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Prepared by Jack Grigg and Thornton Matheson (Fiscal Affairs Department).
The 5-year revenue cost of the tax expenditures considered in this paper (Table 1), estimated by OMB (2012), assume no behavioral changes. Further, because each tax expenditure is estimated in isolation holding all other features of the code constant, they cannot in general be aggregated.
U.S. taxpayers have the option of either itemizing their income tax deductions or taking the standard deduction, which in 2012 varies between $5,950 and $11,900 for non-dependents. The standard deduction is set to correspond roughly to the average value of itemized deductions for moderate-income taxpayers. Taxpayer s with deductible expenses in excess of this amount, who tend to be higher-income individuals, have an incentive to itemize.
The exclusion of imputed rent, net of mortgage interest and other housing-related costs is estimated to cost $337 billion in foregone revenues over five years. The mortgage interest deduction reduces income tax revenues by $606 billion. The tax expenditure from tax-favored treatment of housing equals the sum of these two revenue losses, as imputed rents are measured net of mortgage interest costs.
The substantial increase in the capital gains tax exemption for housing in 1997 is sometimes cited as an inflection point for house prices. However, this was accompanied by elimination of rollover relief, whereby gains on disposal of a house were previously untaxed if the proceeds were reinvested in another property.
Glaeser and Shapiro (2002). There are negative aspects of ownership as well, notably that transactions costs limit mobility in response to labor market shocks.
Urban-Brookings Tax Policy Center (2009).
For a discussion of how the mortgage interest deduction equalizes the tax treatment of debt and equity finance to purchases homes, see Woodward and Weicher (1989).
OMB (2012). The US exemption is limited to $250,000 ($500,000 for joint filers), with some additional restrictions. The revenue cost may be higher during periods of more robust growth in housing prices.
The U.S. federal government supports S&L governments with matching and block grants, but revenue sharing was eliminated in 1986.
The deductibility of S&L sales taxes was eliminated in 1986, but reintroduced in 2004 as an alternative to deduction of S&L income tax, a provision sought by the nine U.S. states—Alaska, Florida, Nevada, New Hampshire, South Dakota, Texas, Tennessee, Washington and Wyoming—that do not levy income taxes.
Metcalf (2011) shows that deductibility does influence state choice of tax instruments, and that deductibility leads to higher levels of state spending. Therefore, the progressivity of eliminating the deduction for SLG taxes would be offset to some degree by the resulting reduction in progressive SLG spending programs.
OECD (2010). Estimates relate to the year 2006 for Germany, Korea, the Netherlands and the UK, 2004 for Canada and 2008 for Spain.
Urban-Brookings Tax Policy Center (2009).
Many countries, including the US, also provide preferential tax treatment for corporate donations to charities.
The cap is set at 30 percent of adjusted gross income for donations for donated property that has appreciated in value since it was initially acquired.
This ignores the role of charitable giving in eliciting the preferences of donors.
Corporate integration is alleviating the double taxation of corporate equity, either through imputation, in which shareholders receive a credit for taxes paid at the corporate level, or through a low or zero rate on dividends. An ACE would allow corporations a deduction for the cost of equity finance.
“Controlling shares,” defined in terms of the percentage of total equity held, are generally taxed at higher rates than portfolio shares.
In Australia the exclusion is restricted to shares held for at least one year.
Some dividends and capital gains arise from income that, due to corporate tax incentives, was never taxed at the corporate level. This can be addressed through integrating corporate and investor levels of tax. Australia, Canada, Mexico and New Zealand have imputation schemes. The E.U. has moved from imputation toward partial dividend exclusion, to equalize tax treatment of cross-border and domestic shareholdings.
An inheritance tax applies to the amount received by each heir rather than the estate as a whole, and thus if it is progressive encourages wider distribution of an estate’s assets.
EET = exempt, exempt, taxed.
Some social security income is also untaxed upon distribution, costing $150 billion over 5 years.
Hungary, by contrast, has a TEE regime.