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Reforming Tax Incentives Into Uniform Refundable Tax Credits

Author

Listed:
  • Batchelder Lily L.

    (New York University)

  • Goldberg Fred T.

    (Skadden, Arps, Slate, Meagher & Flom)

Abstract

Each year the US federal individual income tax delivers over $500 billion worth of tax incentives intended to encourage socially beneficial activities. Currently the vast majority operate through deductions or exclusions, which link the size of the subsidy to the taxpayer's marginal tax bracket. This article argues that uniform refundable credits are a more efficient approach for tax incentives intended to correct for positive externalities, absent evidence that positive externalities exist or that externalities or elasticities associated with the subsidized activity vary by income class. Moreover, some type of refundable credit should almost always be the most efficient subsidy even if externalities or elasticities rise with income. Their efficiency benefits are further magnified by their tendency to automatically smooth household income and macroeconomic demand. This article thus proposes a dramatic change in how the government provides tax incentives for socially valued activities: the default for all such tax incentives should be a uniform refundable tax credit.

Suggested Citation

  • Batchelder Lily L. & Goldberg Fred T., 2008. "Reforming Tax Incentives Into Uniform Refundable Tax Credits," Basic Income Studies, De Gruyter, vol. 2(2), pages 1-11, January.
  • Handle: RePEc:bpj:bistud:v:2:y:2008:i:2:n:8
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    References listed on IDEAS

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    1. Alan J. Auerbach, 2002. "Is there a role for discretionary fiscal policy?," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 109-150.
    2. Dowd, Timothy, 2005. "Distinguishing Between Short-Term and Long–Term Recipients of the Earned Income Tax Credit," National Tax Journal, National Tax Association;National Tax Journal, vol. 58(4), pages 807-828, December.
    3. Ann Huff Stevens, 1995. "Long-Term Effects of Job Displacement: Evidence from the Panel Study of Income Dynamics," NBER Working Papers 5343, National Bureau of Economic Research, Inc.
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