Global Airlines Issue Warning Over Trade Tensions

(From Reuters)

Growing tension over international trade could damage the airline industry and the world economy, global airlines and aviation executives warned on Sunday.

“Any measures that reduce trade and probably consequently limit passenger travel are bad news,” Alexandre de Juniac, director general of the International Air Transport Association, told Reuters at IATA’s annual meeting in Sydney. The group represents most of the world’s main airlines

“We always get concerned when you start to see tensions elevate around global trade and free trade,” American Airlines Group (AAL.O) Chief Executive Doug Parker said. American has not seen any effect yet on revenues, he said.

The uncertainty could curb demand for the business travel, a key driver of profits for the airline industry, Gloria Guevara Manzo, chief executive of the World Travel and Tourism Council (WTTC).

Planemakers Boeing (BA.N) and Airbus (AIR.PA) echoed that the uncertainty was bad for business and said free trade helped to drive economic growth, creating jobs. Airbus said the aviation industry existed because people could travel freely and markets were open.

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Mexico-U.S. tariff spat could sink NAFTA, says Mexican industry sector

An escalating tariff dispute between Mexico and the United States could put an end to the North American Free Trade Agreement , the Institute for Industrial Development and Economic Growth said on Sunday. In its latest report, titled “The 2018 Challenge: Rebuilding the Vision of Mexico,” the IDIC said the country must brace for the possible death of NAFTA, the nearly 25-year trade deal between Canada, Mexico and the United States.

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Yes, there really is a tax break for upper-income graduate students and Congress won’t let it expire – AEI – American Enterprise Institute: Freedom, Opportunity, Enterprise

In an earlier Evidence Speaks post this year, Susan Dynarski and Judith Scott-Clayton summarized important research showing that federal tax benefits for college tuition have had no measurable impact on increasing college-going behavior.[1] Moreover, they note that the benefits are numerous, overlapping and complicated. Yet for all their flaws, these tax breaks enjoy such strong support from lawmakers that even the oddest one, which quietly expires each year, is always revived in a last-minute bill just in time for the tax filing season. The tuition and fees deduction (“the deduction”) was recently extended for a seventh time in an omnibus budget bill in February.[2] Out of all the tuition tax benefits the government offers, this one should be relatively easy to let go because of whom it unintentionally targets.

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Here is how the deduction works. Tax filers can deduct up to $4,000 of tuition and fees paid for higher education in the tax year. It is an “above-the-line” deduction, meaning filers can claim it without having to itemize deductions. As a deduction, filers earn a benefit equal to their marginal tax rate. The maximum benefit any filer could extract from the deduction is $880, the top marginal tax rate of those who are eligible (22 percent) times $4,000. There is no limit to the number of times a filer can claim the deduction, so long as he has incurred tuition expenses, and it does not matter what type of credential he pursues. There is, however, an income limit. Taxpayers with adjusted gross incomes above $80,000 ($160,000 for joint filers) cannot claim it.

There is nothing odd about those terms per se, but they interact with other tax benefits the government offers for tuition such that only upper-income graduate students benefit from the deduction. First, undergraduates, while eligible for the deduction, don’t claim it because a different tax credit only for undergraduates is more beneficial: the American Opportunity Tax Credit, which is worth up to $2,500 in tax relief for filers earning up to $90,000 ($180,000 for joint filers).[3] Tax filers can claim only one tuition tax benefit although they usually qualify for more than one. Second, graduate students with lower and middle incomes are also eligible for the deduction, but they can claim the $2,000 Lifetime Learning Credit, which almost always delivers a bigger tax break than the tuition and fees deduction.[4] But the Lifetime Learning credit has a lower income cut-off than the deduction. Those earning over $66,000 ($132,000 for joint filers) in 2017 cannot claim it.[5]

That’s how the deduction ends up targeting upper-income graduate students. While graduate students would always obtain a larger benefit from the Lifetime Learning Credit, they cannot claim it if they earn more than $66,000 ($132,000 for joint filers). They can, however, claim the deduction until their earnings exceed $80,000 ($160,000 for joint filers). Thus a narrow band of graduate students, those earning between the income limits for the two benefits, are the only students who would claim the deduction. At those levels, their incomes are higher than the incomes of about 80 percent of U.S. households.[6] Of course, tax filers can unintentionally claim a less generous benefit if they are eligible for more than one, such as an undergraduate claiming the deduction when she was eligible for the American Opportunity Tax Credit, which does happen.[7]

What the data say about eligible students

Using a representative sample of graduate students in 2011-12, Kim Dancy of New America and I estimated that just 8 percent of graduate students would benefit from the deduction. Meanwhile, 64 percent of graduate students would benefit most from the Lifetime Learning Credit. The rest of graduate students (28 percent) were ineligible for any tax benefit because they have no taxable income, their tuition was fully covered by grants and scholarships, or their earnings were too high.[8] The analysis assumes that tax filers claim the benefit that provides them with the largest tax reduction if they qualify for more than one. These numbers have likely shifted in recent years, with even fewer students benefiting from the deduction, because Congress has increased the earnings cap for the Lifetime Learning Credit to account for inflation but left the limits for the deduction unchanged.

We also estimated the average benefit graduate students would claim through the deduction for the 2011-12 academic year. At $621, it was smaller than the $859 average benefit that filers eligible for the Lifetime Learning Credit could claim.[9] Due to small sample sizes, however, we were unable to reliably assess important characteristics of filers eligible for the deduction, such as field of study.

The deduction didn’t start out as a graduate school tax break

As is often the case in public policy, lawmakers did not set out explicitly to provide a tax break to upper-income graduate students. In fact, graduate students were never the target group for the tuition tax breaks; undergraduates were always the focus. Although graduate students have been eligible for the tax benefits since their inception, changes to the policies over the years have left the deduction benefiting upper-income graduate students alone.

Prior to mid-1990s, the federal government did not offer widely-available tax breaks for college tuition. The idea first gained prominence when President Clinton proposed a $10,000 deduction for college tuition as part of his “Middle-Class Bill of Rights” reelection platform.[10] After critics noted that a deduction would provide more help to families in higher tax brackets, Clinton added a separate tax credit for the first two years of college to his proposal to provide more even benefits.[11] Congress adopted the president’s idea for the credit in 1997, naming it the Hope Tax Credit, but rejected the additional proposal for a $10,000 deduction. They instead replaced that proposal with a separate credit for “lifelong learning” (i.e., the Lifetime Learning Credit) that families could claim for education after the first two years of college, including graduate school.[12]

Thus, President Clinton’s original idea for a deduction and a credit was replaced with two credits, the Hope Tax Credit and the Lifetime Learning Tax Credit. In keeping with their original purpose to provide middle-class tax relief, Congress capped income eligibility for both benefits at $55,000 ($100,000 for joint filers) in 1997.[13]

With these two tax credits on the books, the idea of a deduction for tuition would be unnecessary and redundant, yet Congress later decided to add one anyway. Seemingly out of nowhere, lawmakers included a $4,000 deduction for tuition and fees in the Economic Growth and Tax Relief Reconciliation Act of 2001, the sweeping bill that included President Bush’s campaign proposal to cut marginal tax rates.[14]

The deduction differed from the two initial tax credits in a key way, which partially explains why lawmakers added it. Families earning up to $80,000 ($160,000 for joint filers) would be eligible as of 2004. That was significantly higher than the income cutoff for the Hope and Lifetime Learning Credits at the time and would therefore offer tax benefits to families with incomes arguably well above middle class. But why not just raise the income limits on the existing credits then? Because creating the new deduction was a way to restrict costs relative to expanding the existing Lifetime Learning Credit in terms of forgone revenue to the government. Recall that the value of the deduction is worth the amount deducted times the marginal tax rate, which at the time it was created would have been $1,120 at the most.[15] That is about half the maximum value of the Lifetime Learning credit.[16]

In other words, the deduction was a way to let upper-income families into the college tax benefit club on the cheap. It also ensured their benefits would be smaller than those of the middle-class families, who were eligible for the credits.

At the time it was created, the deduction was as much an undergraduate benefit as a graduate one. Upper-income families would claim it for tuition paid in pursuit of either degree. According to my analysis referenced earlier, about the same share of graduate students as undergraduates qualified for it prior to 2009.[17] But in 2009, Congress would make it pointless for almost any undergraduate to claim the deduction. That year, lawmakers replaced the Hope Credit with the American Opportunity Tax Credit, which provided larger benefits than the deduction with an income cutoff even higher than the deduction. With upper-income undergraduates now qualifying for American Opportunity Tax Credit, graduate students became the only group left who could benefit from the original tuition and fees deduction.

Conclusion

While Congress never decided to directly create a special tax break for upper-income graduate students alone, opting to extend the deduction year after year is effectively the same thing. The latest one-year extension, which made the deduction available for the 2017 tax year, cost the government over $200 million in forgone revenue.[18]

At a time when an undergraduate education feels financially out of reach for so many families, it’s fair to ask why Congress continues to spend these resources on students who have already earned an undergraduate degree. Moreover, these students earn a median household income of $102,000, according to my analysis.[19] There does not appear to be a good answer to that question other than inertia. Lawmakers have always extended the benefit so they continue to extend it. They may not realize, however, that it no longer benefits undergraduate students.

All of the tax benefits may be a policy failure for not increasing enrollment or being overly complex, but at least those for undergraduates put more money in the pockets of low- and middle-income families working toward their first degree. Today, the deduction does neither. It helps those who already have an undergraduate degree and earn high incomes to boot. While its cost in terms of forgone revenue are relatively modest, those resources would be better spent on aid that encourages students to enroll in and complete an undergraduate degree.

Footnotes

[1] Sue Dynarski and Judith Scott-Clayton, “The Tax Benefits for Education Don’t Increase Education,” Brookings Institution, April 2018, https://www.brookings.edu/research/the-tax-benefits-for-education-dont-increase-education/.
[2] Bipartisan Budget Act of 2018, Public Law 115–123, § 40203 (2018).
[3] Internal Revenue Service, “Instructions for Form 8863, Education Credits (American Opportunity and Lifetime Learning Credits) (2017),” https://www.irs.gov/pub/irs-pdf/i8863.pdf.
[4] There are some circumstances when the deduction might produce a larger benefit than the Lifetime Learning Credit if a filer paid tuition and fees below $4,000 and he is in the highest tax bracket of those eligible for the deduction. For example, a filer in the 22% tax bracket who deducts $3,000 in expenses receives a $660 tax reduction; under the Lifetime Learning credit his benefit would be $600.
[5] Ibid.
[6] Author’s calculation using the American Community Survey, 2016.
[7] Government Accountability Office, “Improved Tax Information Could Help Families Pay for College,” May 2012, https://www.gao.gov/assets/600/590970.pdf
[8] Jason Delisle and Kim Dancy, “Graduate Students and Tuition Tax Benefits,” New America, December 2015, 6–7, https://na-production.s3.amazonaws.com/documents/graduate-students-and-tuition-tax-benefits.pdf.
[9] Author’s calculation using the National Postsecondary Student Aid Study 2011–12. See also Jason Delisle and Kim Dancy, “Graduate Students and Tuition Tax Benefits,” New America, December 2015.
[10] William J. Clinton, “Address to the Nation on the Middle Class Bill of Rights,” December 15, 1997, www.presidency.ucsb.edu/ws/?pid=49591.
[11] Douglas Lederman, “The Politicking and Policy Making Behind a $40-Billion Windfall: How Clinton, Congress, and Colleges Battled to Shape Hope Scholarships,” Chronicle of Higher Education, November 28, 1997.
[12] Taxpayer Relief Act of 1997, Public Law 105–34 § 201 (1997).
[13] Taxpayer Relief Act of 1997, Public Law 105–34 § 101 (1997).
[14] Economic Growth and Tax Relief Reconciliation Act of 2001, Public Law 107–16 § 431 (2001).
[15] The top marginal tax rate for filers eligible for the deduction was 28 percent in the mid 2000s.
[16] See endnote 4. for an explanation of how sometimes when tuition and fees are below $4,000, tax filers can qualify for a larger tax reduction through the deduction than if the Lifetime Learning Credit.
[17] Jason Delisle and Kim Dancy, “A New Look at Tuition Tax Benefits,” New America, November 2015, https://static.newamerica.org/attachments/10416-a-new-look-at-tuition-tax-benefits/TaxCredits11.2.277d3f7daa014d5a8632090f97641cee.pdf; and Jason Delisle and Kim Dancy, “Graduate Students and Tuition Tax Benefits,” New America, December 2015, 6–7, https://na-production.s3.amazonaws.com/documents/graduate-students-and-tuition-tax-benefits.pdf.
[18] Joint Committee on Taxation, “Federal Tax Provisions Expired in 2017” (JCX-5-18), March 9, 2018.
[19] Author’s calculation using the National Postsecondary Student Aid Study 2011–12. See also Jason Delisle and Kim Dancy, “Graduate Students and Tuition Tax Benefits,” New America, December 2015.

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Poland’s consumption binge will meet a painful end – AEI – American Enterprise Institute: Freedom, Opportunity, Enterprise

Is Poland experiencing an economic miracle or a bubble waiting to burst? According to Prime Minister Mateusz Morawiecki, “Poland is on a good path to reach EU average income within 10 to 15 years.” On the surface, the stars seem to be aligned. Economic growth was solid in 2017, at 4.6 per cent, and the government anticipates another strong year in 2018. But there is a catch. More than anything else, Polish growth reflects a growth of consumption, which accounted for 76.3 per cent of gross domestic product in 2017, especially private consumption fueled by entitlement schemes introduced since 2015 by the governing Law and Justice Party.

True, exports expanded too in response to a favourable economic environment in Europe. But in the light of the slowdown seen in the eurozone in the first few months of the year, that growth is unlikely to be sustainable. Worse still, the current GDP growth forecast of 4.3 per cent is based on an unrealistic assumption of investment growth of 8.7 per cent — more than double the 1998-2013 average. The government’s jubilation is not shared by the country’s financial markets. The key stock market index, the WIG, is down more than 5 per cent over the past year, a period during which even Russia’s RTS index has risen 12.3 per cent, notwithstanding that country’s lacklustre economic performance. Markets might be wrong but they do anticipate a downturn. The list of possible concerns is long.

Keep reading at Financial Times

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India economic growth pace picks up to 7.7%

India’s economy continued its recovery in the first three months of 2018, growing at an annualised rate of 7.7 per cent, according to figures published on Thursday. Government statistics showed that gross domestic product grew 0.5 percentage points …

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US economic growth revised down to 2.2 percent rate in Q1

WASHINGTON (AP) — The U.S. economy grew at a weaker 2.2 percent annual rate in the first three months of the year, as consumers and businesses slowed their spending. But given the economy’s recent performance, analysts are still looking for a solid …

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Economic growth revised downward for the first quarter

The U.S. economy grew by 2.2 percent of gross domestic product (GDP) in the first three months of 2018, the Commerce Department reported Wednesday, 0.1 percent lower than initially projected. U.S. economic growth lagged slightly between January and March …

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How tax reform affected these hidden subsidies for higher education – AEI – American Enterprise Institute: Freedom, Opportunity, Enterprise

Most discussions of federal subsidies for higher education focus on student aid programs such as Pell Grants and student loans. Another category of subsidies costs the federal government over $40 billion per year, but receives much less attention. The federal tax code is riddled with many credits, deductions, and exclusions that benefit the education industry. However, these tax expenditures generally aren’t counted as normal government spending.

However, since carveouts in the tax code represent foregone revenue for the federal government, they have the same effect on the deficit as a traditional spending program of the same size. The Committee for a Responsible Federal Budget notes that if tax expenditures were counted as normal spending, they would consume 28% of the federal budget.

New estimates from the Joint Committee on Taxation show that tax expenditures for education cost a combined $47 billion in 2017. The estimates also reveal how last year’s Republican-backed tax reform bill, the Tax Cuts and Jobs Act, influenced these indirect subsidies for education. Most education-related tax expenditures were relatively unaffected by the law, though there are notable exceptions.

Source: Joint Committee on Taxation.

Tuition tax credits represent the largest single tax break for education. These reimburse households for college tuition costs of up to $2,500 per year. The federal government spent $19 billion on these credits in 2017, accounting for 45% of all education-related tax expenditures. For comparison, the federal government spends $27 billion annually on Pell Grants, the main student aid grant program.

The deduction for charitable contributions to educational institutions amounts to the second-largest tax expenditure for education. The “charitable deduction” was also the largest education-related expenditure affected by the Tax Cuts and Jobs Act. While the deduction itself remained mostly untouched after tax reform, other statutory changes will cause the cost of this tax break for schools and colleges to drop from $10.5 billion in 2027 to $8.7 billion in 2021.

Specifically, Congress cut marginal tax rates, which reduces the value of itemized deductions. Additionally, the tax law nearly doubled the standard deduction, to $12,000 for single filers and $24,000 for joint filers. This was a major tax cut for low- and middle-income households, as claiming the standard deduction is more common among these groups.

However, in order to claim the break for charitable contributions, tax filers must forego the standard deduction and instead itemize their deductions. With a larger, more enticing standard deduction, fewer taxpayers will opt to itemize, and so fewer will claim the charitable deduction. Many of these people will still donate to their favorite colleges and universities; they’ll simply no longer get to claim a tax break for it.

Early drafts of the tax law proposed stripping away specialized tax expenditures and using the money to lower tax rates for everyone. Proponents of reform argued that a tax code with lower marginal rates and fewer carveouts would spur faster economic growth than a code with higher rates but more carveouts. Lower marginal rates drive individuals and businesses to invest in projects with high economic dividends, but tax expenditures divert resources to politically popular arenas that may deliver less of a boost to growth.

Under those guiding principles, the tax bill’s authors originally proposed eliminating many education-related tax breaks. These included one of the tuition tax credits, the student loan interest deduction, and tax-exempt bonds for private educational institutions. Yielding to political expediency, however, the final draft of the bill retained most of those tax expenditures while also lowering marginal rates. As a result, under tax reform these carveouts will stay roughly as expensive as they were beforehand. (Meanwhile, the federal budget deficit approaches $1 trillion.)

Two other major tax expenditures—the exclusion of scholarships and fellowships from taxable income and tax preferences for 529 college savings plans—will become more expensive over the next several years. However, the costs of these provisions were already slated to rise before Congress passed tax reform.

Most tax breaks for higher education made it through the Tax Cuts and Jobs Act unscathed. But as Congress grapples with higher deficits over the next several years, it will become more difficult to ignore $40 billion in hidden subsidies for the education industry. Politicians who are serious about reining in government spending should keep tax expenditures on the table.

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