crisis. My colleague, Tracy Gordon, discussed Clinton’s plan last year.

In comparison, Trump painted a broad brushstroke of need among “roads, bridges, railways, tunnels, seaports, and airports.” His campaign has promised a detailed plan since last month’s announcement, but has not released one. If the recent debate provides any clues about Trump’s infrastructure priorities, though, airport modernization may be an early priority.

How do they pay for it?

Clinton’s plans rest squarely on public resources, with the $300 billion preliminary investment embedded in her wider tax and expenditure plans. She proposes $275 billion in direct spending, plus a $25 billion infrastructure bank advised by an independent board of experts to approve lending and loan guarantees that could leverage another $225 billion in financing. One proposed source of the $300 billion would be a tax overhaul for companies with foreign assets.

Trump proposes taking advantage of current low interest rates to issue infrastructure bonds—essentially borrowing money to cover the proposed bills. Presumably the impending proposal would detail just how these bonds would be issued and repaid.

What’s ahead?

The next step we may see is Trump’s campaign releasing more details on what and how he proposes spending infrastructure dollars allowing additional comparison between his and Clinton’s plan.

An additional complexity is the difficulty in getting any major spending initiative approved by future congresses. This challenge will be difficult to overcome for either candidate—and it’s one that neither plan takes into account yet.