1. Tax Policy Fiscal Context and Economic Concepts Molly Sherlock Washington & Lee University January 23, 2015

2. The U.S. Fiscal Position Revenues and Outlays: FY1970 – FY2013 Source: CRS Report R43472, The Federal Budget: Overview and Issues for FY2015 and Beyond, November 4, 2014, by Mindy Levit. 2

3. Persistent Budget Deficits  Increasing Debt 3

4. Why is Spending Projected to Increase? 4

5. Changing Demographics are Increasing Pressure on the Federal Budget 5

6. Federal Revenue by Source: 1946-2017 6

7. Federal Revenue by Source: FY2013 7

8. Why Tax Reform?  Raise additional revenue?  U.S. fiscal position is “unsustainable”  Over time… spending will have to be cut, or taxes increased  Improve the system?  What does an improvement look like?  Economic tools for evaluating tax policy 8

9. Economic Concepts: Equity 9  Is the tax system “fair”?  Two concepts for evaluating fairness:  Vertical equity  Higher burdens on those with a greater ability to pay  Horizontal equity  Equal treatment of equals

10. Evaluating Vertical Equity 10

11. Evaluating Horizontal Equity 11  Those with “equal ability to pay” should pay equal taxes  Measuring ability to pay  Casualty losses  Medical expenses  Similarly situated individuals  Marriage penalties  Homeowners vs. renters

12. 12  Taxes distort behavior  A goal of tax policy  Meet revenue targets with minimal distortions Economic Concepts: Efficiency

13. Balancing equity and efficiency 13  Cutting taxes on capital (investment) income  Wage credits for low-income workers

14. Economic Concepts: Simplicity and Revenue Sufficiency 14  What makes taxes complicated?  Measuring income  Taxes as social policy  The purpose of taxes is to pay for the government’s activities

15. Income Taxes: Computing Taxable Income 15

16. Average Tax Rates Paid 16

17. About those “Loopholes” FY2013 Tax Expenditures (billions) 17

18. And what about those “47%”? 18