Citation URL: http://www.urban.org/PeterOrszag

In his testimony before the Senate Budget Committee, Peter Orszag argues that we are neither paying our way nor investing sufficiently in our workers. The nation's low saving rate and the combination of real income stagnation and increased income risk for most families represent the most pressing economic problems facing the country. [© The Brookings Institution]

The federal tax code provides about $500 billion each year in incentives intended to encourage socially-valued activities, including homeownership, charitable contributions, health insurance, and education. Under our proposal, the default for all tax incentives intended to promote socially beneficial behavior would be a uniform refundable tax credit. These tax credits would provide a much more even and widespread motivation for socially-valued behavior than the current set of tax incentives, and could help smooth out fluctuations in household income and macroeconomic demand, all of which would improve economic efficiency.

Despite substantial attention given to fiscal policy concerns in recent years, the federal government's fiscal status has continued to deteriorate, with the enactment of tax cuts, a massive new Medicare entitlement, increased spending on defense and homeland security, and related economic developments. This paper provides new estimates of the nation's fiscal status over both the 10-year and long-term horizon, based on the most recent (January 2006) Congressional Budget Office official budget figures (CBO 2006). Our general conclusions are not surprising: under plausible assumptions, the nation faces significant short- and medium-term deficits and massive long-term shortfalls. Dealing with these problems will require spending cuts or tax increases that are far beyond the scale of anything currently considered politically palatable.

Under traditional formulations, lower capital income tax rates reduce the user cost of capital and stimulate investment. The traditional approach, however, implicitly or explicitly considers a revenue-neutral reduction in capital income taxation. We extend the traditional approach by considering a reduction in taxes that generates an increase in the budget deficit; the expanded budget deficit may raise interest rates and the opportunity cost of investment. This provides a mechanism through which tax cuts can raise the cost of capital. Representative calculations show that making the administration's recent tax cuts permanent would be to raise the user cost of capital.

For nearly a decade, federal higher education subsidies have increasingly been delivered through the tax code rather than through direct spending programs such as grants, loan subsidies, and work study. This paper reviews the results of using new modules in the TRIM and Tax Policy Center microsimulation models to estimate the distributional impacts and expenditure and revenue effects of major federal higher education tax and spending policies. In addition, the paper reports estimates of the effects of some prototypical policy changes in the Pell Grant program as well as in the Hope and Lifetime Learning tax credits.

The leading policy goal for 401(k)-type plans and Individual Retirement Accounts is to help families accumulate wealth for retirement. Given this objective, policy-makers have created tax penalties for either withdrawing funds too quickly or too slowly. This Tax Fact explores these tax penalties, and shows that the share of all returns with a penalty has risen steadily over the past decade.

The federal tax system provides little incentive for participation in tax-preferred saving plans to households that most need to save more for retirement and whose contributions would most likely represent an actual increase in savings. By contrast, the tax code provides its strongest incentives to those who already are generally better prepared for retirement and who are more likely to use tax-preferred vehicles as a shelter than as an opportunity to increase overall saving. The saver's credit, helps correct this "upside-down" structure of tax incentives for retirement saving.

Under traditional formulations, lower capital income tax rates reduce the user cost of capital and stimulate investment. The traditional approach, however, implictly or explicitly considers a revenue-neutral reduction in capital income taxation. We extend the traditional approach by considering a reduction in taxes that generates an increase in the budget deficit; the expanded budget deficit raises interest rates and the opportunity cost of investment. This provides a mechanism through which tax cuts can raise the cost of capital. Representative calculations show that, even with relatively modest interest rate effects, the net effect of making the Administration's recent tax cuts permanent or a 10-percent reduction in individual income tax rates would be to raise the user cost of capital. Thus, sustained tax cuts can raise the cost of capital and reduce investment.

The federal tax system provides little incentive for participation in tax-preferred saving plans to households that most need to save more for retirement and whose contributions would most likely represent an actual increase in savings. By contrast, the tax code provides its strongest incentives to those who already are generally better prepared for retirement and who are more likely to use tax-preferred vehicles as a shelter than as an opportunity to increase overall saving. The saver's credit, helps correct this "upside-down" structure of tax incentives for retirement saving.

This paper analyzes the effects of a large randomized field experiment, carried out with H&R Block, offering matching incentives for IRA contributions at the time of tax preparation. About 15,000 H&R Block clients, in 60 offices in predominantly low- and middle-income neighborhoods in St. Louis, were randomly offered a 20 percent match on IRA contributions, a 50 percent match, or no match (the control group). [© Brookings Institute]

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