Federal Income Taxation Chapter 8 Tax Expenditures (Muni-Bonds) Professors Wells Presentation:

Federal Income Taxation
Chapter 8 Tax Expenditures (Muni-Bonds)
Professors Wells
September 30, 2015
Tax Exempt Interest
p. 519
Code §103 – exclusion from gross income for interest on state
and local debt obligations.
Economic effect: reduce the amount of interest payable by the
state/local govt. obligor.
Note the leakage for this gross income exclusion between (1)
benefit to local govt and (2) cost to U.S. Treasury. Tax
Expenditure cost is $23.1 billion.
2 U.S. Constitutional Authority to Tax
Muni Bond Interest?
p. 520
Would taxation of muni-bond interest by U.S. Government be
Consider the rights of states as being impaired if federal taxation
Cf., South Carolina v. Baker (p. 521) that muni-bond interest is
taxed if bonds are not in “registered” form. Code §§103(b)(3) &
149. Why this rule?
3 Private Activity Bonds, etc.
Code §§141-150
Use of muni-bonds (1) for government functions and (2) to assist
private industry (by acting as intermediary).
Code §148 re “arbitrage” bonds.
4 Sale of Home
§121 excludes gain on sale of home of up to $250,000 ($500,000 for
married filing jointly)
The benefits of this exclusion arguably changes taxpayer behavior on
where they have their wealth. Is this a good thing?
The Tax Expenditure cost of this benefit is $17.5 billion.
5 Dividend Income
§61(a)(7) treats dividends as part of gross income
§1(h)(11) provides a preferential tax rate for dividends and capital
gains. The Tax Expenditure estimate for this benefit is $65.9 billion.
The Warren Buffet rule. Why should this form of income be taxed
preferentially over ordinary income? See p. 1144 for upside down
subsidy implications.
6 Tax Expenditure Budget
What is a “tax expenditure”?
- deviations from the norm for the measurement of economic
income (both positive and negative amounts)
What is the “tax expenditure budget”?
What is the starting point for measuring the deviation from true
Appropriations without the budget process?
Use “dynamic scoring”?