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Getting More from Tax Incentives: When and How Should Tax Incentives Be Provided?. Lily Batchelder May 19, 2009. What Are Tax Incentives?. Rationales for government intervention Public goods Fairness Benefits or costs for others resulting from individual choices (externalities)

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getting more from tax incentives when and how should tax incentives be provided

Getting More from Tax Incentives:When and How Should Tax Incentives Be Provided?

Lily Batchelder

May 19, 2009

what are tax incentives
What Are Tax Incentives?
  • Rationales for government intervention
    • Public goods
    • Fairness
    • Benefits or costs for others resulting from individual choices (externalities)
  • Rationales for tax provisions
    • Measuring income accurately
    • Allocating tax burdens fairly
    • Incentives for behavior
cold vaccine example
Cold Vaccine Example
  • Cold vaccine is 95% effective but bad side effects for some.
  • Year of protection costs $100 for most, but $1,000 for a few. $200 on average.
  • Characteristics of people with bad side effects or who need more expensive vaccine not know.
framework when and how should fiscal incentives be offered
Framework: When and How Should Fiscal Incentives Be Offered?
  • #1 Do individual choices result in benefits and costs for others?
    • Limit subsidy to:
      • Spending solely on the good or apply to saving that might be used for the good?
      • Purchasing insurance related to the good?
      • Through a large pool?
framework when and how should fiscal incentives be offered1
Framework: When and How Should Fiscal Incentives Be Offered?
  • # 2 Is a fiscal incentive the best response?
    • No government intervention
    • Mandate
    • Fiscal incentive
  • #3 Do people respond after applying behavioral devices?
  • #4 How large are the external benefits after other appropriate government intervention?
framework when and how should fiscal incentives be offered cont
Framework: When and How Should Fiscal Incentives Be Offered? (cont.)
  • #5: Do responsiveness or external benefits vary by household traits or the amount of activity?
buying out the base
Buying Out the Base
  • 20% of low-income get vaccinated.
  • 80% of high-income.
buying out the base with floors
Buying Out the Base with Floors
  • First vaccine
    • 20% of low-income get vaccinated.
    • 80% of high-income.
  • Second vaccine
    • 20% of both groups get vaccinated.
framework when and how should fiscal incentives be offered cont1
Framework: When and How Should Fiscal Incentives Be Offered? (cont.)
  • #5: Do responsiveness or external benefits vary by household traits or the amount of activity?
  • #6: How is the subsidy financed?
  • #7: Does the structure of the incentive affect responsiveness?
    • Refund v. match
    • Uniformity
    • Myopia
  • #8: What if policymakers have little or no information about #5-7?
when and how should fiscal incentives be offered
When and How Should Fiscal Incentives Be Offered?

S3

P

S2

S1

The next $0.10 tax creates a larger marginal DWL, BCDE.

D

P3

B

P2

The first $0.10 tax creates little DWL, ABC.

P1

A

C

$0.10

E

$0.10

D1

Q

Q3

Q2

Q1

Source: Aaron S. Yelowitz, Worth Publications

many don t itemize or have positive income tax liability
Many Don’t Itemize or Have Positive Income Tax Liability

Source: Batchelder, Goldberg and Orszag (2006); Toder and Rosenberg (2007); TPC (2009).

form of major non business federal income tax incentives
Form of Major Non-Business Federal Income Tax Incentives

Source: Burman, Geissler & Toder (2008) excluding special tax rates.