View Research by Author - Benjamin H. Harris

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

To encourage better retirement saving, President Obama recently proposed policies that would require firms without retirement savings plans to automatically enroll their workers in IRAs. In addition, the president proposed an expansion of the Saver's Credit to be fully refundable and available to middle-income taxpayers. This report estimates the revenue costs and distributional effects of the president's proposals.

The largest tax preferences for housing, health care, and retirement saving reduce federal revenues by about 3 percent of GDP. They raise after-tax income proportionally more for higher income groups than lower income groups, but raise income proportionately less for those at the very top. The net distributional effects depend on how these tax preferences are financed. If paid for with higher marginal tax rates, they benefit upper-middle income taxpayers at the expense of both lower-income and the highest-income taxpayers, but if paid for by lower per-capita spending, all high-income groups gain and all low-income groups lose.

This report card evaluates the provisions of the Finance and Ways & Means Committees' conference tax stimulus bill (the "American Recovery and Reinvestment Tax Act of 2009"). The evaluation is preliminary and does not include all of the provisions in the bill most notably we omit provisions related to state and local debt and recovery zone credits. TPC will update the report card if significant changes occur before Congress passes the bill.

The Tax Policy Center has graded the key tax provisions of the pending Senate stimulus bill (the "American Recovery and Reinvestment Tax Plan of 2009"). Our grades, which rely on the bill's legislative language, focus on how well these measures would boost the economy in the short run. Accompanying write-ups describe current law, the proposed change, and the short- and long-term effects on the budget, the economy, fairness and tax complexity. We will update the report card as we learn more about the provisions and as the stimulus bill moves through Congress.

From an economic perspective, marginal tax rates play a critical role in determining the consequences of a change in tax policy. In an uncomplicated tax system the marginal rate is simply equal to the statutory rate. For millions of taxpayers, however, marginal tax rates differ markedly from statutory rates. Because of the tax code's wide array of phase-ins and phaseouts the majority of taxpayers face a different marginal rate than their statutory rate. Marginal and statutory rates differ for about two-thirds of married filers and heads of households and for about one-third of single filers.

Tax policy has been a major issue in the Presidential election campaign, with both candidates proposing extensive changes. The candidates take very different approaches to tax policy. The main differences are two: first, McCain’s plans would reduce revenues by significantly more than Obama’s; and second, McCain’s would be substantially less progressive, especially among very high income taxpayers. From the standpoint of growth or simplicity, both plans disappoint. It is hard to believe that either set of changes would have significant growth effects on the economy.

One promising aspect of retirement saving policy in recent years is the "automatic" or opt-out features in 401(k) plans. Automatic 401(k)s enable saving even if the worker makes no effort to participate in their 401(k) plan. Prior research has shown that automatic enrollment increased participation in 401(k) from 75 percent to as high as 90 percent of newly eligible employees; with the highest change among lower-income and minority workers. This paper provides estimates of the effects - on federal revenue and the distribution of after-tax income - of a policy under which all 401(k) plans are converted to automatic 401(k)s.

The tax code limits the extent to which individuals may take advantage of the tax benefits associated with traditional and Roth IRAs. The only eligibility criteria for contributing to a Roth IRA are income and filing status. In contrast, eligibility for deducting contributions to a traditional IRA depends on those factors as well as on whether the taxpayer and the taxpayer’s spouse participate in an employer-provided pension. Taxpayers are subject to an assortment of phaseout ranges based on those criteria.

Recent tax acts sharply lowered tax rates on long-term capital gains and dividend income. For millions of taxpayers, however, the alternative minimum tax limits the benefits from these cuts by increasing the effective marginal tax rates on capital gains and dividend income. The culprit is the phaseout of the AMT exemption.

These facts and projections highlight the increasing role of the AMT, and the problems it poses. The facts are based on the discussion paper "The Individual AMT: Problems and Potential Solutions." The Tax Reform Act of 1969 created a minimum tax designed to ensure that individuals with high incomes did not take what was deemed undue advantage of tax laws to avoid federal income tax liability. The individual AMT is now on the verge of switching from a "class" tax to a "mass" tax. The trends are troubling because the AMT is notoriously complex, its effects on efficiency and equity are questionable, and its underlying purpose is controversial.

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