Effects of U.S. Tax Policy on Greenhouse Gas Emissions (2013) / Chapter Skim
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6 Greenhouse Gas Emissions and Broad-Based Tax Expenditures
6 Greenhouse Gas Emissions and Broad-Based Tax Expenditures
Pages 113-134
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From page 113... ...
tax incentives for the provision of health insurance. Among tax incentives for investment, the one that results in the largest revenue loss is the provision allowing firms to claim accelerated depreciation for investment in machinery and equipment under the Modified Accelerated Cost Recovery System (MACRS)
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From page 114... ...
2 Some economists believe that the ideal tax system is a consumption tax, which exempts the return to saving, instead of an income tax. Under a consumption tax, the mortgage interest deduction and the exclusion of employer-provided health insurance and health care would still be tax expenditures, but accelerated depreciation would not be.
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From page 115... ...
The ground rules for the modeling of broad-based tax expenditures were similar to those described in Chapter 2. The model calculated the impact of removing tax provisions on the economy and on GHG emissions.
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From page 116... ...
The simulations were performed keeping the budget deficit unchanged on a year-byyear basis. This was done by returning any revenues using two alternative assumptions about how the revenue from eliminating tax expenditure provisions was recycled: first, as lump-sum payments to households, and second, as an equal proportional reduction in all marginal tax rates applied to individual and corporate income.
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From page 117... ...
But in all cases except for accelerated depreciation, removing the tax preference and substituting lower tax rates raises total emissions, because the lower tax rates on labor and capital income raise national output. In the case of removal of the accelerated depreciation preference, national output also increases, because the capital stock, although smaller, is deployed more efficiently and lower tax rates raise saving and labor supply.
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From page 118... ...
National Output (NNP) -1.65 0.38 Capital Stock -2.54 -0.50 Labor Input -0.81 1.01 Coal Mining -2.93 -0.42 Electric Utilities -2.66 -0.64 Total GHG Emissions -2.06 -0.17 CO2 Emissions -1.98 -0.11 GHG Emission Intensity -0.34 -0.49 Source: Dale Jorgenson Associates, "Effects of Provisions in the Internal Revenue Code on Greenhouse Gas Emissions," Report to the Board on Science, Technology and Economic Policy of the National Academies, June 6, 2012.
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From page 119... ...
Higher fiscal deficits could raise interest rates and crowd out investment, while paying for the tax benefit through raising other tax rates or cutting spending could have other potentially harmful effects, depending on how taxes are raised or what types of spending are reduced. There are a number of channels through which accelerated depreciation could affect greenhouse gas emissions: 4 The Office of Tax Analysis at the U.S.
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From page 120... ...
The combination of these effects means that eliminating the accelerated depreciation preference could either increase or decrease GHG emissions. Additionally, policy makers will also be interested in knowing the extent to which changes in GHG emissions reflect changes in the level of national output (all things the same, higher output will be associated with more GHG emissions)
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From page 121... ...
It indicates that accelerated depreciation provides a significant boost to national output, largely due to an increased capital stock. The capital stock will eventually be 2.5 percent smaller than in the base case scenario if the preference were removed.
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From page 122... ...
Eliminating accelerated depreciation would in both recycling cases reduce the capital stock. However, the effect on capital stock would be partially offset and labor supply and national output would increase if the additional revenue were used to finance cuts in individual and corporate marginal tax rates.
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From page 123... ...
Description of Provisions The federal income tax provides significant tax incentives for investments in owner-occupied housing. First, although investment income actually received is generally taxable under the U.S.
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From page 124... ...
Taxpayers who do not itemize deductions on their tax returns receive no benefit from the deductibility of mortgage interest or state and local property taxes.8 Taxpayers with modest incomes who are in the 15 percent rate bracket receive a relatively small subsidy, compared with the benefit received by higher-income taxpayers in the 28 percent or 35 percent rate bracket. JCT reports that the 18 percent of tax returns with incomes of $100,000 and over received 78 percent of the benefits from the mortgage interest deduction and 73 percent of the benefits from the real estate tax deduction.
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From page 125... ...
Effects on Greenhouse Gas Emissions The mortgage interest deduction encourages a shift towards additional investment in owner-occupied housing at the expense of business-sector investment. This reallocation of investment reduces the overall efficiency of the capital stock, thereby lowering national output and reducing GHG emissions associated with higher production.
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From page 126... ...
It also captures the effects on national output and its composition from offsetting cuts in marginal tax rates that may accompany any reduction in housing tax preference as well as the effects of shifts in the composition of output that result from differences in energy intensity among industries (including the household sector)
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From page 127... ...
By contrast, using the revenues from eliminating the deductions to lower marginal tax rates on individual and corporate income would lead to substantial increases in the capital stock, labor input, and national output. The efficiency gain from an improved allocation of the capital stock causes national output to increase by about twice the increase in productive inputs.
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From page 128... ...
Conclusions: Housing Subsidies According to IGEM estimates, eliminating the tax subsidies for owneroccupied housing and using the revenue to lower marginal tax rates would improve the efficiency of allocation of the capital stock and increase national output. According to the modeling results, the impact on overall GHG emissions would be determined primarily by the overall economic reaction: If the provision increases GDP, then GHG emissions would change at about the same rate.
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From page 129... ...
on earnings.11 Including previously exempt fringe benefits in taxable income, without any compensating reduction in other taxes, raises the average effective tax rate on earnings. If the base broadening is accompanied, however, by a revenue 10 EPHI benefits are also excluded from the wage base for payroll taxes used to fund Social Security retirement and disability benefits and Medicare Hospital Insurance benefits.
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From page 130... ...
If in contrast, the value of EPHI benefits rises in proportion to the increase in wages, then eliminating the tax provisions that exclude EPHI from income tax increases the METR by the same amount as an equal revenue increase in the marginal tax rate on wages. Generally, therefore, there is no simple way to characterize how taxing EPHI benefits changes the METR on labor compensation and the consequent incentive to work.
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From page 131... ...
As a result, when EPHI benefits are made taxable and the revenue is used to provide lump-sum transfers to households, there is virtually no effect on the key variables that characterize the economy. But when the revenue from taxing EPHI benefits is used to lower marginal tax rates on individual and corporate income, output, capital stock, and labor supply all increase by more than 2 percent relative to baseline projections.
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From page 132... ...
National Output (NNP) -0.49 +0.98 Capital Stock -0.26 +1.14 Labor Input -0.51 +0.84 Coal Mining -0.78 +1.03 Electric Utilities -0.84 +0.61 Total GHG Emissions -0.74 +0.65 CO2 Emissions -0.71 +0.65 GHG Emission Intensity -0.36 -0.29 Source: Dale Jorgenson Associates, "Effects of Provisions in the Internal Revenue Code on Greenhouse Gas Emissions," Report to the Board on Science, Technology and Economic Policy of the National Academies, June 6, 2012.
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From page 133... ...
Conclusions: Health Subsidies Simulations for the committee found that eliminating the EPHI exemption would raise national output if offset by cuts in marginal tax rates. The estimates probably underestimate the distortionary effect of the health subsidies, so the impact on national output would probably be larger if the model could provide a more detailed representation.
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From page 134... ...
A second finding is that the effects on national output and GHG emissions can be significantly influenced by the way the revenues are recycled. The committee examined two revenue recycling mechanisms, lump-sum rebates and tax rate reductions.
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