WITH new tax breaks for children, college tuition and retirement accounts, taxpayers face more figuring than ever when it comes to filing taxes. How have the new breaks affected the annual tax season? How are these so-called targeted breaks likely to affect the economy? What are the consequences for tax reform?
Director, fiscal policy studies, Cato Institute, Washington
Taxpayers keep telling Congress they want a simpler tax system, but Congress has continued to add new deductions. I view this move toward targeted tax credits as something that adds to our headaches as we try to figure out how much we owe.
The overall burden for a typical working-class family is rising. Just to accentuate that point, in 1993, the average middle-class worker was paying 22.5 percent of his wages in taxes at the federal level. In 1999, it's estimated that figure will rise to a shade under 27 percent, according to the U.S. Treasury Department. Our overall tax burden is creeping up even as the tax code is being carved up.
We've gotten into a tax environment where Congress is using the tax code for social policy purposes. If people actually had lower tax rates, they could pay for college themselves and they wouldn't need special breaks. The child care credit is also silly. If taxes weren't so high in the first place, families maybe wouldn't need two people working, or at least they could afford their own child care.
In my opinion, it's all economically inefficient. A good tax system should have a broad tax base with low tax rates, and we've gotten away from that. That's why I've always been an advocate of a flat-rate system. Tax credits distort the economy when a person doing activity A gets a break and a person doing activity B doesn't.
Chief economist, MBG Information Services, Washington
I think that the changes make sense, although they go against two decades of movement away from using the tax code to micromanage or direct the economy.
There are activities such as education you want to encourage beyond what the market ordinarily provides. I think these kinds of incentives are useful. While they can lead to cheating and they certainly make tax filing more difficult, more expensive and more time consuming, I think they are worthwhile.
I think it's a stimulus for the private economy. Certainly that's the goal in Maryland and around the country. What legislatures have intended to do is to provide incentives where you get the most payoff. The changes are positive and preferable to broad tax cuts, where the government faces a large revenue loss.
It's true that tax preparation is more complicated and the changes represent a movement away from tax simplification. But if the alternative is to do nothing or to have a broader tax reduction, my preference would be to target tax reduction to where the government particularly needs it and to areas where we get more bang for the buck.
The question shouldn't be whether to use the tax code to encourage behavior. The question should be whether the behavior is the right behavior to encourage. Future tax policy will depend on many things. Like so much else, it depends on the stock market.
Senior Fellow, Institute for Policy Innovation, Lewisville, Texas
The tax credits basically make things much more complicated. There are more lines and more forms to fill out. The other thing that's happening -- though we don't know the details yet -- is these credits may be pushing more people into the alternative minimum tax, which was originally designed to capture tax revenue from the super wealthy.
What's happening now is it's dropping into the $50,000 to $70,000 income range. The AMT affects one of every 150 taxpayers. By 2007, it's going to affect one of every 14. It's starting to hit more people than it was ever intended to and the new credits make it worse.
The tax breaks don't do anything for the economy. They don't do anything to change incentives to earn, save or invest. They have no effect on the economy. The Roth IRA does provide an extra incentive save and invest.
In terms of broad-based tax reform, which is what we're going to have to turn to, the Roth IRA is really the way we should really treat all savings: You only tax a dollar of income once.
The Roth IRA doesn't add to complication, but those other breaks do, and they make it more difficult to get reform and make the system more simple. When you give out a targeted deduction, people don't like to give it up.
Chief Economist, Economic Strategy Institute, Washington
On a net basis, some tax credits are helpful, but we ought to move more toward simplifying the code. Some credits help people who are on the bottom rung of the economic ladder and they really need the help.
But the credits aren't likely to affect the economy a lot because they are so limited in size. For example, the child care credit will help some families, but the credit isn't large enough to create a big overall economic effect.
Targeted tax breaks are designed to help some people with their specific needs. We'll probably get more of them instead of tax reform for a while. And that's what's needed. I'm for the right kind of reform that keeps the system progressive, and tax breaks don't get at the issue. Even so, big tax cuts or tax reforms are not likely.