CTJ's Tax Justice Digest, September 14, 2006

Congress Mixing Metaphors

Political lingo is often colorful.  In July and August, we were discussing the "trifecta," a term common to horse racing but used recently in Congress to refer to a bill that combined reducing the estate tax and extending some popular business tax preferences (known as the extenders, some of which benefit underprivileged individuals), with increasing the minimum wage.  Now, there appears to be sentiment in favor of putting off the trifecta - which some had written off as dead - until "lame duck." A lame duck session of Congress is one taking place after elections have been held but before the new Congress is sworn in.  However, such a delay would be problematic because some of the extenders have been expired since last year, and IRS prints its forms for the tax filing season in October.  Thus, if a new law isn't passed until after the November elections, the proper references to these tax provisions could not be included in next year's tax forms.  At this point, it is unclear what will happen or when, but "it ain't over 'til it's over."

House Leaders Struggle to Protect Tax Breaks for Special Interests from Greater Transparency

Republicans in Congress are still divided on what to do about "earmarks," funding provisions directed at specific projects or entities slipped into bills by members of Congress. GOP leaders in the House of Representatives have proposed changes to House rules that would identify members responsible for earmarks. One major problem is the same one that bungles all budget process reforms this year: this Congress's inability to treat tax breaks for special interests the same way it treats direct spending for special interests. Under the House proposal, tax breaks could only be considered "earmarks" if they benefit only one entity or individual. Members of the House Appropriations Committee oppose this standard because it forces their committee (which does the spending) to make sacrifices while the Ways and Means Committee (which does the tax-cutting) would be barely restrained at all.

Meanwhile, Senator Frank Lautenberg (D-NJ) has an idea to shine more light on targeted tax breaks. He has proposed to expand the database that will track federal spending on grants and contracts (which will be created by legislation passed by the House and Senate this month) to include targeted tax breaks. We'll be waiting to see if the same controversy concerning how to define a targeted tax break swallows up this proposal.

Congress Chooses Tax Cuts for Millionaires Over Homeland Security Trust Fund

The Senate rejected an amendment to port security legislation this week that would have created a trust fund for homeland security measures funded by scaling back tax breaks for millionaires. The amendment, offered by Senator Joseph Biden (D-DE), would raise $53.3 billion over five years to fund additional police and FBI agents, increased cargo screening and other measures. Democrats have complained that only an estimated 5 percent of containers entering the United States are examined. The amendment does not itself spell out the tax changes but instructs the Senate Finance Committee to introduce legislation "reducing scheduled and existing income tax reductions enacted since taxable year 2001 with respect to the taxable incomes of taxpayers in excess of $1,000,000."

EITC Enacted In Michigan

Nineteen states offer an Earned Income Tax Credit, or EITC. Now, it looks like Michigan is about to join their ranks. The EITC, first enacted on the federal level in 1975, is a tax credit that reduces the taxes that low-income working families pay. In many states the tax credit is based on the federal credit and refundable. The credit also acts as a wage subsidy for very low-income workers. During the past thirty-one years the EITC has expanded and it's a popular tax policy tool that has enjoyed broad-based bipartisan political support.

Because the EITC is targeted to low-income individuals, it provides less expensive tax relief for state governments especially when compared to broader-based tax cuts. Sharon Parks of the Michigan League for Human Services called the EITC the most successful anti-poverty tool in the country. Lawmakers in Michigan should be applauded for proposing this sensible and effective tax reform. For more information on the EITC, click here.

Use Finger Quotes When Saying "Simplification"

Utah legislative leaders continue to speak the language of "tax simplification" (read: tax cuts for the wealthy). But the Utah Association of Certified Public Accountants isn't buying it. In a letter to Governor Jon Huntsman (an ardent advocate of high-end tax cuts), the CPA's note that his proposed cuts "are labeled as tax reform when they are in fact merely tax reduction - and not a reduction that the majority of taxpayers would benefit from."

Remember Tax Reform?

Remember the President's Tax Reform Commission? The Washington Post's Sebastian Mallaby does. Mallaby suggests that curtailing some of the more poorly targeted federal tax breaks, such as the mortgage interest deduction and tax breaks for IRAs, could help restore fairness and adequacy to the tax code. Of course, Congress and the Bush Administration have moved in the opposite direction this year, making the temporary Bush tax cuts for IRA's a permanent feature of the tax code. Details on this year's pension tax deform are here and here.

Advocates of National Sales Tax Turning Their Attention to the States

Discredited, but undeterred, backers of a bunk national sales tax proposal are taking their message to the states, including Michigan and Georgia.  The idea of a national sales tax isn't new, and ITEP has discredited the idea before. What's new is a state-level push by the idea's backers. A bad tax policy on the national level is an equally bad tax policy on the state level.

IRS Wins Record Settlement Against Pharmaceutical Giant Glaxo...

Glaxo will be paying the IRS $3.4 billion under terms of a settlement announced recently.  The amount resolves the largest tax dispute in IRS history (although the dispute involves over a decade's worth of tax returns).  The dispute was over a highly technical, and frequently abused, area of the tax law dealing with the transfer of income and costs between different branches of a company located in different countries.  It is popularly known as "transfer pricing," and is one of the murkiest areas of the tax law -- and widely believed to facilitate tax avoidance by corporations in the billions of dollars annually.  Transfer pricing is only engaged in by businesses, not individuals, and is a significant component of what is often referred to as "offshore" tax avoidance.

...While Europe Says Katie Bar The Door

The European Court of Justice has ruled in favor of Cadbury Schweppes, saying that it is okay for businesses to relocate to low-tax jurisdictions.  The silver lining to this cloud is that individual European countries may enact tougher tax laws on businesses as a result. 

Another "Offshore" Record

Last week, in what authorities said was the largest criminal tax case ever, Walter Anderson plead guilty to charges of tax evasion and tax fraud.  He had been indicted on charges that he evaded $200 million in Federal and local taxes.  Anderson used offshore corporations and bank accounts to hide income from tax collectors.

The international tax arena is complex and exotic.  But given the increasing globalization of the economy, concerned citizens should educate themselves about what's at stake in international taxes.  "Offshore" is where the very rich, businesses and individuals, get even richer, by paying no or little taxes.  We will continue to update you concerning developments in the international arena.

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