Taxes De-Coded: A Q & A with Rutgers–Camden Researcher Michael Hayes

For many Americans, a change in season means saying goodbye to winter and hello to perhaps the one thing more dreaded than a polar vortex: tax time. But while taxes personally affect most income-generating citizens, they are often little understood past the clockwork increases, deductions, and credits.

To dig a little deeper on current tax policy and its related issues, we check in with Michael Hayes, an assistant professor of public policy and administration at Rutgers University–Camden.

In his recent State of the Union address, President Barack Obama proposed several tax changes aiming to benefit middle-class taxpayers but increase costs for the wealthiest Americans. What is a proposed tax break or increase that stands out to you?

One proposed tax break for middle-class taxpayers offered by President Obama is expanding the current childcare tax credit. According to the White House website, the proposed child care tax credit would triple the maximum Child and Dependent Care Tax Credit for families with children under age five and who have incomes below $120,000.

What do you see as the positive or unintended consequences of this proposal?

One obvious benefit of this proposal is it reduces the financial burden of a parent who would prefer to remain in, or reenter the labor market after their child is born. This not only benefits the individual household, but it will benefit the overall economy via workplace productivity gains.

One potential issue, however, is how the tax credit is targeted, especially since childcare costs vary geographically and by household preferences.

Another one of President Obama’s proposals that is sure to prove popular with college students is the idea to make permanent the American Opportunity Tax Credit, which enables eligible college students to receive a maximum annual credit of $2,500 for qualified education expenses. What are your thoughts on this proposal?

Making the American Opportunity Tax Credit permanent will reduce uncertainty in the higher-education market. For example, college students will know that the tax credit will still be offered in the coming years. Reducing uncertainty will help potential college students make the right financial decision.

However, future research may want to examine who really benefits from this policy – the students or the higher-education institutions and businesses, such as colleges and college textbook publishers.

Tax policy has a major impact on households and firms. Any person recommending a specific or general change to tax policy needs to be mindful of this fact. With that said, one possible change in federal tax policy is “broadening the tax base” by reducing tax expenditures. The federal government subsidizes households and businesses via the tax code, and these subsidies are called tax expenditures.

What are some of these tax expenditures and what is their intended purpose?

Common tax expenditures include the exclusion of employer contributions for medical insurance, the exclusion for pension contributions and earnings, and the deductibility of mortgage interest on owner-occupied homes. There are numerous reasons why we have them. For example, there are possible benefits to society when households own their home, such as increased social capital.

What is the downside of these tax expenditures?

These tax expenditures result in the reduction of federal-government revenues. In addition, these tax expenditures may encourage unintended behaviors. For example, the mortgage interest deduction may encourage households to buy “too big of a home” because a larger mortgage will allow the household to deduct more from their taxable income. This may benefit the particular household in the short run, but if a member of the household loses his or her job, he or she may not be able to afford such a high monthly mortgage payment.

Michael Hayes’ research expertise includes public budgeting and finance, education policy, state and local tax policy, and public management. His latest research study, examining the differential effect of the No Child Left Behind Act of 2001 on states’ contributions to education funding in states with binding tax and expenditure limitations, will be published in the forthcoming issue of Public Budgeting & Finance. For more information, visit his online biography.

Tom McLaughlin
Rutgers University–Camden
Editorial/Media Specialist
(856) 225-6545
thomas.mclaughlin@camden.rutgers.edu