There has been a flurry of articles recently regarding the first-borns of 2008. Every article cites the fact that the baby being born on January 1st means the family will not be able to claim the child as a tax deduction and will also not receive the child tax credit for tax year 2007. For simplicity, there is no pro-rated system for exemptions or filing status under the federal income tax. For a family earning less than $100,000 who is in the 15% marginal tax bracket, a baby in 2007 would have saved the family about $1,500. While this may seem a lot, it may be disturbing for some to see the extent to which parents concern themselves with this issue in the delivery room. It has been the case for some doctors to induce birth prior to midnight on January 1 just so the family can get a bigger refund check in three months. (Most likely, there is also the issue of fraud where the doctor could merely backdate the birth.) Is this behavior optimal?
Assuming the parents care about their offspring to the same extent that they care about themselves, then one would expect them to act with more caution in disrupting a pregnancy for the mere purposes of a one-time income gain. On the cynical side, however, if they care about their offspring less than themselves, then some parents would be willing to engage in a relatively high degree of risk to the health of the child in order to obtain a bigger tax refund check.
For more on this phenomenon, check out a New York Times article on the topic last year. There is also some empirical economic evidence on this as well.
A similar issue is scheduled to take place 23 months from now with the estate tax. Under current law, it will be nonexistent in 2010, but will come back in full force in 2011. This could possibly lead to some difficult decisions having to be made in December 2010 regarding the value of one's living a few extra months or years relative to the financial gain to heirs of a zero estate tax bill.
Time Magazine's campaign blog had an interesting article today analyzing the role of the grassroots organization of the FairTax in Mike Huckabee's big victory on Thursday in Iowa. The article also provides a nice brief historical context for the FairTax, and is rather favorable of it. Here's a portion:
Mike Huckabee's victory in Iowa Thursday was a big victory also for the "Fair Tax," the radical revamping of the federal tax code that he endorses. And while Huckabee's Iowa win may be a one-off, one gets the feeling that the Fair Tax campaign will be with us for a while. The resurgent John McCain is mildly supportive of it as well. And the legions of Fair Tax fanatics aren't going anywhere.
The Fair Tax is a proposal to abolish the Internal Revenue Service, throw out all existing federal taxes and replace them with a 30% nationwide retail sales tax that would, it is hoped, raise about as much as income taxes, payroll taxes, excise taxes and the lot do now. You'll hear a lot of the Fair Taxers saying it's a 23% tax, which it is, if you think of it like an income tax. (No use getting bogged down in that here; I'll explain at the bottom of the post.)
Anyway, on the occasion of Huckabee triumph, I called up Leo Linbeck Jr., the Houston businessman who together with two friends launched the Fair Tax movement just over a decade ago. I'm not sure what I expected from the conversation--maybe a little gloating over the Iowa results, I guess. What I got was two hours of mostly fascinating discourse, ranging from tax theory to feudal nature of modern Washington D.C. to the ideas of philosopher/theologian Michael Novak.
The Fair Tax got started like this, Linbeck told me: Three old rich men in Houston talked over lunch in 1995 about what they could do to leave the country better off before they died. They hit on reforming the tax system, and in particular simplifying it, as a worthy goal. "I've been a beneficiary of the complexity of the tax code," is how Linbeck puts it.
While the Tax Foundation does not officially endorse the FairTax, it is nice to see tax reform on the agenda in the 2008 presidential election, regardless of who the candidates are and what tax reforms they are proposing.
For a less sympathetic view of the FairTax compared to this Time Magazine blog, here is a recent podcast we conducted with one of its biggest critics, Bruce Bartlett. Also, last year, we conducted a podcast with its leading academic supporter, Laurence Kotlikoff.l
It appears that the General Theory is on the president's reading list once again. Given that the economy appears to be headed for a slowdown this year, the Bush Administration is considering short-term tax relief as part of an "economic stimulus" package, according to an AP story today by Martin Crutsinger:
The Bush administration, faced with a deteriorating economy and a big jump in unemployment, said Friday it was considering an economic stimulus package that might include tax cuts to ward off a recession.
On Friday, the Labor Department reported that unemployment was at a two-year high of 5 percent in December, while employers clamped down on hiring for the month. The amount of new jobs employers added to their payrolls was at a four-year low.
Officials stressed that President Bush has not decided yet to offer a proposal but was looking at a variety of options with a plan possibly being unveiled around the time of his Jan. 28 State of the Union address.
"The president is always looking at options ... always talking to people and looking at data," Commerce Secretary Carlos Gutierrez said in an interview with The Associated Press.
...
White House spokesman Tony Fratto said tax cuts were an option being considered.
Bush in his first term included a tax refund of up to $300 per person to combat the impact of the 2001 recession. Private economists said another round of tax cuts would be the best approach to get money to people who would spend it.
Some suggested a one-year tax rebate of $500 might provide a sufficient shot-in-the-arm for the economy. But they stressed that the proposal would have to be passed quickly.
The extent to which short-run fiscal stimulus packages work in stabilization has been the subject of decades of research in macroeconomics leading researchers to draw differing conclusions. But we do know that rebate checks are not free. They cost revenue and are really no different than a spending program. And most economists on both the left and right would agree that rebate checks have little long-run Laffer Curve feedback effect. Finally, there is the administrative costs of sending out over 100 million checks.
The U.S. has seen many debates over what constitutes art, especially with regard to taxpayer-funded projects. This issue has come up in other countries, as well. Any government that treats art differently from other goods or professions with regard to taxing and spending policies will face the unanswerable question, What is art?
From Vertex, Inc.'s Sales Tax State Activity Update:
Thespian Turmoil - Film Acting is Not Art According to HMRC
At issue was where to tax acting services performed in New Zealand by a UK actor and supplied to a New Zealand production company.
The actor contended that the acting services she supplied should be taxed where performed as cultural, artistic or entertainment activities under Art 9(2)(c) EC Sixth VAT Directive (now Art 52(a) Directive 2006/112/EC). ...
The position of HMRC was that the services in question were not cultural, artistic or entertainment activities because they were supplied in connection with a film. Their contention was that the services had to be interpreted in the context in which they were delivered.
Acting services supplied for a film are fundamentally different from acting services supplied for a theatre production. Since an actor providing services for a film is not performing to an audience, unlike a theatre performance, it is not a cultural, artistic or entertainment activity.
The filming of an actor's role is, instead, part of a process that may lead to a cultural, artistic or entertainment experience in the form of a finished film. As a result, the acting service should fall under Art 9(1) EC Sixth VAT Directive (now Art 43 Directive 2006/113/EC) as a basic supply of a service. ...
The VAT Tribunal ruled that there were no fundamental differences between acting for a film and acting for a theatre production. Therefore, the supply is related to a cultural, artistic or entertainment activity under Art 9(2)9C) and taxed where performed which in this case is New Zealand.
Most people would argue that a government official is not qualified to decide what should be considered art. The only way to avoid having policymakers decide what counts as art, entertainment, or culture is to remove from the tax code all special provisions relating to these activities.
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