Policy
Monetary Policy
Fed policy makers took an important yet incremental step in March, when the Federal Open Market Committee (FOMC) excluded the word “patient” from its forward guidance, spurring speculation that a move to tighten is increasingly imminent. But the committee said in its March meeting statement that this change is no indication that it has decided on the timing of the first hike in the short-term federal funds rate since June 2006. The FOMC also reaffirmed that it is unlikely to raise its target range for the rate at its April meeting.
Moreover, Fed chair Janet Yellen told Congress on Feb. 24 that the Fed is unlikely to raise rates for “at least the next couple of FOMC meetings.” Our view remains that we are unlikely to see a change in monetary policy before June.
The FOMC recently stated that if the economy grows faster than expected, rate increases are likely to occur sooner than previously indicated. However, recent economic data do not support a scenario of faster-than-expected growth. The FOMC monitors a wide range of indicators, including labor market conditions, household spending, business investment, imports and exports, inflation and the housing sector, among other measures. Compared with its January statement that “economic activities have been expanding at a solid pace,” the FOMC said in March that “economic growth has moderated somewhat” and “export growth has weakened.”
Inflation, however, picked up a little in February as measured by the CPI after the transitory effects of lower oil prices diminished. But the AIER inflation scorecard, on balance, suggests falling inflationary pressure in the months ahead.
All in all, although the FOMC dropped the word “patient” in its forward guidance, the mixed growth readings suggest that a rate rise will likely occur later rather than sooner. More important, the pace of interest rate increases and when the Fed stops tightening will be critical for economic growth and financial market stability. As the anticipated move approaches, more clarification on these issues will better prepare markets to cope with a changing monetary policy environment.
Fiscal Policy
According to the Congressional Budget Office, individual income taxes totaled $1,395 billion, or 46 percent of total federal revenues of $3,021 billion in 2014. Social insurance taxes totaled $1,024 billion, or 34 percent of the total, while corporate taxes reached $321 billion, or 11 percent. These three areas account for over 90 percent of federal tax revenues and are either directly or indirectly attributable to consumers (Chart 3).
Debates about tax policy bring up many concerns: efficiency, progressivity, industrial policy, social policy, or simply “fairness,” to name a few. Recent debates about income inequality have addressed the use of the tax code for wealth redistribution. While a full understanding of tax policy and its potential impact on these issues is beyond the scope of this report, it is important to establish a baseline knowledge of the facts regarding the current tax system.
Breaking the federal individual income tax payment data into income groups highlights three interesting points. First, as of 2011, the latest year for which data on taxes paid by income groups are available, the top 20 percent of filers by income paid 88 percent of the total federal income tax collection. Filers in the 40th to 80th percentile paid a total of 18.2 percent of federal income taxes. The bottom 40 percent were net recipients of federal support through programs such as the federal earned income tax credit (shown in the chart as negative numbers in 2011). These programs totaled approximately 6.2 percent of federal tax receipts (Chart 4).
The second point is that shares of federal tax payments have fallen for all income groups except the top 20 percent of filers.
Third, the top 1 percent of filers paid 35.4 percent of federal income taxes, more than one third of the total. However, that share has fallen from a peak of 41.8 percent in 2008.
This spotlight on the individual tax burden by income group is just one aspect for evaluating federal tax structure. These data do not consider the amount or type of income earned by these groups. Neither is there any consideration of the tax breaks that many filers receive, what is referred to as the tax expenditure budget. These include the mortgage interest tax deduction that also affects filers of different income levels. Furthermore, there is no consideration as to any intended policy goals or effectiveness. Yet, as the next election cycle begins to gather steam, it is important for voters to understand some of the facts in the tax policy debate.
