Commonwealth Foundation / Mercatus Center Economic Education Seminar. February 18, 2012

Transcription

1 Commonwealth Foundation / Mercatus Center Economic Education Seminar February 18,

2 Temporary Taxes That Aren t The Johnstown Flood Tax Temporary 10% tax on alcohol, 1936 Repeatedly renewed, Made permanent, 1951 Increased to 18%, 1968 Cigarette Tax Temporary 0.1 cents per cigarette, 1935 Made permanent, 1951 Increased to 6.75 then 8 cents per cigarette,

3 Temporary Taxes That Aren t Realty Transfer Tax Temporary 1% tax on real estate transfers, 1951 Made permanent,

4 Temporary Taxes That Aren t How they arrive In the face of an emergency, voters tolerate new taxes that go toward addressing the emergency. 4

5 Temporary Taxes That Aren t Why they don t leave People get used to paying the tax (opposition to imposing a new tax tends to be less than the opposition to removing an existing tax) The state gets used to receiving the tax (after the emergency subsides, the revenue is redirected elsewhere) 5

6 Temporary Taxes That Aren t Poisoning the well People are less apt to support temporary taxes when there is a history of them becoming permanent. State is less able to respond to future emergencies. 6

7 Temporary Tax Cuts That Are Economic Growth and Tax Relief Reconciliation Act, 2001 Reduced federal income tax rates Phased out the federal estate tax Increased per-child tax credits Phased out limits on itemized deductions and exemptions Provisions designed to sunset in 2011 Provisions extended for two years in

8 Temporary Tax Cuts That Are TRURJCA (Job Creation Act of 2010) Extended EGTRRA for two years One-year reduction in FICA payroll tax 8

9 Temporary Tax Cuts That Are How they arrive In the face of recession, politicians are willing to tolerate tax cuts provided that they are temporary. 9

10 Temporary Tax Cuts That Are Why they leave Concern over the federal deficit combined with economic prosperity erodes support for their extensions. 10

11 Temporary Tax Cuts That Are Why they don t perform as promised People make long-term decisions based on anticipated longterm income and expenses. Temporary tax cuts don t affect long-term income and expenses. Knowing that the tax cuts will expire, people use the cuts to offset the future tax increases by paying down debt. 11

12 Civilian Unemployment Rate 12% 10% Temporary tax cut appears to reduce unemployment. Payroll tax cut takes effect 8% 6% Average = 9.2% Average = 9.6% Average = 9.0% 4% 2% 0% Data source: U.S. Bureau of Labor Statistics 12

13 Employment Rate 64% 63% 62% The reduction in unemployment was due largely to discouraged workers leaving the labor force. Payroll tax cut takes effect 61% 60% 59% 58% 57% Average = 59.3% Average = 58.2% Average = 58.3% 56% 55% Data source: U.S. Bureau of Labor Statistics 13

14 How to Keep Temporary Taxes Temporary Keep the tax visible Spread the tax across the widest group of people possible. Collect the tax separately from other taxes. Restrict use of the revenue Enumerate on what the tax revenue can be spent and prohibit its use elsewhere. Return surpluses to those who paid the tax in the proportion in which they paid. 14

15 How Do Tax Revenues Change as Tax Rates Change? Evidence at the federal and state levels indicates that changes in tax rates have little effect on tax revenues as a share of GDP. 15

16 PA State Tax Revenue as Share of GDP 10% 9% Tax revenue = 5.5% ± 0.4% of GDP 8% 7% 6% 5% 4% 3% 2% 1% 0% Data source: U.S. Bureau of the Census 16

17 PA Top Marginal Income Tax Rate 3.5% Tax revenue = 5.7% of GDP Tax revenue = 5.6% of GDP 3.0% 2.5% 2.0% Tax revenue = 5.6% of GDP 1.5% Tax revenue = 5.2% of GDP 1.0% 0.5% 0.0% Data source: U.S. Bureau of the Census 17

18 PA Top Marginal Income Tax Rate 3.5% 3.0% 2.5% 2.0% 1.5% 10% tax increase accompanies a 0% increase in state s share of GDP 1.0% 0.5% 48% tax increase accompanies a 10% increase in state s share of GDP 10% tax cut accompanies a 1% decrease in state s share of GDP 0.0% Data source: U.S. Bureau of the Census 18

19 PA Top Marginal Income Tax Rate PA Tax Revenue (per capita, 2010$) 3.5% $4, % $3, % 2.0% 1.5% 1.0% $3,000 $2,500 $2,000 $1,500 $1, % 0.0% Per-capita, inflation adjusted tax revenue grows at a steady 1.5% annually, regardless of changes in income tax rates. $500 $0 Income Tax Rate Tax Revenue Linear (Tax Revenue) Data source: U.S. Bureau of the Census 19

20 Tax Revenue as Share of GDP is Constant Evidence suggests that using changes in the tax rate to raise revenue typically fails. Since the state s share of GDP is constant, focus tax policy on increasing GDP. 20

21 What About Using Temporary Measures as Stimulus? Evidence suggests that government doesn t have enough information and cannot move fast enough to get the timing right. Result is that intended stimulus spending ends up being suppression spending. 21

22 Government Spending per GDP 21.0% 20.5% One possible goal point of temporary taxes (and temporary spending) is to boost the economy. Used correctly, these temporary measures would follow the pattern shown here. 20.0% 19.5% Reverse temporary measures during expansions 19.0% 18.5% 18.0% Temporarily increase spending and reduce taxes during recessions Quarters After Start of Recession 22

23 Federal Spending per GDP 21.0% 20.5% Pattern of actual federal spending during and following recessions compared to the ideal Keynesian pattern. 20.0% 19.5% 19.0% 18.5% 18.0% Quarters After Start of Recession Data sources: Bureau of Economic Analysis, National Bureau of Economic Research. Quarterly data, January 1953 to September

24 Federal Spending per GDP 21.0% Pattern of actual federal spending during expansions compared to the ideal Keynesian pattern. 20.5% 20.0% 19.5% 19.0% 18.5% 18.0% Quarters After Start of Expansion Data sources: Bureau of Economic Analysis, National Bureau of Economic Research. Quarterly data, January 1953 to September

25 Commonwealth Foundation / Mercatus Center Economic Education Seminar February 18,