Federal Budgets and Fiscal Policy

Brookings Institution. Gary Burtless discusses the tax cut for new hires.

Political theater? Such is the label many have attached to the tax reform task force headed by Paul Volcker. But I heard the same claim made about President Reagan's State of the Union request for a tax reform study from the Treasury Department to be made only after the 1984 election was over. Congress literally burst out laughing.

Suppose that a taxpayer earns an additional dollar of income. How much tax would she owe on that dollar? A natural way to answer this question would be to look up the taxpayer’s statutory tax rate - the tax rate corresponding to her tax bracket and filing status.

The Earned Income Tax Credit, Child Tax Credit (CTC), Additional Child Tax Credit (ACTC), and the dependent exemption all provide benefits to families with children. In 2009, a single mom (or dad) with two children can receive benefits ranging from $0 to about $7,500 - depending on her income, age of the children, and where the children live. While this assistance is extremely important to many low-income families, they must navigate a bewildering set of rules to take full advantage of the credits. Due to the piecewise implementation of these credits and exemptions, total benefits bounce around erratically as income grows.

The Congressional Budget Office's most recent long-term budget outlook declared that "current policies are unsustainable." Translation, according to tax scholar Len Burman: if we don’t change course, we're doomed. America will celebrate its tricentennial with IOUs 6.5 times its total economic output if current policies continue, CBO says, and that is under implausibly optimistic assumptions about the economy.