Evaluating U.S. Tax Reform Options & Trade-Offs

The economic crisis caused by the coronavirus pandemic poses a triple challenge for tax policy in the United States. Lawmakers are tasked with crafting a policy response that will accelerate the economic recovery, reduce the mounting deficit, and protect the most vulnerable.

To assist lawmakers in navigating the challenge, and to help the American public understand the tax changes being proposed, the Tax Foundation’s Center for Federal Tax Policy modeled how 70 potential changes to the tax code would affect the U.S. economy, distribution of the tax burden, and federal revenue.

In tax policy there is an ever-present trade-off among how much revenue a tax will raise, who bears the burden of a tax, and what impact a tax will have on economic growth. Armed with the information in our new book, Options for Reforming America’s Tax Code 2.0, policymakers can debate the relative merits and trade-offs of each option to improve the tax code in a post-pandemic world.

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A Neutral Tax Code Counts Unemployment Compensation as Taxable Income

Since 1987, unemployment compensation benefits have been subject to federal income tax and, in most states, to state income tax. According to the Congressional Research Service, such treatment—including unemployment compensation benefits in taxable income—is common across industrial nations.

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EU business tax reform, European Union business tax reform, European Commission EU business taxation framework
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Europe

The EU Determined to Reform the Business Tax

The EU recently launched a consultation to reform the business tax system, which will outline the priorities for corporate taxation over the coming years to meet the needs of a globalized economy that struggles to recover from the consequences of the COVID-19 crisis. It will also set EU actions regarding the ongoing international discussion on the taxation of the digital economy and a global minimum tax.

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Washington capital gains income tax Washington capital gains tax 2021 Washington election results ballot measures Washington State Lawmakers Floats a Wealth Tax Which Relies Almost Exclusively on Four People, Washington wealth tax proposal, Washington State wealth tax
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Washington State Lawmakers Consider 1,000% Tax Increase on Tobacco Businesses

Limiting addiction to nicotine is a laudable goal, but lawmakers should exercise caution with the methods employed. Using gross receipts taxes on businesses to effectively levy an excise tax introduces complexity to an already flawed tax design. It is better to let the excise tax internalize externalities and the business tax raise general revenue.

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2021 tax season, tax refunds, IRS extends tax filing deadline to May 17
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What to Expect During the 2021 Tax Season

The IRS recently announced the extension of tax filing and payment deadlines from April 15th to May 17th to help taxpayers navigating the many tax changes amid the pandemic and give the IRS opportunity to clear its backlog of tax returns and correspondence.

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Making the Expanded Child Tax Credit Permanent Would Cost Nearly $1.6 Trillion

As the Biden administration and Congress consider making the expanded child tax credit permanent, a nearly $1.6 trillion expansion of tax code-administered benefits, they should consider financing it in a way that doesn’t create significant headwinds to economic recovery.

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TCJA Is Not GILTI of Offshoring

Many members of Congress have taken issue with the 2017 tax reform. However, the reasoning that has led some to believe that GILTI provides a path to offshoring investment and jobs is flawed.

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Total Covid relief (Total Covid-19 relief) in the US. Total unemployment insurance and total unemployment benefits, including total covid relief families. How much money has the US spent on covid-19 Comparing covid relief packages
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U.S. COVID-19 Relief Provided More Than $60,000 in Benefits to Many Unemployed Families

During the pandemic, an unemployment family of four previously earning $60,000 will have received $50,840 in federal and state unemployment benefits from April 1, 2020 to September 6, 2021, plus $11,400 in stimulus payments, plus $7,200 in Child Tax Credit, totaling $69,440 in combined COVID-19 relief benefits.

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PA gas tax proposal seeks to phase out the PA gas tax (Pennsylvania gas tax) to fund PA highway funding. Learn more about the Gov. Tom Wolf gas tax proposal
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Will Pennsylvania Be the First State to Motor Past the Gas Tax?

In Pennsylvania, Gov. Tom Wolf (D) has proposed phasing out the gas tax as the main funding mechanism for the state’s highway fund, and he has established a commission to recommend options for replacing it with alternative revenue sources. In a statement, the governor called the current motor fuel tax burdensome, outdated, and unreliable.

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How GILTI Are U.S. Industries?

Both the Biden campaign and some Democratic members of Congress have recommended changes to GILTI, but before doing that, policymakers should consider how GILTI’s design can have ramifications for many U.S. companies and their tax burdens.

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