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Who cares about data?

Author: Sarah Gillespie

| Posted: April 11th, 2014

 

 

school

Data-driven programs. The U.S. Department of Education has set a high bar for measuring and reporting program performance and it hasn’t gone unnoticed.  The strict requirements even begged the question “Can they be this obsessed with data?”  from one Washington Post education reporter. But ask those hard at work in communities like Northeast DC’s Kenilworth-Parkside neighborhood of the DC Promise Neighborhood Initiative (DCPNI), and they’ll tell you it’s not just the federal government or researchers that care about data.

DCPNI is one of 12 Promise Neighborhoods implementation grantees, the Obama Administration’s effort to build a continuum of cradle-to-college solutions for children and youth that put great schools at the center.  Grantees are required to collect data on 15 specific performance indicators for the communities they serve, ranging from how many young children have a place to go when they are sick to how many parents talk to their high school students about the importance of college and career readiness.

Data-driven communities. Last month, DCPNI invited its partners, community members, and other stakeholders to get a first glimpse at the data behind their efforts.  The data told the story both the strengths and needs of children and youth in their neighborhood—highlighting how they compare to other neighborhoods and what that means for their future and DCPNI’s role.  DCPNI showed their community that though the data’s collection and reporting requirements are demanding, understanding and acting on it is the first step to charting a better path for their children and youth.

One required Promise Neighborhoods indicators is the rate of chronic absenteeism, defined as the number of students who are absent 10-percent or more of the days they are enrolled in school. Research shows chronic absenteeism is a key predictor of negative outcomes for children and youth, including poor academic achievement, school drop-out, poor physical and mental health, and even adulthood poverty.

DCPNI found that the rate of chronic absenteeism across all grades in its target schools during the 2012-2013 school year was 32.6%--three times the 10% national average. This data hit the message home to residents and stakeholders that decreasing chronic absenteeism is a key to improving outcomes for students in the Promise Neighborhood. DCPNI shared it goals to change this trajectory through programs such as attendance campaigns, inviting input and collaboration from the community and partners.

Data-driven results. "Data for the sake of data is useless,” DCPNI’s Director of Data and Evaluation, Isaac Castillo, told community members and partners. “We have to share the data and act on it to make the data meaningful.”  DCPNI understands that being “obsessed with data” is not just about reporting statistics for government and researchers. The data belong to the community—and the community, government and researchers can work together to find data-driven solutions to get results for their children and youth.

Photo from Shutterstock.

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Improving seniors’ lives with new technology

Author: Peter Tatian

| Posted: April 10th, 2014

 

 

seniorPhone

Aging populations in the United States, Japan, and many other countries will need future support and services that current public programs may not be equipped to handle. In Japan, where seniors are expected to reach almost 40 percent of the population by 2050, new technology is helping the country address the challenges of an aging society—and may provide lessons for us as well.

Last week, the Washington Innovation Network sponsored an event highlighting advances in information and communication technology (ICT) and their application to helping seniors live healthy and productive lives—what is referred to as "Silver ICT." The event, supported by the US-Japan Research Institute and Japan Science and Technology Agency, featured products that can support seniors in a variety of environments and enable them to safely age in place—that is, to grow older in their own homes and not in retirement communities.

Toshio Obi from Waseda University (Tokyo)—chair of the OECD-APEC Silver ICT project and coauthor of Aging Society and ICT—spoke at the event and introduced a number of technologies being developed by Japanese companies. Fujitsu's Raku-Raku smartphone, for example, is a touchscreen phone designed to be easier for seniors to use. SECOM's My Spoon robot is a device that makes it possible for physically handicapped people to eat on their own.

A demonstration project being carried out in Otsuki City (near Mt. Fuji) is testing Silver ICT ideas on a municipal scale. The project has three main components: e-Agriculture (many seniors in the area are engaged in farming), e-Health, and e-Tourism. In the e-Agriculture effort, for example, producers are connected electronically to warehouse and distribution outlets to increase market access, allowing more seniors to remain economically productive. A full report on the Otsuki project will be released later this spring.

Silver ICT still faces many barriers to wide-scale adoption, as Majd Alwan, director of LeadingAge's Center for Aging Services Technologies, explained at the event. He cited the lack of awareness of available technologies among both potential users and service providers, variable evidence on return on investment, and the need for sustainable business models as current impediments. Nevertheless, Alwan emphasized the number of products that are being used today, including electronic health records, telehealth systems, and medication management solutions. He advocated moving from pilot projects to large scale demonstration efforts and collecting more data on performance and results.

In the United States, seniors will make up about 20 percent of the population by 2050. Using technology to meet their needs may help them live more independently and self-sufficiently, enhance the quality of their lives, and lower the stresses being placed on the healthcare system. Further international collaboration in this area can benefit all countries in providing for a better quality of life for their aging populations.

The Raku-Raku smartphone is designed to be easier for seniors to use. Photo courtesy of Fujitsu. 

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Keep investing in transit. It’s good for low-income drivers too.

Author: Rolf Pendall

| Posted: April 10th, 2014

 

 

dto_transit

With access to cars, many low-income families would live in better neighborhoods, get more stable jobs, and earn more, as my recent study with Evelyn Blumenberg and Casey Dawkins has shown. This is why it’s important to increase the affordability and reliability of car access for low-income households.

But this doesn’t mean we ought to shift our attention and investment away from improving transit, enhancing walkability, and increasing the diversity and density of cities. In fact, all these efforts can help relieve pressure on low-income Americans’ transportation spending even when they own cars.

In 2011, about a third of urban households in the lowest fifth of earners got by without their own car*, according to the Consumer Expenditure Survey. The average household in the poorest fifth spends as much of its income on transportation—32 percent—as the typical American household pays for housing. But the single largest expenditure for the poorest households isn’t a car; it’s gasoline, adding up to 12 percent of the average the average poor household's income*.

Households in the poorest fifth who had cars also spent about as much on auto insurance—$800 a year—as those in the second-poorest fifth. On a per-car basis, they paid the same amount as everyone else to insure cars with blue-book values a fraction of that of better-off households. Even poor households without cars took about a third of their trips in 2001 either by borrowing a car or riding with a household who had one.

These numbers strengthen the argument that investing in transit and walkability is important for low-income families. Of course many low-income households are carless, and many others need options for family members who can’t drive or can’t get access to the one car they do have. But if we reinforce transit, we support higher-density housing, jobs, and retail.

With these “trip generators” closer and more mixed together, we all drive less—and shorter trips help low-income drivers in the same way they help everyone—but with a much bigger impact on their household finances. Drivers don’t need to buy as much gas or pay as much for insurance (which costs more when you drive more). They’re less likely to get into accidents because their trip speeds are lower, and driving less means spending less on routine maintenance and major repairs.

And then there’s time: almost all the households in our study were single mothers and their kids. Their lives are complicated enough even when they have cars and live close to their destinations. Every additional mile they have to drive is an additional mile where something can go wrong: a missed appointment with a job counselor or a few minutes late to work or day-care pickup.

Investments including transit that support density and land-use diversity not only give these households more options and improve their cities, but also can save time by bringing people closer to the things they need.

Despite all of that, many low-income families could be greatly supported with access to a car. More on that in my next blog post.

Photo by Lionel Foster, Urban Institute. *Amended since posting.

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Seven tax issues facing small businesses

Author: Donald Marron

| Posted: April 9th, 2014

 

 

CapitolFlag

Today I had the chance to testify before the House Small Business Committee on the many tax issues facing small business. Here are my opening remarks. You can find my full testimony here.

America’s tax system is needlessly complex, economically harmful, and often unfair. Despite recent revenue gains, it likely will not raise enough money to pay the government’s future bills. The time is thus ripe for wholesale tax reform. Such reform could have far-reaching effects, including on small business. To help you evaluate those effects, I’d like to make seven points about the tax issues facing small business.

  1. Tax compliance places a large burden on small businesses, both in the aggregate and relative to large businesses. 
    The Internal Revenue Service estimates that businesses with less than $1 million in revenue bear almost two-thirds of business compliance costs. Those costs are much larger, relative to revenues or assets, for small firms than for big ones.
  2. Small businesses are more likely to underpay their taxes.
    Because they often deal in cash and engage in transactions that are not reported to the IRS, small businesses can understate their revenues and overstate their expenses and thus underpay their taxes. Some underpayment is inadvertent, reflecting the difficulty of complying with our complex tax code, and some is intentional. High compliance costs disadvantage responsible small businesses, while the greater opportunity to underpay taxes advantages less responsible ones.
  3. The current tax code offers small businesses several advantages over larger ones.
    Provisions such as Section 179 expensing, cash accounting, graduated corporate tax rates, and special capital gains taxes benefit businesses that are small in terms of investment, income, or assets.
  4. Several of those advantages expired at the end of last year and thus are part of the current “tax extenders” debate.
    These provisions include expanded eligibility for Section 179 expensing and larger capital gains exclusions for investments in qualifying small businesses. Allowing these provisions to expire and then retroactively resuscitating them is a terrible way to make tax policy. If Congress believes these provisions are beneficial, they should be in place well before the start of the year, so businesses can make investment and funding decisions without needless uncertainty.
  5. Many small businesses also benefit from the opportunity to organize as pass-through entities such as S corporations, limited liability companies, partnerships, and sole proprietorships.
    These structures all avoid the double taxation that applies to income earned by C corporations. Some large businesses adopt these forms as well, and account for a substantial fraction of pass-through economic activity. Policymakers should take care not to assume that all pass-throughs are small businesses.
  6. Tax reform could recalibrate the tradeoff between structuring as a pass-through or as a C corporation. Many policymakers and analysts have proposed revenue-neutral business reforms that would lower the corporate tax rate while reducing tax breaks. Such reforms would likely favor C corporations over pass-throughs, since all companies could lose tax benefits while only C corporations would benefit from lower corporate tax rates.
  7. Tax reform could shift the relative tax burdens on small and large businesses.
    Some tax reforms would reduce or eliminate tax benefits aimed at small businesses, such as graduated corporate rates. Other reforms—e.g., lengthening depreciation and amortization schedules for investments or advertising but allowing safe harbors for small amounts—would increase the relative advantage that small businesses enjoy. The net effect of tax reform will thus depend on the details and may vary among businesses of different sizes, industries, and organizational forms. It also depends on the degree to which lawmakers use reform as an opportunity to reduce compliance burdens on small businesses.

Capitol Photo, Shutterstock

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How to improve services for crime victims

Author: Janine Zweig and Jennifer Yahner

| Posted: April 9th, 2014

It’s National Crime Victims’ Rights Week, and communities around the country are holding events to honor and promote the rights of crime victims. As researchers, we know that victim services can be critical to meeting the unique needs of those who have been violated.

Crime victims may not always realize it, but they are entitled to assistance when they begin the process of recovery. As they try to move forward, victims can draw support from a number of services, including safety and crisis intervention, individual advocacy to meet the variety of victims’ needs and case management, emotional support, legal advocacy, child advocacy, and even financial compensation.

But the evidence shows that a majority of crime victims do not receive such assistance. From 1993 to 2009, fewer than 1 in 10 victims of serious violent crime—including rape, sexual assault, robbery, and aggravated assault—received assistance from a victim services agency. Victims of less serious crimes, including simple assault and property crime, were even less likely to seek services.

Whether a victim reports the crime to police can be a key factor in getting services. From 2000 to 2009, a larger portion of violent crime victims who reported the crime to law enforcement received victim services (14 percent) than did those who did not report the crime (4 percent).

Although many victims don’t access services, the support is out there. In fact, crime victim services have grown exponentially in the past 30 years, with nearly every city in the country now offering some type of assistance, and numerous victim resource centers available by phone and online.

Research on the effectiveness of crime victim services is still in its infancy, but a major new effort sponsored by the federal Office for Victims of Crime is focused on narrowing the divide between research and practice. Bridging the Gap: Integrating Crime Victim Services Research and Practice is an effort led by the National Center for Victims of Crime, in partnership with the Urban Institute and the Justice Research and Statistics Association. This multifaceted project involves a comprehensive review of past efforts to bridge the gap, nationwide surveys of researchers and practitioners, and case studies of the most promising strategies for integrating crime victim services and research.

As researchers, we share a common goal with those who work on the ground in victim services: to help crime victims recover and move on with their lives to the best of their abilities. But we recognize that our approach is more scientific—focusing on which services have the greatest effect for the greatest number. Practitioners emphasize crime victims as unique individuals, and focus on delivery of what they know works best based on years in the field.

Both approaches are valid and critical to progress, but until researchers and practitioners work more cohesively, the gap between victim services and research will continue to limit our nation’s response to crime victims.

With the Bridging the Gap project and other recent efforts like the Researcher-Practitioner Partnerships Study, we are moving toward a more unified approach. By joining forces and sharing our collective knowledge, we get closer to the day when every crime victim receives appropriate services to meet their needs, no matter the circumstances.

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The revitalization of American central cities: fact or fiction?

Author: Eric Burnstein and Megan Gallagher

| Posted: April 8th, 2014

We're grateful to our smart and thoughtful readers for pointing out our errors in assembling these data. We've posted amended text, charts, and conclusions immediately below. The original post appears at the bottom for those who wish to compare the changes. Our apologies. 

Despite the damage wrought by the mortgage crisis of 2008 and the ensuing Great Recession, the general narrative has been that an increasing number of young, educated, and (largely) white people are moving back into urban neighborhoods, bringing their tastes, lifestyles, and salaries along with them. Cities as diverse as Los Angeles, DC, Houston, Atlanta, Seattle, and Detroit are in the process of building or planning new rail transport, while formerly blighted urban neighborhoods are seeing new investment, rising property values, and increasing numbers of white, educated residents.

Respectively called revitalization or gentrification, this trend is fraught with contention between those who applaud these changes, and those who see them as harmful to the older residents of the affected neighborhoods.

But is this narrative driven by a handful of hipsters in Brooklyn and San Francisco or by urban revitalization trends in multiple places?

To figure that out, we examined a few indicators of demographic change for a group of 10 mid- to large-sized cities in 2000 and 2012. We selected the cities based on their reputations for being vital or attractive places and for their geographic diversity.  A few—Austin for example—has drawn job seekers through a strong economy and thriving cultural scene.  Pittsburgh, on the other hand, is often seen as a strong example of economic revitalization in the rust belt. While they do not represent the country as a whole, these cities do provide a starting point for a discussion.

What we found was that, despite the popularity of the revitalization narrative, the city-level indicators presented here provide mixed evidence that gentrification on the neighborhood level is affecting demographics in these cities overall.

Pop

The number of people in the “hipster” or “young professional” age group of 20 to 35 has increased  in all 10 selected cities, although not as much as we may be inclined to believe. Charlotte and Washington, D.C. have seen the highest levels of growth, with increases of 27.5% and 20.3% respectively in the 20-35 cohort.

Both of these cities have relatively resilient economies based on large government, academic, and commercial employers. However, other economic draw locations such as Atlanta and Denver have seen increases by relatively modest 5.4% and 7.8% respectively.

The college-educated population in cities is going up

BA

The broad increase in the number of college-educated people in these cities lends some support to the notion that “professionals” are moving into (or staying in) cities. If this is true, they could be pushing out other residents at a higher rate due to increased housing costs and a demand for more living space. While the sheer numbers of college-educated people are increasing, they continue to represent a minority in cities.

Are more families with children living in cities?

Families

Key to the discussion of neighborhood change and sustainability is the number of families with children choosing to live in central cities. While table 3 does show a decline in the number of families with children in half the selected cities, the other half shows growth, including a remarkable 21.5 percent increase in Austin and 38.3 percent in Charlotte.

However, this indicator on its own does not point to educated families choosing the city. In their recent article, William Sander and William A. Testa found that, despite a relatively high number of parents with school-aged kids living in the central cities, college-educated parents overwhelmingly choose the suburbs.

Gentrification isn’t the only trend shaping cities

We know that revitalization is happening in the neighborhoods of many American cities. But what the numbers here tell us is that gentrification is not the only change these cities are seeing, and in many cases, may not be the dominant trend, even in healthy cities.

In any case, population increases, decreases, and compositional changes are likely to have important implications for neighborhood amenities and community institutions. It may be that increases in college-educated residents result in increasing demands for better or different educational opportunities for children in central cities or that quality schools encourage college-educated residents to settle down in central cities.

_____________________________________________________________________________________

Thanks to the sharp eye of one of our readers, we've become aware of a technical error in our calculations for this post.  We are updating the numbers now, and some of the conclusions will change.  An updated version of this post appears above.

Despite the damage wrought by the mortgage crisis of 2008 and the ensuing Great Recession, the general narrative has been that an increasing number of young, educated, and (largely) white people are moving back into urban neighborhoods, bringing their tastes, lifestyles, and salaries along with them. Cities as diverse as Los Angeles, DC, Houston, Atlanta, Seattle, and Detroit are in the process of building or planning new rail transport, while formerly blighted urban neighborhoods are seeing new investment, rising property values, and increasing numbers of white, educated residents.

This trend, whether it’s known as revitalization or gentrification, is fraught with contention between those who applaud these changes, and those who see them as harmful to the older residents of the affected neighborhoods.

But is this narrative driven by a handful of hipsters in Brooklyn and San Francisco or by urban revitalization trends in multiple places?

To figure that out, we examined a few indicators of demographic change for a group of 10 mid- to large-sized cities in 2000 and 2012. We selected the cities based on their reputations for being vital or attractive places and for their geographic diversity.  A few—Austin for example—has drawn job seekers through a strong economy and thriving cultural scene.  Pittsburgh, on the other hand, is often seen as a strong example of economic revitalization in the rust belt. While they do not represent the country as a whole, these cities do provide a starting point for a discussion.

What we found was that, despite the popularity of the revitalization narrative, the city-level indicators presented here provide little evidence that gentrification on the neighborhood level is affecting demographics in these cities overall.

More young adults are moving out than moving in

Population

Surprisingly, the number of people in the “hipster” or “young professional” age group of 20 to 35 has declined in 8 of the 10 selected cities. While some young people certainly are moving into urban neighborhoods, more are leaving. They may be moving to the generally more affordable suburbs or farther afield.

Cities that have seen growth in this cohort—Washington, DC, and Charlotte—both have relatively resilient economies based on large government, academic, and commercial employers. However, the population of young professionals in Austin, another economic draw location, has declined.

The college-educated population in cities is going up

Education

The broad increase in the number of college-educated people in these cities lends some support to the notion that “professionals” are moving into (or staying in) cities. If this is true, they could be pushing out other residents at a higher rate due to increased housing costs and a demand for more living space, accounting for the overall decline in young adults. While the sheer numbers of college-educated people are increasing, they continue to represent a minority in cities.

Are more families with children living in cities?

Families

Key to the discussion of neighborhood change and sustainability is the number of families with children choosing to live in central cities. While table 3 does show a decline in the number of families with children in half the selected cities, the other half shows growth, including a remarkable 21.5 percent increase in Austin and 38.3 percent in Charlotte.

However, this indicator on its own does not point to educated families choosing the city. In their recent article, William Sander and William A. Testa found that, despite a relatively high number of parents with school-aged kids living in the central cities, college-educated parents overwhelmingly choose the suburbs.

Gentrification isn’t the only trend shaping cities

We know that revitalization is happening in the neighborhoods of many American cities. But what the numbers here tell us is that gentrification is not the only change these cities are seeing, and in many cases, may not be the dominant trend, even in healthy cities.

In any case, population increases, decreases, and compositional changes are likely to have important implications for neighborhood amenities and community institutions. It may be that increases in college-educated residents result in increasing demands for better or different educational opportunities for children in central cities or that quality schools encourage college-educated residents to settle down in central cities.

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Why it’s so hard to get federal transit support

Author: Kate Lowe and Sandra Rosenbloom

| Posted: April 7th, 2014

 

 

massTransit

Mass transit supporters argue that the federal government has a strong bias for highways over transit since the federal funding split is about 80/20. But competition for federal transit funds is not a level playing field either, and new rules seem unlikely to change that.

Regions and applicant agencies face intense competition under “New Starts”, a major federal program for transit infrastructure. The Federal Transit Administration (FTA) generally considers the extent and reliability of local financial support for projects to be as important as the benefits projects actually bring.

Congress and the FTA have continually changed how they evaluate projects and the data that applications require. Because some applicants have fewer resources to carry out calculations, they are at an inherent disadvantage. All applicants devote substantial time and resources to calculating benefits, but generally high benefits ratings may not improve the odds of getting an award. The extent of local financial support seems to carry substantial weight no matter what other metrics FTA uses.

Changing the rules
In 2013, the Federal Transit Administration issued new rules to simplify this process and also to incorporate a range of additional or secondary benefits from rail projects. A research brief, by Sandra Rosenbloom and me, covers the newest changes in more detail. Rail proponents have argued that previous evaluations did not allow applicants to claim many indirect benefits from rail investments, such as creating denser land use and fostering a greater sense of community. Under the new rules, applicants may claim indirect reductions in vehicle miles traveled as a benefit.  And, simpler metrics for mobility benefits could theoretically help small or underfunded agencies to compete more effectively.

But if federal awards are driven by the availability of local financial resources more than project benefits, these new ways of measuring project benefits may have little impact. An in-depth study of projects from FY 1998 to FY 2011 showed that a project’s local financing had a statistically significant relationship with winning federal funds, but a project’s benefits (as rated by the FTA) did not. Thus, if local funding remains the criterion in effect, the Federal Transit Administration is still less likely to fund projects proposed by transit agencies with high debt, older vehicles, or limited resources. Because local business and political leaders often prioritize economic development, projects with secure local financial support—and subsequently federal funds—may tend to be based more on economic development aspirations than on public transportation needs.

Changing the rules without changing the game
The new rules may not level the playing field.  Federal money may go to elite-favored projects because those projects could garner local resources while cost-effective projects that improve public transportation fail to receive adequate financial ratings or even enter the federal pipeline at all.

Instead of constantly changing the rules, we could re-think the game by expanding federal support for operating costs and transit agency capacity. Increased transit frequency, speed, and reliability could attract new riders while improving access to opportunities and improving quality of life for vulnerable households. Incremental enhancements that improve the quality of existing transit service, coupled with federal support for operating costs, would be a more equitable and potentially more effective federal approach to improve public transportation.

Transit image from Shutterstock.

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Why are disability benefit rates so different across small areas?

Author: Stephan Lindner

| Posted: April 4th, 2014

Social Security Disability Insurance (DI) is designed to—and does— provide crucial support to individuals with disabilities (in 2012, $120 billion went to nine million people), though not everyone who receives it is truly unable to work, making the program a target for reform.

What do we know about who receives DI? It’s an often overlooked aspect of the program, but participation is highly concentrated in southern states. And even within states, some counties have many people on DI, while neighboring counties do not.

Such sharp differences across small geographic areas are puzzling: What could explain them? Solving that puzzle could lead to meaningful reform and policies that are more closely tailored to people’s actual needs.

disabilityCounties-02

As the map shows, almost all counties in which more than 10 percent of the adult population receives DI are in southern states. The 10 counties with the highest DI beneficiary rates—more than one in seven people—are in just three states: Kentucky, Virginia, and West Virginia (see Table 1). The 10 counties with the lowest DI beneficiary rates tend to be in western states like Colorado, Wyoming, or Idaho (see Table 2).

Note, however, that four of these counties are in Virginia, a state with some of the highest and lowest DI beneficiary rates in the country. Although Virginia is an extreme example, every state with counties with very high rates of DI beneficiaries also has a couple of counties with a moderate or low number of people on DI. Conversely, some counties in states with generally low DI beneficiary rates have a high number of people on the program.

What contributes to these geographical differences in DI participation rates? We don’t know for sure, but here are some possible explanations:

  •  Prevalence of disabilities: Disability rates are generally higher in the South and Southeast, creating a higher need for DI in these regions.
  • Economic conditions: Some of the sharp differences across counties could be a result of economic conditions. For instance, all of the top counties displayed in the table have large coal mining industries. As coal prices plummeted in the 1980s and threw the industry in a long-lasting crisis, DI beneficiary rates in these regions skyrocketed.
  • State policies: Sharp differences in DI participation rates between adjacent states like Kansas and Missouri could stem from differences in state policies for other safety net programs like the Supplemental Nutrition Assistance Program.
  • Determination of DI applications: Caseworkers in field offices assess that state’s DI applications. We do know that caseworkers often decide about identical claims very differently.
  • Knowledge about the program: DI is complicated. Knowledge about the program might differ across regions, which could influence application decisions. Evidence that this might be the case comes from the Earned Income Tax Credit, where knowledge about program details differs greatly even across small areas.

We just don’t know exactly how these (or other) factors influence DI beneficiary rates across small geographical areas, but gaining a better understanding could lead to better policies. For example, if different areas have different interpretations of who can and cannot work, then clearer federal guidelines may promote a more equitable program administration.

Alternatively, if counties with similar industrial bases have very different DI rates, then those counties with low rates could serve as a model of how to accommodate workers with disabilities in other industries, reducing the inflow into the disability program and keeping more people in the workforce.

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The corporate income tax: internationalize it or kill it

Author: Howard Gleckman

| Posted: April 4th, 2014

In an important new paper, Eric Toder of the Tax Policy Center and Alan Viard of the American Enterprise Institute say that corporate tax reforms now being debated in Congress fall far short of solving the widespread problems with the levy. Rather than merely lowering rates and tinkering with tax rules for U.S.- based multi-national corporations, as President Obama and many members of Congress have proposed, Toder and Viard argue that the corporate system needs what they call “major surgery.”

In a paper funded by the Peter G. Peterson Foundation, they propose two alternatives: Either build a tax based on a broad international agreement on how to allocate corporate income among countries, or kill the corporate income tax entirely and replace it with a direct tax on shareholders. In such a system, capital gains would be taxed as they accrue rather than when they are realized upon the sale of shares.

Toder and Viard have both been around Washington a long time and neither has any illusions about the political and technical challenges of either change. But, they argue, the policy options currently on the table “fail to resolve the fundamental contradictions in the current corporate income tax.”

The corporate tax has many well-known shortcomings. Two of the biggest: It’s inability to respond to both the explosion of international commerce  and the growing share of corporate income produced with  intellectual property.  Because the U.S. tax on multinational corporations is based on  corporate residence and income source—economic concepts that increasingly lack clear meaning in the real world—it is relatively simple for firms to manipulate the law to reduce their tax liability.

They argue that current reform proposals could improve matters on the margin, but can’t  resolve these basic contradictions. Neither would the extreme options of either taxing accrued income of U.S. multinationals on a world-wide basis or exempting foreign-source income from tax.

World-wide taxation might prevent U.S. multinationals from shifting reported income to low-tax countries, but it would also place them at a competitive disadvantage if other countries don’t impose similar rules on their multinationals.  A pure territorial tax that exempts all foreign-source income would make U.S. multinationals more competitive, but would encourage them to shift investments and reported income overseas.

What to do? As Viard and Toder see it, there are two options. Neither is perfect but both address the problems a single country has in imposing unilateral tax rules on global entities.

The first would encourage the United States to seek an agreement with other countries on a uniform rule for allocating corporate income among jurisdictions. For instance, countries could apportion income by formula, or agree to tax income from intangibles (such as patents) based on the location of sales.   The base erosion and profit shifting (BEPS) project at the OECD, undertaken at the request of the G-20, is exploring ways countries can cooperate to reduce tax avoidance by multinationals. But the OECD has not yet addressed the basic issue of how to allocate profits of multinationals.

Alternatively,  the U.S. could scrap its corporate income tax entirely for publicly-traded companies. U.S. shareholders would be taxed directly at ordinary income tax rates on their dividends and accrued gains, with a deduction for accrued losses.  The tax would be based only on the residence of the shareholder, not of the corporation or on where it earned its income.  Owners of closely-held businesses would pay individual income tax on their firm’s profits,  just as partnerships and S corporations are taxed  today.

While this design is simple, it raises many technical issues: What about shares held by tax-exempt investors such as charitable organizations or qualified retirement plans? Today, they  indirectly pay corporate income tax but in this new model they’d pay no tax at all on these shares.  How do you allocated profits among multiple classes of stock? What happens to existing business tax preferences, which would disappear for publicly-traded corporations but could remain in place for other businesses? While Eric and Alan suggest some solutions, they  acknowledge these are difficult issues.

Finally, there is the cost. TPC estimates that shifting to a shareholder tax would reduce federal revenues by $168 billion at 2015 income levels. How does Congress make up that lost revenue?

Viard and Toder have come up with some creative solutions to a knotty problem. At the very least, they’ve given tax wonks something to talk about. And, with luck, they may help convince lawmakers to break out of today’s non-productive corporate tax debate.

They are discussing their recommendations at a panel discussion this morning at AEI. You can link to the Webcast here.

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