Tax Expenditure Deductions and Credits

Tax Expenditure Deductions and Credits

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  Hope and Lifetime Learning Credits
  
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    Code § 25A(a). Hope and Lifetime Learning Credits—Allowance of Credit.
    
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    Code § 25A(b). Hope and Lifetime Learning Credits—Hope Scholarship Credit.
    
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    Code § 25A(c). Hope and Lifetime Learning Credits—Lifetime Learning Credit.
    
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    Code § 25A(d). Hope and Lifetime Learning Credits—Limitation based on modified adjusted gross income.
    
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    Code § 25A(e). Hope and Lifetime Learning Credits—Election not to have section apply.
    
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    Code § 25A(f). Hope and Lifetime Learning Credits—Definitions.
    
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    Code § 25A(i). Hope and Lifetime Learning Credits—American Opportunity Tax Credit. In the case of any taxable year beginning in 2009 or 2010.
    
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  Code § 36A. Making work pay credit.
  
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  Code § 164(a). Taxes—General rule.
  
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  Code § 164(c)(1). Taxes—Deduction denied in case of certain taxes.
  
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  Charitable Contributions
  
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    Code § 170(b)(1)(A). Charitable, etc., contributions and gifts—Percentage limitations—Individuals—General rule.
    
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    Code § 170(b)(2)(A). Charitable, etc., contributions and gifts—Percentage limitations—Corporations—In general
    
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    Code § 170(e)(1). Charitable, etc., contributions and gifts—Certain contributions of ordinary income and capital gain property—General rule.
    
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  Code § 213(a). Medical, dental, etc., expenses—Allowance of deduction.
  
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  Code § 213(b). Medical, dental, etc., expenses—Limitation with respect to medicine and drugs.
  
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  Code § 213(d)(1). Medical, dental, etc., expenses—Definitions.
  
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  Code § 222. Qualified tuition and related expenses.
  
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  Code § 501(a). Exemption from tax on corporations, certain trusts, etc.—Exemption from taxation.
  
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  Code § 501(b). Exemption from tax on corporations, certain trusts, etc.—Tax on unrelated business income and certain other activities.
  
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  Code § 501(c). Exemption from tax on corporations, certain trusts, etc.—List of exempt organizations.
  
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  Code § 1011(b). Adjusted basis for determining gain or loss—General rule.
  

Deferring compensation—nonqualified and qualified plans

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  Concept of tax expenditures is controversial
  
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    Easier to get through Congress than spending bills
    
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    Definitions of tax expenditures
    
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      Departures from normal income tax
      
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      Departures from general rules
      
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  5 Justifications for tax codes:
  
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    Ability to Pay—Defining ability to pay to tax income
    
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    Simplification—Administribility provisions
    
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    Distributional—EITC or different marginal tax rates
    
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    Incentives—some would argue that tax expenditures all fall in this category
    
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    Expressive—social approval/disapproval,
    

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  Think about taxation of the family:
  
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    Are we encouraging marriage and kids?
    
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    Are we just assessing the changed ability to pay after marriage
    
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  Donating Appreciated Property
  
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    § 170(e)—donating appreciated property
    
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    property must otherwise have been subject to a long-term capital gain
    
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    tangible personal property which is related to the exempt purpose of the charity
    
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    HUGE amount of fraud with the charitable deduction
    
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  State and Local Tax Deduction
  
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    Value of deduction is MUCH higher in blue states and lower in red states
    
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      (blue states tend to collect more state and local taxes  deduction more valuable)
      
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    Being repealed gradually by the AMT
    
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      AMT:
      
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        Created in 1969
        
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        State and local tax deduction biggest provision denied in AMT taxable income
        
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        AMT cap was not indexed to inflation—but repealing the AMT costs more than repealing the income tax
        
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  Retirement savings
  
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    4 Types:
    
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      Qualified plans
      
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        Defined benefit
        
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        Defined contribution
        
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      IRAs
      
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      Savers Credit
      
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    Employer-sponsored retirement plans:
    
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      Defined benefit (“DB”)
      
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        Usually insured  if employer goes under you still get your pension
        
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      Defined contribution
      
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      Used to be that everything was a DB plan—you don’t have your own account, you just gradually get more entitlement to your pension
      
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    Risks of saving:
    
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      Inflation risk
      
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      Investment risk
      
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      Longevity risk—if you outlive your savings
      

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  Social security addresses ALL of these risks—inflation-adjusted life annuity
  
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  Defined Contribution (401(k) and IRA)—don’t address any of these risks
  
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  Defined Benefit (Pension plans) are fixed payments on life annuity—don’t address inflation risks
  
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  Today:
  
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    73% of retirement savings are in Defined Contribution Plans and IRAs
    
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      401(k) are taxed on a traditional basis—no tax on investment, when you withdraw you pay ordinary income taxes
      
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      Roth instruments—pay ordinary income tax now and none when you withdraw
      
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        When Congress budgets they don’t look to the effects past 10 years—the expense of Roth instruments as compared to traditional plans increase revenue within the budget window even though we’re losing revenue over time
        
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    27% are Defined Benefit Plans
    
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    Internalities—people don’t make choices in their own long-term interest
    
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  Savers credit
  
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    Non-refundable credit that you get between 10 and 50% of your contributions to IRA
    
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    Targeted to low income people
    
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  Proposals
  
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    To make Savers Credit fully refundable
    
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    To make employers default enroll employees in IRA programs—could increase enrollment with inertia
    

IRS denied charitable contribution deductions for the Church of Scientology—members pay fixed donations in exchange for “auditing services” to tell you how to be promoted within the church

SCOTUS held for the IRS because this was a quid pro quo—BUT could we characterize all religious services as a quid pro quo?

THEN the IRS reversed itself (and SCOTUS)—why? Apparently the COS started bogging down the IRS with minor litigation and the IRS just decided it wasn’t worth it

1. 
   What are the potential justifications for the charitable deduction? What do they imply about how it should be structured?
   

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  Student: if you’re giving something away your tax liability should be reduced
  
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  Would be a deduction or exclusion—doesn’t count toward the assessment of ability to pay
  
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  Shouldn’t be limited to certain organizations
  
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  What does this imply about beneficiaries?
  
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    Student: they are better able to pay  tax their receipt, not your gift
    
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    Not always low income
    
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      Operas, universities, art museums—tend to be consumed by more wealthy
      
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      People tend to give within their economic bracket—low income people to churches, higher income to universities, etc.
      
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  If we allow deduction for gift/charitable contributions—we should tax the beneficiaries
  
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    Who would we tax for a donation to an environmental organization?
    
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    What about taxing the charity—if we can’t identify beneficiaries we can tax charity as a proxy
    
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  Charitable deductions subject to 3% haircut
  
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  Justifications:
  
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    Incentivizes charitable gifts
    
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      We value education
      
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      Altruistic externality—donors don’t necessarily take recipients’ appreciation into account
      
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      Redistributional externality—when private gifts displace government aid
      
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      Public goods
      
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  How should we structure to promote this incentive?
  

2. 
   How do you think the tax system should treat contributions to charitable organizations and why?
   

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  Things to consider:
  
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    Responsiveness—are people going to donate regardless of the tax structure? Does out of pocket spending change with incentives?
    
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    Citizen-directed transfer—government benefits go to charities but individual donors choose where it goes—“Democratic Pluralism”—allows minority to decide where government money goes even when majority dominates government
    
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      Credit—more benefit to lower income people—student: rich people have enough of a voice, don’t need to give them an opportunity to direct government funds
      
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    ***Agency costs—certain situations require non-profit entities—maybe we want to subsidize donors who give a lot to one charity  would implicitly create monitors for each charity
    
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  How should we change the tax structure for charities?
  
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    Student: incentives rationale
    
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      Expand the benefit of tax liability to everyone who contributes—try to get around standard deduction by making this an above the line deduction
      
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        BUT most people who contribute are more likely to itemize
        
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        Would get around 3% haircut
        
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        If top 1/3 of population itemize and top 2/3 have tax liability—the lion’s share of this benefit would go to the middle
        
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    Student: get rid of it
    
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      If we aren’t incentivizing donation with the code we should just get rid of it—people will give anyway
      
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      Student: BUT isn’t there a benefit of having some public goods provided by charities and not the government