Former Virginia Governor and current Senate candidate Tim Kaine found himself in hot water after a Senatorial debate last week in which he expressed a willingness to consider “a proposal that would have some minimum tax level for everyone.” Perhaps even worse, Kaine has also proposed a so-called “Middle-Ground” approach to the Bush tax cuts, which he says in his TV ad is fiscally responsible. His middle ground position – putting him between a tax-averse Democratic president and a tax-loathing Republican rival – would extend the Bush tax cuts for the first $500,000 that a taxpayer makes in a year.

His fiscally irresponsible ideas about the expiring Bush tax cuts merit their own outrage. Kaine’s proposal to raise the income threshold above which the Bush tax cuts expire to $500,000 would save 22 percent less revenue than Obama’s $250,000 threshold, and 73 percent of the lost revenue would be paying for tax cuts for people making over $500,000.  A full 30 percent of the cost of Kaine’s extra tax cuts would go to people making over $1 million!

It’s not surprising that his statements regarding a minimum tax have caused an uproar considering that such proposals are usually the province of radical conservatives like Minnesota Republican Michelle Bachman, rather than that of moderate Democrats. Ironically, Kaine himself made a strong case against such a proposal in the debate when he noted that “everyone pays taxes,” a point Citizens for Tax Justice repeatedly makes.

What’s so disturbing about Kaine’s Bush tax cut proposal, as opposed to his openness to a minimum tax (which he’s already walked back), is that it isn’t out of the realm of possibility. Last May, Democratic House Minority Leader Nancy Pelosi proposed to raise the income threshold over which the Bush tax cuts should expire even higher, from $250,000 to $1 million. Kaine and like-minded Democrats need to reconsider their position because allowing even more of the Bush tax cuts to stay in place makes about zero fiscal sense.

Front Page Photo of Tim Kaine via Third Way Creative Commons Attribution License 2.0

Looks like the “spin room” in Topeka has been busy lately. Read how Kansas Governor Brownback and his staff “fashion[ed] a new budget narrative” in reaction to criticism over massive budget cuts he signed (PDF) earlier this year and possible further reductions. Insisting that revenue lost to his pet tax cuts (which take effect next year) won’t be responsible for budget shortfalls, the governor is saying that somehow the European debt crisis and other things beyond the state’s control are forcing spending cuts.

It’s been a while since we’ve heard much about “marriage penalties” imposed by state tax structures (a so-called marriage penalty is imposed when single filers pay more tax as married couples than if they filed as two single filers). But the issue is rearing its head in Wisconsin and this thoughtful blog post from the Wisconsin Budget Projects helps to put the concept in context.

In order to debunk the absurdity of Mitt Romney’s 47 percent claim, an opinion piece in the Las Vegas Sun reminds Nevadans -- by pointing to research from the Institute on Taxation and Economic Policy -- that low income people are paying more than their fair overall share because of state and local taxes.

Here the Charlotte Observer editorial board decries both gubernatorial candidates’ calls for politically popular rate reductions and their failure to commit to genuine, comprehensive reform for North Carolina. “Today’s tax code is riddled with exemptions, loopholes and preferential treatment that sap the state of needed revenue... [and] it’s time for tax code reform to take a prominent place on the agenda of the state’s chief executive. The public – the voting public – should insist on it.”

Kentucky’s tax structure is broken - so broken that policymakers have convened 12 commissions since 1982 to study the state’s revenue stream.  And yet the Institute on Taxation and Economic Policy (ITEP) found that still the state continues to tax low and middle-income people at a higher rate than the wealthy. This year the Governor Beshear formed the Blue Ribbon Commission on Tax Reform, and the consulting economists assisting the Commission have released their report (PDF) which offers a variety of recommendations that are worth legislative consideration. The full commission, consisting of stakeholders and leaders from organizations across the state, will release its recommendations in November.

The Commission was tasked with analyzing the tax structure with these five goals in mind: fairness, competitiveness, simplicity and compliance, elasticity, and adequacy. The economic consultants found (and most analysts agree) that “a broader tax base is needed so that revenue can keep pace with future economic growth.” The report predicts a dire future for the state’s finances unless the tax structure is improved, “Without fundamental reforms Kentucky could face a $1 billion shortfall by 2020, and could find itself at a competitive disadvantage to neighboring states for business growth, retention, and recruitment.”

The experts’ comprehensive report included some common sense, positive proposals like eliminating itemized deductions, instituting an Earned Income Tax Credit, and broadening the sales tax base to more personal services. The Louisville Courier Journal, in the culmination of three months of quality, in-depth reporting on the issue notes that, “many lawmakers and others expect the governor’s effort will fall far short of any significant reform — just as reform attempts by most of Beshear’s immediate predecessors failed.” The reason? Getting legislators to agree to any tax increase (even if other taxes are lowered) may be a political bridge too far.

The Governor, however, has said that he is not abandoning the idea of a special session focused solely on tax reform. He admits, “It’s always difficult to address the issue of taxes. But I think it is do-able if we all will work together.” The full tax commission is expected to come out with its recommendations by November 15. The question remains whether Kentucky can not only study its tax system, but also reform it.

A hearing on offshore profit shifting last week exposed aggressive tax planning strategies employed by Microsoft and Hewlett-Packard (HP) and illustrated the critical need for more disclosure.

On September 20, the Senate Permanent Subcommittee on Investigations held a hearing on “Offshore Profit Shifting and the U.S. Tax Code.” Witnesses from academia, the Internal Revenue Service, U.S. multinational corporations, international tax and accounting firms and the nonprofit Financial Accounting Standards Board (FASB) answered questions from the Senators about how tax and accounting rules allow U.S. multinationals to shift profits offshore using dubious transactions and complicated corporate structures.

The committee looked at two case studies investigated by the committee staff. In the Microsoft case, the committee investigation found that 55 percent of the company’s profits were “booked” (claimed for accounting purposes) in three offshore tax haven subsidiaries whose employees account for only two percent of its global workforce. Microsoft did that by selling intellectual property rights in products developed in the U.S. (and subsidized by the research tax credit) to offshore tax haven subsidiaries, then creating transactions to shift related profits there.

Hewlett-Packard used a loophole in the regulations to use offshore cash to pay for its U.S. operations without paying any U.S. tax on the repatriated income.  Rather than having offshore subsidiaries pay taxable dividends to the U.S. parent company, HP had two subsidiaries alternately loan funds to the parent in back-to-back-to-back-to-back 45-day loans. In the first three quarters of 2010, there was never a day that HP did not have an outstanding loan of $6 to $9 billion from one of its foreign subsidiaries.

In the tax footnote to their public financial statements, companies disclose the amount of their foreign subsidiaries’ earnings which are “indefinitely reinvested.” They do not record U.S. tax expense on these profits, ostensibly because they don’t plan to bring them back to the U.S. anytime soon. But they must disclose the total amount of their unrepatriated profits and estimate the U.S. tax that would be due if the earnings were repatriated.

The FASB representative, in a conversation with CTJ Senior Counsel Rebecca Wilkins after the hearing, noted that the accounting standards require disclosure. If companies do have a reasonable estimate and are not disclosing the amounts, that would be an “audit failure” by the accounting firm auditing the financial statements and subject to possible disciplinary action by the Public Company Accounting Oversight Board (established by Congress in 2002).

Most companies have not disclosed the potential U.S. taxes they would owe, but they must know it’s enough that they don’t want to repatriate the earnings and pay it. Chances are, they know those amounts down to the dollar.

It's outrageous that many of the companies who are lobbying hardest for a repatriation holiday won’t tell Congress whether these foreign earnings are sitting in a tax haven right now or how much U.S. tax they would owe on them. Lawmakers should demand to know.

Last year, when billionaire investor Warren Buffett created a storm by arguing that Congress should reform the tax system that allows him to pay a lower effective rate than his secretary, Senate Republican Leader Mitch McConnell quipped, “if he’s feeling guilty about it, I think he should send in a check.”

This is the common refrain from anti-tax lawmakers and pundits: rich people like Buffett who believe they pay too little in taxes should just make a voluntary contribution to the IRS and stop pestering Congress to raise taxes. Republicans in both chambers of Congress introduced bills to encourage such voluntary contributions, and one was approved by the House of Representatives last week.

Last week, we also learned that presidential candidate Mitt Romney, did, in effect, make a voluntary contribution to the IRS when he decided to forego almost half of the $4 million in charitable deductions that he was allowed under the law for 2011.

Clearly, we can’t expect this sort of voluntary contribution to occur very often. Romney initially resisted the idea strongly, going so far as to state, in January, “I pay all the taxes that are legally required and not a dollar more. I don't think you want someone as the candidate for president who pays more taxes than he owes.”

But this recent disclosure from Romney’s trustee says that Romney decided to forgo the charitable deductions so that his effective tax rate would “conform” with his earlier statements that he always paid at least 13 percent of his income in federal income taxes. CTJ senior counsel Rebecca Wilkins calculated that his effective tax rate would have been around 10.5 percent if he took all the charitable deductions he was allowed for 2011.

So aside from the occasional multi-millionaire who runs for president and wants to avoid answering difficult questions about the policies that allow him to pay so little, can we expect many wealthy Americans to voluntarily pay for public services and public investments?

No. We cannot pay for roads, schools, aircraft carriers and many, many other public goods with voluntary contributions. Even conservative writers for the Economist have skewered the idea, explaining that

A rationally self-interested individual will not voluntarily pay for public goods if she believes others will pay and she can get a free ride. But if we're all rationally self-interested, and we know we're all rationally self-interested, we know everyone else will also try to get a free ride, in which case it is doubly irrational to voluntarily pitch in. Even if you're not inclined to ride for free, why throw good money at an enterprise bound to fail?

In other words, “game theory” suggests that we would not bother to make a voluntary contribution to, say, build a highway, because we know the task will require contributions from many people who are unlikely to make them. As a result, we end up without the new highway, even if the majority of us want it to be built.

That highway can’t be built with the contributions of the occasional public figure who’s embarrassed about his tax loopholes. Not even one with Mitt Romney’s wealth.

A new survey of 250 economists in the business community by the National Association for Business Economics released on Monday revealed their strong support for increasing fiscal stimulus in the short term and taking a balanced approach to deficit reduction (including revenue increases as well as spending cuts) over the long term. This agreement among business economists stands in direct contrast to many conservative lawmakers in Washington, who increasingly favor spending cuts in the short term and actually decreasing taxes over the long term.

Of the economists surveyed, 67 percent favored maintaining or even increasing the current level of fiscal stimulus in 2013. Moving in the opposite direction, Congress actually enacted $984 billion in spending cuts (known as sequestration) last year, which go into effect starting in 2013; a full three quarters of the economists polled outright oppose allowing those sequestration cuts to take effect.

Although a majority of the business economists did favor extending tax cuts in 2013 to help stimulate the economy (although there was no majority for making all the tax cuts permanent), the reason more of them favor preserving government spending is likely explained by the fact that government spending typically has a much greater positive impact on economic growth than tax cuts.

Turning to the long haul, a full 90 percent of those surveyed believe that Congress should take a balanced approach to deficit reduction, meaning a combination of tax increases and spending cuts. And while there is near universal consensus among these economists for tax increases, neither the Democratic nor Republican party platforms support increasing tax revenue as part of a balanced approach to deficit reduction. Both parties instead call for reducing revenue by trillions of dollars (compared to what our tax system would collect if the tax cuts were all allowed to simply expire).

While the business community is often portrayed as being hindered by budget deficits and higher taxes, this survey reveals that they actually favor higher budget deficits in the short term and higher taxes over the long term. It’s time Congress begins listening to the actual business community rather than the anti-tax activists who pretend to speak for them.

First there was the Congressional hearing last Thursday, then the release of Republican Presidential candidate Mitt Romney’s 2011 tax return on Friday. While one of them was big news and the other not so much, both events highlight the biggest subsidy high-income taxpayers get from the tax system – the preferential rate on capital gains and dividends. While we tax “ordinary” income such as salary and wages at rates up to 35 percent, capital gains and dividends are never taxed higher than 15 percent.

The upshot is that a taxpayer with investment income will pay less than half of the federal income tax that someone with the same amount of regular wage or salary income will pay. This is true at any income level – whether comparing two taxpayers that make $60,000 or two taxpayers that make $60 million. This fundamental unfairness in the tax code is the primary reason why Warren Buffett pays a lower tax rate than his secretary, why Mitt Romney pays a lower tax rate than many middle-income Americans and is the reason behind that feeling most Americans have that the tax code is rigged in favor of the wealthy.

A CTJ review of Romney’s 2011 federal income tax return found that he saved $1.2 million in federal income taxes in 2011 because of the preferential capital gains tax rate. Without that special break, he would have paid total federal income taxes of $3.1 million and his tax rate would have been almost 23 percent.

This benefit of this particular tax subsidy goes overwhelmingly to the richest Americans. A CTJ report released Thursday shows that 83 percent of capital gains and 60 percent of dividends are earned by the richest five percent of taxpayers. As Colorado venture capitalist Bill Stanfill testified in the Senate hearing, this tax break is “simply a windfall for wealthy investors.” He urged lawmakers to eliminate the special treatment.

Also at that rare, joint House Ways and Means and Senate Finance Committee hearing was a panel of experts from across the political continuum who all agreed that addressing the huge discrepancy between the ordinary income and capital gains tax rates will be key to any comprehensive tax reform. Len Burman, a professor at Syracuse and former director of the Tax Policy Center, noted, as did CTJ’s report, that the huge differential in tax rates creates enormous complexity in the tax code – which is exacerbated by more people pushing the limits of the code to structure their income as a capital gain, to which lawmakers respond with even more rules, and so on. (Two of the witnesses guessed that this ridiculousness accounts for about half the pages in the tax code!)  David Brockaway, chief of staff of the Joint Committee on Taxation during the tax reform battles of 1986, said the revenue gained from raising the capital gains rate then was essential to pay for the other changes, calling it “a gateway issue.” Even Lawrence Lindsey, former director of the National Economic Council and an architect of the Bush tax cuts, said the ordinary and capital gain tax rates shouldn’t be so far apart.

Mitt Romney’s plan to keep the low capital gains tax rate is the primary reason why his tax proposal will be a huge break for millionaires. Even if all of their other deductions and exclusions are eliminated, taxpayers making over $1 million would get an average federal income tax cut of at least $250,000 and as much as $400,000 under Romney’s plan (to the extent we can know, anyway). For his part, President Obama has proposed to keep the current low capital gains rates for taxpayers with less than $250,000 in income, but to let the rates for taxpayers with higher income revert to the pre-Bush levels of 20 percent – a rate still substantially below the ordinary income rate.

It is clear that the special low rate on capital gains must be completely eliminated to simplify the tax code, end economically-damaging tax shelters, and enable comprehensive tax reform. It would also make the tax system dramatically more fair by taxing income from wealth the same as income from work.

Mitt Romney’s 2011 Returns Reveal a Tax Code Stacked in Favor of the Very Rich Because of Loopholes and Special Rates Not Available to Ordinary Taxpayers

Washington, DC – Since Citizens for Tax Justice (CTJ) first calculated that GOP Presidential candidate Mitt Romney likely paid a 2010 federal income tax rate of 14 percent in October of 2011, CTJ’s analysts have been helping to explain the features of our tax code that allow high wealth individuals like Romney to pay such a low federal income tax rate. The explanation is that loopholes in the tax code benefit the most affluent. 

After reviewing Mitt Romney’s 2011 return (an estimate of which he released in January), and the 20-year summary of the candidate’s taxes issued by his lawyer, CTJ’s Senior Counsel for Federal Tax Policy, Rebecca Wilkins, issued the following statement:

“It’s an indictment of the federal tax code that a man of Mitt Romney’s wealth could pay a federal tax rate as low as 10 percent. While he chose to forgo deductions for charitable contributions in order to keep his “commitment to the public that his tax rate would be above 13 percent,” bringing his rate up to 14 percent for 2011, it is still outrageous that the code allows such a low rate.

“He also takes advantage of a special low rate on investment income. The preferential rate on capital gains and dividends saved Mitt Romney a whopping $1.2 million in taxes in 2011, cutting his tax bill almost in half.  He would have paid $3.1 million in taxes without that special treatment. And much of his low-rate income is really compensation from Bain Capital that should have been taxed like regular wages or salary, but is disguised as capital gains using the “carried interest” loophole.

“Romney also paid $675,000 under the Alternative Minimum Tax (AMT). If his own tax plan, which eliminates the AMT, had been in place in 2011, he would have saved himself an additional $675,000, or one third of his entire federal tax bill, and reduced his effective rate to 9 percent.

“Also notice that Mitt Romney’s tax return for 2011 is almost twice as long as it was in 2010. It is 379 pages long, and 250 pages are foreign entity disclosure forms. Put simply, that’s 250 pages about his offshore investments.

“Further, the summary provided by his lawyer is playing games by averaging Romney’s 20-year tax rate. Including the years 1992-97 skewed his rate upwards because during those years, the capital gains rate was 28 percent instead of the 15 percent it is now. If they’d averaged only the last 15 years, his rate would have been much lower.

“And one final point is that Romney continued to work and make lots of money even when his capital gains tax rate was almost double the current rate, the rate he wants to retain.  Yet he says that the low capital gains rate is essential to incentivizing rich people to do what they do.  How does he explain that?”

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Citizens for Tax Justice (CTJ), founded in 1979, is a 501 (c)(4) public interest research and advocacy organization focusing on federal, state and local tax policies and their impact upon our nation (www.ctj.org).

When the Supreme Court ruled in June that the new penalty for not obtaining health care was actually a tax (and therefore permissible under Congress’s taxing power) we pointed out that hardly anyone would pay it because low-income families would be eligible for Medicaid, and because subsidies would be available to help make coverage affordable for middle-income families (making up to $90,000 for a family of four).

We also pointed to a study from the Urban Institute and Robert Wood Johnson Foundation concluding that “About 7.3 million people—two percent of the total population (three percent of the population under age 65)—are not offered any financial assistance under the ACA and will be subject to penalties if they do not obtain coverage.”

This week, the Congressional Budget Office (CBO) released estimates that a smaller number than that — 6 million people — would be subject to the penalty for not obtaining health insurance. Naturally, some anti-tax politicians like Governor Bobby Jindal of Louisiana have pounced on this as evidence of a crushing tax increase during the Obama administration.

CBO explains that their previous estimate, that only 4 million people would pay the penalty, had to be revised for several reasons, like continuing gloomy unemployment figures and technical changes. But CBO also says that:

A small share—about 15 percent—of the increase in the number of uninsured people expected to pay the penalty results from the recent Supreme Court decision [which also allows states to opt of the Medicaid expansion that was part of health care reform]. As a result of that decision, CBO and JCT now anticipate that some states will not expand their Medicaid programs at all or will not expand coverage to the full extent authorized by the ACA. Such state decisions are projected to increase the number of uninsured, a small percentage of whom will be subject to the penalty tax.

And who are these governors that will opt to not have their states participate in the Medicaid expansion and thus increase the number of people subject to the penalty for not having health insurance? Well, one of them is Governor Jindal of Louisiana.

Photos of Bobby Jindal via Gage Skidmore Creative Commons Attribution License 2.0

The Washington Post explains why so-called “budget surpluses” in Maryland and Virginia are nothing to get excited about: “In both cases, the surpluses are modest, amounting to no more than a percentage point or two of state spending. And in both cases, the states’ present and pending obligations have sponged up most of the so-called extra cash. In a budgetary environment that remains severely austere, no one should equate a surplus with a windfall.”

Missouri is not alone in planning to give corporate income tax credits a much closer look in 2013. The head of a special committee tasked with reviewing Oklahoma’s tax credits said that he will push for a two-year moratorium on over two dozen corporate tax credits.  He will also propose eliminating the “transferability” of tax credits, which allows companies that don’t owe any income tax to benefit from tax credits nonetheless, by selling them to other individuals or businesses.

Iowa State Senator and chairman of the senate’s Ways and Means Committee recently wrote in the DesMoines-Register that Governor Terry Branstad should “strengthen the best anti-poverty program this nation has ever had: the earned income tax credit. This state tax cut will put more money in the pockets of working Iowa families with incomes less than $45,000. That’s money that will be spent in communities across the state.”  

Progressive tax advocates will be happy to hear that Minnesota Governor Mark Dayton has recommitted himself to advocating for legislation in the next legislative session that raises taxes on the wealthiest Minnesotans.

Today the Census Bureau released new data showing that in 17 states, the number of Americans living in poverty increased in 2011.  Lawmakers and advocates interested in helping to lift families out of poverty can and should look to their states’ tax structures, which are often part of the problem but can also be part of the solution and play a role in helping to eliminate poverty.

When all the taxes imposed by state and local governments are taken into account, almost every state imposes a higher effective tax rate on low-income families than on upper- income taxpayers.  A new Institute on Taxation and Economic Policy report, “State Tax Codes as Poverty Fighting Tools,” recommends four key anti-poverty tax policies: the Earned Income Tax Credit, property tax circuit breakers, targeted low-income tax credits, and child-related tax credits.  The report identifies the states where each of these policies is in place, and finds that seven states (Alabama, Alaska, Florida, Mississippi, Nevada, Tennessee and Texas) don’t offer any of these four recommended anti-poverty tax policies.

The report also includes a survey of state-by-state anti-poverty tax policy decisions made this year and offers specific recommendations tailored to policymakers in each state as they work to combat poverty. Read ”State Tax Codes as Poverty Fighting Tools” here.

 A new study by the non-partisan Congressional Research Service (CRS) using data from the past 65 years found that there is no correlation (PDF) between top tax rates and economic growth. But it doesn’t stop there. The study also found that there is a correlation between the reduction in top tax rates and the increasing concentration of wealth toward the top of the income distribution. The report, Taxes and the Economy: An Economic Analysis of the Top Tax Rates Since 1945, is also clear that this is not only about tax rates on regular income, and points out (PDF) that “changes in capital gains and dividends were the largest contributor to the increase in income inequality since the mid-1990’s.”

This has to be just about the last nail in the tax-cutting, supply-side coffin. CRS is a bunch of smart people at the Library of Congress whose mission is “providing comprehensive and reliable legislative research and analysis that are timely, objective, authoritative, and confidential, thereby contributing to an informed national legislature.”  And while the study has earned volumes of media coverage, it’s worth noting that even the Wall Street Journal report didn’t quibble with the study’s finding that “tax cuts for the rich don’t seem to be associated with economic growth…. [but] can be linked to a different outcome: income inequality.”

The CRS findings fall in line with the increasing consensus showing that supply-side tax cuts touted by people like Arthur Laffer have been an enormous failure over the past several decades. As Citizens for Tax Justice’s Bob McIntyre has pointed out, even George W. Bush’s own Treasury Department conceded in 2006 that the Bush tax cuts (which were mostly targeted to the wealthiest Americans) would not have a significant effect on economic growth over the long term. And every few weeks in his New York Times blog post, Ronald Reagan’s former advisor, Bruce Bartlett, explains that tax cuts really can not and do not make an economy healthy.

For numbers crunchers, here are some details about the study. To explore the connection between top tax rates and economic growth, the CRS performed two regression analyses comparing the top income and capital gains tax rates to the private savings rate, productivity growth rate, and real per capita GDP from 1945 to 2010. The results of the analysis reveal that there is simply no statistically significant relationship between tax rates and savings, productivity, or real per capita GDP.

To examine the effect of top tax rates on income inequality, the CRS used a regression analysis comparing the top income and capital gains tax rates to the share of income earned by the top 0.1% and 0.01%. The analysis found that there is a statistically significant negative correlation between the share of income received by the top 0.1% and 0.01% of income earners and the level of the marginal tax rates. In other words, lowering top marginal tax rates has the effect of further increasing the disproportionate amount of income earned by the wealthiest of the wealthy.

Citizens for Tax Justice and other economic think tanks have been demonstrating the flaws in supply-side tax cuts for decades, and the public is increasingly catching on about taxes in particular and economic inequality more generally. With these two issues high on the election year agenda, maybe 2012 will be the year supply-siders, voodoo economists, wishful thinkers and other magical thinkers lose their credibility, once and for all.

***

UPDATE, November 1, 2012: According to a New York Times story, "[t]he Congressional Research Service has withdrawn an economic report that found no correlation between top tax rates and economic growth, a central tenet of conservative economy theory, after Senate Republicans raised concerns about the paper’s findings and wording." The study referred to is the one CTJ blogged here when it was first published in September 2012.

***

UPDATE, December 13, 2013: The report has now been reissued with little changes and the same basic conclusions are contained in the original report.

For Immediate Release: September 20, 2012

Rare Joint House-Senate Hearing on Tax Reform Will Fail without Commitment to Repeal Capital Gains Tax Break

 New Report Shows All Current Proposals Give Richest Taxpayers a Break More than a Thousand Times Larger Than They Give Middle Income Taxpayers

Washington, DC – In advance of a rare joint House-Senate hearing on tax reform and capital gains, a new report finds that the special low tax rates for capital gains and stock dividends will continue to provide huge benefits mainly to the richest one percent of Americans, no matter how Congress resolves the standoff over the expiring Bush-era tax cuts.

The report, from Citizens for Tax Justice, finds that the richest one percent of Americans would enjoy an average break of $41,010 on capital gains and dividends next year under the bill passed last August by the Republican-controlled House to extend all the Bush tax cuts. They would enjoy a slightly lower average tax break of $40,990 under the bill passed by Senate Democrats last July to extend most, but not all, of the Bush tax cuts. Americans in the middle fifth of the income distribution would enjoy an average capital gains and dividend tax break of just $30 next year under either approach. The report is available at this link.

Capital gains, which are the profits obtained from selling assets for more than their purchase price, were already taxed at lower rates than other income when President George W. Bush took office. The Bush tax cuts lowered the capital gains rate further and expanded the break to apply to stock dividends.

“The bad news is that none of the approaches to extending the Bush tax cuts would change the fact that these lower tax rates for investment income are a huge break benefiting the very wealthiest Americans,” said Steve Wamhoff, Legislative Director at Citizens for Tax Justice (CTJ). “The good news is that both parties are talking about extending those tax cuts for only one year and then devising a comprehensive tax reform that makes dramatic changes. The question now is how Congress will define ‘reform.’”

The CTJ report, Ending the Capital Gains Tax Preference Would Improve Fairness, Raise Revenue and Simplify the Tax Code, released today makes five points.

1) The capital gains tax preference mainly benefits the richest one percent of Americans.
2) It reduces revenue, despite claims to the contrary.
3) It gives rise to tax shelters and makes the tax code overly complicated.
4) These problems will be mitigated, but certainly not eliminated, by the reform of the Hospital Insurance tax coming into effect in 2013.
5) The way to fully resolve the problems described here is to eliminate the special, low personal income tax rates for capital gains so that they are taxed just like any other income.

The hearing, which is scheduled for today at 10 a.m. EST, will be held jointly by the House Ways and Means Committee, which is controlled by Republicans, and the Senate Finance Committee, which is controlled by Democrats. The hearing is part of a series of unusual joint hearings to address topics related to tax reform.

Many members of the two committees have shown a willingness to retain, and even expand, some tax preference for investment income. The CTJ report recommends eliminating it altogether and points out that repealing this break completely is not a radical proposal – the Tax Reform Act of 1986 eliminated the capital gains tax break so that all income was taxed at the same rates. Preferential rates for capital gains were subsequently reintroduced into the tax code and the break was gradually increased by subsequent Presidents and Congresses. It was expanded dramatically under President George W. Bush.

“Any overhaul of the tax code that continues to tax the income of wealthy investors like Warren Buffett at lower rates than other income is not worthy of the term ‘reform,’” said Wamhoff.

Citizens for Tax Justice (CTJ), founded in 1979, is a 501 (c)(4) public interest research and advocacy organization focusing on federal, state and local tax policies and their impact upon our nation (www.ctj.org).

Republican Presidential Candidate Mitt Romney was caught on tape explaining to a group of prospective donors that 47 percent of Americans “pay no income tax” and generally fail to contribute their fair share. In identifying these presumed slackers who would never vote for him, Romney betrayed his own myopia about how the tax system works.

Here’s what Romney doesn’t talk about when he talks about taxes.

1. All Americans Pay Taxes

If you look at the tax system as a whole, the share of taxes paid by Americans in each income group is similar to their share of total income.

While Romney is about right that 47 percent of Americans do not specifically pay the federal income tax (according to Tax Policy Center Data), this statement is extremely misleading because it disappears the more than half of this same group that pays payroll taxes. And, every American pays state and local taxes – income, sales, property, etc.

In fact, the bottom 20 percent of taxpayers pays substantially more in state and local taxes as a percentage of their income than any other income group.

Are there people out there who don’t pay any taxes? When we went looking, we couldn’t find any, so we had to make one up.

2. Our Federal Tax System Rewards Work and Combats Poverty, and that’s Good

While every American pays some taxes, it is the case that about 18 percent of Americans pay neither payroll nor federal income taxes. Who are these alleged freeloaders? About 60 percent of them are elderly, meaning that they’re unable to work and are largely living on limited retirement income.

The rest of the households that don’t pay payroll or federal income taxes are low income households bringing in less than $20,000 each year, and who are benefitting from highly effective tax credits like the earned income tax credit (EITC) and child tax credit (CTC).  These credits incentivize work while providing much needed support to low and middle income family budgets, and in 2010 they were responsible for lifting 9.2 million people, including 4.9 million children, above the poverty line.

The effectiveness of these credits is so widely recognized across the political spectrum that every single president since Gerald Ford, from Reagan to Obama, has enacted expansions of the EITC or CTC.  Ronald Reagan once called the EITC the “the best anti-poverty, the best pro-family, the best job creation measure to come out of Congress,” and George W. Bush expanded it as part of his 2001 tax cuts.

3. Also Paying No Federal Income Tax Are High Wealth Individuals and Highly Profitable Corporations

Low income families who pay nothing in federal income taxes are using provisions that were written into the tax code by Congress, just like wealthy corporations and individuals (including Romney himself) do to bring down their tax bills.

On the corporate side, Citizens for Tax Justice found that from 2008-2011, 30 Fortune 500 companies, including the likes of General Electric and Verizon, made $205 billion in profits, yet their overall tax bill was actually negative. The corporate tax system has become so full of loopholes and tax breaks (yes, written by Congress) that what even the most profitable companies actually pay on average is roughly half the statutory corporate tax rate.

As far as the wealthiest Americans, a recent IRS study found that in 2009 a shocking 35,000 Americans making over $200,000 paid not a dime in federal income tax. Similarly, many of the country’s wealthiest Americans, like billionaire investor Warren Buffet, pay lower tax rates than middle class Americans, largely due to the tax break on capital gains income and a plethora of other tax loopholes.

Slow but steady progress toward enforcing state sales taxes on online purchases continues.  Amazon.com has agreed to begin collecting sales taxes in Pennsylvania, and the state’s Revenue Department plans to start auditing and penalizing other online retailers with a physical presence in the state that fail to collect the tax.

Promises from Iowa lawmakers to flatten and lower income tax rates and roll back business property taxes are worrisome. But when House Republicans and the governor recently sketched out their ideas for pursuing this agenda, they actually (and deliberately) “offered no specifics on any of their tax relief and reform commitments.”  The state requires a balanced budget, so these tax cuts will need to be paid for and the choices available are limited: cut services or increase other taxes

While state lawmakers love to offer tax breaks in the name of job creation, Missouri might be learning to resist the urge. Governor Jay Nixon has asked his Tax Credit Review Commission, which he created in 2010 to provide an independent review of the state’s many tax credits, to update its 2010 report, which was harshly critical of many Missouri tax credits. While the original report’s advice was never followed because the state legislature was unable to agree on paring back these tax breaks, House lawmakers are now signaling their interest in critically reviewing the tax breaks the state currently provides in the name of job creation – welcome news since there is remarkably little evidence (PDF) that state tax breaks are an effective job-creation strategy.

Last weekend, Louisiana shoppers took advantage of the Second Amendment sales tax holiday, which allows the purchase of guns and ammunition tax free.  Read why sales tax holidays are silly (PDF) and a political racket.

Bradley Birkenfeld, a former banker at the Swiss banking giant UBS, received a record-setting reward of $104 million from the Internal Revenue Service (IRS) for blowing the whistle on the bank’s systematic efforts to woo wealthy Americans investors and then help them evade taxes. Birkenfeld’s revelations resulted in UBS paying a $780 million fine to the US government, and the recovery of more than $5 billion from American taxpayers took part in the IRS’s amnesty program to avoid criminal charges for their own offshore tax evasion.

Birkenfeld participated in the UBS scheme (he served jail time and is now under house arrest). His insider disclosures led the IRS to other UBS bankers who had persuaded wealthy Americans to place $20 billion of assets in UBS in order to facilitate tax evasion that -- obviously -- boosted those clients’ returns. The IRS has charged two dozen offshore bankers and 50 American taxpayers with crimes, and at least 11 banks are still under criminal investigation.

The record payout to Birkenfeld is part of the IRS Whistleblower program that provides a substantial financial incentive, up to 30 percent of the taxes recovered, to encourage tipsters to come forward with information about tax evasion. This program is a smart piece of the IRS’s larger strategy to combat the estimated $40 to $70 billion in individual offshore tax evasion each year.

While the effort to combat offshore tax evasion has revved up over the past couple years, the IRS still lacks the tools it needs to fully confront evasion. To help fix this, Senator Carl Levin has proposed the Stop Tax Haven Abuse Act, which, among other things, would allow the Treasury to put more pressure on financial institutions that don’t cooperate with US tax enforcement. In addition, the Senate still needs to override Senator Rand Paul’s block and ratify the US-Swiss tax treaty so that the IRS can begin collecting critical information from Swiss banks about US tax evaders.

Even with the many hurdles the IRS faces, Stephen Kohn, the Executive Director of the National Whistleblowers Center, said that it had been a good day in the fight against tax evasion because the IRS sent “104 million messages to banks around the world – stop enabling tax cheats or you will get caught.”

It turns out that Mitt Romney’s energy policy adviser, Harold Hamm, is the CEO of an oil company called Continental Resources, and we all know that energy companies get some of the most generous breaks in the U.S. corporate income tax code. When we learned Hamm had submitted testimony to the House Energy and Commerce Committee claiming that his company pays a 38% effective tax rate, we had to fact check it.  We reviewed data from the company’s own financial reports and ran the numbers, and it turns out Continental Resources has paid a mere 2.2% federal corporate income tax rate on its $1,872 million in profits over the last five years.  Read our one-pager here.

CTJ's legislative director testified before the Congressional Progressive Caucus on the role of revenue in addressing America's economic and fiscal problems.

Read the written version of the testimony, which explains in detail each point that he made today:

- Tax cuts are usually an ineffective tool to spur job creation.
Congress's devotion to tax cuts is making deficit-reduction impossible.
- The expiring tax cuts that help people truly in need are a tiny fraction of the overall package of tax cuts and are no reason to extend all of them.
- Most of the "grand bargains" being discussed to address the budget deficit (including the Simpson-Bowles plan) actually reduce revenue compared to current law (that is, compared to what would happen if Congress did nothing).
- The richest Americans can afford to pay more to support the society that made their wealth possible, and claims that the rich are already disproportionately taxed are untrue.
- One way to get the rich to pay their fair share is to get corporations to pay more taxes.

With just eight weeks to go until Election Day, Republican Presidential nominee Mitt Romney continues to channel former First Lady Nancy Reagan's "Just Say No" campaign. Romney first said "no" to releasing more of his federal income tax returns and now he's saying "no" to releasing details of his plans to change the tax code for the rest of us. But in the same way adults respond to a terrible-twos child with a serious case of the “No’s”, the adults are starting to demand better answers.

Only yesterday, editorials from both the New York Times and the Los Angeles Times took Romney to task over his and running mate Paul Ryan's failure to explain to the American taxpayer just what they would do tax policy-wise. And the Washington Post was clear in its editorial that Americans deserve to know whether Romney plans to follow in the footsteps of former President George W. Bush, who “enacted tax cuts that plunged the nation into debt.”

Politico, meanwhile, reported that Republicans and movement conservatives (from George Pataki to the Wall Street Journal) are warning that the GOP ticket better come clean on its policy plans or risk losing the election. (Evidently believing that once voters hear about their plans to coddle the rich and soak everyone else they will sweep them to electoral victory.)

Two weeks ago, CTJ’s Bob McIntyre also called for Romney to stop stalling and level with the public about his secret tax plan. We, too, have written at length on the lack of math (serious or otherwise) coming from the top of the Republican ticket.

Romney's refusal to release any more of his federal income tax returns tells us he doesn't want people to know how he made his money. Is his refusal to reveal the details of how, if elected, he'd change the tax code an indication he doesn't want you to know what might happen to your money?  

Census data released today shows that while the national poverty rate remained unchanged in 2011, record numbers of Americans are still living in poverty and median income dropped by 1.5 percent, making income supports for the working poor even more important. Also important in this political year when taxes are a major campaign issue are three basic facts: poor people pay taxes, tax credits are vital in mitigating poverty, and it's not just the middle class and the rich who'll be affected by tax policy changes currently under debate.

1) Poor people pay taxes.

Everyone who works pays federal payroll taxes. Everyone who buys gasoline pays federal and state gas taxes. People who shop in stores pay the sales taxes that most state and local governments impose. State and local property taxes affect everyone who owns or rents a home (landlords pass some of the tax on to renters). And of course, most states and many cities levy an income tax.

Among the ways of measuring “how much” taxes any given income group pays, two measures that are often overlooked provide important context: what portion of its income a group spends on all taxes, and whether a group’s share of total taxes paid matches its share of total income. These measures show that the overall U.S. tax system is just barely progressive when you combine all federal, state and local taxes.

Specifically, in combined federal, state and local taxes, the amount each group of American taxpayers spends is as follows (for 2011):

The lowest earning one fifth paid 17.4 percent of their income
The next lowest one fifth paid 21.2 percent of their income
The middle one fifth paid 25.2 percent of their income
The fourth one fifth paid 28.3 percent of their income
The next ten percent paid 29.5 percent of their income
The next five percent paid 30.3 percent of their income
The next four percent paid 30.4 percent of their income
The wealthiest one percent paid 29.0 percent of their income

Total taxes paid by each income group relative to that group’s share of total income is about the same for the very poor and the very rich:

- The share of total taxes paid by the richest one percent in 2011 was 21.6 percent; that group’s share of total income was 21.0 percent.
- The share of total taxes paid by the middle 20 percent in 2011 was 10.3 percent; that group’s share of total income was 11.4 percent.
- The share of total taxes paid by the poorest fifth last year was 2.1 percent; that group’s share of total income was 3.4 percent.

State tax systems are consistently regressive, and the progressive federal income tax plays a mitigating role. Focusing only on federal income taxes paid by different groups distorts and obscures the basic facts of our tax system.

2) As the value of direct government spending on TANF declines, the Earned Income Tax Credit (EITC) and Child Tax Credit (CTC) grow in importance.

The EITC was enacted in 1975 to encourage and reward work. It provides a needed earnings boost for growing numbers of under-employed and low wage heads of household. President Ronald Reagan called it “the best antipoverty, the best pro-family, the best job creation measure to come out of Congress.” It has long had near universal, bipartisan support and has been expanded under Presidents Reagan, Clinton, Bush, and Obama.  The Child Tax Credit was introduced in 1997 to help working families offset the cost of raising their children and has also been expanded with bipartisan support.

Today, the federal revenue spent on these two tax credits is comparable to, and in some cases greater than, revenue spent on other types of programs that lift families out of poverty or keep them from falling into poverty. 

Billions of Federal Dollars Spent on Income Support Programs in 2011:
Unemployment compensation - $117.2
Food and nutrition assistance - $95.7
Earned Income Tax Credit - $55.7
Supplemental Security Income - $49.6
Family & Other Support Assistance (incl.TANF) - $26.4
Child Tax Credit (refundable portion) - $22.7

The EITC is a tax credit equal to a percentage of earnings from work up to a certain limit. The percentage varies based on how many children the family has. In 2012:

- A family with one child receives a credit equal to 34 percent of earnings, up to a maximum credit of $3,169.
- A family with two children receives a credit equal to 40 percent of earnings, up to a maximum credit of $5,236.
- A family with three or more children receives a credit equal to 45 percent of earnings, up to a maximum credit of $5,891.
(For childless workers, the maximum EITC in 2012 is just $475.)

As a family’s income rises, the EITC is phased out. The credit is reduced by a fixed percentage for each dollar exceeding a relatively low level ($22,300 for married families with children and $17,090 for unmarried families with children in 2012).

One of the EITC’s most effective features is that it is refundable. A family can receive the full benefit of the credit in the form of a refund, even if it exceeds their income tax liability, so the EITC can function to offset other kinds of taxes, including those that fall most heavily on low income families, beyond the income tax (particularly consumption taxes).

The Child Tax Credit (CTC) is available to families earning $3,000 a year or more. It is equal to a maximum of $1,000 per child and largely benefits middle-income taxpayers, but the refundable portion of the CTC does benefit low-income families. The refundable portion of the credit equals 15 percent of earnings above a specific threshold, or $1,000 per child, whichever is less.

It is important to note, of course, that while these expenditures help low income households, middle and upper-income households benefit the most from tax expenditures such as the home mortgage interest deduction and the special low rate on capital gains.

3) The EITC and CTC benefits for 13 million families with 26 million children are at stake in current tax cut debates.

The EITC and the CTC were expanded as part of the 2001 Bush tax cuts and again under the American Recovery and Reinvestment Act of 2009; all of these provisions were then extended through 2012, (under the 2010 agreement to extend the Bush tax cuts for two years). The outcome of debates over the fate of the Bush tax cuts, in Congress and among candidates for federal office, affect these anti-poverty credits.

If only the Bush era provisions of these tax credits are preserved (as per a House bill passed this year):

- The EITC would cease to provide a higher percentage for families with three or more children;
- The EITC would begin to phase out at an income level $2,000 lower for married couples;
- Fewer families would be eligible for the CTC since eligibility would begin at $13,300 rather than $3,000 in annual income.

 Preserving the 2009 EITC provisions (as per a Senate bill passed this year):
-  Would save 6.5 million working families, with 15.9 million children, a total of $3.4 billion, an average of $530 per family.

Preserving the 2009 changes to the CTC:
-  Would save 8.9 million working families, with 16.4 million eligible children a total of $7.6 billion; an average of $854 per family.

In combination, preserving both of these 2009 provisions would save 13.1 million working families, with 25.7 million children, a total of $11.1 billion, an average of $843 per family.*

* The total number of families and children affected by the CTC expansion and the EITC expansion is less than the sum of the number affected by each of them because 18 percent of families that benefit would benefit from both.

SOURCES
Section 1) Citizens for Tax Justice, “Who Pays Taxes in America,” April 4, 2012, http://www.ctj.org/pdf/taxday2012.pdf
Section 2) IRS, Internal Revenue Bulletin 2011-45, November 7, 2011, http://www.irs.gov/irb/2011-45_IRB/ar13.html#d0e1033, and FY 2013 Historical Tables, Budget of the U.S. Government, http://www.whitehouse.gov/sites/default/files/omb/budget/fy2013/assets/hist.pdf.Section 3) Citizens for Tax Justice, “The Debate over Tax Cuts: It’s Not Just About the Rich,” July 19, 2012, http://ctj.org/pdf/refundablecredits2012.pdfSections 1 and 2 use figures from the Institute on Taxation and Economic Policy’s Microsimulation Tax Model, http://www.itep.org/about/itep_tax_model_simple.php.

For Immediate Release: September 10, 2012
Contact: Anne Singer, 202-299-1066, ext. 27

Romney’s Bad Arithmetic: CTJ Report Disproves Claim that Romney Won’t Lower Taxes for the Rich

Washington, DC – On Sunday, September 9, presidential candidate Mitt Romney appeared with David Gregory on NBC’s “Meet the Press” and discussed his tax plan, which his campaign website explains would extend the Bush tax cuts, lower all income tax rates by a fifth, and introduce additional tax breaks. Romney claimed that his tax plan would not result in lower taxes for the rich because it would eliminate loopholes that currently reduce the tax bills of the rich. But Romney refused to identify those tax loopholes, or “tax expenditures” as they are often called, that he would eliminate.

“Well, I can tell you that people at the high end, high-income taxpayers, are going to have fewer deductions and exemptions,” Romney told Gregory. “Those numbers are going to come down. Otherwise they’d get a tax break. And I want to make sure people understand, despite what the Democrats said at their convention, I am not reducing taxes on high income taxpayers.” He also said that, “[w]e’re not going to have high-income people pay less of the tax burden than they pay today.”

“The question is not whether the rich will get a tax cut under Romney’s plan,” said CTJ director Robert S. McIntyre. “The question is how big the break for the richest Americans will be. We estimate that millionaires would get somewhere between $250,000 and $400,000 on average in 2013 if the plan was in effect then, no matter how Romney fills in the gaps – which are many.”

A recent CTJ report concluded that if Romney’s plan was in effect next year, people making over $1 million would get an average tax cut of $250,000 even if these wealthy taxpayers have to give up all of the tax loopholes or tax expenditures that Romney has put on the table. (This average break of $250,000 includes about $146,000 that millionaires would receive on average if Congress extended the Bush tax cuts in effect today but made no other changes.)

In other words, for very high-income taxpayers, the value of the tax rate reductions and other new breaks spelled out in Romney’s plan far outweigh the value of all of their tax loopholes and tax expenditures – meaning it would be impossible for Romney to implement his plan without lowering their taxes substantially.

The CTJ report also found that if Romney implemented his plan without touching tax loopholes or tax expenditures, then people who make over $1 million would receive an average tax cut of $400,000. This scenario seems very possible given that Romney has failed to specify a single tax loophole or tax expenditure that he would reduce or eliminate.

The Tax Loopholes Romney Took Off the Table Are the Most Targeted to the Rich

As the CTJ report explains, millionaires would not get such a large tax break under Romney’s plan if he eliminated the many tax loopholes and tax expenditures for investment income in the tax code – but Romney has taken these off the table. For example, the special break for capital gains and stock dividends mostly benefits the richest one percent of taxpayers, but Romney’s campaign website says that his plan would “maintain current tax rates on interest, dividends, and capital gains.”

Meanwhile, Romney’s running mate, Congressman Paul Ryan, told George Stephanopoulos on ABC’s “This Week” that most tax loopholes go to the rich, ignoring the fact that he and Romney have pledged to keep the main tax loophole for the rich, the preferential rates for capital gains and stock dividends.

“Now the question is not necessarily what loopholes go,” Ryan said “but who gets them. High income earners use most of the loopholes. That means they can shelter their income from taxation.”

Actually, the capital gains and dividends break provides the most widely-used tax shelters for the rich, including the technique by which Mitt Romney and other private equity fund managers characterize their compensation as “carried interest,” which they claim is a type of capital gains, in order to cut their tax rate by more than half.

In October of 2011, CTJ director Robert S. McIntyre was the first observer to calculate that Romney’s tax rate was likely about 14 percent because most of his income is characterized as capital gains using the loophole for “carried interest.”

By leaving in place the lower rates for capital gains and stock dividends, Romney’s plan would leave in place the existing incentives to engage in these types of tax shelters.

* * *

Citizens for Tax Justice (CTJ), founded in 1979, is a 501 (c)(4) public interest research and advocacy organization focusing on federal, state and local tax policies and their impact upon our nation (www.ctj.org).

We were not very hopeful that the Democratic National Convention (DNC) in Charlotte would be any more enlightening about tax policy than its Republican counterpart in Tampa. In a previous post we criticized the drafters of the Democratic platform for tripping over themselves to celebrate tax cuts and failing to say much about finding new revenue beyond allowing the Bush tax cuts to partially expire for the richest two percent of Americans.

But the DNC turned out better than we expected. It wasn’t just Obama’s mocking the GOP stance on taxes and smaller government (deservingly) as a cure for everything: “Feel a cold coming on? Take two tax cuts, roll back some regulations, and call us in the morning.” Several DNC speeches were surprisingly specific and brought to light some important issues. The following are some highlights.  

Joe Biden Blasts Romney’s “Territorial” Tax

Governor Romney believes that in the global economy, it doesn’t much matter where American companies put their money or where they create jobs. As a matter of fact, he has a new tax proposal — the “territorial” tax — that experts say will create 800,000 jobs, all of them overseas.

Biden was citing a study estimating that adoption of a territorial tax system by the U.S. would create 800,000 jobs overseas, and that during a recession those jobs would likely come at the cost of U.S. jobs.

There are many, many reasons to oppose a territorial tax system, which would essentially exempt the offshore profits of U.S. corporations from U.S. taxes. We have explained in a fact sheet and in a more detailed report that a territorial system would increase the already significant incentives for corporations to move operations (and jobs) offshore, or to just disguise their U.S. income as foreign income by using complex transactions involving tax havens.

Bill Clinton Dismantles Romney’s Tax Plan

We have a big debt problem, we got to reduce the debt, so what’s the first thing he [Romney] says he’s going to do? Well, to reduce the debt, we’re going to have another $5 trillion in tax cuts, heavily weighted to upper-income people… Now, when you say, what are you going to do about this $5 trillion you just added on? They say, oh, we’ll make it up by eliminating loopholes in the tax code. So then we ask, well, which loopholes, and how much? You know what they say? See me about that after the election…

This is the defining feature of Mitt Romney’s tax plan — he simply refuses to tell us which loopholes he would reduce or eliminate to make up the cost of his 20 percent reduction of personal income tax rates and the other new breaks he proposes. This makes it impossible for organizations like Citizens for Tax Justice and the Tax Policy Center to say exactly what the impact will be on different income groups — and we’d be naïve if we didn’t think this was intentional.

Clinton went on about the three possible ways Romney would have to fill in the details of his plan.

One, they’ll have to eliminate so many deductions, like the ones for home mortgages and charitable giving, that middle-class families will see their tax bills go up an average of $2,000, while anyone who makes $3 million or more will see their tax bill go down $250,000. Or, two, they’ll have to cut so much spending, that they’ll obliterate the budget for national parks, for ensuring clean air, clean water, safe food, safe air travel. They’ll cut way back on Pell Grants, college loans, early childhood education, child nutrition programs… Or, three… They’ll go and cut taxes way more than they cut spending… and they’ll just explode the debt and weaken the economy.

Our own analysis of Romney’s plan found that people who make over $1 million would get an average tax break of $400,000 if Romney didn’t bother to reduce or eliminate any of the tax loopholes enjoyed by the rich. On the other hand, we found that even if he took away all of the loopholes enjoyed by the rich, the people making over $1 million would still get an average break of $250,000. Millionaires would get huge breaks no matter what because the benefit of Romney’s rate reductions would outweigh all the tax loopholes they enjoy.

For middle- and lower-income families, the loss of these tax loopholes or tax expenditures could exceed the gains from Romney’s promised rate reductions, and this would have to be the case if Romney is to offset the costs of his tax breaks as he promises. Otherwise, the spending cuts or deficit-explosion described by Clinton would occur.

An analysis from the Tax Policy Center, which provided the figures quoted by Clinton, came to the same sort of conclusion.

Eva Longoria: I Don’t Need Romney’s Tax Cut for Millionaires

OK, we know, we know, you don’t normally expect to hear anything enlightening about tax policy from a celebrity best known for her role on Desperate Housewives. But Longoria did articulate a point that hasn’t always been made clearly.

Mitt Romney would raise taxes on middle-class families to cut his own and mine. And that’s not who we are as a nation, and let me tell you why. Because the Eva Longoria who worked at Wendy’s flipping burgers, she needed a tax break. But the Eva Longoria who works on movie sets does not.

That sums up the idea behind progressive taxes. Tax breaks like the Earned Income Tax Credit (and to an extent, the Making Work Pay Credit that was in effect for a couple years) are the types of tax cuts that help people who needed it — people struggling to get by on low-wage work. Sadly most of the tax breaks enacted in recent years are the other type, the tax cuts that go to people like Eva Longoria today.

This is reminiscent of the conversation in 2008 between candidate Obama and Joe Wurzelbacher, aka “Joe the Plumber.” Joe said it was wrong to end the Bush tax cuts for high-income people because he hoped to be one of those people one day. Obama replied that Joe needs a tax cut now, while he’s working to get his business off the ground, and not after he’s making over $250,000 a year.

As part of the governor’s campaign to redistribute wealth to corporations and the state’s wealthiest citizens, Wisconsin lawmakers last year reduced the state's Earned Income Tax Credit (EITC) for low income, working families.  Now, leading Republican legislators have signaled their intention to build on this tax hike for the poor by dramatically cutting income taxes for the best-off Wisconsinites next year.

To that end, a joint House-Senate committee convened a hearing on income tax reform this week that was generally understood to be designed to give cover to legislative leaders' goal of replacing the state's graduated income tax with a flat-rate income tax (thus undermining the most progressive feature of any tax system, the graduated income tax).

Matt Gardner, Director of the Institute on Taxation and Economic Policy, was one of four panelists invited to testify before this hearing, and neither he nor any of the witnesses offered meaningful support for the lawmakers’ plan. Gardner's testimony pointed out that graduated income taxes (PDF) are the most sustainable long-run funding source available to states, and that moving to a flat rate income tax would actually slow revenue growth over time. Gardner also explained that the alleged “volatility” of this revenue source (e.g. revenues dip during economic downturns) is more a fiscal management problem than a tax problem. Most states maintain a rainy day fund that functions like a family savings account – it grows in good times and is there to help during bad times. Most states should also be significantly expanding their tax base by expanding the sales tax to services, modernizing their gas tax and closing loopholes in the personal and business tax codes. Gardner also reminded legislators that they should not consider relying on a broader sales tax to make up revenues lost to income tax cuts because sales taxes (PDF) are volatile in the short run as well as regressive, putting the heaviest burden on the lowest income households.

Instead, Gardner advised that the first step toward reforming Wisconsin's income tax should be eliminating loopholes such as the state's 30 percent capital gains tax break. Other panelists agreed.

It’s not necessarily what all of the lawmakers wanted to hear; we will learn when they return to session in January, 2013, if they decided to listen anyway.

In its 2012 Platform, the Democratic Party broadly calls for a tax system that asks “the wealthiest and corporations to pay their fair share,” while also taking “decisive steps to restore fiscal responsibility.” The actual policy proposals called for in the platform, however, are wholly inadequate to achieve either tax fairness or fiscal sustainability.

The Bush Tax Cuts

The most important platform plank on the individual side of the tax system is the call to allow the “Bush tax cuts for the wealthiest to expire,” which reflects President Obama’s proposal to allow the Bush tax cuts to expire for income over $250,000. Under the president’s proposal, 98.1% of Americans would continue receiving the entirety of their Bush tax cuts. It’s important to note that while the wealthiest Americans would lose part of their tax cuts under President Obama’s proposal, they would still receive generous tax breaks because any income up to $250,000 (or $200,000 for singles) would continue to be taxed at the low, Bush tax cut rates. As a result, the wealthiest 1%, for example, would get an average tax break of $20,130 in 2013.

It is also important to note that even this partial extension of the Bush tax cuts the president proposes would increase the deficit by an astounding $4.2 trillion over the next decade. To be sure, President Obama’s plan is much more fiscally responsible than a full extension of the Bush tax cuts, which would increase the deficit by $5.4 trillion. But fiscal responsibility will eventually require something bolder than simply extending most of the tax cuts that are responsible for most of the deficit.

Corporate Tax Reform

Turning to corporate taxes, the Democratic platform follows the misguided “Framework for Corporate Tax Reform,” introduced by President Obama earlier this year, which proposes to use the closure of corporate tax loopholes to pay for lower corporate tax rates. It also proposes an expansion of the research and manufacturing tax credits. What this framework gets right is a call to end the egregious loopholes and tax breaks that allow major corporations to pay an average effective tax rate of half the statutory rate, with many corporations paying nothing at all.

The problem is that instead of using the revenue raised by eliminating tax loopholes and breaks to fund desperately needed government investments and reduce the deficit, the Democratic platform, like the president’s framework, squanders the revenue on lower corporate tax rates and/or additional wasteful tax breaks. In other words, this kind of “revenue-neutral” corporate tax reform is not what the US needs; instead, we need revenue-positive reform.

Stuck in the Anti-Tax Mindset

The Democratic Party 2012 platform reveals a party deeply committed to the anti-tax mindset that historically is associated with the Republican Party. Rather than laying out the cold, hard truth about how the US needs to raise a substantial amount of revenue to meet its commitment to future generations, the Democratic platform seems an attempt to one–up Republicans on the virtues of tax cutting by touting the wide variety of cuts Democrats already enacted, and the massive amount they plan to extend. Given the enormous need for revenue to fund public investments and eventually reduce the deficit, a record of tax-cutting should be a source of embarrassment rather than pride or celebration.

More and more people are asking if Bain Capital’s tax avoidance strategies are more than merely aggressive. On August 23, Gawker.com released a staggering 950 pages of documents related to Bain, the private equity firm that Mitt Romney founded, that confirm a lot of what we had previously surmised, including the fact that the Bain private equity funds set up “blocker” corporations to help tax-exempt investors avoid the unrelated business income tax and help foreign investors avoid tax in the U.S. and in their home countries.

CTJ senior counsel Rebecca Wilkins summarized it for Huffington Post: “The Bain documents posted yesterday show that Bain Capital will go to great lengths to help its partners and its investors avoid tax. Beyond simply putting their funds offshore, the Bain private equity funds are using aggressive tax-planning techniques such as blocker corporations, equity swaps, alternative investment vehicles, and management fee conversions.”

The management fee conversions, detailed in several of the fund documents, do what they sound like they do: they convert some of the private equity firms’ annual management fees from clients, which would be taxed as ordinary income, into increased shares of partnership profits known as “carried interest”.  Carried interest is how these firms have structured their performance-based compensation from managing their clients’ investments, and carried interest is taxed at the special low rate at which capital gains are taxed. The management fee conversion is an effort to get yet another form of client compensation taxed at the capital gains rate, which is less than half the rate at which it would be taxed if it were ordinary income. These conversions save private equity firms’ partners millions of dollars in income taxes (the Bain partners alone have saved an estimated $220 million).

Colorado Law Professor Vic Fleischer, an expert on the taxation of private equity, quickly branded the management fee conversions as improper. “Unlike carried interest, which is unseemly but perfectly legal, Bain’s management fee conversions are not legal.”

It looks as though the New York Attorney General agrees. In July, weeks before the Gawker document dump, AG Eric Schneiderman served subpoenas on more than a dozen private equity firms, including Bain Capital.  The AG’s office is seeking documents related to whether the firms improperly converted management fees into additional carried interest, and running the investigation through its Taxpayer Protection Bureau. 

As controversial as private equity firm tax practices have become (thanks to Mitt Romney’s candidacy), we are likely to be hearing more about this investigation soon. Stay tuned.

Like the Republicans last week, Democrats are featuring governors at their national nominating convention. Because convention speakers are chosen as the parties’ ambassadors to new audiences during these TV spectacles, the state policy team at the Institute on Taxation and Economic Policy are providing quick sketches of current governors from both parties who have been leaders – for better and for worse – in state tax policy. Below are profiles of tonight’s speakers, in order of appearance, at the DNC in Charlotte, NC. (The Sept. 5 speakers are profiled here.)

Connecticut Governor Dan Malloy: Connecticut Governor Dan Malloy championed a balanced and sensible approach to his state’s budget crunch last year (his first in office) that put the Nutmeg State on a path to fiscal sustainability while also protecting critical and core public services that all Connecticut residents depend on.  Malloy’s budget raised substantial new revenue by asking his state’s wealthiest residents and highly profitable corporations to pay more, and by broadening the sales tax base to include more goods and services.  At the same time, Malloy cut taxes for the state’s poorest working families with the introduction of a significant refundable state Earned Income Tax Credit (EITC), a great example of how the tax system plays a key role in alleviating hardship and boosting incomes for low-income working families.  Governor Malloy (who earned CTJ’s Most Likely to Make the Rich Pay Their Fair Share award)   frequently refers to himself as the “Anti-Christie” in juxtaposition to the New Jersey Governor who has rejected even a temporary tax increase on Garden State millionaires passed by his legislature, but has had no qualms about increasing taxes on his poorest constituents.

Colorado Governor John Hickenlooper: Despite coming into office after defeating two anti-tax candidates, Governor Hickenlooper has done very little to fix Colorado’s devastatingly regressive tax system. In fact, he refused to support a Democratic backed ballot initiative to raise taxes, Proposition 103, that would have protected funding for public schools and universities in Colorado. One small step he has taken was signing legislation that ended the agricultural property tax loophole, which had somewhat famously allowed Tom Cruise to claim massive tax breaks for letting sheep occasionally graze around his mansion.

Governor Hickenlooper has the chance to be a great reformer, however, if he uses his signature TBD Initiative (a year-long series of town halls across the state) to make the case for repealing Colorado’s crippling TABOR law and enacting graduated income tax brackets.

Delaware Governor Jack Markell: As the newly elected chair of the National Governor’s association, Governor Markell will play a leadership role in setting the policy agenda across the states over the next year. This could be a very good thing if Governor Markell sticks to the principles laid out his Washington Post op-ed, which argued that providing robust infrastructure, education, and other critical government services are more important to job creation than lower taxes. Unfortunately, last year Governor Markell did not fully stand by these principles when he squandered the improved budget outlook of Delaware by signing a wasteful tax break for banks in the state.

In addition, while Governor Markell cannot be blamed for making Delaware one of the world’s worst tax havens, he has been complicit in maintaining the low tax rates and corporate opacity that have allowed this tax haven to thrive.

Montana Governor Brian Schweitzer (not yet scheduled): Governor Schweitzer has yet to come out strongly in favor of significantly improving Montana’s regressive tax structure.  He has advocated for reducing taxes on business equipment and offering property tax breaks for homeowners. There is a lot of room for improvement in terms of fixes necessary to the Montana income tax, which currently offers a costly deduction for federal income taxes paid (PDF) and a capital gains tax break -- which both disproportionately benefit the wealthiest taxpayers. The Governor has missed an opportunity to come out squarely for repeal of these measures, but Schweitzer, who’s said he would boast about his state’s low taxes and strong finances during his DNC appearance, deserves credit for not squandering the state’s surplus on unjustified tax cuts, unlike governors in other states.

Like the Republicans last week, Democrats are featuring governors at their national nominating convention. Because convention speakers are chosen as the parties’ ambassadors to new audiences during these TV spectacles, the state policy team at the Institute on Taxation and Economic Policy are providing quick sketches of current governors from both parties who have been leaders – for better and for worse – in state tax policy. Below are profiles of tonight’s speakers, in order of appearance, at the DNC in Charlotte, NC.

North Carolina Governor Bev Perdue: Governor Bev Perdue took over leadership of the Tarheel state in 2009 during the worst economic recession in modern history, which had caused revenues to plummet and budget gaps to widen.  Perdue recognized the need for tax increases to be part of a balanced and sensible approach to solving North Carolina’s fiscal crisis.  The final budget adopted in 2009 included two temporary taxes – a one cent increase in the state’s sales tax rate and a personal income tax surcharge on the state’s wealthiest residents.  In 2011, revenues were still not fully recovered and Perdue proposed extending most of the temporary sales tax for another two years to prevent deeper cuts to education spending, but her proposal was blocked by the newly minted Republican majority in the state’s House and Senate.  She tried again in 2012, but was once again stopped in her tracks.  Perdue cannot be called the most progressive governor on taxes, but her strong commitment to public education gave her the courage to increase taxes early on and to later propose more, even in a politically challenging environment.  North Carolina Governor Bev Perdue announced earlier in the year that she is not seeking reelection for a second term in office.

Illinois Governor Pat Quinn: Illinois Governor Pat Quinn’s record on taxes is a mixed bag. While he’s shown leadership in terms of advocating for personal and corporate income tax increases and increasing the state’s personal exemption and Earned Income Tax Credit, the Governor has too often offered handouts to companies threatening to leave the state. Under this Governor’s watch, Illinois also stopped funding a property tax credit designed to specifically help low-income seniors and the disabled.  The Illinois tax structure is one of the worst in the country in terms of asking low-income people to pay far more than their fair share. So far, Governor Quinn has not stood up for real progressive policy changes and his piecemeal, situational approach to tax policy is only making his state’s tax code more complicated.

Rhode Island Governor Lincoln Chafee: Governor Lincoln Chafee, an independent, called for tax increases aimed at refilling Rhode Island’s depleted coffers during his election campaign in 2010.  Chafee made good on that promise and earned the A+ for Effort at Sales Tax Reform award in Citizens for Tax Justice’s Governors Yearbook.  In his first year in office, Chafee introduced a sensible tax reform package that would have modernized his state’s sales tax and raised revenue needed to mitigate spending cuts.  Chafee also supported changes to the Ocean State’s corporate income tax, including combined reporting, a smart rule that levels the playing field for small business by preventing multi-national corporations from sheltering profits in other states, as well as an improved corporate minimum tax.  Unfortunately, lawmakers rejected most of his proposal.  Chafee is one of only a handful of governors over the past two years to propose tax increases in order to restore investments or prevent deeper cuts in education, transportation, health care and other spending priorities.

Massachusetts Governor Deval Patrick: Massachusetts Governor Deval Patrick has spent his six years in office largely punting on tax policy for the Bay State.  With the exception of creating a Tax Expenditure Commission last year to examine the more than $26 billion in tax breaks the state hands out each year (which amounts to more money than the state is expected to take in this year!), Patrick has not proven himself to be a leader on improving his state’s tax system. Patrick has publicly supported making the state’s personal income tax more progressive by moving from a flat rate to a graduated rate, but also said he would not “pursue” it in his second term. The governor has supported some revenue increases in his two terms to prevent spending cuts, but mostly they have been  low-hanging fruit in the form of excise taxes (alcohol, tobacco, etc) or have relied heavily on the sales tax.  And last year, Patrick supported yet another annual sales tax holiday in his state despite admitting that he supported it, “frankly, not because it is particularly fiscally prudent, but because it is popular…. People want it."

Maryland Governor Martin O’Malley: Last but definitely not least, Governor O’Malley has been one of the nation’s boldest leaders in standing up to anti-tax forces and protecting critical public programs, which is why Citizens for Tax Justice gave him the Defender of Public Services award in our 2012 Governors Yearbook. While many governors across the nation were continuing to slash public services in order to expand unsustainable tax breaks, Governor O’Malley bucked the national trend and ushered in a progressive tax increase that allowed Maryland to stop further cuts to education, health services and other crucial state government services. Continuing his record, Governor O’Malley has also shown his willingness to stand up for good policy – even if it’s unpopular – with his advocacy of a responsible increase in the gas tax to improve Maryland’s transportation infrastructure.

Almost all proposals for a broad-based national tax on consumption are terrible ideas. But there is one such proposal — a tax on carbon emissions — that might make sense so long as it includes features to keep it from burdening middle-income Americans and hitting low-income Americans the hardest. A new report from MIT researchers explores options for enacting a carbon tax, but unfortunately spends a lot of time discussing how the resulting revenue could be used to finance ill-advised cuts in other taxes.

Any consumption tax, like a value-added tax (VAT) or a sales tax, is regressive, taking a much larger percentage of income from middle- and low-income families than it would take from the rich.

That’s because middle- and low-income families have little choice but to put most or all of their income towards consumption (spending their paychecks to obtain basic necessities) while rich families can put a lot of their income towards savings — which are not touched by a consumption tax.

The same is true of a tax on carbon emissions, which would raise the price of gasoline, coal-generated electricity, and any product that is produced or shipped using fossil fuels (which is just about everything).

A carbon tax might be justified if these problems were addressed, and it met the compelling interest of preventing catastrophic climate change caused by greenhouse gasses. A tax on carbon emissions would reduce the amount of greenhouse gasses released into the atmosphere as manufacturers, shippers, and consumers shift away from fossil fuels.

Even though the purpose of a carbon tax would be to reduce the amount of carbon emissions, there would still be plenty of carbon emissions to be taxed, resulting in significant revenue. How that revenue is used determines whether or not the regressive impact of the tax is addressed.

The Congressional Budget Office recently found that a tax of $20 on each ton of carbon emissions would raise $1.25 trillion over a decade if it went into effect in 2012. The MIT report finds that it would raise $1.5 trillion over a decade if it went into effect in 2013.

In offering options for how this revenue could be used, the MIT report relies on some questionable assumptions that other types of taxes cause significant economic distortions. (A contrary view, in research from economists Peter Diamond and Emmanuel Saez, for example, finds that taxes affecting the rich are especially unlikely to create much economic distortions.) Yet the MIT report suggests that lower taxes on the well-off might be an appropriate use of carbon-tax revenue. To be fair, the MIT report does show (on pages 12-15) that the overall impact of a carbon tax would be regressive if the revenue is used to cut the personal or corporate income taxes. It also finds that the overall effect could be progressive if the revenue is used to shore up social programs that alleviate poverty.

In other words, a carbon tax could reasonably be considered as a part of a larger tax and budget reform if the revenue is used to offset the tax increases on middle- and low-income families, protect the elderly, and shore up the public investments that benefit people who would otherwise be hardest hit by such a tax.

But even if a Congress full of global-warming deniers would be willing to consider a carbon tax, the big question that would still remain is whether it would also be willing to offset the tax’s otherwise very regressive effects.