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CTJ's Tax Justice Digest, August 10, 2007

Welcome to CTJ's Tax Justice Digest, our regular survey of new and interesting trends in state and federal tax policy. Click here tobrowse through archived editions of the Digest.


New Release from Citizens for Tax Justice on Capital Gains and Dividends Tax Cuts

Cost $92 Billion in 2005 Alone

Three-Quarters of Benefits Went to Richest 0.6 Percent
A new paper from CTJ uses newly released IRS data to show that the special low tax rates on capital gains and dividends, enacted or expanded under President Bush, reduced income tax payments by $91.7 billion in 2005. Almost three quarters of those tax reductions went to the 0.6 percent of taxpayers reporting 2005 adjusted gross incomes in excess of $500,000. The half of taxpayers reporting less than $30,000 in adjusted gross income received virtually nothing from these tax cuts.

The special 15 percent tax rate for dividends was enacted in the 2003 tax cut legislation signed by President Bush. The same legislation also increased an existing tax break for capital gains, by lowering the capital gains tax rate from 20 percent to 15 percent. Ordinary income tax rates are as high as 35 percent for the wealthy families who benefit the most from these tax breaks


Sign-On Letter to Close the Loophole for Billionaire Fund Managers

CTJ and several other progressive organizations and political leaders believe that the cost and regressive nature of the lower tax rate for capital gains, as discussed above, is reason enough to end the different tax treatment of capital gains compared to other income. But there is one particular use of the capital gains tax break that, we all should agree, is exceptionally problematic: the "carried interest" loophole, which allows private equity fund managers to benefit from the 15 percent tax rate even though they don't have real capital gains. 

Even some supporters of the capital gains tax break, like Senator Charles Grassley (R-IA) and Greg Mankiw, former economic adviser to President Bush, believe this loophole should be closed because it doesn't serve the intended purpose of the capital gains tax break. Private equity fund managers who earn hundreds of millions or even over a billion dollars in a year without investing their own money can use this loophole to pay a lower overall tax rate than middle-income people. Fortunately, a bill introduced by Sander Levin (D-MI) (H.R. 2834) would close this loophole and tax carried interest as ordinary income. A similar bill may be introduced in the fall in the Senate.

If you are authorized to sign a letter to Congress on behalf of an organization that supports the effort to close this loophole for billionaires, click here. If you are not authorized to sign on behalf of an organization, you can send a letter on your own behalf to your Senators and Representative by clicking here. For more background on this tax loophole, see CTJ's fact sheet.


New CTJ Paper: Congress Should Enact Proposal to Stop Foreign Corporations from Evading U.S. Taxes

A new paper from CTJ explains that the farm bill passed by the U.S. House of Representatives on July 27 includes a provision proposed by Congressman Lloyd Doggett (D-TX) to close a tax loophole that currently allows foreign companies doing business in the U.S. to dodge taxes on their U.S. profits. This loophole currently gives these foreign companies an advantage that American firms don't have.

The tax dodge used often involves a corporation based in a tax haven country which has a subsidiary in the United States and another subsidiary in a country that we have a tax treaty with. Foreign companies operating in the United States pay a withholding tax on certain types of income, but those based in treaty countries pay lower withholding or none at all under the treaties because their home countries tax their income.

A company based in, say, Bermuda, which does not have a treaty with the U.S., can operate in the U.S. but get around all or part of its withholding tax by exploiting the tax treaty between the U.S. and, say, Switzerland. The company's subsidiary in the U.S. can make a payment to its subsidiary in Switzerland, which will result in no withholding because of the tax treaty between those two countries. But then the Swiss subsidiary can send the money to the parent corporation in Bermuda, and since Switzerland doesn't tax that money, the company has completely avoided paying taxes on its income.

Unfortunately, Senators Max Baucus (D-MT) and Charles Grassley (R-IA), the chairman and ranking member of the Senate Finance Committee, have indicated to the press that they are unlikely to include this provision in their version of the farm bill. This paper lays out why the proposal makes sense and why these Senators should reconsider.


Statement from CTJ on Bush's Corporate Tax Reform Proposal: President Gets It Half Right

After years of promoting or ignoring corporate loopholes and tax sheltering, President Bush announced this week that his administration has suddenly discovered that these corporate tax dodges are a drag on our economy. But as a statement from CTJ explains, while the President is right to call for closing corporate tax loopholes, he's wrong to suggest using all the resulting additional revenues to pay for a cut in the corporate tax rate.

The effective corporate tax rate is actually much lower than the nominal corporate tax rate of 39 percent (including both the federal corporate tax and the average state corporate tax). In 2005, the most recent year for which data are available, U.S. corporate tax revenue as a share of GDP was only 2.6 percent, lower than in all but two developed countries. There is therefore little reason to believe that the corporate tax is chasing investment out of the United States.

What Americans should be worried about however, is the long-term revenue shortfall that we will face if Congress doesn't act. The revenue raised from corporate tax reform should be used to reduce federal borrowing, not cut the corporate tax rate.

To watch CTJ director Bob McIntyre's recent appearance on CNBC to debate this topic, click here.


Minneapolis Tragedy Prompting Reevaluation of Infrastructure Needs

In the aftermath of the tragic Minnesota bridge collapse, policymakers in Minnesota and in many other states have started to examine their transportation and infrastructure needs -- including roads and bridges. In fact, Minnesota Governor Tim Pawlenty, who vetoed legislation to raise the state's gas tax for transportation twice, is now apparently open to increasing the gas tax. Editorial pages from across the country have been filled this week with articles highlighting the need to invest wisely in local highways, tunnels and bridges. Check out the arguments made in Washington, Wisconsin, Michigan, and Nebraska newspapers. There's also been fallout nationally as Rep. Don Young (R-AK) calls 500 bridges spread across the country "potential deathtraps." Rep. Young concludes that solving this problem may even mean an increase in taxes.





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