This week presidential candidate Barack Obama announced the broad outlines of his plan to cut taxes for 150 million Americans at a cost of $85 billion a year. The plan would give families a credit of $1000 (or $500 for unmarried taxpayers) and eliminate income taxes for seniors whose income is below $50,000. The credit would essentially offset payroll taxes on the first $8,100 in earnings.
Low-
and middle-income seniors (who generally don't face payroll taxes) could benefit from being removed from the federal income tax rolls, although that demographic is not paying a whole lot in federal income taxes anyway. The plan also includes a tax credit for home mortgage interest, since the current home mortgage interest deduction is not available to non-itemizers and is regressive
since it is worth less to those in lower tax brackets.
Reducing the Tax Break for Capital Gains
To pay for the plan, the tax rate on capital gains would be raised to some unspecified level and loopholes and offshore tax avoidance would be targeted. Citizens for Tax Justice has recently decried the regressive nature of the current tax break for capital gains (which John Edwards also wants to reduce) as well as offshore tax evasion.
It's Progressive, But Is This What We Need?
Obama's
plan would certainly move the federal tax code in a progressive
direction, but it's not entirely clear that the thing low-
and middle-income Americans
need right now is a tax cut.
"I have
no problem with them trying to undo all or most of the Bush tax cuts
for the wealthy even if it's only for a couple of years, but there are
so many huge fiscal problems that we should be very careful about proposing
new trivial programs when there's so many real big programs we need to
do something about," Robert McIntyre,
director of Citizens for Tax Justice, told
the Wall
Street Journal after the Obama plan was announced.
Would We Want a Firefighter to Have a Part-Time Job as an Arsonist?
Top White House Economic Adviser Involved in Patenting Strategies to Avoid Taxes
Tax Notes, a trade journal for tax experts (sorry subscription required), reports that Edward Lazear, chairman of the President's Council of Economic Advisers, is named on a patent application for a product to help companies avoid taxes. The application was filed 10 months after Lazear began working at the White House.
The White House says that, essentially, Lazear's work on the product ended before he came to the White House. Whatever the case may be, it certainly highlights questions over whether tax strategies should be patentable at all. A patent reform bill in the House of Representatives includes provisions that ban patents on tax strategies. Senators Max Baucus (D-MT) and Charles Grassley (R-IA), chairman and ranking member of the Finance Committee, plan to craft a bill that would ban tax patents as well. A bill introduced by Senators Carl Levin (D-MI), Barack Obama (D-IL) and Norm Coleman (R-MN) in February to target offshore tax avoidance also bans tax patents.
As
Levin pointed out when he introduced his bill, patent law exists to encourage
innovation.
There is no lack of innovation when it comes to avoiding taxes and there is certainly no public
policy reason to encourage it.
Note to Congress:
Taxes Are Not What's Causing Some Households to Go Without Internet
Some voices from the tech world are making dire predictions because the Internet Tax Freedom Act expires
on November 1. The law bans states from taxing internet access providers.
This means states currently cannot tax, say, the monthly fee you
might pay to AOL or another internet provider -- but technically
could after November 1 if Congress does not act.
(This
is not to be confused with the issue of sales taxes for online purchases. The U.S. Constitution has been interpreted to say that states cannot require out-of-state online retailers or other out-of-state retailers to
collect sales taxes from customers unless Congress gives the states
permission to do so).
When
the Internet Tax Freedom Act was first enacted in 1998, the argument
made in its favor was that the internet was a new industry and states
needed some time to figure out what constituted internet access. Now, the industry says that the internet must continue to be tax-free so
that it can more easily reach the many communities and households
that have limited access.
As the Center on Budget and Policy Priorities points out,
there are a lot of things that might prevent a household from having
access to the internet but taxes are not one of them. The cost
of a computer is the obvious bar for many households. As for communities where the proper infrastructure hasn't been developed by telecommunications providers, that has nothing to do with taxes. In several states that do tax internet access (states that did
so in 1998 and were grandfathered in the law) more advanced fiber-optic
networks are being built.
Identical
bills have been introduced in the House and Senate (H.B. 743 and S. 156)
to make the ban permanent. There had been talk that a compromise
was reached in which another extension would be passed instead of
making the ban permanent, but the outcome now looks unclear because
provisions unrelated to the internet have become part of the bill.
Rep. Linda Sanchez (D-CA), chairwoman of the Judiciary subcommittee
that has jurisdiction, supports finding a compromise to temporarily
extend the ban.
Experts Agree that Corporate Tax Loopholes Should Be Closed, But What Should Be Done with the Revenue?
Bush Administration Says Lower the Corporate Rate; CTJ Says Use the Revenue for More Pressing Priorities
Earlier this summer, the Bush Administration floated the idea of closing corporate tax loopholes and using the resulting revenue to offset a reduction in the corporate tax rate. There is even a possibility that a tax bill being developed by House Ways and Means chairman Charles Rangel (D-NY) could include some variation on this theme to win Republican votes. A recent op-ed by CTJ director Robert McIntyre argues that the first half of this plan is a great idea -- close the loopholes that allow corporations to avoid paying their fair share. But there are many pressing needs (healthcare, Social Security, paying off the national debt or just closing the budget deficit during a costly war) that this revenue could be used for rather than a rate reduction for corporations.
And it's not the case that corporations are paying so much in U.S. taxes that it puts them at a competitive disadvantage. 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.
Report on Mississippi Tax
System Finds the Poor Pay More
A new report from
the Mississippi Economic Policy Center provides
a great primer on that state's budget process, with a concise summary of how the
state raises and spends revenue. "Putting the Pieces Together: A Taxpayer's Guide to the Mississippi Budget" highlights the chronic unfairness of the current Mississippi tax system, and discusses the shortcomings of the state's revenue structure in a highly
readable way. Governor Haley Barbour says that Mississippi
needs a tax structure in which "everybody
pays a fair share." Let's hope that Governor Barbour reads this report and gains a better understanding of who really pays
taxes in Mississippi.
Maryland Governor Proposes to Close Fiscal Gap with Regressive Taxes -- and A Few Progressive Ones, Too
Earlier this week, Maryland Governor Martin O'Malley released the broad details of a tax reform plan designed
to close the state's $1.7 billion structural deficit. The plan would make
the state's nearly-flat income tax more progressive, cutting income taxes for low- and middle-income families and creating two new upper-income tax brackets for those with taxable incomes over $150,000, and would reduce the rate of a statewide property tax. The net impact of the income tax hike (somewhere north of $150 million a year) would be dwarfed, however, by the impact of a regressive sales
tax hike that would increase the rate and broaden the base ($730 million), a $1-a-pack cigarette tax hike, and
the introduction of legalized gaming at Maryland racetracks ($500 million), each of which would arguably make the plan both less sustainable and less fair. The plan would also increase corporate income tax collections, although the way in which this would be done is not yet entirely clear.
So
who will win and who will lose from the governor's plan? The
governor himself is only conceding that "if you make more
than $700,000 a year, you smoke, you go to the tanning salon every day,
you have a gym membership, and you're a renter, you'll probably pay more." Of course, people earning a whole lot less than $700,000 are going to be picking up much more of the tab than O'Malley's description lets on. But that may be the unavoidable
price of closing the state's yawning fiscal gap.
