View Research by Author - Troy Kravitz

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There are numerous tax incentives for the oil and gas industry, many of which are designed to encourage exploration and energy production. Both the amount and the value of the incentives have increased in recent years. Economists believe it is generally bad policy to favor one industry or one type of production over another because it distorts investment and production decisions away from a more efficient allocation.

The largest individual AMT preference items in 2002 were state and local taxes (51 percent of all AMT preference items), personal exemptions (22 percent), and miscellaneous itemized deductions, including employee expenses and legal fees (20 percent).

The earned income tax credit was enacted to offset the social security payroll tax for low-income working families. The credit has been significantly expanded and now provides substantial income to these families. However, very low-income workers, such as those working at the minimum wage, have seen the value of their credit erode due to interaction between the earned income tax credit, the minimum wage, and inflation.

Claims that increasing capital gains tax rates will adversely impact stock markets and economic growth are not strongly supported by empirical data. Over the last half-century, the correlation between the maximum capital gains tax rate and the ratio of the S&P index to GDP has been about -0.35. Also, capital gains rates display little evidence of correlation with economic growth.

Following decades of relative stability, income inequality has risen sharply in the United States since the 1970s. Households at the top of the income distribution saw their pretax incomes grow most; similar trends and magnitude are present for after-tax incomes, too.

Higher capital gains realizations are one likely source of the higher individual income tax revenues contributing to this year's decline in the Federal deficit. But capital gains realizations are highly variable over time, even in years when capital gains rates area stable. Between 1959 and 2003, the standard deviation of the ratio of capital gains realizations to gross domestic product (GDP) was about 40 percent of its mean value. In recent years, changes in the ratio of capital gains realizations to GDP have tracked changes in the ratio of the stock prices to GDP, which is about equally variable.

The alternative minimum tax hits people in some states harder than others. Overall, 2.4 million taxpayers (1.8 percent) were subject to the AMT in 2003, however, almost 6 percent of taxpayers in certain states--primarily in the Northeast--paid AMT.

Recently, there has been a renewed interest in large-scale tax reform, namely a broad-based tax on consumption. Data from the Consumer Expenditure Survey give reason to worry about the likely regressivity of a consumption tax. The data indicate that low-income households spend virtually all of their income while high-income households spend less than 40 percent.

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