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Taxes impose many costs. It would be easy to view the costs as simply the amount of money a person gives to the tax collector. However, the economic effects go beyond simply transferring money from one party to another. Since Adam Smith, economists have been concerned with the costs of taxation and have developed several different measurements of the economic costs. MORE>>>
The compliance costs imposed by the U.S. individual income tax system are an excessive $83 billion per year, according to a new study released today by Chairman Jim Saxton of the Joint Economic Committee (JEC). The JEC study, Individuals and the Compliance Costs of Taxation, examines the costs generated by the billions of hours taxpayers spend attempting to comply with an increasingly complex tax system. MORE>>>
Tax distribution tables purport to show who wins or loses from tax legislation. These tables are a typical source of controversy during tax reform debates. Such tables typically use averages to indicate the size and direction of the tax effect. However, the use of averages alone is inappropriate because averages cannot accurately show the impact on most taxpayers within the same income classification. MORE>>>
A regular feature of the debate over changes in the tax code is who benefits and who doesn’t. Most of this debate hinges on federal government statistical tables, which employ distributional analysis to measure the effects of changes in the tax code. MORE>>>
[Download Research Report in PDF] Top of PageWASHINGTON, D.C. - The existing U.S. corporate tax laws have grown into a patchwork of overly complex, inefficient and unfair provisions that impose large costs on corporate business. U.S. corporations seeking to minimize the costs imposed by the counterproductive provisions in the U.S. corporate tax system have adopted strategies to reduce overall tax exposure and increase profits. Such strategies include moving operations overseas, corporate inversions, transfer pricing, earnings stripping, and complex leasing arrangements, all to minimize taxation.
[Download Research Report in PDF] Top of PageWASHINGTON, D.C. - The U.S. corporate income tax is overly complex and counterproductive, according to a new Joint Economic Committee (JEC) study released today by Chairman Jim Saxton. The new study, Reforming the U.S. Corporate Tax System to Increase Tax Competitiveness, identifies several different ways the tax could be improved. These options include territorial taxation, individual and corporate income tax integration, movement toward consumption taxation, and elimination of the corporate alternative minimum tax or the corporate income tax altogether.
[Download Research Report in PDF] Top of PageWASHINGTON, D.C. - The Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA) was designed to encourage balanced economic growth. In addition to stimulating consumer spending and short-term economic growth, the JGTRRA was intended to promote investment, capital formation and long-term growth. The efficacy of the JGTRRA has been the subject of debate in recent policy disputes and in academic and popular publications. Many of the criticisms have questioned the adequacy of the economic stimulus to increase consumer spending. The key issue, however, is whether the JGTRRA stimulated investment.
[Download Research Report in PDF] Top of PageWASHINGTON, D.C. - Economic theory gives policymakers solid support for resisting tax increases and preferring spending reductions as a method of reducing the federal deficit.
[Download Press Release in PDF] Top of PageWASHINGTON, D.C. - A regular feature of the debate over changes in the tax code is who benefits and who doesn't. Most of this debate hinges on federal government statistical tables, which employ distributional analysis to measure the effects of changes in the tax code.
[Download Press Release in PDF] Top of PageWASHINGTON, D.C. - The tax relief enacted since 2001 has pushed after-tax median income for married-couple families with two children to historic highs, according to a new Joint Economic Committee study released today by Vice Chairman Jim Saxton. The new study, Family Income and Income Taxes During the Economic Recovery, examines the impact of the 10 percent tax bracket, expanded child credit, and marriage penalty relief on the after-tax income of such families between 2001 and 2003.
[Download Press Release in PDF] Top of PageWASHINGTON, D.C. - The federal tax cuts of the last few years have put the United States near or at the top among advanced large economies in offering incentives to work, save, and invest, according to a new Joint Economic Committee (JEC) study released by Vice Chairman Jim Saxton.
The new study, How Competitive Is the U.S. Tax System?, compares major tax rates in 2003 in the United States versus those in the world's eight other largest advanced economies: Australia, Canada, France, Germany, Italy, Japan, Spain, and the United Kingdom.
[Download Press Release in PDF] Top of PageTaxes, not fees and expenses, remain the biggest cost to mutual fund shareholders, according to a new study released today by Vice Chairman Jim Saxton. A most serious tax impact comes from how income taxes on capital gain distributions significantly reduce investment returns, according to the new JEC study, Providing Tax Equity for Mutual Fund Investors: Changing the Tax Treatment of Capital Gain Distributions. This tax liability occurs when mutual funds realize capital gains that then must be passed on to mutual fund shareholders, even if the investors sold none of their mutual fund shares.
[Download Press Release in PDF] Top of PageThe tax relief legislation passed in recent years has provided thousands of dollars in tax savings to typical families and should not be tampered with, Vice Chairman Jim Saxton said today in releasing a new study on the topic. The study, Income Tax Savings for Middle-Income Families, focuses on the impact of recent tax changes on four person, married couple families.
[Download Press Release in PDF] Top of PageTax distribution tables are often incomplete, biased and misleading and thus should not drive U.S. tax policy, according to a new Joint Economic Committee study released today by Vice Chairman Jim Saxton. The new study, A Comparison of Tax Distribution Tables: How Missing or Incomplete Information Distorts Perspectives, is the latest product of a JEC research program on tax distribution issues. Tax distribution tables are typically used to project and allot changes in taxation to specific income groups, but often omit basic information such as the share of taxes paid by such groups before and after a given tax measure takes effect.
[Download Press Release in PDF] Top of PageThe top half of taxpayers continue to pay over 96 percent of Federal income taxes, while the bottom half accounts for slightly less than 4 percent, according to new 2001 Internal Revenue Service (IRS) data released today by Vice Chairman Jim Saxton. The impact of the stock market collapse that began in 2000, and the economic slowdown and recession that followed, are clearly visible in the data, especially for the income and tax shares of upper income taxpayers.
[View Press Release] Top of PageComparisons of the effects of tax legislation on taxpayers in various income groups often misrepresent the impact of the tax system on most taxpayers, according to a Joint Economic Committee (JEC) study released today by Vice Chairman Jim Saxton. According to the study, The Misleading Effects of Averages in Tax Distribution Analysis, such comparisons are often misleading because the average tax liabilities commonly used are very different from the income tax liabilities actually borne by most taxpayers in each income group. The study is a statistical analysis of Internal Revenue Service income tax data from its Statistics of Income division.
[View Press Release] Top of PageThe positive effects of repealing the estate tax should be made permanent, Vice Chairman Jim Saxton said today in releasing a new study on this tax with Rep. Jennifer Dunn. The study, The Economics of the Estate Tax: An Update, documents the damage inflicted by the estate tax on capital formation, thrift, continuity of small businesses, and the environment. Under current law, the damaging effects of the estate tax are reduced, and the tax would be repealed in 2010, only to come back to 2001 levels in the next year.
[View Press Release] Top of PageThe new tax legislation recently reported by the House Ways and Means Committee would improve economic growth by addressing a major soft spot in the economic expansion - investment - according to a study released today by Joint Economic Committee (JEC) Vice Chairman Jim Saxton. The study, Near-Term Stimulus and Long-Term Economic Growth, analyzes the economic impact of the Jobs and Growth Tax Reconciliation Act of 2003.
[View Press Release] Top of PageThe federal budget deficit is a manageable problem and should not preclude pro-growth tax relief, Joint Economic Committee (JEC) Vice Chairman Jim Saxton said today. He made his remarks in connection with the release of a new JEC study, "Deficits, Taxation, and Spending."
[View Press Release] Top of PageThe tax relief plan proposed by President Bush would reduce the excessive burden of taxation on the U.S. economy, according to a new JEC study released by Vice Chairman Jim Saxton today. The study examines the extra costs imposed by current levels of taxation, which average about 40 cents on the incremental dollar collected in federal revenue. The study, Federal Tax Policy, Near-Term Stimulus, and Long-Term Growth, analyzes the main components of the Administration plan.
New Internal Revenue Service (IRS) data show that the top one percent of tax filers paid 37.42 percent of federal personal income taxes in 2000, the latest year for which data are available, Chairman Jim Saxton said today. The 2000 share paid by the top one percent (ranked by adjusted gross income) reflects an increase from the 36.18 percent level posted in 1999. The 3.91 percent share paid by the bottom half of taxpayers was virtually unchanged during this period, as was the 96.09 percent share borne by the top half. The new data provide the necessary context in which to evaluate claims about the supposed distributional impact of various tax policy proposals.
| Percentiles Ranked by AGI | Adjusted Gross Income Threshold on Percentiles | Percentage of Federal Personal Income Tax Paid |
|---|---|---|
|
Top 1% |
$313,469 |
37.42 |
|
Top 5 % |
$128,336 |
56.47 |
|
Top 10% |
$92,144 |
67.33 |
|
Top 25% |
$55,225 |
84.01 |
|
Top 50% |
$27,682 |
96.09 |
|
Bottom 50% |
<$27,682 |
3.91 |
[Download in PDF format] Top of PageFor many senior citizens, individual retirement plans, such as IRAs and 401(k)s, are a primary saving vehicle for retirement. Along with Social Security, individual retirement plans (“IRPs”) represent a major source of money for retirement. However, even though IRPs are a valuable saving vehicle for many seniors, many IRPs have one major drawback: the forced distribution of assets and the associated taxation of those assets for senior citizens at age 70½ for traditional IRAs and the later of age 70½ or the year in which the account holder retires for 401(k)s. This requirement forces many seniors to take distributions when they do not need them Worse, in cases of a down market, the forced distributions may require seniors to sell assets at depressed prices to pay taxes, even if investment losses have been incurred.
This study addresses the minimum distribution requirement that effectively forces senior citizens to withdraw funds from IRPs or face a 50 percent excise tax, the reasoning behind the requirement, and the economic harm it can have on seniors, and some policy alternatives to this requirement that would help mitigate the bias against seniors and their retirement that this requirement creates.
[Download in PDF format] Top of PageInvestment is widely recognized as a key to long-term economic growth. Marginal individual income tax rate reductions clearly stimulate aggregate consumption and labor force participation, but their stimulative effects on aggregate investment have been disputed. Based on the empirical evidence available a decade and a half ago, marginal individual income tax reductions were thought to have slight and indirect effects on aggregate investment. Even marginal corporate income tax rate reductions were thought to boost aggregate investment only modestly. To stimulate aggregate investment, many economists recommended asset-specific tax relief such as accelerated depreciation, investment tax credits, and lower differential tax rates on the income from specific capital assets. But, empirical progress in aggregate investment modeling during the last decade and a half suggests that marginal income tax rate reductions is more effective than previously thought in stimulating aggregate investment.
In the three decades prior to 1988, aggregate investment models assumed that all firms operated in a close approximation of a perfect financial market. Beginning in 1988, empirical studies have found that some large businesses in new, rapidly changing industries, many medium-sized businesses, and virtually all small businesses and farms are financing constrained. When financing constrained firms cannot fund their investments through their cash flow or liquid asset stocks, such firms must pay substantial external finance premia over the opportunity costs of internal funds to contract debt or issue equity. As a result, financing constraints force some businesses and farms to forgo some profitable investments.
Incorporating financing constraints into aggregate investment models has profound implications for U.S. tax policy. Aggregate investment models that assume a perfect financial market favor asset-specific tax relief. In contrast, aggregate investment models that incorporate financing constraints favor marginal income tax rate reductions. Marginal income tax rate reductions would increase a business' or a farm's cash flow from its portfolio of existing assets and should stimulate investment. Since many financing constrained businesses and farms are proprietorships, partnerships, or Subchapter S corporations whose income and expenses flow-through to individual tax returns, marginal individual income tax rate reductions rather than asset-specific tax relief are critically important to stimulating investment among these "flow-through" businesses and farms.
[Download in PDF format] Top of PageIn the Federal budget process, the pay-as-you-go (PAYGO) principle as set forth in the Budget Enforcement Act (BEA) requires that all enacted direct spending and tax legislation for a fiscal year must be deficit-neutral in the aggregate. PAYGO rules have been generally praised by proponents for restraining new spending and for encouraging legislators to provide reasons for their budget decisions. Opponents have pointed to unconstrained federal spending, and frequent budget artifices as examples of the failure of PAYGO. In addition, the PAYGO rules raise excessive procedural hurdles for tax relief legislation. Numerous scholars and practitioners in the field have addressed the pros and cons of PAYGO, including the need for changing PAYGO rules or eliminating them altogether. The current PAYGO provisions are set to expire with the BEA after fiscal year 2002.
This paper concludes that if the PAYGO requirements as set forth in the Budget Enforcement Act are to be extended, then at a minimum a compromise approach be adopted to reform PAYGO: to permit dynamic revenue analysis of tax legislation, or at the very least allow legislation providing appropriate tax deferrals (such as contributions to IRAs) to be exempt from PAYGO requirements. This paper discusses budget enforcement and the PAYGO concept, then identifies the problems associated with PAYGO and how PAYGO often leads to counterproductive tax policy decisions. The paper also reviews the mixed success of PAYGO in controlling federal spending. The paper then demonstrates how a reform that would allow legislation providing appropriate tax deferral to be exempt from PAYGO rules would allow both fiscal responsibility and good tax policy by promoting incentives for taxpayers to save and invest, and potentially increasing revenue to the government.
[Download in PDF format] Top of PageThe permanency of the federal tax code is an issue currently before Congress. President George W. Bush is seeking to accelerate the implementation of the individual income tax rate reductions in the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) and to make all of its provisions, including the rate reductions, the expansion of the child tax credit, and the repeal of the estate tax, which are currently scheduled to expire on December 31, 2010, permanent.
According to the available evidence, individuals respond more strongly to a permanent federal tax rate reduction or other permanent tax incentives than to a temporary federal tax reduction or a federal tax rebate. Thus, the duration of a federal tax reduction affects how much it can stimulate economic growth.
Empirical studies generally show that many individuals (between 50 percent and 80 percent) smooth their consumption over their lifetime based upon their expectations of permanent income (i.e., lifetime average income excluding any one-time income gains or losses) while liquidity constraints, myopia, and other limitations compel other individuals (between 20 percent and 50 percent) to limit their consumption to current after-tax income.
Because only a permanent federal tax reduction can increase permanent income, a permanent federal tax reduction elicits higher near-term consumption and GDP growth than a temporary federal tax reduction or a federal tax rebate. A survey of relevant empirical studies using a variety of statistical models and data sets suggests that a permanent federal tax reduction affecting individuals will increase first-year aggregate consumption and GDP twice as much as a temporary federal tax reduction of the same amount and at least three times as much as federal tax rebate of the same amount, all other things being equal.
Instead of finding that individuals anticipate how announced federal tax changes affect their after-tax income and alter their consumption even before such changes are implemented, empirical studies generally find that the most of the economic benefits from federal tax reductions affecting individuals when such reductions are implemented. Lengthy phase-ins and implementation delays minimize the near-term boost to consumption and GDP growth from federal tax reductions affecting individuals.
[Download in PDF format] Top of PageOver the last 30 years, the mutual fund industry has grown tremendously to its current size of almost $7 trillion in funds managed. It has been characterized by rapid innovation and strong competition. The variety of mutual fund types has grown, offering average Americans opportunities to invest money and diversify assets. Mutual fund costs have fallen, driven down by economies of scale and advances in computers and communications. Mutual fund investors have benefited from falling costs, which competition has passed along to them.
[Download in PDF format] Top of PageWASHINGTON, D.C. – New Internal Revenue Service (IRS) data obtained by the Joint Economic Committee (JEC) show that the top one percent of tax filers paid 36.18 percent of federal personal income taxes in 1999, the latest year for which data are available, Chairman Jim Saxton said today. The 1999 share paid by the top one percent (ranked by adjusted gross income) reflects an increase from the 34.75 percent level posted in 1998. The 4.00 percent share paid by the bottom half of taxpayers was virtually unchanged during this period, as was the 96.00 percent share borne by the top half. The new data provide the necessary context in which to evaluate claims about the supposed distributional impact of various tax policy proposals.
"The data publicly released by the JEC today reflects the steeply progressive impact of the federal income tax," Saxton said. "These data must be considered before any valid distributional evaluation of various income tax proposals can be made. Unfortunately, statistics portraying tax policy changes as skewed often are released without disclosing the share of taxes actually paid by various income groups. In other words, these data on the share of taxes paid before and after a tax change would take effect are often undisclosed, leading to incomplete and often misleading results. The bottom line is that these data are needed for an informed discussion of a wide array of tax policy issues. The current tax shares paid by various income groups largely determine the distributional outcomes of most major tax legislation, not the tax rate structure of the legislation itself, " Saxton concluded.
Percentiles Ranked by AGI Adjusted Gross Income
Threshold on PercentilesPercentage of Federal
Personal Income Tax PaidTop 1 % $293,415 36.18 Top 5 % $120,846 55.45 Top 10 % $87,682 66.45 Top 25 % $52,965 83.54 Top 50 % $26,415 96.00 Bottom 50 % < $26,415 4.00
[Download in PDF format] Top of PageFor twenty years, American households have increased their holdings of mutual funds and other financial assets despite periods of inflation, disinflation, booms, bankruptcies, commodity price shocks, and financial crises at home and abroad. During the last ten years, lower inflation, lower interest rates and demographic factors have further boosted the demand for mutual funds.
Mutual funds are the primary financial assets of many middle-income households. More than 80 percent of mutual fund owners have annual household incomes below $100,000; their median financial assests are $80,000. Mutual fund assets make up 21 percent of all retirement assets.
Now is the right time to re-examine the taxation of investment returns on mutual funds. This study describes who owns mutual funds, what forces underlie growth in mutual fund ownership, and what effects changes in the capital gains taxation of mutual fund distributions could have.
[Download in PDF format] Top of PageThe ongoing economic slowdown, exacerbated by the terrorist attacks of September 11, makes changes in economic policy necessary. While there is bipartisan agreement on the desirability of tax relief, the composition and scale of tax legislation are both matters of contention. This paper examines current economic conditions, the primary features of several options for tax relief under consideration in Congress, and their potential effects on the economy.
Current and ongoing Joint Economic Committee (JEC) research on major tax issues indicates that measures to reduce income tax rates and reduce the cost of capital would have positive short- and long-term effects on the economy. This study is divided into several sections: the economic impact of taxation, the recent historical record, and certain major provisions for tax relief under consideration. Among the findings are the following:
[Download in PDF format] Top of PageThe economy has been in an economic slowdown since the middle of 2000, led by a sharp decline in investment growth. The rebound previously projected by many macroeconomic forecasters for the last half of 2001 will probably be delayed or undermined by the terrorist attacks of September 11, 2001. Tax incentives for capital formation are especially appropriate given the important leading role of weakening investment in the economic slump. After the attacks, the extra security costs in the short run as well as in the long run will have effects similar to imposing a “security tax” on an already vulnerable economy. This security tax should be offset by tax policy, such as the relief provided under several core components of the Economic Security and Recovery Act of 2001 (H.R. 3090). The current tax code penalizes work, saving, investment, and entrepreneurship. Tax changes that reduce these penalties will improve long-term economic growth. According to an important and growing body of economic research, the current level of taxation imposes a large excess burden at the margin; 40 cents in lost economic welfare per dollar of tax would be a reasonable estimate. There is no reason for policymakers to accept such counterproductive results. If the tax bill increases the GDP growth rate by only one-tenth of one percentage point annually, it would produce enough additional revenue over 10 years to offset a significant portion of the estimated static revenue losses. The dynamic economic impact of properly designed tax legislation, and the high degree of income mobility in the United States, lead to broadly shared economic benefits that are often ignored in conventional revenue and distributional analysis.
The Alternative Minimum Tax For Individuals: A Growing Burden (JEC Study -- May 2001)
The alternative minimum tax (AMT) for individuals is a separate system of income taxation that operates in parallel to the regular income tax. Taxpayers who may be affected by the AMT must recalculate their taxes using rules about income and deductions different from those that apply to regular income tax. If they owe more under the AMT than they would under regular income tax, they pay the AMT amount.
Unlike the regular income tax, the AMT is not indexed for inflation. Over time, inflation and economic growth have made the AMT affect more and more taxpayers. In 1990, the AMT financially affected only about 132,000 taxpayers. In 2000, it affected an estimated 1.3 million taxpayers, and in 2010, it is projected to affect 17 million taxpayers.
The huge increase in taxpayers who will soon be affected by the AMT has led to Congressional proposals to overhaul or eliminate it. This paper examines the main options for dealing with the AMT.
[Download in PDF format] Top of PageIn order to increase personal saving and investment and to promote tax neutrality among various investment vehicles, the tax treatment of capital gains unrealized by mutual fund shareholders should be modified. The current policy of taxing mutual fund capital gain distributions unfairly discriminates against taxpayers seeking the investment benefits of diversification through mutual funds instead of through direct ownership of stocks. Therefore, the practice of taxing forced distributions of capital gains to mutual fund shareholders should be changed to allow for a deferral of taxation on reinvested capital gain distributions. Until shareholders realize a capital gain through the sale of an asset, no tax liability should incur. Since mutual funds are a popular vehicle for saving and investment of middle-income households, this tax reform would greatly increase the incentives for these people to invest and save for their future by increasing their after-tax rate of return.
A tax deferral on mutual fund capital gain distributions as proposed in H.R. 168, sponsored by Rep. Jim Saxton (R-NJ), could increase the after-tax return by almost 15 percent over a 30-year period for many mutual fund shareholders. For a hypothetical taxpayer with an initial $10,000 investment in a mutual fund that returns 10 percent a year, the deferral on capital gain distributions as proposed in H.R. 168 would amount to $15,055 over a 30-year period after taxes. This amounts to approximately 150 percent of the original $10,000 investment.
A change in the tax treatment of mutual funds would have a beneficial impact on all owners of mutual funds, but the benefits would primarily help those making less than $100,000 a year -- 81% of households owning mutual funds, with 39% of households owning mutual funds earning less than $50,000 a year.
A deferral mechanism, as proposed under H.R. 168, is relatively simple and would not result in a significant paperwork burden for mutual funds or their shareholders.
[Download in PDF format] Top of PageWith large and growing federal budget surpluses, and with the federal tax burden at a peacetime high, a broad spectrum of policymakers are supporting substantial income tax rate cuts. Tax rate cuts would not only provide tax relief to every income taxpayer, they would also spur economic growth by reducing the distortions created by income taxes. This report provides background on marginal tax rate levels, describes the economic costs created by high marginal rates, and summarizes tax rate trends in other industrial countries. The report finds:
The combination of statutory income tax rates, income tax phase-out provisions, state income taxes, and payroll taxes can create excessive marginal rates for families at all income levels. Over 20 million small businesses that pay tax under the personal income tax system would also benefit from rate reductions. Recent research finds a strong link between marginal tax rates and small business hiring and investment behavior. High marginal tax rates distort work and savings decisions, and promote unproductive tax avoidance and evasion activities. These tax distortions create "deadweight losses" which lower the nation's standard of living. Each $1 of marginal tax rate cuts would save the private economy at least $1.25 as deadweight losses fall and economic efficiency increases. The harmful effects of high marginal tax rates have persuaded dozens of countries to reduce rates in recent years. The average top personal income tax rate in the G-7 major economies has fallen 18 percentage points since 1980. In an increasingly competitive world, lowering our marginal rates would reduce the burden of our tax system and help sustain our economic leadership.
[Download in PDF format] Top of PageWASHINGTON, D.C. – New Internal Revenue Service (IRS) data obtained by the Joint Economic Committee (JEC) show that the top one percent of tax filers paid 34.75 percent of federal personal income taxes in 1998, the latest year for which data are available, Vice Chairman Jim Saxton said today. The 1998 share paid by the top one percent (ranked by adjusted gross income) reflects an increase from the 33.17 percent level posted in 1997. The 4.21 percent share paid by the bottom half of taxpayers was virtually unchanged during this period. The new data provide the necessary context in which to evaluate claims about the supposed distributional impact of various tax policy proposals.
"The data publicly released by the JEC today reflect the steeply progressive impact of the federal income tax," Saxton said. "These data must be considered before any valid distributional evaluation of various income tax proposals can be made. Unfortunately, statistics portraying tax policy changes as skewed often are released without disclosing the share of taxes actually paid by various income groups. In other words, data on the share of taxes paid before and after a tax change would take effect are often concealed, producing misleading results. The bottom line is that these data are needed for an informed discussion of a wide array of tax issues."
According to a letter to Saxton from the Director of the Statistics of Income Division (SOI/IRS), these data were also recently provided to the Office of Tax Analysis of the Treasury Department.
Percentiles Ranked by AGI Adjusted Gross Income
Threshold on PercentilesPercentage of Federal
Personal Income Tax PaidTop 1 % $269,496 34.75 % Top 5 % $114,729 53.84 % Top 10 % $83,220 65.04 % Top 25 % $50,607 82.69 % Top 50 % $25,491 95.79 % Bottom 50 % < $25,491 4.21 %
[Download in PDF format] Top of PageTo increase personal saving and investment and to promote tax neutrality among various investment vehicles, the tax treatment of capital gains unrealized by shareholders should be modified. The current practice of forcing distributions of capital gains to mutual fund shareholders should be changed. Until the shareholder realizes a capital gain through the sale of an asset, no tax liability should incur. With respect to regulated investment companies, the realization point that triggers a capital gains tax liability should be moved from the corporate level down to the individual shareholder level. Since mutual funds are a popular vehicle for saving and investment of middle-income households, this tax reform would greatly increase the incentives for these people to invest and save for their future by increasing their pre-liquidation rate of return.
The current tax treatment of mutual funds causes the average mutual fund investor to lose between 10 percent and 20 percent a year of their pre-liquidation rate of return. On a $10,000 investment earning a 10 percent annual rate of return, a 2.3 percentage point reduction in the pre-liquidation rate of return would cost a mutual fund investor almost $82,000 over a 30 year period -- on a $26,000 investment a mutual fund investor would forego approximately $213,000 over a 30 year period.
A change in the tax treatment of mutual funds would have a beneficial impact on all owners of mutual funds, but the benefits would primarily help those making less than $100,000 a year, with 43% of households owning mutual funds earning less than $50,000 a year.
Abstract The analysis of tax data is a time intensive and complicated process. Much time and effort are spent collecting income and tax data, compiling data sets and running statistical analyses. However, it appears that relatively little time and effort are spent actually understanding the data and how best to present results to the public of analyses of using tax data. This is evident in the overuse of averages and the simplistic classification of taxpayers into income ranges and quintiles by tax distribution tables that are often highly publicized. This study shows that the link between income and tax liability is much more tenuous that that often presumed and that a variety of other factors can greatly affect tax liability. Specifically, this report finds that, among other things:
This analysis examines recent trends in stock ownership and explains the reasons for the dramatic increase in stock ownership among a broader and increasingly diverse number of Americans. The key reasons for this democratization of the stock market include:
- The popularization of the mutual fund.
- The general reduction in the multiple taxation of savings and investment that resulted from the genesis of the IRA and 401(k) plan.
- The emphasis of the Federal Reserve on price stability which has lowered interest rates, stabilized financial markets, and acted as a de facto tax cut. [Download in PDF format] Top of Page
This study argues that tax reduction
would have very significant positive welfare effects on the American economy.
Based on previous research by a large number of scholars, it is reasonable
to foresee the equivalent of tens of billions of dollars of new output
being created with a significant reduction in taxes. While it is true that
from a Keynesian, demand-side perspective, the case for a tax reduction
is rather weak, there are compelling arguments that suggest that lowering
taxes would promote economic welfare. A tax reduction that approximates
the magnitude of the 1998 or projected 1999 budget surplus would provide
benefits to Americans measured in tens of billions of dollars annually.
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His review of the key concept of Excess Burden (the net loss in economic well-being to the taxpayer from a tax) demonstrates that even when higher tax rates increase government revenue, economic offsets include reduced taxpayer well being, a shrinking tax base, and a lower economic output.
Lindsey strongly urges the Congress to recognize
this explicit trade off, to change its analytic approach to taxation by
taking into account the degree of burden imposed at the margin to collect
an additional dollar of Federal revenue, and to consider the cost of maintaining
today's high rate structure. This approach, he concludes, would allow Congress
to do the best job it can at maximizing economic welfare. Please Note:
This report was presented as written testimony to the Joint Economic Committee
on March 13, 1997.
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A JEC reconstruction of an undisclosed set of Treasury data shows that, although tax relief is provided for all income groups, their shares of the tax burden are unchanged before and after the Congressional tax reduction is taken into account. The results of this JEC analysis demonstrate the misleading effects of an incomplete release of data and illustrate why the Treasury Department should be more open and less selective in providing information to the public. [Download in PDF format] Top of Page
The historical record shows that new taxes were associated with deficit reduction many years ago, but the federal propensity to spend new taxes has grown in recent decades as the political advantages of new spending have increased. This pattern of spending new revenues was not found at the state and local level where institutional arrangements (e.g., constitutional provisions for a balanced budget) constrain fiscal behavior. Top of Page
