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Gene Steuerle
Eugene Steuerle is Richard B. Fisher chair and Institute Fellow at the Urban Institute, and a columnist under the title The Government We Deserve. Among past positions, he has served as Deputy Assistant Secretary of the Treasury for Tax Analysis (1987-1989), President of the National Tax Association (2001-2002), chair of the 1999 Technical Panel advising Social Security on its methods and assumptions, Economic Coordinator and original organizer of the 1984 Treasury study that led to the Tax Reform Act of 1986, President of the National Economists Club Educational Foundation, Resident Fellow at the American Enterprise Institute, Federal Executive Fellow at the Brookings Institution, and a columnist for the Financial Times. He is alos a co-founder of the Urban-Brookings Tax Policy Center, the Urban Institute's Center on Nonprofits and Philanthropy, and Act for Alexandria, a community foundation in Alexandria, VA. Dr. Steuerle is the author, co-author or co-editor of fifteen books and more than one thousand articles, briefs, and Congressional testimonies.
IRS and the Targeting of the Tea Party and Other Groups
May 14th, 2013To help clarify whether IRS incorrectly, unfairly, or illegally targeted the Tea Party and other conservative groups, here are the answers to a few basic questions.
- Is it improper for IRS to target specific groups?
Almost every contact the IRS makes with select taxpayers derives from targeting. Because its resources are constrained, the IRS conducts only limited audits, examinations, or requests for information. For instance, if you give more than the average amount to charity, you’re more likely to be audited since there is more money at stake. If you run a small business, you have a greater ability to cheat than someone whose income is reported to IRS on a W-2 form. The only way the IRS can enforce compliance at a reasonable administrative cost is by targeting.
This is especially true for the tax-exempt arena. Because audits yield little or no revenue, the IRS tax-exempt division examines very few organizations. Therefore, the IRS must use some criteria to “target” which tax-exempt organizations to approach.
- Does the IRS discriminate?
Picking out which organizations or taxpayers to examine meets the definition of statistical discrimination. Firms do this when they consider only college graduates for jobs; political parties do this when they offer selective access to their supporters. Discrimination is wrong when it implies unequal treatment under the law, such as when unequal punishment is meted out for the same crime, or when people of color have less access to the mortgage market.
- Why then did IRS say it erred in targeting Tea Party and other organizations?
We don’t have all the data yet but organizations with a strong political orientation have a higher probability of pushing the borderline for what the law allows. The groups at the center of this controversy generally applied for exemption under IRS section 501 (c)(4) which requires, among other things, that its primary purpose cannot be election-related and cannot overtly support political candidates.
However, the IRS could have identified election-related activity as a practice worthy of extra attention without specifying “tea party” or similar labels to identify such organizations. Had it done so, it might not be facing a problem now.
IRS apparently initially thought it was just using these labels as a shortcut for such an identification. Had it been engaged early on, the national office might have been quicker to warn against this practice since it would tend to identify more Republican organizations than Democratic groups with similar motives. Who decided what when is still under investigation.
Remember IRS was under pressure to examine those c(4) organizations after applications grew rapidly in the wake of the Supreme Court’s 2010 Citizens United decision. If IRS waits until after an election, it’s generally too late to make any difference.
- Why did IRS start with the exemption process rather than wait and see how the organizations behaved?
Because IRS audits so few tax-exempt organizations, noncompliance is a major problem. But often noncompliance is inadvertent. Organizations trying to do “good” fail to understand legal technicalities or why IRS should be worried about them at all. If the IRS can get these organizations to comply with the rules from the start, it has a better chance of minimizing future problems.
- Well, then, why the heck is IRS even in this game in the first place?
A question asked by many. Unlike some other nations with charities’ bureaus or other government regulatory agencies, tax-exempt organizations in the U.S. are monitored mainly by IRS at the national level and the state attorneys general at the state level. The IRS efforts generally derive from the Congressional requirement that charitable dollars (for which there are deductions and exemptions) go mainly for charitable purposes and not others such as electioneering.
- But c (4) or social welfare organizations don’t benefit from the charitable deduction, so why don’t those with political orientation just operate without tax exemption or c(4) status?
They could, but the tax exemption provides several benefits. The least important may be non-taxation of income from assets since many of these organizations don’t have that much in the way of assets to begin with. However, many contributors interpret (often incorrectly) tax exemption to mean that the organization has satisfied legal hurdles, thus making it easier to raise money. Some c(4) organizations are closely connected to charities or c(3) organizations that can accept charitable contributions, and sometimes there’s a synergy between the two. My colleague Howard Gleckman reminds us that c(4)s quickly became favored over an alternative “527” tax-exempt political designation because the former does not need to reveal its donors. Finally, tax exemption provides an easy way to insure that any temporary build-up of donations in excess of payouts is not interpreted as taxable income to the organization or its contributors.
- What will be the end result of this flap?
Success at agencies like IRS is often measured by their ability to stay out of the news rather than on how well they do their job. I’m guessing this episode will only will increase the bunker-like incentives within the organization. It would be good if Congress used this as an opportunity to figure out how better to monitor tax-exempt organizations, or whether IRS has the capability under existing laws, but that isn’t likely to happen.
How to Avoid Sequester and Give Both Parties What They Want
February 27th, 2013I would like to propose a simple plan that would let Republicans and Democrats avoid a blunt, across-the-board sequester that fails to set priorities. It would give both parties something they want without abandoning their core principles. And it would strengthen the party making the proposal by putting the other on the spot if it fails to move toward a moderate compromise.
Republicans should offer to let the president meet the sequester’s deficit targets through his choice of spending cuts, including from entitlements. Yes, they would cede some power over a moderate share of total spending, but they would retain their primary goal: forcing Democrats to tackle the spending side of the budget.
Democrats should replace their demand that the sequester include tax increases with a simpler requirement that the rich shoulder their fair share of any spending reductions. Yes, Democrats would give up their goal of balancing spending cuts with tax increases, but they would retain their more basic aim: progressivity.
To understand why these strategies would work, we have to go back to the root causes of the impasse. Each party is fiercely fighting to compel the other to ask the middle class for the inevitable—to give up something to restore balance to the budget. But each considers it political suicide to take the lead. Just think back to the presidential campaign, when Barack Obama and Mitt Romney indicated support for Medicare cuts, only to be viciously attacked by the other.
Republicans want all deficit reduction to come from direct spending but recognize that most of those outlays are in so-called mandatory or entitlement spending, which occurs automatically with no new vote required by Congress.
Democrats believe the rich have made out quite well in recent decades and should bear a significant portion of any deficit reduction. They feel it is unfair and unbalanced to exclude tax subsidies, which tend to favor high-income households, from any deficit reduction plan.
To an economist of any stripe, deciding which programs to fix according to the labels we place on them—direct spending or tax subsidy—is silly. In truth, Republicans should be as willing to cut tax subsidies as direct spending, since cutting either would reduce government interference in the economy.
By the same token, Democrats should be just as willing to cut spending as tax subsidies, as long as the wealthy bear a fair share of the burden. Since Democrats end up with smaller government either way, they should focus on progressivity, not the more semantic debate over cuts in tax subsidies versus direct subsidies.
That’s where my compromise comes in. If Republicans would simply empower the president to reallocate the spending cuts, they could eliminate the meat axe of the sequester. Yes, they would be giving up some power, but look how they came out of the last debate, with only tax rate increases and a bloody nose. Forcing the president to choose enables Republicans to run later on how they would have chosen better.
As for Democrats, why not aim their sights at their real target: progressivity? If Republicans let Obama allocate spending cuts, Democrats could get the same progressive distributional outcome as they’d get through tax hikes. And they, too, will have achieved their principal objective. To move beyond budgetary gridlock, each party must figure out what it can give up to get what it really wants. My plan isn’t perfect, but it allows each party to achieve its goals, and it is a big improvement over sequestration.
Why Tax and Transfer Programs Often Discourage Work and Savings
February 14th, 2013Economists and many policymakers generally agree that our tax and transfer systems should promote opportunity, work, saving, and education rather than consumption. The problem is these programs often penalize people for earning that extra dollar of income. Rather than promoting work and savings, these implicit taxes punish such otherwise positive behavior.
These penalties occur in TANF (formerly welfare), SNAP (formerly Food Stamps), Medicaid, the new health exchange subsidy, Pell grants, student loans, and unemployment compensation. The tax code also is loaded with disincentives to work, save, and study. They include PEP and Pease (reductions in tax allowances for personal exemptions and itemized deductions), child tax credits, and the earned income tax credit. These implicit taxes combine with explicit taxes to create incentives for many households that are often inefficient and inequitable, to say nothing of strange and anomalous.
At some income levels, families face prohibitively high penalties for moving off assistance. For instance, a single worker with children could face a steep cut in child care assistance simply for accepting a higher paying job or getting a raise. For some, the rapid phaseout of benefits can more than offset the additional take-home pay. Asset tests in means-tested programs create similar barriers to saving.
One way couples avoid some of these penalties or taxes is to not get married. Indeed, this strategy is the major tax shelter for low- and moderate-income households with children. Our tax and welfare system thus favors those who consider marriage optional—to be avoided if it raises taxes or reduces benefits but embraced if it comes with a financial bonus. The losers tend to be those who consider marriage a social or religious necessity.
These high rates and marriage penalties occur partly because of the piecemeal fashion in which they are developed. Designing benefit packages more comprehensively could greatly improve both the incentives families face and the quality and choice of benefits they receive.
For more details, see my congressional testimony for today’s hearing on “Unintended Consequences: Is Government Effectively Addressing the Unemployment Crisis?” before the Committee on Oversight and Government Reform.
Desperately Needed: A Strong Treasury Department
February 13th, 2013Alexander Hamilton, the first Secretary of the Treasury, set the bar very high. The Senate is about to begin debate over President Obama’s nomination of Jack Lew to be Treasury Secretary. Lately, confirmation hearings have often focused on either the personal foibles of candidates or relatively evanescent policy disputes. But at a time when fiscal policy is so critical to the nation’s well-being, the Senate should not forget the critical role Treasury has played in forging that agenda.
The key question for the Senate: will Treasury continue to play that powerful role under Lew’s stewardship?
While Hamilton could be mercurial and even buffoonish in his monarchial tendencies and late military ambitions, he was extraordinarily visionary in molding institutions and organizations to meet the fiscal needs of the new nation. Whether writing Federalist Papers or engaging in the nation’s first Grand Bargain on the budget, his prescient gaze stretched far into the future, finding limitless possibility for this great nation.
Perhaps nowhere is his legacy more embodied than in the Treasury Department that he helped create and nurture to handle the nation’s debt obligations, taxes, and its budget. That legacy has been threatened by a modern department weakened by the usurpation of its functions.
Remember that the president is the only elected official our founders explicitly tasked to represent the nation as a whole. We expect partisanship among members of Congress because they represent different constituencies, though today the influence of special interests transcends congressional boundaries. The Chamber of Commerce, AARP, National Rifle Association, and AFL-CIO each understand the levers of power, even to the point of knowing how to scare an entire legislature to inaction. I’m not saying that these groups don’t have views worthy of consideration, but they do not—I repeat, do not—represent the “general welfare” that our Constitution explicitly mentions in its preamble and its taxing and spending clause.
Interestingly, one of the earliest fights between our political parties was over whether the federal government should get involved in arenas like agriculture or education. Both sides agreed that if such spending took place, it should be in the general interest and not favor any specific section of the country over another. Today, particular constituencies are the dominant beneficiaries of many spending and tax subsidy programs. Does anyone really think that subsidies for sugar growers or early retirees or owners of oil companies and expensive vacation homes serve the general welfare?
When it comes to spending, taxing, and budgeting in the modern era—especially when the government has made too many promises to too many people—the Treasury Department remains the only agency that can restore order by offering broad reform packages centered on the general welfare.
Treasury sits in the unique position of having to worry about paying for things. It alone must deal with the “take-away” side of the budget ledger, constantly confronting how to administer taxes or float bonds. It’s in its very blood to balance potential benefits with costs and reduce politicians’ incentive to operate on the “give-away” side of the budget by enacting tax cuts and spending increases for which future generations will have to pay.
One other part to solving our fiscal puzzle involves understanding the role of committees or assemblies of politicians. The role of these groups is to approve, not design, policy, and delegating that latter function to them neglects the role of the executive. There was a reason fiscal policy shifted to a strong Treasury and away from the committees operating under the weak Articles of Confederation.
In assuming the executive role of Treasury Secretary, will Jack Lew follow Hamilton’s example by leaving a stronger Treasury as a legacy? Will he help move us down a viable path for getting out of our current fiscal mess? I suggest he is unlikely to succeed at one without accomplishing the other.
A longer version of this column is available at my blog, The Government We Deserve.
Current Revenue Solutions Will Barely Reduce the Deficit
December 7th, 2012Despite the ideological hype over revenue increases for the upper-income taxpayers and restricting itemized tax deductions, almost all the considered changes will tackle only a portion of the deficit.
As the graph below indicates, the Congressional Budget Office projects a fiscal year 2015 deficit under current policy of $883 billion, not far from the $1 trillion–plus deficits in the Great Recession and its early aftermath. By comparison, the Tax Policy Center calculates that revenue gained from repealing ALL itemized deductions would be only $183 billion. Smaller limitations on itemized deductions have smaller effects: President Obama’s proposal to limit the value of itemized deductions to 28 percent would raise only $15 billion. Capping itemized deductions at $50,000 would raise $59 billion, or $38 billion if the charitable deduction was excluded.
The value of all individual tax expenditures is $1.161 trillion, even larger than the deficit. But most revenue proposals—particularly those confined to a tiny portion of taxpayers and only a subset of various tax programs—also only chip away at that amount.
Sources: CBO Budget and Economic Outlook, U.S. Treasury Green Book, and Urban-Brookings Tax Policy Center.
* Tax expenditures estimate excludes payroll tax effects.Notes: Baseline is current policy, which assumes extension of 2001 and 2003 tax cuts, except for Individual Income Tax expenditures, which uses Treasury’s baseline.
Several proposals are circulating concerning the Buffett Rule, aimed to insure a 30 percent minimum effective tax on those making $1 million or more a year. The proposal scored by the Tax Policy Center would eliminate the AMT and replace it with a “fair share tax” styled on the Buffett rule. The “fair share” part would raise $22 billion in 2015 (the amount shown in the graph above), but repealing the AMT would lose $54 billion.
Social Security & Medicare Lifetime Benefits
November 5th, 2012How much will you pay in Social Security and Medicare taxes over your lifetime? And how much can you expect to get back in benefits? It depends on whether you’re married, when you retire, and how much you’ve earned over a lifetime.
I recently published with Caleb Quakenbush “Social Security and Medicare Taxes and Benefits Over a Lifetime: 2012 Update” which updates previous estimates of the lifetime value of Social Security and Medicare benefits and taxes for typical workers in different generations at various earning levels based on new estimates of the Social Security Actuary. The “lifetime value of taxes” is based upon the value of accumulated taxes, as if those taxes were put into an account that earned a 2 percent real rate of return (that is, 2 percent plus inflation). The “lifetime value of benefits” represents the amount needed in an account (also earning a 2 percent real interest rate) to pay for those benefits. Values assume a 2 percent real discount rate and all amounts are presented in constant 2012 dollars.
While no major changes in Social Security or Medicare law have occurred since the last update, these estimates reflect alternative assumptions provided by the Center for Medicare and Medicaid Services (CMS) actuaries that lawmakers will cancel a draconian scheduled cut in Medicare payment rates to physicians and other scheduled spending reductions. The result is significantly higher projected lifetime Medicare benefits than current law assumptions would indicate.
Below is a sample table from the brief, for a two-earner couple both earning Social Security’s average wage measure. This set of calculations assumes that workers retire at age 65.
More background information on these calculations can be found at: http://www.urban.org/socialsecurity/lifetimebenefits.cfm.
Does the Tax Reform Act of 1986 Offer Lessons for Future Reform?
October 20th, 2011As the economic coordinator of the Treasury study that led to Tax Reform Act of 1986, I’ve always found it fascinating to read and listen to stories about the law. Many seek the linear trend from cause to effect to secondary cause to enactment, as if there was some logical series of events that made the dominoes fall. History books, of course, are often written as a series of “A led to B” scenarios.
Thus we are tempted to say, ““Let’s repeat A, then we’ll get another great B,” to which three responses are almost inevitable:
- “A isn’t repeatable.” [The historians]
- “B wasn’t all that great.” [The contrarians]
- “B isn’t the right target today.” [The realists]
Let’s start out by stating the obvious. Heraclitus was right, you can’t walk in the same stream twice. But saying that A isn’t repeatable or B didn’t change the world misses the point.
If there is any lesson from TRA86, it is that real reform requires channeling forces and information in the right direction.
Put more broadly, it isn’t helpful to try to recreate historical circumstances to get the same outcome. It is far more useful to understand how to convert luck into serendipity to increase the odds that good things will happen.
In a recent testimony and a Tax Notes article, I outlined ten steps that increased the chances of reform in 1986 and for the most part are repeatable today. These include; seize today’s, not yesterday’s opportunities; rely on principles like equal justice under the law to determine what should be done; make reform comprehensive, in part, because the political cost is likely to be the same in any case; shift the burden of proof to those opposing the better system; form liberal-conservative coalitions in areas where both sides can gain something; plan strategies in advance for how to best present the proposals and their effects to the public; empower nonpartisan staffs like Treasury’s Office of Tax Policy and the Joint Committee on Taxation (who really assembled the ’86 reform); establish leadership on a variety of fronts; insure accountability so that very specific political leaders bear a significant cost if reform fails; and empower someone to run with the ball and strategize on how to make reform happen.
In 1984 through 1986, much of the political leadership came late to the game. And some of the lessons of 1986 were learned, not planned. For example, one key to passage was that at each step in the process, first Treasury Secretary Don Regan, then House Ways & Means Committee Chair Dan Rostenkowski, and finally Senate Finance Committee Chair Bob Packwood feared they would be blamed if the bill failed. As a result, each worked extremely hard to make sure that tax reform did not die on their watch.
Actual reform is seldom random. It often requires real hard work, perhaps not too different from what a household must do when it changes its way of living or how a business moves forward with a new product that displaces an old one. The failure to reform so many of our government programs and institutions, therefore, rests not solely with the power of the status quo, special interests influence, or weak political leaders. It also involves a real failure to plan how to increase the odds that real reform will take place.
Health Reform: How Will Employers and Employees React to Differential Subsidies?
April 6th, 2010We’ve updated earlier estimates of how the various subsidies in the health reform law affect the insurance market for both employers and workers. And the results remain quite dramatic: It appears that the new law will make it beneficial for many employers to drop their insurance coverage. In 2014 and beyond, once federal money is available through the insurance exchanges, switching from employer coverage to the exchanges may benefit both employers and workers in a wide range of income levels.
The employer-provided system subsidizes health insurance mainly by exempting from tax the health benefits offered by employers. Before reform, unless you were elderly, disabled, or poor, this exclusion was probably the only health care subsidy available. But under the new law, the subsidy tied to the insurance exchanges will significantly exceed the tax benefit that low- and middle-income households get now. Our analysis does not consider the implications for Medicaid, which creates a third subsidy system at the low-income end of the exchange.
How will the new law work? A worker whose household cash income is $60,000 in 2016 and who gets no health benefits from her employer would receive a subsidy equal to approximately $9,000. Because the firm provides no health insurance, it must pay a $2,200 penalty, leaving a net gain of about $6,800. By contrast, a worker earning equal compensation who receives employer-provided insurance would receive a subsidy around $3,500 from the exclusion of health benefits from his taxable wages, leaving him more than $3,000 worse off than his counterpart whose employer offers no insurance. This pattern holds until compensation reaches about $84,000, at which point the two subsidies are about the same. Workers earning more than $84,000 do better under the current employer-provided system than they will under the new system.
Except for the employer penalty for larger firms mentioned above, there are only limited mechanisms to stop employers from dropping coverage and allowing their employees to enter the exchange. Of course, some firms may be reluctant to switch because they are uncertain about changes to the health law or because some workers will insist on keeping their existing plans, at least until they see how the new exchanges work. But new firms, which over time grow and absorb larger shares of the labor force, will not face the demands posed by longtime employees. And the exchange doesn’t fully go into effect until 2014.
Congress could have avoided many of the problems that will result from this shift from employer-sponsored insurance to the exchanges by providing the same subsidy to all households with equal incomes. Perhaps it will move in this direction as the law is refined over time.
Charitable Giving When Filing Your Tax Return
March 17th, 2010I recently reprised my long-standing suggestion to allow taxpayers to deduct charitable gifts made before April 15 on the previous tax year’s tax return.
Congress provided the new impetus for this type of proposal by allowing taxpayers to deduct charitable gifts for Haiti relief on 2009 tax returns, even though they were paid in January and February of 2010. It offered a similar proposal in 2005 for donations to tsunami victims. I predicted that Congress would likely accelerate offerings of these one-off accelerated deductions now that precedent was becoming well established.
My prediction came true, however, almost before the ink was dry on my article. The House just unanimously passed H.R. 4783 to provide similar relief for victims of the earthquake in Chile. But not victims of terrorism in Somalia. Or flood victims in West Africa. As I also noted for Haiti, where needs have indeed risen to an extraordinary level, the real need in many of these situations is for the long-term, not just for now. Congress is not that good at picking charities, and when it picks only one or another it tends to cause substitution—increased giving to favored causes but decreased giving for others.
OK, it’s clear that a more universal provision would be fairer and more efficient. Here I want to address the two concerns raised by a few to my proposal. No one, by the way, disagrees with the fundamental proposition that this type of incentive provides the best of all worlds from the perspective of public finance: outside of a potential minor acceleration of a deduction, the proposal costs nothing unless people actually give more! I can think of few other proposals or programs that meet such a rigorous benefit-cost calculus.
Concern 1: Is there an incentive? Of course. From a strict dollar-and-cents calculation, it’s true that an advanced deduction usually isn’t worth that much. But talk to anyone in marketing, and they’ll tell you that advertising works best when they’ve already got the buyers’ attention. And taxpayers give maximum attention to income taxes when filing returns. Moreover, only at tax filing time, after you’ve added up your income for the past year, can the tax software or accountant can tell you exactly how much you can save. Behavioral economists would agree that motivation, simplicity, and psychology all influence economic behavior.
This is a slam dunk. The natural marketing that would arise at tax filing time, enhanced by the publicity that charities would undertake, would significantly boost charitable giving. And, again, there’s almost no cost if it doesn’t. It’s win-win.
Concern 2: Is compliance an issue? It could be, but it can be turned to an advantage rather than disadvantage. That is, it can be handled in a way that improves compliance. With the type of incentive provided for Haiti and Chile, some people may forget next year that they claimed their deduction on last year’s return. Depending upon how well they keep their own records, errors will occur. Suppose, however, that the new deduction would be made available more generally for donations to charities that agree to file an information report to both IRS and individuals, much like the reports that financial institutions make on individual retirement account contributions. Charities are already required to send reports to individuals for gifts of more than $250; similar reports could be filed with IRS, although Social Security numbers would need to be collected.
What about charities that don’t want to do the extra filing? They don’t need to volunteer for this new opportunity. Charities can voluntarily opt into this system or not. And IRS can allow smaller charities to ease into the system over time.
Now we’ve got another win-win. We’ve solved the problem of granting a double deduction, and we’ve made it a lot easier for the IRS to check up on gifts throughout the year—thus improving compliance.
What the Long-term Revenue Changes in Obama’s Budget Would Achieve
February 5th, 2010
• The President would then reverse some of that loss by raising taxes, mainly on higher income people, by about $140 billion—largely through restoring their pre-Bush tax rates and capping the value of their itemized deductions.
• Other “revenue changes and loophole closers” would bring in about $50 billion, including about $10 billion in a bank tax, $12 billion in international tax changes, and slashing tax subsidies for fossil fuel producers.
• Other revenue losers (such as credits for higher education, research and children) would cost about $40 billion.
The net loss in revenues (-$500b + $140b + $50b – $40b) would be about $350 billion relative to doing almost nothing other than retaining some estate tax. The Administration argues that it is increasing taxes by $150 billion relative to what they argue is the current “policy,” including all of the Bush tax cuts.