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Reforming Tax Incentives into Uniform Refundable Tax Credits

Lily L. Batchelder, Fred T. Goldberg, Jr., Peter Orszag
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Document date: September 08, 2006
Released online: September 08, 2006

The nonpartisan Urban Institute publishes studies, reports, and books on timely topics worthy of public consideration. The views expressed are those of the authors and should not be attributed to the Urban Institute, its trustees, or its funders.

Note: This report is available in its entirety in the Portable Document Format (PDF).

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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. The vast majority of these incentives operate through deductions or other approaches that link the size of the tax break to a household's marginal tax bracket, which means that higher-income taxpayers receive larger incentives than lower-income taxpayers. Such an approach is often appropriate for provisions, such as deductions for business expenses, designed to measure income or ability to pay. But such an approach for incentives intended to promote socially-valued activities excludes more than a third of America, and misses an important opportunity to increase efficiency and economic growth.

We propose a dramatic change in how the government provides these tax incentives, which could be done on a revenue-neutral basis. Under our proposal, the default for all tax incentives intended to promote socially-beneficial behavior would be a uniform refundable tax credit, which would be available to qualifying households even if they owe no income tax. 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.

Note: This report is available in its entirety in the Portable Document Format (PDF).



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