Federal Tax Issues News


Everyone Who Calls for Repealing the Corporate Tax Is Wrong


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Every now and then something happens — a Senate investigation into Apple’s tax dodging, Burger King’s plan to become Canadian — that demonstrates that our corporate income tax is very ill. Every time, pundits debate how to cure this disease, offering various tax reform proposals. And every time, a few suggest we shoot the patient, that is, repeal the corporate income tax, which is expected to raise $4.6 trillion over the coming decade.

The idea of repealing the corporate tax seems to have just one virtue, which is that it’s simplistic enough to fit into a blog post or op-ed. In every other way this idea is terrible.

The argument made is usually some variation of the idea that corporate profits are eventually paid out as stock dividends to shareholders who pay personal income taxes on them, so there is no need to also subject these profits to a corporate income tax. But in real life that’s not how things usually work.

CTJ published a fact sheet last summer that explained three very important reasons why we need the federal corporate income tax.

First, a corporation can hold onto its profits for years before paying them to shareholders. This means that if the personal income tax is the only tax on these profits, tax could be deferred indefinitely. It also means that people with large salaries could probably create shell corporations that would sell their services. Their income would then be transformed into corporate income and any tax would be deferred until they decide to spend the money, which could be decades later, if ever.

Second, even when corporate profits are paid out as stock dividends to shareholders, under our current system about two-thirds of those stock dividends are paid to tax-exempt entitles, such as pensions and university endowments which are not subject to the personal income tax. In other words, a lot of corporate profits would never be taxed if there was no corporate income tax.

Third, our tax system overall is just barely progressive and it would be a lot less progressive if the corporate income tax were repealed. The corporate income tax is a progressive tax because it is mostly paid by the owners of capital — people who own corporate stocks (which pay smaller dividends because of the tax) and other business assets.

Some have tried to argue that the corporate tax is mostly borne by labor because it chases investment out of the United States, leaving working people with fewer jobs and/or lower wages. But corporate investment is not perfectly mobile and, as a result, the Treasury Department has concluded that 82 percent of the corporate income tax is paid by owners of capital, and consequently, 58 percent of the tax is paid by the richest 5 percent of Americans and 43 percent is paid by the richest one percent of Americans. Congress’s Joint Committee on Taxation has reached similar conclusions.

There are various ways Congress could conceivably repeal the corporate income tax and get around these problems but each presents so many complications and uncertainties that one wonders what could possibly be gained in the effort. One proposal that has received attention would partly offset the cost of repealing the corporate income tax by taxing dividends and capital gains as ordinary income (repealing the lower rates for those types of income) and taxing the gains on corporate stocks each year rather than only when they are realized when the stocks are sold. Those are all fine ideas in themselves, but they don’t make up the revenue loss from repealing the corporate income tax. The net effect of the proposal, as its proponents acknowledge, would be to lose about half the revenue raised by the corporate income tax.

Congress could make additional changes, for example, ending the tax-exempt status of those pensions and university endowments that receive so many stock dividends without paying any tax on them, but that seems politically unrealistic to say the least.

Moreover, repealing the corporate tax could create worrisome problems of tax compliance. For example, Jared Bernstein has noted that we do, of course, have many businesses structured as “pass-through” entities whose profits are subject only to the personal income tax and not the corporate income tax, but these businesses are linked to even greater tax compliance problems.

"One study found that the tax gap — the share of taxes owed but not collected — was 17 percent for corporations and 43 percent for business income reported by individuals. That research is over a decade old, but more recent tax gap research found that business income taxed at the individual level was the single largest source of the gap, and that sole proprietors report less than half of their income to the I.R.S."

The bottom line is that repealing the corporate income tax is a seemingly simple answer that would create far more problems than it would solve and would almost surely result in less revenue, a more regressive tax system, and even more complexity and compliance problems than we have now.


Will Congress Let Burger King's Shareholders Have It Their Way?


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Burger King’s statement that its planned merger with the Canadian donut and coffee chain Tim Hortons is not about avoiding taxes might be one of the biggest whoppers we’ve heard about corporate inversions.

The merger will allow Burger King to claim for tax purposes that it is owned and controlled by a smaller Canada-based company. We’ve heard this song before — several times in the last three months (Medtronic, Mylan, Walgreen and Pfizer) and 13 so far this year. Corporate bosses and their lobbyists continue to claim that they are doing nothing wrong. Gaping loopholes in the law allow them to do this, and without action from Congress or the administration, there is no incentive for corporations to stop exploiting those loopholes. 

Corporate inversions have made so many headlines lately that even people outside the tax world know how big businesses are using the practice to game the system: Buy a smaller foreign corporation, maintain the same executives, continue managing the firm from an office in the United States, maintain most of the same shareholders, but file a bit of paperwork and claim the company is based in a foreign county. In the case of Burger King, that country is Canada. The most likely motivation for this sleight of hand is tax avoidance.

Inversions are confusing partly because corporations pursue them for different reasons. For example, some corporations invert to avoid paying U.S. taxes on the profits they have already earned (or claimed to have earned) offshore. After inverting, corporations can get this offshore cash to their shareholders without paying the U.S. tax that would normally be due. This may not be relevant for Burger King, which has little offshore cash compared to other corporations.

But another reason corporations invert is to avoid paying U.S. taxes on profits earned in America in the future, and this is relevant for a company like Walgreen’s (which was considering inversion until recently) or Burger King. This can be accomplished through earnings stripping, a practice that effectively shifts profits earned in the United States to another country where they will be taxed less. So for Burger King, this means it could continue to earn profits off the burgers and fries its sells to Americans yet use accounting tricks to shift those profits to Canada so they will not be subject to U.S. taxes.

Looking past the technical details, the bottom line is this: It’s insulting that the company intends to continue profiting by selling a quintessentially American product to U.S. consumers but then pretend to be Canadian when the time comes to pay taxes.

Of course, the real insult is that a majority of our elected members of Congress have so far not closed the loopholes in our tax laws that allow this nonsense to continue. Several proposals, which have been described by Citizens for Tax Justice, would accomplish this.

Sadly, our lawmakers’ motto regarding big, powerful corporations seems to be “Have it their way.”


New CTJ Report: Proposals to Resolve the Crisis of Corporate Inversions


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The ongoing wave of American corporations inverting, or reincorporating as offshore companies to avoid U.S. taxes, has resulted in a bewildering variety of solutions being debated in Washington and in the editorial pages. A new report from Citizens for Tax Justice explains how these proposals differ and which are most effective.

The proposals vary in several ways. Some target inversion by stopping the IRS from recognizing the “foreign” status of a corporation that has not actually moved abroad except on paper, while others target the tax dodging practices that inversion facilitates and which provide its true motivation.

Contrary to corporate lobbyists’ claims, corporations do not seek to become foreign for tax purposes simply because other countries have lower statutory corporate tax rates. They do it because inversion makes it easier to use accounting tricks to dodge U.S. taxes. For example, an inverted company can strip earnings out of the American business by making large interest payments to the ostensible foreign company that owns it, and it can use accounting tricks to move offshore profits into the U.S. without triggering the tax normally due when U.S. companies repatriate offshore profits.

An American corporation can accomplish these feats after it creates, through inversion, the pretense that it’s owned by a foreign company, even if this change exists only on paper. So, in addition to changing the basic rules about when an American corporation will be recognized as having become a foreign one (the basic proposal to crack down on inversions), many people in Washington are also thinking about ending these two tax dodges to eliminate the incentives to invert.

Another difference between the proposals being debated is that one approach would do this through legislation while another would accomplish this through regulatory changes under existing law. The regulatory route is important in case Congress fails to provide a legislative solution — which seems increasingly likely given some of the impossible conditions key lawmakers have placed on approving any legislative solution.

There is nothing inevitable about corporate inversions. There is no fundamental reason why corporations that are American in every sense and that benefit from taxpayer-funded services should be allowed to pretend they are foreign when it comes time to pay taxes. Congress and the White House have the tools to solve this problem, and simply need to choose the right ones.


How to Combat the Rapid Rise of Tobacco Smuggling


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According to the Bureau of Alcohol, Tobacco, Firearms and Explosives (ATF), an estimated $7 and $10 billion is lost in federal and state tax revenue annually due to cigarette smuggling, which is astounding considering that total federal and state tobacco tax collections were about $32 billion in 2013. This means that as much as a quarter of all tobacco tax revenue is being lost each year.

One of the biggest drivers of the extensive cigarette smuggling is the substantial differences in state excise taxes. For example, Virginia's state tax is only 30 cents on a pack of 20 cigarettes, whereas New York’s combined state and city excise tax is 19.5 times higher at $5.85 per pack. From a practical perspective, this means that an individual could evade $166,500 in tobacco taxes by simply buying up 50 cases of cigarettes in Virginia, driving them to New York City and then illegally reselling them to retailers in the city.

While some level of smuggling may be inevitable due to the high profitability of this enterprise, the good news is that there are a host of simple measures that state governments can take to combat the flow of cigarette smuggling, including simply increasing the quality of tobacco tax stamps and better record keeping by retailers. Lawmakers in Virginia and Maryland, for instance, have already started to crack down on cigarette smuggling by stepping up enforcement and increasing criminal penalties on smugglers.

On the federal level, Rep. Lloyd Doggett has proposed the Smuggled Tobacco Prevention (STOP) Act, which would require unique markings on tobacco products for tracking purposes, ban the use of tobacco manufacturing equipment to unlicensed persons, require better disclosure by export warehouses and increase the penalty on tobacco smuggling offenses. Taken together, these measures provide the critical framework needed for federal and state authorities to significantly stem the flow of cigarette smuggling.

Taking a step back, it's important for state and federal lawmakers to remember that tobacco taxes are most useful as a mechanism to discourage smoking, rather than a particularly desirable revenue source given that they are regressive and the amount of revenue they generate declines over time. Still, allowing tax evasion to erode this revenue source at the state and federal level is simply unacceptable.


Tobacco Industry Games Rules to Dodge Billions in Taxes


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What's the biggest difference between small and large cigars or pipe and roll-your-own tobacco? Their level of taxation, according to the Government Accountability Office (GAO), which estimates that tobacco companies have managed to dodge an estimated $3.7 billion in federal excise taxes since 2009 by superficially repackaging their products to fit within the legal definitions of the least taxed forms of tobacco.

A Senate Finance Committee hearing last week examined the egregious methods tobacco companies use to accomplish this. One panelist related in his testimony (PDF) that Desperado Tobacco had literally pasted a label saying "pipe tobacco" onto its existing roll-your-own tobacco packages so it could avoid the higher rate on roll-your-own tobacco. Perhaps even more stunning, another panelist noted during the hearing that some companies had added cat litter to small cigars to add enough weight to their product so that it fit the definition of the lower taxed "large cigars."

What's driving these outrageous tactics is the substantial difference in the way each product is taxed. For example, roll-your-own tobacco is taxed by the federal government at a rate of $24.78 per pound compared to the $2.83 per pound rate on pipe tobacco. Similarly, small cigars are taxed at a rate of $50.33 per thousand, whereas large cigars are taxed as a percentage of the manufacturer's price, which in many cases results in a tax of about half that for small cigars. These differences in tax levels are so significant that according to the GAO, over the past few years there has been a dramatic rise (PDF) in both the purchase of large cigars and pipe tobacco along with a simultaneous collapse in the market for small cigars and roll-your-own tobacco, as consumers flock to the lower-priced alternatives.

The best way to solve this tax avoidance by tobacco companies would be for Congress to equalize the level of taxation of the varying tobacco products, which would once and for all end the incentive for companies to repackage their product to fit the different product definitions. In the event of congressional inaction, the Alcohol and Tobacco Tax and Trade Bureau (TTB) also has authority to issue clearer definitions between the varying tobacco products. For example, TTB could require that large cigars be defined as being six rather than three pounds per thousand. But it's unlikely that any definitions the bureau could issue would adequately solve the problem of companies gaming their products.

While tobacco taxes are not the best source of revenue given that they are regressive and decline over time, they still provide billions in much needed revenue at the state and federal level to offset some of the social costs of smoking. For these reasons, lawmakers should put an end to the ridiculous games tobacco companies are playing to avoid paying taxes.


Woody Guthrie on Corporate Tax Inversions


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Some will rob you with a six-gun,
And some with a fountain pen.
Woody Guthrie, “Pretty Boy Floyd” (1939)

Short of cash, you decide to rob a bank at gunpoint. But on your way out the door, the cops arrest you. You say, “Sorry about all this. I’d sure appreciate it though if you let me keep the money.” Fat chance.

But for big multinational corporations that are caught stealing from the U.S. Treasury, letting them keep the money seems to be exactly what Republicans in Congress favor.

Case in point involves the recent wave of American corporations renouncing their U.S. citizenship, on paper, to avoid billions of dollars in taxes. Almost everybody says they agree that this sleight of hand has to be stopped. But Senator Orrin Hatch, the ranking Republican on the Senate Finance Committee, says he’ll support closing this huge new corporate loophole only if the result is “revenue-neutral.” In other words, only if the big corporations get to keep the money.

Hatch is not an outlier. In fact, his screwball position reflects the general view of his party in Congress. Republicans in both the House and Senate are blocking legislative action to stop corporate foreign “inversions” unless the needed reforms are accompanied by a reduction in the statutory corporate tax rate.

“As through this world I’ve wandered,” sang Woody Guthrie, “I’ve seen lots of funny men.” Unfortunately, too many Washington politicians don’t want to make the corporate “funny men” play by the same rules as real people.


Statement: Despite Walgreens' Decision, Emergency Action Is Still Needed to Stop Corporate Inversions


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Following is a statement by Robert McIntyre, director of Citizens for Tax Justice, regarding emerging reports that Walgreen Co. will announce Wednesday that, although it still plans to buy Switzerland-based Alliance Boots, it will not use legal maneuvers to reincorporate as a Swiss company to avoid U.S. taxes.

“Reports are stating that Walgreen Co. has decided to set aside — for now — plans to avoid U.S. taxes by reincorporating as a foreign company. Only the proverbial fly on the boardroom wall truly knows what led the company to reach this decision. But a single company backing off plans to exploit loopholes in our tax code to dodge U.S. taxes does not fix the fundamental problem.

“Congress and the Obama Administration still need to act quickly because many other American corporations such as Medtronic, AbbVie and Mylan are still pursuing corporate inversions, while other major companies such as Pfizer have indicated that they may pursue inversion in the near future.

“Walgreens is a quintessentially American company and an easy scapegoat. But the company’s initial plans to dodge U.S. taxes were merely a symptom of a larger problem. The loopholes in our tax code are so gaping that corporations can simply fill out some papers and declare themselves foreign companies that are mostly not subject to U.S. taxes.

“Congress needs to, at very least, enact the legislation proposed by Sen. Carl Levin and Rep. Sander Levin that would disregard, for tax purposes, attempts by American corporations to claim a foreign status that only exists on paper.

“Refusing to address inversions except as part of comprehensive tax reform would be like refusing to put out a house fire until there is a detailed blueprint for rebuilding the house. Quick action is needed while there is still something to save.”  


"Dynamic Scoring" Advanced Again to Argue Tax Cuts Pay for Themselves


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The idea that tax cuts pay for themselves repeatedly has proven to be nonsense, perhaps most spectacularly when President George W. Bush’s own Treasury Department concluded that his enormous tax cuts did not produce anywhere near enough economic growth to recoup their costs. Yet this repeatedly disproven supply-side economics theory pushed by fringe economist Arthur Laffer and others is alive and well and was most recently promoted at a Ways and Means subcommittee hearing on July 30.

Supply-side economics suggests that by allowing people to keep more of their income, tax cuts encourage people to supply more capital and labor. This supposedly generates such increases in income and profits that the resulting boost in tax revenue will partly cancel out or even exceed revenue loss from the tax cut.

Proponents of tax cuts and supply-side economics have for years called on the Joint Committee on Taxation (JCT), the official revenue-estimators for Congress, to use a method called dynamic scoring to take into account these supply-side effects that allegedly reduce the cost of tax cuts or even result in a revenue increase.

But given the utter uncertainty about these macroeconomic impacts, it is entirely reasonable that they are left out of official revenue scores that Congress and the public must rely on to understand the effects of tax legislation.

Nonetheless, supply-siders and their elected allies twisted JCT’s arm into providing dynamic scoring for the tax reform plan introduced in February by House Ways and Means Chairman David Camp, and this analysis was the focus of last week’s hearing.

JCT found that the macroeconomic growth effects of Camp’s plan would increase revenue “by $50 to $700 billion, depending on which modeling assumptions are used,” over a decade. (CTJ found that while the Camp plan would be revenue-neutral in the first decade, it would lose $1.7 trillion in the following decade, a hole that no dynamic analysis can fix.)

Scott Hodge of the Tax Foundation, a hearing witness, argued that the macroeconomic benefits would have been greater if the Camp plan included more tax breaks. For example, he argued that revenue would actually be higher under the Camp plan if it made permanent the recently expired 50 percent expensing for investment (often called bonus depreciation), as the House of Representatives voted to do with a stand-alone bill in July. CTJ has explained why this tax break, which was projected by JCT to cost $276 billion over a decade, is unlikely to have any economic benefit at all.

The Problem with Dynamic Scoring

Supply-side economists sometimes claim that JCT provides only “static” analysis that ignores behavioral effects entirely, which is not actually true. For example, when JCT estimates the effects of a higher income tax rate on capital gains (profits from selling assets for more than they cost to purchase), it does account for behavioral effects by assuming that some people will want to avoid this tax increase by selling fewer assets. This will reduce the revenue increase that would otherwise result. (A CTJ report goes into great detail about the debate over these assumptions.)

What JCT usually does not take into account are impacts that tax legislation might have on the whole economy (macroeconomic impacts) because these are usually small and always impossible to predict. In fact, economists can’t even agree on the direction of such impacts. For example, a lower tax rate could in theory encourage people to work more because they’re able to keep more of what they earn, but it could also encourage people to work less because they don’t have to work as much to reach whatever earnings goals they’ve set for themselves. In other words, a tax cut could cause the economy to expand or contract.

Yet another problem with dynamic scoring is that its proponents never want to apply the same logic to spending. If tax cuts boost the economy enough to offset part of their costs, then surely the same could be true for public investments such as education and infrastructure, which everyone agrees boost the economy. But don’t expect Arthur Laffer or Dave Camp to be making that argument any time soon.


On Highway Bill, Congress Moves to the Right of Grover Norquist


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On Thursday, Congress ended a chapter of its latest manufactured crisis by addressing the shortfall in the Highway Trust Fund just hours before the Department of Transportation would have been forced to cut funding for state and local projects by 28 percent, sidelining hundreds of thousands of workers.

Approved Thursday, the measure extends funding through May. The House passed it after Republicans rejected tax compliance provisions in the bill first approved by the Senate — provisions so innocuous that they were even blessed by the anti-tax zealot Grover Norquist.

Norquist, head of Americans for Tax Reform, is famous for his so-called “Taxpayer Protection Pledge,” which by signing politicians promise never to raise income taxes no matter how apocalyptic the consequences. But Norquist apparently recognized that revenue provisions in the Senate’s bill were compliance measures, meaning they would not increase taxes owed by anyone but only ensure people would pay what they owe. Nonetheless, key Republicans in the House of Representatives (who are usually quick to please Norquist) insisted that they were in no mood to “give them [the IRS] more tools to harass taxpayers.” This meant that the Senate was ultimately forced to approve the House version of the bill, which did not include the revenue provisions.

How Another Long Foreseen Problem Became a Washington Nail-Biter

How to cover the costs and how long of an extension to provide were just two of the issues that allowed a totally foreseen and easily fixed problem to become another artificial crisis.

The trust fund that finances transportation projects was set to run out, and the Department of Transportation planned to cut funding to state and local governments for these projects by 28 percent starting Friday. Nothing about this was unforeseen. The trust fund has an estimated shortfall of $170 billion over the coming decade because it relies mainly on the 18.4 cent gas tax and 24.4 cent diesel tax, which have remained the same since 1993.

A September 2013 report from the Institute on Taxation and Economic Policy found that if the nation’s federal gas tax had been maintained at the same inflation-adjusted level since 1993, the trust fund would have enjoyed more than $200 billion in additional revenues, including $19 billion in 2013.

Congress ignored this blindingly obvious solution and instead bickered about a short-term measure that would continue funding just for a number of months to provide lawmakers with more time. How could Congress possibly need more time to address a problem everyone has known about for years? That has to do with politics, of course. For example, some lawmakers wanted to provide funding until right after the election, which is when politicians often make politically difficult choices, while some Republicans preferred to extend the trust fund until next year with the expectation that their party would control the Senate and thus the details of a long-term fix.

Taking the latter approach, the House of Representatives had already approved a bill to address the funding gap through May, with an $11 billion cost that would be offset by changes in customs fees and in the timing of pension payments (and thus the tax deductions that are taken for them by employers).

The Senate, on July 30 amended that bill to provide funding only through December and to rely partly on the tax compliance provisions that Senator Wyden, chairman of the Finance Committee, had included in his own bill. In a statement on his bill, Wyden said that his revenue provisions

“… are not tax increases. In fact, the Finance Committee even received a letter from Grover Norquist and the group Americans for Tax Reform saying so. Mr. Norquist is not soft on the question of tax increases, and he has indicated that these provisions are not tax hikes. What these provisions do is crack down on tax cheats and ensure that mortgage lenders provide homeowners with more tax information than they are usually getting today.”

One of the revenue measures would require more reporting related to mortgage interest deductions, another would alter the statute of limitations for overstatements of investment costs, while other provisions would increase certain penalties. Altogether, the provisions would have raised $4.3 billion, which seems like a small sum compared to the drama that has surrounded this debate.


New Bill Would Bar Inverted Corporations from Getting Federal Contracts


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It’s bad enough when an American corporation reincorporates as a foreign company to avoid U.S. taxes even as it benefits from research, education, highways, courts and everything else those taxes pay for. But it’s even worse when these companies are allowed to contract with the federal government and profit from business funded by the American taxpayers.

This is the argument behind the No Federal Contracts for Corporate Deserters Act, a bill introduced in the House and Senate on July 29 to bar corporations that invert (reincorporate as foreign companies) from getting federal procurement contracts.

Corporate inversions have been happening for decades, and Congress has enacted laws that are supposed to prevent corporations from dodging taxes by inverting and prevent inverted companies from getting federal contracts. Those rules were never entirely effective, and companies such as Ingersoll-Rand, which reincorporated in Bermuda before those laws were passed, have found numerous ways to get federal contracts through grandfathering and other loopholes and are doing a billion dollars worth of business each year with the federal government.

But the recent wave of announced inversions is a much bigger problem. Corporations have figured out how to circumvent the rules entirely, adding the slightest sheen of legitimacy to the arrangement by obtaining a smaller foreign company and then claiming that the newly merged, restructured company is based in the foreign country.

This is why the medical device maker Medtronic and the pharmaceutical company AbbVie have recently announced plans to acquire Irish companies and reincorporate in Ireland. Similar moves are being considered by Walgreens and (once again) Pfizer.

In May, several lawmakers introduced the Stop Corporate Inversions Act to strengthen the anti-inversion provisions in the tax rules. The No Federal Contracts for Corporate Deserters Act would update the contractor rules the same way. In other words, the two bills are different ways of addressing the current explosion of companies seeking to invert, providing lawmakers separate opportunities to act.

Under the existing rules, a merger with a foreign company can change almost nothing about the American business and yet it can claim to be a new, restructured entity based offshore, with no adverse consequences. The newly merged company can be managed in the U.S. and have significant business in the U.S., and up to 80 percent of its stock can be owned by the shareholders of the original American corporation — and yet it will be considered a brand new company based offshore for tax purposes, not subject to any bar on federal contracting.

Under the two new bills, this would be impossible unless the newly merged company really does become foreign-owned, meaning less than 50 percent of its stock is owned by the shareholders of the American company, and it is actually managed in the foreign country. That would mean an American corporation could no longer simply buy a smaller offshore company and then fill out some paperwork to create the fiction of being foreign.

As more and more corporations announce plans to invert, Congress is under increasing pressure to act to stop them. But key lawmakers, like Senator Orrin Hatch, the ranking Republican on the Senate Finance Committee, have laid out conditions that make it extremely difficult to imagine how progress will be made during this Congress.


Improving the EITC for Childless Workers: A Real Opportunity for Bipartisan Progress


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While experts have noted the many, many problems with Congressman Paul Ryan’s new poverty plan, the same experts have said that it does include a good idea about expanding the Earned Income Tax Credit (EITC) for childless working people.

Ryan, who chairs the House Budget Committee and is expected to chair the Ways and Means Committee in the next Congress, offers a proposal that is nearly identical to one in President Obama’s most recent budget plan. Rep. Ryan and President Obama agree that the EITC for childless workers should be increased roughly from $500 to $1,000 in 2015. They also agree that the age limit for childless people to receive the EITC should be lowered from 25 to 21, so the credit no longer excludes young people struggling at the start of their working lives when they need to gain work experience.

Several studies have found that the EITC boosts work incentives for low-income people with children, but the EITC for childless people is so meager that it may have little impact. Another problem is that childless, poor adults are the only group of people who often owe federal income taxes even if they live below the poverty line.

Although Rep. Ryan and President Obama agree that the EITC should be increased for childless workers, there are some issues to work out. President Obama (reasonably, in our opinion) proposes to pay for the EITC expansion by closing the “John Edwards/Newt Gingrich Loophole” for Subchapter S corporations and also close the “carried interest” loophole that allows buyout-fund managers like Mitt Romney to pay a lower effective tax rate than many middle-income people. (These proposals are all explained in a CTJ report.) Ryan, on the other hand, proposes to offset the costs by cutting spending.

Nonetheless, the fact that the President and a leading congressional Republican agree on how to change part of the tax code seems nearly miraculous in the current environment.

The Details

The EITC is a tax credit equal to a certain percentage of earnings up to a maximum amount and is phased out for people with incomes above a specific threshold.

Under current law, for childless people working in 2015, the credit will be just 7.65 percent of the first $6,570 in earnings, which equals a maximum credit of just $503 in 2015. The credit will be reduced by 7.65 percent of each dollar of income above $8,220 (there’s a higher threshold for married people). When you work out the math, this means that a single childless person receives no credit at all if income exceeds $14,790.

Ryan and Obama both propose to double the credit rate to 15.3 percent, which would double the maximum credit to about $1,005. They would also increase the income threshold at which the credit begins to phase out from $8,220 to 11,500. This means the credit will not be fully phased out for a single person until his or her income exceeds $18,070.

There is one improvement that appears in Obama’s proposal but not in Ryan’s. Obama would also raise the maximum age of eligibility from 64 to 66 to address the fact that people no longer can receive full Social Security retirement benefits at age 65, as was the case when the existing EITC rules were first enacted.

But overall Obama and Ryan are quite in agreement on what changes are needed. Of course, even under the expansion they propose, childless people would only receive the EITC when their incomes are quite low. But this would nonetheless make the EITC more effective in serving a group that it currently leaves behind.


House Approves Bill that Would Shift Child Tax Credit from Poor to the Better Off Families


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On July 25 the House of Representatives approved a Republican bill that would expand the child tax credit for better off families while doing nothing to extend or make permanent a 2009 provision that expands the credit to the working poor. President Obama has proposed to make permanent the 2009 provision before its scheduled expiration date at the end of 2017, which Congressional Republicans have refused to do.

Figures published by Citizens for Tax Justice illustrate how nationally and in each state, making permanent Obama’s provision would mostly help those families making under $40,000 in 2018, while the Republican bill (H.R. 4935) would mostly help those making over $100,000.

The child tax credit (CTC) provides a maximum tax break of $1,000 times however many children under age 17 a family has. If the family’s income is so low that this amount ($1,000 times the number of children under age 17) exceeds their entire income tax liability, they can receive a refundable credit, which means they actually receive money from the IRS.

The refundable part of the CTC is limited to 15 percent of their earnings above a certain threshold. (The total CTC including the refundable portion cannot exceed $1,000 per child.) That earnings threshold was lowered to $3,000 by the 2009 provision enacted under President Obama. If the 2009 provision expires as scheduled at the end of 2017, the earnings threshold will rise to $14,750, which means it will be much more difficult for very low-income working parents to claim the full credit.

While House Republicans would allow that provision to expire, their bill, H.R. 4935, would expand the CTC in ways that benefit better off families. It would index the $1,000 credit amount for inflation, which would help only those families with enough earnings to receive the full credit even with the higher earnings threshold. The Republican bill would also increase the income level at which the CTC starts to phase out from $110,000 to $150,000 for married couples. Finally, that $150,000 level for married couples and the existing $75,000 income level for single parents would both be indexed for inflation thereafter.

Given that both proposals are projected to cost around $11 billion each year that they are in effect, the House Republican proposal has the effect of shifting money that is going to low-income working families towards better off families.


Hedge Fund Managers in the Hot Seat


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What the heck is a derivative and why do we care?

A derivative is a financial instrument whose value and performance depends on another asset. For example, let’s say a lender owns mortgages worth $100 million. The lender can bundle those together and sell interests in the mortgage pool until all $100 million worth is sold. But if, instead, he sells derivatives contracts whose performance is tied to the performance of the mortgage pool, the lender can sell many times the original face value of the mortgages. As a result, he magnifies the return and also the risk of the pool of mortgages. Anyone remember AIG and the 2008 financial crisis?

The advantages and disadvantages of derivatives are many, but I’d like to focus on just two:

1)      the use of derivatives to game the tax system, and

2)      how derivatives contribute to the financialization of our economy.

On Tuesday the Senate Permanent Subcommittee on Investigations questioned hedge fund managers about their use of a complicated financial derivative known as “basket options” to avoid both taxes and regulatory limits on excessive borrowing. Representatives from Barclays and Deutsche Bank, which developed the strategy that they sold to hedge funds, also testified.

It’s just the latest in a series of investigations about the misuse of derivatives for tax purposes. See, for example, earlier reports about the J.P. Morgan Whale Trades and how offshore entities use derivatives to dodge taxes on U.S. dividends. While there are plenty of reasons why financial managers use derivatives, chief among them is avoiding taxes.

Tax-avoidance derivatives are created to take advantage of loopholes that give some special treatment to particular taxpayers, industries, or types of income. For example, if I own a partnership interest, part of the income I receive may be ordinary income subject to my highest marginal tax rate and some of it may be long-term capital gains that are taxed at a maximum income tax rate of 20 percent. On the other hand, if I own a derivative tied to the performance of a particular partnership and I keep the derivative for at least a year, all of my income may be treated as long-term capital gains. When Congress got wind of this game, they shut it down some years ago.

Unfortunately, Congress just can’t keep up with all of the derivatives that the financial industry invents to game the tax system. That’s the main reason why we need a tax system that taxes all kinds of income at the same rates. Whenever Congress passes a special rule that benefits a certain type of transaction or taxpayer, tax attorneys and accountants quickly come up with ways for their wealthy clients to qualify for the tax break in ways that Congress never intended.

Derivatives also contribute to the financialization of the economy—an increase in the size and importance of the financial sector relative to the overall economy. In 1950, financial services accounted for 2.8 percent of the U.S. gross domestic product. By 1980, that number was up to 4.9 percent and in 2008 in was 8.3 percent.

At some point—and many believe we are there or way past there—continued financialization of the economy has major negative consequences: rising inequality, reduced investment by other sectors, and risk magnification, just to name a few. Derivatives not only add to but compound these negative consequences because there is no limit to the amount of derivatives that can be issued.

Derivatives have another ugly side: many are created in offshore tax haven jurisdictions because they cannot be legally used in the U.S. (or other real countries). The derivatives that contributed to the collapse of Enron at the turn of the millennium and the staggering losses of AIG and other financial institutions in the 2008 financial meltdown were mostly related to transactions in offshore jurisdictions.

Kudos to Sen. Levin and the Permanent Subcommittee on Investigations for putting the spotlight on this important issue. A functioning Congress would take quick action to fix the problem. Sadly, however, too many of our legislators are fervent supporters of evil behavior when it comes to taxes.


Senate Hearing on Inversions Indicates No Bipartisan Progress on Addressing the Crisis


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Today the Senate Finance Committee discussed corporate inversions and other problems with the U.S. corporate tax code but showed no signs of bipartisan agreement on a solution. The hearing was held mainly to address the recent wave of corporations making bids to invert, or restructure (on paper) as foreign corporations to avoid U.S. taxes.

While committee chairman Ron Wyden (D-OR) called for immediate action from Congress to prevent corporations from avoiding taxes by inverting, the committee’s ranking Republican, Orrin Hatch, said his support was conditional on several stipulations that probably cannot be met by any reasonable legislation.

The public focus on corporate inversions began in April as the pharmaceutical giant Pfizer made a bid to merge with a smaller foreign company and then call itself a foreign corporation for tax purposes. The drug store chain Walgreens announced that it was considering doing the same. These were followed by the medical device maker Medtronic and the pharmaceutical companies Mylan and AbbVie.

Senator Wyden had previously said that Congress should enact a sweeping comprehensive tax reform that resolves all the problems with our tax code and that also has provisions addressing such inversions, which would be retroactive to May of 2014 to ensure that companies seeking to invert now are not successful in avoiding U.S. taxes. But as the number of corporations seeking inversions increased in recent weeks, Treasury Secretary Jack Lew called for immediate action. Senator Wyden is now calling for temporary legislation to address inversions until Congress can enact comprehensive tax reform.

Such legislation has been introduced in the Senate by Carl Levin (D-MI) and in the House by his brother Sander Levin, the ranking Democrat on the Ways and Means Committee.

During the hearing, Hatch said he could agree to short-term legislation to address inversions, but only if:
—    it is not “punitive,” which he considers the Levin proposal to be,
—    it is not retroactive,
—    it is “revenue-neutral,”
—    it moves the U.S. tax system closer to, rather than farther from, a “territorial” system, which would exempt the offshore profits of our corporations from U.S. taxes.

The Levin legislation that Hatch finds punitive would change the rules so that the newly restructured corporation that results from one of these mergers would be taxed as a U.S. company if it is majority-owned by the same people who owned the original U.S. corporation, or if it’s managed and controlled in the U.S. and has substantial business here. In other words, an American corporation would not be able to use a merger to undertake a “restructuring” that occurs only on paper and then claim to be a foreign company for tax purposes. This seems entirely reasonable and not punitive at all.

As for Hatch’s opposition to any retroactive change in the tax law, waiting even a couple weeks could result in more corporations that merge and claim to be foreign and able to avoid U.S. taxes forever. And a retroactive provision is not particularly burdensome for these corporations, which are on notice that such a change is likely to apply to any deals made from May on and are able to plan accordingly. In fact, Medtronic and other aspiring inverters are actually writing provisions into their merger agreements that allow them to walk away from the deals if Congress changes the rules to deny the tax benefits of inversion.

Finally, Hatch’s call to move towards a “territorial” system misses the problem completely. Hatch and many of the inverting corporations argue that companies are driven to invert because the U.S. taxes the offshore profits of American corporations when they are officially brought to the U.S. (in addition to taxing their domestic profits). Most other countries have a territorial tax system that only taxes the profits earned in that particular country. Hatch and others argue that inverting companies are trying to free their offshore profits from U.S. taxes.

There are many problems with this argument, and the biggest one is that inverting companies are trying to avoid taxes on the profits they earn here in the U.S., not just profits they earn offshore. Several witnesses at the hearing explained that after inverting, corporations typically engage in earnings stripping, which involves loading the U.S. part of the company up with debt that results in interest payments made to a foreign part of the company and interest deductions that wipe out the U.S. income for tax purposes.

For example, the manufacturer Ingersoll-Rand clearly engaged in earnings stripping after it inverted to become a Bermuda company, swiftly shifting from reporting large annual U.S. profits to reporting U.S. losses or very small profits each year along with dramatically larger offshore profits.

Some members of the Finance Committee complained that U.S. corporate tax rate is too high and that a tax reform that lowers the rate is the only answer. But it has been well-documented that the ultimate goal of much corporate tax maneuvering is to make profits appear to be earned in countries with no corporate tax at all like Bermuda, the Cayman Islands, or the British Virgin Islands. So long as loopholes remain that allow this, no reduction in the U.S. corporate tax rate can address this problem.

Comprehensive tax reform is certainly needed, but that cannot become an excuse for Congress doing nothing in the meantime to stop corporate tax avoidance schemes that will be difficult to reverse once they are in place.


Drug CEO Falsely Claims Inversions Don't Facilitate U.S. Tax Avoidance


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Abbott Labs CEO Miles White is shocked that anyone would see the recent wave of U.S. multinationals seeking to renounce their U.S. citizenship as a tax dodge.

In a July 18 Wall Street Journal op-ed, White suggests that there are no tax benefits to inversion: “Inversion doesn't change a company's tax rate. A company pays the same tax rate in the U.S. after inversion as it does before inverting. A company also pays the same tax rates in foreign domiciles before and after inversion,he wrote.

While it is technically true that inverted companies should continue to pay the 35 percent U.S. tax rate on any U.S. profits, the experience of previous inversions tells us that U.S. tax rates will likely become mostly irrelevant to these companies post-inversion because they will move aggressively to make their U.S. profits appear to be foreign.

For example, the manufacturer Ingersoll-Rand, after inverting to become a Bermuda corporation in 2001, immediately went from reporting annual U.S. profits of hundreds of millions to reporting losses or very small profits each year, while it’s reported profits outside the United States expanded dramatically. This did not reflect any actual loss of U.S. customers or business. Rather, the corporation accomplished this by loaning $3 billion to its U.S. subsidiary, which then deducted the interest payments on the debt to effectively wipe out its U.S. income for tax purposes. It seems likely that this practice, called earnings stripping, would be aggressively used by Walgreens, Medtronic, Mylan, and each of the other large U.S. companies that are currently contemplating an inversion.

It’s sad, but understandable that White would want to make this absurd claim. When Treasury Secretary Jack Lew called for a new “economic patriotism” among Fortune 500 corporations earlier this week, he was tapping into a growing public outrage over offshore corporate tax-dodging. Leading into next week’s U.S. Senate hearing on the ongoing inversion problem, White and other CEO’s are understandably nervous that Congress may take away their new favorite tax-avoidance tools.

But Congress should see White’s claim for what it is: a ruse. Corporate inversions are a brazen effort by large multinationals to avoid paying U.S. taxes. At a time when the nation finds itself with no ability to pay for vital transportation infrastructure, it should be obvious that the billions in tax revenue these companies refuse to pay are billions that must be made up by working families not to mention millions of small businesses that don’t have the luxury of creating a paper headquarters in Ireland.


Congress on the Highway Trust Fund: Our Middle Name Is Danger


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Does the 113th Congress live for an adrenaline rush? The current debate over the nation’s highway trust fund might lead one to think so.

As has been widely reported, the federal Highway Trust Fund, which is supposed to provide a steady stream of long-term funding for the nation’s highway infrastructure, is projected to be depleted by early August, rendering the federal government incapable of paying for hundreds of current and pending infrastructure projects.  In anticipation of this rapidly-approaching deadline, the federal Department of Transportation has sketched a contingency plan that would cut federal transportation spending by 28 percent while idling vital infrastructure projects around the nation.

The good news is that lawmakers have a blindingly obvious solution to this problem at their fingertips: restoring the federal gas tax to something resembling its level in the early 1990s. A September 2013 report from the Institute on Taxation and Economic Policy found that if our federal gas tax had been maintained at the same inflation-adjusted level since it was last increased in 1993, the trust fund would have enjoyed more than $200 billion in additional revenues, including $19 billion in 2013.

Despite having more than two decades to think about it, Congress has refused to acknowledged the existence of inflation, and the federal gas tax has essentially fallen by more than a quarter, in inflation-adjusted terms, since the last gas tax hike.

But not to worry—with less than two weeks before the Highway Trust Fund evaporates, congressional tax writers are elbowing each other aside to engineer a buzzer-beating fix for our highway funding woes. Unfortunately, the proposed fixes rely largely on, “pension smoothing,” a misnomer practice that actually won’t raise revenue over the long haul. Pension smoothing allows companies to contribute less to their pension funds over the next decade, which raises revenue because companies take fewer tax deductions for pension contributions.

The plan would increase corporate tax revenue over the next 10 years. But companies would have to make up the resulting pension shortfall later, which means federal revenue would once again be reduced. Conveniently, this falls outside Congress’s 10-year budget window. This transparent attempt to borrow from future taxpayers would only raise enough money to keep the Trust Fund solvent through May of next year. Congress will then confront exactly the same problem.

Responsibly overhauling the federal gas tax by increasing its inflation-adjusted value to 1993 levels and tying the tax to inflation going forward would help restore the Highway Trust Fund to its former health. If Congress can’t take this medicine now, they’ll have to do so next year. They should just stop the bandage politics of kicking the can down the road and address pressing issues such as the Highway Trust Fund in a real, sustainable way.

 


The House Votes to Treat the Internet Like an Infant


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Somehow, arguments that conservative lawmakers usually make about not interfering with the economy and respecting states’ rights have fallen silent as Congress rushes to pass a bill that provides special treatment for an industry that has grown very profitable and powerful.

The infant of 1998 now has the keys to the American economy.

On Tuesday the House of Representatives voted to make permanent a law banning state and local governments from taxing Internet access just as they tax other goods and services. First enacted as a temporary ban in 1998 (the Internet Tax Freedom Act) under the argument that the Internet was an “infant industry” needing special protection, the ban has been extended several times and is now scheduled to expire on Nov. 1.

As we have argued previously, the infant of 1998 now has the keys to the American economy, and yet Congress is still coddling it by shielding it from taxes that apply to other comparable services, such as cable television and cell phone service.

The pending bill is going one step further than previous extensions by stripping out the grandfather provision that allowed seven states that had enacted Internet taxes prior to 1998 to keep those laws in place. This move would cost those states half a billion dollars in revenue each year. And the remaining states would collectively forgo billions in revenue that they could otherwise raise each year if they chose to tax Internet access.

Members of Congress will take credit for shielding the Internet from taxes but the cost will be borne entirely by state and local governments. In other words, continuing the ban on taxing Internet access introduces distortions in the economy by favoring some industries over others and it interferes with state governments’ ability to raise revenue in the ways they find most sensible.


House Poised to Throw $276 Billion "Bonus" at Businesses


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On Friday, the House of Representatives is scheduled to vote on a $276 billion bill that would make permanent “bonus depreciation.” This huge tax break for business investment was first enacted to try to address the recession early in the Bush administration. Since then, it has been repeatedly re-enacted to try to stimulate the economy during the much more severe recession starting at the end of the Bush administration. It finally expired at the end of 2013.

Here are some reasons why Congress should allow bonus depreciation to remain expired rather than making it a permanent part of the tax code.

1. “Bonus depreciation” has not helped the economy in the past and is unlikely to help the economy in the future.

A July 7 report from the non-partisan Congressional Research Service (CRS) reviews research on bonus depreciation and finds that it has little positive impact on the economy as a temporary measure and is likely to have even less impact as a permanent measure. The report cites surveys of firms that “showed that between two-thirds and more than 90 percent of respondents indicated bonus depreciation had no effect on the timing of investment spending.”

Businesses will invest more only if they expect to have more sales. In a recession, when consumer demand falls, companies won’t invest more even with extra tax breaks. In a growing economy, business investment will naturally go up, with or without extra tax breaks. That’s why firms that take advantage of bonus depreciation are getting a break for investments they would have made anyway.

This is one reason why bonus depreciation provides far less stimulative effect for the economy than many other measures. The CRS report cites estimates that each dollar the government gives up for bonus depreciation increases economic output by just 20 cents, whereas each dollar the government spends on unemployment insurance increases economic output by more than a dollar.

2. Enacting the permanent “bonus” depreciation measure is hugely hypocritical when lawmakers refuse to approve much smaller, but more effective measures.

The House is set to approve this bill, which would reduce revenue by $276 billion over a decade to help businesses, after refusing for months to take up a $10 billion extension of emergency unemployment insurance, which would provide a greater impact for each dollar spent.

Many of the lawmakers who champion this bill, including Ways and Means Committee chairman Dave Camp, refuse to support other changes to the tax code unless they are part of a sweeping, comprehensive tax reform. In fact, Camp and others have even used this argument to oppose a bill that would raise $19.5 billion over a decade by preventing the “inversions” that more and more American corporations are seeking so that they can claim to be foreign companies to avoid U.S. taxes. Camp claims that Congress should not close the loopholes these companies use to pretend to be “foreign” unless it is done as part of a comprehensive tax reform. And yet, he supports a permanent change in the depreciation rules that would reduce revenue by $276 billion over a decade.

3. Bonus depreciation provides many business investments with a negative effective tax rate. In other words, these investments are more profitable after taxes than before taxes!

Companies are allowed to deduct from their taxable income the expenses of running their businesses, so that what’s taxed is net profit. Businesses can also deduct the costs of purchases of machinery, software, buildings and so forth, but since these capital investments don’t lose value right away, these deductions are taken over time

Of course, firms would rather deduct capital expenses right away rather than delaying those deductions, because of the time value of money, i.e., the fact that a given amount of money is worth more today than the same amount of money will be worth if it is received later. For example, $100 invested now at a 7 percent return will grow to $200 in ten years.

Bonus depreciation is an expansion of the existing tax breaks that allow businesses to deduct their capital expenditures more quickly than is warranted by the equipment’s loss of value or any other economic rationale.

The problem this presents is not confined to abstract ideas about the tax code. For example, because the tax code generally taxes the income (profits) of a business, it allows deductions for expenses like interest payments. This means that businesses can invest in equipment with borrowed money and the combination of accelerated depreciation and deductions for interest payments often results in these investments having a negative effective tax rate. This problem exists to some degree with the depreciation breaks that are already a permanent part of the tax code. Bonus depreciation makes the problem considerably worse.

The CRS report explains that for debt-financed investments, the effective tax “rate on equipment without bonus depreciation is minus 19 percent; with bonus depreciation it is minus 37 percent.”

Taxes are supposed to raise the money we need to pay for public programs. But bonus depreciation turns business taxes upside-down, allowing companies to make more money on their investments after taxes than they’d earn if there were no tax system at all.


New Report: Addressing the Need for More Federal Revenue


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A new report from Citizens for Tax Justice explains why Congress should raise revenue and describes several options to do so.

Read the report.

Part I of the report explains why Congress needs to raise the overall amount of federal revenue collected. Contrary to many politicians’ claims, the United States is much less taxed than other countries, and wealthy individuals and corporations are particularly undertaxed. This means that lawmakers should eschew enacting laws that reduce revenue (including the temporary tax breaks that Congress extends every couple of years), and they should proactively enact new legislation that increases revenue available for public investments.

Parts II, III, and IV of this report describe several policy options that would accomplish this. This information is summarized in the table to the right.

Even when lawmakers agree that the tax code should be changed, they often disagree about how much change is necessary. Some lawmakers oppose altering one or two provisions in the tax code, advocating instead for Congress to enact such changes as part of a sweeping reform that overhauls the entire tax system. Others regard sweeping reform as too politically difficult and want Congress to instead look for small reforms that raise whatever revenue is necessary to fund given initiatives.

The table to the right illustrates options that are compatible with both approaches. Under each of the three categories of reforms, some provisions are significant, meaning they are likely to happen only as part of a comprehensive tax reform or another major piece of legislation. Others are less significant, would raise a relatively small amount of revenue, and could be enacted in isolation to offset the costs of increased investment in (for example) infrastructure, nutrition, health or education.

For example, in the category of reforms affecting high-income individuals, Congress could raise $613 billion over 10 years by eliminating an enormous break in the personal income tax for capital gains income. This tax break allows wealthy investors like Warren Buffett to pay taxes at lower effective rates than many middle-class people. Or Congress could raise just $17 billion by addressing a loophole that allows wealthy fund managers like Mitt Romney to characterize the “carried interest” they earn as “capital gains.” Or Congress could raise $25 billion over ten years by closing a loophole used by Newt Gingrich and John Edwards to characterize some of their earned income as unearned income to avoid payroll taxes.

Read the report. 


41 Million July 4th Travelers Would Have a Nicer Trip if Corporations Paid Their Fair Share


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AAA estimates that 41 million Americans will travel for the July 4 holiday, including 34.8 million who will travel by car — the highest numbers since before the recession put a damper on holiday travel. Those travelers stuck in traffic bottlenecks may wonder why our government — you know, the one we fought the Revolution to have — can’t provide something as basic as roads and bridges that meet our needs. Infrastructure experts are also wondering that, and in fact, the American Society of Civil Engineers has given the U.S. infrastructure a D+. Now things are about to get worse because, once again, some lawmakers refuse to raise revenue to pay for anything.

Most federal funding for highways comes from the federal Highway Trust Fund, which will face a shortfall starting in August because Congress has not adjusted the 18.4 cent per-gallon gas tax and 24.4 cent per-gallon diesel tax, which are not indexed for inflation, since 1993. The fact that they have not been increased to keep up with the rising costs of construction or adjusted to account for reduced fuel consumption now means that these taxes no longer raise enough money to fund our infrastructure needs.

The straightforward solution would be to raise the fuel taxes, a reform that ITEP has called for before. As usual, many lawmakers oppose this simply because they oppose any and all tax increases even to fund something as basic and popularly supported as highways. Some lawmakers have turned to gimmicks that do not actually raise revenue, which CTJ has criticized.

If lawmakers cannot bring themselves to provide the most obvious solution, an increase in fuel taxes, a second best solution would be to raise revenue by closing corporate tax loopholes. It would be impossible for corporations to profit if the U.S. did not have the roads, bridges and other infrastructure that makes commerce possible, so it’s only reasonable that they pay some taxes to support the federal government and it’s reasonable for Congress to close loopholes allowing corporations to shirk that duty.

Two proposals introduced in Congress recently would raise $19.5 billion for the Highway Trust Fund by closing the loopholes that allow corporations to “invert.” In an inversion, an American corporation reincorporates itself abroad and claims to be a foreign company that is mostly not subject to U.S. taxes even if it is still managed from the U.S. and conducts most of its business in the U.S. There are many more corporate tax loopholes that must be closed, and much more Congress needs to do to provide adequate infrastructure funding. But it certainly makes sense to start by stopping the worst corporate citizens from avoiding taxes. 

The existing tax rules prevent an American corporation from simply reincorporating itself in a tax haven and declaring itself “foreign.” But a loophole allows inversions to take place when an American corporation merges with a smaller foreign corporation, even if the management and most of the business of the newly merged company stays in the U.S. In theory, the profits that any corporation (even a “foreign” corporation) earns in the U.S. are taxable in the U.S., but inversions are often followed by earnings stripping, which makes U.S. profits appear to be earned offshore where they won’t be taxed.

A proposal to close this loophole was first put forward as part of President Obama’s most recent budget plan and was introduced in Congress following the recent news of Walgreens, Pfizer and eventually Medtronic all pursuing inversions over the last several months.

 


The Consequences of Woefully Underfunding the IRS


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Following up on their efforts to enact dramatic cuts to the IRS's funding last year, Republican members of the House Appropriations Subcommittee on Financial Services voted to slash IRS funding by $341 million, pushing the agency's budget to its lowest level in more than five years. What makes these proposed spending cuts so ridiculous is that every dollar invested in the IRS’s enforcement, modernization and management system reduces the federal budget deficit by $200 and every dollar the IRS “spends for audits, liens and seizing property from tax cheats” garners ten dollars back.

From fiscal year 2010 to 2014, the IRS has seen its overall funding cut by as much as 14 percent (adjusting for inflation) and its staff cut by 11 percent. Making matters worse, these cuts come even as the IRS takes on increasing numbers of tax returns and the substantial new responsibilities of enforcing the Foreign Account Tax Compliance Act (FATCA) and the tax subsidies in the Affordable Care Act (ACA).

Because the IRS's job is to collect taxes that pay for the rest of the government, it is unique in that cuts to its budget have the effect of substantially increasing the deficit. In fact, the Treasury Inspector General for Tax Administration (TIGTA) found that the 14 percent reduction in enforcement personnel from fiscal year (FY) 2010 to 2012 forced by budget cuts resulted in a loss of $7.6 billion in revenue in FY 2012 alone.

A new must-read report by the Center on Budget and Policy Priorities (CBPP) catalogues the variety of ways that this decrease in funding has hamstrung the agency’s ability to do its basic duties. For example, the CBPP notes that budget constraints have contributed to the delays of critical computer infrastructure created to combat identity theft and the filing of fraudulent tax returns. As it stands now, the new system has still not come into place, meaning that victims of identity theft have to wait longer than six months for a resolution to their case.

While the recent IRS scandal is driving many House Republicans to push deeper cuts to the agency, the scandal is really just further evidence that the IRS needs a larger budget to get its job done right. The latest blowup over the IRS's failure to keep extensive email records, for instance, appears to be driven in part by the fact that the IRS could not afford the $10 million required to increase the capacity of the server where it stores emails. The non-partisan and well-respected National Taxpayer Advocate perfectly explained the fundamental problem with the IRS when she noted in a speech that while "the IRS can improve its policies and procedures," the recent cuts to the agency are "just plain nuts."

The Senate for its part has proposed increasing the agency’s budget by $236 million, which is $950 million lower than the increase the Obama administration requested. While this would be a significant step in the right direction, even the administration's request would not even restore IRS funding to its 2010 level if you take inflation into account. 


Clinton Family Finances Highlight Issues with Taxation of the Wealthy


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With the release of her new book and the 2016 election just around the corner, Hillary Clinton's wealth and tax rate have been fodder for talking heads the past couple weeks. Both the report on the Clintons estate tax planning and Ms. Clinton's comments that she pays "ordinary income tax" provide useful lessons on the problems with the way the United States taxes wealthy individuals.

When Avoiding the Estate Tax Becomes the "Standard"

According to an in-depth report in Bloomberg, Bill and Hillary Clinton transferred the ownership of their New York residence into a pair of Qualified Personal Residence Trusts (QPRT), which tax experts believe could allow them to avoid hundreds of thousands of dollars in estate taxes.

The substantial tax benefit that the Clintons generated is driven by two key aspects of the QPRT. Most importantly, placing the residence into the QPRT locks in its current value as part of the estate, so all the future growth in the house's value will not be taxable as part of the estate. In addition, because the residence ownership is split in half between two QPRTs, the total valuation of both trusts is discounted because partial ownership stakes are considered by the IRS to have a lower value.

In other words, the Clintons are indeed using a tax dodge. They are using a method that, unfortunately, has become "pretty standard" for wealthy individuals and, also unfortunately, is entirely legal under our broken estate tax system.

Unlike wealthy individuals such as Sheldon Adelson, the Clintons have historically supported strengthening the estate tax rather than dismantling it further. During the 2008 campaign for example, Ms. Clinton supported capping the per-person exemption at $3.5 million, which mirrors President Obama's current proposal to strengthen the estate tax in his most recent budget (PDF).

Noting the Difference between the Tax Treatment Investment and Wage Income

In a much publicized interview with The Guardian, Ms. Clinton noted that she pays "ordinary income tax, unlike a lot of people who are truly well off." While she certainly opened her mouth and inserted her foot, her adversaries attacks on her poor phrasing misses the point.  A big part of the problem with our tax code is the preferential treatment it gives to income derived from wealth (e.g. capital gains, stock dividends) versus income derived from work. So, indeed, the Clintons are wealthy by any standards. Between 2000 and 2007 had $109 million in adjusted gross income, and they paid a 31 percent tax rate. Their tax rate is more akin to the rate paid by working people because they derive a significant portion of their high annual income from speaking fees, book royalties and other activities that are classified as work.

A wealthy investor, like Mitt Romney and Warren Buffet, with the same income but all of it derived from capital gains and stock dividends would have paid about half the rate the Clintons paid. This preferential treatment helps to perpetuate income inequality.

Hopefully, Mrs. Clinton's criticism of these low rates is an indication that she favors substantially curtailing or even ending the preferential rate on capital gains. If so, it would mark a positive shift from her position during the 2008 campaign, when she stated that she would not try to raise the top capital gains tax rate above 20 percent (the level it is today). 


FIFA's World Cup of Tax Breaks


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All eyes are on Brazil and the World Cup, but Gov. Tarso Genro of Rio Grande do Sul believes the country’s decision to host the World Cup has been “a huge mistake”.

And many of the country’s residents as well as a host of global anti-poverty advocates agree with him. Brazil has been under increasing scrutiny for tax breaks it awarded to the sporting giant FIFA--tax breaks that many believe the country can ill afford given the high concentration of poverty in some of the country’s districts.

According to InspirAction, Christian Aid’s Spanish affiliate, Brazil will give up $530 million in tax revenue to benefit the World Cup’s corporate sponsors such as McDonalds, Budweiser and Johnson & Johnson. The country is allowing corporations to import an array of products from food, medical supplies and promotional materials tax-free, while also exempting seminars, workshops and other cultural activities from taxes.

InspirAction and other advocates have said the millions saved by FIFA and its sponsors through these breaks should be used to benefit the poor, not corporations and their shareholders. Foregone World Cup tax revenue could help lift 37 million people out of extreme poverty and help improve basic services. Instead, FIFA, a supposed non-profit organization, is reporting historic profits while leaving the host country to foot the bill.

The bidding to receive games such as the World Cup or the Olympics is always intense. During the publicity runs surrounding the bidding, potential host countries and the sponsoring organization tout the economic benefits including increased tourism dollars. Unfortunately, economic benefits that arise from the events often are as short-lived as the event itself. The economic burden, however, can be lasting.

In 2010, South Africa hosted the World Cup. FIFA reported that it received $3.8 billion tax-free in revenue and that year was “the most profitable in FIFA history”. However, South Africa had a $3.1 billion net loss from hosting the games. The same year, the number of tourists in South Africa dropped by half compared to previous years. The displacement of usual tourists is a reoccurring event in World Cup-host countries including Germany, China and Korea. Similarly, the European Tours Operations (EOTA) conducted a study in 2006 of countries that hosted the Olympics, which showed tourism declined the year pre and post-Olympics.

Host countries also have the financial burden of maintaining specially built stadiums. German economist Wolfgang Maennig conducted a study which found that the utilization of accommodation actually fell by 11.1 percent in Berlin and 14.3 percent in Munich during the 2006 World Cup. In Brazil’s case, the country spent $300 million in public funds constructing Arena Amazonia, which Brazilian officials portrayed as an investment into the Manaus’ economy and tourism in spite of the research indicating otherwise.  There has been speculation that the 42,000-capacity Arena Amazonia will be turned into a detention centre after the games as sporting events in the small town rarely attract 1,000  people. Neither a huge stadium nor a detention center is likely to boost tourism figures for Manaus, despite what officials are saying.

Mayor of Porto Alegre, Jose Fortunati, defended the corporate tax breaks and said his city would not have been able to take part in the games without them.  This reasoning still doesn’t sit well with much of the Brazilian public. Former Brazilian footballer, manager and now politician with the Brazilian Socialist Party, Romário de Souza Faria, noted that FIFA is projected to make $1.8 billion in profits, which should generate $450 million in tax for public services, but FIFA won’t pay anything.

Hosting the World Cup and other international sporting events surely is a public relations boon. But underneath the games’ hype, there are serious questions about who really benefits—questions that are worth broad public debate.

Two years from now, Brazil is set to do this all over again when it hosts the summer Olympics and offers the same sort of tax breaks to the Olympic Committee. It seems that now is as good a time as any to address these issues.  


Congress, Take Note: More States Are Reforming Antiquated Fuel Taxes This Summer


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Transportation funding in the United States is in trouble. With the Highway Trust Fund set to go broke by late August, Congress has forgone any increase in the grossly inadequate federal gas tax (unchanged at 18.4 cents per gallon since 1993) in favor of plugging recurring funding gaps with general revenues. Currently, Senators Chris Murphy (D-Connecticut) and Bob Corker (R-Tennessee) are floating a proposal to hike the federal tax by 12 cents, but the new revenues would be offset by new tax cuts and its chances of passage are at any rate tenuous before a full legislature that habitually shies away from increasing taxes.

Fortunately, states need not wait for Congress to take action. With an eye toward long-term sustainability, several states will increase their own fuel taxes on Tuesday, July 1.

According to an analysis by the Institute on Taxation and Economic Policy (ITEP), four states will hike their gasoline or diesel taxes next week. The changes generally take two forms – automatic inflationary increases designed to keep pace with the rising cost of building and maintaining transportation infrastructure and hikes resulting from recent legislation.

 

Four states will see gasoline tax increases on Tuesday. Increases in Maryland and Kentucky are the result of 2013 legislation requiring an annual adjustment to reflect growth in the Consumer Price Index and a quarterly adjustment reflecting an increase in wholesale gas prices, respectively. New Hampshire deserves special kudos after the state legislature passed its first gas tax increase – and the largest of any state this year – since 1991. An additional levy of 4.2 cents per gallon – a decade’s worth of inflationary value – will be added at the pump on Tuesday to support needed transportation projects. Unfortunately, the tax is essentially a fixed rate increase rather than a variable-rate design which could have kept pace with annual increases in infrastructure costs, and it will be repealed in roughly 20 years when bonds for the I-93 project are paid off. Vermont will see a second structural tweak in its tax formula as a result of 2013 legislation overhauling the state’s gasoline and diesel taxes. The imposition of a higher motor fuel percent assessment combined with a decrease in the per gallon tax will result in an overall net increase next Tuesday of 0.6 cents per gallon.

 

On the diesel tax front, four states will see hikes next week ranging from 0.4 to 4.2 cents per gallon. Changes in Maryland and Kentucky again reflect annual or quarterly price growth. New Hampshire’s diesel tax increase matches that for gasoline (4.2 cents per gallon). Vermont will raise its diesel tax by an additional 1 cent on top of last year’s 2 cent hike as the state’s 2013 tax structure overhaul is fully phased in.

Two more states should have made the list this year, but officials there have actually blocked scheduled fuel tax increases. Georgia Governor Nathan Deal suspended an automatic 15% increase in his state’s variable-rate gas tax by way of executive order earlier this month, citing concerns over the cost burden for families and businesses. North Carolina lawmakers passed legislation during the 2013 session freezing the state’s variable-rate gas tax at 37.5 cents per gallon, effective through June 30, 2015. Officials in these states will likely take credit for enacting “tax cuts” this year as infrastructure projects go underfunded.

Two other states will see their fuel taxes decrease on Tuesday. California will cut its gasoline excise tax from 39.5 to 36 cents per gallon, reflecting a decrease in gas prices. Connecticut’s diesel tax rate is revised each July 1 to reflect changes in the average wholesale price over the past year, and will see a decrease this year of 0.4 cents per gallon.

Fortunately, gasoline tax reform is already on the horizon in Rhode Island, where lawmakers agreed as part of this year’s budget plan to index the tax to inflation, which will mean a roughly 1 cent increase effective July 1, 2015. Michigan’s legislature was expected to come to an agreement this session on a fuel tax increase after voters there expressed a willingness to pay for repairs on badly deteriorating roads and bridges, but proposals to increase the tax by 25 cents per gallon over four years or to index it to keep pace with construction costs stalled. With lawmakers promising to take up the issue again in the fall, another summer construction season is now lost in the state.

Including the budget agreement passed by Rhode Island earlier this month, the total number of states with variable-rate fuel taxes designed to rise alongside the price of gas, overall inflation, or both increases to 19 (plus DC). In the past year, Massachusetts, Pennsylvania, and DC have all switched from fixed-rate fuel tax structures to variable-rate structures.

Given the level of debate and the major changes in states’ fuel tax structures that have taken place in 2013 and 2014, it seems that more states are recognizing the need for a sustainable fuel tax capable of keeping pace with the inevitable increases in transportation infrastructure costs.

NOTE: Differences among states in the direction and magnitude of gas price changes evident in rate revisions reflect states' use of state-specific price data as the basis for rate changes. In particular, California experienced the largest gasoline price drop of any state over the past year and will, therefore, see a large negative change in their rate.


For Education Tax Breaks, Progressivity = Effectiveness


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On Tuesday, when the Senate Finance Committee contemplates the patchwork of tax breaks that are supposed to subsidize postsecondary education, they will likely consider ways to streamline these breaks and make them less confusing. That’s a good idea, but it’s not enough. The bigger problem is that too much of these tax subsidies are going to families who are well-off and would send their kids to college no matter what, and too few are going to lower-income families who are likely to send their kids to college only if they can find sufficient assistance.

The current collection of tax breaks can be confusing. A 2012 report from the Government Accountability Office found that more than a fourth of taxpayers eligible for postsecondary education tax breaks don't take advantage of them, and those who do use them often don't use the most advantageous tax break for their situation.

But Congress also needs to make these tax benefits more targeted to those households that actually need them to access postsecondary education. That could mean scaling back or eliminating some poorly targeted breaks and beefing up the American Opportunity Tax Credit, which is the best targeted of the bunch.  

It’s not clear that lawmakers will take up this cause, especially given that they are likely to move in the opposite direction by extending the most regressive of these tax breaks, the deduction for tuition and related fees. The deduction for tuition and related fees is among the temporary tax provisions that would be extended for two years under the “tax extenders” legislation approved by the Finance Committee on April 3, with the support of committee chairman Ron Wyden and ranking Republican Orrin Hatch.

Tax Breaks for Postsecondary Education Are Poorly Targeted, and Deduction for Tuition and Fees Is the Worst

A report from the Center for Law and Social Policy explains that unlike the direct federal spending provided through Pell Grants, the tax breaks for postsecondary education overall favor relatively well-off households, as illustrated in the graph below.

The graph below shows that the most regressive of the tax breaks is the deduction for tuition and related fees, followed by the Lifetime Learning Credit (LLC) and the deduction for interest payments on student loans.

One option would be to simply end the practice of providing these subsidies through the tax code and instead increase spending on Pell Grants or other similar assistance. While this would be logical, Congress may be too politically committed to the concept of tax breaks for education to seriously consider this.

There are certainly ways to make these tax breaks work better. The more regressive tax breaks could be scaled back, and the savings could be put toward expanding the American Opportunity Tax Credit (AOTC). The figures illustrate that the AOTC, first signed into law by President Obama in 2009, is the most progressive of the postsecondary education tax breaks (or perhaps it’s better described as the least regressive of the education tax breaks).

The biggest reason why the AOTC is better targeted to low-income families than the other breaks is the fact that the AOTC is a partially refundable credit. The working families who pay payroll taxes and other types of taxes but earn too little to owe federal income taxes will benefit from an income tax credit only if it is refundable, such as the Earned Income Tax Credit.

Unfortunately, the AOTC is currently scheduled to expire at the end of 2017, when it will revert to a less generous credit that existed before 2009. If lawmakers were serious about making tax breaks for postsecondary education more effective, they would at very least make the AOTC permanent and allow the deduction for tuition and fees to expire as scheduled.


Good and Bad Proposals to Address the Highway Trust Fund Shortfall


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As a result of Congress’s reluctance to raise the gas tax for the past 20 years, the Highway Trust Fund will run out of money in August. That could bring transportation construction and repairs all across the country to a stop and cost 600,000 jobs, according to one estimate. Experts project a nearly $170 billion shortfall over the next decade. Several proposals have been offered to address this, some of them better than others.

Nonsensical “Repatriation Holiday” Proposal

Last week we described a nonsensical proposal from Democratic Senate Majority Leader Harry Reid and Republican Sen. Rand Paul that supposedly would pay for transportation with a “repatriation holiday,” even though this measure would raise almost no revenue even according to their own description of it. The term “repatriation holiday” is essentially a euphemism for temporarily calling off most of the U.S. tax that is normally due on corporations’ offshore profits when they are officially brought to the United States. One of many problems with such proposals is they encourage corporations to shift even more profits offshore.

Increase the Gas Tax… But Give All the Revenue Away with New Tax Cuts?

This week, Democratic Sen. Chris Murphy and Republican Sen. Bob Corker proposed to finally fix the 18.4 cent gas tax and 24.4 cent diesel tax, which are not indexed for inflation and have not been increased since 1993, but unfortunately they also propose to give an equal amount of revenue away with new tax cuts.

Their proposal would raise both taxes by 12 cents over two years and index them to inflation thereafter. ITEP has long called for this type of reform. Of course, attaching tax cuts of equal value to this proposal turns it entirely into a budget gimmick because no revenue would actually be raised overall. The two proponents suggested that the tax-cutting could take the form of making permanent six of the “tax extenders,” the tax cuts that mostly benefit corporations and that Congress extends every couple of years with little debate, without offsetting the costs. 

Close Offshore Corporate Tax Loopholes

If lawmakers cannot bring themselves to fix the gas tax without giving the revenue away with new tax cuts, perhaps they should consider closing corporate tax loopholes. Given that American corporations would be unable to profit without the infrastructure that makes commerce possible, it seems entirely reasonable that they pay their share in taxes to support it, and that Congress close the loopholes corporations use to avoid paying.

Sen. John Walsh of Montana introduced a bill this week to do exactly that with two provisions that close offshore tax loopholes used by American corporations.

The first provision is President Obama’s proposal, which was incorporated into Sen. Carl Levin’s Stop Tax Haven Abuse Act, to bar corporations from taking deductions for their U.S. taxes for interest expenses related to offshore investments until the profits from those offshore investments are subject to U.S. taxes.

American corporations are allowed to defer paying U.S. corporate income tax on their offshore profits until those profits are officially brought to the U.S. (which may never happen). But the current rules allow them to borrow to invest in that offshore business and deduct the interest expenses right away from their U.S. income when they calculate their U.S. taxes. That means that the tax code is essentially subsidizing companies for investing offshore (at least on paper) rather than in the United States. Sen. Walsh (and Obama and Levin) sensibly propose that if the U.S. tax on offshore profits is deferred, then the interest deduction associated with those offshore profits should also be deferred.

The second revenue provision in Sen. Walsh’s bill is the anti-inversion proposal that Sen. Levin and Rep. Sander Levin, the ranking Democrat on the Ways and Means Committee, introduced in May. A corporate inversion happens when a company takes steps to declare itself  “foreign” for tax purposes, even though little or nothing has changed about where its business is really conducted or managed. Given that several corporations have announced plans (or attempts) to do this in recent months, this is a reform Congress should want to enact even in the absence of any immediate revenue need.


Medtronic's History of Shirking Its Tax Responsibilities


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Defenders of widespread corporate tax avoidance often say the real responsibility lies with Congress for allowing tax loopholes to exist. While partly true, corporate lobbying and political contributions are a significant reason why our corporate tax code is a mess. Some companies pursue tax avoidance schemes so aggressively that it’s clear the people running them lack even a minimal sense of responsibility to the country that makes their companies’ profits and their executives’ huge salaries possible. Medtronic is such a company.

Medical Device Tax

As Congress was debating health care reform at the start of Obama’s presidency, Medtronic had plenty of problems with scandals relating to some of its products and faced diminishing returns from its research. So its leaders decided to make a big deal out of a rather small tax item, the medical device tax, that lawmakers wanted to include in health reform law.

The principle behind the medical device tax was simple enough. All parts of the health care industry, including hospitals, pharmaceutical companies, health insurers, clinical laboratories and others, would benefit from expanded health care coverage provided by health insurance reform. Therefore, such companies should help pay for reform through various types of taxes and cuts in Medicare spending.

After Congress proposed the medical device tax, Medtronic and AdvaMed (the trade association for medical device companies) managed to persuade members to chop it in half before enacting the Affordable Care Act. Medtronic publicly celebrated this victory and lavished praise on lawmakers from both parties who made this happen.

But that wasn’t enough for Medtronic and AdvaMed, which have since demanded full repeal of the tax. The ensuing campaign has included claims by AdvaMed about its potential harmful impacts on the industry, claims that are easily disproven.

Medtronic’s leadership could have joined the honest medical device executives who stated publicly that the 2.3 percent excise tax is not going to hurt their business. As a report from the Center on Budget and Policy Priorities explains:

…Martin Rothenberg, head of a device manufacturer in upstate New York, calls claims that the tax would cause layoffs and outsourcing “nonsense.” The tax, he writes, will add little to the price of a new device that his firm is developing. “If our new device proves effective and we market it effectively, this small increase in cost will have zero effect on sales. It would surely not lead us to lay off employees or shift to overseas production.” Michael Boyle, founder of a Massachusetts firm that makes diagnostic equipment, insists that the device tax is “not a job killer. It would never stop a responsible manager from hiring people when it’s time to grow the business.”

Offshore Tax Havens

Recently, it has become increasingly clear that this is not the only tax that Medtronic has tried hard to avoid. “Offshore Shell Games,” the recent report from Citizens for Tax Justice and US PIRG Education Fund, found that Medtronic has disclosed 37 subsidiaries in countries that the Government Accountability Office has characterized as tax havens. (Companies may have subsidiaries that are not disclosed.) For example, Medtronic has five subsidiaries in the Cayman Islands and one in the British Virgin Islands.

Based on the data available, it’s impossible to know how much of the company’s profits are officially earned in these countries for tax purposes. But it’s clear that little if any of its profits are earned there in any real sense. In the aggregate, the profits that American corporations report to the IRS that they earn in Bermuda are 16 times the size of Bermuda’s economy, and the profits they report to earn in the British Virgin Islands are 11 times the size of that country’s economy. Obviously, corporations use a lot of accounting fictions when they claim to earn profits in these countries, and Medtronic is apparently one such company.

Demonstrating a lot of chutzpah even for a Fortune 500 corporation, Medtronic responded to questions about its offshore schemes by complaining that it would have to pay U.S. taxes on its tax-haven profits if it decided to officially bring them into the U.S.

Corporate Inversion

This week, Medtronic’s leadership went even further to show its distain for the country that makes its profits possible. It announced that it would attempt a corporate “inversion,” which is a euphemism for the practice of American corporations pretending to be foreign companies to avoid U.S. taxes.

The tax laws in this area used to be so weak that American corporations could simply fill out some papers to reincorporate in a country like Bermuda and then declare themselves “foreign” corporations. This had huge benefits. As American corporations, their profits outside the U.S. could, at least in theory, be subject to some U.S. taxes if they were ever officially brought to the U.S. But as “foreign” corporations, their offshore profits would never be subject to U.S. taxes.

A bipartisan law enacted in 2004 tried to crack down on corporate inversions, but a loophole in the law makes it possible for an American corporation to invert if it acquires a relatively small foreign company. The resulting merged company can be considered a “foreign” company even if it is 80 percent owned by the people who owned the American corporation, and even if its business is still mostly conducted and managed in the U.S.

This is exactly what Medtronic aims to do with its bid to acquire Covidien, another device maker, and then reincorporate in Ireland. (Covidien itself is an inverted company, incorporated in Ireland but run out of Massachusetts.)   

Medtronic’s CEO has ludicrously claimed that “this is not about lowering tax rates.” But this is entirely contradicted by the terms of the takeover agreement, which allow Medtronic to call off the deal if Congress changes the tax laws in a way that would treat the merged company as an American corporation for tax purposes.

In fact, legislation to curb inversions has been introduced. Congress should waste no time in enacting it. Otherwise, plenty of other corporations will feel pressure from their shareholders to invert if Medtronic gets away with pretending to be “foreign.”


The Koch Brothers' Ugly Vision for Tax Deform


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The billionaire brothers Charles and David Koch are in the news once again as they step up their efforts to influence elections and the political process with a new super PAC called Freedom Partners Action Fund. It's worth thinking about how tax policy could be affected if they succeed.

Last year, the Koch-Brothers-funded Americans for Prosperity released a 37-page report laying out the group’s vision for what it calls “tax reform.”

Read CTJ's quick take on what that vision would mean.


How Obama Could End the Romney Loophole Right Now


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For the last two decades, a regrettable IRS ruling called the “carried interest loophole” has allowed wealthy private equity and venture capital managers to pay a lower tax rate on their income than the rest of us. Fair tax advocates have long called on Congress to close this loophole as a step toward tax fairness. While the prospects for legislation improving tax fairness in Congress have languished this year, the Obama Administration could bypass Congress and take immediate action to close the loophole.

The carried interest loophole has gained even more notoriety in recent years because former Republican presidential nominee Mitt Romney during his time at Bain Capital, resulting in the loophole being nicknamed the "Romney loophole."

The way the carried interest loophole (PDF) works is that managers of investment partnerships such as private equity and venture capital funds are often compensated with a percentage of the profits earned by assets under their management. Because of an unfortunate 1993 IRS ruling, this income is incorrectly treated as capital gains, which means the managers of these partnerships receive the special preferential rate of 20 percent rather than paying the 39.6 percent rate applied to ordinary income. Given the extraordinarily high compensation that many of these fund managers earn, its unconscionable that the tax system allows them to pay a lower tax rate on their income than their receptionists pay.

As tax professor Victor Fleischer noted in the New York Times, to end this preferential treatment of fund managers, all the administration has to do is direct the IRS to reclassify them as service providers, which would require that their income be taxed as ordinary income. Ironically, even some private fund managers have admitted (PDF) in the past that they the work they do should be characterized as "income earned in exchange for the provision of services," rather than as a capital gain.

While there is not an official estimate on the revenue impact that such an executive action would have, the Obama administration's most recent budget proposals include a provision substantially restricting the carried interest loophole and projected to raise almost $14 billion over 10 years.

Over the long term, it would be preferable to end preferential treatment of capital gains, but closing the carried interest loophole would represent a significant step the Obama administration could take now, without congressional approval, to improve fairness in the tax code. 


Much of What You've Heard about Corporate "Inversions" Is Wrong


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With yet another big U.S. corporation (this time it’s the medical device maker Medtronic) announcing its intentions to “invert” and officially become a “foreign” company for tax purposes, it’s time to correct a few misunderstandings.

1. What is a corporate inversion?

Incorrect answer: A corporate inversion happens when a company moves its headquarters offshore.

Correct answer: A corporate inversion happens when a company takes steps to declare itself a “foreign” corporation for tax purposes, even though little or nothing has changed about where its business is really conducted or managed.

The law used to be so weak that an American corporation could simply reincorporate in Bermuda and declare itself a foreign company for tax purposes. In 2004, Congress enacted a bipartisan law to prevent inversions, but a gaping loophole allows corporations to skirt this law by acquiring a smaller foreign company. The loophole in the current law allows the company resulting from a U.S.-foreign merger to be considered a “foreign” corporation even if it is 80 percent owned by shareholders of the American corporation, and even if most of the business activity and headquarters of the resulting entity are in the U.S. (A proposal from the Obama administration to change these rules has been introduced in Congress by Carl Levin in the Senate and his brother Sander Levin in the House.)

2. How are the offshore profits of American corporations taxed?

Incorrect answer: When American corporations officially bring their offshore profits to the U.S., they must pay the 35 percent U.S. tax rate, and this is why they want to escape the U.S. tax system.

Correct answer: When American corporations officially bring their offshore profits to the U.S., they must pay the U.S. tax rate of 35 percent only if their profits have been shifted to tax havens.

When American corporations “repatriate” offshore profits (officially bring offshore profits to the U.S.) they are allowed to subtract whatever corporate taxes they paid to foreign governments from their U.S. corporate tax bill. (This break is called the foreign tax credit.) The only American corporations that would pay anything close to the full 35 percent U.S. corporate tax rate on offshore profits are those that claim their profits are in countries where they are not taxed — countries we know as tax havens.

American multinational corporations report to the IRS massive amounts of profits earned in countries that either have an extremely low (or zero) corporate tax rate or otherwise allow them to escape paying much in corporate taxes. It is obvious that these reported tax haven profits are not truly earned in these countries, and in fact that would be impossible. For example, the profits American corporations overall report to earn in Bermuda are 16 times the size of Bermuda’s economy. Obviously, these profits are truly earned in the U.S. or other countries with real consumer markets and real business opportunities, and then manipulated to appear to be earned in countries where they are not taxed.

The corporations that make the most use of these tax haven maneuvers — maneuvers that are probably legal, but which should be barred by Congress — are the corporations that would pay close to the full 35 percent tax rate if they repatriated their offshore profits.

3. What profits are corporations trying to shield from U.S. taxes when they invert?

Incorrect answer: When American corporations invert, they do it to escape the U.S. system of taxing offshore profits, which is something most other countries don’t do. After they become a foreign company, their U.S. profits would still be subject to U.S. taxes.

Correct answer: American corporations invert to avoid paying taxes in any way possible, and often that includes avoiding U.S. taxes on their U.S. profits. It’s true that, in theory, all corporate profits earned in the U.S. (even profits of a foreign-owned corporation) are subject to the U.S. corporate income tax. But corporate inversions are often followed by “earnings stripping” to make any remaining U.S. profits appear to be earned offshore where the U.S. cannot tax them.

Earnings stripping is the practice of multinational corporations reducing or eliminating their U.S. profits for tax purposes by making large interest payments to their foreign affiliates. Corporations load the American part of the company with debt owed to a foreign part of the company. The interest payments on the debt are tax deductible, reducing American taxable profits, which are shifted to the foreign part of the company and are not taxed.

If the American part of the company is the parent corporation shifting its profits to offshore subsidiaries, then the benefit is that U.S. tax will not be due on those profits until they are repatriated, which may never happen. But if the American part of the company can claim to be just a subsidiary of a foreign parent company — which would technically be the case after a corporate inversion — then the benefits of earnings stripping are even greater because the profits that are officially “offshore” are never subject to U.S. taxes.

This is part of what motivated the 2004 reform and a 2007 report from the Treasury Department that found that rules enacted earlier to address earnings stripping did not seem to prevent inverted companies from doing it.


Senate Democrats, Joined by Three Republicans, Come Up Short on Buffett Rule, Student Loan Bill


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Three Senate Republicans (two of whom have signed Grover Norquist's infamous no-tax-increases pledge) joined their Democratic colleagues Wednesday to support a bill that would use the “Buffett Rule” to raise taxes on millionaires and offset the cost of easing student loan repayments.

Introduced by Sen. Elizabeth Warren (MA), the bill had the support of 57 senators, three short of the threshold for cloture in the Senate.

The three Republicans voting in favor were Susan Collins (ME), Bob Corker (TN) and Lisa Murkowski (AK). Corker and Murkowski have publicly said they do not feel bound by the Norquist pledge.

The “Buffett Rule” started out as the principle, proposed by President Barack Obama, that the tax code should be reformed in a way that ensures that millionaires don’t pay lower tax rates than middle-income people. It was inspired by the billionaire investor Warren Buffett, who famously argued that it was unfair that his effective tax rate was lower than his secretary's rate.

As a CTJ report explains, some millionaires have lower effective tax rates than middle-income people mostly because investment income that mainly goes to the wealthiest Americans is subject to lower rates under the personal income tax and is not subject to the Social Security tax. The simplest remedy is to eliminate the special, low personal income tax rates that apply to two types of investment income, capital gains and stock dividends.

The tax provision in Sen. Warren’s bill, which was first introduced by Senate Democrats in 2012, takes the more roundabout approach of imposing on millionaires a minimum effective tax rate (including personal income taxes and health care taxes) of 30 percent. It is projected to raise $73 billion over a decade.

In 2012, CTJ called this measure “a small step in the direction of tax fairness” and explained it would raise much less revenue than simply taxing capital gains and dividends like other income under the personal income tax. One reason is that taxing capital gains and dividends like other income would subject them to a top personal income tax rate of 39.6, plus an additional 3.8 percent under the Obamacare tax, rather than 30 percent. Another reason is that there is a great deal of capital gains and dividend income that goes to taxpayers who are among the richest five percent or even one percent but who are not millionaires and therefore not affected by the Senate Democrats’ proposal.

Sen. Warren’s proposal is a good start that should be enacted and built upon one day with a more comprehensive reform.


Reid-Paul "Transportation Funding Plan" is No Plan at All


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The nation has a number of pressing problems, and our polarized Congress all too often can’t seem to compromise on policies that would address fundamental issues that most of us care about. In this context, it seems a pending proposal by Democratic Senator Majority Leader Harry Reid and Sen. Rand Paul, a Republican senator and libertarian stalwart, would be a refreshing change from the norm. But not so much.

Unfortunately, Sens. Reid and Paul have proposed to “fund” the Highway Trust Fund with a nonsensical measure that would reward corporate tax avoidance and raise almost no revenue, according to their own description of the plan.

Policymakers know our nation’s roads are chronically underfunded. Since 2008, Congress has covered $53 billion of transportation funding shortfalls by taking needed tax dollars out of general fund revenue, and official forecasts show the need for a huge infusion of new cash to maintain our roads and bridges. There is a straightforward policy solution—increasing the federal gas tax to offset large inflationary declines over the past two decades—that requires a legislative champion.

Instead of taking the obvious step of fixing the federal gas tax, Reid and Paul propose a repatriation tax holiday, which would give multinational corporations an extremely low tax rate on offshore profits they repatriate (profits they officially bring back to the United States). The idea is that corporations would bring to the United States offshore profits they otherwise would leave abroad, and the federal government could tax those profits (albeit at an extremely low rate) and put the revenue toward the transportation fund.

The first problem with such a proposal is many of these offshore profits are clearly earned in the United States and then manipulated through accounting gimmicks so corporations appear to earn the money in countries where it won’t be taxed, as demonstrated by several recent CTJ reports. In fact, profits corporations report earning in zero-tax countries would receive the biggest breaks under a repatriation holiday because the U.S. tax normally due on repatriated profits is reduced by whatever taxes have been paid to foreign governments.

The second problem with a repatriation holiday is that Congress enacted this type of proposal in 2004, and critics have widely panned that measure as providing no increase in employment or investment but only enriching shareholders and executives.

The third problem is that it loses revenue. The non-partisan Joint Committee on Taxation (JCT) has estimated that a repeat of the 2004 measure would reduce revenue by (and increase the budget deficit by) $96 billion over a decade.

According to JCT, one reason for the massive revenue loss is that some of the offshore profits would be repatriated anyway absent any new tax break, and companies would pay the full tax. Another reason is that the measure would encourage corporations to engage in even more accounting games to make their U.S. profits appear to be earned in offshore tax havens, with the expectation that a little lobbying could prod Congress to enact another repatriation holiday in a few years.

Reid and Paul have added a detail that they claim improves their proposal. They argue that companies would rather borrow money than tap profits they claim to hold “offshore.” Reid and Paul therefore propose to also limit the tax-deductibility of corporate borrowing by asserting that any business borrowing that is done for the purpose of avoiding repatriating offshore cash would be non-deductible.

It is unclear how this could possibly be implemented, but even if it works, the New York Times reports that Reid’s staff believes the net effect would raise just $3 billion over a decade. This is laughably insufficient. Replenishing the Highway Trust Fund just to maintain spending until the end of 2015 will cost $18 billion


Tax Foundation's Dubious Attempt to Debunk Widely Known Truths about Corporate Tax Avoidance Is Smoke and Mirrors


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Yesterday, the conservative Tax Foundation wrote a misleading response to the report, “Offshore Shell Games,” by U.S. Public Interest Research Group (PIRG) Education Fund and Citizens for Tax Justice (CTJ).

Major Conclusions Not Challenged by the Tax Foundation

The Tax Foundation does not challenge most of the report’s findings because a strong body of research by academics, journalists and other tax policy analysts reach the same conclusions.

USPIRG Ed Fund/CTJ conclude that American corporations in the aggregate are obviously engaging in tax avoidance when they report to the IRS that their subsidiaries earn $94 billion in profits in Bermuda during a year when that country has a GDP (total economic output) of just $6 billion. We conclude that American corporations are engaging in obvious tax avoidance when they report to the IRS that they earn $51 billion in the Cayman Islands when that country has a GDP of just $3 billion. The Tax Foundation does not challenge this.

We also conclude that when Apple discloses it would pay a U.S. tax rate of about 33 percent on its offshore profits if it officially brings those profits to the United States, that means Apple has only paid a 2 percent effective tax rate to countries where it claims to have earned those profits. We conclude that when U.S. Steel discloses that it would pay a U.S. tax rate of about 34 percent on its offshore profits if it officially brings them to the U.S., that means U.S. Steel has only paid a 1 percent effective tax rate to the countries where it claims to have earned those profits. The findings are similar for Nike, Microsoft, Oracle, Safeway, American Express, Wells Fargo, Citigroup, Bank of America, and several other companies. This strongly suggests that most of these profits are reported to the IRS as earned in tax havens.

The Tax Foundation challenges none of this.

Tax Foundation’s Own Analysis Depends on Wildly Misleading Use of Data

The Tax Foundation claims that we ignore IRS data that “reports corporations actually paid a tax rate of about 27 percent on their reported foreign income” in 2010, as one of its own reports claims.

This is outrageously misleading. The Tax Foundation’s 27 percent figure is based on the offshore profits that American corporations “repatriate” to the U.S., which excludes profits that are reported as “earned” in tax havens or other countries with low tax rates. (Specifically, the Tax Foundation uses data reported on form 1118, which applies to offshore profits actually taxed by the U.S. in a given year.) The profits booked offshore for tax purposes that the U.S. PIRG Ed Fund/CTJ cite are those that companies have claimed are “permanently reinvested” offshore, meaning they have no plans to ever pay U.S. tax on them. By definition then, the Tax Foundation study does not factor in those profits at all.

As our report explains, when offshore corporate profits are “repatriated,” (officially brought to the U.S.) they are subject to U.S. corporate income tax minus a credit for any corporate income tax they paid to foreign governments. (This is the foreign tax credit.) As a result, American corporations are far, far more likely to repatriate offshore profits that have been subject to relatively high foreign tax rates, because they generate larger foreign tax credits. They are far less likely to repatriate offshore profits that they reported to earn in tax havens, because these profits would generate few if any foreign tax credits.

Tax Foundation’s Attempts to Pick Apart US PIRG Ed Fund/CTJ Analysis Do Not Withstand Scrutiny

The Tax Foundation attempts to pick apart pieces of the analysis in order to create a general sense that there is disagreement about the data and what the data can tell us. For example, we explain that only 55 companies disclose how much they would pay in U.S. taxes on their offshore profits if they officially brought those profits to the U.S. That’s how we determined that Apple, U.S. Steel, and those other companies officially hold most of their “offshore” profits in tax havens. The Tax Foundation claims that we are “cherry-picking” because most companies do not disclose this. We cannot possibly be “cherry-picking” if we provide the data for every Fortune 500 company that discloses such data. Further, there is no reason to believe (and none suggested by the Tax Foundation) that these 55 corporations are not representative of the rest of the Fortune 500 that have significant offshore profits.

In addition, the Tax Foundation challenges our use of IRS data to show how much of the officially “offshore” profits of American corporations are reported to be earned in tax havens, claiming that double-counting makes the data unreliable. The fact is that this data have been used in the same way in the report on tax havens by the non-partisan Congressional Research Service (CRS). Another report from CRS used data from the Bureau of Economic Analysis (BEA), which is similar, and noted (on page 9) that any double-counting in the BEA data would not have a significant impact on the results.

For some unknown reason, the Tax Foundation also challenges our definition of the countries that are tax havens. As discussed in the text of the report, the definition of tax haven is based on the list of countries created by the non-partisan General Accountability Office's (GAO) review of research done by the Organization for Economic Cooperation and Development (OECD), the National Bureau of Economic Research (NBER), and a U.S. District Court.

Rather than disputing the robust research done by various independent authorities that classify these countries as tax havens, the Tax Foundation makes the baseless claim that our list includes countries that have “international recognized normal tax systems.” In reality, each of the countries they define as normal has a well-known history of facilitating tax avoidance. For example, the Tax Foundation lists the Netherlands and Ireland as having normal tax systems, despite the well publicized use of international tax avoidance techniques like the ‘Double Irish With a Dutch Sandwich’ that utilize subsidiaries in these countries.

The bottom line is that the Tax Foundation is probably close to right that American corporations pay about a 27 percent tax rate to foreign countries where they actually do business. Of course, that finding contradicts the Tax Foundation’s frequent false claim that U.S. companies pay lower taxes to real foreign governments than they pay to the United States on their U.S. profits.

But the profits that American corporations book in offshore tax havens for tax purposes are mostly U.S. profits that these companies have artificially shifted offshore to avoid paying U.S. taxes. Such profit shifting is one reason why American corporations pay only a little over half the 35 percent corporate tax rate on the profits they actually earn in the United States.


New IRS Report Demonstrates yet Another Reason Income Inequality Persists


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New IRS Report Demonstrates Yet Another Reason Income Inequality Persists

If we reported that the rich continue to find ways to avoid paying taxes, the statement would elicit no more than a passing yawn, as by now this fact is common knowledge. But a new report released earlier this week by the IRS reveals why the nation shouldn't continue to accept wealthy tax dodging as inevitable.

The IRS report confirms that the best-off taxpayers (those with incomes of $200,000 or more) continue to find legal ways to make their federal tax obligation $0. Worse, the report finds that this is occurring at a pace not seen for decades.

From the report’s first publication in 1977 through 2000, the number of high-income Americans paying no tax never exceeded 3,000. But the past four years have seen an explosion of high-end tax avoidance: in each of these years, the number of zero-tax Americans found in this report has exceeded 30,000.

In 2011 (the latest year for which data are available), almost 33,000 people with incomes over $200,000 paid no federal income tax. For this group—less than one percent of all Americans with incomes over $200,000 in 2011—tax-exempt bond interest and itemized deductions are among the main tax breaks that make this tax-avoiding feat possible. 

In 1977, Congress mandated the IRS publish this report annually to help policymakers understand whether high-income tax avoidance was an ongoing problem, and (presumably) to help build the case for reform. This latest report paints a clear picture of a growing problem.

The good news is that tax reforms included in President Barack Obama’s budget plan for the upcoming fiscal year would pare back tax breaks for itemized deductions and bond interest, making important strides toward restoring these high-income Americans to the tax rolls.

Whether it’s gigantic Fortune 500 corporations or super-rich individuals, tax avoidance has a corrosive effect on the public’s confidence in our tax system, not to mention it perpetuates worsening income inequality. Ensuring the best-off Americans have some “skin in the game” should be a basic priority of tax reform.


Even the Weak Anti-Abuse Measures Contemplated by OECD Are Too Much for Republican Tax Writers


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Representatives of Organization for Economic Co-operation and Development (OECD) countries are meeting in Washington this week to determine what reforms they should recommend to address offshore corporate tax avoidance. Such recommendations would implement the Action Plan on Base Erosion and Profit Shifting (BEPS), which OECD issued last summer. The plan doesn’t go far enough, but the Obama administration has recently indicated that it is restraining OECD talks from resulting in more fundamental reforms, and the top Republican tax writers in Congress issued a statement on June 2 that seems even more opposed to reform.

As we wrote about the Action Plan last summer,

While the plan does offer strategies that will block some of the corporate tax avoidance that is sapping governments of funds they need to make public investments, the plan fails to call for fundamental change that would result in a simplified, workable international tax system.

Most importantly, the OECD does not call on governments to fundamentally abandon the tax systems that have caused these problems — the “deferral” system in the U.S. and the “territorial” system that many other countries have — but only suggests modest changes. Both tax systems require tax enforcement authorities to accept the pretense that a web of “subsidiary corporations” in different countries are truly different companies, even when they are all completely controlled by a CEO in, say New York or Connecticut or London. This leaves tax enforcement authorities with the impossible task of divining which profits are “earned” by a subsidiary company that is nothing more than a post office box in Bermuda, and which profits are earned by the American or European corporation that controls that Bermuda subsidiary.

In April, we noted that the Obama administration seems to be blocking any more fundamental (more effective) reform and is clinging to the “arms length” principle that supposedly prevents subsidiaries owned by a single U.S. corporation from over-charging and under-charging each other for transactions in ways that make profits disappear from one country and magically reappear in another. As we explained,

But when a company like Apple or Microsoft transfers a patent for a completely new invention to one of its offshore subsidiaries, how can the IRS even know what the market value of that patent would be? And tech companies are not the only problem. The IRS apparently found the arm’s length standard unenforceable against Caterpillar when that company transferred the rights to 85 percent of its profits from selling spare parts to a Swiss subsidiary that had almost nothing to do with the actual business.

This week, just to kill any lingering possibility that the OECD will do some good, Rep. Dave Camp and Senator Orrin Hatch, the Republican chairman of the House Ways and Means Committee and the ranking Republican on the Senate Finance Committee, issued a statement claiming they are “concerned that the BEPS project is now being used as a way for other countries to simply increase taxes on American taxpayers [corporations].”

Of course, major multinational corporations from every country will, in fact, experience a tax increase if the OECD effort is even remotely successful. American corporations are using complex accounting gimmicks to artificially shift profits out of the U.S. and out of other countries into tax havens, countries where they will be taxed very little or not at all. There is no question this is happening. As CTJ recently found, American corporations reported to the IRS in 2010 that their subsidiaries had earned $94 billion in Bermuda, which is obviously impossible because that country had a GDP (output of all goods and services) of just $6 billion that year.

In their statement, Camp and Hatch complain that “When foreign governments – either unilaterally or under the guise of a multilateral framework – abandon long-standing principles that determine taxing jurisdiction in a quest for more revenue, Americans are threatened with an un-level playing field.”

But what exactly have these long-standing principles, like the “arm’s length” standard accomplished? They’ve allowed American corporations to tell the IRS that in 2010 their subsidiaries in the Cayman Islands had profits of $51 billion even though that country had a GDP of just $3 billion. They’ve allowed American corporations to tell the IRS that in 2010 their subsidiaries in the British Virgin Islands had profits of $10 billion even thought that country had a GDP of just $1 billion.

Camp and Hatch have claimed in the past that the solution for our corporate income tax is to essentially adopt a “territorial” tax system that would actually increase the rewards for American corporations that manage to make their U.S. profits appear to be earned in Bermuda, the Cayman Islands, the British Virgin Islands, or any other tax haven. Congress needs to move in the opposite direction, as we have explained in detail. 


The Obama Administration Just Made the Research Credit an Even Bigger Boondoggle


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New IRS regulations issued on June 2 expand the ability of companies to claim the research credit retroactively for prior tax years on amended tax returns. This makes it far more likely that the credit will subsidize activities that businesses would have carried out anyway, even in the absence of any tax incentive.

The research credit is supposedly designed to encourage companies to expand the amount of research they conduct. That means it can be thought of as effective only to the extent that it subsidizes research that businesses would not have carried out anyway even if no tax break was offered to them. Of course, if a company carried out research and did not even become aware that it could claim the credit until three years later, there is no way that research was the result of the credit.

In our December 2013 report, “Reform the Research Tax Credit — Or Let It Die,” Citizens for Tax Justice called upon Congress to bar companies from claiming the credit on amended returns. There are two main versions of the research credit available, the regular research credit and the “alternative simplified credit” (ASC). Companies were already allowed to claim the regular credit on amended returns — which CTJ sought to ban. But IRS regulations had barred companies from claiming the ASC on amended returns — until now.

As the CTJ report explained, at least two senators explicitly called for allowing companies to claim the ACS on amended returns, giving absolutely no policy rationale for such a change. It appears likely that the pressure to make this change came from accounting firms like Alliantgroup who approach businesses and offer to help them claim the research credit for activities they carried out in the past.


House Committee Votes to Increase Deficit by Nearly $300 Billion with "Bonus" Depreciation


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Once again, a Congress that cannot enact a $10 billion extension of emergency unemployment benefits is headed toward increasing the deficit by hundreds of billions of dollars to benefit corporations. 

Republicans on the House Ways and Means Committee voted today to make permanent “bonus” depreciation, the most costly provision within the “tax extenders.” Bonus depreciation is a significant expansion of existing breaks for business investment. The Congressional Research Service has reviewed quantitative analyses of the tax break and found that, “... accelerated depreciation in general is a relatively ineffective tool for stimulating the economy.”

This conclusion is not surprising. What businesses need are customers. No business is going to invest to expand operations if there are no customers and thus no way of profiting from that expansion. A tax cut for investment cannot change that logic. The most likely effect of such tax cuts is that they subsidize investment that would have occurred anyway even without a tax break.

Bonus depreciation also departs from general rules on which the tax system is built. Companies are allowed to deduct from their taxable income business expenses so only net profit is taxed. Businesses can also deduct costs of purchases of machinery, software, buildings and so forth.  Since these capital investments don’t lose value right away, these deductions are taken over time. In other words, capital expenses (expenditures to acquire assets that generate income over a long period of time) usually must be deducted over a number of years to reflect their ongoing usefulness.

In most cases firms would rather deduct capital expenses right away rather than delaying those deductions, because of the time value of money. For example, inflation will erode the value of $100 over time, but $100 invested now at a 7 percent return will grow to $200 in ten years.

Bonus depreciation is a temporary expansion of existing breaks that allow businesses to deduct these costs more quickly than is warranted by the equipment’s loss of value or any other economic rationale.

Of course, this tax break makes even less sense if it is permanent. It was enacted to address a recession early in the Bush administration and then enacted again to address the much more severe recession at the end of the Bush administration. The theory behind it had been that firms would be encouraged to invest and expand right away, counteracting the immediate impacts of the recession, because the break would be available only for a limited time. Making the break permanent obviously destroys even this argument for bonus depreciation. 


Pay-Per-Mile Tax is Not a Panacea


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There’s been an increasing amount of talk about whether hybrids and electric cars have made the gas tax obsolete, and whether the time has come to switch to a different system of taxing drivers—like a vehicle miles traveled tax (VMT tax).  In a new report, the Institute on Taxation and Economic Policy (ITEP) argues that the gas tax still has a lot of life left in it, and that lawmakers are setting themselves up for disappointment if they think switching to a flat, per-mile VMT tax is going to fix their transportation budget in the long-run.

As ITEP explains, our roads and bridges are crumbling mainly because federal and state gas tax rates are outdated.  It’s true that fuel-efficiency gains have chipped away at the gas tax base by letting drivers travel further on each tank of gas, but so far that issue has been dwarfed by the impact of inevitable increases in construction costs.  ITEP estimates that “for every $1 that fuel efficiency gains drained from the purchasing power of the nation’s transportation funds, inflation has taken a much larger $4.08.”

In other words, the biggest problem with the gas tax is also one that’s easy to fix: gas tax rates should gradually rise alongside inflation, just like many features of federal and state income tax law.  Or as ITEP explains in a Huffington Post op-ed, “The fact that asphalt tends to become more expensive over time doesn't mean that we need to throw out the gas tax entirely. It only means that we shouldn't expect decades-old gas tax rates to keep pace with the cost of building and maintaining the nation's infrastructure.”

ITEP’s report also reminds readers that the funding problems created by flat tax rates are not unique to the gas tax.  Oregon, for example, is in the process of launching a pilot project that will allow 5,000 volunteer drivers to exempt themselves from gas taxes in exchange for paying a VMT tax.  But Oregon decided to set their experimental VMT tax rate at a flat 1.5 cents per mile—despite the fact that 1.5 cents is guaranteed to buy less asphalt and machinery in the future when those materials become more expensive.  By 2025, Oregon’s VMT tax rate will likely need to rise to 1.89 cents per mile just to maintain the value it has today.

Before completely overhauling its system of taxing drivers, states like Oregon should join the growing list of states that plan ahead for inflation with a “variable-rate” gas tax where the tax rate can grow over time.  And VMT tax proponents should be aware that this more sustainable “variable-rate” style tax rate will need to be carried over into any VMT tax that might eventually be enacted.

Read the report:

Pay-Per-Mile Tax is Only a Partial Fix


Credit Suisse Gets Off Easy for Aiding Tax Evasion


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On Monday, the Department of Justice announced that Credit Suisse, the second largest bank in Switzerland, has agreed to plead guilty to criminal charges for helping Americans open secret bank accounts and use them to evade U.S. taxes. The bank will pay $1.9 billion to the federal government and $715 million to the state of New York in restitution and fines. 

Surprisingly, the agreement does not require the bank to hand over the names of its U.S. customers. In a statement issued the same day, Senator Carl Levin remarked “it is a mystery to me why the U.S. government didn’t require as part of the agreement that the bank cough up some of the names of the U.S. clients with secret Swiss bank accounts. More than 20,000 Americans were Credit Suisse accountholders in Switzerland, the vast majority of whom never disclosed their accounts as required by U.S. law. This leaves their identities undisclosed, with no accountability for taxes owed.”

This is in stark contrast to the 2008 deferred prosecution agreement with UBS, the largest Swiss bank. The financial giant agreed to pay $780 million in penalties and, unlike Credit Suisse, handed over 4,700 names of American account holders.

The Credit Suisse agreement comes after years of investigations into the bank’s illegal activities aiding tax evasion which were detailed in a February report by the Homeland Security Permanent Subcommittee on Investigations. The report lambasted the American and Swiss governments for dragging their feet in efforts to stop it.

The report noted that Switzerland has bank secrecy laws that prevent banks from disclosing the identities of account holders to U.S. tax enforcement authorities. Switzerland enacted a law specifically allowing UBS to provide that information to the U.S. government, but no such law was enacted this time around for Credit Suisse. Instead, the Department of Justice relied on the convoluted process outlined in a U.S.-Swiss treaty to get the information. That process has given greater power to the Swiss government and Swiss courts that have provided as little cooperation as possible.

Although the agreement imposes big fines, it does not revoke Credit Suisse’s license to continue to operate in the U.S. Apparently some fear the repercussions of taking a harder line against the big banks, apprehensive that stronger actions might precipitate a financial crisis. The possibility that the Department of Justice wanted to avoid this and did not push as hard as it might (for example, by demanding the disclosure of account holders) may mean that some banks really are “too big to jail.”

Switzerland has long been known as a tax haven for individuals from all over the world who want to hide their income from tax authorities with the help of banks like UBS and Credit Suisse. It has also been known as a tax haven for corporations like Alliance Boots that want to artificially shift profits there to avoid paying taxes in the countries where their profits are really earned. One might think it would be easier to solve the problem of individuals using tax havens to evade taxes, since that is illegal, whereas the tax avoidance of big corporations like Alliance Boots is not actually illegal (but should be). But the laws against tax evasion by individuals using Credit Suisse and other banks to hide their income are only as strong as the will of governments to enforce them.

A commonsense bill introduced today would prevent American corporations from pretending to be "foreign" companies to avoid taxes even while they maintain most of their ownership, operations and management in the United States.

Sponsored by Sen. Carl Levin and Rep. Sander Levin, the Stop Corporate Inversions Act requires the entity resulting from a U.S.-foreign merger to be treated as a U.S. corporation for tax purposes if it is majority owned by shareholders of the acquiring American company or if it is managed in the U.S. and has substantial business here.

These are common sense rules and many people might be surprised to learn that they are not already part of our tax laws. In fact, the law on the books now (a law enacted in 2004) recognizes the inversion unless the merged company is more than 80 percent owned by the shareholders of the acquiring American corporation and does not have substantial business in the country where it is incorporated.

The current law therefore does prevent corporations from simply signing some papers and declaring itself to be reincorporated in, say, Bermuda. But it doesn’t address the situations in which an American corporation tries to add a dollop of legitimacy to the deal by obtaining a foreign company that is doing actual business in another country.

The management of Pfizer recently attempted to acquire the British drug maker AstraZeneca for this purpose and a group of hedge funds that own stock in the drug store chain Walgreen have been pushing that company to increase its stake in the European company Alliance Boots for the same purpose.

The Stop Corporate Inversions Act is based on a proposal that was included in President Obama’s most recent budget plan, which is projected by the administration and the Joint Committee on Taxation to raise $17 billion over a decade. The only difference between the House and Senate version of the bill is that the House version is permanent while the Senate version is effective for just two years. Apparently the Senate cosponsors include some lawmakers who believe that the issue of inversions can be addressed as part of tax reform at some point over the next two years and a stopgap measure is needed until then.

Either way, Congress needs to act now. House Ways and Means Committee chairman Dave Camp and Senate Finance Committee ranking Republican Orrin Hatch have both suggested that Congress should do nothing at all except as part of a major comprehensive tax reform. Given that the only tax reform plan Camp has been able to produce was a regressive $1.7 trillion tax cut that didn’t even meet his own stated goals of revenue and distributional neutrality, it’s obvious that Congress is a long way off from settling all the issues related to tax reform. In the meantime, how often will we be asked to play along as major American corporations pretend to be “foreign” in order to avoid paying taxes?


Just in Time for Memorial Day: Primers on Federal and State Gasoline Taxes


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The summer driving season is kicking off this weekend, so our colleagues at the Institute on Taxation and Economic Policy (ITEP) have released a pair of updated policy briefs explaining everything you need to know about the federal and state gasoline taxes that pay for our roads and transit systems.

The federal brief explains that the nation’s 18.4 cent gas tax has been stuck in neutral for over 20 years, and that construction cost inflation and fuel efficiency gains have steadily chipped away at the value of the tax.  Since 1997 (the year in which the gas tax was rededicated exclusively to transportation spending), the federal gas tax has lost 28 percent of its value as a result of these two factors.

The state brief is slightly more optimistic, noting that while most states still levy stagnant fixed-rate gas taxes similar to the federal tax, the clear trend is toward a more sustainable, variable-rate design where the tax rate can grow over time alongside inflation or gas prices.

Read the briefs

The Federal Gas Tax: Long Overdue for Reform

State Gasoline Taxes: Built to Fail, But Fixable


States' Failed Tax Policies Have Some Governors Throwing Red Herrings


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Two years ago as part of the fiscal cliff deal, members of Congress sensibly allowed a subset of the Bush tax cuts for the wealthy to expire, including an increase in taxes on capital gains. Many wealthy investors, who have the benefit of tax advisors, chose to sell stocks in 2012 rather than wait for potentially higher federal income tax rates in 2013. The result was a boost in federal and state income tax collections in fiscal year 2013.

To be clear, the fiscal cliff deal’s anticipated tax hikes on the investor class didn’t increase the amount of revenue from capital gains income—it just shifted that income from fiscal year 2014 to fiscal year 2013. This meant that state lawmakers needed to plan for an extra shot of revenue in 2013, and an equivalent amount of missing revenue in 2014.

Most states planned accordingly. In states such as California, this basic budgeting matter hardly caused a ripple: the Golden State experienced a surge in personal income tax revenues in April 2013 and a large decline this year.  But, they saw the decline coming and when the dust cleared, the state actually brought in more money from personal income taxes than expected in April.

A handful of other states, however, didn’t plan as well and are attempting to blame their failed tax policies on the fiscal cliff deal. Kansas is a prime example.

Two years ago, Kansas Gov. Sam Brownback declared that his plan to repeal the state’s income tax would be “a real live experiment” in supply-side economics. He pushed through two successive tax cuts that disproportionately benefited the richest Kansans, assuring the public these cuts would pay for themselves. Now he is facing a barrage of criticism over growing evidence that state tax revenues are declining in the wake of these cuts.

The pressure seems to be getting to the Brownback administration: earlier this month, Brownback’s revenue secretary, faced with a 45 percent decline in April tax revenues relative to the same month in 2013, called the month’s revenue slide “an undeniable result of President Obama’s failed economic policies.”

Kansas experienced the same revenue bubble in 2013, and the same trough in 2014, as did California and many other states. The state Department of Revenue’s April 2014 tax report notes that April 2013 revenues “increased dramatically from the previous year, about 53 percent,” due to accelerated capital gains encouraged by the fiscal cliff deal. In that context, the reported 45 percent decline in April 2014 is not only predictable, it sounds like a pretty good deal.

So why is Gov. Brownback’s administration citing this income-tax timing shift as evidence that President Obama’s policies have caused “lower income tax collections and a depressed business environment?” And why are governors in New Jersey and North Carolina making similar claims? In both Kansas and the Tarheel State, the governor is under pressure to defend the affordability of recently enacted income tax cuts.

Pinning the blame for revenue shortfalls on the fiscal cliff deal deflects scrutiny from state tax cuts costing more than advertised. In New Jersey, as the Tax Foundation has noted, Gov. Christie has been accused of using wildly optimistic revenue forecasts as part of his 2013 reelection campaign, and now he has some explaining to do about why his projections were so wrong. Once again, the Obama Administration serves as a convenient scapegoat for poor fiscal management decisions by state leaders.

But the news is not all bad out of Kansas: in a rhetorical flourish that would make North Korea envious, just one month before the Kansas Department of Revenue blamed President Obama for April’s decline in tax revenues, they explained a March increase in tax revenues as evidence that “ [w]e’re seeing the Kansas economic engine running.”

Kansas is, by all accounts, in a real fiscal jam. The ballooning cost of Brownback’s tax cuts and a recent state Supreme Court mandate that Kansas spend additional money on schools has made the task of a balanced budget very difficult for state lawmakers. But if Kansas lawmakers are in a fiscal hole, they need look no further than the state capitol to determine who is wielding a shovel.


Why Does Pfizer Want to Renounce Its Citizenship?


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After years of being a bad corporate citizen, Pfizer is now seeking to renounce its U.S. citizenship entirely by reincorporating in Britain as part of its hoped-for purchase of British pharmaceutical company AstraZeneca. While the deal would allow Pfizer to claim on paper that it’s a British company, it would not require the company to move its headquarters abroad.  In fact, the main effect would be to allow Pfizer to reduce its taxes to an even lower level than they already are.

While the audacity of this newest maneuver by Pfizer is striking, it’s not shocking. The company has a history of engaging in offshore income-shifting games. Over the past five years for example, the company has reported that it lost about $14.5 billion in the United States, while at the same time it earned about $75.5 billion abroad. Is the United States just a really bad market for Pfizer? It’s unlikely given that Pfizer also reports that around 40 percent of its revenues are generated in the United States. The more realistic explanation is that Pfizer is aggressively using transfer pricing and other tax schemes to shift its profits into offshore tax havens.

Despite its already low U.S. taxes, Pfizer has been aggressive in pushing Congress to preserve and expand loopholes in the corporate tax code. Over the past five years, Pfizer spent more than $72 million lobbying Congress. It reports that “taxes” are second only to “health” among issues it lobbies on. In addition to its own efforts, Pfizer has helped sponsor four different business groups (Alliance for Competitive Taxation, Campaign for Home Court Advantage, LIFT America and the WIN American Campaign) pushing for lower corporate taxes.

Over the years, Pfizer’s aggressive lobbying efforts have taken billions of dollars out of the U.S. Treasury, at the expense of ordinary taxpayers. Its biggest coup was the passage of a repatriation holiday (PDF) in 2004, for which it was the largest single beneficiary and ultimately saved the company a whopping $10 billion. On the state and local level Pfizer has also done very well for itself, receiving over $200 million in subsidies and tax breaks over the past couple decades.

What makes Pfizer’s tax avoidance efforts particularly galling is how it’s also happy to take full advantage of U.S. taxpayer assistance via government spending. From 2010 to 2013 for instance, Pfizer sought and received $4.4 billion in contracts to perform work for the federal government. On top of this, Pfizer has directly benefited from taxpayer funded research to develop drugs like Xelijanz, which was first discovered by government scientists at the National Institutes of Health (NIH). Finally, it’s worth remembering that without Medicaid and Medicare, Pfizer would lose out on billions from customers who would be unable to afford to purchase their drugs.

All this begs the questions of why Pfizer thinks it is worthy of profiting from taxpayer-funded research, corporate tax subsidies, and federal health care spending,  but feels no corporate responsibility to pay its fair share of U.S. income taxes.

Congress, should it decide to do so, can easily put a stop to Pfizer’s offshore shenanigans. To prevent Pfizer, as well as companies like Walgreens, from relocating to another country to avoid taxes, Congress could pass a proposal by the Obama administration that would limit the ability of domestic companies to expatriate. It would nix any repatriation if a company continues to be controlled and managed in the United States or if at least 50 percent of the shareholders stay the same after the merger. To address Pfizer’s broader tax dodging, Congress should also require that companies pay the same tax rate on both their offshore and domestic profits, by ending deferral of taxes on foreign profits.

Photo of Pfizer Pill via Waleed Alzuhair Creative Commons Attribution License 2.0


Rep. Dave Camp's Latest Tax Gambit Is "Fiscally Irresponsible and Fundamentally Hypocritical"


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Fresh off a two-week spring recess, House Ways and Means Committee Chairman Dave Camp today shepherded through six bills that would provide corporate tax breaks at a whopping cost of more than $300 billion over the next decade.

The tax breaks are a subset of the temporary business tax breaks or “tax extenders.” Given the nation’s many other pressing priorities, its nothing short of outrageous that the committee, on a party-line vote, approved this package of corporate giveaways.

Rep. Sander Levin, the committee’s ranking Democrat, called this approach “fiscally irresponsible and fundamentally hypocritical” given House leaders’ refusal to extend emergency unemployment assistance or make permanent tax breaks that will help working people with children, including recent EITC and child tax credit expansions.

“To say Republican action today is hypocritical is a serious understatement,” Levin said. He and his Democratic colleagues voted against each of the measures, while Camp’s Republican colleagues voted in favor of each.

The party-line vote was not a certainty given many of the committee’s Democrats are sponsors of the bills. Ultimately, many Ways and Means Democrats said although they support making certain business tax breaks permanent, they oppose doing so in a way that provides hundreds of billions of dollars in deficit-financed tax breaks for businesses while the House refuses to address the needs of the unemployed and working people with children. The unified opposition may mean the full House and Senate may think twice before following Camp’s approach.

Citizens for Tax Justice has explained that the tax breaks made permanent by this legislation demonstrate fealty to corporations over ordinary people and are simply bad policy.

A recent CTJ report describes significant problems in the research credit that should be addressed before it is extended or made permanent. CTJ and other organizations have also called upon Congress to allow the expiration of two breaks that encourage offshore tax avoidance: the so-called “active financing exception” and “look-through rule” for offshore subsidiaries of American corporations.

The Senate Finance Committee has taken a different approach. Instead of choosing certain temporary tax breaks to make permanent, it voted earlier this month to extend the entire package of 50-plus expiring provisions (often called the “tax extenders”) for two years, without offsetting the cost. CTJ has explained that this approach is also deeply problematic.

Some of the tax extenders should be dramatically reformed, and some should be allowed to expire altogether. None should be enacted unless Congress offsets the costs by repealing other tax breaks or loopholes that benefit businesses.

Rep. Dave Camp, the chairman of the House Ways and Means Committee, will take the first step to make permanent certain business tax breaks on Tuesday, when his committee marks up legislation that would increase the deficit by $300 billion over the coming decade.

The provisions are among the “tax extenders,” the package of tax breaks that mostly benefit businesses and that Congress extends every couple of years. We have pointed out that even if Congress simply continues its practice of extending these tax breaks for another two years, it would signal that these corporate tax breaks will likely be with us forever — which the Congressional Budget Office projects would increase the deficit by $700 billion over the coming decade. Camp’s move to make certain of the tax extenders permanent would make that unfortunate outcome even more likely.

These bills should be rejected for several reasons.

1. It is plainly hypocritical for Congress to provide hundreds of billions in deficit-financed tax breaks for corporations while refusing to help the long-term unemployed, ostensibly because of the impact it would have on the federal budget.

2. One of the provisions Camp would make permanent is the research tax credit, which needs major reform before it can come close to carrying out its goal of encouraging businesses to conduct research.

3. Two other provisions Camp would make permanent are tax breaks that facilitate offshore tax avoidance by corporations —the “active finance exception” and “CFC look-through rule.”

Each of these three reasons to reject the legislation is discussed below.

1. Congressional Hypocrites Would Provide Deficit-Financed Tax Breaks for Businesses, Nothing for the Unemployed

It is plainly hypocritical for Congress to provide hundreds of billions of dollars in deficit-financed tax breaks for corporations while refusing to extend Emergency Unemployment Compensation (EUC) to the long-term unemployed, which expired in December, ostensibly because of the impact it would have on the federal budget. Since the 1950s, Congress has always continued such help until the long-term unemployment rate fell lower than it is today. As the Coalition on Human Needs explains

EUC has long been considered an emergency program that does not have to be paid for by other spending reductions or revenue increases. Five times under President George W. Bush, when the unemployment rate was above 6 percent, unemployment insurance was extended without paying for it and with the support of the majority of Republicans.

Now many lawmakers are establishing a new norm: All direct spending must be paid for, even if it’s temporary emergency legislation to help families of unemployed workers, but spending in the form of tax cuts for businesses does not have to be paid for. The bill approved by the Senate before the April recess to extend EUC includes provisions that offset the cost. (House Speaker John Boehner has nonetheless refused to bring the bill to a vote in the House.)

2. Congress Should Not Make Permanent the Research Credit before Reforming It

The most costly of the bills that will be marked up Tuesday would make permanent the research credit, which is supposed to encourage research but actually subsidizes activities no one would call research, and activities that companies would do in the absence of any subsidy.

A report from Citizens for Tax Justice explains that the research credit needs to be reformed dramatically or allowed to expire. One aspect of the credit that needs reform is the definition of research. As it stands now, accounting firms are helping companies obtain the credit to subsidize redesigning food packaging and other activities that most Americans would see no reason to subsidize. The uncertainty about what qualifies as eligible research also results in substantial litigation and seems to encourage companies to push the boundaries of the law and often cross them.

Another aspect of the credit that needs reform is the rules governing how and when firms obtain the credit. For example, Congress should bar taxpayers from claiming the credit on amended returns, because the credit cannot possibly encourage research if the claimant did not even know about the credit until after the research was conducted.

As it stands now, some major accounting firms approach businesses and tell them that they can identify activities the companies carried out in the past that qualify for the research credit, and then help the companies claim the credit on amended tax returns. When used this way, the credit obviously does not accomplish the goal of increasing the amount of research conducted by businesses.

3. Congress Would Make Permanent Two Tax Provisions that Facilitate Offshore Tax Avoidance

The general rule is that American corporations are allowed to “defer” (indefinitely delay) paying U.S. taxes on offshore profits that take the form of “active” income (what most of us think of as payment for selling a good or service) as long as those profits are officially offshore. The general rule also is that American corporations cannot defer paying U.S. taxes on “passive” income like dividends or interest on loans, because passive income is extremely easy to shift from one country to another for the purpose of tax avoidance.

Two of the provisions that would be made permanent on Tuesday poke holes in this general rule.

One of these provisions is the “active financing exception” but ought to be remembered as the “G.E. loophole.” In a famous story reported in the New York Times in 2011, the director of General Electric’s 1,000-person tax department literally got on his knees in the office of the House Ways and Means Committee as he begged for an extension of the “active finance exception,” which allows G.E. to defer paying any U.S. taxes on offshore profits from financing loans.

G.E. publicly acknowledges (in the information it provides to shareholders by filing with the Securities and Exchange Commission) that the company relies on the active finance exception to reduce its taxes. 

The other provision is the “look-through rule” for “controlled foreign corporations,” (for the offshore subsidiaries of American corporations). The look-through rule allows a U.S. multinational corporation to defer paying U.S. taxes on passive income, such as royalties, earned by an offshore subsidiary if that income is paid by another related subsidiary and can be traced to the active income of the paying subsidiary.

The closely watched Apple investigation by the Senate Permanent Subcommittee on Investigations a year ago resulted in a report — signed by the subcommittee’s chairman and ranking member, Carl Levin and John McCain — that listed the CFC look-through rule as one of the loopholes used by Apple to shift profits abroad and avoid U.S. taxes.

 

If a group of Walgreens shareholders get their way, the drug retailer will restructure itself to become — on paper — a foreign company for tax purposes. It’s likely that nothing would actually change in terms of Walgreen’s business or management. The scheme is a simply a gimmick to avoid taxes. The bad news is that the laws that are supposed to to prevent this kind of tax avoidance are weak, and Congress, particularly its Grover Norquist-directed contingent, has shown no inclination to address this sort of problem. The good news is that the Obama administration has at least proposed a reform that probably would prevent this sort of corporate tax avoidance.

In some parts of the United States, there is a Walgreens every few miles or even every few
blocks, and it’s difficult to think of a company that seems more American. But tax rules don’t always conform with common sense.

Walgreens recently acquired nearly half of the Swiss-based pharmacy chain Alliance Boots, and could acquire a majority of the company. A group of hedge funds that own almost 5 percent of Walgreens’s stock demand that it use the merger to officially become a “foreign” corporation for tax purposes. This type of maneuver is often referred to as a corporate “inversion.”

When a corporation renounces its Americanism, little or nothing about the way the company does business or is managed changes, and yet the company can claim to be a brand new entity incorporated in another country. For example, a U.S. corporation can merge with a foreign corporation resulting in a new company that is 80 percent owned by shareholders of the original U.S. corporation and still be treated as a foreign corporation for tax purposes. This is true even if the new company is managed and controlled in the United States.

Some anti-tax types argue that the problem facing Walgreens and other American corporations is that the United States taxes both domestic and offshore profits, and that this is unfair. But that’s neither true nor the real motivation behind corporate inversions.

U.S. taxes levied on American corporations' offshore profits are extremely minimal or non-existent in practice. One reason for this is that American corporations get a tax credit equal to any taxes they pay to foreign governments. Another reason is that companies are allowed to “defer” U.S. taxes until they officially bring their offshore profits to the U.S.

The real reason American corporations sometimes invert is that it makes it easier to avoid U.S. taxes on their U.S. profits. Corporate inversions are often followed by “earnings-stripping,” which makes U.S. profits appear, on paper, to be earned offshore. The American part of the company is loaded up with debt that is owed to the foreign part of the company, so that interest payments officially reduce the American profits, which are effectively shifted to the foreign part of the company.

Congress can tighten up rules to prevent all this from happening. As CTJ has explained, under a reform included in President Obama’s most recent budget plan, a company that results from the merger of a U.S. corporation and a foreign corporation will be taxed as an American company if more than half its voting stock is owned by shareholders of the original U.S. corporation. That’s far more reasonable than the current rule, which would allow the resulting company to pretend that it’s a “foreign” corporation for tax purposes even if 80 percent of its voting stock is still owned by the shareholders of the original U.S. corporation.

Under another part of the Obama proposal, the resulting company would be taxed as an American corporation (regardless of how much the ownership has or has not changed) if it has substantial business in the U.S. and is managed and controlled in the U.S.

The President’s budget also includes a proposal to make it more difficult for all U.S. corporations (not just those involved in inversions) to engage in earnings stripping.

It’s impossible to know what Walgreens will do. Maybe it will be too ashamed to renounce its ties to the U.S., or fear customer blow back. But Congress should enact common sense reforms to ensure that it and other American corporations don’t avoid U.S. taxes simply by pretending to be foreign companies.

Photo via Kai Morgener Creative Commons Attribution License 2.0


Partners in Crime? New GAO Report Shows that Large Corporate Partnerships Can Operate Without Fear of Audits


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More than a decade ago, a Republican-led Congress held a series of “show trials” designed to paint a picture of the Internal Revenue Service as intrusive, jackbooted thugs. It worked — at least well enough to convince Congress, which has since embarked on a decade-long trend of gradually defunding the IRS’s enforcement capabilities. But a new report from the General Accounting Office  (GAO) is the latest indicator that the pendulum has swung too far toward defanging the IRS’s enforcement capabilities. The GAO report shows that a business form known as “widely held partnerships” is growing dramatically — and that the IRS is able to audit less than 1 percent of the very largest such firms.

Businesses that are partnerships are not subject to the corporate income tax. Instead, the profits are passed along to the partners, who pay personal income taxes on them. Under current rules, this means that when the IRS wants to audit the partnership’s tax filings, it must examine the tax returns of each of the organization’s partners — and levying an adjustment is similarly burdensome for the IRS. The largest such partnerships, including hedge funds and private equity firms, can have hundreds or even thousands of partners. Even an adequately funded IRS might understandably find it difficult to audit even the most blatant partnership tax dodger.

But of course, the IRS is not adequately funded.The agency has lost 10,000 employees since 2010, more than 30 percent of which worked in enforcement areas.

If the prospect of large partnerships being able to bank on the inability of the IRS to audit them sounds like trouble, it is: the revenue stakes are potentially huge. The GAO estimates that the largest partnerships had $69.1 billion in total net income in 2011 alone. Any aggressive tax avoidance practiced by these firms will have a real effect on our nation’s budget deficit.

In a statement on the report, Senator Carl Levin from Michigan said, “Auditing less than 1 percent of large partnership tax returns means the IRS is failing to audit the big money. It means over 99 percent of the hedge funds, private equity funds, master limited partnerships, and publicly traded partnerships in this country, some of which earn tens of billions each year, are audit-free.”

Astonishingly, both President Barack Obama and outgoing House Ways and Means Chair Dave Camp have proposed sensible (partial) solutions to this problem. Both propose to allow the IRS to audit partnerships at the entity level, the same way they audit publicly traded corporations. Sadly, neither has proposed to completely reverse the damaging loss of IRS audit capacity caused by recent budget cuts.

Unfortunately, Camp’s proposal is embedded within a larger tax plan that altogether would result in a massive $1.7 trillion dollar deficit and make the tax code more regressive. Congress should enact the specific reform that would address the problem with partnerships now, on its own.


NASCAR Tax Breaks Just Another Reason Corporate Tax Is on the Skids


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Back in 2004, as the presidential contest between George W. Bush and John Kerry heated up, so-called NASCAR dads were identified as a potential key constituency in swinging the election results—and the NASCAR dad vote was courted accordingly by both sides. Entirely coincidentally, Congress chose to codify a four-year “NASCAR tax break” into law in 2004 as part of the American Jobs Creation Action of 2004, a corporate-gift-laden package pushed through just before the election. The idea was that corporations building race tracks and related facilities should be able to write off costs of these investments over seven years, a much shorter period than the likely lifespan of the tracks.

Although some members of Congress have attempted to make this tax break permanent since then (most notably former Pennsylvania Sen. Rick Santorum’s Fairness and Permanency Act of 2005) none have succeeded. But Congress has done what, in the eyes of the racing industry, is the next best thing: they’ve made the NASCAR break part of the “tax extenders,” the growing array of temporary, primarily corporate tax breaks that are routinely authorized by Congress for one or two years to obscure their long-term cost.

The International Speedway Corporation, which owns tracks in Daytona, Darlington and Watkins Glen, has benefitted handsomely from Congress’s largesse. In 2013, the company reported $73 million in U.S. profits, didn’t pay a dime in federal income tax but received a rebate of $8 million. In fact, over the past five years, ISC has enjoyed a federal tax rate of just 11 percent on $400 million in US profits.

ISC’s competitor Speedway Motorsports has been even more blessed: the company reports a 6.9 percent federal tax rate over the past five years on $287 million in U.S. profits, and reports zeroing out its federal income tax entirely in two of those years.

To be clear, if the federal corporate income tax is on the skids, the NASCAR tax break plays only a small direct part in this decline. The temporary extension of the tax break envisioned by Sen. Ron Wyden’s “Expiring Provisions Improvement Reform and Efficiency Act of 2014” would never cost more than $18 million a year. But the NASCAR giveaway is perfectly emblematic of the “death by a thousand cuts” that plagues the corporate tax: as long as the racetrack industry continues to enjoy this special privilege, it will be difficult for Congress to repeal tax breaks for other favored businesses. Any movement toward true corporate tax reform needs to start by rooting out even the smallest targeted corporate giveaway. Wyden’s extenders bill fails utterly to achieve this.   


Delayed Action on Cap and Trade Comes at a Cost


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In spite of mounting evidence that greenhouse gas emissions will continue to increase the earth’s temperatures, political polarization in Washington is standing in the way of the United States doing its part to address this global crisis.

A new report from the United Nations’ Intergovernmental Panel on Climate Change paints a sobering picture of the need for the governments to take immediate action to reduce carbon emissions. The report finds that despite ongoing efforts by developed nations to curb these emissions, greenhouse gas emissions "have grown at about twice the rate in the recent decade (2000–2010) than any other decade since 1970.” The report also outlines compelling arguments for enacting policy solutions (such as a carbon tax or a “cap and trade” mechanism) to curb emissions in the very near term, because delays could make it impossible to prevent substantial increases in worldwide temperatures and would likely increase the cost of any mitigation efforts.

But as the New York Times notes in its coverage of the report, these findings are falling on deaf ears in Congress. The Times spends far more ink detailing the political impossibility of a carbon tax than it does discussing the report’s bleak findings. The politics surrounding the carbon tax are, indeed, challenging. Congressional efforts to reform the tax code are widely perceived to have ground to a halt in this election year, and any effort to hike carbon taxes would face additional opposition from lawmakers.

This opposition is, in part, sensible: in general, a national tax on consumption is a bad idea that would make our already unfair tax system even more so. Taxes on consumption are regressive, taking a much larger percentage of income from middle- and low-income families than from the rich. This is because middle- and low-income families must spend most or all of their income on basic necessities, while rich families can put a lot of their income toward savings (which are not touched by a consumption tax).

A tax on carbon emissions, while inherently regressive, could be coupled with features to keep it from burdening middle-income Americans and hitting low-income Americans the hardest. Because any such tax would likely generate substantial new revenues—the Congressional Budget Office (CBO) has found that a carbon tax that starts off at $20 per ton and then rises by 5.6 percent annually could raise as much as $1.2 trillion over ten years—it would be straightforward to design a tax cut, such as a reduction in the federal payroll tax or a targeted tax credit, that would help to offset the impact of the carbon tax on middle- and low-income families. Since our tax system already imposes substantial taxes on low-income families who would be hit hardest by a carbon tax, a low-income offset must be part of any acceptable environmental tax reform.

And there are other compelling arguments in favor of some form of carbon tax. It would create a market incentive to develop low- or zero-carbon emission energy sources and simultaneously create a market disincentive to using carbon emitting energy sources. In other words, while it would raise substantial new revenues, it would reduce the amount of greenhouse gasses released into the atmosphere, as manufacturers, shippers, and consumers shift away from fossil fuels.

Of course, discussions of environmental tax reform should not distract lawmakers from the fundamental challenges facing our existing tax code. As we have argued, both the individual and corporate income taxes are ridden with loopholes that should be repealed as part of revenue-raising federal tax reform. And we’ll shed no tears if Congress starts its 2015 session by requiring General Electric and other big multinationals to pay their fair share of the corporate tax rather than dealing with the thorny carbon tax issue. But the latest UN report is a stark reminder that the potential costs of delay on environmental tax reform will be substantial.

According to the Daily Tax Report (subscription only) a Treasury Department official said publicly on April 8 that the government’s goal in international negotiations over corporate tax dodging is to prevent dramatic change and preserve the “arm’s length” standard that has proven impossible to enforce.

Last summer, the Organization for Economic Co-operation and Development (OECD) released an “Action Plan on Base Erosion and Profit Shifting” in response to public outcry in several nations that multinational corporations are using tax havens to effectively avoid paying taxes in the countries where they do business.

At that time, CTJ criticized the plan as too weak, arguing that:

While the plan does offer strategies that will block some of the corporate tax avoidance that is sapping governments of the funds they need to make public investments, the plan fails to call for the sort of fundamental change that would result in a simplified, workable international tax system.

Most importantly, the OECD does not call on governments to fundamentally abandon the tax systems that have caused these problems — the “deferral” system in the U.S. and the “territorial” system that many other countries have — but only suggests modest changes around the edges. Both of these tax systems require tax enforcement authorities to accept the pretense that a web of “subsidiary corporations” in different countries are truly different companies, even when they are all completely controlled by a CEO in, say New York or Connecticut or London. This leaves tax enforcement authorities with the impossible task of divining which profits are “earned” by a subsidiary company that is nothing more than a post office box in Bermuda, and which profits are earned by the American or European corporation that controls that Bermuda subsidiary.

The rules that are supposed to address this today (but that fail miserably) require multinational corporations to deal with their offshore subsidiaries at “arm’s length.” This means that, for example, a corporation based in New York that transfers a patent to its offshore subsidiary should charge that subsidiary the same price that it would charge to an unrelated company. And if the New York-based corporation pays royalties to the offshore subsidiary for the use of that patent, those royalties should be comparable to what would be paid to an unrelated company.

But when a company like Apple or Microsoft transfers a patent for a completely new invention to one of its offshore subsidiaries, how can the IRS even know what the market value of that patent would be? And tech companies are not the only problem. The IRS apparently found the arm’s length standard unenforceable against Caterpillar when that company transferred the rights to 85 percent of its profits from selling spare parts to a Swiss subsidiary that had almost nothing to do with the actual business.

It turns out that some of the OECD governments are proposing reforms that challenge the arm’s length concept at least to some degree, but the US government is pushing a line that is more favorable to the multinational corporations.

Robert Stack, the Treasury Department deputy assistant secretary for International Affairs in the Office of Policy, is quoted by the Daily Tax Report as saying that the “main challenge for the U.S. is to get this project to work back from blunt instruments and towards policies that are understandable, fair, clear, administrable, and reach the right technical tax results.”

Stack also said that the “United States feels very strongly that the 2014 deliverable should be a clear articulation of intangibles under the arm's-length principle—and should reserve on the evaluation of potential special measures to treat BEPS [base erosion and profit-shifting] that depart from the arm's-length principle.”

The international tax system needs reform that is more fundamental than anything that either the OECD or the US is contemplating. Any system that relies on the artificial boundaries between the dozens (or hundreds) of entities in a multinational group and the ways they price transactions between them is unworkable. The US’s “deferral” system and Europe’s “territorial” system, which both require transfer-pricing rules and the hopeless “arm’s length” standard, should be eliminated. CTJ has proposed its own tax reform plan that would provide fundamental solutions. 


"Tax Extenders" Would Mean Even Lower Revenue than the Ryan Plan


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The tax extenders making their way through Congress would cut federal revenue below the level proposed in Rep. Paul Ryan’s budget. This once again demonstrates that anything goes when it comes to providing tax breaks for corporations.

As CTJ explained in its report last week, the Ryan plan includes huge tax cuts for the very rich. But Ryan nonetheless proposes to eliminate unspecified tax breaks to offset the costs and thus collect the same amount of revenue as current law.

The tax extenders, on the other hand, would cut revenue, and increase the deficit, by $700 billion over the coming decade if Congress continues its practice of extending these breaks every couple of years or makes them permanent.

Even organizations not particularly known for progressive positions have pointed out this fact and how it damages the fiscal outlook that lawmakers claim to care about whenever they are discussing domestic spending.

CTJ has explained that the tax breaks that make up the bulk of the “tax extenders” do not provide any economic benefits that would justify the increase in the budget deficit that would result.

We have called the “tax extenders” the biggest budget buster many have never heard of. Fortunately, more and more people are publicly decrying this giveaway to corporations.

Citizens for Tax Justice:
“Four Reasons Why Congress Should Reject the "Tax Extenders" Unless Dramatic Changes Are Made”

Citizens for Tax Justice op-ed in the Hill:
“Tax Extenders: The Biggest Budget Buster You’ve Never Heard Of”

Americans for Tax Fairness:
“35 National Organizations Say Oppose Offshore Corporate Tax Loopholes in Tax-Extenders Legislation”

The Financial Accountability & Corporate Transparency (FACT) Coalition:
“FACT Urges Chairman Wyden: Don’t Let First Major Action Favor Multinationals”

The National Priorities Project:
“Congress May Extend Corporate Tax Breaks But Not Unemployment Benefits”

U.S. PIRG:
Offshore Loophole Got Snuck Back in Tax Extenders Bill Behind Closed Doors

New York Times editorial:
“Hypocritical Tax Cuts”

Washington Post editorial:
“Lawmakers Should Offer Up a Fiscally Responsible ‘Tax Extenders’ Bill”

 


How'd Caterpillar Dodge All Those Taxes?


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Large tech companies are among the most notorious tax dodgers, but they are hardly the only ones to enlist crafty accountants to avoid paying U.S. taxes.

So it’s refreshing to see lawmakers also taking a look at other companies, as Sen. Carl Levin’s Permanent Subcommittee on Investigations did last week when it documented that Caterpillar is exploiting loopholes to dodge taxes just like companies in Silicon Valley.

Caterpillar is one of the most widely recognized manufacturers of heavy construction equipment in the United States. Its major profit center is spare parts sales.ons did last week when it documented that Caterpillar is exploiting loopholes to dodge taxes just like companies in Silicon Valley.

So just how did Caterpillar dodge taxes?

Until 1999, Caterpillar purchased spare parts from suppliers and subsequently resold them to local dealers. But for the past 15 years, Caterpillar has transferred ownership of most of its parts to a Swiss subsidiary, CSARL. Even though the Swiss subsidiary “owned” the parts, Caterpillar continued to store them in its Illinois warehouse and send them directly to buyers, exactly as it always has.

But when Caterpillar shipped the parts to overseas customers, it attributed the profits to CSARL, even though the Swiss subsidiary never took physical possession. The result? According to the subcommittee report, the company declared at least 85 percent of its profits on sales to non-U.S. customers—profits that appeared on U.S. tax returns before 1999—as Swiss income, subject only to a special single-digit tax rate negotiated directly with the Swiss government.

In depositions before the subcommittee, Caterpillar executives and tax attorneys were sometimes remarkably candid in admitting that this maneuver did not change the way the company does business, and the rationale for the move was simply to avoid taxes. During investigations prior to last week’s hearing, this exchange occurred:

Government: Was there any business advantage to Caterpillar, Inc., to have this arrangement put into place other than the avoidance or deferral of income taxation at higher rates?

Caterpillar: No, there was not.

Caterpillar Counsel: Let’s take a break.

The subcommittee report estimates that since 1999, Caterpillar has shifted $8 billion in profits offshore, avoiding $2.4 billion in U.S. income taxes.

Policy solutions?

Fortunately, Congress has the option to enact straightforward policies to end shenanigans practiced by Caterpillar, as well as the army of tech-company tax dodgers. Ending deferral—the ability of multinationals to postpone paying U.S. taxes on their foreign profits until those profits are brought home to the US—would remove the incentive of companies to shift their income into foreign tax havens because it would require companies like Caterpillar to pay tax at the U.S. rate (minus any taxes already paid to foreign governments) on offshore profits. Until Congress finds the backbone to enact this needed reform, it can put a stop to Caterpillar’s hijinks using the “economic substance” doctrine it codified in 2010, which says that for a corporate transaction to be recognized for tax purposes, the transaction must have a legitimate non-tax business purpose—a purpose Caterpillar executives were generally at a loss to identify.

Congress should also take a hard look at the role played in this mess by their accountant, PricewaterhouseCoopers, which actually dreamed up this tax dodge for Caterpillar in its capacity as the company’s tax advisor, and later approved its own tax-dodging ideas in its capacity as Caterpillar’s tax auditor.

It’s not acceptable for burglars to moonlight as parole officers, nor should accounting firms be free to create clear conflicts of interest by evaluating their own tax schemes.


Some Unregulated Preparers Use Tax Season for Illicit Profits


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It’s tax time. Across the nation, millions of families are rolling up their sleeves to file federal and state income tax forms—and millions more are awaiting refunds. But as a New York Times report documents, a cottage industry of untrained, unregulated “tax preparers” is jeopardizing those refunds for many low-income families. Astonishingly, more than half of the 79 million returns filed in 2011 were completed by paid preparers who were entirely unregulated. And all too often, these unregulated tax preparers are using tax season as an illicit profit-making enterprise, illegally claiming tax breaks for their taxpayer clients and keeping a share of the haul.

The Obama administration has, sensibly, attempted to implement regulations that would allow the Internal Revenue Service to regulate tax preparers. But earlier this year, a federal court struck down the regs as beyond the IRS’s regulatory authority.

Some tax preparers are vociferously opposed to having their industry regulated. Hysterically, one itinerant tax preparer complained to the author of the Times report that, “Each year it’s getting tighter and tighter…It’s hard to defraud the government now.” But a recent report from the National Taxpayer’s Advocate—a position created to represent the interests of individual taxpayers in their dealings with tax administrators—concludes that there is currently no “meaningful IRS oversight of preparers” at all, and calls for reforms mirroring those sought by the IRS’s now-discontinued attempts to regulate the industry.

The good news is that Congress can easily enact legislation that achieves the regulatory goals President Obama has proposed. In fact, Obama’s proposed budget for the upcoming fiscal year includes such a measure. Senate Finance Committee Chair Ron Wyden has scheduled a hearing on predatory tax preparers for today, saying that “there should be a floor of basic consumer protection and fairness” for low-income taxpayers depending on tax filing assistance.

Congress has, laudably, enacted a variety of targeted tax breaks designed to reduce the federal income tax’s impact on middle- and low-income families. These families deserve an infrastructure of tax preparers that they can trust to help them claim the tax breaks to which they are entitled. 


Five Key Tax Facts About Healthcare Reform


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With Obamacare exceeding the Administration's goal of 7 million sign-ups for private health coverage this week, there's no longer any doubt about the dramatic impact that the Affordable Care Act (ACA) is having on healthcare coverage throughout the country. Unfortunately, there is a lot of misunderstanding about the various tax provisions included as part of the ACA.

Here are the five key facts to remember about tax policy in the ACA:

1. The Affordable Care Act includes tax subsidies of $940 billion for low- and middle-income families.

While endless coverage has been given to the tax increases (mostly on the rich) used to pay for the ACA, the reality is that the act also includes over $940 billion in tax subsidies over the next decade to help individuals and families pay for health insurance. In fact, a recent report by the Kaiser Family Foundation found that as of February 28, 2014, 3.5 million people have already qualified for a total of about $10 billion in annual premium subsidies, which breaks down to an average subsidy of $2,890 per person. By 2018, the CBO expects the number of people receiving tax subsidies to help pay for healthcare to reach as high as 20 million.

2. Only two percent of Americans will pay the tax penalty for not having insurance.

The tax penalty on individuals who do not purchase health insurance will be paid by hardly anyone. According to the CBO, only an estimated two percent of the US population will owe the rather modest penalty.

More importantly, the provision in the ACA banning discrimination against pre-existing conditions cannot work without the penalty for not purchasing health insurance. Without the tax penalty, the ban would cause a significant increase in the cost of health insurance premiums because it would allow individuals to simply delay obtaining insurance until they need care.

3. About three-fourths of the tax increases included to pay for health reform apply to businesses or married couples making over $250,000 and single people making over $200,000.

Our calculations show that about three-fourths of tax increases apply to businesses or married couples making over $250,000 and single people making over $200,000. For example, the biggest revenue-raiser in the ACA is the expansion of the Hospital Insurance tax so that it applies at a higher rate for very high-earners and no longer exempts wealthy people’s investment income. These reforms were originally proposed (PDF) by Citizens for Tax Justice.

4. Healthcare reform includes billions in tax subsidies to help small businesses.

Every politician loves to talk about helping small businesses, but opponents of the ACA have been surprisingly quiet when it comes to discussing the estimated $14 billion in tax subsidies that the ACA will provide small businesses over the next decade to help pay for health insurance for their employees. The tax credit can actually be worth up to 50 percent of a small business’s contribution toward its employees’ premium costs.

5. The medical device excise tax is worth keeping.

Since the passage of the ACA, the effects of the medical device excise tax have been wildly distorted by industry opponents of the tax. They will enjoy increased business as a result of the ACA’s increase in coverage, but don’t want to shoulder any of the costs. Despite their claims to the contrary, the tax is not large enough to have a significant impact on the industry.

Repealing the tax would cost about $30 billion over 10 years, which would either require raising taxes on other groups or increasing the deficit. It’s also worth nothing that medical device companies like Baxter International already pay extremely low effective income tax rates tax rates and enjoy substantial profits. 


New "Corporate Tax Explorer" Site Details What Fortune 500 Companies Pay in Corporate Taxes


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A new web tool, the Corporate Tax Explorer, from Citizens for Tax Justice (CTJ) and the Institute on Taxation and Economic Policy (ITEP), is a one-stop shop for the state and federal data we analyze on corporate taxes. Just search for a company by name or browse the list of companies to get detailed information on what the company paid in federal, state and foreign corporate income taxes, as well as information about offshore holdings and various tax breaks. This database includes all of the data from our recent corporate studies, The Sorry State of Corporate Taxes and 90 Reasons We Need State Corporate Tax Reform, which analyzed data from 2008-2012.


Enter a Company's Name and Click on Their Page to See What They Pay:

Browse




Data on Top Tax Dodgers


Four Reasons Why Congress Should Reject the "Tax Extenders" Unless Dramatic Changes Are Made


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*This post was updated on April 2, 2014 to address news that "bonus depreciation," the biggest and most inefficient break among the "tax extenders" will be included in the legislation before the Senate Finance Committee this week.*

Congress appears likely to enact legislation that Capitol Hill insiders call the “tax extenders” because it extends several tax breaks that are technically temporary. These tax breaks, which mostly benefit corporations, are effectively permanent because Congress extends them every couple of years with almost no debate or oversight.

Here are four reasons why that should change this year and Congress should reject the tax extenders unless dramatic modifications are made to the legislation.

1. The tax extenders are deficit-financed tax cuts for corporations, breaking all the “fiscally responsible” rules that Congress applies to benefits for the unemployed, low-wage workers, and children.

In the past several weeks, Congress made clear that it will not enact an extension of emergency unemployment benefits (which have never been allowed to expire while the unemployment rate was as high as today’s level) unless the costs are offset to prevent an increase in the budget deficit.

Congress has also, in the last several years, enacted automatic spending cuts of about $109 billion a year known as “sequestration” in order to address an alleged budget crisis. Even popular public investments like Head Start and medical research were slashed. The chairman of the House and Senate Budget Committees (Republican Paul Ryan and Democrat Patty Murray) struck a deal in December that undoes some of that damage but leaves in place most of the sequestration for 2014 and barely touches it in 2015.

Meanwhile, lawmakers have expressed almost no concern that the “tax extenders” are enacted every two years without any provisions to offset the costs. According to figures from the Congressional Budget Office, if Congress continues to extend these breaks every couple years, they will reduce revenue by at least $700 billion over a decade.

2. “Bonus depreciation,” the most costly of the tax extenders, is supposed to encourage businesses to invest, but there is little evidence that it has this effect.

Bonus depreciation is a significant expansion of existing breaks for business investment. Congress does not seem to understand that business people make decisions about investing and expanding their operations based on whether or not there are customers who want to buy whatever product or service they provide. A tax break subsidizing investment will benefit those businesses that would have invested anyway but is unlikely to result in much new investment.

Companies are allowed to deduct from their taxable income the expenses of running the business, so that what’s taxed is net profit. Businesses can also deduct the costs of purchases of machinery, software, buildings and so forth, but since these capital investments don’t lose value right away, these deductions are taken over time.

Bonus depreciation is a temporary expansion of the existing breaks that allow businesses to deduct these costs more quickly than is warranted by the equipment’s loss of value or any other economic rationale.

We believed bonus depreciation to be truly temporary until recently because there was very little talk in Congress of extending this particular break. The fact that it is included in the legislative package before the Senate Finance Committee is startling.  

A report from the Congressional Research Service reviews efforts to quantify the impact of bonus depreciation and explains that “the studies concluded that accelerated depreciation in general is a relatively ineffective tool for stimulating the economy.”

3. The second most costly of the tax extenders is the research credit, which is supposed to encourage research but actually subsidizes activities no one would call research, and activities that companies would do in the absence of any subsidy.

A report from Citizens for Tax Justice explains that the research credit needs to be reformed dramatically or allowed to expire. One aspect of the credit that needs to be reformed is the definition of research. As it stands now, accounting firms are helping companies obtain the credit to subsidize redesigning food packaging and other activities that most Americans would see no reason to subsidize. The uncertainty about what qualifies as eligible research also results in substantial litigation and seems to encourage companies to push the boundaries of the law and often cross them.

Another aspect of the credit that needs to be reformed is the rules governing how and when firms obtain the credit. For example, Congress should bar taxpayers from claiming the credit on amended returns, because the credit cannot possibly be said to encourage research if the claimant did not even know about the credit until after the research was conducted.

As it stands now, some major accounting firms approach businesses and tell them that they can identify activities the companies carried out in the past that qualify for the research credit, and then help the companies claim the credit on amended tax returns. When used this way, the credit obviously does not accomplish the goal of increasing the amount of research conducted by businesses.

4. Another costly provision among the tax extenders would extend a break called the “active finance exception,” which should be called the “G.E. Loophole.”

In a famous story reported in the New York Times in 2011, the director of General Electric’s 1,000-person tax department literally got on his knees in the office of the House Ways and Means Committee as he begged for an extension of the “active finance exception,” which allows G.E. to “defer” (indefinitely delay) paying any U.S. taxes on offshore profits from financing loans.

The general rule is that American corporations are allowed to “defer” U.S. taxes on offshore profits that take the form of “active” income (what most of us think of as payment for selling a good or service) as long as those profits are officially offshore. The general rule also is that American corporations cannot defer U.S. taxes on “passive” income like dividends or interest on loans, because passive income is extremely easy to shift from one country to another for the purpose of tax avoidance.

G.E. managed to get Congress to enact an exception, so that it can defer paying U.S. taxes on offshore financial income that it calls “active finance” income — which is ridiculous because these profits are the ultimate example of the sort of passive income that can be easily shifted between countries. G.E. publicly acknowledges (in the information it provides to shareholders by filing with the Securities and Exchange Commission) that the company relies on the active finance exception to reduce its taxes. 

Congress should eliminate deferral or further restrict it to prevent corporations from making their U.S. profits appear to be earned in offshore tax havens, but this break actually expands deferral.

Congress Should Reject “Tax Extenders” Legislation that Mostly Benefits Corporations Unless Corporate Tax Loopholes Are Closed to Offset the Costs

The Senate committee with jurisdiction over taxes has announced that it will take up legislation called the “tax extenders” (legislation extending several tax breaks mostly benefiting corporations) that could undo half of the savings achieved through the much-debated “sequestration,” or automatic spending cuts.

This comes just weeks after the Senate failed to provide any extension of emergency unemployment benefits until it was agreed that the costs would be fully offset to avoid any increase in the deficit.

The package of provisions that Capitol Hill insiders call the “tax extenders,” which the Senate Finance Committee will take up the week of March 31, includes tax breaks that are officially temporary (mostly in effect for two years) but are effectively permanent because Congress routinely extends them without any debate or oversight whatsoever.

The last extension of these breaks was tucked into the deal that Congress approved on New Year’s Day of 2013 to address the “fiscal cliff” of expiring tax breaks. Before that it was tucked into the legislation enacted in late 2010 to extend all the Bush-era tax breaks for two years. Before that it was tucked into the legislation that created TARP (the bank bailout), which was signed into law by President George W. Bush in 2008. Congress has never offset the costs of these tax breaks.

While Congress has been generous in providing subsidies to corporations through the tax code, it has taken a very different approach to providing subsidies in the form of direct spending, especially when it would benefit working people. Most mainstream economists believe that governments should not cut spending when their economies are still climbing out of recessions, but that’s pretty much exactly what Congress did by approving the 2011 law resulting in sequestration (automatic spending cuts) of about $109 billion each year for a decade.

The resulting cuts in public investments like Head Start and medical research caused widespread public outcry. But even the deal that Rep. Paul Ryan and Senator Patty Murray struck in December to undo some of the damage eliminates less than half of the sequestration for 2014 and a much smaller portion in 2015.

The Ryan-Murray deal undid $63 billion of sequestration over two years. The last time Congress enacted the tax extenders (extending tax breaks for two years) the cost was over $71 billion. Figures from the Congressional Budget Office show that if the tax extenders are never allowed to expire, they will cost at least $450 billion over the next decade (and over $700 billion if the package includes more recent breaks for writing off business equipment).

In this deficit-obsessed environment, it would be logical for Congress to refuse to enact any corporate tax breaks unless they can also offset the costs by ending other corporate tax breaks or tax loopholes. Otherwise, Congress should do something it has never done — vote down the tax extenders.

Tax Extenders Legislation Provides More Harm than Help to the Economy

It would be different if the tax breaks included in this legislation were helpful to the economy. But they are mostly wasteful subsidies for businesses with no obvious benefit to America.

The most costly provision among the “tax extenders” would extend the research credit. As a report from CTJ explains, this break is supposed to encourage companies to perform research but appears to subsidize activities that are not what any normal person would call research (like redesigning packaging for food). It also subsidizes activities that businesses would carry out in the absence of any tax break — including activities that businesses performed years before claiming the credit.

The third most costly provision among the tax extenders would extend the seemingly arcane “active financing exception,” which expands the ability of corporations to avoid taxes on their “offshore” profits and which General Electric publicly acknowledges as one of the ways it avoids federal taxes.

Next in line is the deduction for state and local sales taxes. Lawmakers from states without an income tax are especially keen to extend this provision so that their constituents will be able to deduct their sales taxes on their federal income tax returns. But, as CTJ has explained, most of those constituents do not itemize their deductions and therefore receive no help from this provision. Most of the benefits go to relatively well-off people in those states.

Even those few provisions that seem like they would help ordinary families are mostly bad policy. For example, the deduction for postsecondary tuition and related fees seems, on its surface, like a nice idea, but CTJ has explained that it’s actually the most regressive of all the tax breaks for postsecondary education. In other words, this break is targeted more to the well-off than any other education tax break, as illustrated in the graph below.

There simply is no provision among the “tax extenders” that justifies Congress enacting this enormous, costly package once again without asking corporations to pay for it.

Last week, the Congressional Progressive Caucus released its budget proposal, the Better Off Budget, which eliminates the automatic spending cuts (the “sequestration” that has slashed public investments and harmed the economy) while also increasing employment by 8.8 million jobs and cutting the deficit by $4 trillion over a decade.

The Better Off Budget is able to accomplish all of this partly because it is willing to do the one thing that Congressional majorities have refused to do: raise revenue. Estimates for the revenue provisions in the Better Off Budget were provided by Citizens for Tax Justice and the Economic Policy Institute.

The budget proposes returning to the tax rules that applied at the end of the Clinton years for Americans with incomes exceeding $250,000 and taxing investment income at the same rates as income from work. The budget also incorporates a proposal from Congresswoman Jan Schakowsky to provide additional income tax brackets (with rates of 45 percent and higher) for those with incomes exceeding $1 million.

A tax credit similar to the Making Work Pay Credit (which was provided temporarily under the recovery act enacted in 2009) would be available in 2015 and 2016, and in a scaled back form in 2017. Citizens for Tax Justice has explained that the Making Work Pay Credit was more targeted towards families struggling to get by, and therefore more effective in stimulating the economy, than other tax breaks.

The Better Off Budget also makes some important changes to the corporate income tax, including doing away with the rule allowing American corporations to “defer” paying U.S. taxes on profits that are officially “offshore.” CTJ has long argued that deferral encourages corporations to use accounting tricks to make their U.S. profits appear to be earned in countries where they won’t be taxed (offshore tax havens). While the administration and members of Congress have proposed complicated rules to crack down on this type of tax avoidance, the most straightforward and effective solution is to stop rewarding these games by ending deferral.

Because the Congressional Progressive Caucus is willing to take on the corporate interests and others that the rest of Congress tiptoes around, it is able to put forward a plan that actually provides more deficit reduction with less pain for working Americans. The Better Off Budget would reduce the deficit to 1.4 percent of gross domestic product (1.4 percent of economic output) within a decade, as illustrated by the chart from the Caucus below. The President’s budget would leave a larger deficit, 1.6 percent of GDP, while under the current law the deficit would be 4 percent of GDP.


New CTJ Reports Explain Obama's Budget Tax Provisions


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New CTJ Reports Explain the Tax Provisions in President Obama’s Fiscal Year 2015 Budget Proposal

Two new reports from Citizens for Tax Justice break down the tax provisions in President Obama’s budget.

The first CTJ report explains the tax provisions that would benefit individuals, along with provisions that would raise revenue. The second CTJ report explains business loophole-closing provisions that the President proposes as part of an effort to reduce the corporate tax rate.

Both reports provide context that is not altogether apparent in the 300-page Treasury Department document explaining these proposals.

For example, the Treasury describes a “detailed set of proposals that close loopholes and provide incentives” that would be “enacted as part of long-run revenue-neutral tax reform” for businesses. What they actually mean is that the President, for some reason, has decided that the corporate tax rate should be dramatically lowered and he has come up with loophole-closing proposals that would offset about a fourth of the costs, so Congress is on its own to come up with the rest of the money.

To take another example, when the Treasury explains that the President proposes to “conform SECA taxes for professional service businesses,” what they actually mean is, “The President proposes to close the loophole that John Edwards and Newt Gingrich used to avoid paying the Medicare tax.”

And when the Treasury says the President proposes to “limit the total accrual of tax-favored retirement benefits,” what they really mean to say is, “We don’t know how Mitt Romney ended up with $87 million in a tax-subsidized retirement account, but we sure as hell don’t want to let that happen again.”

Read the CTJ reports:

The President’s FY 2015 Budget: Tax Provisions to Benefit Individuals and Raise Revenue

The President’s FY 2015 Budget: Tax Provisions Affecting Businesses

The tax reform plan released last week by Congressman Dave Camp, the Republican chairman of the House Ways and Means Committee, fails to accomplish what should be the three basic goals for comprehensive tax reform: 1) raise revenue from individuals and corporations, 2) make our tax system more progressive than it is now, and 3) tax the offshore profits and domestic profits of our corporations at the same time and at the same rate. (See more details on these three goals.) As explained below, Camp’s plan also manages to restrict state and local governments’ ability to make important public investments.

 Our lastest study documenting corporate tax avoidance dispels the myth that corporations need the sort of revenue-neutral tax reform that Rep. Camp proposes. But that is only one of  many problems with his plan. Here are some other basic ways in which it fails.

FAILS TO RAISE REVENUE:
Tax reform should result in more revenue collected from both the personal income tax and the corporate income tax.

The United States is the least taxed of all OECD countries besides Chile and Mexico. Neither individuals nor corporations are taxed at high rates. American corporations even pay lower effective tax rates in the United States than they pay in other countries where they do business. At a time when Congress continues to bitterly argue whether we have the resources to fund important public investments that most Americans support like Head Start and medical research, we need to take a critical look at our nation’s tax structure and determine how we can raise more revenue in a way that is fair and just. Rep. Camp’s proposal makes no attempt to raise more revenue from wealthy individuals or profitable corporations.

We have been very critical of both Rep. Camp and President Obama for proposing that business tax reform be revenue-neutral. But Camp’s approach is far worse, proposing  that all of tax reform (including changes that affect individuals, as well as changes affecting businesses) be revenue-neutral.

FAILS TO ENHANCE FAIRNESS:
Tax reform should result in a tax system that is more progressive than the one we have now.

When you account for the different federal, state and local taxes that people pay, the tax code is just barely progressive. Camp’s plan fails to address this. Partly this is because Camp’s plan would continue to tax capital gains and stock dividends, which mostly go to the wealthy, at lower rates than income from work.

Under Camp’s plan, the personal income tax would have two regular rates, 10 percent and 25 percent, and then a surcharge (an additional tax) of 10 percent would apply to very high-income people. The rules for the regular tax and the surcharge would be somewhat different. For example, no itemized deductions could be taken against the surcharge, except the charitable deduction. But the combination of the regular tax and the surcharge would be similar to having one tax with rates of 10 percent, 25 percent, and 35 percent.

The plan claims that capital gains and dividends would be taxed at the same rates as other income, but effectively they would be taxed at lower rates because 40 percent of capital gains and dividends would be excluded from taxable income. The top effective personal income tax rate on capital gains and dividends would be 21 percent. This is a one percentage point increase over the current top rate of 20 percent, which is probably enough to cause Grover Norquist to have an aneurism but will not address the fundamental unfairness of taxing income from wealth at lower rates than income from work.

Camp’s plan also reduces the EITC and eliminates personal exemptions while also increasing child tax credits and the standard deduction. Citizens for Tax Justice is currently producing estimates of how the combination of these changes would affect people in different income groups. But we already know that low-income families in certain situations would experience a substantial tax increase.

FAILS TO END OFFSHORE TAX SHELTERS:
Tax reform should result in rules that tax American corporations’ offshore profits and domestic profits at the same time and at the same rate.

This is the only way to end the tax incentives for corporations to shift jobs offshore and make their U.S. profits appear to be earned in offshore tax havens (countries where they are not taxed). Under the current system offshore profits and domestic profits are not taxed at the same time, because American corporations can indefinitely “defer” paying U.S. taxes on profits that are officially “offshore” until they are officially brought to the U.S. Under Camp’s plan, offshore profits and domestic profits would not be taxed at the same rate, and in fact the default rule would be for offshore profits to be taxed at a rate of 1.25 percent.

While Camp claims that various other measures he proposes would prevent corporate tax avoidance, it is impossible to believe that they would work since his overall proposal would dramatically increase rewards for any American corporation that can make its U.S. profits appear to be earned in offshore tax havens.

HURTS STATE AND LOCAL GOVERNMENTS:
Camp’s plan would hurt state and local governments by repealing the most justified deduction in the tax code.

Rep. Camp’s plan would limit and repeal many different tax breaks, but one of the most significant changes would be repeal of the deduction for state and local taxes. As the Institute on Taxation and Economic Policy (ITEP) has argued, this is the one of the most justified of all the deductions in the federal personal income tax.

The deduction for state and local taxes paid is often seen as a subsidy for state and local governments because it effectively transfers the cost of some state and local taxes away from the residents who directly pay them to the federal government. For example, if a state imposes a higher income tax rate on residents who are in the 39.6 percent federal income tax bracket, that means that each dollar of additional state income taxes can reduce federal income taxes on these high-income residents by almost 40 cents. The state government may thus be more willing to enact the tax increase because its high-income residents will really only pay 60.4 percent of the tax increase, while the federal government will effectively pay the remaining 39.6 percent. This is why Rep. Camp and many anti-government lawmakers want to do away with this particular deduction.

But viewed a different way, the deduction for state and local taxes is not a tax expenditure at all, but instead is a way to define the amount of income a taxpayer has available to pay federal income taxes. Another view is that the deduction encourages state and local governments to make public investments that they would otherwise underfund because the benefits spill outside their borders. For example, state and local governments provide roads that, in addition to serving local residents, facilitate interstate commerce. They also provide education to those who may leave the jurisdiction and boost the skill level of the nation as a whole, boosting the productivity of the national economy.

In this light, eliminating the deduction for state and local taxes is not a brave attempt to trim unnecessary breaks out of the tax code, but just one more attempt to restrict our ability to make the public investments that allow America’s economy and people to thrive.


Tax Preparers Should Be Regulated


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When individuals fill out their tax returns, billions of dollars -- both for individual taxpayers and for the federal government -- are at stake. This is one reason why more than half of U.S. taxpayers rely on paid tax preparers to help them.

And yet, there are no national standards to ensure tax preparers are well qualified to play this critical role (only four states have taken licensing into their own hands) despite the fact that many preparers are error-prone, or worse. When the Treasury Inspector General for Tax Administration sent auditors into the field to pose as taxpayers seeking preparer services in 2008, 61 percent of the resulting tax returns were found to be flawed. While 65 percent of the mistakes were honest lapses, the other 35 percent were “willful or reckless” misstatements or omissions. The Government Accountability Office reached similar conclusions in a 2006 study, and the National Taxpayer Advocate has been sounding the alarm on this issue for years.

The IRS recently found that the net "tax gap" (the difference between taxes owed and taxes paid after enforcement measures are taken) was $385 billion in 2006, and that $235 billion came from individual income tax underreporting. Tax preparers certainly had a great deal to do with this.

And even relatively small parts of this problem -- like underreporting related to income tax credits, which accounted for $28 billion of the tax gap -- can have huge implications for the individual families affected. For example, the Earned Income Tax Credit (EITC) involves complicated rules and steep penalties for the taxpayer if any misrepresentations are identified, even if the mistakes are inadvertent or caused by preparer error. Roughly half of returns claiming an EITC in 2011 were filed with the help of an unregulated preparer.

While the rate of EITC overpayments has been greatly overstated, the truth is that there are too many overpayments and underpayments of EITC benefits and incompetent or nefarious preparers are partly to blame. Some have been known to offer EITC refunds in the form of deceptive loan products with exorbitant fees.

In reaction to these concerns, the IRS issued regulations in 2011 that would require unenrolled paid preparers to pass a certification exam, pay fees, and take continuing education courses. These regulations are not unprecedented. Some paid preparers who also represent taxpayers before the IRS during appeal proceedings -- like attorneys, certified public accountants, and “enrolled agents” -- are already regulated. And similar requirements currently apply to volunteer tax preparers who work through the Volunteer Income Tax Assistance (VITA) program.

Unfortunately, the 2011 regulations were never implemented because commercial tax preparers attempting to avoid the certification requirements brought suit and won in federal district court. The challengers claimed that the IRS only had statutory authority to regulate preparers that assist taxpayers in their dealings with the IRS after their returns have already been filed (the aforementioned “enrolled” agents), not those who help prepare the return before filing. While it may not seem like a meaningful distinction, federal judges have now ruled against the IRS twice. The latest rebuke came this week from the D.C. Circuit Court of Appeals.

Assuming the Supreme Court does not take up the case (the IRS has not yet announced if it will appeal), the burden will fall on Congress to give the IRS the explicit authority to pursue these important reforms. As the National Community Tax Coalition and the National Consumer Law Center wrote in their amicus brief to the DC Circuit Court, “Without such regulation, consumers are at the mercy of an industry with no minimum training or competency standards for one of the most critical financial transactions that consumers engage in every year.”

If Congress decides it cannot spend money to help working families and the unemployed without offsetting the costs by cutting spending, then lawmakers should also refuse to enact tax cuts for businesses unless they can offset the costs by closing business tax loopholes. Sadly, both Democrats and Republicans refuse to acknowledge this commonsense principle as they discuss enacting the so-called “tax extenders” without closing any business tax loopholes — after failing to extend Emergency Unemployment Compensation (EUC) because of a dispute over how to offset the costs.

If there is any federal spending that should not be paid for, surely it is EUC and other temporary spending that is designed to address an economic downturn. As our friends at the Coalition on Human Needs explain:

In January, the national unemployment rate dropped to 6.6 percent from 6.7 percent in December, but jobs grew by a less than expected 113,000. Congress, by failing to renew unemployment benefits, is making things worse.  According to the Congressional Budget Office, restoring EUC throughout 2014 will increase employment by 200,000 jobs… EUC has long been considered an emergency program that does not have to be paid for by other spending reductions or revenue increases. Five times under President George W. Bush, when the unemployment rate was above 6 percent, unemployment insurance was extended without paying for it and with the support of the majority of Republicans.

Unfortunately, on February 6, a measure to extend EUC by three months and another to extend it by 11 months both failed to garner the 60 Senate votes needed for passage.

Compare this to Congress’s approach to provisions that are often called the “tax extenders” because they extend a variety of tax breaks that mostly go to business interests. Unlike EUC, these provisions cannot be thought of as temporary, emergency measures. Even though these tax cuts are officially temporary, Congress has routinely extended them every couple of years with little or no review of their impacts, so that they function as permanent tax cuts.

And, sadly, lawmakers of both parties are guilty of enacting these provisions time after time without closing any business tax loopholes to offset the costs. In some years, Democrats have introduced bills that would close tax loopholes to offset the cost of the extenders. For example, in 2009, Citizens for Tax Justice and several other organizations supported legislation that would have offset the costs of the tax extenders by closing the “carried interest” loophole and other tax loopholes.  

But in other years, neither party even bothered to discuss paying for the tax extenders. This happened the last time they were enacted as part of the “fiscal cliff” legislation that also extended most of the Bush-era tax cuts. Sadly, 2014 may be another year when neither party even pretends to be “fiscally responsible” when it comes to lavishing businesses with tax breaks. Several news reports indicate that Senators are discussing how to enact the tax extenders with as little debate as possible. 

There Is No Provision among the “Tax Extenders” that Is So Beneficial that It Justifies Enacting the Entire Package Without Offsetting the Costs

The feeling among lawmakers that the tax extenders must be enacted under absolutely any circumstances is simply not justified, as demonstrated by examining the most costly provisions among them. This is explained in detail in CTJ’s report on the tax extenders.

The pie chart above, which is taken from the CTJ report, illustrates the costs of the individual tax extenders provisions the last time they were enacted, at the start of 2013 as part of the “fiscal cliff” legislation.

The most costly is the research credit, which is supposed to encourage companies to perform research but appears to subsidize activities that are not what any normal person would consider research, and activities that a business would have performed in the absence of any tax break including activities that the business performed years before claiming the credit. The second most costly is the renewable electricity production credit, which even many supporters agree will be phased out at some point in the near future. The third most costly is the seemingly arcane “active financing exception,” which expands the ability of corporations to avoid taxes on their “offshore” profits and which General Electric publicly acknowledges as one of ways it avoids federal taxes. These three tax provisions make up over half of the cost of the tax extenders.

Next in line is the deduction for state and local sales taxes. Lawmakers from states without an income tax are especially keen to extend this provision so that their constituents will be able to deduct their sales taxes on their federal income tax returns. But, as the CTJ report explains, most of those constituents do not itemize their deductions and therefore receive no help from this provision. Most of the benefits go to relatively well-off people in those states.

Even the provisions that sound well-intentioned are really just wasteful subsidies for businesses. The Work Opportunity Tax Credit ostensibly helps businesses to hire welfare recipients and other disadvantaged individuals, but here’s what a report from the Center for Law and Social Policy concludes about this provision:

WOTC is not designed to promote net job creation, and there is no evidence that it does so. The program is designed to encourage employers to increase hiring of members of certain disadvantaged groups, but studies have found that it has little effect on hiring choices or retention; it may have modest positive effects on the earnings of qualifying workers at participating firms. Most of the benefit of the credit appears to go to large firms in high turnover, low-wage industries, many of whom use intermediaries to identify eligible workers and complete required paperwork. These findings suggest very high levels of windfall costs, in which employers receive the tax credit for hiring workers whom they would have hired in the absence of the credit.

It’s Time for Congress to Change How It Does Business

For Congress to enact unnecessary tax cuts for businesses without closing any business tax loopholes would be very problematic under any circumstances. To do so now, after making clear that help will not be provided to the unemployed unless the costs are offset with spending cuts, is simply outrageous.


What's NOT in the Queue for Netflix: A Tax Bill


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Hidden in the footnotes of the financial report released last week by Netflix is an admission that the company reduced its taxes by $80 million in 2013 by deducting the “cost” of executive stock options. This means that as a result of this single tax break, the company didn’t pay a dime of federal or state income tax on its $159 million in US profits last year.

Last year CTJ reported that a dozen emerging tech firms, including Twitter, Facebook and Priceline, were poised to shelter as much as $11 billion in profits from tax using this arcane loophole. For some of these companies, the stock option tax break can singlehandedly wipe out all income tax liability, as it did for Facebook last year.

Stock options are rights to buy stock at a set price. Corporations sometimes compensate employees (particularly top executives) with these options. The employee can wait to exercise the option until the value of the stock has increased beyond that price, thus enjoying a substantial benefit. The problem is that poorly designed tax rules allow corporations to deduct the difference between the market value of the stock and the amount paid when the stock option is exercised. In practice, corporations are often able to deduct more for tax purposes for stock options than they report to shareholders as their cost.

The defenders of this tax break sometimes argue that when companies pay their employees, it shouldn’t matter whether the pay takes the form of salaries and wages or stock options. But this argument glosses over the fact that while paying salaries imposes a dollar-for-dollar cost on employers, issuing stock options simply does not. As we have argued elsewhere, a sensible analogy is airlines giving employees the opportunity to fly free on flights that aren’t full, which costs the airlines nothing. It would be ludicrous to argue that airlines should be able to deduct the retail value of these tickets.

Senator Carl Levin (D-MI) has introduced legislation that would pare back (but not repeal entirely) the stock option tax break. Levin’s legislation (the Cut Unjustified Tax Loopholes Act) would address situations in which corporations take tax deductions for stock options that exceed the cost they report to their shareholders. It would also remove the loophole that exempts compensation paid in stock options from the existing rule capping companies’ deductions for compensation at $1 million per executive.

Allowing high-profile tech companies to zero out their taxes using phantom costs erodes the public’s faith in the tax system; any meaningful attempt to reform our corporate tax should remedy this situation.


US PIRG Report: States Can Crack Down on Corporations that Shift Profits to Tax Havens


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Citizens for Tax Justice has long argued that offshore tax avoidance by corporations will never be fully addressed until Congress reforms our laws to tax the domestic profits and the offshore profits of our corporations at the same time and at the same rate. Only then will corporations have no incentive to make their U.S. profits appear to be generated in tax havens like Bermuda and the Cayman Islands. But a new report from US PIRG explains that state governments can at least protect state corporate income taxes from the worst offshore abuses with reforms newly adopted by Montana and Oregon.

As PIRG explains, these two states

“simply treat profits that companies book to notorious tax havens as if it were domestic taxable income. This simple loophole closing uses information that multinational companies already report to states. The reform could be introduced anywhere, but is readily available to the 24 states and District of Columbia that have already modernized their tax codes by enacting “combined reporting,” which requires companies to report on how profits are distributed among jurisdictions so that they are taxed based on how much business activity they do in those places. All told, closing this tax haven loophole could save the remaining 22 states and District of Columbia over a billion dollars annually.”

Read the US PIRG report.


Has the Tax Code Been Used to Reduce Inequality During the Obama Years? Not Really.


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Many expect that during his State of the Union address tonight, President Obama will speak of income inequality, which he has previously called the “defining issue of our time.” As our nation hopefully begins this much-needed debate, everyone should be clear about one thing that has not been used much in recent years to reduce income inequality: the tax code.

The table below shows that effective tax rates were slightly higher in 2013 for all income groups (not just the rich) than they would have been if Congress had simply extended the tax rules in effect in 2012, as Congressional Republicans had called for in the debate over the “fiscal cliff.”

For the poor and middle-class, slightly higher effective tax rates resulted from the expiration of a Social Security payroll tax cut. For the rich, higher effective tax rates resulted from the end of parts of the Bush-era tax cuts and an effective increase in the Medicare tax as a part of health care reform.

The result is that the share of total taxes paid by each income group did not change much at all. As the table below illustrates, the richest one percent of Americans paid 24 percent of the total taxes in 2013, but would have paid 23.1 percent if the 2012 tax rules had been extended as Congressional Republicans called for. The shares of total taxes paid by the bottom four fifths of Americans were almost unchanged.

These figures are taken from one of the many CTJ reports that analyzed the impacts of the “fiscal cliff” deal that allowed certain tax cuts to expire. In other reports we have demonstrated that the tax code is not particularly progressive. For example, the richest one percent of Americans paid 24 percent of the total taxes in America in 2013, which may seem like a lot until you consider that this same group also received 21.9 percent of the total income that year. The poorest fifth of Americans paid only 2.1 percent of the total taxes in 2013, and received just 3.3 of the total income that year.

In other words, America’s tax system can just barely be called progressive.


Republican Platform Now Endorses Gutting Laws that Stop Offshore Tax Evasion


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(Updated 1/24/2014 to reflect the fact the resolution passed.)

At its yearly winter meeting, the Republican National Committee approved a resolution calling for the repeal of the Foreign Account Tax Compliance Act (FATCA), a major law enacted in 2010 (as part of the HIRE Act) to clamp down on offshore tax evasion.

FATCA was enacted in the wake of revelations that the Swiss bank UBS had helped American citizens evade U.S. income taxes by illegally hiding income in offshore accounts. The most important provisions of FATCA basically require Americans, including those living abroad, to tell the IRS about offshore assets greater than $50,000, and apply a withholding tax to payments made to any foreign banks that refuse to share information about their American customers with the IRS.

Those who are directly affected by FATCA are likely to be few in number and they certainly have the means to fill out the disclosure form required with their federal income tax return under its provisions. The $50,000 threshold excludes housing and other non-financial assets. That means that even a relatively well-off American who works for a few years abroad and even someone who owns a house abroad will not be affected unless they hold over $50,000 in cash or financial assets in the other country.

Whatever inconvenience is caused by these requirements is far outweighed by the benefits to the U.S. and its law abiding taxpayers. According to the Congressional Joint Committee on Taxation (JCT), FATCA's anti-tax evasion measures are estimated to raise $8.7 billion (PDF) over their first decade of implementation. (JCT does have a history of underestimating tax enforcement measures.) Considering that the U.S. loses an estimated $100 billion (PDF) annually due to offshore tax abuses, this seems like a modest reform.

In May 2013, Senator Rand Paul introduced legislation to repeal the important parts of FATCA, claiming that this is necessary to protect privacy. But there simply is no right of Americans to hide income from the IRS. As we explained at that time, for a country with a personal income tax (like the U.S.), that kind of information sharing is indispensible to tax compliance, as the IRS stated in its most recent report on the “tax gap”:

“Overall, compliance is highest where there is third-party information reporting and/or withholding. For example, most wages and salaries are reported by employers to the IRS on Forms W-2 and are subject to withholding. As a result, a net of only 1 percent of wage and salary income was misreported. But amounts subject to little or no information reporting had a 56 percent net misreporting rate in 2006.”

Other opponents of FATCA, like the Wall Street Journal, have claimed that it is causing Americans living abroad to renounce their U.S. citizenship, but as we have pointed out, those renouncing citizenship make up a tiny fraction of one percent of the six million Americans living abroad.


The Bennet-Blunt Corporate Tax Amnesty Must Be Stopped


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On January 17, Senators Michael Bennet (D-CO) and Roy Blunt (R-MO) and nine of their colleagues introduced the Senate version of Congressman John Delaney’s proposal providing a tax amnesty for profits that corporations officially hold offshore on the condition that they purchase bonds to fund an infrastructure bank.

Instead of tapping corporate profits that are “locked” offshore as supporters claim, this proposal would provide an enormous tax break for profits that already are in the U.S. economy but which are booked in offshore tax havens in order to avoid taxes, a practice that will be more common  if this proposal is enacted. In fact, the net effect of this bill could be to reduce employment.

Background of Delaney Bill

In the spring of 2013, Congressman John Delaney, a Democrat from Maryland, proposed to allow American corporations to bring a limited amount of offshore profits to the U.S. (to “repatriate” these profits) without paying the U.S. corporate tax that would normally be due. This type of tax amnesty for repatriated offshore profits is euphemistically called a “repatriation holiday” by its supporters. The Congressional Research Service has found that a similar proposal enacted in 2004 provided no benefit for the economy and that many of the corporations that participated actually reduced employment.

Rep. Delaney and the 50 House cosponsors to his bill seem to believe they can avoid that unhappy result by allowing corporations to repatriate their offshore funds tax-free only if they also fund a bank that finances public infrastructure projects, which they believe would create jobs in America. How much a corporation could repatriate tax-free would be determined through a bidding process, with a maximum cap of six dollars in offshore profits repatriated tax-free for every one dollar spent on the bonds. Unfortunately, as explained below, the proposal is designed to give away two dollars in tax breaks for every one dollar spent on infrastructure.

So-Called “Offshore” Corporate Profits Are Largely Invested in the U.S.

Many lawmakers seem to mistakenly believe that the $2 trillion in “permanently reinvested profits” that American corporations officially hold abroad are locked out of the American economy. This has led many to support proposals to exempt American corporations’ offshore profits from U.S. taxes, either on a permanent basis (through a so-called “territorial” tax system) or a temporary basis (with a tax amnesty for repatriated offshore profits).

But the premise is wrong. As a recent report from the Center for American Progress explains, American corporations’ offshore profits are actually invested in the U.S. economy already because they are deposited in U.S. bank accounts or invested in U.S. Treasury bonds or even corporate stocks. The real problem is that our tax system traps badly needed revenue out of the country by allowing American corporations to “defer” (delay) paying U.S. taxes on profits characterized as “offshore” — even if they are really earned here in the U.S.

A study from the Senate Permanent Subcommittee on Investigations (chaired by Carl Levin of Michigan) that examined the corporations benefiting the most from the repatriation amnesty enacted by Congress in 2004 found that almost half of their offshore profits were actually in U.S. bank accounts, Treasury bonds, and U.S. corporate stocks. Corporations are, in theory, restricted by law from using their offshore profits to pay dividends to shareholders or to directly expand their own investments. But even these rules can be circumvented when the corporations borrow money for these purposes, using the offshore profits as collateral.

Biggest Benefits Would Go to Corporations Disguising their U.S. Profits as Tax Haven Profits

The proposal would provide the biggest benefits to the most aggressive corporate tax dodgers. Often, an American corporation has offshore profits because its offshore subsidiaries carry out actual business activity. But a great deal of the profits that are characterized as “offshore” are really U.S. profits that have been disguised through accounting gimmicks as “foreign” profits generated by a subsidiary (which may be just a post office box) in a country that does not tax profits (i.e., an offshore tax haven). These tax haven profits are the profits most likely to be “repatriated” under such a proposal for two reasons.

First, offshore profits from actual business activities in foreign countries are often reinvested into factories, stores, equipment or other assets that are not easily liquidated in order to take advantage of a temporary tax break, but profits that are booked as “foreign” profits earned by a post office box subsidiary in a tax haven are easier to “move” to the U.S.

Second, profits in tax havens get a bigger tax break when “repatriated” under such a tax amnesty. The U.S. tax that is normally due on repatriated offshore profits is the U.S. corporate tax rate of 35 percent minus whatever was paid to the government of the foreign country. Profits that American companies claim to generate in tax havens are not taxed at all (or taxed very little) by the foreign government, so they might be subject to the full 35 percent U.S. rate upon repatriation — and thus receive the greatest break when the U.S. tax is called off.

Not a Way to Create Infrastructure Jobs

While infrastructure spending is economically stimulative, this plan is an absurdly wasteful and corrupt way to fund job creation. First, the proposal is designed to give away two dollars in tax breaks for every one dollar spent on infrastructure (and the jobs to build infrastructure) — to give away up to $105 billion in corporate tax breaks in order to raise $50 billion to finance the infrastructure bank. Because up to six dollars could be repatriated tax-free for every one dollar corporations spend on the bonds, up to $300 billion would be repatriated tax-free to raise $50 billion for the infrastructure bank. As already explained, the profits most likely to be repatriated have not been taxed at all by any government so under normal rules the full 35 percent U.S. tax rate would apply, and 35 percent of $300 billion is $105 billion.

Second, this proposal would be the second tax amnesty for offshore profits (the first was enacted in 2004), and once Congress signals its willingness to do this more than once, corporations could be encouraged to shift even more profits (and even jobs) offshore in hopes of benefitting from another tax amnesty in the future. In other words, the proposal’s net effect on U.S. job creation could be negative.


CTJ Submits Comments on Finance Committee Chairman Baucus' International Tax Reform Proposal


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Today Citizens for Tax Justice submitted comments to the Senate Finance Committee on the discussion draft that the committee recently published under the direction of its chairman, Max Baucus of Montana. Tax reform seems to be on hold, with Baucus’s expected departure to serve as ambassador to China being just one of many complications. But the discussion draft may nonetheless be a starting place for future debates on how the corporate tax should be overhauled.

And that would pose problems because, as CTJ’s comments explain, Baucus’s discussion draft fails to accomplish what should be three goals for tax reform:

1. Raise revenue from the corporate income tax and the personal income tax.
2. Make the tax code more progressive.
3.Tax American corporations’ domestic and offshore profits at the same time and at the same rate.

As CTJ’s comments explain, the discussion draft would, in a proclaimed revenue-neutral manner, impose U.S. corporate taxes on offshore corporate profits in the year that they are earned. But it would do so at a lower rate than applies to domestic corporate profits.

The goal of revenue-neutrality causes the discussion draft to fail the first goal of raising revenue as well as the second, because any increase in corporate income tax revenue would make our tax system more progressive. The discussion draft also fails to meet the third goal. Although it would tax domestic corporate profits and offshore corporate profits at the same time, it would subject the offshore profits to a lower rate, preserving some of the incentive for corporations to shift investment (and jobs) offshore or to engage in accounting gimmicks to make their U.S. profits appear to be generated in offshore tax havens.

Read CTJ’s comments (8 pages) on the Finance Committee discussion draft.

 


Center for American Progress: There Are No Corporate Profits "Trapped" Offshore


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A new report from the Center for American Progress (CAP) explains that, despite the well-known complaints of America’s largest multinational corporations, our tax system is not trapping corporate profits offshore. In fact, the profits characterized as “offshore” are invested in the U.S. economy already because they are deposited in U.S. bank accounts or invested in U.S. Treasury bonds or even corporate stocks. The real problem is that our tax system traps badly needed revenue out of the country by allowing American corporations to “defer” (delay) paying U.S. taxes on profits characterized as “offshore” — even if they are really earned here in the U.S.

Many lawmakers seem to mistakenly believe that the $2 trillion in “permanently reinvested profits” that American corporations hold abroad are locked out of the American economy. This has led many to support proposals to exempt American corporations’ offshore profits from U.S. taxes, either on a permanent basis (through a so-called “territorial” tax system) or a temporary basis (with a tax amnesty for repatriated offshore profits).

But nothing restricts corporations from investing these profits in the U.S. The CAP report cites a study from the Senate Permanent Subcommittee on Investigations (chaired by Carl Levin of Michigan) that examined the corporations benefiting the most from the repatriation amnesty enacted by Congress in 2004 and finding that almost half of their offshore profits were actually in U.S. bank accounts, Treasury bonds, and U.S. corporate stocks.

American corporations continue to designate these profits as “permanently reinvested earnings” offshore (to use the technical term) because these profits will be subject to U.S. corporate taxes when they are officially “repatriated” (brought to the U.S.).

Corporations are, in theory, restricted by law from using their offshore profits to pay dividends to shareholders or to directly expand their own investments. But even these rules can be circumvented when the corporations borrow money for these purposes. Because these companies have so much accumulated profits (offshore and often in the U.S. also) they are effectively able to borrow money at very low or even negative interest rates. The report explains how Apple and Microsoft both borrowed in this way to finance dividends and share buybacks.

Apple and Microsoft are also examples of another problem, which is that much of these “offshore” profits are actually U.S. profits that the companies characterize, using accounting gimmicks, as earned in countries like Bermuda or the Cayman Islands that do not tax them (offshore tax havens). The existing rule allowing American corporations to “defer” U.S. taxes on their offshore profits already encourages companies to engage in these tricks. Rather than expanding that break into a bigger one (a territorial system or a repatriation amnesty), the CAP report suggests either repealing deferral or cracking down on the worst abuses of deferral, as Senator Carl Levin has proposed.


Should It Bother Us that Boeing Says It Needs a Tax Incentive to Make Its Planes Safe?


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How worried should we be that Boeing argues it should get a tax break for performing safety tests on its new planes? This is the argument the corporation seems to have made at an IRS hearing on January 8 and in comments submitted (sorry, subscription only) to the agency about proposed regulations governing tax breaks for research.

Tax breaks designed to encourage research can only be said to be effective if they result in their recipients conducting research that they would not otherwise conduct. Boeing seems to argue that this includes safety testing of airplanes. But isn’t this something that Boeing must do anyway?

On one hand, if Boeing is not naturally inclined, in the absence of a tax incentive, to make its planes safe, you might want to consider that before you book your next flight. On the other hand, if we trust that the FAA and comparable foreign agencies have stringent safety requirements, then why does Boeing need a tax incentive to do what is required by law?

In its comments on the regulations, Boeing criticizing a proposed “shrinking-back rule” that would provide the research tax break only for companies that develop and test individual components of an aircraft rather than those who put together and test the entire aircraft (which is what Boeing does). Another issue Boeing raises is whether it can receive the break for multiple pilot models (prototype planes, for example) for safety testing.

Boeing argues that “in the aerospace industry, companies such as Boeing that have built tens of thousands of aircraft through the years know from experience that they need multiple pilot models for testing. Indeed, without multiple pilot models, a failure may not be correctly identified as a design problem or a unique problem encountered by the pilot model because of, for example, a defect in materials.”

To which the sensible response seems to be, so what? Are we supposed to believe that Boeing will not do the appropriate safety testing if it does not receive a tax incentive for doing so? Indeed, Boeing goes on at length about the FAA safety standards it must meet through testing.

Firms are allowed to deduct their business expenses each year, except that capital expenses (expenditures to acquire assets that generate income in the future) must usually be deducted over a number of years to reflect their ongoing usefulness. In 1954, Congress enacted section 174 of the tax code, which relaxed the normal capitalization rules by allowing firms to deduct immediately their costs of research. This immediate deduction is the specific tax break addressed by the proposed regulation that is causing Boeing so much angst.

But that’s not all that’s at stake. Businesses must meet the requirements of section 174 (and some additional requirements) to get an even bigger break, the research tax credit, which was first enacted in 1981.  Of those corporations that make public how much they claim in research tax credits, Boeing is near the top of the list. This is illustrated in the table, which was published in our recent report on the many problems with the research tax credit.

You really have to hand it to Boeing. The company has managed to have billions in profits for a decade while paying nothing in federal or state corporate income taxes over that period. Yet, President Obama argues that companies that use tax breaks to shift operations and profits offshore ought to pay more U.S. taxes and that the revenue “should go towards lowering taxes for companies like Boeing that choose to stay and hire here in the United States of America.” Likewise, after Washington State recently gave Boeing the biggest state tax break in history, other states like Missouri still seem to think they can lure the corporation by lavishing it with even more tax breaks. At this rate, Boeing could probably threaten that its planes will explode midair if it doesn’t get more tax breaks, and the Treasury Department and Congress probably would provide them.


Congressional Research Service: Stop Assuming Tax Rate Reductions Will Help the Economy


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Several reports released by the Congressional Research Service (CRS) in the first week of January refute claims that tax rate reductions will boost the economy and even pay for themselves by generating economic growth.

Changes in Personal Income Tax Rates

A report released on January 2 “summarizes the evidence on the relationship between tax rates and economic growth” and finds “little relationship with either top marginal rates or average marginal rates on labor income.” It also finds that work effort and savings are “relatively insensitive to tax rates.”

While many advocates of tax cuts claim that a high top marginal personal income tax rate hinders investment by the wealthy, the report finds that “periods of lower taxes are not associated with higher rates of economic growth or increases in investment.”

The January 2 report also concludes, “Claims that the cost of tax reductions are significantly reduced by feedback effects do not appear to be justified by the evidence.” Many advocates for tax cuts claim that reducing tax rates will cause so much growth of income and profits that the additional taxes collected (the “revenue feedback effects”) will replace much of the revenue lost from the rate reduction.

But the report explains that “the models with responses most consistent with empirical evidence suggest a revenue feedback effect of about 1% for the 2001-2004 Bush tax cuts,” meaning the effects that the tax cuts had on the economy and on behavior of taxpayers offset just 1 percent of their total cost. And much of this effect may have taken the form of taxpayers changing how many deductions they take, and other tax planning changes, rather than actual economic growth.

Even cuts in tax rates for capital gains, which are often argued to have the most significant “revenue feedback effects,” don’t come close to paying for themselves.

“Capital gains taxes have been scored for some time as having a significant feedback effect through changes in realizations, one that had a revenue offset of around 60 percent,” the report explains.  In other words, some analysts have claimed that a tax cut for capital gains increases those gains to such an enormous degree that up to 60 percent of the lost tax revenue is ultimately regained.

But the report explains, “More recent estimates, however, have suggested a feedback effect of about 20 percent.” CRS’s descriptions of these more recent estimates have been used in CTJ’s analyses of capital gains tax changes and are explained in the appendix to this report. (Another CTJ report proposes coupling higher capital gains tax rates with a policy change that would largely eliminate any negative effect on revenue.)

Changes in the Corporate Income Tax

The idea of changing the corporate income tax rate has received so much attention that the topic apparently warranted a separate report, which CRS released on January 6.

“Claims that behavioral responses could cause revenue to rise if rates were cut do not hold up on either a theoretical basis or an empirical basis,” the report explains. It also shoots down the argument that the corporate tax is a regressive tax because it chases investment offshore in a way that ends up hurting American workers.

This report goes into great detail about some of the problems with the studies that advocates of reducing corporate tax rates rely on. Much of the report details how CRS, using the same data and methods found in these studies, found that the results either disappeared or became insignificant after correcting for various errors

For example, the CRS report cites an op-ed published by R. Glen Hubbard, chairman of President George W. Bush’s Council of Economic Advisers. In it, Hubbard cites a study by Kevin A. Hassett and Aparna Mathur that was rife with methodological problems.

As the CRS report explains, Hassett and Mathur conclude that “a 1% increase in the corporate tax causes manufacturing wages to fall by 0.8% to 1%. These results are impossible, however, to reconcile with the magnitudes in the economy... corporate taxes are only about 2.5% of GDP, while labor income is about two thirds. These results imply that a dollar increase in the corporate tax would decrease wages by $22 to $26, an effect that no model could ever come close to predicting.” A later report by Hassett and Mathur “continued to produce implausible estimates” because it “implies a decrease of $13 in wages for each dollar fall in corporate taxes.”

To take another example, the CRS report also examines a cross-country study concluding that corporate taxes reduce investment. But CRS finds that some of the results seem to be affected by countries that are outliers, like Bolivia, for which a transaction tax is mistakenly counted as a corporate income tax. When such mistakes are corrected, the results are found to no longer be statistically significant.

This CRS report is particularly helpful because advocates of cutting the corporate income tax rate often rely on econometric studies that they claim support their case. These studies are often mind-numbingly complicated and it is rare that policymakers or their aides have the time and ability to go through these studies to understand whether or not they actually make sense. Thankfully, the Congressional Research Service has done that job for everyone.


Reasons Why Congress Should Allow the Deduction for Tuition to Remain Expired


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You might be surprised to learn that Congress is likely to extend a tax break that is claimed mostly by high-income individuals paying for graduate education and by families of undergrads who are mistakenly taking this break instead of one that would benefit them more.

The deduction for tuition and related fees is part of the “tax extenders,” which is the nickname often given to a package of provisions that Congress approves every couple of years to extend various arcane tax breaks that mostly go to businesses. This deduction is one relatively small piece of the larger “tax extenders” package, and it’s one that does go to families. But unfortunately, it’s also the most regressive of all the tax breaks for postsecondary education, meaning it’s targeted more to the wealthy than any other education tax break.

Congress last extended the deduction for tuition and related fees in the tax extenders package that was included in the “fiscal cliff” legislation approved on January 1 of 2013. That legislation extended it retroactively to 2012 and prospectively through the end of 2013. The two-year extension cost $1.7 billion.

Here’s a list of reasons why Congress should allow it to remain expired.

The deduction for tuition and related fees mainly supports graduate education.

Americans paying for undergraduate education for themselves or their kids in 2009 or later generally have no reason to use the deduction because starting that year another break for postsecondary education was expanded and became more advantageous. The more advantageous tax break is the American Opportunity Tax Credit (AOTC), which has a maximum value of $2,500. The deduction for tuition and related fees, in contrast, can be taken for a maximum of $4,000, and since it’s a deduction that means the actual tax savings even for someone in the highest income tax bracket (39.6 percent) cannot be more than $1,584.

The AOTC is more generous across the board. Under current law, the AOTC is phased out for married couples with incomes between $160,000 and $180,000, whereas the deduction for tuition and related fees is phased out for couples with incomes between $130,000 and $160,000. For moderate-income families, the AOTC is more beneficial because it is a credit rather than a deduction.   The working families who pay payroll and other taxes but earn too little to owe federal income taxes – meaning they cannot use many tax credits – benefit from the AOTC’s partial refundability (up to $1,000).

Given that a taxpayer cannot take both the AOTC and the deduction, why would anyone ever take the deduction? The AOTC is available only for four years, which means it would normally be used for undergraduate education, while the deduction could be used for graduate education or in situations in which undergraduate education takes longer than four years.  The deduction can also be used for students who enroll for only a class or two, while the AOTC is also only available to students enrolled at least half-time for an academic period during the year.

For graduate students and others in extended education, under current law the Lifetime Learning Credit (LLC) is generally a better deal than the tuition and fees deduction. Because the upper income limit for the LLC is lower — $124,000 if married, $62,000 if single, the tuition and fees deduction primarily benefits taxpayers whose income is above these thresholds.

Taxpayers confused by all the education tax breaks may mistakenly take the deduction rather than a tax break that benefits them more.

One reason a family paying for undergraduate education would claim the deduction instead of the AOTC is confusion. Because the panoply of education tax breaks is so confusing, many taxpayers mistakenly claim a break that is not the best deal for them. A 2012 report from the Government Accountability Office found that over a fourth of taxpayers eligible for postsecondary education tax breaks don't take advantage of them, and those who do use them often don't use the most advantageous tax break for their situation.

The deduction for tuition and related fees is the most regressive tax break for postsecondary education.

The distribution of these tax breaks among income groups is important because if their purpose is to encourage people to obtain education, they will be more effective if they are targeted to lower-income households that could not otherwise afford college rather than well-off families that will send their kids to college no matter what.

The graph below was produced by the Center for Law and Social Policy (CLASP) using data from the Tax Policy Center, and compares the distribution of various tax breaks for postsecondary education as well as Pell Grants.

The graph illustrates that not all tax breaks for postsecondary education are the same, and the deduction for tuition and fees is the most regressive of the bunch. Some of these tax breaks are more targeted to those who really need them, although none are nearly as well-targeted to low-income households as Pell Grants. Tax cuts for higher education taken together are not well-targeted, as illustrated in the bar graph below.

One proposal offered by CLASP would expand the refundability of the American Opportunity Tax Credit (AOTC), represented by the blue bar above, increasing the assistance available to low-income families not helped by the other tax breaks. The proposal offsets these costs — and simplifies higher education tax aid – by eliminating the other tax breaks and reducing AOTC benefits for higher income households


Corporate Income Tax Repeal Is Not a Serious Proposal


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Another year, another campaign to give even bigger breaks to corporations and claim that this will create jobs. In 2014, the campaign opened with a January 5 op-ed by Laurence Kotlikoff in the New York Times titled, “Abolish the Corporate Income Tax.”

Before getting into Kotlikoff’s argument, let’s just remember a few reasons why we have a corporate income tax.

First, the personal income tax would have an enormous loophole for the rich if we didn’t also have a corporate income tax. A business that is structured as a corporation can hold onto its profits for years before paying them out to its shareholders, who only then (if ever) will pay personal income tax on the income. With no corporate income tax, high-income people could create shell corporations to indefinitely defer paying individual income taxes on much of their income.

Second, even when corporate profits are paid out (as stock dividends), only a third are paid to individuals rather than to tax-exempt entities not subject to the personal income tax. In other words, if not for the corporate income tax, most corporate profits would never be taxed.

Third, the corporate income tax is ultimately borne by shareholders and therefore is a very progressive tax, which means repealing it would result in a less progressive tax system.

This last point deserves emphasis. Proponents of corporate tax breaks argue that in the long-term the tax is actually borne by labor — by workers who ultimately suffer lower wages or unemployment because the corporate tax allegedly pushes investment (and thus jobs) offshore. But most experts who have examined the question believe that investment is not entirely mobile in this way and that the vast majority of the corporate tax is borne by the owners of capital (owners of corporate stocks and business assets), who mostly have high incomes. This makes the corporate tax a very progressive tax.

For example, the Department of the Treasury concludes that 82 percent of the corporate tax is borne by the owners of capital. As a result, the richest one percent of Americans pay 43 percent of the tax, and the richest 5 percent pay 58 percent of the tax.

But Kotlikoff argues that our corporate income tax chases investment out of the U.S. and his simplistic answer is to repeal the tax altogether. He writes that, “To avoid our federal corporate tax, they [corporations] can, and often do, move their operations and jobs abroad,” and cites the well-known case of Apple booking profits offshore.

But Apple is a perfect example of a corporation that does not actually move many jobs offshore but rather is engaging in accounting gimmicks to make its U.S. profits appear to be generated in offshore tax havens. These gimmicks take advantage of the rule allowing American corporations to “defer” (delay indefinitely) paying U.S. corporate income taxes on the profits they claim to earn abroad. Lawmakers will end these abuses when they see that voters’ anger over corporate tax loopholes is even more powerful than the corporate lobby.

Kotlikoff has constructed a computer model that purports to prove that the economy would benefit greatly from cuts in the corporate income tax. But any such model relies on assumptions about how corporations would respond to changes in tax policy. Economists have failed to demonstrate a link between lower corporate taxes and economic growth over the past several decades that would justify the assumptions Kotlikoff uses.

In fact, Kotlikoff’s assumptions are at odds with the historical record. As former Reagan Treasury official, J. Gregory Ballentine, once told Business Week, “It’s very difficult to find much relationship between [corporate tax breaks] and investment. In 1981 manufacturing had its largest tax cut ever and immediately went down the tubes. In 1986 they had their largest tax increase and went gangbusters [on investment].”

In any event, the U.S. corporate tax is effectively already among the lowest in the developed world because of its many loopholes. According to the Department of the Treasury, federal corporate tax revenue in the U.S. was equal to 1.3 percent of our economy in 2010 (1.6 percent if you include state corporate taxes). The average for OECD countries (which include most of the developed countries) besides the U.S. was 2.8 percent.


Ultra-Wealthy Dodge Billions in Taxes Using "GRAT" Loophole


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A new Bloomberg report describes how billionaires have dodged an estimated $100 billion in gift and estate taxes since 2000, according to the lawyer who perfected the practice.

The trick involves temporarily putting corporate stocks (or similar assets) into a “Grantor Retained Annuity Trust” (GRAT), where the grantor gets the stocks back after two years, plus a small amount of interest, while any appreciation of the stock goes to the grantor’s heirs tax-free.

Because the initial gift has no inherent value (it’s essentially a gift to oneself), there is no gift tax at the time the GRAT is set up. The loophole is that the appreciation of the stock that goes to the heirs is not subject to gift tax either. As a result, extremely wealthy individuals avoid billions of dollars in gift and estate tax.

This is what Sheldon Adelson did (to take just one example) when he put much of his Las Vegas Sands stock in GRATs when the stock had plummeted during the recession. Adelson knew that the stock was likely to rise significantly from that low point. If Adelson had simply given his heirs the stock, the gift tax would have  applied to the value of the stock at the time it was given. Or if he bequeathed the stock upon his death, the estate tax would apply.

But by using GRATS, neither the value of the stock at the time it was temporarily put into the GRAT nor the subsequent appreciation was subject to gift or estate tax. See the graphic below from Bloomberg for how the shelter works in practice.

Many well-known figures, such as Facebook CEO Mark Zuckerberg, Goldman Sachs CEO Lloyd Blankfein and fashion designer Ralph Lauren, have set up GRATs to shelter their assets from gift and estate tax. Bloomberg estimates that Adelson, whose net worth is more than $30 billion, has already avoided at least $2.8 billion in US gift taxes using at least 25 different GRATs over time.

For his part, Adelson has not just sought to follow (or exploit) whatever law is on the books, but has actually taken an active role in trying to shape the law and the government that enacts it. In 2012, Adelson spent an astonishing $150 million to support conservative candidates and has said that he’s ready to “double” his donations to candidates going forward. Considering the billions that Adelson has at stake, this exuberant campaign spending may actually be a prudent investment if it works to preserve the GRAT loophole and the plethora of other massive tax breaks for the wealthy individuals embedded in the tax code.

To their credit, the Obama Administration has proposed to curb (PDF) the use of GRATs by requiring that a GRAT have a minimum term of 10 years. As the Treasury explains (PDF, pg. 142), this would create some downside risk to using a GRAT because it increases the likelihood that the grantor will die before the GRATs paid out the appreciation to the heirs, at which point that appreciation would be subject to the estate tax. Unfortunately, this proposal has been brushed aside by Republicans who seek to eliminate the estate tax entirely and by some Democrats who are not enthusiastic about taking on a tax break used by the large campaign donor class.

The latest budget deal in Congress seems to indicate that anti-government, anti-tax lawmakers will not force a costly shutdown of the federal government in 2014 as they did in 2013, although they still threaten to cause the U.S. to default on its debt obligations if some yet-undefined demands are not met. In today’s dysfunctional Congress, that’s considered a great achievement. Congress could have replaced all of the harmful sequestration of federal spending for next year and the year after by closing the tax loopholes used by corporations to shift jobs and profits offshore, as recently proposed by Reps. Lloyd Doggett and Rosa DeLauro. Sadly, the deal negotiated by Senate Budget Chairman Patty Murray and House Budget Chairman Paul Ryan does none of that.

Deal Replaces Some Sequestration, Further Reduces the Deficit

On Wednesday the U.S. Senate approved the Murray-Ryan budget deal, which was negotiated by Senate Budget Chairman Patty Murray and House Budget Chairman Paul Ryan and approved last week by the House. It would undo $63 billion of the $219 billion sequestration cuts scheduled to occur in 2014 and 2015 under the Budget Control Act of 2011 (the deal President Obama and Congressional Republicans came to in one of the previous hostage-taking episodes).

Most mainstream economists believe that governments should not cut spending when their economies are still climbing out of recessions, but that’s pretty much exactly what Congress did by approving the 2011 law resulting in sequestration of about $109 billion each year for a decade.

The Murray-Ryan deal would reduce that by $45 billion next year and by $18 billion in the following year. While the deal replaces $63 billion of sequestration, the total savings in the deal add up to $85 billion, which means the deal technically reduces the deficit compared to doing nothing. But about $28 billion of the savings come from simply extending some of the sequestration cuts longer than they were originally intended to be in effect (extending them into 2022 and 2023). This enables Rep. Ryan to claim that the deal further reduces the deficit. But this has no real policy rationale except for those who believe that shrinking government is good in itself, regardless of the impacts.

Any major budget deal approved during a recession ought to provide an increase in unemployment insurance, which is the sort of government spending that puts money in the hands of the people most likely to spend it right away, thus enabling local businesses to retain or create jobs. But under the Murray-Ryan deal, the extended unemployment benefits that were enacted to address the recession would run out (at the end of this month for many people). As the Center on Budget and Policy Priorities explains, in the past Congress has not allowed these benefits to run out until the rate of long-term unemployment was much lower than it is today.

Tax Loopholes Left Untouched, but Revenue Raised through Fees

The Murray-Ryan deal does not close a single tax loophole for corporations or individuals. A bill recently introduced by Reps. Lloyd Doggett and Rosa DeLauro demonstrates exactly how this could be done. The DeLauro-Doggett bill basically borrows the loophole-closing provisions from Senator Carl Levin’s Stop Tax Haven Abuse Act and uses the revenue savings to replace sequestration for two years.

To take just one of many examples of how it would work, the DeLauro-Doggett bill would close the loophole allowing corporations to take deductions each year for interest payments related to the costs of offshore business even though the profits from that offshore business will not be taxable until the corporation brings them to the U.S. years or even decades later. This reform is estimated to raise around $50 billion over a decade. Another provision would reform the “check-the-box” rules that allow corporations to tell different governments different things about the nature of their subsidiaries and whether or not their profits have been taxed in one country or another, resulting in profits that are taxed nowhere. This reform is estimated to raise $80 billion over a decade.

These two reform options appear on a list of potential loophole-closing measures released by Senator Murray’s committee (as well as in the DeLauro-Doggett legislation). The committee’s list also included others that Citizens for Tax Justice has championed, like closing the carried interest loophole to raise $17 billion over a decade, closing the John Edwards/Newt Gingrich loophole (for S corporations) to raise $12 billion, closing the Facebook stock option loophole to raise as much as $50 billion, and several others. (Many of the reforms on the budget committee list are explained in this CTJ report.)

Instead of closing tax loopholes, the Murray-Ryan deal raises revenue through fee increases that are not technically tax increases but would probably feel like tax increases to the people experiencing them. For example, fees on airline tickets that pay for the Transportation Security Administration (TSA) would increase to $5.60 per ticket, raising $12.6 billion over a decade. The premiums paid by companies for the Pension Benefit Guaranty Corporation (to guarantee employee’s pension benefits) would increase, raising $7.9 billion over a decade. Another provision would increase federal employee pension contributions, raising $6 billion over a decade. These are just a few examples.

These measures do raise revenue, but it would seem more straightforward to remove the loopholes that complicate the main taxes we rely on to fund public investments and that eat away significantly at the amounts of revenue they can raise. Members of Congress can only run for so long before facing the need for tax reform.


Income Tax Deductions for Sales Taxes: A Step Away from Tax Fairness


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Sales taxes are the biggest tax fairness problem facing state and local governments: they inexorably fall hardest on the low-income families who are least able to pay them, while asking far less, as a share of income, from the very best-off taxpayers. So if the federal government enacts a tax break designed to offset the impact of sales taxes, that can’t be a bad thing, right? As it turns out, it IS a bad thing, as explained in a recent report from Citizens for Tax Justice.

A deduction for sales taxes existed in the past but was repealed as part of the loophole-closing Tax Reform Act of 1986. In 2004 Congress brought the concept back as the itemized deduction that federal income taxpayers can claim for state and local sales taxes they pay each year.

Spearheaded by then-House Majority Leader Tom DeLay, the provision, enacted as part of the “American Jobs Creation Act of 2004,” gave itemizers the choice of deducting either their state and local income taxes or their sales taxes. The provision was set to expire two years later–and that’s how it joined the big happy family of “tax extenders,” the motley crew of temporary tax giveaways Congress now extends every couple of years.

Almost a decade later, the sales tax deduction is once again set to expire at the end of 2013. However, the deduction has a vocal fan base among politicians in the nine states that have no broad-based income taxes and rely more on sales taxes to fund public services. Since these states include large states like Florida and Texas, it’s a constituency that is difficult to ignore. Their Congressional delegations argue that it’s unfair for the federal government to allow a deduction for state income taxes, but not for sales taxes, but this misses the larger point. The underlying problem with sales taxes is their impact on low-income families, and itemized deductions don’t help low-income people, who mostly take the standard deduction rather than itemizing. Also, the higher your income, the more the deduction is worth, since the tax benefit depends on your income tax bracket.

The table above includes taxpayer data from the IRS for 2011, the most recent year available, along with data generated from the Institute on Taxation and Economic Policy (ITEP) tax model to determine how different income groups would be affected by the deduction for sales taxes in the context of the federal income tax laws in effect today.

As illustrated in the table, people making less than $60,000 a year who take the sales-tax deduction receive an average tax break of just $100, and receive less than a fifth of the total tax benefit. Those with incomes between $100,000 and $200,000 enjoy a break of almost $500 and receive a third of the deduction, while those with incomes exceeding $200,000 save $1,130 and receive just over a fourth of the total tax benefit.

So the sales tax deduction is both complicated and regressive, not to mention an added burden on the vast majority who don’t use it but have to pay for it (in the form of higher tax rates or skimpier public services). Yet too many of our politicians seem to think “other than those flaws, what’s not to like?”

The good news is that all Congress has to do in order to make this bad dream end is... nothing. Since the tax break is set to expire on New Year’s Day, Congressional tax writers can achieve a small, but meaningful, victory for tax fairness and simplification by simply sitting on their hands.


Rental Housing and the Tax Code


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More than sixty years after President Franklin Delano Roosevelt made “freedom from want” one of the “four freedoms” he sought to guarantee to families worldwide, one important component of Roosevelt’s vision—affordable housing—is further and further away for many low-income families. It’s well-known that the gradually unfolding foreclosure crisis of the past half-decade put homeownership out of reach for millions of American families. But as a new study from Harvard’s Joint Center for Housing Studies (JCHS) shows, many of these families have found that shifting from homeownership to renting has hardly eased the burden of housing costs. The study, America’s Rental Housing: Evolving Markets and Needs, finds that half of all renters nationwide are now paying more than 30 percent of their incomes on rent.

This is significant because housing experts have traditionally viewed the 30-percent-of-income threshold as the upper limit on affordable housing costs—and because the share of American renters paying burdensomely high rents, by this measure, grew faster over the past decade than at any time in the past half century. In 1960, JCHS finds, the share of renter households paying more than 30 percent of their income was 22 percent. In 2000, that share had risen to 38 percent, and in the decade that followed it jumped to 50 percent.

The JCHS measure breaks out families whose rental costs are “moderate burdens” (30 to 50 percent of income) and “severe burdens” (more than 50 percent of income). Disturbingly, the last decade’s jump in unaffordable rents was driven primarily by those with “severe” rental costs. An astonishing 27 percent of American rental households now spend more than half their income on rent alone, up sharply from 19 percent at the turn of the century. 

But as a September 2013 ITEP report notes, an increasing number of state tax systems have a straightforward mechanism in place, the property tax “circuit breaker” credit, that can be tailored to reduce the burden of rental housing cost for families. Circuit breakers are designed to prevent housing costs from exceeding some “excessive” share of income, and nearly half of the states now offer renters at least a small tax credit to keep their rental costs below these excessive levels. Recent expansions in renter tax breaks in Minnesota and the District of Columbia, described in our September report, show that even in a fiscally challenging environment these relatively inexpensive tax credits can be achievable for states.

In fact, circuit breakers administered by state governments may be the most attainable policy solution going forward for mitigating the excessive rental housing costs that millions of low-income families currently face. This is because, as the JCHS report shows, direct rental subsidies have actually been provided to fewer and fewer rent-challenged families even as rental costs have soared. The share of eligible households receiving rental subsidies fell from 27 to 23.8 percent during the past five years alone. In other words, state circuit breakers may be the last backstop for near-poverty families facing severe housing costs.


New CTJ Report: Congress Should Offset the Cost of the "Tax Extenders," or Not Enact Them At All


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Congress should end its practice of passing, every couple of years, a so-called “tax extenders” bill that reenacts a laundry list of tax breaks that are officially temporary and that mostly benefit corporations, without offsetting the cost. A new report from Citizens for Tax Justice explains that none of the tax extenders can be said to help Americans so much that they should be enacted regardless of their impact on the budget deficit and other, more worthwhile programs. It is entirely inappropriate that lawmakers refuse to fund infrastructure repairs or Head Start slots for children unless the costs are offset, while routinely extending these tax breaks without paying for them.

The tax breaks usually considered part of the “tax extenders” were last enacted as part of the deal addressing the “fiscal cliff” in January of 2013. At that time most of the provisions were extended one year retroactively and one year going forward, through 2013. As these tax breaks approach their scheduled expiration date at the end of this year, they are again in the news.

Read the report.


American Express Uses Offshore Tax Havens to Lower Its Taxes


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American Express's Tax Avoidance Opposed by Most Small Businesses

Since 2010, American Express has boosted itself as a supporter of small businesses, by promoting “Small Business Saturday” as a counterpart to Black Friday. But American Express is no friend of American small business. Not only does it charge merchants high swipe fees, but it also uses and wants to expand offshore tax loopholes that most small businesses can’t use and want to close.

A short report from CTJ explains that the company's SEC filings indicate it is holding $8.5 billion in low-tax offshore jurisdictions, including at least 22 offshore subsidiaries in 8 jurisdictions typically identified as “tax havens.” By its own estimates, American Express has avoided paying $2.6 billion in U.S. taxes by holding these profits offshore. To give some perspective, this amount is two and half times the budget of the entire Small Business Administration.

Even on the $21.3 billion in pretax profits that American Express officially earned in the U.S. over the past five years, the company has paid only half the 35 percent federal statutory tax rate.

Read the CTJ report.


New CTJ Report: Reform the Research Tax Credit -- Or Let It Die


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Read the report.

Business lobbyists are pushing Congress to enact tax “extenders” — a bill to extend several temporary tax breaks for business that expire at the end of this year. A new report from Citizens for Tax Justice examines the largest of those provisions, the federal research and experimentation tax credit, a tax subsidy that is supposed to encourage businesses to perform research that benefits society. The report explains that the research credit is riddled with problems and should be either reformed dramatically or allowed to expire.

Created in 1981, the credit immediately became the subject of scandals when it was claimed by businesses that no ordinary American would consider deserving of a tax subsidy (or any government subsidy) for research — like fast food restaurants, fashion designers and hair stylists.

Reforms enacted in 1986 were supposed to prevent these abuses, but there is evidence that corporate tax planners have often out-maneuvered the reforms.

The report explains that many of the problems it describes are the work of accounting firms that wrote the book on abusing the credit — and quite literally wrote the credit regulations as well. The credit’s rules are so lax thanks in large part to Mark Weinberger, a Bush top Treasury appointee who had previously lobbied for a broader definition of “research” while he was at Ernst and Young and, after he left the Treasury, returned to a grateful Ernst and Young where he was eventually promoted to CEO.

Another firm behind abuses of the credit is Alliantgroup, a tax consulting firm with former IRS Commissioner Mark W. Everson serving as its vice chairman and Dean Zerbe, former senior counsel to former Senate Finance Committee Chairman Charles Grassley, as its managing director.

Members of Congress have pushed to remove what reasonable restrictions remain on the research credit. For example, the report explains that Senators Charles Grassley and Amy Klobuchar have both called on the Treasury Department to make it easier for businesses to claim the credit on amended returns for research done in previous years, which cannot possibly achieve the goal of providing an incentive to do research. (A business’s research cannot possibly be the result of a tax incentive that the business was unaware of until years after the research was carried out.)

Meanwhile, a report coauthored by former Clinton adviser Laura D’Andrea Tyson argues that Congress should simply repeal the reforms of 1986 and make legal the abuses that the IRS is trying to stop.

The CTJ report explains that even when the credit is claimed by companies doing legitimate research, it’s difficult to believe that the research was a result of the credit.

Congress should let the research credit expire, and redirect the billions of dollars that it costs into true, basic, truly scientific research, which businesses rarely engage in because the payoffs often take years to arrive.

The report explains that if lawmakers insist on extending the research credit once again when it expires at the end of 2013, they should address three broad problems. If these problems are not addressed, then the credit should be allowed to expire.

Read the report.


This Holiday, The Tax Justice Team Is Thankful For...


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During Thanksgiving we tend to reflect on the year’s events and remember what we’re grateful for. This was a doozy of a year for tax analysts, with the federal government shutting down and state legislatures across the nation threatening deep cuts to major sources of revenue. But, nonetheless, as we look back on the year we have many things to be grateful for:

— That the taxes we all pay help make our communities, our states and country stronger and more vibrant.  Our tax dollars are used to provide public education, clean air and water, well-connected road and public transit systems, safe streets, affordable health care, and income supports for working families.

— That every state that started 2013 with a personal income tax continues to have one, despite efforts in LouisianaNebraska, and North Carolina to dismantle their most progressive form of taxation.

— That poor families in Colorado, Iowa, Minnesota, Oregon, the District of Columbia, and Montgomery County, Maryland will find it a little easier to make ends meet now that lawmakers in those states and localities approved expansions to various low-income tax credits.

— For the Americans who have demanded that Congress address the tax avoidance uncovered by CTJ and carried out by huge corporations like GE, Apple, and Boeing.

— That CTJ’s proposal to increase the Medicare payroll tax for the wealthy, and subject their investment income to the same type of tax, is part of the health care reform law in effect now.

— That Senator Max Baucus’s tax reform proposals (so far) do not give corporations their dream of ending all U.S. taxes on profits they claim to earn offshore and that many members of Congress are signalling a new seriousness about closing loopholes that allow corporations to shift profits into offshore tax havens.

Additionally, we thank our donors and friends for making our work possible.  Unlike other groups, who have one large benefactor, CTJ and ITEP rely on our thousands of supporters for funding.  2013 has been a banner year for CTJ and ITEP as we have seen a dramatic increase in online contributions, but our work has never been so important, so please consider CTJ or ITEP in your holiday giving to help us prepare for the tax fights ahead in 2014.

We wish you all a very happy Thanksgiving!


Why Everyone Is Unhappy with Senator Baucus's Proposal for Taxing Multinational Corporations


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Max Baucus, the Senator from Montana who chairs the committee with jurisdiction over our tax code, has made public a portion of his ideas for tax reform. Multinational corporations that have lobbied Baucus for years are unhappy because his proposal would (at least somewhat) restrict their ability to shift jobs and profits offshore. Citizens for Tax Justice and other advocates for fair and adequate taxes are unhappy because his proposal would not raise any new revenue overall — at a time when children are being kicked out of Head Start and all sorts of public investments are restricted because of an alleged budget crisis.  

The Need for Revenue-Raising Corporate Tax Reform

Materials released from Senator Baucus’s staff explain that this part of his proposal is “intended to be revenue-neutral in the long-term.” The idea behind “revenue-neutral” corporate tax reform is that Congress would close loopholes that allow corporations to avoid taxes under the current rules, but use the savings to pay for a reduction in the corporate tax rate.

Among the general public, there is very little support for this. The Gallup Poll has found for years that more than 60 to 70 percent of Americans believe large corporations pay “too little” in taxes.

There is almost no public support for the specific idea of using revenue savings from loophole-closing to lower tax rates. A new poll commissioned by Americans for Tax Fairness found that when asked how Congress should use revenue from “closing corporate loopholes and limiting deductions for the wealthy,” 82 percent preferred the option to “[r]educe the deficit and make new investments,” while just 9 percent preferred the option to “[r]educe tax rates on corporations and the wealthy.”

Of course, Baucus also says that he “believes tax reform as a whole should raise significant revenue,” which would mean that reform of the personal income tax would raise revenue. But there are questions about how that can work, given that he also wants to reduce personal income tax rates.

A growing number of consumer groups, faith-based groups, labor organizations and others have called on Congress to raise revenue from reform of the corporate income tax, as well as from reform of the personal income tax. In 2011, 250 organizations, including groups from every state, signed a letter to lawmakers calling for revenue-positive corporate tax reform, and a similar letter in 2012 was signed by over 500 organizations.

CTJ has repeatedly demonstrated that most corporate profits are not subject to the personal income tax and therefore completely escape taxation if they slip out of the corporate income tax. We have also explained that the corporate income tax is a progressive tax, which is needed in a tax system that is not nearly as progressive as most people believe.

The Need to Stop Corporations from Shifting Jobs and Profits Offshore

While CTJ and other tax experts are still going through the fine print of Baucus’s proposal to understand its full impact, it is clear to us that the proposal would stop some American corporations from using offshore tax havens to avoid U.S. taxes as successfully as they do today. Some multinational corporations are upset by this, but that doesn’t in itself mean that Baucus’s proposal is extremely strict.

CTJ has demonstrated that several very large and profitable corporations — like American Express, Apple, Dell, Microsoft, Nike and others — are making profits appear to be earned in offshore tax havens so that they pay no taxes on them at all. Any proposal that makes the code even slightly stricter will cause these companies to pay more and, naturally, cause them to complain bitterly. 

These companies are taking advantage of the most problematic break in the corporate income tax, which is “deferral,” the rule allowing American corporations to “defer” (delay indefinitely) paying U.S. corporate income taxes on the profits of their offshore subsidiaries until those profits are officially brought to the United States. Deferral is really a tax break for moving operations offshore or for using accounting gimmicks to make U.S. profits appear to be generated in a country with no corporate income tax (like Bermuda or the Cayman Islands or some other tax haven).

CTJ has long argued that the best solution is to simply repeal deferral and subject all profits of our corporations to U.S. corporate taxes in the year they are earned, no matter where they are earned. (We already have a separate foreign-tax-credit rule that reduces U.S. corporate taxes to the extent that companies pay corporate taxes to other countries, to prevent double-taxation.) Barring this, Congress could at least curb the worst abuses of deferral with the type of reforms proposed by Senator Carl Levin.

The big multinational corporations lobbied Baucus and others to expand deferral into an even bigger break, an permanent exemption for offshore profits, often called a “territorial” tax system, which CTJ and several small business groups, consumer groups and labor organizations have always opposed.

Baucus did not propose either approach. His proposal is somewhat like a territorial tax system except that he would place a minimum tax on the offshore profits of American corporations, which would take away much of the advantage that the corporations thought they might obtain after their years of lobbying. American multinational corporations would be required to pay a minimum level of tax on their offshore profits, during the year that they are earned.

But if a corporation is paying corporate taxes to a foreign government at a rate as high or higher than the U.S. minimum tax, there would never be any U.S. taxes on the profits generated in that country. This means that offshore profits of American corporations would still be subject to a lower tax rate than domestic profits, which may preserve some incentive to shift jobs and profits offshore.

Baucus proposes two different versions of a minimum tax. One would require that profits generated in other countries be taxed at a rate that is at least 80 percent of the regular U.S. corporate tax rate. Baucus has not yet revealed what corporate tax rate he will propose, but if one assumes it is 28 percent, that would mean that the foreign profits must be taxed at a rate of at least 22.4 percent. If they are taxed by the foreign country at a rate of, say, 18 percent, that would mean the corporation would pay U.S. corporate taxes of 4.4 percent. (18+4.4=22.4)

The second option Baucus offers would require that “active” profits generated abroad be taxed at a rate that is 60 percent of the U.S. tax rate while “passive” profits generated abroad be taxed at the full U.S. rate (both before foreign tax credits). The concept of “active” income and “passive” income already is a major part of our tax code, but Baucus would define them differently for this option. The basic idea is that “passive” income (like interest payments, rents and royalties) is income that is extremely easy to move from one subsidiary to another and therefore easily used for tax avoidance if it’s not taxed at the full U.S. rate. 

The Baucus proposal has several other innovations that are too numerous to fully explain here. To give one example, the proposal says that if an American corporation has a subsidiary in another country that earns profits by selling to the U.S. market, those profits would be subject to the full U.S. corporate tax rate in the year that they are earned. How well this would work might depend heavily on how easily this can be administered.

Since there are no public estimates of the revenue impacts of the provisions Baucus has proposed, it is not yet clear how important many of them are. Stay tuned as we examine this proposal and learn more.

Senate Finance Committee Chairman Max Baucus (D-Mont.) today released a draft proposal for changing the way the United States taxes multinational corporations. Robert McIntyre, the director of Citizens for Tax Justice, made the following statement about the draft:

"Senator Baucus promises that his proposals will not increase the paltry federal income taxes that multinational corporations now pay. He also promises that he will later propose changes to the taxes on domestic corporations, which will also be 'revenue-neutral.' And he also says that he 'believes tax reform as a whole should raise significant revenue.'

"That must mean that Baucus plans to propose 'significant' increases in personal income taxes (or some new tax). Will this mean higher taxes on the rich? That seems unlikely, since Baucus is expected to propose a considerably lower top personal income tax rate. So that apparently will leave the middle class and maybe the poor holding the bag.

"That is certainly not what most Americans think tax reform should be about. Lawmakers should instead reform the corporate income tax in a way that raises significant revenue."


Poll Shows Almost No Support for Using Savings from Loophole-Closing to Lower Tax Rates


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A poll commissioned for Americans for Tax Fairness and released on November 13 shows almost no public support for the “revenue-neutral” approach to tax reform advanced by Rep. Dave Camp, the chairman of the House Ways and Means Committee.

One question put to respondents was how Congress should use revenue from “closing corporate loopholes and limiting deductions for the wealthy.”

To this, 82 percent preferred the option to “Reduce the deficit and make new investments,” while just 9 percent preferred the option to “Reduce tax rates on corporations and the wealthy.”

What 9 percent chose is basically the approach to tax reform laid out by House Budget Committee chairman Paul Ryan (in the various version of the infamous “Ryan Plan”) as well as the approach laid out by Ways and Means Chairman Dave Camp. Both have said that tax loopholes and tax breaks should be reduced and/or eliminated and the revenue savings should be used to offset reductions in tax rates, including reducing the top personal income tax rate and the corporate income tax rate to 25 percent.

Of course, Camp and Ryan present their approach as more than simply reducing rates for corporations and wealthy individuals. They will continue to make the case that they can include provisions that help middle-income Americans directly.

But this will be an impossible case for them to make. After Ryan released the most recent version of his plan, CTJ demonstrated that the tax reform section would provide those whose annual income exceeds a million dollars with an average tax cut each year of at least $200,000. In other words, even if Congress eliminated all of the tax loopholes and tax breaks that Ryan put on the table, millionaires would still end up with a huge net tax cut because of the rate reductions. And if the plan would be implemented in a way that is truly “revenue-neutral” as Ryan and Camp claim, that would mean someone further down on the income ladder would have to pay more than they pay today.

The budget resolution approved by the Democratic majority in the Senate in the spring called for raising $975 billion in taxes over a decade from corporations and wealthy individuals. President Obama has taken a disappointing middle ground, arguinug that reform of the personal income tax should raise revenue, but reform of the corporate income tax (and the personal income tax insofar as it affects businesses) should be revenue-neutral.


GE-Sponsored "Territorial" Study Promotes Agenda of Tax Avoidance


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A newly released study sponsored by General Electric and a corporate lobbying group argues in favor of a “territorial” tax system, which House Ways and Means chairman Dave Camp has proposed as part of comprehensive tax reform. Here’s Citizens for Tax Justice director Bob McIntyre’s take on the study.

General Electric and a corporate lobbying group called ACT have sponsored a “study” arguing that our economy would benefit from a “territorial” tax system — one that permanently exempts from U.S. taxes the offshore profits of American corporations. This flies in the face of overwhelming evidence that today many of these profits are really earned in the U.S. but characterized as “offshore” in order to obtain existing tax benefits that would be expanded under a territorial system. The “study” is hopelessly flawed for several reasons.

For starters, the long-term “improvement” in the U.S. economy that the report predicts is so small that it’s a rounding error. The authors claim that permanently exempting offshore corporate profits from tax would increase U.S. GDP by $22 billion a year. That’s an increase of only 0.1%. So even if one believed this would actually happen (we don’t), one wouldn’t care.

More fundamentally, the authors seem to believe that the trillions of dollars that multinational corporations claim they earn in tax havens are floating in baskets in the Caribbean, and are unavailable for use in the United States. But that’s not true. As we’ve learned from the annual reports of companies such as Apple, most of that money is actually invested in the United States, in the stock market, corporate bonds and government bonds. In other words, most of the money is already here. It just hasn’t been taxed.

The authors brush aside the problem that a permanent tax exemption for “foreign” profits would encourage American corporations to work even harder at making their U.S. profits appear to earned in other countries that don’t tax them. The authors simply assert that they don’t think a permanent exemption would be any worse than our current system of indefinite “deferral” of U.S. taxes on such profits. What they don’t mention, however, is that there is a straightforward way to fix our current system.

As CTJ and others have pointed out, the solution is to repeal “deferral” and make multinationals pay tax on their overseas profits, with a credit for taxes paid to foreign governments. This would make profit-shifting to tax havens useless, and would also end tax incentives to move operations abroad. As a bonus, ending “deferral” would reduce the federal budget deficit by over $500 billion over the next ten years, making it much easier to protect essential public programs such as Social Security and Medicare.

General Electric, one of America’s most notorious tax dodgers, wouldn’t like such a reform, of course. That’s probably why it’s never mentioned by the authors of the study.


Let's Face It: Delaware and Other U.S. States Are Tax Havens


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On November 1, The New York Times published on op-ed written by John Cassara, formerly a special agent for the Treasury Department tasked with following money moved illegally across borders to evade taxes or to launder profits from criminal activities. The place where the money often disappeared, he explains, was the state of Delaware, which allows individuals to set up corporations without disclosing who owns them.

“I trained foreign police forces to “follow the money” and track the flow of capital across borders.

During these training sessions, I’d often hear this: “My agency has a financial crimes investigation. The money trail leads to the American state of Delaware. We can’t get any information and don’t know what to do. We are going to have to close our investigation. Can you help?”

The question embarrassed me. There was nothing I could do.

In the years I was assigned to Treasury’s Financial Crimes Enforcement Network, or Fincen, I observed many formal requests for assistance having to do with companies associated with Delaware, Nevada or Wyoming. These states have a tawdry image: they have become nearly synonymous with underground financing, tax evasion and other bad deeds facilitated by anonymous shell companies — or by companies lacking information on their “beneficial owners,” the person or entity that actually controls the company, not the (often meaningless) name under which the company is registered.”

Americans might comfort themselves by thinking that all countries have this problem, but Cassara points out that it is particularly bad in the U.S. He explains that a “study by researchers at Brigham Young University, the University of Texas and Griffith University in Australia concluded that America was the second easiest country, after Kenya, in which to incorporate a shell company.”

This creates enormous problems for U.S. tax enforcement efforts. It’s more difficult to persuade foreign governments to help the IRS track down money hidden offshore when several U.S. states seem to be helping people from all over their world evade taxes owed to their governments. Another problem is that much of the money hidden in shell companies incorporated in Delaware or other U.S. states may be U.S. income that should be subject to U.S. taxes, and/or income generated by illegal activities in the U.S.

The good news is that legislation has been proposed to require states to collect information on the beneficial owners (i.e., whoever ultimately owns and controls a company) when a corporation or LLC is formed and make that information available when ordered by a court pursuant to a criminal investigation. The Incorporation Transparency and Law Enforcement Assistance Act has bipartisan sponsorship in the Senate (including Senators Levin, Feinstein, Grassley and Harkin) and has been referred to the Judiciary Committee. This is an improvement over the last attempt to pass this legislation, in 2009, when it was referred to the Homeland Security and Government Affairs Committee (HSGAC), where it was memorably sabotaged by Delaware’s Senator Tom Carper. Last month, a similar bill was introduced in the House by Rep. Maloney.

Of course, enactment of this legislation would not solve all of the problems with our tax code. For example, it would not address the major problem of big, publicly traded corporations like Apple avoiding taxes by using offshore tax havens in ways that are (probably mostly) legal under the current rules. But, the incorporation transparency legislation would be huge progress in clamping down on tax evasion (the illegal hiding of income from the IRS) by individuals, including those engaged in other criminal activities like drug trafficking, smuggling, terrorist funding and money laundering.

In fact, as we have argued before, it is disappointing that the Obama administration has not put any real energy into advocating for this type of comprehensive legislation. This is not too much to ask for. The Conservative Prime Minister of the UK recently announced that his government would go even farther — not just recording names of owners of all UK corporations and making them available to enforcement authorities, but even automatically making those names public.


Paul Ryan Says No to Any Revenue Increase, Again


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The House and Senate budget conference committee that was formed as part of the deal that ended the federal government shutdown and raised the debt ceiling is unlikely to come to any “grand bargain” that dramatically reduces the deficit or increases public investments. This is because, as House Budget Committee Chairman Paul Ryan reiterated this week, Congressional Republicans will oppose any proposal that includes new revenue.

“Taking more from hardworking families just isn't the answer. I know my Republican colleagues feel the same way,” Ryan said during a meeting of the conference committee on Wednesday. “So I want to say this from the get-go: If this conference becomes an argument about taxes, we're not going to get anywhere. The way to raise revenue is to grow the economy.”

There can be no reasonable “grand bargain,” which is usually interpreted to mean a deal including cuts to programs like Social Security and Medicare, if Congressional Republicans continue to block any and all revenue increases. The U.S. collects lower taxes as a percentage of its economy, than any Organisation for Economic Co-operation and Development (OECD) nations other than Mexico and Chile. Our current federal tax system is projected to collect revenue equal to 18.5 percent of our economy a decade from now. As we have pointed out before, in only a handful of years over the past three decades has federal spending been this low.

There are still useful things the committee might do, in theory, like changing the way sequestration affects certain programs. But the overall level of federal spending may be stuck at its current austere level, which has already done much damage to the economy.

Even the apparent glimmers of interest in revenue among Republicans on the conference committee are misleading. Rep. Tom Cole, for example, raised the possibility of “raising revenue” by enacting a tax amnesty for repatriated offshore profits like the one that was enacted in 2004. The non-partisan Joint Committee on Taxation has already concluded that allowing American corporations to officially bring to the U.S. their offshore profits (many of which are already being invested in the U.S.) would raise revenue for a few years and then lose revenue as companies are encouraged to shift even more profits offshore and wait for the next tax amnesty.

Committees can talk around the issue all they want, but there is simply no getting around the need for increased revenue.


Bruce Bartlett Is Wrong: New Conclusions on the Corporate Income Tax Change Nothing


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One question that comes up in debates about the corporate income tax is who pays it. Even though the corporate tax is officially paid by corporations, all taxes are ultimately paid by actual people.

It is clear that the corporate tax is, in the short term, borne by the owners of capital — meaning it’s paid by the owners of corporate stocks and other business and investment assets because the tax reduces what corporations can pay out as dividends to their shareholders. But those who promote corporate tax breaks sometimes argue that in the long-term the tax is actually borne by labor — by workers who ultimately suffer lower wages or unemployment because the corporate tax allegedly pushes production activity offshore.

Most experts who have examined the question believe that investment is not entirely mobile in this way and that the vast majority of the corporate tax is borne by the owners of capital, who mostly (but not exclusively) have high incomes. This makes the corporate tax a very progressive tax.

For example, the Department of Treasury concluded that 82 percent of the corporate tax is borne by the owners of capital. According to Treasury, this results in the corporate income tax being distributed as illustrated in the table to the right, which shows that the richest one percent of Americans pay 43 percent of the tax while the richest 5 percent pay 58 percent of the tax. These figures were used by CTJ to estimate the distribution of tax increases resulting from corporate loophole-closing in our new comprehensive tax reform proposal.

Treasury’s findings are similar to those of other analysts. The Tax Policy Center, for example, has concluded that 80 percent of the corporate income tax is borne by the owners of capital.

Two weeks ago, the Joint Committee on Taxation (JCT), the official revenue estimators for Congress, announced that it would finally include corporate income taxes in its distributional tables showing the effects of proposed tax changes. This will make JCT’s analyses more consistent with other analyses (including CTJ’s), and will mean that lawmakers will no longer get a free pass in JCT’s distributional tables when they enact regressive corporate tax cuts.

In conjuction with its announcement, JCT published a report estimating that in the short-run all of any change in the corporate tax will benefit or burden owners of capital, while in the long-run 75 percent of a corporate tax change will affect owners of capital (and the rest will affect labor income).

JCT’s conclusion is not all that different from the conclusions of others, but some observers seem to think it is “news” and have misinterpreted its importance. For example, Bruce Bartlett, who typically has a lot of insightful things to say about taxes, wildly misinterprets JCT’s conclusion:

Politically, it is now easier to show that a cut in the corporate tax rate will have benefits that are broadly shared, especially by those with incomes below $30,000. Conversely, it means that the Obama administration’s plan to raise new revenue by closing corporate tax loopholes will have a harder time gaining traction, because much of the burden will fall on those with low incomes.

This is all wrong. Bartlett includes some tables from the JCT report in his piece but fails to include the table that actually matters, which is at the top of page 27 and is titled “Distribution of a $10 Billion per Year Increase in Corporate Income Taxes.” This table shows JCT’s estimates of how much taxes would go up for taxpayers at different income levels in each of the next 11 years. JCT’s figures are in millions of dollars, but with some simple arithmetic, we can calculate the share of a corporate tax increase paid by each of the income groups that JCT presents. We focus on the first and last year that JCT analyzes, to show both the immediate and longer-term impacts.

The result is the table below, which shows that under JCT’s assumptions, over half of a corporate income tax increase would be paid by people with income exceeding $200,000. Well over three-fourths would be paid by people with incomes exceeding $100,000. Only about 6 percent would be paid by the 55 percent of taxpayers earning less than $50,000, whose average tax increase from a $10 billion corporate tax hike would be only $7.

In other words, any provision that raises revenue by closing corporate tax loopholes will have a progressive impact, meaning it will increase the share of taxes paid by high-income people.

Low- and middle-income Americans will be hurt by proposals being debated like cuts to Social Security, Medicare and Medicaid and proposals recently put into effect like sequestration of funds for Head Start. It would be far better for lawmakers to achieve whatever savings they think are necessary by closing corporate tax loopholes, because very little of the resulting tax increase would be paid by low- and middle-income Americans.

A headline in a publication read widely by tax experts (subscription only) this morning screamed “PwC Study: Effective Corporate Tax Rate Topped Statutory Rate From 2004 to 2010.”

The actual report, which was published in a rival publication this week (subscription only), provides three different ways of measuring effective corporate tax rates, and only one tells us anything about how our corporate tax system is working. That measure — the percentage of worldwide profits paid in worldwide taxes for corporations that were profitable from 2008 through 2010, was 22 percent, the study concludes.

This is not surprising at all. CTJ’s study of most of the Fortune 500 corporations that were consistently profitable from 2008 through 2010 found their effective U.S. federal corporate income tax rate on their U.S. profits to be 18.5 percent over that period. The PwC study finds that worldwide profits (not just U.S. profits) were subject to worldwide taxes (including U.S. federal and state taxes plus foreign taxes) of 22 percent.

These two findings are entirely compatible. The effective worldwide tax rate can be expected to be slightly higher than the effective U.S. tax rate that CTJ calculated because the CTJ study also found most of the corporations to pay higher taxes in the other countries where they did business, and because the worldwide rate includes state corporate taxes.

However, PwC’s report also includes two other, odd measures of corporate tax rates that are irrelevant to the policy debate, and tries to get reporters to focus on these irrelevant figures. One includes companies whether they were profitable are not in the years examined. Of course, corporations that are not profitable are not expected to pay the corporate income tax, which is a tax on profits. But including corporations with losses reduces the total amount of profits and makes the effective tax rate (taxes as a percentage of profits) appear much larger.

Another irrelevant measure used by the PwC study includes all corporations with positive taxable income. This measure leaves out corporations that actually are profitable but avoid taxes because of breaks (like depreciation breaks) that reduce their taxable income to below zero. This measure simply excludes the corporations that are most effective at dodging taxes.

The author of the PricewaterhouseCoopers report, Andrew Lyon, was called out by CTJ in 2011 for a report he wrote for the Business Roundtable claiming that U.S. corporations pay higher effective tax rates than corporations of other countries. It appears that this time around, his better angel compelled him to include a straightforward, relevant statistic even while he tries to divert readers’ attention to his report’s other, meaningless findings.


New Comprehensive Tax Reform Plan from Citizens for Tax Justice


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Citizens for Tax Justice released a detailed tax reform plan this week that accomplishes the goals we set out in an earlier report: raise revenue, enhance fairness, and reduce tax incentives for corporations to shift jobs and profits offshore.

A budget resolution approved by the House of Representatives in the spring called for a tax reform that raises no new revenue, while a budget resolution approved by the Senate called for $975 billion in new revenue over a decade. CTJ’s report on goals for tax reform explained why we need even more revenue than the Senate resolution calls for, and the plan we released this week would raise $2 trillion over a decade

Our proposal would accomplish this by ending some of the biggest breaks for wealthy individuals and corporations. The proposal includes the following reforms:

■ Repealing the special, low tax rates for capital gains and stock dividends, as well as the rule allowing accumulated capital gains to escape taxation when the owner of an asset dies.

■ Setting the top tax rate at 36 percent — which would be a significant tax increase on the wealthy because this rate would apply to the capital gains and stock dividends that mostly go to the richest Americans and which are now taxed at much lower rates.

■ Increasing the standard deduction by $2,200 for singles and twice that amount for married couples.

■ Replacing several “backdoor” taxes (like the Alternative Minimum Tax) with President Obama’s proposal to limit the tax savings of every dollar of deductions and exclusions to 28 cents.

■ Repealing several enormous corporate tax breaks, including the rule allowing American corporations to “defer” paying U.S. taxes on their offshore profits until those profits are officially brought to the U.S.

Read our tax reform reports:

Tax Reform Goals: Raise Revenue, Enhance Fairness, End Offshore Shelters
September 23, 2013

Tax Reform Details: An Example of Comprehensive Reform
October 23, 2013


Illinois Ruling Strengthens Case for a Federal Solution to Online Tax Collection


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Last week, the Illinois Supreme Court struck down a state law (commonly called the “Amazon law”) that would have helped solve some of the sales tax enforcement problems surrounding online shopping.  As things currently stand in Illinois (and most other states), traditional retailers with stores, warehouses, or actual employees in Illinois are required to collect  state sales taxes from their customers, while online retailers who don’t employ any Illinois residents (or have any other “physical presence”) are given a free pass.  Online shoppers are supposed to pay the sales tax directly to the state when e-retailers fail to collect it, but few shoppers actually do this in practice.

Illinois, along with nine other states, had tried to strengthen its sales tax enforcement by requiring more online retailers to collect the tax (specifically, those retailers partnering with Illinois-based “affiliates” to market their products).  But this court ruling strikes down Illinois’ law on the grounds that it treats companies partnering with online affiliates differently than companies who advertise in Illinois through traditional media.  According to a majority of the justices, this feature of Illinois’ “Amazon law” violates a federal law enacted in 2000 that bars “discriminatory taxes on electronic commerce.”

In his dissent, Justice Lloyd Karmeier points out that Illinois’ “Amazon law” didn’t actually impose any new taxes—it simply required a larger number of retailers to be involved in collecting and remitting sales taxes that are already due.  Karmeier went on to say that he would have upheld the law – in much the same way that New York’s highest court did with a similar law in that state earlier this year.

With Illinois’ and New York’s courts disagreeing on this issue, legal observers seem to think there’s a growing chance that the U.S. Supreme Court will consider the case next year.  But it’s a shame it’s come to this.  The Supreme Court already made clear over two decades ago that Congress has the authority to set up a more rational, nationwide policy for how states can tax purchase made over the Internet.  The U.S. Senate did exactly that this May with a bipartisan vote in favor of the Marketplace Fairness Act, but so far the U.S. House of Representatives has yet to act on it.  We presume it’s the political disagreements among activists and lobby groups that’s prevented the House from acting so far, but it’s increasingly urgent that states finally be allowed to resolve the mess that is tax collection for online shopping.

Cartoon by Monte Wolverton, available at and courtesy Cagle Cartoons.


Shutdown Ends with Deal Creating Yet Another Budget Panel


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Sixteen days after parts of the federal government were shut down because House Republicans refused to approve a spending plan unless it defunded or delayed health care reform and after coming close to causing a breach of the federal debt limit that would cause a catastrophic default, Congress and the President have enacted legislation to address both problems — for a while.

The deal does not change health care reform in any significant way and provides appropriations to keep the federal government running through January 15. It also suspends the debt ceiling until February 7, likely giving the Treasury until sometime in March before it requires another change in the debt ceiling.

As we have already explained, President Obama and Congressional Democrats had already more or less accepted the level of spending demanded by Republicans (a level of spending that assumed sequestration or other cuts equally large would stay in place) at the beginning of the debate over the continuing resolution (CR) that Congress needed to enact to keep the government running. But House Republicans demanded eliminating or delaying the health care reform law — even though it is funded entirely separately from the programs covered by the CR.

Of course, this all could happen again. The government could partially shut down again on January 15 if spending legislation is not enacted, and the U.S. could default on its debt in March if legislation is not enacted to raise the debt ceiling. Hopefully, Congressional Republicans will accept President Obama’s stance that the debt ceiling is simply not something that should be negotiated at all because a debt default would be so calamitous for the U.S. and the world economy. But there will still be plenty to argue about when Congress turns to the spending legislation needed to avoid another shutdown.

Budget Conference Panel Should Raise Taxes or Go Home

The deal that Congress and the President just enacted sets up a process for Congress to work out its differences and avoid another shutdown, at least in theory. The deal calls for the House and Senate to form a conference committee to work out the differences between the fiscal year 2014 budget resolutions approved in the spring by each chamber, and to report an agreement by December 13.

But the most likely scenario is that the committee will come to no agreement at all by December 13, and Congress eventually will enact another continuing resolution that keeps federal spending at the current harmfully anemic level.

Unlike the President’s debt commission in 2010 (the “Simpson-Bowles commission”) and the Joint Select Committee on Deficit Reduction in 2011 (the “Super Committee”), this panel is the normal conference committee that traditionally works out differences between House-passed and Senate-passed bills.

But it’s very unlikely that the committee can come to any such agreement. The Senate budget resolution is relatively moderate, but the House budget resolution is so ideological that it makes compromise seem impossible.

The House budget resolution, nicknamed the “Ryan Plan” after House Budget Committee Chairman Paul Ryan, calls for overhauling the tax code without raising any new revenue and calls for huge program cuts to balance the budget. The Senate budget resolution, crafted by Senate Budget Committee Chair Patty Murray, would raise $975 billion over a decade, bringing revenue to an extra 0.7 percent of the economy, and also calls for $975 billion in spending cuts.

We have pointed out before that the level of tax revenue projected to be collected under current law (which has recently been adjusted downward from 19.1 to 18.5 percent of the economy) would not have covered federal spending in any but a handful of the past thirty years. It is also wildly unrealistic to assume, as the Ryan plan does, that the deficit can be eliminated without raising revenue from this level.

This is why the spending cuts included in the Ryan plan are so draconian that they involve eliminating health insurance for millions of Americans and making massive cuts to safety net programs for poor and working families.

A CTJ report explains that the few details that the Ryan plan does set out for tax reform could not possibly be enacted without giving millionaires an average tax cut of at least $200,000, while requiring people at lower income levels to make up the difference.

The two resolutions also take different approaches to the deficit. The Senate resolution reduces it but does not eliminate it entirely, which is appropriate given that the projected short-term deficit has dropped sharply. Paul Ryan’s schizophrenic view that deficits are a huge problem but revenue increases cannot be used to address them is reflected in the House resolution’s reliance on enormous, harmful cuts in entitlements and safety net programs to balance the budget.

In theory, Murray and Ryan, who will co-chair the new budget conference committee, could come up with a compromise that does some good, like ending the damage done by sequestration. But any “deal” or “compromise” that fails to raise tax revenue from wealthy individuals and corporations should be rejected. 


Paul Ryan's Latest Idea: Enact the Spending Cuts Proposed by Obama, Ignore His Revenue Proposals


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Congressman Paul Ryan, chairman of the House Budget Committee and former vice presidential candidate, penned an op-ed in the Wall Street Journal this week proposing that Congress might end the government shutdown and avoid a cataclysmic debt default if Democrats agree to cut spending and not raise revenue. There is absolutely nothing new about Rep. Ryan taking this approach. (Although some of his Republican peers are reportedly disappointed that he did not also call for the defunding of health care reform.)

As we recently explained, the President and Congressional Democrats have already completely capitulated to Republican demands on reduced levels of spending to be set out in a “continuing resolution” (CR) to keep the government running. The shutdown resulted from House Republicans’ refusal to approve a CR that did not also defund or delay health care reform, which is an unrelated matter because it is funded separately (and in fact its implementation moves forward even now as much of the government is closed).

We also explained that the need to increase the debt ceiling does not involve increasing the deficit or increasing the size of government, but only carrying out the laws already enacted by Congress. And yet, House Republicans have demanded several policy “concessions” in return for raising the debt limit, which is necessary to avoid a catastrophic default on U.S. debt obligations.

In his Walls Street Journal op-ed, Ryan argues that we should “ask the better off to pay higher premiums for Medicare... reform Medigap plans to encourage efficiency and reduce costs... and ask federal employees to contribute more to their own retirement.”

President Obama, according to Ryan, “has embraced these ideas in budget proposals he has submitted to Congress. And in earlier talks with congressional Republicans, he has discussed combining Medicare's Part A and Part B.”

Others have pointed out that all of President Obama’s comprehensive budget proposals have, in fact, included the entitlement cuts Ryan mentions, but coupled them with increased revenues. For example, CTJ has explained that the President’s proposed budget blueprint for fiscal year 2014 would have raised revenue by $851 billion over a decade (not counting certain revenue-raising provisions that the President unfortunately wants to use to offset tax breaks for businesses). The idea has always been that the President would agree to some spending cuts if Congressional Republicans agree to a revenue increase.

A graph from the Washington Post shows that the offers traded back and forth between President Obama and House Speak John Boehner leading up to the “fiscal cliff” deal all included significant revenue increases as well as cuts in spending. (Yes, even Speaker Boehner offered significant revenue increases initially).

But Ryan ignores all of that. He argues that a deal to end the shutdown and raise the debt ceiling should include a move towards tax reform that would not raise revenue. “Rep. Dave Camp and Sen. Max Baucus have been working for more than a year now on a bipartisan plan to reform the tax code,” Ryan writes. “They agree on the fundamental principles: Broaden the base, lower the rates and simplify the code.”

Actually, one of the most fundamental principles needed in designing a tax code is determining the amount of revenue you want to raise, and Camp and Baucus have not come to any agreement on that. Camp, like Ryan, has repeatedly called for a reform of the tax code that does not raise any additional revenue, while Baucus has called for a revenue increase without being specific about the amount.

A recent CTJ report explains that the level of revenue the federal government will collect under our current tax laws would equal about 18.5 percent of our economy a decade from now. That’s lower than the level of federal spending for all but a few years over the past three decades. With the retirement of the baby-boomers and the need for public investments in infrastructure, education, nutrition and other programs that will help us thrive as an economy and as a nation, it is simply absurd to call for a budget deal that precludes any increase in revenue.


How Congress Can Fix the Problem of Tax-Dodging Corporate Mergers


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On Wednesday, the New York Times examined the practice of some U.S. corporations inverting (reincorporating in another country) by merging with foreign companies, and the extent to which this is done to avoid U.S. taxes. This problem is probably somewhat overblown, but to the extent that it exists, there are straightforward ways Congress can address it.

It used to be that U.S. tax law was so weak in this area that an American corporation could reincorporate in a known tax haven like Bermuda and declare itself a non-U.S. corporation. (Technically a new corporation would be formed in the tax haven country that would then acquire the U.S. corporation.) In theory, any profits it earned in the U.S. at that point should be subject to U.S. taxes, but profits earned by subsidiaries in other countries would then be out of reach of the U.S. corporate tax.

But what sometimes happened in practice was that even the profits earned in the U.S. were made to look (to the IRS) like they were earned in the tax haven country through practices like “earnings stripping,” which involves loading up the American subsidiary company (the real company) with debt owed to the foreign parent (the shell company). That would reduce the American company’s taxable profits and shift them to the tax-haven parent company, which wouldn’t be taxable. A 2007 Treasury study concluded that a section of the code enacted in 1989 to prevent earnings-stripping (section 163(j)) did not seem to prevent inverted companies from doing it.

This problem was to some extent addressed by the “anti-inversion” provisions of the American Jobs Creation Act (AJCA) of 2004, resulting in the current section 7874 of the tax code. The problem highlighted in the Times article is that American corporations today can sometimes get around section 7874 by merging with an existing foreign corporation.

It’s a safe bet that some of these mergers really are motivated partly by a desire to avoid U.S. taxes on profits earned in other countries and also to avoid U.S. taxes on what are really U.S. profits but which are shifted into tax havens through earnings stripping. This may well be the case in the three examples cited of American corporations merging with Irish corporations, as Ireland has a low corporate tax rate and has featured prominently in tax schemes used by Apple and other companies.

In other cases, tax avoidance may not be the only factor in firms deciding to merge — as in the examples cited in the article of an American company merging with a French firm and another merging with a Japanese firm. But even in both of these cases, the new companies are to be incorporated in the Netherlands, which has also featured in tax avoidance schemes used by companies like Google, which suggests that tax avoidance is certainly a sweetener in the deal.

One question not addressed is the extent to which an Obama administration proposal to crack down on earnings stripping by inverted companies would resolve this problem. This proposal would basically apply a stricter version of section 163(j), the provision that is supposed to stop earnings stripping, to inverted companies that manage to avoid being treated as a U.S .corporation under section 7874, the anti-inversion provision enacted in 2004.

Specifically, section 7874 treats an ostensibly foreign corporation as a U.S. corporation for tax purposes if (1) it resulted from an inversion that was accomplished (meaning the U.S. corporation became, at least on paper, obtained by a corporation incorporated abroad) after March 4, 2003, (2) the shareholders of the American corporation own 80 percent or more of the voting stock in the new corporation, and (3) the new corporation does not have substantial business activities in the country in which it is incorporated.

Section 7874 provides much less severe tax consequences for corporations that meet these criteria except that shareholders of the American company now own between 60 percent and 80 percent (rather than 80 percent or more) of the voting stock in the newly formed corporation. Section 7874 does not treat these corporations as U.S. corporations, and that may allow them to save a lot of money by stripping earnings out of their American subsidiary companies. The President’s proposal would apply a stricter version of section 163(j), the provision that is supposed to prevent earnings stripping, to these companies (and to companies that inverted before 2003).

Tax avoidance by the corporations resulting from the mergers discussed in the Times article might be curbed by the Obama proposal. To be affected, the new corporations need to be at least 60 percent owned by the shareholders of the American company and also have no substantial business activities in the country where they are incorporated. For example, the merger between an American company and a French company and the merger between an American company and a Japanese company both resulted in companies incorporated in the Netherlands. They may be over 60 percent owned by the American shareholders and it’s likely that they have no substantial business in the Netherlands, a notorious tax-haven conduit.

But even if the resulting company does not meet these tests, Congress should subject them to the stiffer earnings stripping rule. In other words, the administration’s proposal is arguably too weak. For example, even if one of these mergers results in a company that does have substantial business activities in the country where it is incorporated, why should that company be allowed to strip earnings from its American subsidiary companies?

For that matter, the stricter earnings stripping standard that would be imposed under the President’s proposal is one that reasonably should apply to any foreign-owned company. Among other things, it would bar an American subsidiary company from taking deductions for interest payments to a foreign parent company in excess of 25 percent of its “adjusted taxable income,” which is defined as taxable income plus most certain significant deductions that corporations are allowed to take.

This seems like a reasonable standard to apply regardless of whether or not an inversion has taken place. In other words, Congress should enact an expanded, stronger version of the President’s proposal.


Stop the Presses: Apple Has Not Been Cleared on Tax Avoidance Charges


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Following the Securities and Exchange Commission (SEC)’s announcement (PDF) that it had closed its review of Apple's financial disclosures, headlines like "SEC Agrees That There's Nothing Wrong With Apple's US Taxes" started appearing, giving the false impression that what Apple has somehow been exonerated for is its tax avoidance practices. The reality, however, is that the SEC is now satisfied that Apple is not violating the rules in the disclosure of its tax circumstances to the agency, which has nothing to do with the legal validity of its tax avoidance methods more generally. In addition, the SEC only closed its investigation after Apple agreed to disclose more information on its foreign cash, tax policies and plans for reinvestment of foreign earnings; that makes it pretty clear that the SEC did not judge the company’s previous disclosures adequate.

Much of the news coverage took its cues from a story at the Dow Jones tech news site, All Things D. called “SEC Clears Apple’s Tax Strategy.” To that site’s credit, it corrected the story, explaining that the article "was updated to make it clear that the SEC’s review concerned Apple’s tax disclosures, not the legality of its tax practices under U.S. tax law, which is the purview of the IRS." Also relevant is a Los Angeles Times story that ran several days before All Things D’s. It got no significant pick-up from other news outlets because it rather blandly, and accurately, conveyed that this whole thing was simply a step in a bureaucratic process. Unfortunately, the flurry of stories and columns suggesting that Apple had been wrongly convicted in the court of public opinion are still out there, uncorrected, creating an impression that Apple’s tax practices are pure benevolence.  

Going beyond just the misleading headlines, articles like the editorial in the Wall Street Journal turned the SEC letter into an opportunity to argue that the Senate investigation into Apple was really just a "three-ring media circus" created by Senators to "please their political masters." (Some believe that corporations like Apple are themselves the political masters, but that’s another matter.) But the WSJ editorial misconstrues… everything. The entire point of the Senate investigation and subsequent hearing is that what Apple does may be legal, but it also allows the company to escape paying its fair share in taxes on its high profits.

As Citizens for Tax Justice (CTJ) noted in a May report, Apple has managed to manipulate the international tax system using tax havens to such an extent that it paid almost nothing in income taxes on over $102 billion in foreign profits. While Apple's abuses of the international tax system are particularly striking, CTJ also found that Apple is joined by companies like Dell, Microsoft and Qualcomm in shifting billions of dollars of profits to tax havens. CTJ was unable, however, to include many other companies engaging in these kinds of manipulations because the SEC is not using its authority to require companies to disclose all the information needed to make these determinations about every company. (Ironically, Apple has been more forthcoming than other notorious tax dodgers like Google and GE.) 

Rather than fixating on whether what Apple does is technically legal, the focus needs to be on how lawmakers can put an end to these elaborate tax dodges altogether. The most straightforward way to stop companies from dodging taxes would be to end deferral (PDF), which allows companies like Apple to indefinitely postpone paying taxes on offshore profits. In addition, lawmakers could follow the recommendations from the Senate investigation's report (PDF) on Apple, which proposed tightening transfer pricing rules and reforming the "check-the-box" and "look-through" rules in the Internal Revenue Code.

There is mounting public outrage over the way corporations are avoiding U.S. taxes using offshore tax havens, and one move that would encourage Congress to do the right thing sooner would be for the SEC to tighten its disclosure requirements. The agency should ask for more detail on country-by-country income shifting, in particular, since that’s the direction the world is going anyway.  It’s time for the SEC to start exercising the authority it has, and for Congress to stop the revenue hemorrhage that is corporate tax avoidance.

Cartoon by Mike Smith, courtesy the Press Democrat.


Understanding the Government Shutdown and Debt Ceiling Debates


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In recent weeks, Capitol Hill has been fixated on two major deadlines to pass important legislation. One was October 1, when spending authority ran out for many federal operations causing a partial government shutdown because Congress did not enact legislation to continue to fund those programs. The second deadline, which is much more serious, is October 17, when the U.S. debt will reach the existing $16.7 trillion debt ceiling set in federal law, making it impossible for the federal government to entirely meet obligations like Social Security payments and debt payments.

The government shutdown is tragic because it needlessly closes down public services and removes money from the economy with no benefit whatsoever. Breaching the debt ceiling would be catastrophic because it would lead the U.S. to default on its debt obligations, which is difficult to even fathom because much of the global economy is based on U.S. debt (on U.S. Treasury bonds).

Recent reports are that the government shutdown may continue on for some days and some lawmakers may attempt to link legislation to open the government with legislation to raise the debt ceiling.

The two posts below address some important aspects of this situation that you may not have heard about regarding both the shutdown and the debt ceiling.

What You Need to Know about the Government Shutdown

What You Need to Know about the Debt Ceiling


What You Need to Know about the Government Shutdown


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Congressional Democrats have already capitulated to Republican demands on what level of spending should be enacted to keep the government running.

The last government shutdown, which stretched from the end of 1995 into the start of 1996, happened because the parties disagreed about the size of the spending bills that would keep the government funded. Wherever you stand on that issue, you can logically see how such a disagreement might result in no spending bills being approved and a consequent shutdown of the government.

But this year, Democrats have already agreed to the level of spending proposed by the Republicans, at least in the short-term.

Congress has failed to enact the appropriations bills that are supposed to fund federal government operations (in some cases because Republicans could not support the low funding levels they earlier committed to.) But this happens frequently and is addressed by passage of a “continuing resolution” that provides short-term funding to whatever programs and agencies need it until Congress is able to work something out.

The “continuing resolution” (CR) approved by the Democratic-led Senate would keep the government funded for another six weeks — at the levels demanded by Republicans. As the Center for American Progress has explained, if the spending level of the CR was continued for the whole year it would amount to $986 billion in discretionary spending (the part of government spending Congress must approve each year). That’s roughly the same as the $967 billion called for in the most recent “Ryan budget” (the House budget resolution, named after House Budget Committee chairman Paul Ryan).

That’s considerably lower than the $1,058 billion that the Senate sought to spend in the budget resolution it approved in the spring, and much lower than the $1,203 billion in spending in 2014 that President Obama called for in his first budget proposal.

Once the Republican spending level is agreed to for the short-term CR, it is far more likely that Congress will continue funding the government at that same level for the rest of the year.

Put a different way, Congressional Democrats have basically conceded that sequestration of funding for federal programs under the Budget Control Act (across-the-board spending cuts that no one thinks make any sense) would remain intact for the time being. 

So if the parties essentially agree on the spending level, what is the problem? That brings us to the next point…

Congressional Republicans in the House (or a faction of them) have refused to approve the spending legislation needed to keep the government running unless it also includes provisions on the completely unrelated issue of health care reform.

The House Republicans approved a version of the CR that defunded the Patient Protection and Affordable Care Act (ACA, also known as Obamacare). The health care reform law is not even funded by this spending legislation, and in fact its implementation has proceeded this week even while other parts of the government shut down. In other words, Obamacare is a completely unrelated issue that the House Republicans have tacked onto their CR.

The Democrats in the Senate voted to send a “clean CR,” a CR without the health care provisions, to the House. The House then approved a CR with provisions that would delay for one year, rather than defund, the health care reform. (Many Republicans acknowledged that this delay would eventually lead to repeal of the law.)

In addition to the one-year delay of health care reform, this CR also included a provision that would repeal one piece of that health care reform — a tax on medical devices designed to get some of the businesses that would profit from the law’s expansion of health coverage to contribute to support it. Another CTJ post explains why repealing the medical device tax is a terrible idea.

The Democratic majority in the Senate rejected this Republican House-passed CR as well.

The government shutdown does not actually save money and probably increases the budget deficit.

The shutdown that occurred in 1995-1996 actually cost the government $2 billion in today’s dollars. There are a lot of reasons for this. Furloughed federal workers received back pay for the time they were out of work during the shutdown, but even if federal workers don’t receive back pay this time around, it’s not likely that the shutdown will reduce the deficit. Part of that is because of the various fees (for inspections, visas, entrance at national parks) that won’t be collected, as well as the costs of reopening agencies and programs after they’ve been closed.

A prolonged shutdown could reduce economic output generally — fewer people with paychecks means fewer consumers buying goods, which in turn means fewer profits for businesses and less income for people employed by those businesses. This lost income, and the lost taxes that would be collected on that income, is another reason to worry that the shutdown will increase, rather than decrease, the deficit.


What You Need to Know about the Debt Ceiling


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The need for Congress to increase the existing $16.7 trillion debt ceiling by October 17 does not involve increasing the deficit or spending but rather allows the government to issue debt to cover the costs of legislation that Congress has already enacted — including interest payments on existing debt.

In most governments around the world, any time a legislature approves spending or tax cuts that create a deficit or increase the deficit, the central bank is authorized to issue whatever debt is needed to accomplish this. The U.S. has a strange law, arising mainly out of a historical accident, which bars the federal government’s debt from rising above a certain level — even though the debt may be on course to blow through that limit because of the spending measures and tax cuts already enacted by Congress.

It’s generally been recognized that it would be irrational for Congress to refuse to raise the debt ceiling when it is necessary to carry out legislation already enacted by the same Congress. Past votes against debt ceiling increases were considered “message” votes, cast when it was clear that the increase would pass both chambers and be signed by the President. (And contrary to claims of Congressional Republicans, most deficit-reduction bills are enacted separately from the debt ceiling increases.)

That changed in 2011, when Congressional Republicans refused to increase the debt ceiling unless President Obama gave them “concessions” (which is a strange word to use when these “concessions” are in return for avoiding a debt default that would cause economic catastrophe for all of us). The concession given by the President was basically the spending caps and sequestration enacted as part of the Budget Control Act of 2011.

This event seems to have led Congressional Republicans to believe that threatening to cause the U.S. to default on its debt obligations is an effective and rational way to extract concessions from the President and the Democrats who control the Senate. This leads us to the next point…

House Republicans (or a faction of them) now refuse to raise the debt ceiling (in other words, threaten that the U.S. will default on its debt obligations) unless several unrelated parts of their legislative agenda are enacted.

The House Republicans have drafted a bill to raise the debt ceiling — and also enact a long list of items on the GOP agenda, including but not limited to: approving the Keystone pipeline, enacting tort “reform,” delaying health care reform for a year, means-testing Medicare, abolishing part of the Dodd-Frank financial reform, and setting up a process to enact a tax reform along the lines of the tax provisions in the most recent Ryan budget. This is the same Ryan tax plan that would provide millionaires with an average tax cut of at least $200,000 annually, as explained in a CTJ report

There are extremely strong legal arguments that if the debt ceiling is not raised in time, the President should declare that the debt ceiling itself is illegal and ignore it.

If Congress fails to enact an increase in the debt ceiling before October 17, the President will face laws that contradict each other: on the one hand, laws requiring money to be spent on various programs and debts to be paid, and on the other hand, the debt ceiling which will bar him from borrowing the funds necessary to do this. So if the debt limit is not increased, then President Obama will have to violate the law one way or another. Several government experts and attorneys have examined this issue and concluded that if the President must ignore one of these laws, he should ignore the debt ceiling.

This also makes the most sense as a matter of policy. If the debt ceiling is breached and the President does not ignore it, that will mean that one chamber of Congress can use periodic threats of default to control the executive branch of government, which would completely upend the Constitutional arrangement of separation of powers.


The Medical Device Tax Should Not Be Repealed


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On Sunday, House Republicans passed a budget plan that included the repeal of the medical device excise tax, making the end of this tax one of its demands in the ongoing budget negotiations. As the Center on Budget and Policy Priorities (CBPP) notes, the case against the medical device excise tax is being driven by misinformation put out by the medical device industry, which is hoping to avoid paying their fair share in taxes by getting the tax repealed. (The trade association even wrote the letter 75 members of the House sent to Speaker Boehner asking for the repeal.)

One argument made by the industry against the medical device excise tax is that it singles them out for higher taxes. The reality, however, is that the excise tax was passed as one of many levies on various healthcare sectors to help pay for health insurance expansion.

More vaguely, the industry has argued that the medical device excise tax will threaten "medical innovation and Americans jobs." On its face, this charge is ridiculous considering that healthcare reform will increase demand for devices overall, and that the excise rate on the device is a mere 2.3 percent. That low tax rate should be a drop in the bucket to a medical device company like Medtronic, which had a profit margin of over 20 percent last year. In addition, the excise tax applies to medical devices imported to the US, and does not apply to devices made in the US if they are exported, meaning that the legislation was designed to protect competitiveness and job creation at US medical device companies.

The one critical thing that the medical device tax does accomplish is to raise crucially needed revenue. According to the Joint Committee on Taxation (PDF), the measure will raise about $30 billion over the next ten years. Given that the tax cuts passed earlier this year are already set to double the projected long term national debt, it does not make sense to exacerbate the debt further by passing billions more in tax cuts for an already lucrative industry.

As we noted last year, the push for repeal of the medical device excise tax is yet another example of corporate special interests trying to use their money and influence to increase their profits at the cost of ordinary American taxpayers. Hopefully, lawmakers will resist this relentless lobbying effort not only during immediate budget negotiations but in the long run as well.



Inequality for All, Starring ITEP Board Member Robert Reich, Opens Today


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Professor Robert Reich is a former Secretary of Labor, the star of a new documentary generating all kinds of buzz, and he is also a member of the board of our partner organization, the Institute on Taxation and Economic Policy (ITEP).  His new movie, "Inequality for All," examines the scale and causes of the economic inequality that plagues the United States (including, argues Reich, our democracy). Watch the trailer!

Here at our blog we track new reports and research on the interaction of tax policy and income inequality. We write about the unequal treatment the tax code gives to investment income in contrast to the ordinary income most Americans take home. We tell anyone who will listen there are no freeloaders when it comes to paying taxes – unless you’re talking about the super rich or big corporations.

In a recent interview, Professor Reich explained,

There’s a lot of confusion about inequality. People know that inequality is surging. Many people have a feeling the game is rigged. But they don’t really understand why, how it’s happened and why it is dangerous. Or what they can do about it. This film also provides a kind of guide to people. There’s a social action movement that is connected to the film. We hope that the film really spurs not just a different discussion in this country, but also a movement to take back our economy and democracy.

Click here to find out when "Inequality for All" is coming to a city near you.

And…. If you are in the DC area, join us Monday! After a screening of "Inequality for All" on October 1 at 7:15 PM at E Street Cinema, ITEP's Executive Director Matt Gardner will join a panel to discuss how what should be done to reverse the growth of income inequality locally and nationally.

The Facebook event has the details – see you there!


New Research: Blame Congress, Not Hybrids, for Road-Funding Shortfall


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Next Tuesday the federal gas tax will celebrate an unfortunate anniversary: 20 years stuck at a rate of exactly 18.4 cents per gallon.  A unique new report from our partner organization, the Institute on Taxation and Economic Policy (ITEP), puts this occasion in context and explains why the gas tax has fallen some $215 billion short of what a better-designed tax would be raising. The report shows that Congress’ embarrassing failure to plan for growth in construction costs is the main cause of our transportation funding gaps.

To hear some gas tax naysayers tell it, hybrids and other fuel-efficient vehicles are consuming so little gasoline that the gas tax can’t possibly raise enough money to keep our infrastructure from falling apart.  But ITEP’s new analysis shows that just 22 percent of the gas tax shortfall we’re experiencing today is due to growth in vehicle fuel-efficiency.  By far the more important factor (accounting for the other 78 percent of the shortfall) has been Congress’ decision to stop the gas tax rate from rising alongside normal growth in the cost of asphalt, machinery, and other construction inputs.

Seventeen states, home to over half the country’s population, now use smarter “variable-rate” gas taxes that tend to rise over time.  And we note that the federal government wisely allows other parts of the tax code to rise each year with inflation—like the personal exemption, standard deduction, and Earned Income Tax Credit (EITC), so similarly giving the gas tax room to grow shouldn’t be that hard.

ITEP’s report offers a better path forward, and explains how reform could have prevented our current funding predicament.  By allowing the gas tax rate to grow alongside both construction cost inflation and fuel-efficiency, the federal transportation fund could have been brought from frequent deficits to consistent surpluses.  ITEP finds that more than $215 billion in additional revenue could have been raised over the 1997-2013 period—money that would have made a real difference in putting people to work and improving the efficiency of our transportation network.

Read the report, A Federal Gas Tax for the Future.

 


When Congress Turns to Tax Reform, It Should Set These Goals


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Tax reform is a serious undertaking. The majority party in the House of Representatives now proposes to allow the U.S. to default on its debt obligations — refuse to pay the debts built up by Congress itself — unless it can force through a “tax reform” that raises no new revenue, along with other controversial measures.

Don’t be fooled. Raising the debt ceiling to avoid a default on U.S. debt obligations is a matter that should not require much debate, while tax reform is a completely separate issue that will require a vast amount of discussion and debate. The two do not belong in the same bill.

When lawmakers are serious about tax reform, they should turn to a new report from Citizens for Tax Justice that lays out just what tax reform should accomplish. If Congress is going to spend time on a comprehensive overhaul of America’s tax system, this overhaul should raise revenue, make our tax system more progressive, and end the breaks that encourage large corporations to shift their profits and even jobs offshore.

Read CJT’s new report —
Tax Reform Goals: Raise Revenue, Enhance Fairness, End Offshore Shelters

 

 


Stop Tax Haven Abuse Act Would Curb Some of the Worst Multinational Corporations' Tax Dodges


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Senator Carl Levin (D-Mich.) today introduced the “Stop Tax Haven Abuse Act.” The bill, cosponsored by Senators Sheldon Whitehouse (D-R.I.), Mark Begich (D-Alaska) and Jeanne Shaheen (D-N.H), would curb some of the worst tax dodges used by multinational corporations to avoid their U.S. tax responsibilities.

Multinational corporations are currently allowed to indefinitely “defer” paying U.S. taxes on their foreign profits, even when those profits have been shifted out of the United State and into foreign tax havens.

The Levin bill does not go so far as to repeal “deferral.” But its enactment would be an important step in limiting incentives for multinational corporations to shift jobs and profits offshore. The bill is estimated to raise $220 billion over the upcoming decade.

Among the key features of the “Stop Tax Haven Abuse Act” are the following:

■ There are numerous problems with “deferral,” but it’s particularly problematic when a U.S. company defers U.S. taxes on foreign income even while it deducts the expenses of earning that foreign income to reduce its U.S. taxable profits. The Levin bill would defer corporate tax expenses related to offshore profits until those profits are subject to U.S. tax.

■ Individuals or companies with income generated abroad get a credit against their U.S. taxes for taxes paid to foreign governments, in order to prevent double-taxation. This makes sense in theory. But, unfortunately, corporations sometimes get foreign tax credits that exceed the U.S. taxes that apply to such income, meaning that the U.S. corporations are using foreign tax credits to reduce their U.S. taxes on their U.S. profits, not just avoiding double taxation on their foreign income. The Levin bill would address this problem by requiring that foreign tax credits be computed on a “pooled basis” so that no credits would be allowed for tax-haven profits.

■ Current tax rules allow U.S. corporations to tell foreign countries that their profits are earned in a tax haven, while telling the United States that the tax-haven subsidiaries do not exist. This allows corporations to shift profits out of the U.S. and real foreign countries and avoid paying income taxes to any country. The Levin bill would repeal the “check-the-box” rule and the “CFC look-through rules” that allow such tax avoidance.

■ Multinational corporations can often use intangible assets, such as patents and know-how, to make their U.S. income appear to be “foreign” income. For example, a U.S. corporation might transfer a patent for some product it produces to its subsidiary in a tax-haven country that does not tax the income generated from this sort of asset. The U.S. parent corporation will then “pay” large fees to its subsidiary for the use of this patent. The Levin bill would limit the worst abuses of this tax dodge.

For a more detailed description of the reforms discussed above, see our Working Paper on Tax Reform Options.


An Underfunded IRS Means More Tax Avoiders Get a Pass


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A troubling new report (PDF) released by the Treasury Inspector General for Tax Administration (TIGTA) has revealed that the substantial budget cuts imposed on the IRS meant that it recovered $5 billion less in revenue from enforcement efforts in 2012 compared to 2011. That is, while law abiding citizens and businesses paid the taxes that make up the bulk of our federal revenues, more non-payers, late-payers and under-payers are getting a pass because there aren’t enough IRS staffers to follow up with them.

This drop in revenue should come as no surprise given that the IRS's annual budget was actually cut by some $329 million dollars from Fiscal Year 2010 to 2012. To absorb these cuts, the IRS was forced to get rid of 5,000 front-line enforcement workers – a 14 percent reduction of its enforcement personnel. Not so coincidentally, the TIGTA report notes that this 14 percent reduction in personnel correlates with the 13 percent reduction in revenue from enforcement over the past two years.

As we've noted before, cutting spending on the IRS budget is about the most counterproductive (and we’re being polite – other words are more fitting) ways to reduce the deficit because every one dollar invested in the IRS’s enforcement, modernization and management system saves the federal government as much as $200 in the long run.  So that loss of $5 billion in tax revenue in the TIGTA report amounts to this: every dollar the government cut under the guise of savings actually increases the deficit by $15. How's that for bad math?

Rather than reversing the budget cuts to the IRS in Fiscal Year 2013, Congress allowed the sequester to cut an additional $600 million from the agency’s budget. Looking ahead to Fiscal Year 2014, House Republicans are pushing to carve an additional $3 billion from the IRS, which would represent a cut of almost 25 percent of its entire budget.

Meanwhile, some of those pushing for these cuts view them as somehow a way to fix the IRS after the recent (trumped up) scandal over the process of granting tax exempt status to certain political groups. The reality that these anti-tax conservatives seem to be missing is that that the lack of resources at the agency was one of the main causes of the administrative issues surrounding the scandal, according to the National Taxpayer Advocate (PDF). In other words, cutting the IRS's budget further will almost certainly generate more problems within the agency, not fewer. 

Considering that the $50 billion recovered through enforcement in 2012 is only a fraction of the estimated $450 billion total tax gap, Congress should not only restore the funding lost to years of budget cuts, but significantly increase funding to help us reduce the deficit and pay for critical government investments.   


The Road Show's Over, It's Time to Talk Policy


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What could be more lovable than a bipartisan effort to simplify the tax code? A bipartisan effort to simplify the tax code led by a couple of folksy guys in shirtsleeves who call themselves Max and Dave. No matter that they are two of the most powerful members of Congress, they have managed to craft a successful PR campaign playing on the public’s frustration with political partisanship and endemic dislike of the tax code. 

Max and Dave, of course, are Senator Max Baucus, chair of the Senate Finance Committee, and Representative Dave Camp, chair of the House Ways and Means Committee. Their aw-shucks, let’s-get-a-beer-and-fix-the-tax-code routine has received friendly media coverage inside the Beltway and outside too, during their recently wrapped up road show, which took the pair to Minnesota, Philadelphia, Silicon Valley and Memphis.

But as we have said many, many times, if these two are serious about reforming the tax code, they need to get serious about revenues. Indeed, they need to get serious period.  Stop putting the cart before the horse, quit with the campaign strategy and get down to policy.

Most recently, we made our point on the opinion pages of the Memphis Commercial Appeal, the day before Max and Dave showed up for a friendly roundtable with executives from FedEx, one of the squeakier (PDF) corporate wheels when it comes to tax reform.  Our op-ed, “Most of Us Want Corporate Loopholes Shut,” asked why the Senator and Congressman would visit with FedEx for advice about tax reform.

“The venue is apt because FedEx’s taxpaying behavior is emblematic of the challenges facing anyone seeking to fix the United States’ corporate tax system; it’s awkward because FedEx is a heavy feeder on tax breaks enthusiastically supported over many years by bipartisan majorities in Congress.”

We then explained some of what we’d learned in reviewing FedEx’s latest financial statements.

“For example, my organization, the Institute on Taxation and Economic Policy, found that between 2008 and 2010, FedEx paid an effective federal income tax rate of just 0.9 percent on over $4.2 billion in U.S. profits. With two more years of tax filings now publicly available, we know that over the past five years, FedEx paid an average effective federal income tax rate of just 4.2 percent.”

And we took on that worn-out whine about corporations needing a lower corporate tax rate to be competitive.

“FedEx also demonstrates how the U.S. corporate income tax does not appear to make our companies less “competitive,” despite the insistence of legions of CEOs that it does. Between 2008 and 2010, FedEx paid an effective income tax rate of 45 percent in the foreign countries where it does business. That’s about 50 times higher than the 0.9 percent rate they faced in the U.S. In fact, of the Fortune 500 corporations that were consistently profitable and that had significant offshore profits during that same period, we found that two-thirds actually paid higher taxes in the foreign countries where they do business than they paid in the U.S.”

Our op-ed in Tennessee also made reference to FedEx’s vast offshore holdings and how it drives down its taxes using depreciation. You can read the whole thing here. You can also read a small business owner using the Max and Dave visit at FedEx to make a similar point in a Tennessean op-ed.

Our real target, of course, wasn’t FedEx but rather the tax reforming team of Baucus and Camp.  We use individual corporations’ tax payments as case studies – little narratives to show what’s wrong with the corporate tax code.  As these corporations like to say, their tax avoidance practices are generally legal because Congress made them legal, so we like to show Congress exactly how their laws are working when it comes to corporate tax revenues.

Sometimes, though, companies take it personally when we publicize their actual tax payments, (remember our back and forth with GE last year?).  Sure enough, two days after our op-ed ran in Memphis, a FedEx V.P. took to the same opinion page to defend the company, using many of the shell games we’ve come to expect. For example, we had explained that FedEx paid a 4.2 percent effective federal income tax rate on its U.S. profits over five years. FedEx V.P. Michael Fryt retorted with a ten year total tax payments figure in dollars, cited its total bill for state, local and federal taxes over five years, and then wrote that FedEx’s effective tax rate has been between 35.3 and 37.9 percent since 2010 – and was even 85.6 percent in 2009.

Notice how those effective rate figures he cites are all actually higher than the federal statutory rate of 35 percent? There’s a reason for that.  While we focused on the company’s federal corporate income tax as a percentage of its U.S. profits, like we always do, Fryt is trying to divert attention to other taxes and taxes that FedEx has not paid yet, as companies often do.  It’s like CTJ shows the world an apple and these companies jump up and down demanding the world look at their oranges instead.  

We have a full response to those oranges FedEx was pushing last week right here.  Among other things, it’s a case of Fryt including taxes that FedEx paid not just to the U.S. Treasury but to every country and locality everywhere it does business, which is not something that Max Baucus or Dave Camp or any member of Congress has any control over. Members of Congress are debating how to reform federal taxes, and we assume that FedEx is lobbying (and lobbying) Congress to influence the shape of that same federal corporate income tax, not the taxes it pays to states or cities or foreign countries.

What Congress can legislate is the federal corporate tax rate and the loopholes, breaks and other special provisions that are increasingly eroding corporate taxes as a share of revenues.  Senator Baucus has told his colleagues to assume the tax code will be wiped clean of such expenditures, even as he and Camp continue to meet with corporations who unapologetically defend their favorite tax breaks – and demand lower rates on top of that.  Summer is over and with it, Max and Dave’s road trip. When they are ready to get back to work, we are ready to offer constructive ideas for tax reform that generates the revenues we need and delivers the fairness the public wants.


FedEx Responds to CTJ, Avoids the Tough Questions about Its Taxes


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As Senator Max Baucus and Congressman Dave Camp, the chairmen of the tax committees in the Senate and House, took their tax reform road show to the FedEx headquarters in Memphis last week, CTJ released a short report and op-ed concluding that the company had paid just 4.2 percent of its profits over the previous five years in federal corporate income taxes. FedEx’s Corporate Vice President for Tax, Michael D. Fryt, responded with an op-ed of his own (subscription required) that took issue with CTJ but avoided the actual issue raised.

The stakes are high for FedEx when it comes to tax reform. The company’s CEO has called for a lower federal corporate income tax rate and a “territorial” tax system (a tax system that exempts the offshore profits of corporations). FedEx is participating in several coalitions of corporations lobbying to achieve these goals.

The debate before Congress, (which Baucus and Camp are trying to move in a certain direction) is over how to reform the federal corporate income tax, so CTJ’s report and op-ed examined what FedEx pays in federal corporate income taxes as a percentage of its profits. That is FedEx’s effective federal corporate income tax rate, 4.2 percent.

Fryt’s op-ed attempts to confuse the issue by discussing other taxes, like state and local sales taxes, which the corporation does not even pay. A company like FedEx merely collects sales taxes from customers, who do pay them, and then hands the taxes over to whatever state or local government they are owed to.

Fryt goes on to say that FedEx’s effective tax rate was “36.4 percent in 2013, 35.3 percent in 2012, 35.9 percent in 2011, 37.5 percent in 2010 and 85.6 percent in 2009.” These ludicrous assertions are based on accounting practices and gimmicks that corporations like FedEx use when they make their reports to the SEC, but that obscure what they actually pay in taxes.

These figures include taxes paid to other governments as well as deferred taxes — taxes that FedEx has not actually paid but which it might pay at some point in the future. We believe reasonable people would agree that if we want to understand what a corporation pays in federal corporate income taxes as a percentage of profits over certain years, we should divide the federal corporate income taxes actually paid by the company by the profits actually generated by the company.

Fryt then seems to admit that FedEx’s taxes were low during the years we examine, but then explains that this is because of temporary tax breaks for “accelerated depreciation.” Such breaks allow a company to deduct the cost of equipment much more quickly than it actually wears out, and are the reason FedEx can “defer” a lot of its taxes. Fryt argues that there is broad consensus that such breaks create jobs, but this is actually not true.

The non-partisan Congressional Research Service recently reviewed efforts to quantify the impact of these tax breaks and found that “the studies concluded that accelerated depreciation in general is a relatively ineffective tool for stimulating the economy.” Further, we worry that this break is not truly “temporary” because Congress will keep extending it. Bonus depreciation was enacted in 2002 and has only been allowed to expire for two years, 2006 and 2007, since then.

None of this is to say that there is something immoral or evil about FedEx’s corporate tax practices. Members of Congress are responsible for the tax laws, which FedEx is following as far as we know. Of course, FedEx is lobbying to preserve and even expand its breaks, and it is unsurprising that it manipulates facts and figures to further its goals.


New CTJ Report Explains How Congressman Delaney Misinforms about His Proposed Repatriation Holiday


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In July, a letter signed by thirty national organizations and a report from Citizens for Tax Justice (CTJ) both warned members of Congress about a proposal from Congressman John Delaney of Maryland that would have the effect of rewarding corporations that use offshore tax havens to avoid U.S. taxes. Rep. Delaney’s staff responded with a “rebuttal” that is itself based on misinformation about corporate tax law and about the likely effects of the proposal, which would provide a tax amnesty for offshore profits (often euphemistically called a “repatriation holiday”) for corporations that agree to finance an infrastructure bank.

A new report from Citizens for Tax Justice addresses each point made by Rep. Delaney's "rebuttal" as well as the myth that a huge amount of money is "locked offshore" and waiting for a tax break to lure it back into the U.S. economy.

Read the report.


Payroll Tax Loophole Used by John Edwards and Newt Gingrich Remains Unaddressed by Congress


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For several years, Citizens for Tax Justice has raised the alarm about a payroll tax loophole that allows many self-employed people, including two former lawmakers, John Edwards and Newt Gingrich, to use “S corporations” to avoid payroll taxes. Unfortunately, Congress passed up an opportunity to address this loophole as part of health care reform. Despite a few recent court decisions in favor of the IRS’s attempts to slightly restrict this loophole, it will continue to be a problem until Congress takes our advice and closes it.

The IRS and Tax Court Lets Some Self-Employed People Avoid Social Security and Payroll Taxes — Unless They Go Too Far

Payroll taxes are supposed to be paid on income from work. The Social Security payroll tax is paid on the first $113,700 in earnings (adjusted each year) and the Medicare payroll tax is paid on all earnings. These rules are supposed to apply both to wage-earners and self-employed people.

“S corporations” are essentially partnerships, except that they enjoy limited liability, like regular corporations. The owners of both types of businesses are subject to income tax on their share of the profits, and there is no corporate level tax. But the tax laws treat owners of S corporations quite differently from partners when it comes to Social Security and Medicare taxes. Partners are subject to these taxes on all of their “active” income, while active S corporation owners are supposed to determine what salary they would pay themselves if they treated themselves as employees.

Naturally, many S corporation owners make up a salary for themselves that is much less than their true work income.

The Tax Court recently found that a California man named Sean McAlary attempted to do this in 2006 with an S corporation. He was the sole owner of the company, and he had only a handful of other real estate agents working sporadically for him (as independent contractors).

In 2006, McAlary, through his S corporation, had net income (income left after paying the other agents and paying other expenses) of $231,453. McAlary, who worked 60 hours a week at his company, initially did not report any of this income as compensation for work. And thus he paid no payroll taxes on it. When the IRS challenged him, he later claimed that only $24,000 was compensation for work. The other 90 percent, he said, was profit, not subject to Social Security or Medicare tax.

Logically, one would think that all of the net income of the company was income from work, since it all stemmed from McAlary’s efforts in selling real estate (and to a slight degree, from managing his sales agents).

But the IRS and the Tax Court totally missed the point. First, the IRS decided that less than half of McAlary’s income, only $100,755, was earned income. It came to this figure by multiplying what it guessed should be McLary’s hourly wage times the number of hours he worked. The Tax Court adjusted that down to $83,200 by making up a slightly lower average hourly wage.

Imagine if such a rule applied to ordinary wage earners. “So you were paid $75,000,” the IRS might say, “but you claim you were only worth half that much. Well, you have a point, but we’d say you were worth $50,000.”

By engaging in such fictions, the IRS and the Tax Court go to absurd lengths to give Subchapter S owners a tax break — just not as absurd as the numbers that many of the owners make up.

Medicare Tax Reform Was Missed Opportunity to Close Loophole

Two famous politicians have gained notoriety for low-balling their work income from Subchapter S corporations. The first was former Senator John Edwards, who actually claimed that his name was an asset, and that this asset (rather than his labor) was generating most of the income from his one-man law firm. The second was former House Speaker Newt Gingrich, whose tax returns released during the 2012 Republican primary demonstrated that he, too, took advantage of this dicey tax dodge.

In 2009, as members of Congress considered revenue-raising proposals to pay for health care reform, they eventually looked at an idea from Citizens for Tax Justice to reform the Medicare tax. We proposed that the Medicare tax, which was a flat-rate tax on wages, should have a higher rate for higher-income workers and that Congress create a matching Medicare tax applying to investment income (excluding retirement income) for people above a certain income threshold.

We assumed that if our proposal was adopted, then what was called the “John Edward Loophole” (and later called the “Newt Gingrich Loophole”) would be closed. Essentially all income over a certain threshold (not counting retirement income) would be subject to the Medicare tax one way or the other. Most of the disputes between the IRS and S corporation owners over how much of their income constitutes compensation would become unnecessary.

But Congress had other ideas. Although the health care law as enacted did include most of our proposal, an exception was made for “active income” of S corporations that the owners do not characterize as compensation for work.

This has created a strange situation in which wages and salary are subject to the Medicare tax and even most investment income (capital gains, dividends, interest, royalties, rents, to the extent they make up a taxpayer’s income in excess of $250,000 for married couples and $200,000 for singles) is, effectively, subject to the same tax. But “active income” that can be characterized as not wages and salary still escapes the tax, and thus taxpayers like McAlary still have an incentive to mischaracterize this income.

The most obvious and simplest solution would be for Congress to simply apply the Medicare tax to all “active income” of S corporations.

Some lawmakers have proposed a more limited solution that is overly complicated but which would at least solve part of the problem. Such legislation was first introduced as part of a tax “extenders” bill in 2010 (in order to offset some of the cost of those tax breaks) and a version has been introduced this year by Congressman Charlie Rangel. This legislation would address situations in which an S corporation provides a service and generates most of its profits based on the reputation or skills of three or fewer people. If this rule had been in place, Edwards and Gingrich probably would not have been able to avoid their Medicare taxes. But it might have left the courts to deal with cases like McAlary’s (because his business arguably relied on the skills and reputation of more than three people). 


Max and Dave Do Silicon Valley


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If Senator Max Baucus and Congressman Dave Camp wanted to know what Intel thinks about the corporate tax code, they didn’t need to fly into Silicon Valley this week on the taxpayers’ dime to find out. They could just have sat down in Washington, DC with a lobbyist from the proliferating number of lobby alliances corporate America is subsidizing in advance of tax reform, including the four that Intel belongs to.

If these two self-appointed Congressional tax reformers, a.k.a. Max and Dave, had just pulled up Intel’s own position paper (PDF) on tax policy, they would have learned that it, like most major U.S. corporations, wants a lower tax rate, and to keep its favorite tax breaks, too.

One tax break Intel says it likes is “deferral.” Deferral – a company’s ability to defer paying U.S. taxes on profits generated and kept abroad – is a preferred loophole for companies with intellectual property. It is relatively easy for them (unlike infrastructure-dependent manufacturers) to rent a post office box and call it a “business” anywhere they like, including in tax havens where no business is actually happening. And based on Intel’s public reports, it has six subsidiaries in that most famous of tax havens, the Cayman Islands. Deferral is also one of the most expensive expenditures in the corporate tax code, and will cost U.S. taxpayers around $600 billion in lost revenues over the coming decade.

Intel’s financial reports tell us that it currently has $17.5 billion in profits held offshore (at least for tax and accounting purposes) which are therefore not taxable by the U.S. This doesn’t make Intel an unapologetic offshore cash hoarding champ like Apple, with its $102 billion parked offshore. Intel is more like Google (and HP and Cisco) in that it’s squirreling away billions but won’t report what that money is doing, or where. If the money is working in an economically developed country, Intel is paying taxes on it that would be deducted from its U.S. tax bill if it brought those billions home; if it’s in a tax haven, (say, in a Caymans subsidiary), Intel has paid no taxes on it to any government.

As it is, Intel has paid roughly a 27 percent tax rate on its reported domestic corporate profits over the last five years (and a mere 0.3 percent in state taxes). And while Intel says its taxes are too high, what should worry Americans is that the two lawmakers campaigning for tax reform seem sympathetic to this common corporate complaint. Both have said that the current corporate tax rate should be cut, and Camp promotes a form of deferral on steroids, a “territorial” system, and Baucus won’t rule that out.

Baucus and Camp went to Silicon Valley as part of their “Max and Dave Road Show” to drum up support for tax simplification, promoting their bipartisan folksiness but consistently dodging serious questions about what tax reform should accomplish for the American public.

A simpler tax code is a good idea and certainly a popular one, but it is also popular for corporations to pay their fair share. 83 percent of Americans say we should close corporate tax loopholes, and then use that money to invest in the economy and pay down our debt (rather than cut the corporate tax rate), and with good reason. The corporate taxes we collect as a share of the economy has rarely been lower, and is well below average for the developed world. The effective federal income tax rate that big, profitable companies pay is actually only about half of the statutory 35 percent rate they complain about.

Baucus and Camp didn’t need to give another CEO another platform to ask for a tax cut.  (And now we learn Treasury Secretary Jack Lew is heading to Silicon Valley to visit Facebook. Don’t get us started!) What they need is to ask the public what we want out of tax reform. We want simple, sure, but we also want fair.


Remembering an International Tax Expert and Voice for Tax Justice


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Michael McIntyre, an international tax professor at Wayne State University, former consultant to the United Nations, OECD, and several governments, and the brother of CTJ director Robert McIntyre, passed away on August 14 at the age of 71.

An obituary published in Tax Notes allows Michael McIntyre’s colleagues, among them his brother, to share their thoughts:

“My older brother, Mike, was my mentor and best friend,” said Citizens for Tax Justice Director Robert McIntyre. “He's the reason that I've spent my career in tax policy.”

“Over the past four decades, we collaborated on tax reform proposals that ran the gamut from international, to federal, to state and local, to American Indians. We were soul mates both in tax policy and in life,” Robert McIntyre said. “He made the world a better place, not just for me, the rest of his large extended family, and his many friends, but also for the countless people here in the U.S. and around the world who benefited from the tax policies he promoted.”

Michael McIntyre published a multitude of books and articles on a variety of tax topics. He served as a senior adviser to the Tax Justice Network (TJN) and was the editor of a Web page dedicated to taxation and policy issues for developing countries.

“Mike played a major role in shaping TJN's research and advocacy programs,” said TJN Director John Christensen.

“He has been a trenchant critic of the OECD's dismal lack of progress over umpteen decades, while setting out a cogent case for more radical reform, especially in the direction of combined reporting,” said Christensen. “Mike gave his time and expertise generously, and he'll be remembered fondly for his permanent smile and constant good humor.”

Read the Tax Notes obituary in full.


Washington Post Owner Jeff Bezos Does Not Believe in Taxes


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The news that Jeff Bezos, the founder and CEO of Amazon.com, is going to buy the Washington Post for $250 million is shining the light on Bezos’ politics and Amazon's corporate behavior for obvious reasons. The Washington Post is the paper of record in the nation's capital and exerts extraordinary influence over political debates.  As an organization that follows tax policy, we went looking for the track record on taxes and, as it turns out, Bezos and his company have consistently demonstrated a contempt for taxes and an aggressive interest in avoiding them. Here's what you need to know:

1. Bezos personally donated $100,000 to an anti-income tax initiative group in Washington state.
In 2010, Initiative 1098 would have created a five percent tax on income exceeding 200,000 and a nine percent rate on income exceeding $500,000 for individuals in Washington State. It was designed to pay for a cut in the property and business taxes as well as an increase in education spending, but it was defeated with the help of a $100,000 donation from Bezos to the group Defeat I-1098. Passing I-1098 would have not only helped Washington state get on a more sustainable fiscal footing, but it would have gone a long way to improving the fairness of the nation's most regressive (PDF) state tax system.

2. Amazon bullies states to avoid its responsibility to collect state sales taxes.
In late June, Amazon decided to cut ties with all its affiliates in Minnesota to dodge a new law that would have forced it to begin collecting sales tax in the state. This move made Minnesota just the latest casualty among a whole slew (PDF) of states to feel Amazon’s wrath in its relentless pursuit of preserve its tax advantage over local retailers. Fortunately, the federal Marketplace Fairness Act, which would eliminate this tax advantage by allowing states to require Amazon and other websites collect sales taxes, has passed the Senate and could realistically be enacted in the not-too-distant future.

3. Amazon is a notorious international tax dodger.
Amazon has become infamous for its international tax dodging over the last year since the United Kingdom discovered that it "immorally" paid almost no taxes on over £4.2 billion in sales by routing its operations through Luxembourg (a well-known tax haven country). The happy irony is that Amazon’s audacity helped prompt the recent unprecedented international effort to crack down on this sort of international tax dodging.

4. Bezos could reap substantial tax benefits from the purchase of the Washington Post.
Although it is unclear how much time Bezos plans to spend working at the Washington Post, a report by Reuters notes that if he spends about 10 hours each week on it he could realize substantial tax benefits from the purchase of the newspaper. The reason is that business owners like Bezos are able to deduct any losses (of which the Post has tens of millions) from operating the business they own, thus reducing their overall tax bill.

5. Bezos wanted to start Amazon.com on an Indian reservation to avoid taxes.
Illustrating a particularly brash anti-tax philosophy, in an interview almost 17 years ago, Bezos said that he "investigated whether we could set up Amazon.com on an Indian reservation near San Francisco."  He explained the idea was to get "access to talent without all the tax consequences."  Bezos went on to lament that this was not possible because, "[u]nfortunately, the government thought of that first." In other words, Bezos wanted to fully exploit all the "talent" of  Silicon Valley without having to pay for the public investments that nurture that talent and draw the human and other capital that make businesses profitable and industries blossom. 

Front page photo via Dan Farber Creative Commons Attribution License 2.0 


Surge in Tax-Wary U.S. Expats Renouncing Citizenship? Not Really.


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In its latest attack on the Foreign Account Tax Compliance Act (FATCA), the Wall Street Journal describes in ominous tones the “record” number of individuals who renounced their U.S. citizenship in the last quarter, supposedly driven by FATCA’s reporting requirements, which are designed to prevent tax evasion.

What scary headlines about a “surge” in expatriations leave out, however, is what a miniscule number it really is. Even the six-fold increase this quarter compared to the second quarter of last year meant that only 1,130 people renounced their citizenship in the second quarter of this year. To give some context, this number represents less than 0.02 percent of the estimated six million Americans that live abroad.

Surge in Expatriations to Avoid Taxes!” “US expatriates renounce citizenships at record rate!” Pretty alarming headlines. News coverage of what complying with FATCA actually entails has been misleading and would make you think that the rise in renunciations is driven by the "overly burdensome" rules that are financially crippling US citizens living abroad. The fact is, the primary component of FATCA affecting individuals is the requirement that U.S. citizens with $50,000 or more in foreign financial assets (which does not include housing or other basic non-financial assets) simply have to attach a disclosure statement about their accounts in their yearly tax return.

Whatever inconvenience is caused by these requirements is far outweighed by the benefits to the U.S. and its law abiding taxpayers. According to the Congressional Joint Committee on Taxation (JCT), FATCA's anti-tax evasion measures are estimated to raise $8.7 billion (PDF) over their first decade of implementation (and JCT has a history of  underestimating such tax enforcement measures, too.) Considering that the U.S. loses an estimated $100 billion (PDF) annually due to offshore tax abuses, rather than seeking to curtail FATCA, Congress should expand on these efforts through legislation like the Stop Tax Haven Abuse Act in the House or the CUT Unjustified Loopholes Act (PDF) in the Senate.

While the emigration of every single wealthy person abroad is makes big news (see, for example, coverage of Facebook billionaire Eduardo Saverin or singer Tina Turner), the reality is that the number of renunciations is negligible – especially compared to the number of new citizen naturalizations each year. In fact, 503,104 people have been naturalized in the US since the start of Fiscal Year 2013, which means well over 250 people embracing US citizenship for every one person renouncing it over the past several months.

Asking the few and largely wealthy Americans with substantial offshore financial assets to do a little extra paperwork is not unreasonable when we know that cracking down on offshore tax evaders will bring in revenues to invest in things like roads, schools, healthcare and a quality of life that make the US so attractive to aspiring U.S. citizens.


Politicians Use Tax Breaks to Subsidize Manufacturing. What Could Possibly Go Wrong?


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A recent court ruling allowing the use of the “manufacturing” tax deduction by a company that places candy bars and bottled wine in gift baskets illustrates a truth that politicians hate to admit: The tax code is a lousy tool for encouraging domestic manufacturing.

In a recent column, gadfly journalist David Cay Johnston berated the federal district judge in the case for his interpretation of section 199 of the tax code, which allows a company to deduct 9 percent of its income that is generated from domestic manufacturing. This law was passed by Congress after the World Trade Organization (WTO) found in 2002 that a U.S. tax break meant to encourage exports violated trade treaties and the European Union began to impose sanctions against the U.S. in 2004. Congress decided to replace the illegal tax break with a new one, which became section 199.

By the time it was enacted, this provision had been hijacked by lawmakers who stretched the term “manufacturing” to include things like drilling for oil, constructing buildings, and the architectural services to design those buildings. A footnote in the conference report in the legislation made clear that a company like Starbucks could claim the deduction for roasting coffee beans used in its beverages.

In fact, the definition of manufacturing seems so unclear that we should not be surprised by the recent court ruling regarding gift baskets. Johnston notes that Greg Mankiw, who was President Bush’s chairman of the Council of Economic Advisers, questioned the whole concept in 2004 when he wrote, “When a fast-food restaurant sells a hamburger, for example, is it providing a ‘service’ or is it combining inputs to ‘manufacture’ a product?”

More Tax Breaks for Companies that Already Avoid Taxes?

President Obama has proposed to increase such tax incentives. His “framework” for corporate tax reform, the vague plan for lowering the corporate tax rate to 28 percent that he made public in February of 2012 and proposed again recently with slight changes, would expand the section 199 deduction.

In theory, the President’s proposal could improve things because it would “focus the deduction more on manufacturing activity,” which is a nice way of saying that oil companies and people who assemble gift baskets are on their own.

But the bigger question is whether American manufacturers actually need tax breaks. In 2012, just before Obama announced his “framework,” he told a crowd at a Boeing plant in Washington State that companies that use tax breaks to shift operations and profits offshore ought to pay more U.S. taxes and the revenue “should go towards lowering taxes for companies like Boeing that choose to stay and hire here in the United States of America.” CTJ immediately released figures showing that Boeing’s effective tax rate over the previous decade was negative. In fact, there had only been two years during that decade when Boeing paid anything in federal income taxes.

Fix the Real Problems

A lot of people in the Obama Administration and in Congress (and, of course, K Street lobbyists) have the idea that our corporate tax is too burdensome on companies and that this pushes them to manufacture products offshore. However, CTJ’s major 2011 study of most of the profitable Fortune 500 corporations found that two-thirds of those with significant offshore profits actually paid higher taxes in the other countries where they did business than they paid in the U.S.

The real problem with our international corporate tax rules is the provision allowing American companies to “defer” paying U.S. taxes on the profits of their offshore subsidiaries until those profits are brought to the U.S. And to a large extent, deferral results in American companies disguising their U.S. profits as tax haven profits rather than moving actual operations. And that problem cannot be solved by any amount of tax breaks thrown at companies that claim to “manufacture” something in the U.S.


Chairman of House Tax-Writing Committee Reported to Push Ryan Plan as Tax Reform


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Republican Congressman Dave Camp of Michigan, chairman of the House Ways and Means Committee, reportedly told members of his committee on Wednesday that he would propose a tax reform based on the framework spelled out in the House budget resolution – also known as the “Ryan plan,” because it was developed by House Budget Committee chairman Paul Ryan.

The Ryan plan calls for Congress to enact some very specific tax cuts and offset their costs by eliminating or limiting tax expenditures that are left unspecified. A report from Citizens for Tax Justice concludes that no matter how the details of the plan are filled in, people who make over $500,000 would pay tens of thousands of dollars less each year and people who make over $1 million would pay hundreds of thousands of dollars less each year, than they do under the current tax system.

The Ryan plan calls on Congress to replace the current progressive rates in the federal personal income tax with just two rates, 10 percent and 25 percent, eliminate the AMT, reduce the corporate income tax rate from 35 percent to 25 percent, and enact other tax cuts. It calls on Congress to offset the costs of these tax cuts by eliminating or reducing tax expenditures which are left unspecified, although it is fairly clear that tax breaks for investment income (most of which goes to the richest one percent of Americans) would not be limited in any way.

CTJ’s report found that even if high-income Americans had to give up all the tax expenditures that could be eliminated under the Ryan plan, they would still benefit because the rate reductions under the plan are so significant. If Congress fills in the details of the plan in a way that makes it “revenue-neutral,” which Camp proposes, that can only mean that low- and middle-income people must pay more to make up the difference.

According to The Hill, on Wednesday Camp “told Ways and Means Committee members that he planned to push a framework similar to the tax revamp that was passed in the House GOP budget this year. That plan collapsed the current seven individual tax brackets into two — a 10 percent and a 25 percent bracket — while scrapping the Alternative Minimum Tax. Corporations’ top rate would drop from 35 percent to 25 percent under the plan, which would neither raise nor reduce revenue to the Treasury.”

Congressman Camp and Democratic Senator Max Baucus of Montana, the chairman of the Senate Finance Committee, have recently toured the country, making appearances in Minneapolis, Philadelphia, and suburban New Jersey to promote an overhaul of the tax code even though they do not say what that overhaul would look like during their appearances. As the Republican and Democratic chairmen of the two tax-writing committees, they argue that Congress can enact a bipartisan tax reform. However, the Ryan budget plan, which Camp says will be the basis of his proposal, failed to receive a single Democratic vote when versions of it were approved by the House in 2011, 2012 and 2013.

The Hill also reported that Camp planned to mark up a bill before Congress acts to raise the debt ceiling, and that tax reform could be linked to legislation to raise the debt ceiling. The administration has already announced that it will not negotiate over the debt ceiling, and that instead Congress must pass a “clean” bill to raise the ceiling to prevent a default on U.S. debt obligations and the economic tailspin that would result. 


What the President Really Said about Business Tax Reform


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If lawmakers and the media are confused about the President’s recent proposal to enact a business tax reform tied to a jobs program, it’s because the White House has not explained it very well. The President’s plan has been depicted by some as a major shift away from his long-held position that tax reform affecting corporations (and possibly other types of businesses) should be revenue-neutral.

That’s all wrong. What the President just proposed is not much different from his previous proposals. If the President really had shifted away from his previous position and declared that corporations should contribute more to fund public investments on a permanent basis, we’d be a lot happier about it. But that’s not what the President has said. If anything, his “new” proposal is more of a clarification than a shift in policy.

(See our previous blog post describing the President’s proposal.)

President Obama has consistently said that business tax reform should be “revenue-neutral,” meaning loopholes and special breaks would be eliminated but the revenue savings would all be used to offset a reduction in tax rates paid by corporations, so that, overall, corporations would not pay more than they do today. The fact sheet released by the White House yesterday still describes his approach to reform as “revenue-neutral.”

All that’s changed is that the President acknowledged that some of the revenue raised from eliminating loopholes and special breaks might be temporary, meaning it would only show up in the first few years or so. This temporary revenue increase cannot be used to pay for anything that is permanent (like the reductions in tax rates). Instead, the White House argues, reasonably, that a temporary revenue increase should be used to pay for something that is temporary. The President proposes to use this temporary revenue to fund a temporary jobs program.

Not counting this temporary revenue increase (which might only appear in the first decade or so after a tax overhaul is enacted) the President’s approach would be revenue-neutral. So the President’s approach still falls short of the “revenue-positive” corporate tax reform that CTJ and others organizations have called for.

The President did not elaborate on possible temporary revenue increases, but here’s an example of how it might work. We have argued that businesses, particularly those set up as corporations, often benefit entirely too much from accelerated depreciation and that this does not help our economy. Accelerated depreciation consists of businesses taking deductions for investments in equipment much more quickly than the equipment actually wears out. If Congress repeals or limits accelerated depreciation, that means businesses will have to take these deductions over a longer period of time. They’ll pay more early on, but less in later years because these deductions are spread out over a longer period of time.

This means that some of the revenue raised by repealing or limiting accelerated depreciation simply represents a timing shift. Taxes are paid during this decade that would otherwise be paid in the next decade. On the other hand, some of the revenue increase we see in the first decade would be permanent, occurring again in the next decade and the decade after.

If lawmakers want to offset a permanent reduction in tax rates, only the permanent part of this revenue increase can be used for that. Otherwise the reform will be “revenue-negative,” meaning it loses revenue, in the second decade or third decade after it’s enacted.

There are other types of changes that can lead to timing shifts, resulting in a larger revenue increase in the first decade than in the second or third decade after reform is enacted. For example, if Congress enacts some sort of tax on profits that corporations have accumulated offshore, then part of the resulting revenue gain would be temporary because some of those profits would have been repatriated and taxed at a later date under the current rules. (Keep in mind that here we’re talking about a mandatory tax of some sort on offshore profits, not the sort that would be paid under a “repatriation holiday” for corporations to choose to bring profits back to the U.S. — that sort of proposal loses revenue.)

None of this was explained in the President’s speech on this topic or in the fact sheet released by the White House, but rather was mentioned when Gene Sperling, director of the National Economic Council, explained to reporters that “That money can’t responsibly be used to lower rates because it doesn’t sustain itself.”

So the only new development is that the White House has acknowledged that some of the revenue increase that comes from closing corporate tax loopholes would be temporary and therefore should be used to fund something temporary rather than permanent rate cuts. CTJ’s longstanding view has been that corporations should contribute more on a permanent basis to support the public investments that make this nation prosperous — and that make their profits possible. That’s why we see the President’s proposal as only a slight improvement over his previous one.


Best and Worst Ideas for "Blank Slate" Tax Reform


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Here’s a look at some of the best and worst ideas that Senators submitted as part of the “blank slate” tax reform process proposed by Senators Max Baucus and Orrin Hatch, the chairman and ranking member of the tax-writing committee in the Senate. In theory, the “blank slate” is supposed to be an approach that assumes Congress is drawing the tax code completely from scratch, with no “tax expenditures” (subsidies provided through the tax code) and Senators were asked to explain which tax expenditures they would want to preserve in a newly reformed tax system.

Of course, this list is not comprehensive. Only a minority of Senators both submitted letters to Baucus and Hatch and made their letters public.

While CTJ has criticized Baucus and Hatch’s “blank slate” approach as ignoring the most crucial issue (the dire need for increased revenue), we have also put forward an approach to determine which tax expenditures should be repealed or preserved. Lawmakers should repeal tax expenditures that are regressive and serve no policy goals, preserve tax expenditures like the EITC that are progressive and do accomplish policy goals, and reform those tax expenditures that fall somewhere in between. CTJ has also explained that revenue should be raised by closing tax expenditures for corporations, particularly those that encourage corporations to shift jobs and profits offshore.

Some Senators, like Bernie Sanders and Jay Rockefeller, submitted letters very much in agreement with our approach. Others, like Jeff Flake, Mike Enzi and Mike Crapo, submitted letters that run completely counter to our approach. 

Worst Idea Submitted: Enact the Ryan Plan

Senator Jeff Flake of Arizona proposes that tax reform follow the approach taken by the House budget plan (also known as the Ryan plan), which would replace our progressive personal income tax rates with two rates of just 10 percent and 25 percent, and would lower the corporate income tax rate to 25 percent. CTJ has frequently pointed out that the Ryan plan would reduce taxes on the very rich no matter how the details are filled in, which means low- or middle-income people would have to pay more if the frequently cited goal of revenue-neutrality is to be achieved.

Senator Flake also repeats several myths about how certain types of income, like corporate stock dividends, are allegedly double-taxed. (CTJ has explained why dividends are rarely, if ever, double-taxed.)

Worst Proposal to EXPAND a Tax Expenditure for Corporations: Enact a “Territorial” Tax System

Senator Mike Enzi of Wyoming calls for enactment of his legislation, S. 2091 from the 112th Congress, to create a territorial tax system. In this context, a “territorial” tax system, which is also endorsed by Senator Mike Crapo of Idaho, is a euphemistic way of describing an exemption of offshore corporate profits from U.S. taxes.

Right now, U.S. corporations already get a big break from the rule that allows them to “defer” paying U.S. taxes on the profits of their offshore subsidiaries until those profits are brought to the U.S. “Deferral” is one of the biggest tax expenditures for corporations and, as we have explained, it encourages American corporations to shift operations offshore or engage in accounting gimmicks to make their U.S. profits appear to be generated in a country like Bermuda or the Cayman Islands that won’t tax them. Expanding deferral into an exemption for offshore profits would only increase these terrible incentives.

Worst Proposal to EXPAND a Tax Expenditure for Individuals: Cut Rates for Capital Gains

The letter from Senator Mike Crapo of Idaho lauds the approach to tax reform taken by the Simpson-Bowles plan — which would remove most tax expenditures and adopt a set of low rates — but then proposes to increase the most regressive tax expenditure of all, the preferential income tax rate for capital gains and stock dividends. A recent CTJ report explains that 68 percent of the benefits of this tax expenditure are estimated to go the richest one percent of Americans this year.

Senator Crapo also believes that further reducing the tax rates on capital gains and dividends will “stimulate investment, capital formation, and additional revenue.” Senator Crapo is referring to the argument made by Arthur Laffer that cutting tax rates on capital gains causes revenue to actually increase. The CTJ report explains that this idea has been disproven time and again by the revenue statistics.

Best Ideas for Ending Tax Expenditures: Eliminate Deferral and Preferential Rates for Capital Gains and Dividends

The letter from Senator Bernie Sanders of Vermont includes several proposals, and among the most significant are repeal of deferral and repeal of the preferential personal income tax rate for capital gains and stock dividends for the rich. Senator Sanders cites the two terrible incentives that deferral creates and that have already been mentioned (incentives to shift jobs offshore and make U.S. profits appear to be generated in offshore tax havens) and also explains that the capital gains and dividends break is the reason why wealthy investors like Warren Buffett can pay lower effective tax rates than many middle-income people.

Best Articulation of Key Principles for Tax Reform: Increase Progressivity and Raise Revenue

Senator Jay Rockefeller of West Virginia writes that his “highest priority for tax reform is to reduce income inequality.” While he praises Senators Baucus and Hatch for committing to maintain the tax code’s current progressivity, “we must go further, by requiring the wealthiest individuals and businesses to contribute more.” He writes that, “While incomes for the top one percent soared over the past two decades, effective tax rates for these same individuals declined dramatically,” and that “too many giant corporations pay no tax...”

Senator Rockefeller also writes that some tax expenditures like the EITC provide a “solid foundation for increasing opportunity and upward mobility for people who are low-income...” The recent CTJ report on individual tax expenditures explains how the EITC is the most progressive tax expenditure and is extremely effective at accomplishing policy goals like encouraging work. 

Finally, Senator Rockefeller is refreshingly candid about the uselessness of any debate over tax reform that does not lead to increased revenue. “I can assure you that I will not support tax reform that does not raise real, sustainable revenue,” he writes. “Frankly, I would rather the tax reform process be delayed for another Congress than pass a bad bill this year that raises inadequate revenue.”

Obama’s Plan Wisely Makes Job Creation the Priority, But Unwisely Lets Corporations Off the Hook

President Obama has once again proposed to reform business taxes without raising any revenue in the long-term. He has shifted his position slightly, however, by proposing to raise some revenue in the very short-term from businesses in order to fund infrastructure and other investments that would create jobs.

While the President’s focus on job creation is laudable, the fact that he still refuses to call for permanently increasing the amount of revenue generated from the corporate tax is a big disappointment. Over the last three years, CTJ has written reports and op-eds explaining why reform of the corporate income tax (as well as reform of the personal income tax) should raise revenue. CTJ also published reports explaining that profitable corporations pay an effective tax rate that is far lower than the statutory tax rate of 35 percent (which corporate lobbyists want to lower), and many pay no taxes at all.

A letter to members of Congress that was circulated by CTJ in 2011 and signed by organizations in every state explains that, “Some lawmakers have proposed to eliminate corporate tax subsidies and use all of the resulting revenue savings to pay for a reduction in the corporate income tax rate. In contrast, we strongly believe most, if not all, of the revenue saved from eliminating corporate tax subsidies should go towards deficit reduction and towards creating the healthy, educated workforce and sound infrastructure that will make our nation more competitive.”

A similar letter was signed by even more organizations at the end of 2012 before being sent to members of Congress. 

President Obama’s Same Old Framework, with One Addition

While speaking today at an Amazon facility in Chattanooga Tennessee, President Obama proposed that Congress enact a business tax reform that closes loopholes, “ends incentives to ship jobs overseas, and lowers rates for businesses that create jobs right here in America,” and also simplifies tax filing for businesses. He also proposed to “use some of the money we save by transitioning to a better tax system to create more good construction jobs” and other types of jobs.

A fact sheet released by the White House explains that the tax reform would be “revenue-neutral” in the long-run, because revenue saved from closing loopholes would go towards offsetting the cost of lowering the corporate tax rate from 35 percent to 28 percent (and setting the rate even lower, at 25 percent, for domestic manufacturing).

This is entirely in keeping with the “framework” for business tax reform that the President proposed in February of 2012. CTJ criticized the framework for not calling for increased revenue and for failing to explain which loopholes would be closed to offset the costs of the rate reductions.

The one thing that is new, based on the President's speech in Chattanooga, is his proposal to use a temporary increase in revenue generated from "transitioning to a better tax system" for public investments that create jobs. This new wrinkle is the President's recognition that some of the tax reforms under consideration will raise money in the short run, but will raise far less after they are fully phased in. The President says this short-term revenue should not be counted in calculating whether tax reform is “revenue-neutral,” but should instead be devoted to his “jobs program.”

Such short-term extra revenues could come from changes that alter the timing of tax payments, like limiting accelerated depreciation so that business must wait longer before they can write off the cost of equipment, or from a transition rule for taxing current offshore corporate profit hoards (at an unspecified tax rate). In speaking about this type of timing shift, Gene Sperling, director of the National Economic Council, told reporters that “That money can’t responsibly be used to lower rates because it doesn’t sustain itself.”

Overall, however, the President continues to ignore what should be an essential result of real tax reform: to make corporations pay their fair share of taxes in order to provide the additional revenues we need to provide the public services and investments that our country needs.


Nike's Tax Haven Subsidiaries Are Named After Its Shoe Brands


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Did you know that “Nike Waffle” isn’t just a shoe? It’s also a tax shelter.

Nike, like companies such as Apple, Dell and Microsoft, has a huge stash of offshore profits that it hasn’t paid U.S. taxes on. We also know that Nike, like these other corporations, has paid little or nothing in foreign taxes on these profits either. And we also know that all these companies have many offshore subsidiaries in tax-haven countries.

Nike’s latest annual report, released earlier this week, shows just how blatant multinational corporations have become in using offshore tax havens to avoid their U.S. tax responsibilities.

Nike reports that its cache of “permanently reinvested offshore profits” ballooned from $5.5 billion to $6.7 billion in the past year — meaning that the company moved $1.2 billion of its profits offshore. Nike also discloses that if it were to pay U.S. taxes on its offshore stash, its federal tax bill would be $2.2 billion, a tax rate of just under 33 percent. Since the federal income tax is 35 percent minus any taxes corporations have paid to foreign jurisdictions, it’s easy to deduce that Nike has paid virtually no tax on its offshore profit hoard.

Nike’s long list of offshore subsidiaries includes twelve shell companies in Bermuda alone, ten of which are named after one of Nike’s own shoes! To wit: Air Max Limited, Nike Cortez, Nike Flight, Nike Force, Nike Huarache, Nike Jump Ltd., Nike Lavadome, Nike Pegasus, Nike Tailwind and Nike Waffle!

Why does Nike want to pretend that its product names live in Bermuda? To avoid paying taxes, of course. When multinationals move their brand names and other “intellectual property” to tax-haven subsidiaries, they can have their subsidiaries “charge” the U.S. parent companies big royalties for using the names. These transactions reduce U.S. taxable income and rob state and federal governments of tens of billions of dollars each year.

You might think that American multinational corporations might be just a little embarrassed by such nefarious behavior. But no, they mostly aren’t. Nike, in particular, is thumbing its corporate nose at the IRS and ordinary taxpayers by making its tax avoidance maneuvering so obvious and having a little fun at our expense.

Frontpage Photo of Nike Shoes via Daniel Y. Go Creative Commons Attribution License 2.0 


CTJ Presents the Nuts & Bolts of Corporate Tax Reform


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On July 19, CTJ’s Steve Wamhoff made a presentation to members of the Alliance for a Just Society on the details of corporate tax reform. Because several of the audience members were small business owners, the presentation partly focused on the offshore tax loopholes that give large multinational corporations an unfair advantage over domestic businesses, which are often smaller businesses.

The presentation makes the following points:

1. The U.S. needs more revenue.

2. New revenue must come from progressive sources.

3. The corporate tax is a progressive revenue source.

4. American corporations are undertaxed.

5. One way to get more corporate tax revenue is to close tax loopholes related to offshore tax havens.

6. We must stop current proposals to expand these loopholes (territorial tax system, repatriation holiday).

Needless to say, corporate lobbyists and many of their friends in Congress and even in the Obama administration disagree with many of these points, so the presentation provides a detailed argument for each.

See the slideshow from the presentation, providing details on each of these points.


New CTJ Report: Reforming Individual Income Tax Expenditures


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Congress Should End the Most Regressive Ones, Maintain the Progressive Ones, and Reform the Rest to Be More Progressive and Better Achieve Policy Goals

A new report from Citizens for Tax Justice explains how Senators responding to the “blank slate” approach to tax reform should prioritize which “tax expenditures” to preserve, repeal or reform.

Read the report.

Senators Max Baucus and Orrin Hatch, chairman and ranking member of the tax-writing committee in the Senate, have asked their colleagues to assume tax reform starts from a “blank slate,” meaning a tax code with no tax expenditures (special breaks and subsidies provided through the tax code). Senators are asked to provide letters to Baucus and Hatch by this Friday explaining which tax expenditures they would like to see retained in a new tax code.

CTJ’s report evaluates the ten costliest tax expenditures for individuals based on progressivity and effectiveness in achieving their stated non-tax policy goals — which include subsidizing home ownership and encouraging charitable giving, increasing investment, encouraging work, and many other stated goals.

CTJ’s report concludes that:

1. Tax expenditures that take the form of breaks for investment income (capital gains and stock dividends) are the most regressive and least effective in achieving their stated policy goals, and therefore should be repealed.

2. Tax expenditures that take the form of refundable credits based on earnings, like the Earned Income Tax Credit (EITC) and the Child Tax Credit, are progressive and achieve their other main policy goal (encouraging work) and therefore should be preserved.

3. Tax expenditures that take the form of itemized deductions are regressive and have mixed results in achieving their policy goals, and therefore should be reformed.

4. Tax expenditures that take the form of exclusions for some forms of compensation from taxable income (like the exclusion of employer-provided health insurance and pension contributions) are not particularly regressive and have some success in achieving their policy goals, and therefore should be generally preserved.

Read the report.

In response to public outcry in several nations that multinational corporations are using tax havens to effectively avoid paying taxes in the countries where they do business, the Organization for Economic Co-operation and Development (OECD) has released an “Action Plan on Base Erosion and Profit Shifting.” While the plan does offer strategies that will block some of the corporate tax avoidance that is sapping governments of the funds they need to make public investments, the plan fails to call for the sort of fundamental change that would result in a simplified, workable international tax system.

Most importantly, the OECD does not call on governments to fundamentally abandon the tax systems that have caused these problems — the “deferral” system in the U.S. and the “territorial” system that many other countries have — but only suggests modest changes around the edges. Both of these tax systems require tax enforcement authorities to accept the pretense that a web of “subsidiary corporations” in different countries are truly different companies, even when they are all completely controlled by a CEO in, say New York or Connecticut or London. This leaves tax enforcement authorities with the impossible task of divining which profits are “earned” by a subsidiary company that is nothing more than a post office box in Bermuda, and which profits are earned by the American or European corporation that controls that Bermuda subsidiary.

The OECD’s action plan does make several suggestions that would make it harder for corporations to pretend their profits are all earned in Bermuda, the Cayman Islands or other tax havens, many of which echo proposals offered by President Obama and Senator Carl Levin. For example, the plan clearly targets rules allowing corporations to immediately take deductions for expenses of doing business offshore, when they will not pay taxes on their offshore profits for years or ever. The plan seems to target rules like the U.S.’s “check-the-box,” which allow corporations to give different governments conflicting information about the nature of offshore entities so that their profits are not taxed by any government anywhere.

But we will never really end the ability of corporations to pretend their profits are all “earned” in offshore tax havens so long as developed countries continue to rely on “territorial” tax systems or a “deferral” tax system like the U.S. has.

In his comment on the OECD action plan, Professor Sol Picciotto, a Senior Adviser to the Tax Justice Network, sums it up well:

“The Action Plan contains some ambitious measures, which would produce some benefits if implemented. But its approach is like trying to plug holes in a sieve. The OECD has chosen a road that is strewn with obstacles, and leads in the wrong direction. The OECD has missed this big opportunity to crack open the door to the big reform that the world’s citizens need...”


Citizen Groups Oppose Rep. Delaney's Tax Amnesty for Offshore Corporate Profits


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In a July 16 letter, 30 national organizations asked members of Congress to reject a proposal by Congressman John Delaney of Maryland because it rewards the most aggressive corporate tax dodgers with tax breaks and even gives them control of a new bank that would be created to fund American infrastructure. The plan is one in a history of Congressional schemes to hand corporations a massive tax break under the pretense that it will help the U.S. economy.

Delaney’s proposal would allow a “repatriation holiday,” meaning American multinational corporations could bring their offshore profits to the U.S. without paying the U.S. taxes that would normally be due, on the condition that they purchase bonds to finance a new bank that would be set up to fund infrastructure projects.

A CTJ report released in June explains that much (and perhaps most) of the profits that American corporations claim to hold “offshore” are actually already invested somehow in the American economy.  So, these profits are not truly “offshore,” and the argument that the U.S. economy is somehow deprived of these dollars doesn’t really hold up. 

As the CTJ report explains, the corporations most likely to benefit from Delaney’s proposed “holiday” are not those with actual business activities offshore, because those companies have their offshore assets tied up in things like factories and equipment. The benefits are much more likely to go to those American corporations that have made their U.S. profits appear to be foreign profits by artificially shifting them to subsidiary companies in offshore tax havens. These subsidiaries are often nothing more than a post office box, and the profits they claim to generate are easy to shift around using accounting gimmicks. 

Incredibly, Rep. Delaney’s proposal would allow those corporations repatriating the most offshore profits — that is, those corporations that are most aggressive and successful at tax dodging — the right to nominate the majority of the members of the board controlling the infrastructure bank.

As the report and letter point out, the last tax amnesty for offshore corporate profits, enacted in 2004, did nothing to create jobs and actually benefitted many corporations that cut their American workforces. The Joint Committee on Taxation found that a repeat of this type of measure would lose revenue partly because it would encourage American companies to shift (on paper, using accounting gimmicks) even more profits into offshore tax havens where they are not subject to U.S. taxes.


The Wrongheaded Quest to Shrink the IRS


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Some House Republicans are hitting the IRS when it’s down, using recent scandals (such as they are, anyway) to push through a dramatic 25 percent cut to the IRS budget. Such a devastating cut would not only substantially increase the deficit, but would make the IRS less effective and exacerbate the myriad of problems it already faces, most of which are due to inadequate resources.

Even as its responsibilities have grown dramatically over the past decade, the IRS has continued to get too few resources to do its job, with its budget actually declining 17 percent since 2002 (adjusted for inflation and population). The results of these cuts have not been pretty. Nina Olsen, the National Taxpayer Advocate, noted (PDF) recently that Americans need to "wake up to the consequences of shrinking the IRS budget" and pointed to the fact that the budget cuts had the effect of "virtually eliminating funding for training, reducing taxpayer service to laughable levels (if it weren't so sad), and undertaking enforcement actions before any meaningful attempt to communicate with taxpayers."

Also, cutting the IRS's budget would actually increase the deficit and cost taxpayers more money than it would save. The primary reason – which is pretty obvious when you think about it – is that every dollar the IRS spends on activities like audits, liens, and seizing property brings in more than $10 in revenue. In addition, the IRS is currently making substantial long term investments in its enforcement, modernization and management systems, for which the federal government (i.e., us taxpayers) receives a $200 return for every dollar invested.

Some more hard-core anti-tax conservatives are going beyond the 25 percent cut, like Senators Rand Paul and Tex Cruz, and are calling for abolishing the IRS entirely, accompanied by enactment of a flat tax or some type of national consumption tax. While the mechanics of collecting these taxes without an agency resembling the IRS at the state or national level remain murky, it is clear that such proposals would have the effect of substantially increasing taxes on the poor and middle classes, while at the same time providing massive tax cuts to the wealthiest individuals.

Whatever gripes people may have about the IRS, the reality is that cutting its budget further will only make things worse. The best move for everyone (except maybe tax cheats) would be for lawmakers to significantly increase the IRS's budget going forward, so that it can do its job better – including collecting more revenue.


Congress Members' Home States Have Fiscal Stake in Immigration Reform


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We still don’t know what the U.S. House of Representatives is going to do about immigration reform. The Senate passed a bill with a solid majority, and that legislation enjoys support from the Chamber of Commerce and the labor movement, from George W. Bush and Barack Obama.  What we do know, though, is that members of the House leadership had a nice long talk about it this week because they know the pressure is on them to do something. 

Also this week, the Institute on Taxation and Economic Policy (ITEP) released a study with a bland title, Undocumented Immigrants’ State and Local Tax Contributions, that held some interesting numbers. What it shows is that once unauthorized immigrants are legalized and participating fully in the tax system, state tax revenues will go up, just as the CBO showed they would at the federal level. In fact, the report shows that state tax payments from this population are already at $10.6 billion a year, and that will rise by $2 billion under reform. The report (with a clickable map on the landing page!) shows how those tax dollars are distributed state by state.

According to reports, the following Representatives are now the key players on whatever immigration bill comes from the House. So, in hopes of informing the debate, we are sharing the total amount of estimated annual revenue each of their respective states would get in the form of tax payments from legalized immigrants following reform.

Rep. Mario Diaz-Balart, Florida: $747 million a year, up $41 million
Rep. Raul Labrador, Idaho: $32 million a year, up $5.5 million
Rep. John Boehner, Ohio:  $95 million, up $22 million
Reps Michael McCaul, John Carter and Sam Johnson, Texas: $1.7 billion, up $92 million
Rep. Jason Chaffetz, Utah: $133 million, up $31 million
Reps Eric Cantor and Bob Goodlatte, Virginia: $260 million, up $77 million
Rep. Paul Ryan, Wisconsin: $131 million, up $33 million


Undocumented Immigrants Pay Taxes, and Will Pay More Under Immigration


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As the battle over immigration reform shifts to the U.S. House of Representatives, some opponents of reform continue to focus on the alleged costs of reform. Yet, as a recent Congressional Budget Office (CBO) report reminds us, immigration reform involves both costs (in the form of health, education and other services provided to legalized immigrants) and benefits (in the form of federal taxes paid by newly legal immigrants)—and in the long run, the benefits to the US Treasury from immigration reform are likely to exceed the costs. Put another way, immigration reform will make our federal budget situation better, not worse.

A new report from the Institute on Taxation and Economic Policy (ITEP) shows that state and local budgets will also receive a new jolt of needed tax revenues as a result of immigration reform—and that undocumented taxpayers are already paying a substantial amount of state and local taxes across the nation. The report estimates that these families pay $10.6 billion a year in state and local sales, excise, income and property taxes right now, and would pay an additional $2 billion if these families were, as part of immigration reform, allowed to fully participate in state tax systems.

How are undocumented taxpayers contributing such a large amount right now? The main reason is that the sales and excise taxes that fall most heavily (PDF) on low-income taxpayers don't depend on your citizenship status. Anytime you buy a cup of coffee, a pair of jeans or fill up your tank up with gas, you're paying state and local sales and excise taxes. Property taxes are similarly unavoidable-- especially for renters, who pay them indirectly because landlords generally pass some of their property tax bills on to their tenants in the form of higher rents. And many undocumented taxpayers have state income taxes withheld from their paychecks each year.

The $2 billion in new tax revenues ITEP estimates will be paid by currently-undocumented families as a result of legalization is the product of two factors. Most importantly, legalization will bring all undocumented workers into the income tax system. The best estimates are that about half of undocumented workers are currently “off the books.” But legalization will also likely bring a substantial wage boost for these currently-undocumented workers—further boosting state and local income tax collections as well.

There are, of course, costs associated with immigration reform. Newly-legalized families will (eventually) be able to rely on the same important public services, from education to health care, that U.S. citizens can depend on. This is as it should be. But the scope of these costs will vary substantially depending on how future political battles play out, and are virtually impossible to calculate on a state by state basis at this time – one particular think tank’s lonely insistence that they can notwithstanding. However, the recent CBO report’s finding, that at the federal level these costs would be outweighed by the benefits from new tax revenues, suggest that a similarly positive outcome is likely at the state and local level.  

The undocumented population is notoriously hard to measure —but under any reasonable assumptions about the size and income levels of this population, they are already paying billions of dollars a year to support the state and local services from which they benefit, and will likely pay billions more on legalization.

Front Page Photo via SEIU International Creative Commons Attribution License 2.0

Senators Max Baucus and Orrin Hatch, the Democratic chairman and the ranking Republican of the Senate Finance Committee, have invited all members of the Senate to begin the debate over tax reform without any basic agreement on how much revenue is needed.

Under their “blank slate” approach, they ask their Senate colleagues to start with the assumption that the tax code has no “tax expenditures” (exceptions to the overall rules in the form of tax breaks for specific activities or situations). They ask Senators to tell them which tax expenditures they think are warranted and should be preserved in a newly overhauled tax system.

But the entire point of this exercise, and the entire point of reducing or eliminating tax expenditures, is still not settled. In their letter to colleagues, Baucus and Hatch explain:

While Members of the Senate have different views on whether the revenue raised from eliminating tax expenditures or other reforms should be used to lower tax rates, reduce the deficit, or some combination of the two, we believe that everyone should understand the trade-offs involved when adding tax expenditures back to the tax code.

We will have more to say about how lawmakers should determine which tax expenditures to repeal, preserve or reform. But for now it’s worth noting that the Senate’s top tax-writers believe that lawmakers can and should engage in a detailed discussion of tax provisions before they come to any agreement on something as basic as how much revenue is needed to fund public services and public investments. It’s almost as if they forgot that the whole point of the tax system is to raise revenue.

As we have explained before, our current tax laws will collect revenue equal to 19.1 percent of the economy a decade from now. We know this is unsustainable because even during the Reagan years, government spending equaled between 21.3 percent to 23.5 percent of the economy.

Congressional Democrats seem to be vaguely aware of this but have been far too timid in their tax proposals. Most recently, the budget resolution approved by the Democratic majority in the Senate (with no Republican votes) would raise revenue equal to just 19.8 percent of the economy in a decade, and offers no specifics whatsoever on how to do that.

Meanwhile, the budget resolution approved by the Republican majority in the House of Representatives would raise the same revenue level as current law (19.1 percent of the economy), but would overhaul the tax rules so that the very rich pay a smaller share of the total.

Chairman Baucus has attempted for a long time to move the tax reform conversation forward despite this utter lack of consensus on the basic question of revenue. As we have argued before, “This would be like holding bipartisan talks on immigration reform - if one party supported a path to citizenship while the other party pledged to round up all undocumented immigrants and deport them without exceptions.”

To their credit, Baucus and Hatch, in their letter to colleagues, do mention “maintaining the current level of progressivity.” But we have already shown that America’s tax system overall is just barely progressive as it stands. Putting a great deal of time and energy into an overhaul of the tax code that does not make our tax system more progressive or raise more revenue than the current rules would be a waste of time and certainly would not be “reform.”


What Are the Tax Implications of the Supreme Court Ruling on Marriage Equality?


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The Supreme Court’s decisions striking down the law banning federal recognition of gay marriages, as well as the Court’s decision to not rule on the California ban on gay marriage that the state government has decided not to enforce, make our nation’s tax system fairer and are expected to reduce the federal deficit.

Up until the Supreme Court's ruling, the Defense of Marriage Act (DOMA) prevented the recognition of same-sex marriage for the purposes of more than 1,100 different federal laws, including many tax provisions that consider marriage status when determining an individual’s rights and responsibilities. For example, the original petitioner in the Supreme Court case challenging DOMA, United States v. Windsor, Edith Windsor was forced to pay an additional $363,053 more in federal estate taxes because her same-sex marriage was not recognized for the “surviving spouse” estate tax exemption. Because of the Supreme Court ruling in her favor, however, the IRS will have to pay Windsor back the $363,053 taxes she paid originally, plus interest.

Windsor’s windfall notwithstanding, the overall effect of recognizing gay marriage is likely to reduce the federal deficit. A 2004 report from the Congressional Budget Office (CBO) concluded that if the federal government recognized gay marriages performed in all the states, revenues would increase by around $400 million a year and outlays would decrease by $100 million to $200 million a year. These are relatively small numbers in the context of the federal budget, and the effect of this week’s rulings will be smaller because the Court ruled that the federal government must recognize gay marriages only in the minority of jurisdictions that have legalized it. (Currently, only 31 percent of the US population lives in a state that allows the freedom to marry or honors out-of-state marriages between same-sex couples.)

Nonetheless, CBO’s findings provide an answer to critics like the chairman of the Alabama Republican Party, who complained on Wednesday that Alabama taxpayers would “be on the hook” for funding federal benefits for same-sex spouses.

The reason for the revenue increase is that same-sex spouses will now generally file jointly, whereas previously they were barred from doing so. While the effect of this will increase revenues overall, some same-sex spouses would actually see their tax rates go down, depending on how much each spouse makes.

On the state level, studies have similarly found that allowing same-sex marriage would increase revenue slightly. One think tank found, for instance, that allowing same-sex couples to marry will generate $7.9 million benefits to state coffers in Maine and $1.2 million in Rhode Island.

In the debate over offshore tax avoidance by multinational corporations, one proposal that should not be controversial is country-by-country reporting. The U.S. government does collect information on what profits corporations claim to earn and what taxes they pay in each country, but this information is not available to lawmakers or the public. Some developing countries that suffer the most from outflows of capital into offshore tax havens do not seem to have country-by-country reporting even for the purposes of tax administration.

And so, the declaration issued by the G-8 governments in Northern Ireland last week included a plea that “Countries should change rules that let companies shift their profits across borders to avoid taxes, and multinationals should report to tax authorities what tax they pay where.”

Note that this does not even call for such information to be made public but only available to tax authorities. Given that tax authorities in the U.S. already have this information and corporations like Apple are still able to artificially shift their profits into tax havens, this seems like an awfully small step towards reform. Perhaps if this information was collected and actually made public, then ordinary citizens would find out how many other corporations engage in the same type of offshore tax avoidance and demand reform.

But even a small step in this direction seems to be too much for officials at the U.S. Treasury Department to contemplate, as they rushed this week to assure multinational corporations that their interests would take priority over stopping tax avoidance.

An article appearing Wednesday in Tax Notes Today (subscription required) tells us, “With both the G-8 and the OECD’s base erosion and profit shifting (BEPS) project examining expanded country-by-country reporting by multinationals, Treasury officials say the tax information should not be made available to the public.”

The article quotes Brian Jenn, an attorney-adviser with the Treasury Office of International Tax Counsel, saying “For us it is important that that information be restricted to tax administrations and not be publicly available.”

“Jenn said,” the article informs us, “that in addition to addressing concerns about uncoordinated legislative actions, the BEPS project is meant to ward off aggressive positions by tax administrations that could be ‘disruptive to multinationals.’”

This is an alarming statement because anything that stops offshore corporate tax avoidance would be considered “disruptive” to the companies involved in it. It’s a sure bet that Apple’s CEO Tim Cook would find it “disruptive” if the company had to pay taxes on the profits that it claims are generated by a zero-employee subsidiary that allegedly has no country of residence for tax purposes. This seems to confirm the suspicion that the OECD’s latest talk of working to stop corporate tax avoidance is really an effort to throw a few symbolic bones to the principles of tax fairness in order to prevent any real reform from developing.

Arlene Fitzpatrick, attorney-adviser in the Treasury Office of International Tax Counsel, also commented on the OECD’s BEPS project, saying “We don't want to have a situation where unilateral action is taken and you wind up with a situation where we have double tax rather than double nontax [profits not taxed in any country].” This statement defies belief, as the problem of double-non-taxation (that is, corporate profits being taxed in no country at all) is the defining feature of the current international corporate system and should be the number one focus of international efforts.

Jenn stressed that any solutions would be tailored as narrowly as possible and that solutions could be found in changing the OECD’s “transfer pricing” guidelines, which some countries have adopted for their rules.

But these “transfer pricing” rules are hopeless. They are an attempt to get different parts of a corporation spanning different countries to treat each other as unrelated parties engaging in transactions when they exchange, say, a patent or charge royalties for the use of a patent.

Tax authorities are supposed to apply an “arm’s length” standard, meaning the subsidiaries of a corporate group (the different parts of a multinational corporation) must charge market prices when they engage in these transfers with each other, otherwise (for example) a subsidiary in the U.S. will tell the IRS that it has no profits because it had to pay enormous royalties to its subsidiary in Bermuda (which is probably just a post office box). But what’s the market price for a patent for a brand new invention? Neither the tax authorities nor anyone else has any idea.

As we’ve argued before, the international tax system needs a more fundamental overhaul. But, sadly, the Obama Treasury Department resists fundamental change and resists even telling the public what corporations are claiming to earn and the taxes they pay in other countries so that we can determine how much profit-shifting is taking place.

Congressman John Delaney, a Democrat from Maryland, has proposed to allow American corporations to bring a limited amount of offshore profits back to the U.S. (to “repatriate” these profits) without paying the U.S. corporate tax that would normally be due. This type of tax amnesty for repatriated offshore profits is euphemistically called a “repatriation holiday” by its supporters.

The Congressional Research Service has found that a similar proposal enacted in 2004 provided no benefit for the economy and that many of the corporations that participated actually reduced employment. Rep. Delaney seems to believe his bill (H.R. 2084) can avoid that unhappy result by allowing corporations to repatriate their offshore funds tax-free only if they also fund a bank that finances public infrastructure projects, which he believes would create jobs in America.

A new CTJ report explains why this is a strange and problematic way to fund infrastructure projects. Delaney’s bill will provide the greatest benefits to corporations that are engaging in accounting schemes to make their U.S. profits appear to be generated in offshore tax havens, further encouraging such tax avoidance and resulting in a revenue loss in the long-run. Incredibly, a super-majority of the infrastructure bank’s board of directors would, under Delaney’s bill, be chosen by the corporations that receive the most tax breaks.

Read the CTJ report on Rep. Delaney's proposal.


Immigration Reform Bill Will Substantially Reduce the Deficit, According to CBO


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On Tuesday, the non-partisan Congressional Budget Office (CBO) found that the immigration reform bill currently making its way through the US Senate will actually decrease the deficit by $197 billion between 2014-2023. The report’s findings are at odds with claims by the bills opponents that increased immigration would be fiscally harmful to the US. In fact, House Speaker John Boehner said today that if the CBO is right, those revenues could be a “real boon” for the US.

According to the CBO, the bill would generate $459 billion in additional revenue over the next decade. Allowing unauthorized immigrants to seek legal status would increase tax compliance, and also increase the wages and thus the taxes of those same immigrants. In addition, the CBO found that the increase in the immigrant population and the number of individuals working in the US as a result of the bill would also substantially increase revenue.

Conservative critics of the immigration bill have tried to argue that the bill will drain public resources as immigrants obtain government benefits. The reality, according to the CBO, is that the required increase in government outlays (primarily in the form of refundable tax credits, Medicaid, and health insurances subsidies) would amount to only $262 billion over the next decade, meaning that immigrants as a group would end up paying more than they receive. This would be even more true over the bill's second decade (from 2024-2033), during which the CBO estimates the federal deficit would be decreased by an additional $700 billion.

The bill’s positive fiscal impact could undermine efforts by lawmakers like Senators Marco Rubio, Orrin Hatch, and Jeff Sessions to add amendments to the bill that would create extra obstacles for immigrants in terms of taxes and government benefits.

 


U.S. and Other G8 Governments Move to Prevent Tax Evasion and Avoidance, But Is It Enough?


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On June 18, the leaders of the G-8 countries meeting in Northern Ireland released a declaration that included cracking down on the use of shell corporations for tax evasion and principles related to this goal, while the White House released a national action plan to implement these principles.

Shell Corporations Facilitate Tax Evasion, Money Laundering and Terrorism

Certain countries and certain U.S. states (Delaware most of all) allow individuals to form shell companies that carry out no real business but only serve to hide money and the owners of money from our government or a foreign government.

This is a problem for tax enforcement and other types of law enforcement, because the motivation for forming a shell company is often to evade income taxes owed to the U.S. government or a foreign government or to launder money generated by criminal activity or even to funnel money to terrorists. 

If you think that sounds far-fetched, think again. Viktor Bout, an indicted Russian arms dealer who was the inspiration for the book Merchants of Death (and the Nicholas Cage movie), used Florida, Texas and Delaware companies to carry out his activities, including moving millions in dirty money. In 2008 he was indicted for conspiracy to kill United States nationals, the acquisition and use of anti-aircraft missiles, and providing material support to terrorists. As Senator Carl Levin (D-MI) explained in a 2009 hearing:

In July 2009, Romania filed a formal request with the United States for the names of [Bout's] company’s owners and other information.  But it is unlikely that the United States can supply the names since, as this Committee has heard before, our 50 states are forming nearly 2 million companies each year and, in virtually all cases, doing so without obtaining the names of the people who will control or benefit from those companies. The end result is that a U.S. company may be associated with an alleged arms trafficker and supporter of terrorism, but we are stymied in finding out, in part because our States allow corporations with hidden owners.

Of course, it’s much more difficult to convince other governments to cooperate with our efforts to stop tax evasion, money laundering and terrorist funding when we allow their citizens to establish shell companies in the U.S. that are used for these very purposes.David Cameron, Prime Minister of the United Kingdom, which is currently the president of the G-8

In 2009, Senators Carl Levin (MI-D), Chuck Grassley (R-IA) and Claire McCaskill (D-MO) introduced a bill that would require states to collect information on the beneficial owners (i.e., whoever ultimately owns and controls a company) when a corporation or LLC is formed and make that information available when ordered by a court pursuant to a criminal investigation.

Unfortunately, this legislation, the Incorporation Transparency and Law Enforcement Assistance Act, was stymied by Senator Tom Carper of Delaware, who introduced an alternative bill that would defeat the entire purpose of the reform. (Among other problems, Carper's bill would allow the beneficial owner on record to be a shell company, rather than requiring it to be an actual human being.)

The White House action plan released during this week’s G-8 summit proposes to “advocate for comprehensive legislation” which “could” include several possible provisions, one of which would “define beneficial owner as a natural person…” In English, that means that states would have to record the actual human being who ultimately owns the company being formed. 

The bill previously promoted by Senator Levin and his allies in 2009 would accomplish this, and hopefully they will soon reintroduce their proposal with White House backing to implement the action plan. But, the organization Global Financial Integrity points out that the action plan is “essentially the same action plan the White House has had for two years under the Open Government Partnership, and the administration has yet to really ‘advocate for comprehensive legislation’” like Senator Levin’s proposal.

Some organizations addressing exploitation and impoverishment of developing countries, which suffer disproportionately from illegal outflows of capital into offshore tax havens, praised the move by the G-8 and the member countries that have released action plans.

Global Witness noted that part of the G-8’s success today can be attributed to the government of the United Kingdom, which has historically turned a blind eye to tax evasion in its territories but used its current presidency of the G-8 to push for reform. UK Prime Minister David Cameron has said that he would prefer to go even farther than the reforms being discussed today and make the owners of all incorporated entities known to the public, rather than just to law enforcement officials, an idea supported by Global Financial Integrity.

Addressing Tax Avoidance by Companies Like Apple

The declaration issued from the G-8 meeting in Northern Ireland also addressed other tax issues. While mysterious shell corporations are the tool of individuals seeking to illegally hide their income from governments, well-known, publicly traded corporations are involved in offshore tax practices that are probably not illegal, but ought to be. (Think of Apple’s recently uncovered tax avoidance practices using Ireland as a tax haven.)

The G-8’s declaration addresses this type of corporate tax avoidance, for example by stating, “Countries should change rules that let companies shift their profits across borders to avoid taxes, and multinationals should report to tax authorities what tax they pay where.”

Unimpressed, Global Financial Integrity says in its statement, “While we’re happy that the G8 acknowledges aggressive tax avoidance and profit shifting is a problem, they failed to agree to curtail it in any meaningful way. This is one area where coordination of changes to legal systems is essential to combat the problem, and public reporting by companies of revenues, profits, losses, taxes paid and number of employees in each country in which they operate is necessary in order to see whether those measures are having the desired effect.”

Ultimately, the White House must promote concrete legislative proposals rather than just vague principles. As we saw with the Incorporation Transparency and Law Enforcement Assistance Act, even a bill cracking down on money laundering and terrorist funding (the sort of bill the public would likely support) can be defeated by vested interests without advocacy from the President.


Proponents of "Territorial" Change Defend Apple's Practices at Ways and Means Hearing


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On Thursday morning, a hearing was held on “Tax Havens, Base Erosion and Profit-Shifting,” by the House Ways and Means Committee, whose chairman, Dave Camp (R-MI), has proposed several types of “territorial” tax systems that CTJ has long argued would make these problems worse.

One of the witnesses, Paul Oosterhuis of Skadden Arps, explained that adoption of one of Camp’s proposals would move the U.S. towards taxing only those profits that come from sales generated in the U.S., which is essentially what Apple accomplished through the complicated tax planning revealed by the Senate Permanent Subcommittee on Investigations (PSI) last month. Oosterhuis argued that this would be a good result. He said that the taxes it avoided were really taxes on profits from foreign sales, and therefore of no importance to the U.S.

While Chairman Camp seemed to be in full agreement with Oosterhuis, some of the other committee members and another of the witnesses, Ed Kleinbard, pointed out the problems with his approach. Apple’s profits are generated by its research and development, and 95 percent of that activity takes place in the U.S. (Apple outsources the actual manufacture of its products to other companies.) Rep. Danny Davis of Illinois pointed out that this research and development, which seems to be the source of Apple’s profits, would not be possible without the public investments funded by U.S. taxpayers, like our patent protection and other legal protections, our educated workforce and infrastructure.

Kleinbard also pointed out that the U.S. must prevent our corporations from avoiding foreign taxes as well as U.S. taxes. Partly this is because much of the profits that are characterized as “foreign” are really U.S. profits that our corporations have dressed up as “foreign” using the type of practices Apple engages in. Another reason is that lax rules facilitating avoidance of foreign taxes makes foreign investment more attractive than investment here in the U.S.

The PSI hearing on Apple revealed the tricks used by the company to make its profits appear to be generated abroad so that it can take advantage of the rule allowing U.S. corporations to “defer” paying U.S. taxes on their offshore profits. As CTJ has explained before, a territorial system would expand deferral into an exemption for offshore profits, which would increase the incentives to engage in these practices.


CTJ Fact Sheet: Why We Need the Corporate Income Tax


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Some observers have asked why we need a corporate income tax in addition to a personal income tax. The argument often made is that corporate profits eventually make their way into the hands of individuals (in the form of stock dividends and capital gains on sales of stock) where they are subject to the personal income tax, so there is no reason to also subject these profits to the corporate income tax. Some even suggest that the $4.8 trillion  that the corporate income tax is projected to raise over the next decade could be replaced by simply raising personal income tax rates or enacting some other tax. This is a deceptively simple argument that ignores the massive windfalls that wealthy individuals would receive if there was no corporate income tax.

A new fact sheet from Citizens for Tax Justice explains three of the biggest problems with repealing the corporate income tax:

First, a business that is structured as a corporation can hold onto its profits for years before paying them out to its shareholders, who only then (if ever) will pay personal income tax on the income. With no corporate income tax, high-income people could create shell corporations to indefinitely defer paying individual income taxes on much of their income.

Second, even when corporate profits are paid out (as stock dividends), only a fraction are paid to individuals rather than to tax-exempt entities not subject to the personal income tax.

Third, the corporate income tax is ultimately borne by shareholders and therefore is a very progressive tax, which means any attempt to replace it with another tax would likely result in a less progressive tax system.

Read the fact sheet.


CTJ Report: Apple Is Not Alone


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Recent Congressional hearings on the international tax-avoidance strategies pursued by the Apple Corporation documented the company’s strategy of shifting U.S. profits to offshore tax havens. But a new report from Citizens for Tax Justice (CTJ) documents seventeen other Fortune 500 corporations which disclose information, in their financial reports, that strongly suggests they, too, have paid little or no tax on their offshore holdings. It’s likely that hundreds of other Fortune 500 companies are doing the same, taking advantage of the rule allowing U.S. companies to “defer” paying U.S. taxes on their offshore income.

Read the report, Apple is Not Alone.

Apple is one of eighteen Fortune 500 companies that disclose that they would pay at least a 30 percent U.S. tax rate on their offshore income if repatriated. These 18 corporations have $283 billion in cash and cash equivalents parked offshore.
The report also identifies an additional 235 companies that choose not to disclose the U.S. tax rate they would pay on an almost $1.3 trillion in combined unrepatriated offshore profits.

Taken together, if all of these companies’ offshore holdings were repatriated, it could amount to $491 billion in added corporate tax revenue according to CTJ's calculations.

CTJ concludes that the most sensible way to end offshore tax avoidance of the kind documented in this report would be to end “deferral,” the rule that indefinitely exempts offshore profits from U.S. income tax until these profits are repatriated. Ending deferral would mean that all profits of U.S. corporations, whether they are generated in the U.S. or abroad, would be taxed by the United States – with, of course, a “foreign tax credit” against any taxes they pay to foreign governments to ensure that these profits are not double-taxed.


Proponents of Low Taxes Called Out in Austerity Debate


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The damage that austerity budgets have done to economies in Europe and elsewhere poses a problem for proponents of smaller government and lower taxes. How can they argue that cutting spending and shrinking government is such a good thing when it has it turned out so dismally for other countries? The arguments they employ to escape this problem show that they are far more committed to keeping taxes low than any other goal.

At a May 22 hearing of the Senate Budget Committee, Veronique de Rugy of the Mercatus Center argued that the composition of deficit-reduction programs is what matters. The problem with the recent deficit-reduction packages, she said, is that they relied too much on tax increases. If they had relied on spending cuts, their economies would be doing just fine and they would be more successful at getting their deficits under control.

At a June 4 hearing of the committee, Salim Furth of the Heritage Foundation made the same argument, and went further by claiming that most of the governments thought to have austerity budgets have actually increased their deficits because they increased spending by more than they raised taxes.

But this time at least one of the Senators had done his homework and had looked up the data. Senator Sheldon Whitehouse of Rhode Island presented data from the OECD (which Furth said he was relying on) showing 15 countries in Europe did enact austerity plans (plans reducing their budget deficits) and the spending cuts outweigh the tax increases in 9 of these. In only two of these countries did tax increases make up 60 percent of more of the enacted deficit-reduction.

As Dylan Matthews of the Washington Post’s Wonkblog explains, Furth’s claim that most governments increased deficits is based on each country’s spending as a percentage of Gross Domestic Product (GDP), or to put it differently, spending as a percentage of the overall economy. Some of the countries have seen their GDP shrink so dramatically in recent years that even after serious cutbacks of public services, their spending as a percentage of GDP is higher than before the recession. (At the same hearing, Larry Summers presented a more sensible way of measuring the deficit reduction governments have enacted.)

The bottom line is that governments in Europe and elsewhere are cutting the deficit mainly by cutting spending, and the economy has struggled as a result. Blaming sluggish economic growth on high taxes is simply wrong.


Yes, What Apple's Doing in Ireland May Well Be Legal -- and That's the Problem


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 What Rand Paul Fails to Understand about Apple’s Tax Dodging

During the May 21 Senate hearing on Apple’s tax practices, Senator Rand Paul (R-KY) said lawmakers should apologize for “bullying” the company and holding a “show trial,” and says he’s “offended by the tone” of the hearing. Senator Paul, who took the opportunity to call for a “repatriation holiday,” claims that the debate over tax reform should not include a discussion of the tax avoidance practices of a corporation like Apple.

As CTJ has explained, the hearing uncovered how Apple is shifting profits out of the U.S. and out of other countries and into Irish subsidiaries that are not taxed by any government. Senator Paul’s response is a non-sequitur: What Apple is doing is legal, therefore Congress should not debate whether or not its practices ought to be legal. 

Tax Reform Will Go Nowhere Unless We Know How Specific Companies Like Apple Avoid Taxes

Senators Carl Levin (D-MI) and John McCain (R-AZ), the chairman and ranking Republican of the subcommittee that investigated Apple, understand three basic facts that escape Senator Paul. First, our corporate tax system is failing to do its job of taxing corporate profits. Second, virtually no one in America can understand this until someone explains how individual corporations are dodging their taxes. Third, the corporations themselves will, quite naturally, lobby Congress to defend and even expand the loopholes that facilitate their tax dodging.

Once you understand these three facts, it becomes clear that the only path to tax reform is to explain to the public how certain big, well-known corporations are avoiding taxes.

An abstract debate about corporate tax dodging — a debate that doesn’t mention any specific corporations — is not likely to result in reform. Just look at President Obama’s approach. He first made his proposals to tighten the international corporate tax rules in May of 2009. The proposals made barely a ripple in the media at that time, and no one in Congress even bothered to put them in legislation.

On the other hand, the New York Times expose on GE’s tax dodging in March of 2011 was discussed by everyone from the halls of Congress to the Daily Show. CTJ’s big study of Fortune 500 companies’ taxes — including 30 companies identified as paying nothing over three years — was published in November of that year and is still cited today in debates over our broken tax code.

Senator Levin has legislation to crack down on corporate offshore tax avoidance — which includes several of the President’s proposals. Levin’s bill includes an Obama proposal — reform of the “check-the-box” rules — that Obama himself backed away from under pressure from corporations. (CTJ’s explanation of Levin’s hearing and report on Apple explains how the company took advantage of the current “check-the-box” rules.)

Senator Paul’s Solution: Facilitate More Tax Avoidance with a “Repatriation Holiday”

As CTJ explained last week, Senator Paul proposes a tax amnesty for offshore corporate profits, which proponents like to call a “repatriation holiday.” We explained that Congress tried this in 2004, and the result was simply to enrich shareholders and executives while encouraging corporations to shift even more profits offshore in the hope that Congress will enact more “repatriation holidays” in the future.

Senator Paul’s slight of hand during the hearing was impressive. He argued that instead of targeting Apple, the discussion should be about how to fix the tax system (assuming away the possibility that an explanation of Apple’s practices would facilitate that discussion), and then moved on to argue that the necessary fix is a repatriation holiday. In other words, leave Apple alone because its tax avoidance practices are legal, and instead let’s legalize even more tax avoidance.

This has generally been the position of Apple, which has lobbied for a repatriation holiday. Apple CEO Time Cook argued at the hearing that Apple would like a more permanent change to the tax code, one that would slash taxes (if not eliminate taxes) on offshore profits that are repatriated.

The truth is that corporations like Apple lobby for as many tax loopholes and breaks as they can get. We may see them as morally culpable. Or we may think it’s natural for people to ask for the very best deal they can get — just as children naturally argue for the latest bedtime possible and the largest quantity of ice cream possible. Either way, Senator Paul’s claim that America’s interests can be served by simply giving corporations what they ask for is absurd.

On May 21, top executives of Apple Inc attempted but failed to explain to a Senate committee why Congress should maintain or expand the tax loopholes that allow them to avoid U.S. taxes on billions of dollars in profits.

The Senate Homeland Security and Government Affairs Permanent Subcommittee on Investigations (PSI) issued a report on Apple’s tax practices and held a hearing to ask Apple executives and tax experts about the findings. (PSI has the power to subpoena companies to provide information that would otherwise not become public.)

A CTJ report published the day before the hearing explains how Apple’s public documents indicate that its offshore profits are in tax havens. PSI’s report and hearing have uncovered how Apple pulls this off.

Thanks to PSI’s efforts, we now know that Apple shifts U.S. profits to one of its non-taxable Irish subsidiaries through a “cost-sharing agreement” that gives the subsidiary the right to 60 percent of profits from its intellectual property, and that Apple also shifts profits from other foreign countries where it sells its product to its non-taxable Irish subsidiaries.

The Irish subsidiaries have few if any employees and don’t do much of anything, but Apple Inc has a huge incentive to claim that a lot of its profits are generated by these subsidiaries because Ireland is not taxing them. So, Apple uses the “cost-sharing agreement” to convert U.S. profits to non-taxable Irish profits for tax purposes, and likewise manipulates transfer-pricing rules and other tax provisions to turn profits from other countries into untaxed Irish profits.

Avoiding U.S. Corporate Taxes Through “Cost-Sharing Agreement”

Under the cost-sharing agreement, an Irish subsidiary that had no employees until 2012 (it now has about 250) has the rights to the majority of profits from Apple’s intellectual property, even though virtually all of that intellectual property is developed by Apple Inc (the parent company) in the United States. Since almost all of the actual manufacturing of Apple’s physical products is outsourced to other companies, this intellectual property is the real source of Apple’s profits.

It’s absurd to think of the so-called “cost-sharing” as an “agreement,” because the parties are Apple Inc and a subsidiary that it owns and controls — in other words, an agreement between Apple and itself. As the tax experts testifying at the hearing explained, there is no way that Apple would enter into such an “agreement” with an entity that it did not completely control.

Because the Irish subsidiary is controlled and managed by Apple Inc in the United States, Irish tax law treats it as a U.S. corporation not subject to Irish tax. But because the Irish subsidiary is technically incorporated in Ireland, the U.S. treats it as an Irish corporation, on which U.S. taxes are indefinitely “deferred.” Thus, neither nation taxes the profits that Apple has shifted to its Irish subsidiary.

So despite the fact that Apple does virtually all of the work responsible for its global profits in the U.S., it gets to tell the IRS that the majority of its profits are in Ireland, where they are not subject to Irish tax, while indefinitely “deferring” U.S. taxes on those profits.

Avoiding Taxes Outside the Americas by Manipulating Transfer Pricing Rules

The end of PSI’s report informs us that in 2011, Apple’s tax-planning “resulted in 84% of Apple’s non-U.S. operating income being booked in ASI,” which is one of Apple’s Irish subsidiaries. That’s because Apple also shifts potentially taxable profits from other countries into Ireland.

All the Apple products sold outside North and South America are sold by Apple subsidiaries that purchase them, apparently at inflated prices, from the Irish subsidiaries. This aggressive use of “transfer pricing” (on paper) means that Apple’s subsidiaries in these other countries reported only tiny taxable profits to their governments. That explains why Apple reports foreign effective tax rates in the single digits.

Of course, transactions between different Apple subsidiaries are all really transfers within a single company. Transfer pricing rules are supposed to make Apple and other multinational corporations conduct these paper transfers as if they were transactions between unrelated companies. But the tax authorities clearly find these complicated rules impossible to enforce.

The Bottom Line

So despite the fact that almost all of Apple’s profits ought to be taxable in the United States, most of its profits are not taxable anywhere.

Policy Solutions

Ending the rule that allows a U.S. corporation like Apple to indefinitely defer U.S. taxes on offshore profits would mean that none of Apple’s schemes to avoid taxes would be successful. We have argued before that the only way to completely end the incentives for corporations to shift profits into tax havens is to repeal deferral.

Short of full repeal of deferral, Congress could close some important tax loopholes that Apple and other multinational corporations use to make their schemes work. For example, PSI explains how Apple uses a tax regulation known as “check-the-box” to simply tell the IRS to disregard many of its offshore subsidiaries. This allows Apple to continue deferring U.S. tax on the payments made from one subsidiary to another, which circumvents a general rule that deferral is not supposed to be allowed for such “passive,” easily moved income.

One of the recommendations of the committee is to reform the “check-the-box” rules, which was also a proposal in President Obama’s first budget. (This proposal was left out of subsequent White House budgets, apparently in response to corporate lobbying). 

PSI also suggests that the U.S. tax foreign corporations that are controlled and managed in the U.S. (like Apple’s Irish subsidiaries), that Congress strengthen rules governing transfer pricing, and makes several other recommendations to block the type of tax avoidance techniques used by Apple.


New CTJ Report: Apple Holds Billions of Dollars in Foreign Tax Havens


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Virtually None of Its $102 Billion Offshore Stash Has Been Taxed By Any Government

Apple Inc. CEO Tim Cook is scheduled to testify on May 21 before a Congressional committee on the $102 billion in profits that the company holds offshore. Citizens for Tax Justice has a new analysis of Apple’s financial reports that makes clear that Apple has paid almost no income taxes to any country on this offshore cash.

That means that this cash hoard reflects profits that were shifted, on paper, out of countries where the profits were actually earned into foreign tax havens — countries where such profits are not subject to any tax.

As CTJ explains, the data in Apple’s latest annual report show that the company would pay almost the full 35 percent U.S. tax rate on its offshore income if repatriated. That means that virtually no tax has been paid on those profits to any government.

Read the report.


Tax Rules for the Rich are Different, Just Ask Commerce Nominee Pritzker and Senate Candidate Gomez


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First it was Mitt Romney, and now two more aspiring public servants are in the spotlight for questionable tax maneuvers – Penny Pritzker, President Obama’s Commerce Secretary Nominee, and Massachusetts Republican Senate candidate, Gabriel Gomez.  The complex tax avoidance strategies exercised by both these two candidates for federal office demonstrate the stunning extent to which wealthy individuals of all stripes can play by a different set of tax rules than everyone else.

Avoiding Every Last Penny of Taxes

While many wealthy families go to great lengths to avoid taxes, the Pritzker family (most famous for it’s ownership of the Hyatt hotel chain) is unique in its role as “pioneers” in the use of offshore tax shelters. Many of its existing offshore trusts were set up as long as five decades ago, and some have allowed the family to continue benefitting from tax loopholes that have long since been closed.

As the graphic below from a 2003 Forbes story details, one of the primary ways the Pritzker family uses offshore trusts to avoid taxes is by having income from their businesses funneled into offshore trusts. Those trusts then pay debt service to a bank, owned by the family trust, that loans that money right back to the business. The upshot is that all the taxable profits disappear and the family wealth accumulates unabated. A more recent Forbes article looking at the Pritzker family fortune notes that these trusts were not at the margin but rather “played a substantial role in the growth of the Pritzker fortune.” The same article notes that this fortune makes up the vast majority of Pritzker’s $1.85 billion empire and has allowed 10 members of the Pritzker family to earn a spot on the list of Forbes 400 richest people in America.

When the New York Times asked Penny Pritzker for her thoughts on the ethical implications of her family’s use of offshore trusts, she remarked that the trust was set up when she was only a child, after all, and that she does not control how the offshore trusts are administered. Her continued vagueness on these issues makes it likely that she will face more questions about her views of offshore tax avoidance more generally next week when she goes before the Senate for her confirmation hearing.

While Pritzker’s personal involvement with her family’s most infamous tax avoidance legacy is unclear, it is clear that she has actively used tax avoidance strategies in her own professional and private life. For example, a family member in this Bloomberg News profile from 2008 recounts one of her very first assignments working for Hyatt, which was to set up a like-kind property exchange to help avoid taxes on a property owned by Hyatt.

It turned out Penny was a natural at this particular tax avoidance scheme, in which a company takes deductions for the purported depreciation of their property and then sells the property at an appreciated price, but avoids paying capital gains tax by swapping the property for another like-kind property. (Originally created for use by farmers trading acreage, this tax break is a perfect example of a loophole in the tax code that is abused by companies and should be eliminated (PDF).)

In her personal finances, Penny Pritzker has run into criticism for making 10 appeals to lower the property tax assessment for her mansion in Chicago’s Lincoln Park. Like many wealthy taxpayers, Pritzker is able to retain lawyers who, through repeated appeals, have been able to save her an estimated $175,905 (PDF), even though their appeals have only succeeded half the time.

Gabriel Gomez and the Façade of Charitable Donations

While not on the same scale, according to the Boston Globe, U.S. Senate candidate Gabriel Gomez claimed a $281,500 income tax deduction in 2005 for “pledging not to make any visible changes to the façade of his 112-year-old Cohasset home” because the value of such an agreement is considered a charitable deduction by federal law. The only problem is that local laws already prohibit he and his wife from making any changes to the exterior of their home, meaning that his “agreement” to leave the façade alone is more like complying with local laws rather than a choice, so it may not have an actual “value” that is deductible.

In fact, just five weeks after Gomez claimed this deduction, the IRS listed the abuse of historic façade easements as one of its “Dirty Dozen” tax scams. Moreover, the organization with which Gomez made the agreement, the Trust for Architectural Easements, has been criticized by the IRS, Department of Justice, and Congress for encouraging tax avoidance. Altogether the IRS estimates that the Trust cost American taxpayers $250 million in lost revenue.

Fortunately for Gomez, the IRS did not challenge his use of this deduction, as it has with hundreds of others. If they had done so, they likely would have rejected the deduction and Gomez would have had to pay thousands in back taxes and an additional penalty. For his part, Gomez’s lawyer argues that the restrictiveness of the agreement goes further than local zoning laws, but it appears unlikely that the additional restrictions are so great as to justify such a substantial deduction.


Senator Rand Paul's Fight for Offshore Tax Havens


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Senator Rand Paul of Kentucky, an opponent of efforts to crack down on offshore tax havens, is stepping up his efforts by introducing FATCA repeal, and is extending his help to tax-dodging corporations by proposing a repatriation amnesty.

Senator Paul’s Campaign for Individual Tax Cheaters: Repeal of FATCA

A year ago we explained that Senator Paul was blocking an amendment to a U.S.-Swiss tax treaty designed to facilitate U.S. tax evasion investigations:

The US and Swiss governments renegotiated their bilateral tax treaty as part of the 2009 settlement of the UBS case. That case charged the Swiss mega-bank UBS with facilitating tax evasion by US customers. Under the settlement agreement, UBS paid $780 million in criminal penalties and agreed to provide the IRS with names of 4,450 US account holders.

Before it could supply those names, however, UBS needed to be shielded from Swiss penalties for violating that country’s legendary bank-secrecy laws. The renegotiation of the US-Swiss tax treaty addressed that problem by providing, as most other recent tax treaties do, that a nation’s bank-secrecy laws cannot be a barrier to exchange of tax information.

Today Senator Paul is still blocking such treaties. Taking his efforts a step further, he has introduced a bill to repeal a major reform that clamps down on offshore tax evasion. That reform is the Foreign Account Tax Compliance Act (FATCA), which was enacted in 2010 as part of the Hiring Incentives to Restore Employment (HIRE) Act. Senator Paul says he opposes it because of “the deleterious effects of FATCA on economic growth and the financial privacy of Americans.”

His arguments are entirely unfounded and the only thing he is accomplishing is to help those illegally hiding their income from the IRS. FATCA basically requires taxpayers to tell the IRS about offshore assets greater than $50,000, and it applies a withholding tax to payments made to any foreign banks that refuse to share information about their American customers with the IRS.

For a country with personal income tax (like the U.S.), that kind of information-sharing is indispensible to tax compliance, as the IRS stated in its most recent report on the “tax gap”:

Overall, compliance is highest where there is third-party information reporting and/or withholding. For example, most wages and salaries are reported by employers to the IRS on Forms W-2 and are subject to withholding. As a result, a net of only 1 percent of wage and salary income was misreported. But amounts subject to little or no information reporting had a 56 percent net misreporting rate in 2006.

So why shouldn’t foreign banks that benefit from the business of U.S. customers report the assets they deposit to U.S. tax enforcement authorities? Without such reporting, people who have the means to shift assets offshore are able to evade U.S. income taxes, while the rest of us are left to make up the difference.

Senator Paul’s Repatriation Amnesty Would Help Corporations That Use Tax Havens

The same week he proposed repeal of FACTA, Senator Paul introduced a bill that would reward corporations for shifting profits overseas. What the corporations are doing is not actually illegal, but in some ways that is exactly the problem, and the Senator’s tax amnesty proposal would make it worse.

The general rule under current law is that U.S. corporations are allowed to “defer” paying U.S. taxes on their offshore profits until those profits are “repatriated” (until they are brought back to the U.S.). A significant tax benefit to corporations, “deferral” actually encourages them to disguise their U.S. profits as foreign profits generated in a country that has no corporate tax or a very low corporate tax — in other words, a tax haven.

Whereas now U.S. corporations do have to pay the U.S. corporate tax on those profits upon repatriation (minus whatever amount they paid to the other country’s government, to avoid double-taxation), a repatriation amnesty would temporarily call off almost all the U.S. tax on those offshore profits. Paul’s proposal would subject the repatriated profits to a tax rate of just five percent.

A similar repatriation amnesty was enacted in 2004 and is widely considered to have been a disaster. A CTJ fact sheet explains (PDF) why proposals for a second repatriation amnesty should be rejected:

■ Another temporary tax amnesty for repatriated offshore corporate profits would increase incentives for job offshoring and offshore profit shifting... One reason why the Joint Committee on Taxation concluded that a repeat of the 2004 “repatriation holiday” would cost $79 billion over ten years is the likelihood that many U.S. corporations would respond by shifting even more investments offshore in the belief that Congress will call off most of the U.S. taxes on those profits again in the future by enacting more “holidays.”

■ The Congressional Research Service concluded that the offshore profits repatriated under the 2004 tax amnesty went to corporate shareholders and not towards job creation. In fact, many of the companies that benefited the most actually reduced their U.S. workforces.

Completely ignoring JCT’s findings, Senator Paul claims that the tax revenue generated from taxing the repatriated profits (even at a low rate of 5 percent) could be used to fund repairs of bridges and highways.

We’d like to assume that Senators know you can’t use a tax proposal that loses revenue to pay for something. We would like to assume that, but, sadly, we can’t.  

Photo of Rand Paul via Gage Skidmore Creative Commons Attribution License 2.0


Sam Adams Seeking "Craft Brewer" Tax Break


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The Brewers Association, a lobbying group for craft beer brewers, has been trying to make a case for a reduction in the federal excise tax on small U.S. craft brewers. The group supports legislation – the Small BREW Act – introduced earlier this year which would cut in half the excise tax on the first 60,000 cases of beer a craft brewer produces. Significantly, the bill would also quietly redefine what the federal tax code considers a “craft brewer” to include companies producing up to 6 million barrels of beer a year. (Right now, companies making less than 2 million barrels a year are eligible for an already-existing, smaller excise tax break on the first 60,000 barrels.) This would have the effect of giving beer tax breaks to some companies that few Americans would think of as “craft brewers.”

That would make the Boston Beer Company, maker of tasty brews under the Sam Adams label which enjoyed more than $95 million in US profits last year, a craft brewer and take a big bite out of its already low tax bill.

Over the past five years, the Boston Beer Company has claimed $22 million in tax breaks for executive stock options, has cut its taxes by $9 million using a federal tax break for “domestic manufacturing” and it has even enjoyed millions of dollars in federal research and development tax breaks. The company’s effective tax rate on its $330 million in US profits over the past five years has been just 23 percent, well below the 35 percent corporate income tax rate. And in 2008, while it reported $16 million in US profits it managed not to pay a dime in federal income taxes on that income. (In fact, the company reported receiving a tax rebate of $2 million from Uncle Sam that year.)

Boston Beer would become eligible for “craft brewer” tax breaks under the proposed bill (courtesy of the Congressional Small Brewers Caucus). While the Boston Beer Company is certainly smaller than the two multinational giants it competes against (Anheuser-Busch Inbev and SAB Miller), the company with the ubiquitous Sam Adams products enjoys profits on a scale that dwarfs the true craft breweries dotting the American landscape.

At a time when Congress and the Obama administration are critically examining many of the unwarranted tax breaks that have been purchased with lobbying dollars over the years, one has to ask: are new tax breaks for a mid-sized tax-avoider beer company high on our national “to-do” list?


Lawmakers Should Oppose "Revenue-Neutral" Tax Reform


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Some members of Congress are pushing ahead (or at least creating the appearance that they are pushing ahead) with tax reform without addressing the most important issue of the debate: revenue. As we have pointed out before, the $975 billion in tax increases called for in the recent Senate budget resolution would not even raise revenue high enough to fund the level of spending that Ronald Reagan presided over. To discuss addressing the tax code without raising any new revenue at all is simply absurd. 

Lack of Attention to Revenue in House and Senate

In the Ways and Means Committee, the tax-writing committee in the House of Representatives, Republican chairman Dave Camp has made clear that he wants tax reform to be “revenue-neutral,” meaning loopholes and tax expenditures (subsidies provided through the tax code) may be reduced, but the revenue savings would all be used to offset the cost of reducing tax rates.

Camp split his committee members into working groups that spent several weeks focused on various tax issues and receiving comments from interested parties (dominated as usual by big business). The Congressional Joint Committee on Taxation (JCT) just published an enormous report summarizing different facets of the tax system and summarizing the comments and suggestions submitted to these working groups. The suggestions include everything imaginable, from reducing the tax expenditure for capital gains to boosting the tax expenditure for capital gains, from ending “deferral” of taxes on offshore corporate profits to exempting those profits completely with a territorial system.

But almost none of the suggestions summarized in the report actually touch upon the biggest question facing anyone trying to overhaul a tax system: How much revenue should we collect?

Meanwhile, Senator Max Baucus, the chairman of the Finance Committee, the tax-writing committee in the Senate, seems to believe that he can carry out a debate over tax reform without actually addressing how much revenue should be collected. A CTJ op-ed published last month criticized Baucus’s approach. We noted that

Democratic and Republican tax-writers are holding bipartisan talks to craft a tax reform bill, even though there is no agreement between the parties on what the basic goals of such reform ought to be. One party recognizes a need for more revenue while another has pledged to not raise more revenue. This would be like holding bipartisan talks on immigration reform — if one party supported a path to citizenship while the other party pledged to round up all undocumented immigrants and deport them without exceptions…

Some more recent comments from Senator Baucus have indicated that he at least might try to get some revenue from tax reform. He recently said during a hearing,

“We will close billions of dollars of loopholes. Some of this revenue should be used to cut taxes for America’s families and help our businesses create jobs, and some of the revenue raised in tax reform should also be used to reduce the deficit,” Baucus said. “It’s all about finding common ground.”

We’d feel better if Senator Baucus acknowledged that raising revenue should be the main purpose of tax reform because our most pressing need is revenue to fund public investments.

Deficit-Neutral Tax Reform Has No Place in a Plan to Address the Deficit

The most ridiculous idea aired recently is for Congressional Republicans to demand revenue-neutral tax reform in return for agreeing to President Obama’s request that the federal debt ceiling be raised.

The last time the Republican majority in the House of Representatives agreed to pleas of President Obama and the Senate to raise the debt ceiling, they demanded that the deficit be reduced by the sequestration that is in effect today. No revenue was raised in that deal.

Now, some Republican lawmakers are discussing extracting a different concession: an agreement that would provide a fast-track process to enact tax reform. But the tax reform they propose would be revenue-neutral (meaning it would be deficit-neutral). There is simply no logical connection between the deficits that require us to raise the debt ceiling and a tax reform that would do nothing to reduce those deficits.

Will “Dynamic Scoring” Paper Over the Revenue Question?

Some lawmakers have tried to confuse the debate by arguing that Congress should enact a tax reform that is revenue-neutral according to the revenue-scoring methods officially used by Congress but revenue-positive if Congress switches to a different method that they claim is more accurate. This method is known as “dynamic scoring,” which assumes that reducing tax rates increases incomes and profits so dramatically that the additional tax collected on the new income and profits would partially offset (or more than offset) the revenue lost as a result of the rate reduction. In other words, a tax cut (because it causes the economy to expand) could pay for itself or even raise revenue.

There is no evidence that the money channeled into the economy by reductions in tax rates expands the economy in this way. But even if we all agreed that it did, that would logically require us to agree that spending cuts could suck enough money out of the economy to have the opposite effect. But Chairman Camp and his colleagues support the spending cuts in the Ryan budget and would never want to admit that spending cuts have macroeconomic effects that blunt or even reverse any deficit-reduction that these lawmakers are trying to accomplish.

Members of Congress have a serious disagreement over revenue, and they can’t paper over it by using the gimmick of “dynamic scoring.” There is only one real resolution, and that’s to acknowledge a need for tax increases.


New from CTJ: State-by-State Figures on Obama's Proposal to Limit Tax Expenditures


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President Obama has proposed to limit the tax savings for high-income taxpayers from itemized deductions and certain other deductions and exclusions to 28 cents for each dollar deducted or excluded. This proposal would raise more than half a trillion dollars in revenue over the up­coming decade. 

A new report from Citizens for Tax Justice (CTJ) analyzes the proposal and models its effects on taxpayers nationally and state-by-state. Findings include:

  • Only 3.6 percent of Americans would receive a tax increase under the plan in 2014, and their average tax increase would equal less than one percent of their income, or $5,950.
  • The deduction for state and local taxes and the deduction for charitable giving together would make up just over half of the tax expenditures (deductions, etc.) limited under the proposal.
  • Arkansas and West Virginia have the lowest percentage (1.6 percent) of taxpayers who would see a tax increase from this proposal; Washington, D.C. would have the largest percentage (8.9 percent) followed by Connecticut and New Jersey (both 6.7 percent).

Read the report.


FACT: Online Sales Tax Does Not Violate Grover's "No Tax Pledge"


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There’s been some confusion in recent days about whether the 258 members of Congress who have signed Grover Norquist’s “Taxpayer Protection Pledge” are allowed to vote in favor a bill that lets states collect sales taxes owed on purchases made over the Internet.  There is no reason for any confusion on this point.  Anybody with 15 seconds of free time and the ability to read the one sentence promise contained in the national pledge can see it’s completely irrelevant to the debate over online sales taxes:

I will: ONE, oppose any and all efforts to increase the marginal income tax rates for individuals and/or businesses; and TWO, oppose any net reduction or elimination of deductions and credits, unless matched dollar for dollar by further reducing tax rates.

Since federal income tax rates, deductions, and credits are altered exactly zero times in the online sales tax legislation set to be voted on by the Senate, Grover’s federal affairs manager is being less than truthful when she says that “there’s really not any way an elected official [who signed the pledge] can vote for this.”

There’s no doubt that Grover would be tickled pink to have gotten 258 of our elected officials to pledge opposition to improving states’ ability to limit sales tax evasion over the Internet.  For that matter, he would probably be even more excited to have gotten those officials to promise to vote against any increase in the estate tax, gasoline tax, or cigarette tax, as well as the creation of a carbon tax or a VAT.  But none of these things fall within the scope of the pledge, either, and it’s a shame that Grover and his spokespeople have shown no interest in being truthful on this point.


Seriously, How Does OpenTable Get the Manufacturing Tax Break?


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When Congressional tax writers signaled their intention to enact a new tax break for domestic manufacturing income in 2004, lobbyists began a feeding frenzy to define both “domestic” and “manufacturing” as expansively as possible.  As a result, current beneficiaries of the tax break include mining and oil, coffee roasting (a special favor to Starbucks, which lobbied heavily for inclusion) and even Hollywood film production. The Walt Disney corporation has disclosed receiving $526 million in tax breaks from this provision over the past three years, presumably from its film production work, and even World Wrestling Entertainment has disclosed receiving tax breaks for its “domestic manufacturing” of wrestling-related films.

But CTJ has now discovered, after poring over corporate financial reports, an example that may trump them all.

Silicon Valley-based OpenTable, Inc. provides online restaurant reservations and reviews for restaurants in all fifty states and around the world, connecting customers and restaurants via the Internet and mobile apps.  While members of Congress may enjoy how OpenTable can “manufacture” a last minute seating at their favorite Beltway watering hole, it’s hard to believe the company engages in any activity that most Americans would think of as manufacturing.

And yet OpenTable discloses in its SEC filing that the domestic manufacturing tax break reduced the company’s effective corporate income tax rate substantially recently, saving it about $3 million over the last three years.  Even as a small portion of the company’s overall tax bill, that $3 million is emblematic of the scores of absurd loopholes carved out of the corporate tax code.

President Obama has repeatedly proposed scaling back the domestic manufacturing deduction to prevent big oil and gas companies from claiming it, but we have argued that the manufacturing tax break should be entirely repealed. At a minimum, Congress and the Obama Administration should take steps to ensure that the companies claiming this misguided giveaway are engaged in something that can at least plausibly be described as manufacturing.


Do the Math: Sequester Cuts to IRS Increase the Deficit


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Let’s start with the facts. Every dollar invested in the IRS’s enforcement, modernization and management system reduces the federal budget deficit by $200. Here’s another metric. Every dollar the IRS “spends for audits, liens and seizing property from tax cheats” garners ten dollars back.

Can you say “return on investment?”

Here’s another fact. The IRS’s budget has been reduced by 17 percent since 2002 (per capita and adjusted for inflation), and that includes this year’s sequester cuts. To adapt to the $594.5 million in budget cuts required by the sequester, the IRS has announced it will be forced to furlough each of its more than 89,000 employees for at least five days this year. While deficit reduction is supposed to be the goal of the sequester, cuts to the IRS will probably increase the deficit because it’s the IRS, after all, that collects tax revenue.  In fact, one expert estimated recently that furloughing 1,800 IRS “policeman” positions could cost the Treasury – that is, all of us – some $4.5 billion in lost revenue.

Denied adequate resources over the years, the IRS has not been able to keep up with its current workload, let alone expand its work. For example, a new report on IRS enforcement found that the agency actually audited 4.7 percent fewer returns in 2012 than it did in 2011. Considering that the IRS typically recovers about 14 percent of the $450 billion of unpaid taxes in a single year with its current resources, by increasing IRS resources we stand to reap billions in additional revenue from noncompliant taxpayers.

The Obama Administration proposed in its fiscal year 2014 budget to increase the IRS’s budget to $12.9 billion, about $1 billion more than its 2012 budget, with about $5.7 billion of that going to enforcement.  This increase doesn’t go nearly far enough considering the substantial decline in its budget during the past decade, but it’s a small investment we’d be smart to make.

 


Online Sales Tax: Norquist vs. Laffer and Other Bedfellow Battles


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By now you've probably heard that the U.S. Senate is close to approving a bill that would allow the states to collect the sales taxes already owed by shoppers who make purchases over the Internet.  Currently, sales tax enforcement as it relates to online shopping is a messy patchwork, with retailers only collecting the tax when they have a store, warehouse, headquarters, or other “physical presence” located in the same state as the shopper.  In all other cases, shoppers are required to pay the tax directly to the state, but few do so in practice.  The result of this arrangement is both unfair (since the same item is taxed differently depending on the type of merchant selling it) and inefficient (since shoppers are given an incentive to shop online rather than locally).

Unsurprisingly, two of the strongest proponents of a federal solution to this problem have been traditional “brick and mortar” retailers that compete with online merchants and state lawmakers struggling to balance their states’ budgets even as sales tax revenues are eroded by online shopping.  But this issue has also turned anti-tax advocates, states without sales taxes, and even online retailers against one another in surprising ways, for reasons of ideology and self interest. 

Ideological Frenemies, Norquist and Laffer

Supply-side economist Arthur Laffer recently argued in the pages of the Wall Street Journal that states should be allowed to enforce their sales taxes on online shopping as a basic matter of fairness, so that “all retailers would be treated equally under state law.”  We completely agree with this point, but Laffer makes clear that his larger aim is to shore up state sales taxes in order to make cuts to his least favorite tax—the personal income tax. It’s no secret that Laffer wants states to shift toward a tax system that leans heavily on regressive sales taxes, but it’s harder to advocate for such a shift if the tax can be easily avoided by shopping online.

Grover Norquist of Americans for Tax Reform stands in direct opposition to Laffer on this issue.  Norquist has been “making the case on the House side of either seriously amending it or even stopping” federal efforts to allow for online sales tax enforcement.  But Norquist reveals his fundamental misunderstanding of the issue when he argues that out-of-state retailers should be free from having to collect sales taxes because “you should only be taxing people who can vote for you or against you.”  In reality, retailers aren’t being taxed at all—they’re simply being required to do their part in making sure their customers are paying the sales taxes already owed on their purchases.

Delaware vs. The Other No-Sales-Tax States

Four states levy no broad-based sales tax at either the state or local level: Delaware, Montana, New Hampshire, and Oregon and Senators from these last three states are generally not interested to helping other states enforce their sales tax laws. After all, why vote for a “new tax” if there’s no direct benefit to their own states’ coffers?

But Delaware’s senators see the issue differently, as both Sen. Carper and Sen. Coons voted in favor of the bill.  In fact, Carper introduced his own bill for collecting tax on e-purchases years ago, explaining it this way: “The Internet is undermining Delaware's unique status” because “part of Delaware's attraction to tourists is that people can come and shop until they drop and never have to pay a dime of sales tax.”

Amazon vs. Other Internet Retailers

It shouldn’t come as a surprise that online retailers as a group have opposed legal requirements that their customers pay sales taxes on their purchases since it means these e-retailers would have to charge and collect that tax.  Some companies, however, like Netflix, have long collected (PDF) those sales taxes, even without a legal requirement to do so. But most have clung to online sales tax evasion as a way to undercut traditional retailers by up to 10 percent (or more, depending on the sales tax rate levied where the buyer is located).

One recent exception is eBay, which appears to have seen the writing on the wall and has pivoted from opposing the bill to watering it down – and it’s deploying its 40 million users as an army of online lobbyists to that end.

But it is Amazon that stands apart from other online retailers in fully supporting a federal solution to the patchwork of state laws and the growing number of deals it has finally had to strike with states. The company’s reason is likely two-fold.

First, Amazon has a “physical presence” in a growing number of states and plans to continue its expansion in order to make next-day-delivery a reality for more of its customers. As a result, Amazon will be legally required to remit sales taxes in more states in the future and will find itself at a competitive disadvantage if other online retailers remain free from sales tax collection requirements.  Second, Amazon processes a large number of sales for other merchants through its website and collects sales taxes on behalf of some of them – for a fee.  Amazon’s sales tax collection services could become much more lucrative in the future if more of the merchants it partners with are required to collect sales taxes.

 


CTJ Op-Ed Criticizes Senator Baucus' Handling of Tax Reform


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Democratic Senator Max Baucus of Montana, chairman of the Senate Finance Committee which oversees tax legislation, announced today that he is retiring when his term closes at the end of 2014. Many people are asking how this will affect the tax reform that he hopes to shepherd through his committee. Last week, CTJ published an op-ed criticizing Baucus’s approach to tax reform.

Democratic and Republican tax-writers are holding bipartisan talks to craft a tax reform bill, even though there is no agreement between the parties on what the basic goals of such reform ought to be. One party recognizes a need for more revenue while another has pledged to not raise more revenue. This would be like holding bipartisan talks on immigration reform — if one party supported a path to citizenship while the other party pledged to round up all undocumented immigrants and deport them without exceptions…

A recent profile of Baucus's efforts informs us that “Baucus declined say whether he views tax reform as a way to raise revenue, although he did not rule it out. Instead, he said, that divisive question should be left unanswered until committee members have a chance to study areas of reform where they are more likely to agree.”

Read the op-ed.

Read CTJ's response to the Tax Foundation's claim that the U.S. has a high corporate tax rate.

Senator Bernie Sanders of Vermont recently appeared on Real Time with Bill Maher and disputed the claim by the Tax Foundation that the U.S. has the highest corporate tax in the world. Senator Sanders is right, the Tax Foundation is wrong.

CTJ explains that the effective corporate tax rate (the share of profits that corporations pay in taxes) is what matters, and the effective tax rate for U.S. corporations is quite low. The Tax Foundation relies on flawed studies to argue otherwise. For example, one study cited by the Tax Foundation excludes corporations paying a negative tax rate — in other words, excludes corporate tax dodgers. Obviously this will result in a higher estimated effective tax rate.

Read CTJ's full response.


The Corporate Tax Code Gives Away as Much as It Takes In


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A revealing new report from the Government Accountability Office (GAO) found that in 2011, the US government spent as much on corporate tax expenditures as it collected in corporate taxes. According to the report, 80 tax expenditures (exceptions, deductions, credits, preferential rates, etc.), cost the Treasury $181 billion in corporate tax revenue, which is the same as the total amount the Treasury collected in corporate taxes in 2011.

While the study looked at 80 corporate tax expenditures, over three-quarters of the revenue loses ($136 billion) were attributed to the four largest expenditures: accelerated depreciation, deferral of foreign income, the research credit, and the domestic production activities deduction. (CTJ has explained before that repealing these provisions would raise massive amounts of revenue.)

Making matters worse, 56 of the 80 tax expenditures that GAO looked at were used by individuals as well as corporations, resulting in an additional loss of $125 billion in revenue from the individual income tax. This happens because many corporate tax breaks can be used by businesses taxed under the individual income tax (the personal income tax), such as partnerships, S-corporations and other “pass-through” entities.

The report also revealed that more is spent on corporate tax expenditures in the budget areas of Commerce and Housing, International Affairs, and General Purpose Fiscal Assistance than is spent in direct federal outlays. For example, GAO found that the government spends only $45.7 billion in direct federal outlays for International Affairs, while spending $50.8 billion on corporate tax expenditures on this same budget function. Similarly, GAO concluded that one-third of the corporate only tax expenditures “appear to share a similar purpose with at least one federal spending program.”

These expenditures account for major U.S. corporations paying an average effective tax rate of half the 35 percent statutory rate, and often even zero in federal income taxes; elimination of these tax breaks should be the top priority for lawmakers looking to replace the sequester or reduce the deficit. In fact, a coalition of 515 groups recently called on Congress to repeal or reduce corporate tax expenditures as a way to raise revenue (as opposed to enacting corporate tax reform that is “revenue-neutral”). As Representative Lloyd Doggett (R-TX), who requested the GAO study, explained, “Corporate America did not contribute a nickel to the fiscal cliff deal that meant higher taxes for many Americans [and] it is reasonable to ask corporate America to contribute a little more toward closing the budget gap and to the cost of our national security.”

These corporate tax expenditures get nothing like the public scrutiny that direct spending is subject to. But tax expenditures for corporations are just like subsidies provided to corporations in the form of direct spending because Americans have to make up the costs somehow. That’s true whether it’s that bundle of earmark-like tax extenders that gets quietly renewed every year or two, or the rule allowing corporations to indefinitely defer taxes on foreign profits, or the massive breaks for depreciating equipment. All this is the spending of ordinary taxpayers’ dollars – and it merits the same critical attention.


Rolling Tax Justice Billboard in DC for Tax Day 2013


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EVENT ADVISORY/PHOTO-OP FOR APRIL 15, 2013

BILLBOARD TRUCK IN WASHINGTON, DC ASKS, DO YOU PAY MORE TAXES THAN MAJOR CORPORATIONS?

 Citizens for Tax Justice Mobile Billboard to Visit Dupont, K Street, Capitol Building and National Capitol Post Office over Eight Hour Day

 Washington, DC – “Do you pay more Federal Income Taxes than Facebook, Southwest Airlines, GE, Pepco and other Giant Corporations? Yes You Do!” These words are splashed across a red, white and blue, ten by twenty foot rolling billboard that will be seen by thousands of tourists, food truck customers, pedestrians and commuters on Monday April 15th, courtesy of Citizens for Tax Justice (CTJ). CTJ’s April 11 report, “Ten Reasons We Need Corporate Tax Reform,” supports the billboard’s text that will be circulating around DC between 11 AM and 7 PM on Tax Day.

The billboard route maximizes visibility for passersby and access for news cameras, in particular at its final stop affording a visual of taxpayers visiting the Post Office. The route and schedule is divided into four parts, all times Eastern, primarily in NW DC. Some stops scheduled, others by request.

11 AM – Noon: Circling Dupont Circle and pulling off the Circle onto 19th St. NW (in front of Dupont Metro, Krispy Kreme, Front Page bar) at 11:30 for cameras and as needed.

Noon – 2 PM: Lunch at K Street Parks - Farragut Sq, McPherson Sq, Franklin Park. Route is rectangle of K Street NW to 13th Street to I (Eye) Street to 17th Street. Stops at I (Eye) near 15th/Vermont at 1:00 and 1:30 PM and as needed.

2 – 3 PM: US Capitol Building Loop - 3rd St NW/SW to Independence Avenue to 2nd St SE/NE to Constitution Ave. No stops scheduled but as needed will be on 3rd Street NW between Madison/Jefferson Streets.

3:30 – 7 PM: National Capitol Post Office, 2 Mass Ave, NE at North Capitol Street. Billboard will park kitty corner from Post Office entrance (doors on North Capitol), adjacent to Sun Trust Bank, in sight of Dubliner bar (F Street). Depending on parking, truck’s 5-minute loop passes busy tourist sites as it runs up North Capital, onto Louisiana Ave NE onto New Jersey Ave NW and back on Mass Ave NW for media availability.

tax day truck @ dupont.jpg

###

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).

Two new analyses from Citizens for Tax Justice demonstrate that the richest Americans still are not shouldering a disproportionate share of taxes and that the poor are still not avoiding them, despite stories that are commonly told every year around Tax Day.

The first is Who Pays Taxes in America in 2013?, a fact sheet we release each year. It examines all the taxes paid by Americans (all federal, state and local taxes) and finds that people in all income groups do pay taxes (despite claims to the contrary by Mitt Romney and others) and that the tax system overall is just barely progressive.

The second analysis is our six-page report called New Tax Laws in Effect in 2013 Have Modest Progressive Impact. This goes into more detail and explains that the tax code has not changed in 2013 despite recent headlines about unprecedented taxes on the rich.

For example, Americans in all income groups are paying more than they would pay if Congress had just extended the tax laws in effect in 2012, but the share of taxes paid by the top one percent has risen only slightly. The richest one percent, who will receive 21.9 percent of America’s income in 2013, will pay 24 percent of all the taxes in 2013. If, instead of enacting the “fiscal cliff” deal that allowed some tax cuts for the rich to expire, Congress had just extended the 2012 tax laws, then the richest one percent would pay 23.1 percent of all the taxes in 2013.

In other words, the “fiscal cliff” deal made our tax system slightly – not dramatically –more progressive.


Exclusive CTJ & ITEP Newsletter Content Going Online


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Just in time for Tax Day 2013, our quarterly newsletter Just Taxes is arriving in mailboxes this week. This edition features original articles discussing the fallacies of anti-tax legislation in state legislatures, Facebook's tax avoidance schemes, the release of ITEP's new report, Who Pays? and highlights of ITEP and CTJ's recent press coverage. Starting this year, we are putting back issues of Just Taxes online, and you can now browse editions from the past nine years.  

Just Taxes is a provided as a service to our current donors – who make our work possible – so we’re not making this special content available until six months after publication. (The current issue, for example, will be posted in October.) So to make sure you receive the most up-to-date edition, please make a contribution to CTJ or you can choose to make a tax-deductible contribution to ITEP.  And thank you for all the ways you show support for our work.

The largest revenue-raising proposal put forth by President Obama, which is expected to be among the proposals the White House plans to release next week, would limit the tax savings of each dollar of certain deductions and exclusions to 28 cents. CTJ's new report on the President's proposal examines who would be affected and also breaks down the composition of the tax expenditures limited under the proposal.

For example, the report finds that Obama's proposal, which would only apply to married couples with AGI above $250,000 and singles with AGI above $200,000, would affect just 2.4 percent of taxpayers in 2014. The deduction for state and local taxes would make up over a third of the tax expenditures limited, and the deduction for state and local taxes along with the charitable deduction would, together, make up over half of the tax expenditures limited under the proposal.

Read the report.


Study: US Tax Code Fails to Slow Widening Economic Inequality


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Are economically disadvantaged families in the US likely to reverse their fortunes anytime soon? Not according to a new report by the Brookings Institution, which found that growing economic disparities between Americans are becoming increasingly permanent and irreversible. In other words, the study confirms that disadvantaged Americans are finding it increasingly difficult to move up the income ladder, while at the same time the position of the well-off is increasingly secure.

Brookings also found that between 1987 and 2009 the US tax system only “partially mitigated” the increase in income inequality and that it was not enough to “sufficiently alter its broadly increasing trend.” This result is not all that surprising given that the overall (combined state and federal) tax system is barely progressive, meaning that it can only have a small redistributive impact.

While many countries have taken dramatic steps to reduce income inequality, the US has allowed income inequality to grow so extreme that it now has the fourth highest level of income inequality in the developed world. Looking at the low end of the scale, the US Census Bureau found that over 46 million (PDF), or 1 in 6, Americans were below the poverty line in 2011 (the most recent year for which data is available).

But don’t expect a revolution just yet. Most Americans are wholly unaware of how off track our economic system has gotten. For example, as the viral video “Wealth Inequality in America” explains, there is a huge disconnect between the actual distribution of wealth, the distribution of wealth as the public perceives it, and the distribution that the public believes is desirable.

According to the study (PDF) on which the video was based, Americans believe that the top 20 percent hold only 58 percent of the country’s wealth and that under an ideal system, the top 20 percent would own just 32 percent of the wealth. The reality, however, is that the top 20 percent actually own about 84 percent of the country’s wealth. Consider, for example, that the heirs to the Wal-Mart fortune alone own as much wealth as the bottom 40 percent of Americans combined.

One of the best ways to combat rising economic inequality and increase economic mobility would be to enact progressive tax reforms and use the additional revenue raised to pay for critical investments in education, healthcare, and other areas that are needed to improve the economic mobility of lower and middle income Americans.


SCOTUS Rulings Could Change Same-Sex Spouses' Taxes


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This week the Supreme Court heard arguments on two cases looking at the constitutionality of same-sex marriage. Specifically, the cases were about measures that ban recognition of gay marriage by the federal government and the state of California. At the federal level, the Court heard about the Defense of Marriage Act (DOMA), which bans the recognition of a same-sex marriage and entails over 1,100 different laws that consider marriage status when determining an individual’s rights and responsibilities.  And some of those laws determine how much that individual owes in taxes.

The discriminatory effect of the DOMA, which was signed into law in 1996, in tax law is at the center of United States v. Windsor. The original petitioner in the case, Edith Windsor, was forced to pay $363,000 more in federal estate taxes because under DOMA, her same-sex marriage is not recognized for tax purposes and thus is not eligible for the “surviving spouse” estate tax exemption available to heterosexual spouses. If the Supreme Court rules in favor of Windsor and declares DOMA unconstitutional, it would mean that same-sex marriages will be recognized by the federal government for all purposes, including taxes.

While such a ruling would have a relatively small impact in terms of the estate tax since almost no one pays it, there are many other federal tax provisions that do affect most married couples. The New York Times, for example, points to the fact that DOMA prevents same-sex spousal health benefits from being treated as a tax-exempt benefit, therefore increasing the tax bill of individual same-sex couples by a few thousand dollars each year. 

Perhaps the most widespread tax impact would be on same-sex spouses who are not currently allowed to file their federal tax returns jointly. According to an analysis by CNN and tax experts, some same-sex spouses may currently be paying as much as $6,000 in extra taxes each year because of DOMA. While many same-sex spouses could receive a substantial tax benefit from filing jointly, they could also end up paying more in taxes due to the infamous marriage penalty, depending on each spouse’s level of income.

There is also a larger fiscal effect to consider. A 2004 Congressional Budget Office (CBO) report (PDF) estimated that federal recognition of same-sex marriage would actually reduce the deficit by roughly $450 million each year, through a combination of higher revenues and lower outlays. In other words, ruling DOMA unconstitutional would not only end same-sex marriage discrimination in the tax code and other parts of federal law, but would also have the bonus effect of slightly reducing the deficit.

On Saturday, the Senate approved the budget resolution that was crafted by Budget Chairman Patty Murray of Washington State, by 50 votes. (The resolution would have received 51 votes if New Jersey Senator Frank Lautenberg not been absent due to an illness.)

The most important implication of this vote is that a majority of Senators agreed that Congress should raise $975 billion over a decade and cut spending by the same amount, rather than attempt to achieve deficit-reduction entirely through spending cuts. Indeed,  the Senate rejected several amendments that would have reduced or eliminated the revenue increase.

The description of the plan from Murray’s budget committee staff explains that revenue would be raised by “closing loopholes and cutting wasteful spending in the tax code that benefits the wealthiest Americans and biggest corporations.” But a great deal is left to be determined because, as we explained earlier, this budget resolution offers no details on which loopholes or wasteful tax expenditures might be limited.

Murray Plan in the Senate a Stark Contrast to the Ryan Plan in the House

In any event, the Senate budget resolution is so different from the resolution approved by the House (the plan crafted by House Budget Chairman Paul Ryan) that it’s difficult to imagine how a Senate-House conference committee could ever “reconcile” or “merge” the two documents.  As CTJ has already demonstrated, the Ryan plan would provide millionaires an average net tax cut of at least $200,000, and possibly much more.

Senate Would Give States the Right to Require Online Retailers to Collect Sales Taxes

The Senate approved, by a vote of 75 to 24, an amendment to allow states to require out-of-state remote retailers (like Internet retailers) to collect sales taxes from their customers. This amendment has no binding effect but it shows that there are enough votes in the Senate to pass important legislation (the Marketplace Fairness Act) that would give states this authority.

Currently, a state is allowed to require a retailer to collect sales taxes from its customers only if the retailer is “physically present” in the state. This creates an unfair advantage for a company like Amazon, which is selling its products remotely, over a company like Target, which is physically present (because of its stores) almost everywhere it does business. Even worse, states are losing more and more revenue as more commerce happens online — a trend that can only increase with time.

It’s worth repeating (as CTJ has explained before) that this proposal would not actually increase taxes, but would only facilitate the collection of taxes that are due (but rarely paid) under current law.

Many Other Amendments Have Little Meaning

Votes taken on amendments during the Senate budget debate are generally not binding. Their greatest significance is that they show whether or not enough votes can be gathered to pass a given proposal in the Senate. For example, the vote on allowing states to require remote retailers to collect sales taxes demonstrates that there are more than the 60 votes needed in the Senate to approve that proposal when it comes to the floor as an actual bill.

But other amendments are not as helpful in determining support for actual legislation, and can be best described as posturing with little real meaning.

For example, the Senate rejected a Republican-sponsored amendment to repeal the estate tax, but then approved by 80-19 an amendment sponsored by Democratic Senator Mark Warner “to repeal or reduce the estate tax, but only if done in a fiscally responsible way.”

The Senate’s approval of this amendment does not indicate that an actual bill to reduce or repeal the estate tax would get 60 votes because an actual bill would either have to include specific provisions to offset the costs, or the bill would clearly increase the deficit. There have been votes on such bills in the Senate many times and they have never received the needed 60 votes, much less 80 votes.

To take another example, the Senate voted 79-20 to repeal a tax on medical device manufacturers that was enacted as part of health care reform. This was one of the taxes enacted with the idea that companies that would benefit from health care reform should share in its costs. The budget amendment says that legislation should be passed to repeal the tax “provided that such legislation would not increase the deficit.”

An actual bill to repeal this tax would require some sort of provisions to offset the cost, or it would increase the deficit, and Senators voting in favor would have to be ready to support those offsetting provisions or the increase in the deficit. It’s not obvious that any such bill would get 60 votes.

There are many other examples of amendments that were mostly about posturing, and many would be terrible policy if they were enacted as actual legislation. The estate tax, for example, has been gutted in recent years even though it’s the one tax that addresses concerns about income inequality and the richest one percent pulling away from everyone else. And the medical device tax was part of the intricate compromise that was necessary to enact virtually universal health coverage without increasing the budget deficit. It’s unfortunate that so many Senators feel a need to pander to the special interests who want to repeal these taxes.


Mobile Millionaires and the Search for the Holy Grail Tax Jurisdiction


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Actor John Cleese, most famous for his central role in the British comedy group Monty Python, has decided to move back to Great Britain from Monaco, after concluding that the tax benefits of moving to the tax haven last year were not worth it after all. The actor’s return to Great Britain provides a high profile counterpoint to the false narrative that “high” taxes are driving wealthy people to migrate to low-tax jurisdictions, like Florida in the United States, or like Monaco, Russia or Bermuda for the globe trotting set.

The quest for a lower tax rate has not proven to be as much of a factor for wealthy individuals as anti-tax advocates would have you believe. Several studies confirm this, including a recent academic analysis based on actual tax returns that concludes the effect of tax rates on migration is “negligible” between the different tax jurisdictions in the United States.

What anti-tax advocates ignore is the fact that taxes actually play a very small role in an individual’s decision where to live, especially compared to factors like employment opportunities, family and friends, housing and even weather. In addition, lower taxes may actually discourage migration if they result in lower quality government services (a well-funded Ministry of Silly Walks  maybe especially close to John Cleese’s heart for example). What wealthy person wants to move to a jurisdiction with poor public schools, dirty streets and parks, and inadequate law enforcement?

The real lesson is that non-tax benefits of living in a location usually outweigh higher taxes, even in cases where the individual could save substantial sums of money by moving elsewhere. A recent case in point? The billionaire hedge-fund manager John Paulson’s decision not to move to Puerto Rico, despite the fact that doing so would have allowed him to avoid billions of dollars in capital gains taxes. In other words, Paulson has indicated that he’d just as soon keep paying billions more in taxes for the advantages of living in New York City. Colorful anecdotes and threats aside, the holy grail of tax codes ends up being the one that allows for a quality of life worthy of millionaires – and everybody else.


ITEP on How Federal Tax Reform Can Affect State and Local Governments


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There’s a lot of talk in the halls of Congress about reforming the federal tax code, but few people think about how that might impact state and local governments and their ability to raise enough revenue to fund the services their residents use on a daily basis.

As the tax-writing committee in the House of Representatives examined this issue on Tuesday, CTJ’s partner organization ITEP submitted written testimony to clear up some little-understood points.

The federal tax system accommodates the taxing authority of state and local governments in a few different ways, which could be altered for better or worse, depending on what Congress does.

The Deductions for State and Local Taxes

For example, the federal personal income tax allows a deduction for taxes one pays to state and local governments. ITEP’s testimony points out that in many ways this is one of the most justified of the federal tax deductions and therefore should not be eliminated. Most deductions are for spending that the taxpayer has control of — like home mortgage interest or charitable giving — but this is not true of state and local taxes. It makes more sense to think of state and local taxes as reducing the amount of income a taxpayer has to pay federal taxes.

Perhaps more importantly, eliminating the deduction would make state and local governments more hesitant to tax the incomes of wealthy residents (who know that the deduction offsets part of those taxes). This tax revenue is badly needed as the U.S. has underinvested in infrastructure, education and other goods that are largely funded with state and local taxes.

State and Local Bonds

Another accommodation made by the federal tax system is its exclusion of state and local bond interest from taxable income. State and local governments can borrow at lower interest rates, because the interest payments they make are not taxable for the bondholders (who are thus willing to accept lower rates than are paid on ordinary bonds).

But, as ITEP’s testimony explains, the current tax subsidy is inefficient because some of the revenue given up by the federal government falls into the hands of very high-income bond-holders rather than the state and local governments that the exclusion is ostensibly supposed to help.

The Obama administration has a proposal that would remedy this by reviving Build America Bonds. These bonds were available for two years under the economic recovery act Obama signed into law in 2009, and are designed differently so that they support state and local government projects without creating a windfall for the wealthy.

Marketplace Fairness Act

Congress has additional opportunities to accommodate state and local governments’ taxing authority. For example, we have written recently that anyone who lives in a state with a sales tax and purchases something online owes sales tax on that purchase. But states and local governments are not allowed to require remote sellers to collect these sales taxes, which they can and do require of retailers who are physically present in the state. The Marketplace Fairness Act (MFA) is a bill in Congress that would fix this.  

The MFA is a common sense bill. It would not even increase taxes but only facilitate the collection of the sales taxes that people already owe but usually fail to pay.


What You Should Know about the RATE Coalition's Quest for a Lower Corporate Tax Rate


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This week, members of Congress will receive a visit from the tax vice presidents of major corporations that have come together in the so-called Reforming America’s Taxes Equitably (RATE) Coalition, a corporate lobbying group pressing lawmakers to reduce the corporate tax rate.

U.S. Corporate Tax Is Actually Lower than What Multinational Corporations Pay Abroad

The first thing you should know about the RATE Coalition is that their rhetoric about the U.S. having a high corporate tax is nonsense. The U.S. statutory corporate income tax rate of 35 percent, which RATE wants to reduce, is not as important as the effective corporate tax rate — the percentage of profits that corporations actually pay in taxes after accounting for all the loopholes and breaks that lower their tax bills.

This is explained in a CTJ report appropriately titled, “The U.S. Has a Low Corporate Tax.” The report also explains that CTJ examined most of the Fortune 500 companies that were consistently profitable from 2008 through 2010 and found that two-thirds of those with significant offshore profits actually paid a higher effective tax rate in the other countries where they did business than they paid in the U.S.

RATE Agrees with CTJ on Closing Tax Loopholes, Disagrees about What To Do with the Savings

The second thing you should know about the RATE Coalition is that they agree with all of the findings of CTJ’s studies documenting corporate tax avoidance due to corporate tax loopholes. They simply disagree with us about what should be done with the revenue savings if Congress ever closes those loopholes.

The RATE Coalition cites CTJ at length in a recent post on its website:

"Because of these reductions [due to corporate tax breaks], the effective tax rate is closer to 18.5 percent on average, according to Washington, D.C. think tank Citizens for Tax Justice (CTJ), making the rate one of the lowest of any developed country…

A 2011 report on 280 corporations conducted by CTJ found that nearly a third paid no federal income tax in at least one of the three previous years, while 30 of those surveyed recouped more federal dollars than they paid in taxes in one of the previous three years…"

The RATE Coalition’s website admits that “corporate tax base-broadeners [provisions to close corporate tax loopholes] should be on the table.” But they seem to believe that all of the revenue saved from such loophole-closing should be given right back to corporations in the form of a reduction of their corporate income tax rate.

Citizens for Tax Justice has explained (in this fact sheet, for example) that most, if not all, of the revenue savings from closing tax loopholes should be used to fund the public investments that build the American economy and the American middle-class.

CTJ is not alone in holding this position. For example, in May of 2011, U.S. Senators and Representatives received a letter from 250 organizations, including organizations in every state, calling on Congress to close corporate tax loopholes and use the revenue saved to address the budget deficit and fund public investments. The 250 non-profits, consumer groups, labor unions and faith-based groups called for a corporate tax reform that raises revenue. In December of 2012, over 500 organizations from around the country joined a similar letter that was sent to each member of Congress.

Tax-Dodging Corporations like Boeing Extremely Influential in Washington

Despite polling showing that most Americans want our corporations to pay more in taxes and despite the evidence that these companies are not paying very much now, Congress and the administration are taking seriously proponents of a “revenue-neutral” reform of the corporate income tax.

Lawmakers of both parties and even President Obama have shown an alarming level of deference to these companies.

For example, CTJ’s figures show that Boeing, one of the corporations that is a member of the RATE Coalition, paid nothing in net federal income taxes from 2002 through 2011, despite $32 billion in pre-tax U.S. profits. In fact, Boeing has actually reported more than $2 billion in negative total federal taxes over that period.

Amazingly, this did not stop President Obama from telling a crowd at a Boeing plant in Washington State that revenue saved from closing offshore tax loopholes “should go towards lowering taxes for companies like Boeing that choose to stay and hire here in the United States of America.”

President Obama has also signed onto the overall goal of the RATE Coalition, a “revenue-neutral” reform of the corporate tax, which CTJ has criticized in detail.

It’s hard to know how much longer members of Congress and the President can ignore the opinions of the majority of Americans who want corporations to pay more in taxes. Perhaps as more people feel the effects of the sequester and other service cuts supposedly necessary to balance they budget, the more they’ll demand to know why their elected leaders are allowing so much corporate tax revenue to go uncollected.


The Myth that Tax Cuts Pay for Themselves Is Back


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Our report on Paul Ryan’s most recent budget notes that it includes a package of specific tax cuts but claims to maintain current law revenue levels, without specifying how. Our report assumes tax expenditures would have to be limited, as all of Ryan’s previous budget plans propose explicitly, to offset the costs of his tax cuts.

It is possible that Ryan doesn’t believe he would have to make up all of those costs, because he might believe that at least some of his tax cuts pay for themselves. In other words, Ryan might rely, at least partly, on “supply-side” economics.

One of the main ideas behind supply-side economics is that reducing tax rates will unleash so much productivity and investment and so much growth in incomes and profits that the tax collected on those increased incomes and profits will make up for the revenue loss from the reduction in tax rates.

The section of Ryan’s budget plan on tax reform cites, and is nearly identical to, a letter from Ways and Means Chairman Dave Camp and the Republican members of his committee explaining that they seek a tax reform that would “lead to a stronger economy, which would create more American jobs and higher wages. More employment and higher wages would lead to higher tax revenues which would simultaneously address both the nation's economic and fiscal reforms.” The letter goes on to say that they “will continue to oppose any and all efforts to increase tax revenue by any means other than through economic growth.”

Having Failed to Win the Argument Over the Income Tax Cuts and Capital Gains Tax Cuts, Supply-Siders Now Turn to Corporate Tax Cuts

Of course, if there was any possibility that we could actually get more revenue by paying less in taxes, we would all support that. The idea is so appealing that many lawmakers cling to it despite overwhelming evidence that it’s wrong.

Anti-tax lawmakers and pundits have tried to use the supply-side argument for several different types of tax cuts.

For example, the George W. Bush administration had the Treasury investigate whether or not the Bush income tax cuts would pay for themselves, and the Treasury reported back that, sadly, they would not.

To take another example, the editorial board of the Wall Street Journal has been obsessed for several years with the idea that income tax breaks for capital gains (if not other types of personal income tax cuts) pay for themselves. But the evidence shows that revenue from taxing capital gains rises and falls with the stock market and the overall economy, not changes in tax policy.

And yet another example is the apparent campaign underway now to convince Congress and the public that cuts in the corporate tax rate pay for themselves. On the same day as Ryan released his budget plan, the Tax Foundation released a report claiming that reductions in corporate tax rates pay for themselves. Two days earlier, Arthur Laffer, the leading proponent of “supply-side” economics, made the same argument in a U.S.A. Today column. (See ITEP's critiques of Laffer's other work as junk economics.)

The Tax Foundation report is particularly telling. The Tax Foundation explains that their “dynamic” estimates assume that changing the corporate tax rate affects the economy. But stop and think about what this means exactly. They are essentially feeding assumptions into a model and then reporting the result.

The effect of taxes on the economy is complicated, especially when you consider that taxes fund public investments (like infrastructure and education) that enhance economic growth by enabling businesses to profit.

The Tax Foundation has fed their model assumptions about the effects of taxes on the economy and assumptions about how significant those effects are. If they assumed that cutting corporate tax rates had a negative impact or only a small positive impact on the economy, then their model would conclude that these tax cuts do not pay for themselves. But they assume a large positive impact on the economy, and their model therefore concludes that such tax cuts do pay for themselves.   

Some Members of Congress Seek “Dynamic Scoring” for Tax Proposals

It is unclear that proponents of supply-side economics will be any more successful with corporate income tax cuts than they have been with other types of tax cuts. But there is a real danger because anti-tax lawmakers often demand that Congress’s process of estimating the revenue effects of tax proposals be altered to take supply-side economics into account.

In other words, some lawmakers demand that the revenue estimating process assume that tax cuts cause economic growth, which can in turn offset at least part of the revenue loss — meaning tax cuts can at least partially pay for themselves.

Using this type of “dynamic scoring,” as it is often called, would be particularly manipulative. For one thing, even if we believed that tax cuts putting money into the economy boosts growth enough to partially offset the costs, then it’s equally logical to assume that spending cuts taking money out of the economy would reduce growth enough to limit the amount of deficit reduction they achieve.

But of course Paul Ryan and Dave Camp, who are championing a budget plan that includes massive spending cuts, do not suggest that the estimating process be altered to assume that such effects on the economy limit the amount of savings achieved. These are not the type of “dynamic” effects they have in mind.


Comparing Congressional Budget Plans


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The bottom line on the revenue proposals in the three budget plans in Congress today can be stated simply: The Congressional Progressive Caucus’s plan (for which CTJ provided some estimates) is sensible. House Budget Chairman Paul Ryan’s plan is absurd, and Senate Budget Chairman Patty Murray’s plan is in the middle.

As our new report explains, Paul Ryan promises a specific set of tax cuts but promises to maintain current law revenue levels, meaning some unspecified reduction or elimination of tax expenditures must take place. Our report explains that the richest Americans would see a net tax decrease under this plan even if they must give up all the tax expenditures that Ryan has put on the table. And if the richest Americans pay less, then obviously someone else must pay more, in order to meet Ryan’s goal of revenue-neutrality.

The other two budget plans at least recognize the need for more revenue. Some have suggested that Ryan is softening his stance on revenue because he accepts the overall revenue level projected under current law, which is more than he accepted in the past. But the current law revenue level is entirely inadequate and untenable.

Here’s why. Ryan’s plan notes that under current law, federal revenue will equal 19.1 percent of GDP (19.1 percent of the overall economy) in 2023, and observers have noted that this is more than his previous budgets would have allowed. But this level of revenue would not have balanced the budget even during the Reagan administration, when federal spending ranged from 21.3 percent to 23.5 percent of GDP.

Chairman Murray’s plan would raise revenue by $975 billion over a decade, so that federal revenue will equal 19.8 percent of GDP in 2023. The plan from the Congressional Progressive Caucus (CPC) would raise revenue by $5.7 trillion, so that revenue will reach 21.8 percent in 2023. In other words, only the Progressives would come close to funding the type of spending that Reagan presided over.

It’s helpful to think about a given budget plan’s projected revenue as a percentage of GDP for the purpose of comparison, but one should not overstate the usefulness of this number. Chairman Ryan has often talked as though the goal of the budget process is hitting a certain percentage, rather than fairly raising enough revenue to pay for the public investments that actually build the middle-class and the country.

Most Americans probably don’t care what revenue is as a percentage of GDP as long as the revenue collected is enough to adequately fund the schools they send their kids to, maintain the highways they drive to work on, and keep their health care costs from bankrupting them.

Ryan’s budget clearly slashes funding for anything that would address any of those issues. That’s what happens if you balance the budget in a decade without raising any revenue.

The Murray Plan

There are many good things to say about Senator Murray’s plan, in that it calls for badly needed tax increases and better-designed spending cuts to replace the sequestration (the scheduled cuts of over $1.2 trillion over the decade).

The Murray plan also makes the case for more revenue, explaining that the projected current law revenue is lower, as a percentage of GDP, than it was during the last five times the budget was balanced (going all the way back to 1969). It also explains that the level of revenue it envisions is still less than was proposed in the Simpson-Bowles plan and the other plans that lawmakers calling themselves “centrists” claim to admire.

But the Murray plan does not specify what tax increases or spending cuts would be acceptable. The plan says it would raise revenue by “closing loopholes and cutting wasteful spending in the tax code that benefits the wealthiest Americans and biggest corporations,” which is certainly moving in the right direction for those of us who believe that the overall tax system is not asking very much from wealthy individuals or from corporations.

The Murray budget plan would use the reconciliation process (the process that avoids filibusters in the Senate) to pass legislation raising the promised $975 billion, and it does specify that the progressivity of the tax code must be maintained. But the plan does not specify what the tax increases would be. The plan explains how tax expenditures like deductions and exclusions benefit the rich, but fails to mention the most regressive tax expenditure of all, the preferential rate for capitals gains and dividends. The plan explains how corporations avoid taxes through offshore tax havens, but does not suggest fixing the problem by ending the rule allowing U.S. corporations to “defer” their offshore taxes, and does not even suggest rejecting proposals for a “territorial” system that would exacerbate the problem.

The Congressional Progressive Caucus (CPC) Plan

The CPC plan addresses all of these issues, repealing the enormously regressive capital gains tax preference and closing several loopholes used to avoid taxes on capital gains, repealing “deferral” and explicitly rejecting a territorial system, introducing new tax brackets for high-income individuals and many very specific proposals that have been championed by Citizens for Tax Justice. No one will agree with every provision in the CPC budget plan, but it is certainly a plan for people who want to have substantive discussions about what Congress should actually do.

The plan’s list of tax provisions range from huge (raising over a trillion dollars by ending far more of the Bush tax cuts than were allowed to expire under the fiscal cliff deal) to small (ending the Facebook stock options loophole) to very small (eliminating write-offs for corporate jets).

Even supporters of Murray’s plan should find the CPC plan useful because it provides a list of proposals that can be used to fill in some of the blank spots in the Murray plan.

Read CTJ's new report on the latest budget plan from House Budget Chairman Paul Ryan.

Paul Ryan’s budget plan for fiscal year 2014 and beyond includes a specific package of tax cuts (including reducing income tax rates to 25 percent and 10 percent) and no details on how Congress would offset their costs, all the while proposing to maintain the level of revenue that will be collected by the federal government under current law.

The revenue loss would presumably be offset by reducing or eliminating tax expenditures (tax breaks targeted to certain activities or groups), as in his previous budget plans.

CTJ's new report find that for taxpayers with income exceeding $1 million, the benefit of Ryan’s tax rate reductions and other proposed tax cuts would far exceed the loss of any tax expenditures. In fact, under Ryan’s plan taxpayers with income exceeding $1 million in 2014 would receive an average net tax decrease of over $200,000 that year even if they had to give up all of their tax expenditures.

Because these very high-income taxpayers would pay less than they do today in either scenario, the average net impact of Ryan’s plan on some taxpayers at lower income levels would necessarily be a tax increase in order to fulfill Ryan’s goal of collecting the same amount of revenue as expected under current law.


Replace the Sequester By Closing Tax Loopholes


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The “sequester” that went into effect on March 1st is another clear indication of the stranglehold that anti-tax zealots still have over Washington. While lawmakers across the political spectrum (and particularly those outside the Beltway) oppose the sequester’s $85 billion in across-the-board cuts, the failure to reach a deal to replace these cuts rests entirely with anti-tax lawmakers who have blocked any agreement that would include any revenue increases at all.

The primary argument made to justify this anti-tax position is that the fiscal cliff deal already raised a substantial amount of revenue; they’re saying the President "already got" his tax increase.  According to the official scorekeepers at the Congressional Budget Office however, the fiscal cliff deal actually reduces revenue by almost $4 trillion over the next decade because it made most of the Bush tax cuts permanent, renewed a slew of special interest tax breaks for a year, and extended some expanded refundable tax credits for five years.

Even if you accept that the Fiscal Cliff “raised” $620 billion in revenue (measured against what would have happened if Congress had extended all the tax cuts instead of 85 percent of them), the reality is that having anything close to a balanced approach to deficit reduction should include raising a whole lot more revenue. This may be news to Republican House Speaker John Boehner, who recently asked “When is the president going to address the spending side of this?” But Congress has already enacted $3 in spending cuts for every $1 in revenue raised by the fiscal cliff deal. If the sequester is allowed to stay in effect, or is replaced entirely by spending cuts, the ratio of spending cuts to revenue increases will rise to as high as 5-to-1.

For his part, President Obama has offered a plan that would replace the sequester with $1.8 trillion in deficit reduction, including $1,130 billion in spending cuts and $680 billion in revenue increases. The President is proposing to raise about $583 billion of the $680 billion in revenue by limiting the tax savings of each dollar of certain deductions and exclusions to 28 cents.

President Obama’s plan, however, does not ask for nearly enough revenue to replace the trillions lost by making the Bush tax cuts permanent, or to even make the level of revenue increases equal to the level of spending cuts enacted during his first term. In fact, if Congress enacted President Obama’s plan as is, it would still mean that well over $2 in spending cuts will have been enacted for every $1 in revenue increases. 

The fairest approach would be to replace the entirety of the sequester cuts with new revenue. To accomplish this, lawmakers should not only limit deductions and exclusions as President Obama is proposing, but should also consider raising hundreds of billions of dollars more by eliminating the tax breaks and loopholes that allow wealthy individuals and corporations to shelter their income from taxation.

Taking a step back, it’s simply unjustifiable to proceed with devastating spending cuts that would reduce already meager unemployment benefits by eleven percent, or deny aid to as many as 750,000 women and children, just to preserve exorbitant, unwarranted tax breaks for the wealthiest individuals and profitable corporations.


New Corporate Tax Lobby: Don't Call It LIFT, Call It LIE


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A group of so far undisclosed corporations are forming a lobbying coalition called Let’s Invest for Tomorrow (LIFT) to press Congress to enact a “territorial” tax system. The coalition should be named Let’s Invest Elsewhere (LIE), because that’s exactly what American multinational corporations would be encouraged to do under a territorial tax system.

A “territorial” tax system is a euphemism to describe a tax system that exempts offshore corporate profits from the U.S. corporate tax.

U.S. corporations are already allowed to “defer” (delay indefinitely) paying U.S. taxes on their offshore profits until those profits are brought back to the U.S. This creates an incentive for U.S. corporations to shift operations (and jobs) offshore or just disguise their U.S. profits as offshore profits so that U.S. taxes can be deferred. Completely exempting those offshore profits from U.S. taxes would obviously increase the incentives to shift jobs and profits offshore.

A CTJ report from 2011 explains these problems in detail and concludes that Congress should move in the opposite direction by ending “deferral” rather than adopting a territorial tax system. The stakes are getting higher each year as U.S. corporations hold larger and larger stashes of profits offshore. (A recent CTJ paper finds that 290 of the Fortune 500 have reported their profits held offshore, which collectively reached $1.6 trillion at the end of 2011.)

The Public Opposes Territorial Tax Proposals – But Will Congress Listen?

In a world where politicians actually did what voters wanted, we would not have to worry that this coalition might actually succeed in its goal of bringing about a territorial tax system, which the public would clearly oppose.

For example, a survey taken in January of 2013 asked respondents, “Do you approve or disapprove of allowing corporations to not pay any U.S. taxes on profits that they earn in foreign countries?” 73 percent of respondents said they “disapprove” and 57 percent said they “strongly disapprove.” The same survey found that 83 percent of respondents approved (including 59 percent who strongly approved) of a proposal to “Increase tax on U.S. corporations’ overseas profits to en