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GLOSSARY

A
Accelerated depreciation: See depreciation.

Adjusted Gross Income (AGI): A measure of income used to determine a tax filing unit’s tax liability
(before subtracting personal exemptions and the standard or itemized deductions). AGI excludes
certain types of income received (e.g., municipal bond interest, most Social Security income) or pay-
ments made (e.g., alimony paid, IRA deductions, moving expenses). (See also taxable income.)

Affordable Care Act (ACA): See Patient Protection and Affordable Care Act (PPACA).
After-tax income: Total income of an individual or corporation minus all federal, state, and local tax-
es (e.g., federal income tax, Social Security tax).

Alternative minimum tax (AMT): The individual alternative minimum tax is a supplemental income
tax originally intended to ensure that high-income filers not take undue advantage of tax preferenc-
es to reduce or eliminate their tax liability. The most common “preference” items, however, are for
state and local tax deductions, personal exemptions, and miscellaneous itemized deductions—not
items normally thought of as preferences or shelters. The AMT exemption and tax bracket thresh-
olds are indexed for inflation, protecting many taxpayers from the tax, but rising real incomes make
more taxpayers subject to the AMT every year. There is also a corporate alternative minimum tax,
but few companies are subject to it.

AMT patch: For many years following enactment of the 2001 tax cuts, lawmakers repeatedly—but
only temporarily—raised the AMT’s rate bracket thresholds and exemption to offset the effects
of inflation. These ad hoc adjustments are sometimes referred to as the “patch,” because it was a
stopgap remedy for a basic design flaw—the fact that the AMT was not indexed for inflation, unlike
most other income tax provisions. Patch legislation also typically extended a temporary provision al-
lowing AMT taxpayers the full benefit of personal tax credits, such as the child and dependent care
tax credit. The American Taxpayer Relief Act of 2012 eliminated the need for the patch by perma-
nently raising the AMT exemption amount and indexing it, the AMT exemption phaseout threshold,
and AMT tax brackets for inflation beginning in 2013. (See also indexation of the tax system.)

American Taxpayer Relief Act of 2012 (ATRA): Permanently extended most provisions of the 2001
and 2003 tax acts (EGTRRA and JGTRRA) but generally allowed both acts to expire for taxpayers
with the highest incomes. In particular, the act maintained most reduced tax rates, expansion of the
child tax credit and EITC, and the American Opportunity credit for higher education. It also made
permanent reductions to the AMT and the estate tax.

Appropriation: Money a state or federal legislature designates for a specific purpose. Federal ap-
propriations are paid for by the US Department of the Treasury.

Automatic stabilizers: Features of government tax and transfer systems that temper the economy
when it overheats and provide economic stimulus when the economy slumps, without direct inter-
vention by policymakers.
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Average effective tax rate (ETR): A widely used measure of tax burdens, equal to tax paid divid-
ed by some measure of income. ETRs may be calculated with respect to a single tax, such as the
individual income tax, or with respect to a combination of taxes (e.g., the total of individual and
corporate income taxes, payroll taxes, excise taxes, and estate taxes). Furthermore, ETRs can differ,
depending on whether taxes are assigned based on statutory incidence (who remits the tax to the
government) or on economic incidence (who bears the actual economic cost of the tax). Note that
all Tax Policy Center estimates of ETRs are based on economic incidence. (See also tax incidence.)

B
Balanced budget: A budget in which revenues equal outlays. A balanced budget has neither a defi-
cit nor a surplus.

Base broadening: A term applied to efforts to expand the tax base, usually by eliminating deduc-
tions, exclusions, and other preferences from the tax base. A broader base allows more revenue to
be raised without increasing tax rates, or for rates to be cut without sacrificing revenues.

Bracket creep: The movement of taxpayers into higher tax brackets caused by inflation. Under a
progressive tax system, rising nominal income can move taxpayers into higher tax brackets, even if
their real income (after adjusting for inflation) remains constant. Congress indexed tax rate sched-
ules for inflation in the early 1980s to prevent general increases in the price level from causing
bracket creep. (See price indexing.)

Budget baseline: The baseline is the level of revenue (or spending) expected under a given set of
assumptions. Traditionally, Congress and the administration have used a “current law baseline” that
assumes that discretionary spending grows at the rate of inflation and mandatory spending and tax
revenues are determined by current law. In particular, this approach assumes that temporary tax
provisions will expire as scheduled. An alternative is a “current policy baseline,” which assumes that
temporary tax cuts are extended indefinitely and that temporarily delayed provisions never take ef-
fect. The Obama administration used the latter baseline during the years when the temporary 2001-
2003 tax cuts were in effect.

Budget resolution: A non-binding Congressional outline for federal spending and revenues for the
next fiscal year, including targets for the subsequent four fiscal years. A budget resolution does not
actually appropriate funds, but instead, sets goals and establishes tax and spending priorities. It
may include budget reconciliation instructions.

Budget scoring: The process of estimating the budgetary effects of proposed changes in tax and
expenditure policies and enacted legislation. The budget score represents the difference from base-
line revenues or spending.
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GLOSSARY

Bush tax cuts: A set of tax provisions that were originally enacted in the administration of Presi-
dent George W. Bush—mostly in 2001 and 2003. The first installment, the Economic Growth and
Taxpayer Relief and Reconciliation Act of 2001 (EGTRRA), cut individual income tax rates, phased
out the estate and gift tax, doubled the child tax credit, provided marriage penalty relief, expand-
ed retirement tax incentives, and temporarily raised the threshold for taxation under the individual
alternative minimum tax (AMT). The provisions of EGTRRA phased in slowly and al of them were
set to expire at the end of 2010. The Jobs and Growth and Taxpayer Relief and Reconciliation Act
of 2003 sped up many of the 2001 tax cuts, added cuts in the tax rates on long-term capital gains
and dividends, and again temporarily patched the AMT, but preserved the 2010 expiration date.
In succeeding years, Congress regularly adjusted AMT parameters to limit the impact of the alter-
native tax. In 2006, the Pension Protection Act made the retirement savings provisions of EGTRRA
permanent and In 2010, the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation
Act extended the Bush tax cuts through 2012 (along with several new tax cuts created by the Amer-
ican Recovery and Reinvestment Tax Act of 2009). Finally, the American Taxpayer Relief Act of 2012
made the Bush tax cuts permanent for all but the highest-income taxpayers. (See also AMT patch.)

C
Capital cost recovery: Income tax features intended to allow businesses to deduct over time the
costs of tangible capital assets that are used to produce income. It is similar to a depreciation al-
lowance, except that “depreciation” in principle relates the timing of the deductions to changes in
asset value over time. (See depreciation.)

Capital gains: The difference between the sale price and purchase price of capital assets net of
brokers’ fees and other costs. Capital gains are generally taxable upon sale (or “realization”). Long-
term gains, those realized after a year or longer, face lower tax rates (no more than 20 percent) than
short-term gains, which are taxed the same as earned income. High-income taxpayers must also pay
the Affordable Care Act’s net investment income tax, a 3.8 percent tax on capital gains and other
investment income above specified thresholds. Taxpayers can deduct up to $3,000 of net losses
(losses in excess of gains) each year against other income; taxpayers can carry over losses above
that amount and deduct them from future gains.

Charitable deductions: Deductions allowed for gifts to charity. Subject to certain limits, individual
taxpayers who itemize deductions and corporations are allowed to deduct gifts to charitable and
certain other nonprofit organizations. Among other reasons, the deduction is intended to subsidize
the activities of private organizations that provide viable alternatives to direct government pro-
grams. (See itemized deductions.)

Child and dependent care tax credit (CDCTC): A tax credit based on eligible child care expenses
incurred by taxpayers who are employed or in school. The credit varies with the expenses incurred,
the number of eligible children, and the taxpayer’s AGI. A separate exclusion is available for some
employer-provided child care.
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Child tax credit (CTC): A $1,000 tax credit for each of a family’s children under age 17. The credit is
partially refundable for filers with earnings over a $3,000 threshold—the refundable portion is limit-
ed to 15 percent of earnings above the threshold. (See refundable tax credit.)
Circuit-breakers: Mechanisms that provide relief for an individual’s property tax obligation on the
basis of the person’s age, income level, or disability.

Congressional Budget Office (CBO): A nonpartisan, congressional agency that gives Congress
budget and economic analyses and information. CBO was established by the Congressional Budget
and Impoundment Act of 1974 to provide Congress with its own agency to project and evaluate
federal budget issues.

Consumer price index: A measure of the average level of prices, inclusive of sales and excise taxes,
faced by urban households for a given “market basket” of consumer goods and services.
Consumption tax: Tax on goods or services. In the United States, most consumption taxes are levied
by states and local governments (as retail sales taxes), although the federal government does levy
some selective consumption taxes, called “excise taxes,” on items such as alcohol, tobacco prod-
ucts, and gasoline. The most common consumption tax overall is the value-added tax (VAT), used by
virtually all developed countries but not by the US.

Corporate income tax: A tax levied on corporate profits. A corporation’s taxable income is its total
receipts minus allowable expenses and capital depreciation. The top corporate income tax rate in
the US is 35 percent, higher than that in any other developed country.

D
Debt held by the public: The portion of the national debt held by entities other than the federal
government. Investors holding this debt include US citizens, state and local governments, the Fed-
eral Reserve, domestic private investors such as banks, and international investors such as foreign
nations.

Debt service: The amount needed to repay interest and principal on a debt over a period of time.
For an individual, this might be the amount they owe on student loans or a mortgage. For the feder-
al government, debt service is the interest paid on the national debt.

Deduction: A reduction in taxable income for certain expenses. Some deductions such as that
for contributions to an Individual Retirement Account (IRA) reduce AGI. Most deductions, such as
those for home mortgage interest and state and local taxes, are only available to those who itemize
deductions. About 70 percent of taxpayers choose not to itemize and instead claim the standard
deduction because it provides a greater tax benefit. Because tax rates increase with taxable income,
a dollar of deductions generally benefits a high-income taxpayer more than a low-income taxpayer.
Deductions cannot reduce taxable income below zero.
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GLOSSARY

Deficit: The difference between what the governments takes in (receipts) and spends (outlays)
during a year, typically either a fiscal year (October-September for the US government) or a calendar
year.

Defined benefit pension plan (DB plan): A retirement plan that guarantees a specified retirement
payment beginning at a certain age and after a specified period of service. Contributions to and
earnings in DB plans are exempt from both income and payroll taxes, and withdrawals are fully sub-
ject to federal income tax.

Defined contribution retirement plan (DC plan): A retirement program in which each employee
has an individual account that accumulates employee contributions, employer contributions, and
investment earnings. Contributions to DC plans and any increase in value are generally not includ-
ed in the taxable income of beneficiaries. Employer contributions are also exempt from payroll tax.
Withdrawals are fully taxable.

Dependent: An individual supported by a tax filer for more than half of a calendar year. Federal tax
law stipulates five tests to determine whether a filer may claim someone as a dependent and thus
qualify for an exemption: a relationship test, a joint return test, a citizen-or-resident test, an income
test, and a support test. In 2017, a tax filer can reduce taxable income by $4,050 for each depen-
dent exemption.

Depreciation: A measurement of the declining value of assets over time because of physical deteri-
oration or obsolescence. The actual rate at which an asset’s value falls is called economic deprecia-
tion, which depends on wear and tear and the rate of technological obsolescence. . In practice, tax
depreciation is calculated by a schedule of deductions, usually over the asset’s “useful life” specified
in the tax code through which the full cost of an asset can be written off. Accelerated depreciation
refers to a depreciation schedule that allows larger deductions in early years than would be expect-
ed due to economic depreciation. (See also Expensing.)

Discretionary spending: Spending decided upon by Congress through the annual appropriations
process.

Distortion: The economic cost of changes in behavior due to taxes, government benefits, monopo-
lies, and other forces that interfere with the otherwise-efficient operation of a market economy. For
example, employees might choose to work fewer hours because taxes reduce their after-tax wage.

Distribution table: A table that details how a proposal or policy affects the distribution of tax bur-
dens across income categories, demographic groups, or sets of taxpayers defined by other charac-
teristics. Alternative measures assess different aspects of distributional effects (see Measuring the
Distribution of Tax Changes).

Dividends: Profits distributed by a corporation to its shareholders. Under 2003 tax law, most divi-
dends are taxed at the same lower tax rates that apply to long-term capital gains.
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Double taxation of dividends: Most tax systems that have both corporate and individual income
taxes levy tax on corporate profits twice, once at the corporate level and again at the individual lev-
el when shareholders receive profits in the form of dividends or capital gains. The reduced tax rates
on capital gains and dividends are intended in part as an offset to double taxation. Other more
sweeping reform options would address double taxation by allowing shareholders credits against
personal taxes for tax levied at the corporate level (an “imputation system”) or by passing corpo-
rate profits through to shareholders, similar to the tax treatment of partnerships and S-corporations
(“corporate tax integration”).

Dynamic analysis: An approach to calculating how a tax proposal would affect the economy in the
short and long run by determining the policy’s macroeconomic effects. Unlike conventional (“static”)
analysis, which holds economic inputs and outputs constant, dynamic analysis predicts how a policy
would affect macroeconomic factors, such as consumption, investment, saving, and labor supply,
and uses those factor changes to forecast GDP and government revenues over a period of time.
Dynamic analysis can also be used for proposals affecting government spending and regulation.

Dynamic modeling: Computer simulation of how tax policy or tax reform affects the economy tak-
ing into account how individuals, households, or firms alter their work, saving, investment, or con-
sumption behavior, and how those effects feed back to affect tax revenues.
Dynamic scoring: See dynamic analysis.

E
Earned income tax credit (EITC): A refundable tax credit that supplements the earnings of low-in-
come workers. The credit is a fixed percentage of earnings up to a base level, remains constant over
a range above the base level (the “plateau”), and then phases out as income rises further. Those
income ranges depend on both the taxpayer’s filing status and number of children in the taxpayer’s
family. In contrast, the credit rate depends only on the number of children. Married couples with
three or more children receive the largest credit, a maximum of $ 6,318 in 2017. Childless workers
get the smallest credit, no more than $510 in 2017. Originally enacted in 1975, the EITC is now the
largest federal means-tested cash transfer program.

Economic Growth and Taxpayer Relief and Reconciliation Act of 2001 (EGTRRA): A tax bill
passed under the presidency of George W. Bush (and therefore often referred to as the “Bush tax
cut”) that reduced most tax rates, increased the child tax credit and made it partially refundable,
expanded tax-free retirement savings, reduced marriage penalties, increased the child and depen-
dent care tax credit, and phased out the estate tax. Most provisions were scheduled to phase in
slowly between 2001 and 2010, and then expire at the start of 2011. JGTRRA accelerated some of
the EGTRRA tax cuts and added others.
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GLOSSARY

Economic income: A very broad income concept that includes cash income from all sources, fringe
benefits, net realized capital gains, both cash and in-kind transfers, the employer’s share of payroll
taxes, and corporate income tax liability. The Treasury Department’s Office of Tax Analysis devel-
oped a similar measure in the 1980s and used it for distribution tables until 2000.

Economic Recovery Tax Act (ERTA): Tax legislation enacted in 1981 (and often referred to as the
“Reagan tax cut”) that significantly reduced income taxes on individuals and businesses. The Tax
Equity and Fiscal Responsibility Act (TEFRA) scaled back the cuts in 1982.

EGTRRA: See Economic Growth and Taxpayer Relief and Reconciliation Act of 2001.

Employer-sponsored health insurance: Health insurance offered by an employer to some or all em-
ployees. Employer contributions to health insurance plans are exempt from both income and payroll
taxes. Economists believe that workers accept lower wages in exchange for the valuable tax-free
fringe benefit. The exclusion from tax of employer-sponsored health insurance is the single biggest
tax expenditure.

Empowerment zone: A rural and urban geographic area of economic distress eligible for special
grants, business training, improved access to capital, tax benefits, and regulatory relief aimed at
encouraging economic development and greater opportunity.

Enterprise zone: A geographically targeted tax, expenditure, and regulatory inducement used by
state and local governments since the early 1980s and by the federal government since 1993. While
they differ in their specifics, all the programs provide development incentives in an attempt to en-
courage private investment and increase employment opportunities.
Entitlements: Payments to individuals, governments, or businesses which, under law, must be made
to all those eligible and for which funds do not have to be appropriated in advance. Major entitle-
ment programs include Social Security, Medicare, Medicaid, and Temporary Assistance to Needy
Families (TANF).

ERTA: See Economic Recovery Tax Act.

Estate tax: A tax levied on a person’s estate at the time of his or her death. The federal estate tax
applies only to large estates, those worth over $5.49 million for people dying in 2017 ($10.98 million
for married couples). No tax is owed on transfers to spouses or to charities and special provisions
apply to farms and small businesses. (See also Gift Tax and Inheritance Tax.)
Excise tax: A tax on specific goods and services, levied at federal, state, and local levels. The most
common excise taxes are on gasoline, alcohol, and tobacco products.

Expenditure: The purchase of a good or service.

Expensing: Allow businesses to immediately deduct the entire cost of a capital asset, rather than
claiming depreciation deductions over the useful life of the asset. (See also Depreciation.)
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Extenders: Temporary tax provisions that will expire if Congress does not act to extend them.

F
Federal poverty levels: See Poverty levels.

Federal fiscal year (FY): See Fiscal year.

Federal Reserve: The central bank of the United States that controls monetary policy. The Federal
Reserve System of the United States, also referred to as the Fed, is made up of 12 Federal Reserve
Banks throughout the country and is headed by a Board of Governors. The Fed controls monetary
policy by making open-market sales or purchases of government bonds and Treasury bills.

Filing status: Tax filers fall into one of five categories, depending on their marital status and family
structure. A single person without children files as a single; a single person with dependents who
maintains her own home files as a head of household; a married couple, with or without children,
files either as married filing joint or married filing separate; and a recent widow(er) may file as a
qualifying widow(er), which is the same, in effect, as married filing joint. The standard deductions,
bracket widths, and qualification criteria for certain credits and deductions vary by filing status.

Fiscal policy: The way in which the federal government can affect the economy through tax and
spending policies. Fiscal policy can boost economic activity, at least in the short run, through tax
cuts and increases in spending. Fiscal policy can slow down the economy through tax increases or
spending cuts.

Fiscal year: The government’s accounting period designated by the calendar year in which it ends.
The federal government’s fiscal year begins on October 1 and ends on September 30.

Flat tax: A proposal for tax reform that would replace the income tax system with a single-rate (or
flat-rate) tax on businesses and individuals, after an exempt amount. Many flat tax proposals are
designed to be consumption rather than income taxes (see VAT), many would retain politically sensi-
tive deductions such as for mortgage interest payments, and most are really not “flat” because they
grant an exemption at least for the first dollars of earnings.

Foreign tax credit: A credit that allows U.S. residents to subtract foreign income taxes paid from
the U.S. income tax due on income earned abroad.

G
Gift tax: A tax levied on gifts in excess of a specified threshold. In 2017, no tax is levied on annual
gifts of up to $14,000 per recipient; gifts in excess of the limit are taxable but no tax is due until life-
time taxable gifts total more than $5.49 million. Any tax still due must be remitted when the donor
dies and is incorporated into the decedent’s estate tax. (See also Estate tax.)
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Gini coefficient: A summary measure of how unequal is the distribution of income (or wealth or
other quantity) across a given population. It ranges from 0 (perfect equality) to 1 (perfect inequal-
ity); higher values thus indicate greater inequality. The coefficient is useful for comparing levels of
inequality over time or across populations. Note, however, that two populations may have the same
Gini coefficient and thus the same level of inequality overall, yet have differently shaped income
distributions.

Gramm-Rudman-Hollings law: A law enacted in 1985 requiring that budget deficits be brought
down to specified amounts and the budget be balanced by 1991; failure to meet those goals would
trigger automatic spending cuts. The law was replaced in 1990 with specific deficit reduction targets
(and pay-as-you-go rules) unrelated to actual size of the deficit, as it varied with economic condi-
tions. (See also Pay-as-you-go and caps.)

Gross domestic product (GDP): The total value of goods and services produced by the economy,
the sum of aggregate consumption, investment, government purchases, and exports, less the value
of imports.

H
Health savings account (HSA): A special tax-favored account for deposits made to cover current
and future health care expenses paid by the individual. Like defined contribution retirement plans,
contributions to HSAs and any earnings are generally deductible (or excluded from income if made
by an employer). Unlike DC plans, withdrawals from the account are also tax-free as long as they
are used to pay for medical expenses. Enacted in 2003 as part of legislation providing drug benefits
under Medicare, the tax preference is only available if the individual purchases a high-deductible
health insurance policy.

Highway trust fund: A federal trust fund created in 1956 to finance highway construction and cer-
tain other federal spending on transportation. The fund’s revenues and outlays are segregated from
the rest of the federal budget.

Horizontal equity: (See also Vertical equity.) The concept that people of equal well-being should
have the same tax burden.

Human capital: Knowledge and skills that people acquire through education, training, and experi-
ence.

I
Income: The amount of wages, interest, dividends, business income, transfer payments, and other
resources that an individual or household receives that can be used to purchase goods and services
or be saved for future purchases.
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Individual income tax: A tax on the income of an individual or household. In the US, a minimum
level of income is exempt from tax, and rates are progressive. Many spending-like programs (“tax
expenditures”) are administered through the income tax.

Indexation of the tax system: Annual adjustments to various parameters in the tax code to ac-
count for inflation and prevent bracket creep. Since 1981, many features of the federal individual
income tax, including personal exemptions and tax brackets, have been automatically indexed for
inflation based on changes in the Consumer Price Index. For instance, with 5 percent inflation, a
personal exemption of $1,000 would be raised to $1,050. More broadly, the term applies to all ef-
forts to adjust measures of income to account for the effects of price inflation.

Inheritance Tax: A tax imposed on the amount of gifts and bequests a taxpayer receives from a
person who dies. Currently the United States has no federal inheritance tax, but several states do.
Inheritance tax rates can differ, depending on the relationship of an heir to the decedent, with the
lowest rates applying to closer relatives such as spouses and children. (See also Estate Tax and Gift
Tax.)

Intragovernmental debt: The amount one part of the federal government owes to another part of
the federal government. This money is typically held in trust funds such as those for Social Security
and Medicare.

IRA (Individual Retirement Account): Retirement accounts funded by individuals through their own
contributions or by rolling over benefits earned under an employee-sponsored plan. An IRA is a kind
of defined contribution retirement account. In traditional IRAs, contributions and earnings are tax-
free, but withdrawals are taxable. In Roth IRAs, contributions are not deductible, but earnings and
withdrawals are exempt from income tax.

Itemized deductions: Particular kinds of expenses that taxpayers may use to reduce their taxable
income. The most common itemized deductions are for state and local taxes, mortgage interest
payments, charitable contributions, medical expenses larger than 10 percent of AGI, and certain
miscellaneous expenses. Individuals may opt to deduct these expenses or claim a standard deduc-
tion.

JGTRRA: See The Jobs and Growth Tax Relief Reconciliation Act of 2003.

The Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA): The 2003 tax act that
accelerated the phase-in of tax rate reductions scheduled under EGTRRA, reduced the taxation of
capital gains and dividends, accelerated increases in the child credit amount, and temporarily raised
the exemption for the alternative minimum tax (AMT). Most provisions were set to expire at the
end of 2010, but were first extended through 2012 and then generally made permanent for all but
high-income taxpayers by the American Taxpayer Relief Act of 2012. (See also Bush tax cuts and
American Taxpayer Relief Act.)
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Joint Committee on Taxation: A nonpartisan committee of the United States Congress charged
with assisting Members of Congress on tax legislation and related issues. The committee helps draft
legislative proposals, estimates the revenue effects of all tax legislation considered by the Congress,
and examines various aspects of US federal taxes.

L
Low-income housing credit: A tax credit given to investors for the costs of constructing and reha-
bilitating low-income housing. The credit is intended to encourage the acquisition, construction,
and/or rehabilitation of housing for low-income families. Credits are allocated to state housing
agencies based on state population. The agencies select qualifying projects and authorize credits
subject to statutory limits.

Mandatory spending: Expenditures on federal programs that are required by the statutory struc-
ture of the program, rather than by an annual appropriation. Examples are Social Security and
Medicare.

Marginal tax rate: The additional tax liability due on an additional dollar of income. It is a measure
of the effect of the tax system on incentives to work, save, and shelter income from tax. Provisions
such as the phaseout of tax credits can cause marginal tax rates to differ from statutory tax rates.

Marriage bonus: The reduction in tax that some married couples owe because they must file as a
couple rather than separately. Marriage bonuses result from the combination of treating a family as
a single tax unit and progressive tax rates. In general, couples in which spouses have quite different
incomes receive marriage bonuses. (See also Marriage penalty.)

Marriage penalty: The additional tax that some married couples pay because they must file as a
couple rather than separately. Marriage penalties result from the combination of treating a family as
a single tax unit and progressive tax rates. In general, couples in which spouses have similar incomes
incur marriage penalties. (See also Marriage bonus.)

Medicaid: A federal entitlement program that reimburses states for a portion of the costs associat-
ed with providing acute and long-term care services to certain low-income individuals. States de-
termine which services and categories of people, beyond the minimum required by federal law, to
cover. States also establish payment rates for providers and administer the program.

Medicare Part A: The part of Medicare that covers hospital services, skilled nursing facility services,
and some home health care. Anyone over age 65 who is eligible for Social Security and persons
under age 65 who have received Social Security disability payments for two years are eligible. Par-
ticipants pay no premiums for Part A coverage. (See also Medicare Part B and Medicare Part D.)
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Medicare Part B: Supplementary medical insurance for Medicare beneficiaries; provides physician
services and other ambulatory care (such as outpatient hospital services and tests). Beneficiaries
must pay a premium to join; premiums, which are higher for high-income enrollees, cover about
one-fourth program costs. All persons over the age of 65 and other Medicare beneficiaries can en-
roll. (See also Medicare Part A and Medicare Part D.)

Medicare Part D: Also called the “Medicare prescription drug benefit,” Part D provides Medicare
beneficiaries with supplementary medical insurance for prescription drugs. Enrollees pay an addi-
tional premium for Part D coverage. (See also Medicare Part A and Medicare Part B.)

Monetary policy: A set of actions taken by the Federal Reserve (or Fed) to influence the economy.
Monetary policy can be used to control inflation, stimulate growth, or slow down the economy. The
Fed influences the economy by making open-market sales or purchases of government bonds and
Treasury bills. The rate at which the Fed sells or purchases government bonds determines the feder-
al funds rate, or the rate at which banks can borrow funds from one another overnight.

Moral hazard: The incentive created by insurance (explicit or implicit) to engage in behaviors that
raise the expected cost of insurance. The moral aspect refers to the observation that unscrupulous
people covered by fire insurance were sometimes tempted to engage in arson. However, less insid-
ious behavior, such as using more health services when they are covered by insurance, is also cov-
ered by the term.

National debt: The cumulative amount that the federal government owes its creditors. Total US
federal debt is the sum of debt held by the public and intragovernmental debt, and is approximate-
ly equal to deficits accumulated over the years.

Nominal income: A measure of income that is not adjusted for inflation. That is, nominal income is
expressed in current dollars. (See also real income.)

Non-filer: A person or household who does not file an individual income tax return. Most non-filers
do not work; many are elderly. Others simply fail to comply with the legal requirement that they file
annual tax returns.

O
OASDI (Old Age, Survivors, and Disability Insurance): The Social Security programs that pay
monthly benefits to retired workers and their spouses and children, to survivors of deceased work-
ers, and to disabled workers and their spouses and children.
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Off-budget: Federal government expenditures on certain programs, agencies, and government

sponsored enterprises that are accounted for separately in the budget to prevent spending changes
or avoid a conflict of interest. Examples “off-budget” programs include Social Security and the Post
Office. The Federal Reserve is an “off-budget” government agency in order to maintain its autono-
my when making policy decisions.

Office of Management and Budget (OMB): An office of the executive branch that develops the
president’s budget and evaluates the effectiveness of the executive branch’s programs and policies.

On-budget: Government programs that are generally subject to annual appropriations, and there-
fore susceptible to spending cuts or increases.

The Omnibus Reconciliation Act of 1987: Legislation that attempted to decrease the budget defi-
cit through tax increases and expenditure decreases.

The Omnibus Budget and Reconciliation Act of 1990 (OBRA90): This act increased excise and
payroll taxes, added a 31 percent income tax bracket, and introduced temporary high-income
phase-outs for personal exemptions and itemized deductions. OBRA93 made these changes perma-
nent.

The Omnibus Budget and Reconciliation Act of 1993 (OBRA93): This act introduced 36 percent
and 39.6 percent income tax brackets, repealed the wage cap on Medicare payroll taxes, increased
the portion of Social Security benefits subject to income taxation for those with higher incomes,
made more workers with children eligible for the Earned Income Tax Credit and increased their ben-
efits, and made permanent the temporary high-income phase-outs of the personal exemption and
itemized deductions. Overall, the bill was focused on deficit reduction.

Out year: In budget parlance, a future year beyond the period over which budget costs are tallied
(in recent years, after a five5- or ten10-year period over which costs are estimated).

Outlay: The amount of federal spending on goods and services. (See also Expenditures.)

P
Patient Protection and Affordable Care Act (PPACA): Also known as the Affordable Care Act
(ACA), the act included a variety of health-related provisions that extended health insurance cov-
erage to many uninsured Americans, implemented measures designed to reduce health care costs,
imposed requirements on health providers and insurance companies, and levied a broad range of
taxes to help pay for expanded healthcare.
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Pay-as-you-go system: A retirement system in which benefits for current retirees are funded by
taxes on today’s workers in return for the implicit promise that those workers will receive retirement
benefits funded by future workers. Social Security operates largely on this system.

Pay-as-you-go and caps: As part of the 1990 Budget Enforcement Act, spending subject to ap-
propriation was made subject to a separate series of annual caps. Pay-as-you-go rules (often called
PAYGO) covered the rest of the budget: changes to mandatory spending and revenues could not
together increase the deficit in any bill when pay-as-you-go rules were enforced.

PAYGO: See Pay-as-you-go and caps.

Payroll taxes: Taxes imposed on employers, employees, or both that are levied on some or all of
workers’ earnings. Employers and employees each pay Social Security taxes equal to 6.2 percent of
all employee earnings up to a cap ($127,200 for 2017 and indexed for wage growth) and Medicare
taxes of 1.45 percent on all earnings with no cap. Those taxes are referred to by the names of their
authorizing acts: FICA (Federal Insurance Contributions Act) or SECA (Self-Employment Contribu-
tions Act), depending on the worker’s employment status. Employers also pay State and Federal
Unemployment Taxes (SUTA and FUTA) that cover the costs of unemployment insurance.

Personal exemption: A per-person amount of income that is shielded from income tax. In calculat-
ing taxable income, tax filers may subtract the value of the personal exemption times the number of
people in the tax unit. The personal exemption—$4,050 in 2017—is indexed for inflation to main-
tain its real value over time.

Poverty guidelines: Income levels used to determine eligibility for participation in means-tested
federal programs. The guidelines equal a base amount for each household plus a constant addition-
al amount for each household member. The guidelines are indexed annually to the Consumer Price
Index. (See also poverty levels.)

Poverty levels: (Also called “poverty thresholds.”) The level of pre-tax cash income below which a
family is considered to be officially “poor.” Thresholds vary by family size, age of head, and number
of children. When established in 1965, the thresholds were set at three times the cost of a mini-
mally adequate diet and indexed annually for changes in the price of food. The basis for indexing
changed to the Consumer Price Index for all goods and services in 1969. (See also poverty guide-
lines.)

Price indexing: (See also Wage indexing.). Adjusting monetary values by the change over time in
prices. For example, many parameters in the federal individual income tax system are price-indexed
annually. A prominent proposal to reform Social Security would price-index earnings to compute
benefits, instead of the current wage indexing.

Progressive tax: A tax that claims a larger percentage of the income of higher-income households
than from lower-income households. (See also regressive tax.)
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Progressivity: A measure of how tax burdens increase with income. A progressive tax claims a pro-
portionately larger share of income from higher-income than from lower-income taxpayers. Con-
versely, a regressive tax levies a larger share of income from lower-income households than from
higher-income ones. Taxes that claim the same percentage of income from all taxpayers are termed
“proportional.”

Property tax: A tax based on the value of property owned by an individual or household. In the
United States, most property taxes are levied locally.

Public debt: See “debt held by the public.”

R
Real income: The value of income after accounting for inflation. Real income is typically converted
in terms of a particular year’s prices—for example, a table may show income in 2010 dollars, mean-
ing that the incomes are shown in terms of purchasing power in 2010. (See also nominal income.)

Receipts: Government revenue from taxes, fees, fines, and miscellaneous other sources.
Reconciliation: A process created by the Congressional Budget Act of 1974, which allows for legisla-
tion to be fast-tracked for approval. If Congress opts to go through the “reconciliation” process, the
House and Senate must set spending and tax targets. In recent years, the reconciliation process has
been used to tack pieces of legislation onto the year-end Omnibus Spending Bill.

Refund anticipation loan: An immediate cash loan from a private lender, typically a commercial tax
preparer, backed the by the anticipated tax refund claimed on the borrower’s tax return.
Refundable tax credit: A tax credit that is payable even when it exceeds an individual’s tax liability.
Tax credits generally may be used only to reduce positive tax liability, and are therefore limited to
the amount of tax the individual otherwise would owe. Unlike other tax credits, the refundable por-
tion of a tax credit is scored as an outlay in government budget accounts—that is, it is treated the
same as direct spending. (See, for example, earned income tax credit.)

Regressive tax: A tax that claims a larger percentage of the income of lower-income households
than of higher-income households. (See also progressive tax.)

Revenue: Federal government revenue consists of taxes, mandatory fees, licenses, fines, and Feder-
al Reserve earnings.

Revenue-neutral: A term applied to tax proposals in which provisions that raise revenues offset pro-
visions that lose revenues so the proposal has no net effect on revenue.
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S
SSDI (Social Security Disability Insurance): Social insurance that provides benefits to disabled
individuals who have the required years of work covered by Social Ssecurity and can no longer work.
(See also OASDI.)

SSI (Supplemental Security Income): Provides a floor of protection as cash for those who become
disabled or reach age 65 and have very low incomes and assets.

Stagflation: The combination of stagnant growth and high inflation, a situation that occurred in the
United States during the 1970s.

Standard deduction: A deduction that taxpayers may claim on their tax returns in lieu of itemizing
deductions such as charitable contributions, mortgage interest, or state and local taxes. Typically,
taxpayers with modest deductible amounts that could be itemized choose to take the standard de-
duction. Single filers, heads of household, and married couples filing jointly have different standard
deductions. Roughly two-thirds of tax filers claim a standard deduction. (See also itemized deduc-
tions.)

Stimulus: An effort to increase growth in an economy during a recession by using monetary poli-
cy, fiscal policy, or both. Fiscal policy uses tax cuts and increased government spending to boost
economic growth. Monetary policy can also stimulate economic growth by reducing interest rates
through purchases of government bonds.

Sunset: Provision of a tax act that terminates or repeals other parts of the act on a certain date un-
less legislation is passed to extend them.

T
Tax incidence: A measure of the actual burden of a tax. Tax incidence may deviate from statutory
tax liability because the imposition of a tax may change pre-tax prices. For example, retailers remit
sales taxes, but those taxes raise the prices faced by consumers, who ultimately bear much of the
burden of the tax.

Taxable income: The final income amount used to calculate tax liability. Taxable income equals ad-
justed gross income (AGI) less personal exemptions and the standard or itemized deductions.

Tax-after-credits: A filer’s calculated, final tax liability after all credits (e.g., the earned income tax
credit, the child credit, the child and dependent care tax credit, and the foreign tax credit) have
been applied. If this amount is less than taxes paid via withholding or estimated tax payments, the
taxpayer receives the difference as a refund. If the amount exceeds taxes paid, the taxpayer must
remit the difference as a final payment.
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Tax burden: The total cost of taxation borne by a household or individual. The burden includes not
only the costs of taxes paid directly but also those taxes paid indirectly through lower wages or a
reduced return on an investment. For example, in addition to the employee portion of payroll taxes,
a worker may also bear the employer’s share in the form of lower compensation.

Tax credit: A reduction in tax liability for specific expenses such as for child care or retirement
savings. Unlike deductions, which reduce taxable income, a tax credit reduces tax liability dollar for
dollar. Nonrefundable credits may only offset positive tax liability; in contrast, if a refundable credit
exceeds the taxpayer’s tax liability, the taxpayer receives the excess as a refund. (See also refund-
able tax credit.)

Tax expenditure: A revenue loss attributable to a provision of federal tax laws that allows a special
exclusion, exemption, or deduction from gross income or provides a special credit, preferential tax
rate, or deferral of tax liability. Tax expenditures often result from tax provisions used to promote
particular activities in place of direct subsidies.

Tax filing threshold: The level of income at which filing units of specific size and filing status first
owe a tax before considering tax credits. The amount varies with filing status, allowable adjust-
ments, deductions, and exemptions. Tax credits can further increase the amount of untaxed income.

Tax incidence: A measure of the actual burden of a tax. Tax incidence may deviate from statutory
tax liability because the imposition of a tax may change pre-tax prices. For example, retailers remit
sales taxes, but those taxes raise the prices faced by consumers, who ultimately bear much of the
burden of the tax.

Tax liability: The amount of total taxes owed after application of all tax credits.

Tax preferences: Special provisions of tax laws that are designed to further policy objectives dif-
ferent from tax policy objectives. In the income tax, such provisions include special deductions and
exclusions, special rates, and tax credits. For example, the deduction for home mortgage interest is
intended to encourage home ownership, rather than to properly reflect ability to pay income tax.

Territorial system: An income tax that generally applies only to economic activity within a country.
A territorial tax is intended to apply only to income earned by residents and businesses from activi-
ties within the country. In practice, to mitigate tax avoidance territorial systems do apply to income
earned outside the country in certain circumstances.

TRA86 (Tax Reform Act of 1986): Revenue-neutral legislation passed in 1986 that simplified the
tax code, lowered marginal tax rates, and closed corporate loopholes.

TRA97 (Taxpayer Relief Act of 1997): Tax legislation passed in 1997 that reduced capital gains tax
rates, introduced the child credit, created education credits, raised the estate tax exemption level,
created Roth IRAs, and increased the contribution limit for traditional IRAs.
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U
Unemployment insurance (or Unemployment compensation): A government program that pro-
vides cash benefits to some jobless workers for limited periods. Supervised by the federal govern-
ment, the state-run programs are funded by payroll taxes states impose on employers.

Value-added tax (VAT): A form of consumption tax collected from businesses based on the value
each firm adds to a product (rather than, say, gross sales). VATs are almost universal outside the
United States.

Vertical equity: A value judgment about whether the net tax burden on people at different levels of
well-being is appropriate. (See also horizontal equity.)