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.
Federal Tax Issues News
American Express's Tax Avoidance Opposed by Most Small Businesses
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.
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 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.
— 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!
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.
Statement from CTJ Director Robert McIntyre: Is the Baucus Plan for Multinational Corporations a Prelude to a Middle-Class Tax Increase?
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."
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.
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.
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.
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.
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.
PricewaterhouseCoopers Report Quietly Confirms Low Effective Tax Rates for Corporations But Directs Attention to Irrelevant Figures
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.
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
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.
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.
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.
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.
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.
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
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.
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.
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.
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!
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.
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.
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.
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.
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.
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.
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.
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).
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.
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.”
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
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.
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.
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.
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.
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.”
President Obama Clings to His Proposed Business Tax "Reform" that Would Raise No Revenue in the Long-Run
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.
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
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.
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.
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...”
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.
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.
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
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.”
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.
Obama's Treasury Department Prioritizes Interests of Multinational Corporations Over Reducing Tax Avoidance
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.
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.
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.
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.
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.
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.
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.
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.
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.
Senate Hearing Demonstrates How U.S. Tax Rules Allow Apple (and Many Other Companies) to Use Offshore Tax Havens
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.
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.
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.
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 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
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?
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.
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).
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.
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.
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.
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.
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.
New from CTJ: Bernie Sanders Is Right and the Tax Foundation Is Wrong -- The U.S. Has Very Low Corporate Income Taxes
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.
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.
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.
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).
CTJ Fact Sheet & Report: America's Tax System Is Not Very Progressive, and the Fiscal Cliff Deal Did Not Change That
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.
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.
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.
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.
Senate Budget Debate Shows Support for Increased Revenue, Sales Taxes on Internet Purchases, and More
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.
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.
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.
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.
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.
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.
New CTJ Report: Paul Ryan's Latest Budget Plan Would Give Millionaires a Tax Cut of $200,000 or More
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.
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.
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 ensure it is as much as tax on their U.S. profits.”
And yet, it’s unclear that lawmakers are paying attention to the interests or opinions of ordinary Americans.
It is true that Vice President Biden went out of his way at the Democratic National Convention to criticize the territorial system proposed by Mitt Romney. And it’s also true that the “framework” for corporate tax reform released by the White House in February of 2012 refused to endorse a territorial system.
But the framework only rejected a “pure territorial system.” CTJ pointed out that the time that probably no country has a “pure territorial system,” so this does not provide much assurance or guidance.
Meanwhile, it has long been rumored that many of the Democratic members of the Senate Finance Committee (the Senate’s tax-writing committee) favor a territorial system.
Republican lawmakers, for their part, have long fully endorsed a territorial system. House Ways and Means Committee Chairman Dave Camp made public his proposals for a territorial system in October 2011. That very day, CTJ released a letter signed by several national labor unions, small business associations and good government groups opposing Camp’s move, but the response from lawmakers was relatively muted.
Perhaps more disturbing, at his recent confirmation hearings, the new Treasury Secretary, Jack Lew, appeared open to the idea of a territorial system.
Similar Corporate Lobbying Coalition Failed to Get a Temporary Exemption for Offshore Profits (Repatriation Holiday)
Some readers will remember that during 2011 and 2012 a group of corporations calling itself WIN America pushed for an tax amnesty for offshore profits (which they preferred to call a “repatriation holiday.”) The coalition was made up of companies who believed that Congress might not be naïve enough to give them the much bigger prize, a territorial system. As explained in a CTJ fact sheet, a repatriation holiday would temporarily exempt offshore profits from U.S. taxes, while a territorial system would permanently exempt those offshore profits from U.S. taxes, and would therefore cause even greater problems.
WIN America did give up and disband. But that could be largely because influential lawmakers like Ways and Means Chairman Dave Camp are indicating that the bigger prize, a territorial system, is within reach.
Complexity Helps the Lobbyists and Lawmakers Who Hope the Public Does Not Catch On
It may be that politicians remain open to tax proposals that the public hates because the issues involved are so complicated that they believe no one is paying attention. This makes it vital to call attention to the effects a territorial system would have on ordinary Americans.
The issues are admittedly complicated. For example, Americans have been presented over and over with a very simple story about how the U.S. has a corporate tax that is more burdensome than the corporate taxes of other countries, and that our companies need new rules that make them “competitive” with global competitors.
The reality is very different and much more complicated. While the U.S. has a relatively high statutory tax rate for corporations, the U.S. corporate tax has so many loopholes that most major multinational corporations seem to be paying a lower effective tax rate in the U.S. than they pay in the other countries where they have operations. CTJ’s major 2011 report on corporate taxes studied most of the profitable Fortune 500 companies and found (on pages 10-11) that among those with significant offshore profits (making up a tenth or more of their overall profits) two-thirds actually paid a lower effective tax rate in the U.S. than in the other countries where they operated.
On the other hand, there are a number of countries that have extremely low corporate tax rates or no corporate tax at all – mostly very small countries with little actual business activity – where U.S. companies like to claim their profits are generated, in order to avoid U.S. taxes. These are the offshore tax havens that exploit the rule allowing U.S. corporations to “defer” U.S. taxes on their offshore profits. If the U.S. completely exempts these profits from U.S. taxes (in other words, enacts a territorial system) these incentives will be greatly increased.
This is confirmed by a recent report from the Congressional Research Service finding that in 2008, American multinational companies reported earning 43 percent of their $940 billion in overseas profits in the five very small tax-haven countries, even though only four percent of their foreign workforce and seven percent of their foreign investments were in these countries. In contrast, the five “traditional economies,” where American companies had 40 percent of their foreign workers and 34 percent of their foreign investments, accounted for only 14 percent of American multinationals’ reported overseas’ profits.
These statistics are outrageous and demonstrate that U.S. corporations are engaging in various accounting tricks in order to make it appear (for tax purposes) that their profits are generated in countries where they won’t be taxed. The LIFT coalition will count on the fact that this is simply too difficult for ordinary people to understand – which makes educating the public about this more important than ever.
The Center for Media and Democracy (CMD), creator of the indispensible wiki, SourceWatch, recently launched a new wiki resource allowing users to explore the funding, leadership, partner groups and lobbyists that make up the Campaign to Fix the Debt. This resource reveals Fix the Debt for what it really is: another coordinated push by large corporations and billionaire Pete Peterson to force Congress to pass large and unneeded cuts to Social Security and Medicare.
We’d be remiss if we failed to also mention Fix the Debt’s naked duplicity in pushing for massive cuts to critical programs while simultaneously pushing for additional tax breaks for its many corporate backers. Using data from Citizens for Tax Justice (CTJ), CMD exposes the audacity of some of 151 corporate backers of Fix the Debt by showing that many of them, such as Boeing, General Electric and Verizon, are already paying less than nothing in taxes.
371 Productions, the creator of the PBS documentary, “As Goes Janesville,” has launched a corporate transparency website and iPhone app called BizVizz, which provides consumers with easy access to financial information about America’s largest corporations. BizVizz uses CTJ’s corporate tax data to reveal that our broken corporate tax system allows the makers of many of our everyday products to get away with paying little – or sometimes nothing – in income taxes. One especially cool feature of the app allows the user to snap a picture of a product logo and get instant information on how much the company paid in federal taxes.
BizVizz includes other data, too. It shows how major corporations obtain their low tax rates because it includes data from the Sunlight Foundation on how much each corporation gave to politicians in campaign contributions. The other category of data BizzVizz includes is from Good Jobs First, listing subsidies corporations get from state and local governments – subsidies that come straight out of the tax dollars the rest of us pay in.
A new report from the Center for Law and Social Policy (CLASP) explores the shortcomings and potential reforms of tax breaks that are intended to expand access to postsecondary education. “While delivering student aid through the tax system is a ‘second best’ strategy,” the report argues, “because Congress has chosen to deliver nearly half of non-loan student aid this way, it is essential to make it work better."
It’s hard to disagree. The report notes that the confusing collection of tax breaks for postsecondary education cost $34.2 billion in 2012, almost as much as the $35.6 billion spent on Pell Grants. But, whereas Pell Grants target lower-income households that could not otherwise afford college, the tax breaks target relatively well-off families who will usually send their children to college with or without any tax incentive to do so.
As the report explains, “…the percentage of high school completers of a given year who enroll in two- or four-year colleges in the fall immediately after completing high school… was 52 percent for low-income families (bottom 20 percent), 67 percent for middle-income families (middle 60 percent) and 82 percent for high-income families (top 20 percent…).” In other words, higher-income families might send their children to college no matter what, while student aid could make the difference between going to college or not going to college for lower-income people.
Improve and Expand the Best Education Tax Break, Ditch the Others
But not all tax breaks for postsecondary education are the same. Some are more targeted to those who really need them than others, although none are nearly as well-targeted to low-income households as Pell Grants, as illustrated in the bar graph below.
The graph 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 proposal offered in the CLASP report would expand the American Opportunity Tax Credit (AOTC), represented by the blue bar above, which at least reaches low-income families not helped by the other tax breaks. The costs of the expansion would be offset by eliminating the deduction for tuition and fees, the LLC and the deduction for student loan interest.
In addition to better targeting tax breaks for postsecondary education, this reform would also reduce confusion among families as they try to figure out what aid is available for college. A 2012 report from the Government Accountability Office found that over a fourth of taxpayers eligible don't take advantage of any tax benefits for education, and those who do use them often don't use the most advantageous tax break for their situation.
Things Will Get Worse if Congress Doesn’t Act
The AOTC, the most progressive of the education tax breaks (or perhaps it’s better described as the least regressive of the education tax breaks) was signed into law by President Obama in 2009 and extended several times, but was never made permanent. The New Year’s Day deal enacted to avoid the so-called “fiscal cliff” extended the AOTC through 2017. If Congress fails to act before then, it will expire and its precursor, the less targeted Hope Credit, will come back into effect.
The biggest reason why the AOTC is better targeted to low-income families than the Hope Credit is the fact that the AOTC is partially refundable. 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, like the Earned Income Tax Credit.
The proposals described in the CLASP report would expand the refundability of the AOTC, among several other reforms.
You're a Tax Cheat if You Don't Pay Sales Taxes on Amazon Purchases -- and a New Bill Might Make You Pay
The only thing worse than giving Amazon an unfair advantage over local businesses is creating that advantage by facilitating tax evasion.
And that’s exactly what the Supreme Court did in the early 1990s when it decided that the Commerce Clause of the Constitution barred state and local governments from requiring out-of-state retailers to collect sales taxes from their customers. Essentially, the court decided that a business without a “physical presence” in the state could not be required to collect sales taxes from customers the way that a company with a physical store in your state is required to collect sales taxes on whatever you buy there.
If you live in a state with a sales tax and you buy a product online from a company that has no physical presence in your state, you do owe sales tax on that purchase — but the state cannot make the online retailer collect it from you. You are supposed to pay the tax directly to the state (technically this tax is called a “use tax”). But this rule is obviously unenforceable and as a result most online buyers never pay that tax.
The Solution: The Marketplace Fairness Act of 2013
The Supreme Court’s decision does allow for Congress to explicitly authorize states to require these retailers (retailers with no physical presence in the state) to collect sales taxes, and this is the goal of a bill introduced in the House and Senate last week, the Marketplace Fairness Act (MFA) of 2013.
The MFA would essentially undo the effect of the Supreme Court decision for those states that adopt a minimal set of common rules (which mostly involve harmonizing sales tax rules for taxing jurisdictions within the state's borders). Twenty-four states have already joined what is called the Streamlined Sales and Use Tax Agreement (SSUTA), which includes a common set of sales tax rules, and would be authorized to require sales tax collection immediately under the MFA. Other states would be authorized if they meet the minimal standards set out in the bill.
Who Can Defend Tax Evasion?
The legislation has Republican and Democratic cosponsors in the House and Senate. This is not as surprising as it seems, given that the bill would not raise taxes but merely allow states to require retailers to collect the sales taxes that are already due.
It is difficult for opponents of the law to defend the current situation, which would basically be a defense of tax evasion. Opponents usually resort to claiming that it’s simply too difficult for online retailers to figure out what taxes would apply in the many different taxing jurisdictions where their customers are located.
But, as the Institute on Taxation and Economic Policy (ITEP) has explained, new technology, combined with the harmonized sales tax rules under SSUTA, would make it relatively easy for internet retailers to determine what sale taxes apply in a customer’s jurisdiction. We know this because major retailers that have a “physical presence” in numerous states, like Best Buy and Barnes and Noble, already collect sales taxes on sales made over the Internet, in addition to those made inside their physical stores. Similarly, Amazon collects sales tax on behalf of certain merchants located all around the country that sell via its website, though it mostly refuses to do so on items it sells directly.
Netflix’s CEO summed up the reality of the alleged tax complexity problem when he said, “We collect and provide to each of the states the correct sales tax. There are vendors that specialize in this... It’s not very hard.”
Increased Chances for Passage
The MFA has been introduced in various forms in previous Congresses, but there is reason to think that its chances of passage are greater than before. One reason is that sponsors have settled on a high exemption level — $1 million. While it seems ridiculous that a retailer could make $950,000 in sales in a year without being required to collect sales taxes from its online customers, this change will placate those concerned about the bill’s effect on “small businesses.”
Another reason the chances for passage are increasing is the changing nature of retail business. As we continue to charge ahead into the digital age, it’s becoming undeniable that a sales tax based only on retailers with a physical presence is simply not adequate for the 21st century.
Former White House chief of staff Erskine Bowles and former Senator Alan Simpson, co-chairs of President Obama’s ill-fated fiscal commission, have a new proposal for a “grand bargain” to reduce the budget deficit. Their newest idea is to raise less revenue than they suggested in their original proposal and rely more on cuts in public services and public investments. They have absolutely no policy rationale for this whatsoever, but state quite explicitly that they are proposing a new plan to adjust for the political positions of President Obama and House Speaker John Boehner.
This might come as a surprise to the many observers of Bowles and Simpson, including many of their admirers in Congress, who believed the original Bowles-Simpson plan was based on policy rationales developed by technocrats who weren’t weighed down by the political baggage that hinders our elected officials.
The original Bowles-Simpson plan, approved by a majority of the commission members in 2010 but not by the super-majority that was needed under its rules to refer it to Congress, would have raised $2.6 trillion in revenue over a decade to reduce the deficit. It also would have cut spending by $2.9 trillion to reduce the deficit.
The new Bowles-Simpson plan would raise just $1.2 trillion to reduce the deficit, including revenue saved in the time that has passed between the two plans. (This includes roughly half a trillion dollars saved in the New Year’s deal from allowing tax cuts for the rich to expire plus additional revenue that Congress would need to raise.)
In a Washington Post interview, Erskine Bowles reminded the reporter that President Obama called for raising just $1.4 trillion in new revenue during debates over the fiscal cliff, and then explained, “being far out front of the president on revenues wasn’t something I wanted to do again.”
This all begs a question: If politicians feel they need leadership from an unelected panel (like the President’s Commission or the “super committee”) to address the budget in a technical way, but the technocrats leading those panels are simply finding the middle-ground between the positions of the politicians, then who exactly is leading?
Background: The Misunderstood (Original) Bowles-Simpson Plan
The original Bowles-Simpson plan was often said to achieve one-third of its deficit-reduction from revenue increases, mostly from a tax reform that would raise $80 billion in 2015 alone and $180 billion in 2020 alone.
But, as the Center on Budget and Policy Priorities explains, the original Bowles-Simpson plan raises much more revenue if you hold it to the same accounting standards used for most budget plans in Washington today — including savings from allowing tax cuts for the rich to expire and measuring revenue impacts over a full decade. By this standard, the original Bowles-Simpson plan raises about $2.6 trillion in new revenue and achieves almost half of its deficit-reduction goal through new revenue rather than spending cuts.
You might think that achieving half of a given deficit-reduction goal through spending cuts and another half through revenue increases is a centrist position. But with the President continuously compromising in his efforts woo Congressional Republicans to make a deal, and the latter refusing any increase in revenue at all, Bowles and Simpson now perceive the “middle-ground” to be somewhere entirely different.
None of this is to say that the original Bowles-Simpson plan was great policy. It would have (by some mechanism that was never entirely clear) capped revenue at 21 percent of GDP, even though government spending had reached 22 percent of GDP even back in the Reagan years.
The President, meanwhile, is calling for one-half of the remaining deficit reduction to come from increased revenues — and that’s not enough. When you add up all the deficit reduction that has occurred since Bowles and Simpson first failed in their attempt to bring Washington together, and the remaining deficit reduction Obama proposes, only about a third of it would take the form of increased revenue. The rest would come from spending cuts. That’s not balanced at all.
Front Page Photo of Barack Obama meeting with Alan Simpson and Erskine Bowles via Cal Almond Creative Commons Attribution License 2.0
If confirmed, Jack Lew, the President’s nominee for Treasury Secretary, will oversee IRS enforcement of tax laws and will oversee the development and analysis of tax proposals, among other things. It would therefore be reassuring if Lew did not seem unaware of what is going on in tax havens, and unaware of the problems with proposals to exempt corporations’ offshore profits from U.S. taxes.
Much has been made of the fact that Lew, who worked at Citigroup before serving as chief of staff to the President, had an investment in a fund registered in the Cayman Islands, a notorious offshore tax haven.
Lew told the Senate Finance Committee on Wednesday that the fund was set up by Citigroup, that he didn’t know where it was based, and that he lost money on it in any event.
Lew “Unaware of Ugland House” in the Cayman Islands
What’s actually alarming about Lew’s comments before the committee is that he didn’t even seem to understand the crisis in our tax system that the Cayman Islands and other tax havens are taking advantage of.
For example, Republicans on the committee told of how the fund in question was registered in Ugland House, a small five-story building in the Cayman Islands where over 18,000 companies are officially headquartered. Obviously, most of these “companies” consist of little more than a post office box. Profits are shifted from real business activities in countries like the U.S. into these “companies” in Ugland House. The profits can then be designated as Cayman Island profits, because the Cayman Islands has no corporate income tax.
Those of us who follow tax issues know that Ugland House has been discussed for years at Congressional hearings — although Wednesday’s hearing may be the first time that it was brought up by Republicans.
The Washington Post describes the back-and-forth during the hearing on this topic:
Lew argued that “the tax code should be constructed to encourage investment in the United States.”
“Ugland House ought to be shut down?” Grassley asked.
“Senator, I am actually not familiar with Ugland House,” the witness pleaded. “I understand there are a lot of things that happen there.”
Lew Unaware that Offshore Tax Avoidance, Not Just Tax Evasion, Is a Problem
Equally troublesome is Lew’s defense. “I reported all income that I earned. I paid all taxes due.”
This completely misses the point and misses the point of the debate over tax reform. No one has suggested that Lew committed tax evasion — the criminal act of hiding income from the IRS. The Cayman Islands and other tax havens are certainly used for tax evasion, but that’s not the issue here.
The much larger problem is that our tax system allows massive tax avoidance — practices that reduce taxes that are mostly legal, but in many cases should not be legal — and that tax havens like the Cayman Islands are exploiting this weakness.
Lew probably did pay all the taxes that were due under the tax laws as they’re currently written. The same is true of General Electric, Boeing, Pepco, Verizon, Wells Fargo and the dozens of corporations that paid nothing over several years because the tax laws allowed it. The scandal is not that laws were broken, but that the laws actually allowed this.
Is Lew Unaware that the Administration Has Rejected a “Territorial” Tax System — Or Does He Know Something We Don’t?
One Senator at the hearing asked Lew about the possibility of the U.S. shifting to a “territorial” tax system — which is a euphemism for a tax system that exempts the offshore profits of corporations.
Lew said “there is room to work together.” He said [subscription required] “We actually have a debate between whether we go one way or the other [towards a territorial system or a worldwide system], and we have a hybrid system now. It’s a question of where we set the dial.”
This is alarming for those who thought that the administration had already wisely rejected moving to a territorial system. As CTJ has explained in a report and fact sheet, U.S. companies now can “defer” (delay indefinitely) paying U.S. taxes on their offshore profits, which creates an incentive to use accounting gimmicks to make their U.S. profits appear to be “foreign” profits generated in a tax haven like the Cayman Islands. Under a territorial system, they would never have to pay U.S. taxes on offshore profits, which would logically increase the incentive to engage in such tax dodges.
A year ago, the Obama administration stated that it opposes a “pure territorial system.” CTJ pointed out at the time that a little more clarity is needed because probably no country has a “pure” territorial system, and the “impure” ones are facilitating widely reported tax avoidance in Europe and across the world.
That clarification seemed to arrive when Vice President Joe Biden went out of his way to criticize the idea of a territorial tax system at the 2012 Democratic convention, referring to a study concluding that it could cost the U.S. hundreds of thousands of jobs.
We hope that this is simply another case of Lew being uninformed, and not an indication that the administration may shift towards favoring a territorial system.
Last year at this time, CTJ predicted, based on Facebook’s IPO paperwork, the company would get a federal tax refund in 2012 approaching $500 million, and the company’s SEC filing this month tells us we were right: Facebook is reporting a $429 million net tax refund from the federal and state treasuries. And it’s not because they weren’t profitable. Indeed, Mark Zuckerburg’s little company earned nearly $1.1 billion in profits.
Facebook’s income tax refunds stem from the company’s use of a single tax break, that is the tax deductibility of executive stock options. That tax break reduced Facebook’s federal and state income taxes by $1,033 million in 2012, including refunds of earlier years’ taxes of $451 million.
Of course, Facebook is not the only corporation that benefits from stock option tax breaks. Many big corporations give their executives (and sometimes other employees) options to buy the company’s stock at a favorable price in the future. When those options are exercised, corporations can take a tax deduction for the difference between what the employees pay for the stock and what it’s worth (while employees report this difference as taxable wages). On page 12 of our 2011 Corporate Taxpayers and Corporate Tax Dodgers report, we discuss how 185 other large, profitable companies have exploited the stock option loophole.
We can probably expect the President’s first State of the Union address since being re-elected to include yet another plea to his Congressional adversaries to just be reasonable and meet him somewhere between his already compromised position and their Tea Party-enforced ideology.
We can probably expect the President to continue his calls for legislation that replaces all or part of the automatic spending cuts (sequestration) scheduled to begin March 1 with a mix of both revenue increases and spending cuts. He calls this mix a “balanced approach” in spite of the fact that spending cuts have already been the main source of deficit reduction over the past two years, meaning that the only truly “balanced” way to replace sequestration at this point would be almost entirely by revenue increases.
We can also expect more talk of sacrifice from all Americans, and for the President to reiterate his openness to cutting programs that low- and middle-income Americans rely on – so long as the opposition agrees to some modest tax increases, on those who will hardly notice them.
A new working paper from Citizens for Tax Justice (CTJ) shows that all of this lopsided compromising is unnecessary and that Congress could raise enough new revenues to replace the entire scheduled sequestration and avoid the cuts everyone agrees will weaken our economy. Sequestration, remember, was supposed to be a poison pill because of its unnecessarily blunt, across-the-board cuts of $85 billion from every program and agency this year, and $1.2 trillion over the next decade.
CTJ’s paper shows that such revenue increases can be achieved without affecting low- and middle-income Americans by instead asking profitable corporations, wealthy individuals – particularly those wealthy individuals sheltering their investment income – to pay their fair share in taxes.
For example, Congress could raise around $600 billion over a decade by ending “deferral” of U.S. taxes on offshore corporate profits.
In other words, Congress would repeal the rule allowing U.S. corporations to “defer” (delay indefinitely) paying U.S. taxes on their offshore profits until they bring those profits to the U.S.
Even if Congress didn’t need the revenue, there are still extremely important reasons to end deferral, as a new proposal from Senator Bernie Sanders and Congresswoman Jan Schakowsky would do. In some cases, for example, deferral encourages corporations to shift operations (and jobs) offshore; in other cases, it encourages corporations to use accounting gimmicks to disguise their U.S. profits as “foreign” profits generated in a tax haven like the Cayman Islands or Bermuda.
Another revenue raising option is taxing capital gains at death.
Under the current rules, income that takes the form of capital gains on assets that are not sold during the owner’s lifetime escape taxation entirely. The rationale for this special treatment seems to be that it would be difficult to determine exactly how much an asset has appreciated if it’s been held for many years, but that’s a red herring because the current break applies to assets that have been held for even just a couple years.
It is not known exactly how much revenue would be raised by ending this break, but the Joint Committee on Taxation has estimated that this break will cost the Treasury over $250 billion in just the next five years.
Another option is the President’s own proposal to limit the tax savings that wealthy individuals get from each dollar of deductions and certain exclusions to 28 cents.
The tax code is filled with deductions and exclusions that effectively subsidize certain activities and behaviors, like buying a home, giving to charity, obtaining health care and many others. But providing subsidies through the tax code in this way means that the wealthiest people, those in the top, 39.6 percent tax bracket, are saving almost 40 cents for each dollar they spend on home mortgage interest, charitable giving and health care. Middle-income people, on the other hand, might (if they’re lucky) be in the 25 percent bracket and save just 25 cents for each dollar spent on these things.
Limiting the tax savings to 28 percent would at least reduce that unfairness and it would raise over half a trillion dollars over a decade. Sadly, there is talk that the President, responding to misinformation about how it would impact charitable giving, is open to diluting his proposal so that the charitable deduction is not much affected.
The President can champion policies that large majorities of Americans support.
New polling shows the public is on board with the proposals outlined above. About two-thirds of Americans say corporations should pay more in taxes and two-thirds say the rich should pay more than they pay today. Significantly, this poll was taken more than two weeks after the New Year’s Day deal that allowed tax cuts to expire for the rich, aka “raised taxes” on the wealthiest Americans.
The only thing standing in the way of progressive tax reforms that raise enough revenue to replace the sequestration is the same thing that always stands in the way: the interests of powerful corporations and wealthy investors. Those special interest groups aside, the vast majority of Americans would support the President in a more progressive approach to tax reform.
In recent months, Google, Inc. has come under fire by Britain’s parliament for its alleged use of “immoral” offshore tax dodges as well as by French authorities (Google’s history of shifting income to offshore jurisdictions, aka tax havens, is well documented). But none of this criticism seems to have changed the minds of Google’s executives: the company’s 2012 annual financial reports were released last week, and in them, the company admits to having shifted $9.5 billion in profits overseas in just the past year.
To put this in context, a recent CTJ report identified all 290 of the Fortune 500 corporations that have admitted holding cash indefinitely overseas; this report ranked Google as having the 15th largest offshore cash hoard, with $24.8 billion of offshore cash in 2011. CTJ’s report also showed that the offshore cash holdings of big corporations are highly concentrated in the hands of just a few companies, and the biggest 20 among these 290 corporations represented a little over half of the $1.6 trillion in offshore income we documented. And while we can’t precisely predict the revenue loss this represents, we did calculate that it could be as much as $433 billion in unpaid taxes.
So this fierce debate over whether to offer US multinationals a “tax holiday” for bringing their overseas stash back to the US, or to give them a permanent exemption by adopting a “territorial” tax system, is largely about whether a small number of large companies, including Google, should be rewarded for shipping their cash to low-tax jurisdictions. Given that most of us pay taxes on the money we earn in this country, only seems reasonable that colossally profitable corporations should do the same.
A bill introduced in Congress today called the Corporate Tax Dodging Prevention Act would end “deferral,” the most problematic break in the U.S corporate income tax.
The bill would repeal the rule allowing U.S. corporations to “defer” (delay indefinitely) paying U.S. corporate income taxes on their offshore profits until those profits are “repatriated” (brought to the U.S.).
At an event announcing the proposal this morning, CTJ director Bob McIntyre spoke in favor of the legislation. McIntyre explained:
Because of “deferral,” companies like Apple, Microsoft, Dell and Eli Lilly can shift their U.S. profits, on paper, to foreign tax havens and avoid billions of dollars in taxes that they should be paying. At the end of 2010, just 10 companies, including those just mentioned, report that they had stashed $210 billion offshore, almost all of it in tax havens, and thereby avoided $69 billion in U.S. income taxes.
A recent CRS report found that in 2008, American multinational companies reported earning 43 percent of their $940 billion in overseas profits in five little tax-haven countries, even though only 4 percent of their foreign workforce and 7 percent of their foreign investments were in these countries.
In total, the JCT [Joint Committee on Taxation] estimates that repealing deferral would add $600 billion to federal revenues over the next decade.
The bill was introduced today in the Senate by Bernie Sanders of Vermont and in the House by Jan Schakowsky of Illinois.
CTJ’s recent working paper on tax reform options explains in detail how ending deferral would improve the corporate income tax. It also explains that President Obama has offered several proposals that would address some of the worst abuses of deferral, but would not be as effective or straightforward as simply repealing deferral.
Senator Carl Levin of Michigan has introduced bills to limit some of the worst abuses of deferral, and has been discussing similar proposals with other Senators as a way to raise revenue to replace or delay the automatic spending sequestration that is scheduled to go into effect in March.
The bills introduced by Senator Levin also include provisions targeting offshore tax evasion by individuals, in addition to the offshore tax avoidance by corporations. Offshore tax evasion involves hiding income from the IRS in offshore tax havens in ways that are criminal offenses, whereas the offshore tax avoidance by corporations generally involve practices that are not illegal — but that ought to be.
Ending deferral has become increasingly important as corporations hold more profits than ever offshore. A recent CTJ report finds that public information from 290 of the Fortunate 500 companies indicate that they hold $1.6 trillion in profits offshore. For many of these corporations, the majority of their “offshore” profits are actually U.S. profits that have been artificially shifted to offshore tax havens and then reported as “foreign” profits.
Citizens for Tax Justice has a new online calculator that will tell you what you’d pay in federal taxes in 2013 under three different hypothetical scenarios:
1) Congress did nothing during the New Year and allowed the “fiscal cliff” to take effect.
2) Congress extended all tax cuts in effect in 2012 and delayed all tax increases that were scheduled to go into effect.
3) Congress enacted the American Taxpayer Relief Act, which extended most, but not all tax cuts. This is what actually happened.
The calculator illustrates the impact of the changes in personal income taxes (the expiration of some of the Bush tax cuts for the very rich and the extension of some 2009 provisions expanding the EITC and Child Tax Credit) as well as the health reform-related change to the Medicare tax and the expiration of the Social Security tax holiday.
The calculator demonstrates to the vast majority Americans that their personal income taxes are no different than they would be if all the Bush tax cuts were extended. (A CTJ fact sheet explains that less than one percent of Americans lost any part of the Bush tax cuts under the fiscal cliff deal that was enacted.)
But the calculator also demonstrates that the expiration of the payroll tax holiday — which lawmakers of both parties barely bothered to debate at all — affects middle-income people.
A new short report from Citizens for Tax Justice explains that House Ways and Means Committee Chairman Dave Camp has put forward an intriguing proposal to reform the tax treatment of derivatives — the complex financial instruments that played a starring role in the financial collapse. As the report explains, Camp unfortunately proposes to use any revenue saved from his reforms to pay for reductions in tax rates.
Derivatives can create huge opportunities for tax avoidance. To take just one example explained in the report, Ronald S. Lauder, heir to the Estée Lauder fortune, used a derivative called a “variable prepaid forward contract” to sell stock without paying taxes on the capital gains for a long time. Lauder entered into a contract to lend $72 million worth of stock to an investment bank and promised to sell the stock to the bank at a future date at a discounted price, in return for an immediate payment of cash. The contract also hedged against any loss in the value of the stock.
The contract put Lauder in a position that is economically the same as having sold the stock — he received cash for the stock and did not bear the risk of the stock losing value — and yet he does not have to pay tax on the capital gains until several years later, when the sale of the stock technically occurs under the contact.
The most significant of Chairman Camp’s proposals would subject most derivatives to what is called “mark-to-market” taxation. At the end of each year, gains and losses from derivatives would be included in income, even if the derivatives were not sold.
Assuming the mark-to-market system is implemented properly without loopholes or special exemptions for those with lobbying clout, the result would be that the types of tax dodges described above would no longer provide any benefit. The taxpayers would not bother to enter into those contracts because they would be taxed at the end of the year on the value of the contracts (meaning they are unable to defer taxes on capital gains) and the gains would be taxed at ordinary income tax rates.
The reform could be key to blocking the sort of tax dodges available only to the very rich.
CTJ’s recently updated working paper on tax reform options identifies three categories of reforms that would accomplish this. They include ending tax breaks and loopholes that allow wealthy individuals to shelter their investment income from taxation, ending breaks and loopholes that allow large, profitable corporations to shift their profits offshore to avoid U.S. taxes, and limiting the ability of wealthy individuals to use itemized deductions and exclusions to lower their taxes.
Sequestration: Spending Cuts No One Seems to Want
In 2011, President Obama and Congress agreed to across-the-board sequestration (automatic spending cuts) that they hoped to replace with more targeted, thought-out deficit-reduction measures.
Under the law they enacted, the Budget Control Act of 2011 (the BCA), the sequester was supposed to take effect in the beginning of this year. But the recent deal addressing the “fiscal cliff” replaced the first two months of sequester savings with some arcane accounting gimmicks, so now the sequester begins March 1 if Congress does not act. Between then and the end of the year, it would cut spending by $85 billion. Over a decade, the sequester will cut spending by $1.2 trillion.
Those cuts are spread evenly across defense and non-defense spending, affecting the programs favored by politicians of every ideological stripe. Lawmakers agree that they do not like the scheduled sequester. Congressional Republican leaders argue that it should be replaced entirely with spending cuts while Democratic leaders in Congress and President Obama insist that revenue increases must be involved.
Revenue Is the Answer
The Center on Budget and Policy Priorities points out that if the sequester is averted with spending cuts and no revenue increases, that will mean that the combination of all the deficit-reduction measures, which began in 2011, would include five times as much in spending cuts as revenue increases. The President is calling for any deficit reduction from this point on to include an equal share of spending cuts and revenue increases. But even this would mean that the combination of all these deficit-reduction measures would include twice as much in spending cuts as revenue increases.
A fair approach would be for Congress to replace the sequester entirely with new revenue. There are several reform options described in CTJ’s working paper that would raise hundreds of billions of dollars over the coming decade.
Some of these reform options could be enacted on their own, like President Obama’s proposal to limit the tax savings of each dollar of deductions and exclusions to 28 cents. Others are more likely to be part of a larger tax reform, like ending the rule allowing corporations to “defer” (not pay) U.S. taxes on their offshore profits or ending the provision in the personal income tax exempting capital gains at death. All of these reforms would end or cut back tax breaks that are hugely beneficial to extremely wealthy families and large corporations but not to low- and middle-income families.
A new working paper on tax reform options from Citizens for Tax Justice has a section describing a category of revenue-raising proposals that has not received much attention: ending tax shelters for investment income. As former Treasury Secretary Larry Summers noted in a recent op-ed: “What’s needed is an element that has largely been absent to date: [reducing] the numerous exclusions from the definition of adjusted gross income that enable the accumulation of great wealth with the payment of little or no taxes.”
The problem addressed by these proposals is partly related to the problem posed by the special, low rates that apply to capital gains and stock dividends. (Congress certainly needs to eliminate those special rates, so that investment income is taxed just like any other income.)
The breaks and loopholes criticized by Larry Summers and explained in CTJ’s new working paper allow wealthy individuals to delay or completely avoid paying taxes on their capital gains — at any rate. It does not matter what tax rate applies to capital gains so long as the wealthy can use these shelters to avoid paying any tax at all.
Path to Reform that Taxes All Income at the Same Rates
If these tax shelters are eliminated, that may make it easier for Congress to tackle the other problem with investment income — the special low rates that apply to investment income that takes the form of capital gains and stock dividends. Currently, the Joint Committee on Taxation (JCT), the official revenue estimator for Congress, assumes that people will respond to hikes in tax rates on capital gains by holding onto their assets or finding ways to avoid the tax, reducing the amount of revenue that can be raised from such a rate hike. (CTJ has explained why JCT’s assumptions are overblown in the appendix of our 2012 report on revenue-raising options.)
But if the various shelters that people use to avoid taxes on capital gains are closed off, JCT could logically assume that raising tax rates on capital gains will raise substantially more revenue.
Tax Capital Gains at Death
The tax shelter that is probably the largest, in terms of revenue, is the “stepped-up basis” for capital gains at death. Income that takes the form of capital gains on assets that are not sold during the owner’s lifetime escape taxation entirely. The heirs of the assets enjoy a “stepped-up basis” in the assets, meaning that any accrued gains at the time the decedent died are never taxed. (The estate tax once ensured that such gains would be subject to some taxation, but repeal of three-fourths of the estate tax has been made permanent in the fiscal cliff deal.)
The justification for the stepped-up basis seems to be the difficulty in ascertaining the basis (the purchase price, generally) of an asset that a taxpayer held for many years before leaving it to his or her heirs at death.
But this difficulty (which is decreasing rapidly because of digital records) does not justify the sweeping rule allowing stepped up basis for all assets left to heirs — even assets that have a clearly recorded value and assets that were only acquired right before death.
It is also not obvious that this difficultly with determining the basis is that different after the death of the owner of the asset. Consider an asset that was held for, say, 40 years and bequeathed at death and an asset that was held for 40 years and then sold to fund the taxpayer’s retirement. In the former situation, the gains that accrued over those 40 years are never taxed, but in the latter situation they are taxed. But any difficulties in determining basis would seem to be the same in these situations.
The proposal to tax capital gains at death, and the others described in the working paper, challenge some breaks that wealthy individuals and their accountants and lawyers are deeply attached to. But the vast majority of Americans whose income takes the form of wages are not able to use these maneuvers to delay or avoid taxes on their income. They would have trouble understanding why these tax shelters for the wealthy should be preserved while Congress considers dramatic cuts to public investments that support all Americans.
On Friday, the IRS held its EITC Awareness Day, working with local governments, non-profits and community groups to ensure that people potentially eligible for the Earned Income Tax Credit (EITC) file tax returns and claim it. The IRS says that one in five who are eligible for the EITC do not claim it.
The EITC, which is basically a tax credit equal to a certain percentage of earnings (up to a limit) to encourage work and reduce poverty, is widely misunderstood by many pundits and members of Congress. Like the Child Tax Credit, the EITC is a refundable tax credit, meaning it provides a benefit even when the credit is larger than the federal personal income tax that a taxpayer would otherwise owe. This can result in a negative income tax, meaning the IRS will send a check to the taxpayer.
These refundable credits are one reason why some Americans do not owe federal personal income taxes. (There are other reasons as well, like the fact that most of the Social Security benefits that retirees and people with disabilities receive are not subject to the income tax.)
Conservative Opposition to 2009 Expansions of EITC and Child Tax Credit
For the past couple years, conservative politicians and pundits have largely missed or ignored the fact that taxpayers with a negative income tax rate resulting from refundable credits do pay other types of taxes, which tend to be regressive. Federal payroll taxes, to take one example, are paid by everyone who works (and the EITC and the refundable part of the Child Tax Credit are only available to those with earnings). And all Americans pay state and local taxes, which are particularly regressive. The refundable credits in the federal personal income tax offsets some of the regressive impact of these other taxes.
Conservative politicians actually came out against expanding the EITC and the refundable part of the child tax credit in 2009, when President Obama proposed expanding the EITC for larger families and families headed by married couples and expanding the refundable part of the Child Tax Credit for very-low income working families. Those provisions were included in the economic recovery act enacted in 2009 and again in the deal the President made with Republicans at the end of 2010 to extend all the expiring tax cuts for another two years.
But each time Congressional Republicans introduced a proposal to extend tax cuts, it allowed these particular provisions to expire. CTJ’s figures showed what was at stake if these 2009 provisions expired. For example, CTJ’s state-by-state figures showed that in 2013, benefits for 13 million families with 26 million children would be lost if the provisions were not extended.
All Americans Pay Taxes
Conservative pundits claimed that these provisions led to nearly half of Americans not paying taxes. Paul Krugman at the New York Times, Ruth Marcus and Ezra Klein at the Washington Post and other observers have noted CTJ’s data showing that once you account for all of the different types of taxes, Americans in all income groups do, in fact, pay taxes and that our tax system overall is just barely progressive.
Mitt Romney and the 47 Percent
Perhaps the misinformation came to its spectacular climax when presidential candidate Mitt Romney was recorded making disparaging remarks about the 47 percent of Americans who, in his words, “believe that they are entitled to health care, to food, to housing, to you-name-it... These are people who pay no income tax.”
2009 Expansions of EITC and Child Tax Credit Extended for Only Five Years
One might think that the backlash produced by Romney’s comments, and his subsequent electoral loss, might have prompted conservatives to change their thinking. But they can only evolve so much, so fast. As an apparent concession to the right, the fiscal cliff deal approved by the House and Senate on New Year’s Day extended President Obama’s 2009 expansions of the EITC and Child Tax Credit for just five years — even though it made other tax cuts permanent.
Making permanent the EITC and Child Credit expansion would have cost in the neighborhood of $100 billion over a decade, and the five-year extension of these provisions cost around half that amount. This is real money, but insignificant compared to the $369 billion spent on making permanent estate tax cuts for millionaires or the $3.3 trillion spent on making permanent most of the income tax cuts first enacted under George W. Bush.
The EITC and the Child Tax Credit do a lot to offset the regressive impacts of the many types of taxes paid by low-income Americans. Congress should remember this and make the recent expansions of these refundable credits permanent.
New CTJ Report: Congressional Research Service Finds Evidence of Massive Tax Avoidance by U.S. Corporations Using Tax Havens
A two-page report from Citizens for Tax Justice explains new evidence of offshore tax avoidance by corporations unearthed by the non-partisan Congress Research Service (CRS).
In a nutshell, CRS finds that U.S. corporations report a huge share of their profits as officially earned in small, low-tax countries where they have very little investment and workforce while reporting a much smaller percentage of their profits in larger, industrial countries where they actually have massive investments and workforces.
This essentially confirms that corporations are artificially inflating the share of their profits that they claim to earn tax havens where they don’t really do much real business. Remember that offshore tax avoidance by corporations often takes the form of convoluted transactions that allow U.S. corporations to claim that most of the profits from their business are earned in offshore subsidiaries in a tax haven like Bermuda, and that the offshore subsidiary my be nothing more than a post office box.
And Bermuda is a great example. CRS finds that the amount of profits that U.S. corporations report to earn in Bermuda is 1,000 percent of Bermuda’s GDP! That’s ten times Bermuda’s gross national product — ten times the tiny country’s actual economic output. This is obviously impossible and confirms that much of the profits that U.S. corporations claim are earned there represent no actual economic activity but rather represent profits shifted from the U.S. or from other countries to take advantage of that fact that Bermuda has no corporate income tax.
Sadly, most of the tax dodges practiced by U.S. corporations to shift their profits to tax havens are actually legal. CTJ’s report explains what type of tax reform is needed to address this.
While the fiscal cliff debate may have seemed abstract and technical to many Americans, the results of the tax deal has become much more tangible to 77.5% of Americans who are seeing their take-home pay decrease in their first paychecks of the year, due to the expiration of the payroll tax holiday.
Anti-tax, anti-government types in the media and politics have taken advantage of the confusion over the fiscal cliff deal to make it seem like it was one big tax hike. One even argued that President Obama tricked the American public when he said he would only increase taxes on the wealthiest Americans. This is utter nonsense because what the deal really did was simply let a slew of temporary tax cuts expire.
As to the payroll tax holiday, President Obama actually supported another one year extension, but was forced to abandon it by House Republicans who largely opposed extending the holiday as part of the fiscal cliff deal. Going back even further, the temporary payroll tax holiday was only even put into effect in 2010 because President Obama demanded it, (albeit as a second choice to the much more effective Making Work Pay Credit which Republicans opposed), as part of his economic stimulus package.
Moreover, while many Americans may feel the pain from lower take-home pay this year compared to last, the reality is that the fiscal cliff deal made 85 percent of the Bush income tax cuts permanent. These rate reductions and other provisions were all written to be temporary and expire in 2010, but now they are permanent parts of the tax code and amount to $3.9 trillion in tax cuts over the next 10 years. In other words, rather than shifting America back to the Clinton-era tax rates, President Obama instead opted to make permanent the historically low Bush-era tax rates for 99.1 percent of Americans.
Finally, it’s worth remembering why we pay the payroll tax to begin with. It is the funding source for Social Security, one of the most successful government programs in US history. Although paying lower payroll taxes was nice for a couple years, the reality is that the holiday could not have been extended forever without endangering the long-term viability of Social Security’s funding.
The expiration of parts of the Bush-era income tax cuts under the fiscal cliff deal affects just under one percent of taxpayers this year, while the expiration of the payroll tax cut affects over three-fourths of taxpayers this year, according to a new CTJ report that includes state-by-state figures.
The fiscal cliff deal (the American Taxpayer Relief Act of 2012), which was approved by the House and Senate on New Year’s Day and signed into law by President Obama, extended most of the Bush-era income tax cuts but allowed all of the payroll tax cut in effect over the previous two years to expire.
The figures in the report show the percentage of taxpayers in each income group nationally and in each state who will pay higher income taxes or payroll taxes as a result in 2013.
Read the report
Senator Minority Leader Mitch McConnell argued on Sunday that, with the passage of the fiscal cliff deal, the “tax issue is finished” and that instead of raising more revenue we need to confront our “spending addiction” in order to reduce the deficit. What McConnell failed to mention was that lawmakers in Washington have already passed trillions of dollars in deficit-reducing spending cuts, while at the same time enacting trillions of dollars in deficit-increasing tax cuts.
Perhaps the biggest flaw in McConnell’s logic is the idea that lawmakers have already raised a substantial amount of revenue. According to the Joint Committee on Taxation (JCT), the official revenue estimators for Congress, the fiscal cliff deal will actually reduce revenue by $3.9 trillion over the next decade. The deal raises revenue only if compared to what would happen if Congress had extended all the tax cuts (which were set to expire by law at the end of 2012).
If you accept this baseline as touted by the President and others who supported the deal, the fiscal cliff resolution can be said to be a $620 billion tax “increase” on the rich. But even if you accept that logic, it is nonetheless true that the substantial spending cuts already enacted in order to reduce the deficit justify raising a lot more revenue.
According to the Center for American Progress, since fiscal 2011 nearly $3 in spending cuts were enacted for every $1 in revenue raised. In other words, even under the artificial baseline that allows us to pretend Congress just raised revenue, we would need to raise roughly $1.2 trillion in additional revenue before even reaching parity with the level of spending cuts already implemented.
Anti-tax lawmakers like Senator McConnell claim that spending is so out of control that we can’t possibly raise enough revenue from taxes to reverse the growth of the debt. But, according to the non-partisan Congressional Budget Office (CBO), the long-term debt crisis is largely driven by the persistence of the Bush tax cuts, rather than spending. In fact, the CBO’s long term budget outlook found that had Congress done nothing and simply allowed all the Bush era tax cuts to expire, the debt would have been on track to begin dropping substantially starting in 2015 and over the coming decades.
There is also the related matter of fairness in our tax code. The reality is that the fiscal cliff deal did very little to change the tax rate paid by wealthy investors like Warren Buffett or Mitt Romney and actually included an extension of many of the corporate tax breaks that allow companies like General Electric to avoid taxes altogether. As we’ve explained, these corporate tax breaks are likely to be extended again and again and end up costing more than was saved by ending some of the tax cuts for the rich.
Considering it’s centrality to fixing the debt and improving fairness, the “tax issue” is certainly not finished. It’s really just getting started.
In the first two days of the new Congress, 21 bills to amend the tax code were introduced in the House of Representatives. The 113th Congress officially convened at noon on January 3rd and by the end of the business day on January 4th, House members had introduced 218 bills and over 40 resolutions. (By way of comparison, the 112th Congress passed only 219 bills during its entire two-year session, making it the least productive Congress on record!)
Bills to reduce taxes and revenues outnumber other kinds of tax proposals. For example, there are two designed to abolish the estate tax forever. There are proposals to repeal the 16th amendment, (that allows Congress to collect taxes in the first place), and to eliminate the Internal Revenue Service. Subtler proposals are special interest giveaways. For example, there’s one that would extend tax-free health savings accounts to church-based health insurance co-ops, another that would roll back transfer taxes on farmland and a couple designed to expand or entrench the obscenely expensive (PDF) research tax credit for business. And one more asks Congress to commit to protecting the tax break that experts across the ideological spectrum would like to see end: the mortgage interest deduction on second homes.
It’s worth mentioning that the anti-tax beast is not just a Beltway menace; similarly radical ideas are on the agenda in the states, too. As recently as November 2012, voters in 11 states faced 17 tax-related ballot initiatives, and most of them would have exacerbated income inequality and drained revenues. (Some prevailed, some did not.) Looking ahead, some 30 states are looking at tax changes of some kind this year and 15 are likely to undertake a substantial overhaul of their tax codes. Only a few, however, will be doing it in a way that makes their tax systems more fair and sustainable, and too many proposals mimic the disastrous laws already passed in states like Kansas and Michigan.
The federal fiscal cliff deal that left 85 percent of the Bush era tax cuts in place indefinitely was a bad deal for most Americans; it raises too little revenue and leaves all of the same breaks and loopholes available to the very rich and the large corporations. The lobbyists who brought you that stinker were back at work on January 2nd pushing for more, and their friends in the 113th Congress seem all too happy to help.
The legislation signed into law by President Obama on Wednesday makes permanent 85 percent of the Bush-era income tax cuts and 95 percent of the Bush-era estate tax cut still in effect in 2012. It also directs 18 percent of its income and estate tax cuts to the richest one percent of Americans — and directs an identical 18 percent of the tax cuts to the poorest 60 percent of Americans.
These are some of the findings of two reports from Citizens for Tax Justice. One examines the revenue impacts of the fiscal cliff deal and explains why the White House claims the bill saves $620 billion over ten years even while it is official estimated to reduce revenue by $3.9 trillion over ten years. The report also explains that the law includes a package of provisions known as the “extenders” because they extend several special-interest tax breaks for two years, and that these provisions are likely to be extended again in the future and eventually offset the revenue saved from allowing high-income tax cuts to expire.
The second CTJ report examines the distributional effects of the law. It finds that while the law will give the middle fifth of Americans an average tax cut of $880 this year, which is equal to 2.0 percent of their income. At the same time, the law will give the richest one percent of Americans an average tax cut of $34,190, equal to 2.3 percent of their income.
Read the two reports:
Also see CTJ’s New Year’s Day report:
Former President George W. Bush mused recently that if the tax cuts he signed in 2001 and 2003 weren’t named after him, maybe more people would like them. But what’s to like about a package of tax policies that contributed trillions to our national debt and to the consolidation of wealth among an unsustainably small minority of American families?
Well, there’s not much more to like about the eleventh hour legislation just passed by Congress that enshrines the vast majority of those policies permanently in the federal tax code.
The American Taxpayer Relief Act, passed by the U.S. Senate and then the House hours before we all went back to business on January 2, 2013, has generated thousands of contradictory headlines. It’s a tax hike on the rich! A tax hike on the poor! The middle class is saved! The middle class is screwed!
One thing is sure: the U.S. Treasury is screwed. Had these 2001 and 2003 tax cuts – scheduled to expire after ten years because of their onerous cost, but extended for another two in 2010 – actually been wiped from the books, we would have been on the fast track to deficit reduction even without any spending cuts. But having preserved the vast majority of those low rates and loopholes, we’ll be hemorrhaging almost four trillion dollars over the next ten years.
When we first learned of the Senate deal taking shape on New Year’s Eve, we wrote:
Today, several news reports indicate that the deal taking shape in Washington would raise less revenue than the President's December 17 proposal. There are reports that the threshold for higher income tax rates would be $400,000 for singles and $450,000 for married couples, and that this $450,000/$400,000 threshold would also apply to higher income tax rates on capital gains and dividends…. Congress should reject any deal that extends more of the Bush income tax cuts or Bush estate tax cuts than President Obama originally proposed to extend. America would be better off if Congress simply does nothing and allows the Bush income and estate tax cuts to expire completely.
When the Senate passed legislation based on that deal, we ran the numbers and published our results on New Year’s Day, 2013, we concluded:
The tax deal negotiated between Vice President Joe Biden and Senate Minority Leader Mitch McConnell and approved by the Senate early on January 1 would save less than half as much revenue as President’s Obama’s original proposal…. The Biden-McConnell deal includes estate tax provisions that are much closer to the even more generous rules of 2011 and 2012 than the 2009 rules.
After a false start and dramatic reconvening, the U.S. House passed that Senate-approved legislation moments before midnight on New Year’s Day, and the President signed it on January 3rd.
Our full analysis of the legislation is contained in two new reports:
Poorest Three-Fifths of Americans Get Just 18% of the Tax Cuts in the Fiscal Cliff Deal
The so-called Bush tax cuts that dominated fiscal debates for far too long are now history, and we may never speak of them again. But their legacy endures in our crippling deficit, and our growing economic inequality. And now, thanks to President Obama and the 112th Congress, they will continue to distort our tax system into the foreseeable future.
Since he first began running for President, Barack Obama has consistently proposed to extend almost four-fifths of the tax cuts first enacted under President George W. Bush, proposing to allow the expiration of just the one fifth of the tax cuts that go solely to the richest two percent of Americans. This was President Obama's proposal to extend the tax cuts for income up to $250,000 for married couples and up to $200,000 for singles (PDF). To extend any more of these tax cuts for the richest two percent of Americans is entirely unwarranted and fiscally irresponsible.
Our latest report estimates the revenue impact of the President's proposal to extend the Bush tax cuts for income up to $250,000/$200,000 and to reclaim a fraction of the lost revenue by limiting the savings from deductions and exclusions for high-income Americans. Compared to what would happen if Congress extends the Bush income tax cuts and makes no other changes, this would save $1.4 trillion. Compared to what would happen if Congress does nothing and lets the Bush tax cuts expire, this would lose $2.4 trillion.
That report also illustrates the impact of President Obama's recent proposal which became public on December 17, and which is the same except that the income threshold for higher tax rates on ordinary income would be raised from $250,000/$200,000 to $400,000. If the limit on deductions and exclusions is still included, this would save 85 percent as much revenue as the President’s original, $1.4 trillion proposal. If the limit on deductions and exclusions is not included, the report finds this would save just 49 percent as much as Obama’s original, $1.4 trillion proposal.
Today, several news reports indicate that the deal taking shape in Washington would raise less revenue than the President's December 17 proposal. There are reports that the threshold for higher income tax rates would be $400,000 for singles and $450,000 for married couples, and that this $450,000/$400,000 threshold would also apply to higher income tax rates on capital gains and dividends. (The President’s December 17 proposal would still have allowed higher rates to go into effect for capital gains and dividends for income in excess of $250,000/$200,000.)
Further, it is unclear whether or not any limit on deductions and exclusions is included in the deal taking shape now. This means that the proposal could save considerably less than half as much revenue as the President’s original, $1.4 trillion proposal.
In addition to this, lawmakers want to address the Bush-era estate tax cuts, which also expire tonight. The President has long proposed to make permanent the estate tax cuts that were in effect for one year, in 2009. CTJ has criticized this proposal because it asks only a tiny fraction of the wealthy to pay any estate tax. (CTJ’s figures show that only 0.3 percent of deaths in 2009 resulted in federal estate tax liability.) There are reports that the deal taking shape would extend an even larger estate tax cut, one much closer to the estate tax cut that was in effect for 2011 and 2012.
CTJ’s most recent reports on other components of the New Year’s Eve tax deal taking shape are online at:
Congress should reject any deal that extends more of the Bush income tax cuts or Bush estate tax cuts than President Obama originally proposed to extend. America would be better off if Congress simply does nothing and allows the Bush income and estate tax cuts to expire completely. This would merely allow the tax rules to revert to those in place at the end of the Clinton administration. Given the economic prosperity experienced at the of the Clinton years, it’s difficult to believe that this more fiscally responsible approach will have a significant adverse effect on our economy. Of course, Congress should act to stimulate the economy so that the private sector creates more jobs, but almost any measure would be more effective in accomplishing this goal than extending more of the disastrous Bush tax cuts for the rich.
A new report from Citizens for Tax Justice finds that the “Plan B” tax proposal that House Speaker John Boehner plans to put to a vote in the House of Representatives would allow the richest one percent of Americans to pay $36,000 less in federal income taxes, on average, than they would pay under President Obama’s most recent proposal.
Under Plan B, the poorest three-fifths of Americans would pay more in federal income taxes, on average, than they would pay under the President’s latest plan.
Read the report
The latest tax proposals from Speaker Boehner and President Obama show that their respective positions on taxes have moved very slightly towards each other.
President Obama’s major proposals for the personal income tax would have, in their original version, saved $1.4 trillion compared to what would happen if Congress extended the Bush tax cuts and made no other changes to the tax code. As illustrated in the table on the following page, the President’s latest proposal, which became public December 17, would save 85 percent of that amount. Meanwhile, Speaker Boehner’s Plan B would save 24 percent of that amount.
Compared to current law (compared to what would happen if Congress does nothing), both of these proposals would lose trillions of dollars over the next decade.
United for a Fair Economy (UFE) invites everyone who supports fair taxes to join a petition to Congress to enact a robust estate tax.
The petition drive was launched on Tuesday as UFE’s Responsible Wealth project convened a group of well-known policy and political luminaries supporting a stronger estate tax and billionaires who believe that their estates should be taxed upon their deaths. The group includes George Soros, Abigail Disney, Robert Rubin, President Jimmy Carter and others.
Richard Rockefeller (one of the Rockefellers) spoke about how public investments funded by taxes will improve the quality of life for his heirs in a way that his own money alone cannot.
"If the world I leave behind is one of gated communities, growing inequality and misery among the have-nots, downward mobility for the middle class, a degraded environment and a rotting social and physical infrastructure -- then [my children's] inheritance will be a shabby one -- no matter how much money they get.”
The bill approved by Senate Democrats over the summer to extend most, but not all, of the Bush income tax cuts did not address the Bush estate tax cuts, which also expire at the end of this year. This is apparently because Senate Democrats themselves could not agree on how robust the estate tax should be.
The Bush tax cuts included the gradual reduction and eventual repeal (in 2010) of the estate tax. The “compromise” that President Obama signed that extended the Bush income tax cuts through 2012 does not repeal the estate tax altogether, but does set it at very low levels. Republicans and some Democrats in Congress want to extend these current rules, which exempt $5 million of an estate’s value per person, meaning a married couple can leave at least $10 million behind without triggering any estate tax. The taxable part of an estate is then taxed at a rate of 35 percent.
President Obama and many Democrats want to bring back the estate tax rules that were in place, for one year, in 2009, which exempted $3.5 million of an estate’s value per person (meaning $7 million for a married couple) and taxed the taxable part of an estate at 45 percent.
Citizens for Tax Justice has pointed out that even President Obama’s proposal (to reinstate the 2009 estate tax rules) would only tax an absurdly small number of estates. A 2011 report from CTJ shows that just 0.3 percent of deaths in 2009 resulted in estate tax liability. (The report also has figures for each state.)
The UFE petition recognizes this and calls for an estate tax that is more robust than what President Obama proposes, one that exempts $2 million of an estate’s value per person. The taxable part of an estate would be taxed at progressive rates, starting at 45 percent.
New CTJ Report: Fortune 500 Corporations Holding $1.6 Trillion in Profits Offshore
More Evidence that the Corporate Lobbyists’ Version of Tax “Reform” Should NOT Be a Part of Any Budget Deal
A new report from Citizens for Tax Justice explains that among the Fortune 500 corporations, 290 have revealed that they, collectively, held nearly $1.6 trillion in profits outside the United States at the end of 2011. This is one indication of how much they might benefit from a so-called “territorial” tax system, which would permanently exempt these offshore profits from U.S. taxes.
Just 20 of the corporations — including household names like GE, Microsoft, Apple, IBM, Coca-Cola and Goldman Sachs — held $794 billion offshore, half of the total. The data are compiled from figures buried deep in the footnotes of the “10-K” financial reports filed by the companies annually with the Securities and Exchange Commission.
Read the report.
The appendix of the report includes the full list of 290 corporations and the size of their offshore profits in each of the last three years, as well as the state in which their headquarters is located.
Corporate lobbyists and their allies in Congress are pushing for two changes that would benefit their investors but leave America worse off. Neither one of these should be included in any deal coming out of the so-called “fiscal cliff” negotiations.
Congress Should Reject a Revenue-Neutral Corporate Tax Overhaul
The first goal of the corporate lobbyists is an overhaul of the corporate tax that does not raise any revenue. Some corporations have stated that they would support closing corporate tax loopholes, but only if all the revenue savings is used to reduce the corporate tax rate. This would be a terrible waste of revenue at a time when lawmakers are considering cutting public investments that middle-income people rely on in order to reduce the deficit.
In May of 2011, a letter circulated by Citizens for Tax Justice was signed by 250 organizations, including organizations from every state, calling on Congress to close corporate tax loopholes and use the revenue saved for public investments and deficit reduction rather than lowering the corporate tax rate.
CTJ also has published a fact sheet and a detailed report explaining why corporate tax reform should be revenue-positive rather than revenue-neutral.
Unfortunately, the Obama administration endorsed a revenue-neutral corporate tax overhaul in the vague “framework” it released in February of this year. As lawmakers face real choices about whether to cut programs like Medicare, Medicaid, and education, we believe many will realize that demanding corporations contribute more to the society that makes their profits possible is more sensible.
Congress Should Reject a Territorial Tax System
The second goal of the corporate lobbyists is a transition to a “territorial” tax system, which would call off U.S. taxes on the offshore profits of U.S. corporations. As the new CTJ report explains, many of those profits are truly U.S. profits that have been made to look like “foreign” profits generated in tax havens through convoluted accounting schemes.
Citizens for Tax Justice has published a fact sheet and a detailed report explaining why Congress should reject a territorial tax system.
Thankfully, the administration has not endorsed a territorial tax system and Vice President Biden even criticized it during his speech at the Democratic National Convention. We hope that the President and his allies in Congress hold firm to this position.
A story in this week’s New York Times uses CTJ numbers to demonstrate what CTJ has said many times: President Obama’s proposal is not the confiscatory tax plan opponents would have you believe.
We have pointed out that taxpayers earning just over $250,000 really don’t have to worry because the President’s plan would barely affect them. “A married couple whose income is exactly $250,000 would see no change in their income taxes under Obama’s plan,” we explained.
As the New York Times puts it, “A close look at the president’s plan shows that a large majority of families making up to $300,000 — as well as hundreds of thousands of families with even larger incomes — would not pay taxes at a higher marginal rate…. [T]hey are the beneficiaries of choices the administration has made to ensure that families earning less than $250,000 do not pay higher rates.”
According to the Times, in crafting the plan, Obama’s team assumed high-income families take $20,000 in deductions, even though most families in this income range take a much larger amount, further driving down their taxable income. The Obama team also indexes the $250,000 and $200,000 thresholds for inflation from 2009, when the proposal was first formally put forward. This means families in 2013 could have considerably more than $250,000 in income without losing any part of the Bush income tax cuts under Obama’s approach.
“They wanted to be able to say that ‘Absolutely nobody making less than $250,000 could possibly pay higher taxes under our plan,’” said Robert S. McIntyre, the director of Citizens for Tax Justice, a liberal advocacy group. “So they had to assume the most ridiculous assumptions, that even if you’re a childless couple with no itemized deductions making $250,001, your taxes still won’t go up. They figured that if this couple existed and their taxes went up, somebody would find them and jump on ’em.”
You can view the graphics here.
In the end, the Times reports that if the President’s plan to allow the Bush tax cuts to expire on the top two percent is implemented, only about 32 percent of families with income from $250,000 to $300,000 would lose part of their income tax cuts. About 77 percent of families with income of $300,000 to $350,000 would lose tax cuts, and almost 99 percent of families with incomes above one million would lose some of theirs.
A related story in the Boston Globe uses other new CTJ numbers to show that, by contrast, one of the Republican plans to cap deductions without raising rates would have the inverse effect; it would “exact a bigger toll on upper- to high-income earners in the professional classes,” as opposed to the Mitt Romneys and Warren Buffetts.
While the headlines on the fiscal cliff negotiations are about wrangling over the top individual tax rates, multinational corporations are quietly lobbying for an agreement to move the U.S. international tax rules to a territorial system.
Members of the so-called Fix the Debt Campaign have called for massive cuts to social programs while seeking additional tax breaks for their own companies. A move to a territorial system could give the 63 publicly-held companies in the Fix the Debt campaign an immediate windfall of up to $134 billion and would massively increase their incentives to move even more profits offshore, where they would then be permanently exempted from U.S. taxes. Terrible-torial.
Meanwhile, defense contractors that exhort Congress to find a “reasonable approach” are also lobbying for permanent tax breaks on their offshore earnings. And major corporations complain (perennially) about having to pay U.S. taxes on any foreign cash they decide to bring home.
Moving to a territorial tax system would be a disaster for the U.S. Treasury and an open invitation for multinational companies to intensify their offshore shenanigans. Our fact sheet explains why. For an illustration of why it’s such a bad idea, you only need to look at headlines from the U.K. Because of their territorial tax system, they are unable to collect corporate income tax from U.S. corporate giants Starbucks, Amazon, and Google who are profiting wildly from sales and business in the U.K. Recently, these multinational giants were hauled before Parliament to explain their “immoral” tax-dodging behavior.
The U.S. already collects only a fraction of the taxes corporations owe on their profits; why would we move to a system that makes the problem even worse?
While most of the IRS’s various statistical reports tend to inspire little excitement in the public and media, the agency’s latest report,“Individual Income Tax Returns, 2010” is something of a barnburner, in part because it confirms several troubling trends in the federal income tax. A few stand outs:
1. Our Income Tax Code Stops Being Progressive at $2 Million of Income
According to the new IRS data, the average effective income tax rate actually drops from 25.3 percent for people making (a mere) $1.5 - 2 million to 20.7 percent for taxpayers making $10 million or more in income. (Those are 2010 figures.) In other words, as a taxpayer’s income surpasses $2 million, their effective income tax rate actually goes down, which is the opposite of what should happen under a progressive tax system.
2. Average Effective Income Tax Rates on Taxpayers Making Over $500,000 Dropped In 2010
While taxpayers making between $30,000 and $499,000 saw their average effective income tax rates go up slightly between 2009 and 2010, taxpayers making $500,000 or more actually saw their average effective tax rates go down. In fact, taxpayers making $10 million or more saw their effective tax rate drop almost eight percent from 2009 to 2010. Looking over a decade (2001 to 2010), the picture is even more dramatic: taxpayers making $10 million or more saw their average effective tax rate drop by almost 21 percent.
3. The Special Low Rate on Capital Income is Driving Effective Income Tax Rates Lower for the Wealthiest of the Wealthy
What explains the drop in the average effective tax rate for people making $10 million or more between 2009 and 2010? The IRS data reveals that these taxpayers saw their reported income from capital gains and dividend income increase to 48.5 percent of their total income in 2010, compared to 35.8 percent in 2009. That change was driven largely by the economic recovery and rebounding stock market. Because income from investments is subject to a lower preferential rate than wages or salary, the more income taxpayers earn from these sources the lower the effective tax rate they will ultimately pay. As Citizens for Tax Justice has explained, ending the tax preference on capital gains and dividends is critical to ensuring that the wealthiest Americans pay their fair share.
A cynic might think it’s a little bit of theater we’re witnessing, political pantomime deliberately staged to make Republicans look like they’ve gone all reasonable and are willing to raise taxes. Others see this week’s headlines as the meticulously orchestrated end game in a 30-year strategy laid out by Grover Norquist and his Americans for Tax Reform. More likely it’s just a rush among journalists to tell a big story: Republicans are renouncing their fealty to Grover’s no-tax pledge and are ready to support tax hikes.
The media loves a good story, and this one is the stuff of drama. An awkward little man who rose to power as leader of an anti-government movement faces sudden mutiny, with his followers peeling off and his authority in question. In this story, Grover Norquist is part spurned lover and part emperor with no clothes.
We’re not buying it. Much as we love the idea of Grover losing his clout and credibility, there’s no evidence his followers (mostly Republicans, a few Democrats) have changed their minds about taxes. Even when they make noises about abandoning the pledge and embracing new revenues, they are nonetheless hewing to Norquist’s two-part pledge. Just listen to a few who’ve been making news with their allegedly new-found freedom:
Senator Bob Corker: “I’m not obligated on the pledge. I made Tennesseans aware, I was just elected, the only thing I’m honoring is the oath I take when I serve, when I’m sworn in this January.” But, “[my] proposal includes pro-growth federal tax reform, which generates more static revenue… by capping federal deductions at $50,000 without raising tax rates.”
Senator Lindsey Graham: “I agree with Grover — we shouldn’t raise rates — but I think Grover is wrong when it comes to we can’t cap deductions and buy down debt…. I will violate the pledge, long story short, for the good of the country, only if Democrats will do entitlement reform.”
Senator Saxby Chambliss: "Times have changed significantly, and I care more about my country than I do about a 20-year-old pledge…. If we do it (Norquist's) way, then we'll continue in debt." But (he tweeted), “I’m not in favor of tax increases. I’m in favor of significant tax reform 2 lower tax rates & generate additional revenue through job growth.”
Rep. John Boehner: “….[R]aising taxes on the so-called top two percent – half of those people are small-business owners that pay their taxes through their personal income tax filing every year. The goal here is to grow the economy and to cut spending. We’re not going to grow the economy if we raise tax rates on the top two rates.” And, “[w]e're willing to put revenue on the table as long as we're not raising rates.”
Rep. Tom Cole: “I think we ought to take the 98 percent deal right now. It doesn’t mean I agree with raising the top two. I don’t.” And, “I signed that pledge; I'm honored to do it. I don't think in this case we would be breaking it by making what are temporary tax cuts permanent....I want to make all of them permanent, quite frankly. “
None of these Republicans characterized as leading the mutiny against Grover’s no-tax pledge is getting anywhere near raising taxes, in both senses that the pledge mandates. It is often forgotten that support for making all the Bush tax cuts permanent amounts to another rate cut because by law, those rates are scheduled to all go up on January 1, 2013. They may cap a deduction here or there, but that will be outweighed by the generous Bush era rate cuts they (and to a large extent, the President) promise for 2013. And that’s exactly what the pledge they’ve all signed spells out:
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.
Increasingly, too, the Republican House leadership is demanding revenue cuts. Where are the President’s cuts? What are the Democrats’ plans for entitlement reform? This is what Speaker Boehner is tweeting several times a day. And his lieutenant, Eric Cantor, remains clear his party is opposed to tax rate increases.
An organization like Americans for Tax Reform doesn’t spend upwards of $24 million in one election cycle if it’s not serious about getting its way, and Grover Norquist is a serious man. As he told Politico just this week:
“I want pro-taxpayer candidates to survive and thrive….. My goal is to have the Democrats also all take the pledge…. I'm not planning on losing the tax debate we're having right now, but the tax issue will be more powerful in 2014 and '16 than today. It gets more powerful.”
Let’s don’t kid ourselves or help the deep pocketed anti-tax lobbying machine peddle more myths. It’s a testament to Norquist’s thirty-year effort that four years into an historic economic crisis, a couple of closed loopholes looks like a win for the good guys. It’s not a win. Let’s view it instead as a chink in the armor, though – and redouble our own efforts.
Image of Norquist courtesy Liberaland.
Republican Rep. Tom Cole Is Right: Obama's Proposal to Extend Most, But Not All, of the Bush Tax Cuts Is NOT a Tax Increase
An Oklahoma Congressman who chaired the National Republican Congressional Committee is the first person in Washington to speak clearly about the debate over the looming expiration of tax cuts first enacted under President George W. Bush.
Politico reports that Rep. Tom Cole of Oklahoma has argued to fellow Congressional Republicans that voting for President Obama’s proposal to extend the Bush income tax cuts for income up to $250,000 (up to $200,000 for unmarried taxpayers) is clearly a vote for cutting taxes, not raising them, and therefore does not violate a no-tax-increase pledge promoted by Grover Norquist’s organization and signed by most Republican lawmakers.
In other words, the President’s approach is a tax cut, just not quite as big of a tax cut (particularly for the rich) as the Republican Congressional leadership has advocated so far. This is illustrated in the graph below, which is from CTJ’s recent reports on the competing approaches to these expiring tax cuts.
This issue has been muddled by both Republicans and Democrats in Congress and in the White House. For example, President Obama often refers to his proposal to extend the tax cuts for income up to $250,000 or $200,000 as a way to “raise revenue.”
But Rep. Cole is correct because the Bush tax cuts are temporary tax cuts that are specifically written to expire at a certain date. Any extension of part of those tax cuts is a new tax cut that reduces revenue, and is “scored” by the Joint Committee on Taxation and the Congressional Budget Office as a revenue loss.
President Obama’s approach would extend the Bush income tax cuts entirely for 98 percent of Americans and partially for the richest two percent of Americans. Rep. Cole is reported to argue that Congressional Republicans should settle right now for Obama’s proposal to extend the tax cuts entirely for 98 percent of Americans, before they expire, and debate the tax cuts for the richest two percent at a later date.
CTJ has long argued that President Obama’s proposal would extend far too many of the unaffordable Bush tax cuts, but Congress should enact his proposal for the short-term if it is the least irresponsible option being debated today. On the other hand, if anti-tax lawmakers in Congress refuse to follow Cole’s lead and instead block any tax bill that does not include an extension of all the tax cuts, then President Obama should simply allow all of the tax cuts to expire.
The logic used by most Congressional Republicans (not including Rep. Cole) is that allowing the expiration of a tax cut is the same thing as enacting a tax increase. But this logic is not applied consistently. While the Republican tax bills in the House and Senate would extend all the tax cuts first enacted under President Bush, they would allow the expiration of some expansions of the of the EITC and the Child Tax Credit that were first enacted under President Obama in 2009. That’s why the graph above shows that low- and middle-income groups would get slightly smaller average tax cuts under the approach of GOP Congressional leaders than they would get under Obama’s approach. (The difference is much more dramatic for the particular families affected.)
Somehow, followers of Grover Norquist don’t seem to consider the expiration of a tax cut to be a “tax increase” when only low- and middle-income people are affected.
President and Lawmakers Should Resist Proposals to Extend Income Tax Cuts for $1 Million of Income
The idea that Democrats and Republicans might “compromise” by extending the Bush income tax cuts for the first $1 million a taxpayer makes is back in the news, and it’s still a terrible idea.
Bill Kristol, editor of the right-ring Weekly Standard, said on Fox News that Congressional Republicans should be willing to give in on taxes, at least when it comes to higher taxes on millionaires. That set off chatter among some political observers and media outlets that perhaps there was a room for a “compromise” with Congressional Democrats, some of whom have called for extending the Bush tax cuts for income up to $1 million, rather than $250,000 for couples and $200,000 for singles as proposed by President Obama.
Here’s why the idea is absurd: Obama’s approach to the Bush tax cuts is already a huge compromise for the many lawmakers who originally opposed the Bush tax cuts. Remember, President Obama’s proposal is to extend 78 percent of the Bush tax cuts (in terms of revenue). His proposal would extend the Bush income tax cuts entirely for 98 percent of Americans and partially for the richest two percent, and would extend much of the Bush estate tax cut so that only 0.3 percent of deaths would result in estate tax liability.
In May, House Minority Leader Nancy Pelosi floated the idea of extending the income tax cuts for up to $1 million of income. CTJ estimated that this would reduce the revenue savings from Obama’s approach to the income tax cuts by 43 percent. (This was later confirmed by the Joint Committee on Taxation.) We also found that people making over $1 million would get half of the additional tax cuts that would result from moving the threshold from $250,000/$200,000 to $1 million.
Married Couples Making $250k to $300k would Lose Just 2% of their Tax Cuts under Obama’s Approach. So Why Should We Extend Even More Tax Cuts?
People have asked us how extending the tax cuts for income up to $1 million could possibly help people who make over $1 million. The answer is that all of these proposals would extend reductions in income tax rates for all the income a taxpayer makes up to whatever threshold is being proposed. Obama’s proposal would extend the income tax cuts for the first $250,000 a married couple makes. That means that a married couple making $300,000 would only pay the higher, pre-Bush tax rates on $50,000 of their income (at most).
Similarly, Pelosi’s proposal (which she subsequently backed away from) would extend the income tax cuts for the first $1 million a family makes. That means that a family making $1.1 million would pay the higher, pre-Bush tax rates on just $100,000 of their income (at most).
Many people, including those who write about these issues and enact tax laws, have failed to appreciate this. Much of the debate has revolved around whether or not people who make $250,000 should be considered “rich” if they live in higher-cost areas. This debate is utterly beside the point because someone making $250,000 would not have to give up any of their tax cuts under Obama’s proposal.
In fact, a CTJ study found that married couples making between $250,000 and $300,000 would lose just 2 percent of their Bush-era income tax cuts under President Obama’s proposal. People making up to half a million dollars would keep most of their tax cuts.
Congresswoman Nita Lowey of Westchester, NY, is one of the Democrats who have made noises about moving the threshold from $250,000 to $1 million. Her comments on the issue reflect this lack of understanding.
Earlier this year, she told the Star Gazette that “If you are making $200,000 and are a fireman and a teacher, you are not feeling too rich with all the property taxes and all your expenses. But when you are making over $1 million, you ought to pay your fair share so we can support basic services in our communities.”
Even if Rep. Lowey’s district is some Bizarro World where fire fighters and teachers make $200,000 a year, they would not lose any portion of the Bush tax cuts under President Obama’s approach. And they certainly are not going to be helped by extending the tax cuts for even higher levels of income.
If Congress departs from its annual tradition of steeply reducing the Alternative Minimum Tax (AMT), 57 percent of the tax will be paid by the richest five percent of Americans and 91 percent of the tax will be paid by the richest fifth of Americans. If Congress does reduce the AMT as usual, almost all of the tax will be paid by the richest five percent of Americans.
The AMT is one of the factors contributing to the hysteria in Washington about the so-called “fiscal cliff,” the point at which several tax cuts expire and several spending cuts go into effect at the end of this year. Lawmakers and observers often mistakenly portray the AMT as a tax that will affect middle-income Americans if it is not controlled.
The Washington Post reports that if Congress does not act, “the AMT is in line to affect about 33 million households in the 2012 tax year.” The paper also reports that as many as 60 million households could face filing delays because the IRS would have to update its forms and systems to determine who would be subject to the more expansive AMT.
But the vast bulk of actual AMT payments would come from a smaller number of very well-off Americans. CTJ’s fact sheet on the AMT shows that even if Congress fails to provide the usual AMT relief, the middle fifth of Americans would pay just one percent of the AMT. The bottom two fifths of Americans would pay virtually none of the AMT.
The AMT is a backstop tax designed to ensure that well-off Americans pay at least some minimum level of tax no matter how good they are at finding deductions, credits and loopholes that reduce their regular tax calculation. The exemptions in the AMT that keep most of us from paying it have never been indexed to rise with inflation, so Congress has increased them each year for the last several years.
More importantly, the Bush tax cuts reduced the regular income tax without making any permanent corresponding change in the AMT. In other words, most of the impact of an unrestrained AMT would be to limit the Bush tax cuts for well-off Americans. What would be so terrible about that?
There have been a lot of contradictory statements coming from Washington these days about how employment levels would be affected by President Obama’s proposal to allow the expiration of the Bush-era income tax rate reductions for the top two income tax brackets (only affecting income in excess of $250,000 for couples and $200,000 for singles). Republican House Speaker John Boehner continues to cite a discredited report claiming that 700,000 jobs will be lost, while several media outlets have recently reported that the Congressional Budget Office (CBO) found 200,000 jobs would be lost. Neither is right.
This is one of the confusing aspects of the debate over the so-called “fiscal cliff,” the term sometimes used to describe the point at which the Bush tax cuts are scheduled to expire, and some spending cuts are scheduled to take effect, at the end of this year.
Boehner’s Bogus 700,000 Jobs Claim
Let’s start with the most outrageous claim — that of Speaker Boehner. Last week, we explained why his call to pursue tax reform along the model of the Tax Reform Act of 1986 was both disingenuous and not up to the task of addressing our current budget situation. During the same speech, Boehner mentioned an Ernst & Young report finding that “going over part of the ‘fiscal cliff’ and raising taxes on the top two rates would cost our economy more than 700,000 jobs.”
Citizens for Tax Justice explained, back in July, why the study Boehner cites (which was paid for by groups like the U.S. Chamber of Commerce and the National Federation of Independent Businesses) is bogus. To take just one example of the problems with the report, it assumes a labor supply response (the degree to which people work fewer hours in response to higher tax rates) that is nearly 10 times stronger than the non-partisan CBO assumes when it makes similar estimates on labor supply effects.
CBO’s Misunderstood 200,000 Jobs Figure
The most recent CBO estimates, which are claimed to show a potential loss of 200,000 jobs, are another story. One problem is that the CBO study examines the impact of delaying, for two years, the expiration of the Bush tax cuts (and some reductions in spending) which will occur under current law. One of CBO’s findings is that extending the income tax rate reductions for the top two tax brackets (the tax cuts for the rich that Obama would like to see expire) for two years will result in 200,000 more jobs than would exist if Congress allowed these tax cuts to expire.
But if Congress decides to delay the expiration of the Bush tax cuts for the rich for two years (or any amount of time), chances are extremely high that this delay will eventually become permanent rather than temporary. If President Obama caves to Republican demands to extend tax cuts for the rich now, when he seems to have a mandate from the voters to let them expire, why in the world would he do any better in the years to come?
And, permanently extending the Bush tax cuts for the rich, as Republican Congressional leaders ultimately want, would have negative long-term impacts because it would substantially increase the budget deficit and make it more difficult to make the investments that create jobs.
This is demonstrated by other CBO studies that examine the long-term impact of removing all the impacts of the so-called “fiscal cliff” permanently. A CBO report from August shows (in a table on page 37) that removing all the fiscal cliff impacts (by making the Bush tax cuts permanent and canceling the scheduled spending cuts) would reduce economic output (and thus jobs) by 2022. Gross domestic product would be down 0.4 percent and gross national product would be down 1.7 percent, compared to what would happen if Congress did nothing and simply allowed the fiscal cliff impacts to take effect. (And remember, two-thirds of the fiscal cliff’s impact on deficit reduction results from the expiration of tax cuts, rather than then spending cuts scheduled to take effect.)
Of course, the short-term does matter — we need to improve the economy right now! But even if we could be persuaded that extending the income tax cuts for income in excess of $250,000 could save 200,000 jobs in the short-term, we could think of many, many, more cost-effective ways to do this. The figures in the new CBO report show (in a table on page 7) that the cost difference between extending all the Bush tax cuts and extending all but the income tax cuts for the top two brackets would be $42 billion in 2013. Divided by 200,000, that comes to $210,000 per job saved.
In other words, CBO thinks we can save a job for every $210,000 that we give to people who make over $250,000 (or $200,000 for single taxpayers). We’re not sure how much it costs annually to help public schools hire back teachers laid off due to budget cuts, or to hire construction workers to build bridges, but we’re pretty sure it’s less than $210,000 each.
Actually, the same CBO report also shows that the cost of calling off the automatic cuts in defense and non-defense spending and the scheduled expiration of increased doctor payments from Medicare would be $64 billion by the end of 2013 and would make a difference of 800,000 jobs. Divide $64 billion by 800,000 and that comes to $80,000 per job saved. That sounds like a much better deal.
Enact Obama’s Proposal or Go Off the Fiscal Cliff
The biggest issue facing Congress right now is finding revenue to make the public investments that will help our economy and to reduce the deficit. Extending most of the Bush tax cuts, as President Obama proposes, is not a great way to achieve that, but it makes sense to enact Obama’s approach for one year to give lawmakers time to find better solutions. If anti-tax lawmakers block that approach and insist on enacting all the tax cuts, then Congress and the President should simply allow all the tax cuts to expire.
Obama's Proposed Extension of the Bush Tax Cuts Is Costly, But Can Be Followed with Real Revenue-Raising Tax Reforms
For Immediate Release: November 9, 2012
Obama’s Proposed Extension of the Bush Tax Cuts Is Costly, But Can Be Followed with Real Revenue-Raising Tax Reforms
Citizens for Tax Justice Responds to President’s Fiscal Cliff Remarks Today
Washington, DC -- Arguing that it would create certainty as he undertakes negotiations over the year-end fiscal cliff, today President Obama called on Congress to extend for another year most of the Bush-era tax cuts scheduled to expire at the end of this year under current law. He noted that such a bill has already been approved by the Senate and only needs the approval of the Republican-controlled House of Representatives.
“Deficit reduction is getting off to a terrible start, when the President’s opening offer to Republicans is a huge tax cut that will add $250 billion or more to federal borrowing in 2013 alone,” said Bob McIntyre, director of Citizens for Tax Justice.
Under the President’s approach, 78 percent of the cost of the Bush tax cuts would be extended through 2013, which is far too much. The Senate bill that the President has endorsed would extend for one year the Bush income tax cuts for the first $250,000 a married couple makes and the first $200,000 a single taxpayer makes. Most people don’t realize that this would allow taxpayers who make as much as half a million dollars a year to keep most of their Bush income tax cuts.
But Obama’s approach is certainly superior to the approach advocated by the Republican-led House, which would extend the tax cuts for all income levels, including the very richest Americans.
As the President said during his remarks today, voters want progressive revenue increases. Exit polls show that 60 percent of voters want taxes to go up for the people making over $250,000. An election night poll from Hart Research found that 62 percent of voters were sending a message that we should “make sure the wealthy start paying their fair share of taxes.”
If President Obama caves to the demand of House Speaker John Boehner that Bush-era income tax rate reductions must be extended even for the richest Americans, the President will have given up the enormous leverage he has gained following the election, and will have ignored the clear mandate the voters gave him to end tax cuts for the rich.
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).
According to the official exit polls on Election Day a combined 60 percent of voters support increasing taxes, with 47 percent supporting an increase in taxes on those making over $250,000 and 13 percent supporting a tax increase on everyone. Barely one third of voters think no one’s taxes should be increased. This support for higher taxes reinforces the fact that only small minority (21 percent) support the disastrous spending cuts-only approach to deficit reduction, as represented by the debt ceiling deal.
Making the voters' views even more clear, an election night poll by Hart Research found that 62 percent of voters said that they were trying to send the message that the Congress should make sure the wealthy pay their fair share in taxes. In addition, the Hart poll found that 73 percent of voters said that Medicare and Social Security benefits should be protected from cuts.
This is important: while lawmakers in DC have been focused on deficit reduction over the last couple years, most voters do not share their concern. In fact, 59 percent told pollsters on Election Day that unemployment was the most important economic issue facing the country, which is almost four times the percentage of voters that said the deficit was the most important economic issue.
The results of these Election Day polls mirror a plethora of public polling over the past couple of years on how to handle deficit reduction. Earlier this year, for example, a Washington Post-ABC News poll found that as many as 72 percent of Americans support increasing taxes on millionaires. Making the public preference clear, former Reagan official Bruce Bartlett compiled 19 different polls during the debt ceiling fight last year showing there is wide support among Americans for raising taxes to deal with the deficit.
Taken together, the Election Day polls once again reveal the substantial gap between the kinds of policies that the public would like Congress to pursue and the policies it’s actually pursuing. To start, the fact that the public is more concerned about the health of the economy than about deficit reduction should make Congress reverse course and actually increase government spending and investment, which is several times more stimulative to the economy than making the Bush tax cuts permanent, i.e. permanently cutting taxes. Second, Congress should recognize that to the extent that deficit reduction is needed over the long term, the public heavily favors a balanced approach that includes significant immediate revenue increases and spending cuts, rather than the spending cuts-only approach favored by Congress in recent years. Voters told Washington to get real about taxes because voters themselves are realistic about revenues. The message couldn’t be more clear.
For years, conservatives and many moderates have believed that signing Grover Norquist’s no-tax pledge was a ticket to electoral success. Maybe it was, maybe it wasn’t. But on election night 2012, it began to look like the pledge was actually a liability as signatories to it were sent packing by voters in states from New Hampshire to Ohio to California. While the results are still coming in, at least 55 House incumbents or candidates and 24 Senators or Senate hopefuls who signed the pledge lost on Election Day. That means in the next Congress, the number of pledge-signers will be 264 at most, down from 279, and Grover’s fans could potentially become the minority in the House, with only 216 seats, according to reports from Bloomberg (link not available).
Rather than a boon, in many Senate races signing Grover’s pledge turned out to be a burden this election year. In the Ohio Senatorial race for instance, Republican State Treasurer Josh Mandel attempted to portray himself as an independent and principled thinker, but this image was tarnished by the fact that he had signed the no-tax pledge. In fact, Mandel gave a pretty limp response to his opponent, Democratic Senator Sherrod Brown (who ultimately won the race), who pointed out during a debate that signing the pledge equaled “giving away your right to think.”
Similarly in Massachusetts, tax policy became the focal point of difference between Republican Senator Scott Brown and Democratic candidate Elizabeth Warren. During a debate between the candidates, Warren warned voters that “instead of working for the people of Massachusetts” Brown had “taken a pledge to work for Grover Norquist.” Such criticism helped voters see that he was not as independent from conservative influence and the Republican Party as he liked to portray himself in deep blue Massachusetts.
Earlier this year, the stranglehold of the no-tax pledge on the Republican Party and candidates was already showing signs of cracking as a substantial number of Republican candidates either refused to sign the pledge or repudiated their former fealty to it. Leading the charge, Virginia Republican Representative Scott Rigell advised fellow Republicans to not sign the pledge and ran explicitly on the platform of taking a balanced approach to deficit reduction. In contrast to many of his colleagues who lost running on the no-tax pledge, Rigell was easily re-elected to his House seat.
Moving forward, we expect more lawmakers will realize that taking a dogmatic anti-tax approach is not only bad policy, but that it’s also increasingly bad politics.
Picture of Norquist in a bathtub courtesy the New Yorker magazine.
If yesterday’s election was a referendum on taxes, what voters rejected was the tired oldargument that cutting taxes is good for an ailing economy, and that is a welcome development. For his part, President Obama has said winning would give him a mandate to raise revenue by ending the Bush tax cuts for the wealthiest Americans, one of his campaign promises. Republicans have said if he follows through on that promise, it will destroy any chance of the two parties working together in the coming years.
As we head into the lame duck Congressional session that begins next week and look ahead to 2013, let’s review the (frankly) uninspiring policy options both parties are proposing – proposing for a country where tax rates are at historic lows, income inequality is at historic highs, tax avoidance by the wealthy and corporations is epidemic and revenues are anemic.
Sadly, President Obama’s “balanced” fiscal plan comes up short. Far from raising needed revenues or “raising taxes on the rich” as many describe it, the President’s plan actually cuts taxes dramatically for most Americans. If President Obama's plan to keep all but the high end Bush tax cuts in place is implemented, the lion's share of the unaffordable and unfair tax cuts pushed through by President George W. Bush more than a decade ago would remain in place for another year, through the end of 2013 – at a one-year cost of $250 billion or more.
Whether the President succeeds in getting a grand bargain that includes a one year extension of most of the Bush tax cuts, or we end up with the Republicans’ latest idea for a six month “bridge” across the fiscal cliff, what both parties are saying is that the time they buy with these bargains will be used to rewrite the tax code in a permanent way. And while we agree that some kind of tax code overhaul is necessary, any overhaul that fails to raise revenue and increase tax fairness is not worthy of the word “reform.”
Our corporate tax system is currently in a shambles, with hugely profitable multinational corporations aggressively using shady tax dodges as well as tax breaks enacted by Congress to zero out their tax bills. Unfortunately, most Democrats and Republicans are listening to corporate lobbyists’ complaints that the U.S. statutory corporate income tax rate of 35 percent is too high. This complaint is largely baseless. We studied most of the Fortune 500 corporations that were consistently profitable in recent years and found that they collectively paid just 18.5 percent of their profits in taxes, and many paid nothing at all. Still, most plans for corporate tax reform from both sides of the aisle call for closing loopholes only to lower the rate, resulting in no new revenues for the Treasury.
We acknowledge, however, that Democrats have articulated some encouraging goals. In Congress, for example, Senator Carl Levin is actively working to close loopholes that allow corporations to shift profits to offshore tax havens. And President Obama has indicated he wants to restrict the most egregious corporate loophole, the rule allowing corporations to “defer” paying taxes on their foreign profits (which are often U.S. profits artificially shifted offshore). Contrasted with the Republican Party’s support of a territorial tax system that permanently widens that loophole and exempts all foreign profits, the President’s corporate tax framework looks progressive, even if it is woefully short on detail.
Our view, though, is that ending “deferral” entirely is the only road to real reform of the corporate tax. In this global economy, deferral is the massive hole in which our most profitable companies can legally hide their profits, even as those profits are at historic highs.
And the personal income tax, with or without the Bush tax cuts in place, contains expensive and unwarranted loopholes that make it possible for wealthy investors to pay taxes at a lower rate than middle-income workers – as Warren Buffett has so helpfully illustrated. There is a simple way to fix this, of course, and that is to tax capital gains and dividends the same way we tax income from salaries and wages. Other provisions of the personal income tax (like tax breaks for charitable deductions on appreciated property and the “carried interest” loophole) can be reformed or eliminated so that they no longer provide tax shelters for the richest Americans. But it’s the low rates on capital gains (and dividends) that overwhelmingly benefit the very wealthiest Americans, and tax reform that maintains a progressive federal income tax must end that special break.
Tax policy is often inscrutable, and one aspect that can complicate and thwart a constructive public discussion is the issue of which “baseline” or assumptions an analysis begins with. For example, there are those who characterize the scheduled expiration of the Bush tax cuts as a tax increase. Don’t believe them. Nor should you believe those who say that President Obama’s proposal to extend most of the Bush tax cuts would “raise revenue.” By law, the Bush tax cuts are still temporary and are set to expire at the end of this year. Allowing them all to expire is not a tax increase, and the President’s approach to extending most of them would result in less revenue (and a much higher budget deficit) than we’d get if Congress just did nothing, let the Bush cuts (and scores of smaller temporary tax expenditures) expire and went home.
Indeed, Congress simply going home next month and allowing the Bush tax cuts to expire on January 1, 2013 would not be the worst result. You hear people say that we can’t possibly allow all the Bush tax cuts to expire because they benefit low- and middle-income Americans who need help, especially right now. But this is no reason to enact a bill that also extends tax cuts for the rich, which are far larger, and that’s exactly what it would mean to extend the Bush tax cuts wholesale. We’ve estimated that if Congressional Republicans get their way and all the Bush tax cuts are extended, 32 percent of the benefits would go to the richest one percent of Americans and just one percent of the benefits would go to the poorest fifth of Americans. Under President Obama’s approach, 11 percent of the benefits of the extended tax cuts would go to the richest one percent of Americans and three percent of the benefits would go to the poorest fifth of Americans. Clearly Obama’s plan is the fairer one, though it’s hardly something to celebrate.
The White House and Congress will be working on a deal during the lame duck session to tide us over through 2013. If the only deal they can reach is a bad deal – one that preserves all those expensive Bush tax cuts – the President should reject that deal. We believe the public would support him if he did.
While we aren’t enthusiastic about any of the short term deals we know of, we are hopeful that 2013 can bring positive change to our tax code if Congress follows some basic principles. Like the historic tax reform of 1986, reform next year should close loopholes in the personal and corporate income taxes. Unlike ’86, however, it should not be revenue-neutral. Today, following decades of tax cuts, we have shrinking revenues and swelling deficits. So the next tax overhaul must raise revenues sufficient to fund the government and provide services citizens deserve and depend on. Real reform will also leave the code fairer than it is today by closing loopholes that have slowly eroded the progressivity the federal income tax was designed to deliver. We know that when you include local and state taxes, lower and middle income Americans are, in fact, paying their fare share. At Citizens for Tax Justice, our mission is advocating for those taxpayers, and we will continue to do so into 2013 as a still divided Congress and Democratic White House debate reform of the entire tax code.
A new report from Citizens for Tax Justice shows that the Making Work Pay Credit, a tax credit that was in effect in 2009 and 2010, is better targeted towards low- and middle-income families than the payroll tax cut in effect today, at half the cost. It is dramatically more targeted to these families than the Bush tax cuts, at just over a sixth of the cost.
Prominent Washington figures and media outlets have suggested in recent days that either the payroll tax cut might be extended or the Making Work Pay Credit might be revived to help the economy.
Read the report.
New Report: Romney's Latest Proposal to Pay for His Tax Cuts Would Offset Only a Fraction of Their Costs: National & State-by-State Figures
Presidential candidate Mitt Romney has proposed to make permanent the Bush tax cuts without offsetting the costs and also enact new, additional tax cuts that would be paid for by limiting tax expenditures (special breaks or loopholes in the tax code). Romney recently suggested that his new tax cuts could be paid for by limiting itemized deductions to $25,000 per tax return, which we estimate would offset just 36 percent of their costs. The percentage of Romney’s new tax cuts offset by this limit on itemized deductions would vary dramatically by state.
Read the report.
When most people think of major foreign policy issues facing the U.S., they rarely think of taxes and budget deficits. But during the foreign policy-focused final presidential debate on Monday night, the candidates delved into tax and budget issues – domestic ones, that is, but not those related to foreign policy. Below, we break down the most important tax policy moments of the night.
The Debt “Crisis”
Romney came out swinging saying that President Barack Obama had put the U.S. on a path “heading towards Greece” and that by the end of his second term Obama will have pushed the debt to $20 trillion. He added that a former Chairman of the Joint Chiefs of Staff has called the debt “the biggest national security threat we face.” There is a lot to unpack in this line of attack.
To start, even alarmist estimates, like those by the conservative Heritage Foundation, show that on its “current” path the U.S. still has twenty years before it reaches a debt-to-GDP ratio on par with Greece. More importantly, however, such projections assume that Congress and the President will extend the Bush tax cuts and reverse the spending cuts contained within the sequester; and in truth, that combination is the most serious long term debt threat U.S. faces.
It is also true that Obama’s approach to our long term debt comes up short. Citizens for Tax Justice (CTJ) has criticized Obama’s plan that would increase the deficit by $4.2 trillion over the next ten years by extending a full 78 percent of the Bush tax cuts. But it’s quite a thing for Romney to point fingers at Obama regarding the debt since Romney is proposing an approach far and away more reckless, one that includes about $5 trillion in additional tax cuts on top of the $5.4 trillion cost of a full extension of the Bush tax cuts over the next ten years, which he also endorses.
Compounding this, Romney has not proposed enough specific spending cuts to get anywhere close to balancing the budget. In fact, the Congressional Budget Office has found that Romney’s number one recommendation to cut the deficit during the debate, his plan to “get rid” of Obamacare, would actually increase the deficit by $210 billion over ten years. In addition, even under Romney’s running-mate Representative Paul Ryan’s draconian budget plan, the debt would still increase to $19 trillion in 2016 by Ryan’s own estimations.
Making Romney’s budget math even more fantastical (as Obama correctly pointed out) is his proposal to increase military spending by about $2 trillion over the next ten years compared to Obama’s budget proposal, and about $2.5 trillion compared to what the sequester deal would require.
Balancing Budgets at the State Level
To support his idea that it’s possible to enact massive tax cuts while also balancing the budget at the federal level, Romney pointed to his record as governor in Massachusetts, where he said he was able to balance the budget four years in a row while still cutting taxes “19 times.” In actuality, Romney was only able to balance the budget because he took the responsible position of actually raising more, rather than less revenue as governor.
According to an analysis by the Massachusetts Taxpayers Foundation, budgets enacted under Romney raised around $700 million in additional revenue annually through higher user fees (a popular approach of raising revenue among anti-tax governors) and closing tax loopholes. This increase in revenue outweighed the cost of his 19 tax cuts, which were mostly small and included gimmicky measures like a sales tax holiday. By contrast, Romney is now proposing tax cuts that would dwarf the revenues he would raise through loophole closing.
Candidates Barely Touch on International Tax Dodging
As we predicted, the candidates barely made a passing reference to the problems facing our international tax system, even though, for example, the U.S. loses an astounding $100 to $150 billion in tax revenues each year to offshore tax havens. The only mention of international tax issues came when Obama noted that the current system “rewards companies that are shipping jobs overseas” and when he repeated the point previously made by Vice President Joe Biden that the territorial tax system Romney supports will create 800,000 jobs – but in places like China rather than the U.S.
Biden and Obama are right, and they cite this study showing that the territorial tax system (PDF) Romney proposes would even further encourage corporations to move jobs offshore and disguise their U.S. income as foreign income in order to avoid U.S. taxes. Rather than moving backwards with a territorial tax system, the U.S. should end deferral of taxes on foreign profits by U.S. corporations, which would immediately solve the issue of companies holding $1.5 trillion of income offshore to avoid taxes on the billions they owe in taxes on that income.
As President Obama and Governor Romney discuss foreign policy in their final debate, there’s a major issue that they will, unfortunately, probably ignore: the tangle of international tax rules that allow offshore tax dodging.
The U.S. tax system is already in a mess when it comes to the rules we use to determine how profits of multinational companies are taxed. President Obama has proposed some steps to rein in the worst abuses, but most of these are relatively timid or vague. Meanwhile, Romney proposes that the U.S. follow the example of other countries that have a “territorial” system, which has facilitated high-profile tax avoidance schemes by major multinational corporations. On this issue, the U.S. needs to show leadership that has been lacking so far.
Here are the basics: The U.S. could either have a “worldwide” tax system, in which we tax the offshore profits of our corporations (but provide a credit for foreign taxes paid, to prevent double-taxation) or the U.S. could have a “territorial” tax system, which exempts the offshore profits of our corporations from U.S. taxes. What we have now is a hybrid of the two systems. The U.S. does tax the offshore profits of U.S. corporations and provides a credit for foreign taxes paid, but also allows the corporations to “defer” (delay indefinitely) those U.S. taxes, until the profits are brought to the U.S.
Under the current rules, U.S. corporations have a reason to prefer offshore profits over U.S. profits, because they benefit from the rule allowing them to “defer” U.S. taxes on offshore profits indefinitely. So they may shift operations (and jobs) to a country with lower taxes, or engage in convoluted transactions that make their U.S. profits appear to be earned by subsidiaries in countries with no (or almost no) corporate tax (i.e., offshore tax havens).
The offshore subsidiary may be nothing more than a post office box in the Cayman Islands. CTJ recently explained that Nike, Microsoft, Apple and several other companies essentially admit in their public documents that they engage in these tricks.
If allowing corporations to “defer” U.S. taxes on offshore profits causes them to prefer offshore profits over U.S. profits, then eliminating U.S. taxes on offshore profits would logically increase that preference, and increase these abuses. And that’s exactly what a territorial system, which Romney supports, would do.
CTJ has explained in a fact sheet and a more detailed report that we should move in the opposite direction by simply repealing “deferral” so that we have a true “worldwide” tax system. A CTJ report on options to raise revenue explains that repealing deferral would raise $583 billion over a decade.
President Obama has proposed far more limited steps. His most recent budget blueprint proposes to raise $148 billion over ten years with a package of provisions to crack down on the worst abuses of deferral. (The official revenue estimators for Congress projected that the provisions would raise a little more, $168 billion over a decade.)
These proposals would do some good. For example, one would end the practice of companies taking immediate deductions against their U.S. taxes for interest expenses associated with their offshore operations while they defer (not pay) the U.S. taxes on the resulting offshore profits indefinitely. Another would help ensure that the foreign tax credit, which is supposed to prevent double-taxation of foreign profits, does not exceed the amount necessary to achieve that goal. Still another would reduce abuses involving intangible property like patents and trademarks, which are particularly easy to shift to tax haven-based subsidiaries that are really no more than a post office box.
But none of these reforms proposed as part the President’s budget really addresses the underlying problem with a deferral system or a territorial system: The IRS cannot figure out which portion of a multinational corporation’s profits are truly generated in the U.S. and which portion is truly generated overseas. If a U.S. corporation tells the IRS that a transaction with an offshore subsidiary wiped out its profits, the IRS cannot challenge the company unless it can prove that the transaction was unreasonable. And that’s difficult to do, especially when the transaction involves some product or service that is not comparable to anything else in the market (like a new invention, pharmaceutical, or software program).
President Obama has also proposed, as part of his “framework” for corporate tax reform, a minimum tax on offshore corporate profits. Because he has not yet specified any rate for this minimum tax, it’s impossible to say whether it would be effective. If the rate is set extremely low, then it would change very little. In theory, if the rate was set high enough, it would almost have the same effect as ending deferral — but no one in the administration is talking about anything that dramatic. (Read CTJ’s response to the President’s “framework” for corporate tax reform.)
There are some members of Congress looking very seriously at offshore tax dodging by corporations (like Senator Carl Levin). But serious leadership is unlikely to come from the presidential candidates anytime soon.
Photo of Barack Obama, Mitt Romney, and Cayman Islands Flag via Austen Hufford, Justin Sloan, and J. Stephen Con Creative Commons Attribution License 2.0
The discussion over tax policy during Tuesday night’s town hall debate between President Barack Obama and former Massachusetts Governor Mitt Romney is a case study in how candidates can make selective use of facts. Below we bring some context to some of the most significant points made about tax policy during the debate.
Canada and the “High” Corporate Tax Rate
One area of unfortunate mutual agreement between Obama and Romney is, as Obama put it during the debate, that our corporate tax rate is “too high.” Backing this notion up, Romney noted that Canada’s corporate tax rate is now “15 percent” while the U.S.’s “35 percent” and thus leaves the U.S. in a less “competitive” position.
The primary problem is that both candidates are focusing on the statutory rate (the written law), which is relatively high in the United States, rather than the effective rate (the percentage of profits that corporations actually pay in taxes), which is far lower than the 35 percent statutory rate due to tax loopholes that plague our corporate tax system. In fact, Citizens for Tax Justice (CTJ) has found that large profitable corporations pay about half the statutory rate on average, while some companies like General Electric and Verizon pay nothing at all in corporate taxes.
Turning back to Romney’s comparison of the U.S. corporate tax rate with Canada’s, a CTJ analysis of Organisation for Economic Co-operation and Development (OECD) data actually found that the U.S. collects half as much in corporate tax revenue as Canada when measured as a percentage of GDP.
Rewriting the Legacy of George W. Bush
Getting to the core of many undecided voters’ concerns about his candidacy, one of the questioners asked Romney how his policies would differ from those of former President George W. Bush. Romney responded that he, unlike Bush, would balance the budget and that Obama had actually doubled the size of the annual Bush deficits.
What’s bizarre about this statement is that Romney is saying he will balance the budget, unlike Bush, while simultaneously doubling down on many of the same policies that drove the Bush deficits to begin with. For example, the Bush tax cuts added $2.5 trillion to the deficits between 2001-2010, yet Romney supports extending the entirety of the Bush tax cuts, which over the next ten year are estimated to cost $5.4 trillion (twice as much as in the first decade). Building on this, Romney is actually proposing roughly $5 trillion in more tax cuts over the next ten years, the costs of which he cannot offset without taxing the middle-class (which he pledges not to do).
Romney was also off base when he said that Obama doubled the federal budget deficit. For one, Obama came into office 3 months after the start of fiscal year 2009, and CBO had already projected a $1.2 trillion dollar deficit for that year. In addition, the Center on Budget and Policy Priorities points out that the economic downturn, the bailouts, the war costs, and Bush-era tax cuts, all of which began under the Bush Administration, account for most of the budget deficit.
Taking an Interest in the Preferential Tax Rate for Capital Gains
During the discussion over which loopholes and deductions Romney would close, Obama rightfully noted that Romney has already taken off the table any option that would close or reduce the biggest tax loophole for the wealthy, the preferential rate for capital gains. As CTJ noted in a recent report, ending the preferential rate would improve tax fairness, raise revenue, and simplify the tax code. Surprisingly, Romney did not offer any defense of the preferential capital gains rate during the debate, which could be explained by the fact that he did not want to bring further attention to the fact that he personally saved $1.2 million in taxes due to the lower rate.
Instead of defending the merits of a lower rate, Romney instead highlighted his plan to eliminate taxes on interest, dividends, and capital gains for taxpayers with AGI below $200,000. While this sounds like a boon to lower and middle-income taxpayers, the reality is that the only 6 percent of all capital gains income and 17 percent of dividend income is earned by the bottom 80 percent, so it would apply to relatively few taxpayers.
While the presidential candidates debate whether the tax code rewards companies that move operations overseas, a new CTJ report shows that ten companies, including Apple and Microsoft, indicate in their own financial statements that most of their foreign earnings have never been taxed – anywhere. The statements the companies file with the SEC reveal that if they brought their foreign profits back to the U.S., they would pay the full 35 percent U.S. tax rate, which is how we can surmise that no foreign taxes were paid that would offset any of the 35 percent U.S. tax rate.
The most likely explanation of this is that these profits, instead of being earned by real, economically productive operations in developed countries, are actually U.S. profits that have been shifted overseas to offshore tax havens such as Bermuda and the Cayman Islands. This same type of offshore profit shifting was the focus of a recent Senate hearing where Microsoft and Hewlett-Packard found themselves in the hot seat.
In the tax footnote to their financial statements, companies disclose the amount of their foreign subsidiaries’ earnings which are “indefinitely reinvested,” that is, parked offshore. Calling it "indefinitely reinvested" allows them to embellish their bottom lines, on paper anyway, because they don't have to account for the cost of U.S. taxes they'd pay on that offshore income. But, they must disclose the total amount of their unrepatriated profits, and also estimate the U.S. tax that would be due if those earnings were repatriated.
A new CTJ analysis of the Fortune 500 found that, although 285 companies reported unrepatriated foreign earnings, only 47 companies disclosed in their financial statements an estimate of the U.S. income tax liability they would face upon repatriation, although that disclosure is required by accounting standards. The remaining companies hid behind a common dodge that estimating the U.S. tax would be “not practicable.” Legions of lawyers and accountants help these companies avoid taxes but can’t calculate the costs to the U.S. treasury?
Which Fortune 500 Companies are Shifting Profits to Offshore Tax Havens? ranks the 47 companies that do disclose this figure by the tax rate they’d pay if they repatriated their foreign earnings. Seven of the top ten are members, either directly or through a trade association, of the WIN America campaign that is lobbying for a repatriation tax holiday (aka corporate tax amnesty) that would let them bring the foreign earnings home at a super-low rate.
It’s not as though the rest of the Fortune 500 is innocent. CTJ’s report notably says nothing about the 238 Fortune 500 companies that have admitted having offshore hoards but refuse to calculate how much tax they’d pay. These companies include suspected tax dodgers like Google and HP, each of which has subsidiaries in known tax haven countries. In all likelihood, many of these other companies have been as successful in avoiding tax as the ten companies ranked highest in CTJ’s report.
The new CTJ report is another reminder of what U.S.-based multinationals will do to avoid paying tax and why changing the U.S. international tax system to a territorial system is such a bad idea. Moving to a territorial tax system, which is supported by Gov. Romney and Congressman Ryan, would give companies a permanent tax holiday and encourage even more aggressive offshore profit shifting. President Obama has proposed corporate tax reform that would include a “minimum tax” on foreign earnings, although the rate has not been specified. And Congress, it seems, will be taking up overhaul of the corporate tax code next year, so watch this space for the facts about corporate America’s campaign to make dodging taxes even easier.
In last night’s presidential debate, Governor Romney pointed out that President Obama’s pension holds investments in Chinese companies and even in a Cayman Islands trust. Unlike Romney’s self-directed Individual Retirement Account, the President’s pension is in a system over which the President has absolutely no control; it’s an account with the Illinois General Assembly Defined Benefit Pension Plan. To somehow compare that with the vast wealth that Romney has personally placed offshore is ludicrous.
While Romney was at the helm of Bain Capital, the private equity firm began forming all of its new funds in the Cayman Islands through labyrinthine structures that allow investors to legally avoid – and illegally evade – tax. In addition, Gov. Romney has a Bermuda corporation which has never been explained and, of course, there is that famous Swiss bank account. Over 250 of the 379 pages of Romney’s 2011 tax return are devoted to disclosing transactions with offshore corporations and partnerships.
If Romney was trying to make the point that most investors have some holdings in companies outside of the U.S., we buy that. But if Romney’s point was that facilitating tax avoidance and evasion through complicated offshore structures is both normal and acceptable or in any way ordinary, we could not disagree more.
During Tuesday night’s presidential candidate town hall debate, President Barack Obama and former Massachusetts Governor Mitt Romney went at it again over, among other things, their respective approaches to tax policy. While both candidates come up short on proposing fair and sustainable tax policy, Romney was downright brazen in misrepresenting the facts about his own and Obama’s tax plans. Here we break down his three biggest whoppers.
Romney Says “Of Course” His Tax Plan Adds Up
After months of criticism from all sides for failing to specify which deductions he would eliminate in order to make his tax plan add up, Romney floated the idea during the debate of having a cap where each American gets up to $25,000 of deductions and credits. As Citizens for Tax Justice (CTJ) noted when Romney first floated a $17,000 cap a couple weeks ago, the reality is that even if Romney eliminated every single deduction for the wealthy, he would still violate his promise to “not under any circumstances reduce the share that's being paid by the highest income taxpayers.” The tax cuts in his plan (which he does specify) would result in a net tax reduction of $250,000 on average for millionaires, even if they had to give up all the tax expenditures they currently enjoy.
Seeming to contradict his own point about the share of taxes the wealthiest Americans would pay, Romney also said that he particularly wanted to bring personal income tax rates down for individuals at the high end of the income spectrum because so many small businesses are taxed under the personal income tax. Romney is again missing the point that only 3 to 5 percent of business owners (and the richest ones at that) would be affected by a high end rate change, and it would only be on the profits those business owners take home.
When Romney defends the arithmetic of his tax plan, he emphasizes that he will not reduce “the share” of taxes paid by the wealthiest Americans. We suspect this is so he can argue later that since his across-the-board tax breaks would reduce the tax burden on different income groups equally, even if it gives the wealthiest the largest tax breaks, the ratios stay the same. Of course, it would be impossible for Romney to cut high end rates without breaking his pledge to make his plan revenue-neutral. But it’s already been established (as discussed above) that his revenue pledge conflicts with his pledge to make these specific tax cuts and pay for them without raising the net taxes paid by the middle-class.
Romney Claims Middle Class Will See $4,000 Rise in Taxes Under Obama
Trying to deflect the argument that he would have no choice but to raise taxes on the middle class to pay for his across-the-board tax cuts, Romney tried to throw it back at Obama, saying that “people in the middle class will see $4,000 per year in higher taxes” under the President’s budget plan. This is jujitsu of epic proportions.
First, Romney misrepresents a study by the conservative American Enterprise Institute (AEI) which is NOT about higher taxes that would be levied next year, as the Governor suggested, but rather provides an estimate of what people who make between $100,000 and $200,000 could have to pay to cover their share of the debt accumulated under President Obama’s policies (both those implemented and those proposed). Second, he’s not even talking about the middle class, because a truly middle-income taxpayer makes much less than $100,000. Third, and most importantly, if Romney wants to say that tax proposals that would increase the debt are equivalent to future tax increases, then he needs to admit that his own plan, which likely increases the debt much more than Obama’s, is equivalent to a massive tax increase. Indeed, Romney still hasn’t explained how he would pay for $10 trillion in tax cuts and another trillion in increased defense spending over the next ten years.
Romney Says He will Create 12 Million Jobs
One of Romney’s boldest claims of the night was that he had a “five-point plan that gets America 12 million new jobs in four years.” The numbers the Romney campaign uses to make this assertion, however, are so blatantly bunk that Romney earned 4 Pinocchios from the Washington Post’s fact checker.
Romney’s 12 million jobs claim relies most heavily on a study of Romney’s tax plan which found that it would create seven million jobs over 10 (as opposed to four) years. That study (PDF), however, rests on two false foundations. First, it overestimates the positive economic impact of tax reform, an impact which has been proven to be minimal at best. Second, because Romney has not yet laid out a plan that is even mathematically possible or detailed enough to model, the study necessarily rests on a whole series of assumptions about the plan that border on fictitious.
Romney’s evidence supporting the power of his plan to create the other five million jobs is even weaker than those he claims from tax reform. Three million of his alleged new jobs are among those that would already be created over the next eight (not four) years under current energy policies, some of which Romney actually opposes. Similarly misleading, Romney regularly points to a study with a speculative estimate that Chinese violation of U.S. intellectual property rights is costing two million jobs. Romney wants us to infer that he would somehow save two million jobs by preventing China from pursuing this practice, even though he has never identified a truly effective tool the U.S. has at its disposal for changing the behavior of Chinese counterfeiters.
The first and only Vice Presidential Debate of the election season between Vice President Joe Biden and Wisconsin Congressman Paul Ryan featured a spirited discussion over their competing visions for tax policy. While watching, we began to genuinely wonder if Biden had spent time reading Citizens for Tax Justice (CTJ) materials considering that time and again he made precisely the points CTJ has been making for years. Ryan, on the other hand, repeatedly misrepresented the tax system and the two tickets’ tax plans.
Below we breakdown the most important tax policy moments in the debate:
1. Biden Highlights the Regressiveness of Extending All the Bush Tax Cuts
While the presidential candidates largely ignored the Bush tax cuts in their debate last week, Biden put them front and center during the VP debate when he pointed out that Romney and Ryan are proposing the “the continuation of a tax cut that will give an additional $500 billion in tax cuts to 120,000 families” over the next ten years, compared to the Obama Administration plan for the Bush tax cuts.
Biden’s formulation here is a little confusing but not incorrect. Of course, President Obama proposes to allow the Bush income tax cuts to expire for income in excess of $250,000 for couples and in excess of $200,000 for singles, and only 2 percent of taxpayers would lose any portion of their Bush income tax cuts under this approach. The administration has stated that this would cost $849 billion less, over ten years, than extending the Bush income tax cuts for all income levels, while our own estimate is that it would cost $887 billion less over ten years. Pretty close.
Biden is focusing specifically on the part of this figure that would benefit the richest 120,000 families, apparently based on figures from the Tax Policy Center. Our own calculations essentially back up Biden’s point. We estimate that the richest taxpayers with incomes exceeding $2 million in 2013 (the richest 135,000 families in 2013) would receive about 57 percent of the income tax cuts that would otherwise expire under Obama’s approach, which comes out to $507 billion over ten years.
2. Ryan Promises the Mathematically Impossible
In defending Romney’s tax plan, Ryan reiterated their ticket’s commitment to “lower tax rates across the board” and to “close loopholes,” while simultaneously sticking to the “bottom lines” of not raising the deficit, not increasing taxes on the middle class or lowering the share of income that is borne by high-income earners. But Ryan is defending a plan that CTJ has found is mathematically impossible. Even if Romney and Ryan eliminated all the tax expenditures for wealthy taxpayers that they have put on the table, our analysis has found that their across-the-board tax cuts would still require them to give an average tax break of $250,000 to individuals making over $1 million, which would violate their pledge not to lower the share of taxes borne by high-income earners.
Ryan said during the debate that there are six studies showing that their plan is possible, but Biden correctly pointed out that even the studies Ryan cites conclude that the plan would require increasing taxes on taxpayers who do not have particularly high incomes.
3. Biden Calls Ryan Out for Taking Capital Gains Tax Breaks Off the Table
One of the major reasons that the Romney campaign’s tax plan would be incapable of eliminating enough tax expenditures to add up is that Romney has specifically said that he would keep the tax breaks for capital gains and stock dividends. During the debate, Biden noted that this shows the lack of seriousness in Romney’s loophole-targeting approach because Romney has exempted the “biggest loophole” of all - the “capital gains loophole.” As CTJ pointed out in a recent report, ending the capital gains tax preference would tremendously improve fairness, raise revenue, and simplify the tax code in one fell swoop.
4. Ryan and Biden Dispute the Definition of Small Businesses
Repeating Romney’s line on small businesses from the first presidential debate, Ryan claimed that Obama is going to raise taxes on small businesses and kill 710,000 jobs by doing so. The reality, however, is that only the 3 to 5 percent richest business owners (individuals who could hardly be called “small business” owners) would lose any of their tax breaks, and the job loss claims are complete malarkey.
5. Biden Takes on Romney and Ryan’s Commitment to Grover Norquist
During the first presidential debate, Romney reiterated his pledge to not raise a single penny in revenue, even if the revenue was raised as part of a deal that included $10 in spending cuts for every $1 in revenue increases. Biden took issue with this commitment saying that “instead of signing pledges to Grover Norquist not to ask the wealthiest among us to contribute to bring back the middle class, they should be signing a pledge saying to the middle class we're going to level the playing field.”
Biden is absolutely right that we need to reject the extreme anti-tax approach taken by individuals like Grover Norquist and instead embrace a balanced approach to deficit reduction. The question for Romney is when he will recognize that a balanced approach is not only what the American people want, but also what business experts support as well.
6. Ryan Misrepresents History of 1986 Tax Reform
Responding to the question of what specific loopholes he and Romney are proposing to close, Ryan attempted to dodge the question by arguing that they should not lay out specific loopholes they want to close because doing so would prevent them from following the model that allowed Ronald Reagan and Tip O’Neill to produce the 1986 tax reform. The reality, however, as recounted by CTJ Director Bob McIntyre – whose work was integral to the passage of the 1986 reform – is that Reagan’s Treasury Department released a detailed tax reform plan explicitly laying out exactly which tax expenditures the Administration would like to see closed. In other words, the 1986 tax reform experience actually proves the opposite of what Ryan is saying about vagueness being some kind of asset.
7. Biden Revives Romney’s 47% Remark
Continuing his efforts to upend tax myths during the debate, Biden took issue with Romney’s earlier statement that 47 percent of Americans aren’t paying their fair share, and he noted that many middle income people actually “pay more effective tax than Governor Romney in his federal income tax.” Biden was right to push back against the notion that any Americans are not contributing their fair share since, on average, any American’s share of total taxes is already roughly equal to their share of total income. In addition, CTJ has found that individuals making around $60,000 do in fact pay an effective federal tax rate of 21.3% on average, which is a lot compared to Romney’s tax rate of 14% in 2011.
8. Ryan Claims Obamacare Includes 12 Middle Class Tax Hikes
During the debate, Ryan asserted, “Of the 21 tax increases in Obamacare, 12 of them hit the middle class.” The reality, according to a CTJ analysis, is that 95 percent of the tax increases included in the healthcare reform legislation would be borne by either companies or households making over $250,000. Adding to this, Ryan’s specific point about the 12 tax provisions is mostly false because 4 of the 12 provisions are not really taxes at all.
9. Biden Stumbles on the Primary Cause of Great Recession
The only significant tax policy stumble for Biden came when he argued that Ryan helped create the Great Recession by “voting to put two wars on a credit card, to at the same time put a prescription drug benefit on the credit card, a trillion-dollar tax cut for the very wealthy.” The problem of course is that the Great Recession was due primarily to a financial crisis, not some sudden crisis in government spending and deficits.
While extraordinary increases in deficit spending and tax cuts for the rich during President George W. Bush’s presidency, (which Ryan did vote for), did not cause the recession, they certainly caused an explosion in the national debt. In fact, if continued, the Bush tax cuts and the cost of the wars will account for nearly half of the public debt by 2019.
10. Ryan Wrong on How Much Revenue Could Be Raised by Taxes on the Rich
In an attempt to discredit the idea that allowing the Bush tax cuts to expire for the wealthiest Americans will help fix the deficit, Ryan argued that “if you taxed every person and successful business making over $250,000 at 100 percent, it would only run the government for 98 days.” To start, the entire premise of this argument is bogus because the Obama administration is not proposing a revenue-only approach to deficit reduction; in fact it has already signed into law over $2 trillion in spending cuts. In addition, Ryan ironically failed to discern, even by his own calculations, that 98 days worth of government spending would be more than enough to close the projected budget deficits and would be more than enough to pay down the national debt in the coming years.
While most commentators have focused on the back-and-forth between President Barack Obama and former Governor Mitt Romney over tax rates and deficit reduction during the first presidential debate, we paid extra close attention to what the candidates said about corporate and small business taxes. Unfortunately, we found what both candidates had to say really wanting.
Corporate Tax Reform
Early in the debate, Obama noted that he and Romney have something of a consensus over corporate taxes in that they both believe that “our corporate tax rate is too high.” If there's such an agreement, it's based on a fundamental misunderstanding. While the U.S. has a relatively high statutory corporate tax rate of 35 percent, the effective corporate tax rate (the percentage of profits that corporations actually pay in taxes) is far lower because of the loopholes they use to shield their profits from taxes. CTJ has found that large profitable corporations pay about half the statutory rate on average, while some companies like General Electric and Verizon pay nothing at all in corporate taxes.
President Obama proposes to close corporate tax loopholes, but would give the revenue savings right back to corporations as a reduction in the statutory tax rate from 35 percent to 28 percent, resulting in no change in revenue, as outlined in his corporate tax reform framework released earlier this year. (During the debate Obama actually said he’d lower the statutory rate to 25 percent, which seems more likely a misstatement than an intentional policy shift.)
In contrast, 250 non-profits, consumer groups, labor unions and faith-based groups have called for a corporate tax reform that actually raises revenue in order to pay for critical government investments and reduce the budget deficit.
Of course, Governor Romney also proposes a deep cut in the statutory corporate tax rate (to 25 percent) and is far more vague on whether he would bother to offset the costs.
Romney took issue with Obama’s claim during the debate that the tax code currently allows companies to take a deduction for moving plants overseas, saying that he had “no idea” what Obama was talking about and that if such a deduction really exists that he may “need to get a new accountant.” Technically, Obama is right that the tax code currently allows companies to take a deduction for business expenses of moving a plant overseas, but he leaves out the fact that companies are allowed to deduct most business expenses, including those associated with moving facilities. In any case, Romney certainly does not to need to hire a new accountant.
What both candidates missed during this discussion was that our current tax system does in fact encourage corporations to move operations overseas by allowing them to defer taxes on foreign profits. To his credit, Obama proposed, as part of his 2013 budget and in his framework for corporate tax reform, several reforms to the international tax system that would reduce the size of this tax break, although he has not gone as far as to call for an end to deferral entirely. In contrast, Romney wants to blow a giant hole in our corporate tax by moving the US to territorial tax system, under which US companies would pay nothing on offshore profits.
Small Business Taxes
During the debate Romney revived a classic tax myth by claiming that allowing the Bush tax cuts to expire for income over $250,000 will harm small businesses because a lot of businesses “are taxed not at the corporate tax rate, but at the individual rate.” Obama pushed back noting that he had “lowered taxes for small businesses 18 times” and that under his plan “97 percent of small businesses would not see their income taxes go up.”
A Citizens for Tax Justice (CTJ) analysis found that only the 3 to 5 percent richest business owners would be lose any their tax breaks under Obama’s plan. The CTJ report also points out that if you’re a business owner, tax breaks affect how much of your profits you can take home, but not whether or not you have profits. A business owner will make investments that create jobs if, and only if, such investments will lead to profits, regardless of what tax rates apply.
In an attempt to push his small business claim even further, Romney cited a study by the National Federation of Independent Businesses (NFIB) claiming that Obama’s plan will force small business to cut 700,000 jobs. When the NFIB report came out during the summer, the White House did a fine job of pointing out the many, many outrageous distortions in the report. Just to take one, the NFIB report makes assumptions about the relationship between taxes and investment that are far out of line with those of the non-partisan Congressional Budget Office and even the Treasury Department during the Bush administration.
Oil and Gas Tax Breaks
President Obama stated that the oil industry receives “$4 billion a year in corporate welfare” and added that he didn’t think anyone believes that a corporation like ExxonMobil really needs extra money coming from the government. Romney hit back saying that the tax break for oil companies is only $2.8 billion a year and that Obama had enacted $90 billion worth of tax breaks in one year for green energy, which he said dwarfed the oil tax breaks 50 times over.
On the oil company tax break claims, Obama’s figure is much closer to the truth. The President’s 2013 budget has a package of provisions that would eliminate or reduce special tax breaks for the fossil fuel industry and the Treasury estimates this would raise $39 billion over a decade. (See page 80 of this budget document.) A CTJ report explains the arguments for these provisions. Ironically, the oil industry itself puts this number much higher, claiming that the Obama administration’s proposal would eliminate about $8.5 billion in tax breaks it receives annually.
In addition, FactCheck.org points out that Romney’s claims on Obama’s clean energy tax breaks were largely bogus. Just to list some of the problems with Romney’s $90 billion claim, FactCheck.org notes that these breaks were spent over two years not one, that the figure includes loan guarantees not just actual spending, and that many of these “breaks” were spent on infrastructure projects.
During the first presidential debate of this election season, President Barack Obama and former Governor Mitt Romney’s discussion focused primarily on what is arguably the most important issue of this election: tax policy. Over half of the debate was spent on the intricacies of tax policy, from the treatment of small businesses to the precise revenue cost of trillions of dollars in proposed tax cuts. Here we offer some criticism and context.
Size of the Candidates’ Tax Cut Plans
Early in the debate Obama explained that Romney’s “central economic plan calls for a $5 trillion tax cut – on top of the extension of the Bush tax cuts.” Romney denied this, saying “I don’t have a $5 trillion cut. I don’t have a tax cut of the scale that you’re talking about.” Romney added that his plan would not “reduce the share of taxes paid by high-income people” and that it would “provide tax relief to people in the middle class.”
The truth is that Romney isn’t proposing a $5 trillion tax cut, he’s proposing to cut taxes by over $10 trillion over ten years. Romney proposes new tax cuts costing around $500 billion a year (according to the Tax Policy Center) on top of making permanent all the Bush tax cuts, which by themselves would cost $5.3 trillion over a decade.
Romney is proposing to make up some of the $5 trillion in additional tax cuts by closing loopholes, eliminating deductions and other tax expenditures, but he has kept his plan secret so far and has refused to name even a single tax expenditure he would eliminate or loophole he’d close.
An analysis by Citizens for Tax Justice found that even if millionaires were forced to give up all the tax expenditures that Romney has put on the table, his tax plan would still give a tax break of at least $250,000 on average for individuals making over $1 million. That is, he simply cannot back up his assertion that he is “not going to reduce the share of taxes paid by high- income people.” And if he really is going to make up the revenues we’ll lose to his rate cuts, taxes would have to go up for other taxpayers.
Throughout the debate, Romney referred to several studies showing that his plan is mathematically possible (a low standard to meet to be sure), but the reality is that the studies he’s referring to aren’t all actual studies, nor do they fully support his plan.
It’s important to note that while Romney’s tax plan is the height of fiscal irresponsibility, Obama himself is proposing to extend most of the Bush tax cuts, at a cost of $4.2 trillion over the next ten years. The President assured the audience that he wants to “continue the tax rates - the tax cuts that we put into place for small businesses and families. But,” he continued, “for incomes over $250,000 a year that we should go back to the rates that we had when Bill Clinton was president,” that is, the pre-Bush tax cuts rate.
CTJ has analyzed Obama’s plan and found that extending 78 percent of the Bush tax cuts will lose far too much revenue in the long run. The President’s plan would extend the tax cuts for the first $250,000 a married couple makes. We also found that married couples making between $250,000 and $300,000 would still continue to enjoy, on average, 98 percent of the Bush tax cuts. Fewer than two percent of taxpayers would lose any part of the Bush tax cuts under Obama’s plan, so it’s hardly a bold proposal for reducing the deficit and restoring urgently needed revenues.
In other words, neither presidential candidate showed on Wednesday night that they have fully come to terms with the fact that the United States cannot afford continuing to hand out trillions of dollars in tax cuts.
Long Term Deficit Reduction Plans
At a Republican presidential debate over a year ago, Romney joined with all the other candidates in saying that they would reject any deal that raised tax revenues, even one that would include $10 in spending cuts for every $1 in additional tax revenue – ten times more in crippling spending cuts than tax increases. When pushed by the moderator during Wednesday’s presidential debate, Romney stood firm, saying that he had “absolutely” ruled out the possibility of raising additional revenue to reduce the deficit.
The Simpson-Bowles Commission plan to balance the budget, which Romney praised last night, however, requires a ratio of $1 in spending cuts to $1 in revenue increases (compared to the budget baseline that Obama and many members of Congress use). Ironically, by seemingly embracing Simpson-Bowles, Romney put himself to the left of Obama, whose own long term deficit reduction plan actually cuts fewer taxes and less spending than Simpson-Bowles. As Obama explained in the debate: “the way we do it is $2.50 for every cut, we ask for a dollar of additional revenue.” (And he repeatedly points out, of course, that his health care legislation will slow the deficit’s growth by reducing Medicare costs.)
Neither candidate is acknowledging the elephant in the room. In the long-run, what they really have to do to fix the budget deficit is just to stop extending most or all of the Bush tax cuts, or find a way to pay for those parts they do extend.
To make watching the debates just a little more fun, we created a Bingo card with all the tax and budget related terms we expect the two candidates to trot out time and again over the coming debates. (If you want to make the debates even more fun you could have a drink everytime they use one of these words as well, but you didn't hear this from us.)
|Bingo Card #1||Bingo Card #2||Bingo Card #3|
Former Virginia Governor and current Senate candidate Tim Kaine found himself in hot water after a Senatorial debate last week in which he expressed a willingness to consider “a proposal that would have some minimum tax level for everyone.” Perhaps even worse, Kaine has also proposed a so-called “Middle-Ground” approach to the Bush tax cuts, which he says in his TV ad is fiscally responsible. His middle ground position – putting him between a tax-averse Democratic president and a tax-loathing Republican rival – would extend the Bush tax cuts for the first $500,000 that a taxpayer makes in a year.
His fiscally irresponsible ideas about the expiring Bush tax cuts merit their own outrage. Kaine’s proposal to raise the income threshold above which the Bush tax cuts expire to $500,000 would save 22 percent less revenue than Obama’s $250,000 threshold, and 73 percent of the lost revenue would be paying for tax cuts for people making over $500,000. A full 30 percent of the cost of Kaine’s extra tax cuts would go to people making over $1 million!
It’s not surprising that his statements regarding a minimum tax have caused an uproar considering that such proposals are usually the province of radical conservatives like Minnesota Republican Michelle Bachman, rather than that of moderate Democrats. Ironically, Kaine himself made a strong case against such a proposal in the debate when he noted that “everyone pays taxes,” a point Citizens for Tax Justice repeatedly makes.
What’s so disturbing about Kaine’s Bush tax cut proposal, as opposed to his openness to a minimum tax (which he’s already walked back), is that it isn’t out of the realm of possibility. Last May, Democratic House Minority Leader Nancy Pelosi proposed to raise the income threshold over which the Bush tax cuts should expire even higher, from $250,000 to $1 million. Kaine and like-minded Democrats need to reconsider their position because allowing even more of the Bush tax cuts to stay in place makes about zero fiscal sense.
Front Page Photo of Tim Kaine via Third Way Creative Commons Attribution License 2.0
A hearing on offshore profit shifting last week exposed aggressive tax planning strategies employed by Microsoft and Hewlett-Packard (HP) and illustrated the critical need for more disclosure.
On September 20, the Senate Permanent Subcommittee on Investigations held a hearing on “Offshore Profit Shifting and the U.S. Tax Code.” Witnesses from academia, the Internal Revenue Service, U.S. multinational corporations, international tax and accounting firms and the nonprofit Financial Accounting Standards Board (FASB) answered questions from the Senators about how tax and accounting rules allow U.S. multinationals to shift profits offshore using dubious transactions and complicated corporate structures.
The committee looked at two case studies investigated by the committee staff. In the Microsoft case, the committee investigation found that 55 percent of the company’s profits were “booked” (claimed for accounting purposes) in three offshore tax haven subsidiaries whose employees account for only two percent of its global workforce. Microsoft did that by selling intellectual property rights in products developed in the U.S. (and subsidized by the research tax credit) to offshore tax haven subsidiaries, then creating transactions to shift related profits there.
Hewlett-Packard used a loophole in the regulations to use offshore cash to pay for its U.S. operations without paying any U.S. tax on the repatriated income. Rather than having offshore subsidiaries pay taxable dividends to the U.S. parent company, HP had two subsidiaries alternately loan funds to the parent in back-to-back-to-back-to-back 45-day loans. In the first three quarters of 2010, there was never a day that HP did not have an outstanding loan of $6 to $9 billion from one of its foreign subsidiaries.
In the tax footnote to their public financial statements, companies disclose the amount of their foreign subsidiaries’ earnings which are “indefinitely reinvested.” They do not record U.S. tax expense on these profits, ostensibly because they don’t plan to bring them back to the U.S. anytime soon. But they must disclose the total amount of their unrepatriated profits and estimate the U.S. tax that would be due if the earnings were repatriated.
The FASB representative, in a conversation with CTJ Senior Counsel Rebecca Wilkins after the hearing, noted that the accounting standards require disclosure. If companies do have a reasonable estimate and are not disclosing the amounts, that would be an “audit failure” by the accounting firm auditing the financial statements and subject to possible disciplinary action by the Public Company Accounting Oversight Board (established by Congress in 2002).
Most companies have not disclosed the potential U.S. taxes they would owe, but they must know it’s enough that they don’t want to repatriate the earnings and pay it. Chances are, they know those amounts down to the dollar.
It's outrageous that many of the companies who are lobbying hardest for a repatriation holiday won’t tell Congress whether these foreign earnings are sitting in a tax haven right now or how much U.S. tax they would owe on them. Lawmakers should demand to know.
A new survey of 250 economists in the business community by the National Association for Business Economics released on Monday revealed their strong support for increasing fiscal stimulus in the short term and taking a balanced approach to deficit reduction (including revenue increases as well as spending cuts) over the long term. This agreement among business economists stands in direct contrast to many conservative lawmakers in Washington, who increasingly favor spending cuts in the short term and actually decreasing taxes over the long term.
Of the economists surveyed, 67 percent favored maintaining or even increasing the current level of fiscal stimulus in 2013. Moving in the opposite direction, Congress actually enacted $984 billion in spending cuts (known as sequestration) last year, which go into effect starting in 2013; a full three quarters of the economists polled outright oppose allowing those sequestration cuts to take effect.
Although a majority of the business economists did favor extending tax cuts in 2013 to help stimulate the economy (although there was no majority for making all the tax cuts permanent), the reason more of them favor preserving government spending is likely explained by the fact that government spending typically has a much greater positive impact on economic growth than tax cuts.
Turning to the long haul, a full 90 percent of those surveyed believe that Congress should take a balanced approach to deficit reduction, meaning a combination of tax increases and spending cuts. And while there is near universal consensus among these economists for tax increases, neither the Democratic nor Republican party platforms support increasing tax revenue as part of a balanced approach to deficit reduction. Both parties instead call for reducing revenue by trillions of dollars (compared to what our tax system would collect if the tax cuts were all allowed to simply expire).
While the business community is often portrayed as being hindered by budget deficits and higher taxes, this survey reveals that they actually favor higher budget deficits in the short term and higher taxes over the long term. It’s time Congress begins listening to the actual business community rather than the anti-tax activists who pretend to speak for them.
Mitt Romney’s 2011 Returns Reveal a Tax Code Stacked in Favor of the Very Rich Because of Loopholes and Special Rates Not Available to Ordinary Taxpayers
Washington, DC – Since Citizens for Tax Justice (CTJ) first calculated that GOP Presidential candidate Mitt Romney likely paid a 2010 federal income tax rate of 14 percent in October of 2011, CTJ’s analysts have been helping to explain the features of our tax code that allow high wealth individuals like Romney to pay such a low federal income tax rate. The explanation is that loopholes in the tax code benefit the most affluent.
After reviewing Mitt Romney’s 2011 return (an estimate of which he released in January), and the 20-year summary of the candidate’s taxes issued by his lawyer, CTJ’s Senior Counsel for Federal Tax Policy, Rebecca Wilkins, issued the following statement:
“It’s an indictment of the federal tax code that a man of Mitt Romney’s wealth could pay a federal tax rate as low as 10 percent. While he chose to forgo deductions for charitable contributions in order to keep his “commitment to the public that his tax rate would be above 13 percent,” bringing his rate up to 14 percent for 2011, it is still outrageous that the code allows such a low rate.
“He also takes advantage of a special low rate on investment income. The preferential rate on capital gains and dividends saved Mitt Romney a whopping $1.2 million in taxes in 2011, cutting his tax bill almost in half. He would have paid $3.1 million in taxes without that special treatment. And much of his low-rate income is really compensation from Bain Capital that should have been taxed like regular wages or salary, but is disguised as capital gains using the “carried interest” loophole.
“Romney also paid $675,000 under the Alternative Minimum Tax (AMT). If his own tax plan, which eliminates the AMT, had been in place in 2011, he would have saved himself an additional $675,000, or one third of his entire federal tax bill, and reduced his effective rate to 9 percent.
“Also notice that Mitt Romney’s tax return for 2011 is almost twice as long as it was in 2010. It is 379 pages long, and 250 pages are foreign entity disclosure forms. Put simply, that’s 250 pages about his offshore investments.
“Further, the summary provided by his lawyer is playing games by averaging Romney’s 20-year tax rate. Including the years 1992-97 skewed his rate upwards because during those years, the capital gains rate was 28 percent instead of the 15 percent it is now. If they’d averaged only the last 15 years, his rate would have been much lower.
“And one final point is that Romney continued to work and make lots of money even when his capital gains tax rate was almost double the current rate, the rate he wants to retain. Yet he says that the low capital gains rate is essential to incentivizing rich people to do what they do. How does he explain that?”
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).
A new study by the non-partisan Congressional Research Service (CRS) using data from the past 65 years found that there is no correlation (PDF) between top tax rates and economic growth. But it doesn’t stop there. The study also found that there is a correlation between the reduction in top tax rates and the increasing concentration of wealth toward the top of the income distribution. The report, Taxes and the Economy: An Economic Analysis of the Top Tax Rates Since 1945, is also clear that this is not only about tax rates on regular income, and points out (PDF) that “changes in capital gains and dividends were the largest contributor to the increase in income inequality since the mid-1990’s.”
This has to be just about the last nail in the tax-cutting, supply-side coffin. CRS is a bunch of smart people at the Library of Congress whose mission is “providing comprehensive and reliable legislative research and analysis that are timely, objective, authoritative, and confidential, thereby contributing to an informed national legislature.” And while the study has earned volumes of media coverage, it’s worth noting that even the Wall Street Journal report didn’t quibble with the study’s finding that “tax cuts for the rich don’t seem to be associated with economic growth…. [but] can be linked to a different outcome: income inequality.”
The CRS findings fall in line with the increasing consensus showing that supply-side tax cuts touted by people like Arthur Laffer have been an enormous failure over the past several decades. As Citizens for Tax Justice’s Bob McIntyre has pointed out, even George W. Bush’s own Treasury Department conceded in 2006 that the Bush tax cuts (which were mostly targeted to the wealthiest Americans) would not have a significant effect on economic growth over the long term. And every few weeks in his New York Times blog post, Ronald Reagan’s former advisor, Bruce Bartlett, explains that tax cuts really can not and do not make an economy healthy.
For numbers crunchers, here are some details about the study. To explore the connection between top tax rates and economic growth, the CRS performed two regression analyses comparing the top income and capital gains tax rates to the private savings rate, productivity growth rate, and real per capita GDP from 1945 to 2010. The results of the analysis reveal that there is simply no statistically significant relationship between tax rates and savings, productivity, or real per capita GDP.
To examine the effect of top tax rates on income inequality, the CRS used a regression analysis comparing the top income and capital gains tax rates to the share of income earned by the top 0.1% and 0.01%. The analysis found that there is a statistically significant negative correlation between the share of income received by the top 0.1% and 0.01% of income earners and the level of the marginal tax rates. In other words, lowering top marginal tax rates has the effect of further increasing the disproportionate amount of income earned by the wealthiest of the wealthy.
Citizens for Tax Justice and other economic think tanks have been demonstrating the flaws in supply-side tax cuts for decades, and the public is increasingly catching on about taxes in particular and economic inequality more generally. With these two issues high on the election year agenda, maybe 2012 will be the year supply-siders, voodoo economists, wishful thinkers and other magical thinkers lose their credibility, once and for all.
UPDATE, November 1, 2012: According to a New York Times story, "[t]he Congressional Research Service has withdrawn an economic report that found no correlation between top tax rates and economic growth, a central tenet of conservative economy theory, after Senate Republicans raised concerns about the paper’s findings and wording." The study referred to is the one CTJ blogged here when it was first published in September 2012.
UPDATE, December 13, 2013: The report has now been reissued with little changes and the same basic conclusions are contained in the original report.
Bradley Birkenfeld, a former banker at the Swiss banking giant UBS, received a record-setting reward of $104 million from the Internal Revenue Service (IRS) for blowing the whistle on the bank’s systematic efforts to woo wealthy Americans investors and then help them evade taxes. Birkenfeld’s revelations resulted in UBS paying a $780 million fine to the US government, and the recovery of more than $5 billion from American taxpayers took part in the IRS’s amnesty program to avoid criminal charges for their own offshore tax evasion.
Birkenfeld participated in the UBS scheme (he served jail time and is now under house arrest). His insider disclosures led the IRS to other UBS bankers who had persuaded wealthy Americans to place $20 billion of assets in UBS in order to facilitate tax evasion that -- obviously -- boosted those clients’ returns. The IRS has charged two dozen offshore bankers and 50 American taxpayers with crimes, and at least 11 banks are still under criminal investigation.
The record payout to Birkenfeld is part of the IRS Whistleblower program that provides a substantial financial incentive, up to 30 percent of the taxes recovered, to encourage tipsters to come forward with information about tax evasion. This program is a smart piece of the IRS’s larger strategy to combat the estimated $40 to $70 billion in individual offshore tax evasion each year.
While the effort to combat offshore tax evasion has revved up over the past couple years, the IRS still lacks the tools it needs to fully confront evasion. To help fix this, Senator Carl Levin has proposed the Stop Tax Haven Abuse Act, which, among other things, would allow the Treasury to put more pressure on financial institutions that don’t cooperate with US tax enforcement. In addition, the Senate still needs to override Senator Rand Paul’s block and ratify the US-Swiss tax treaty so that the IRS can begin collecting critical information from Swiss banks about US tax evaders.
Even with the many hurdles the IRS faces, Stephen Kohn, the Executive Director of the National Whistleblowers Center, said that it had been a good day in the fight against tax evasion because the IRS sent “104 million messages to banks around the world – stop enabling tax cheats or you will get caught.”
It turns out that Mitt Romney’s energy policy adviser, Harold Hamm, is the CEO of an oil company called Continental Resources, and we all know that energy companies get some of the most generous breaks in the U.S. corporate income tax code. When we learned Hamm had submitted testimony to the House Energy and Commerce Committee claiming that his company pays a 38% effective tax rate, we had to fact check it. We reviewed data from the company’s own financial reports and ran the numbers, and it turns out Continental Resources has paid a mere 2.2% federal corporate income tax rate on its $1,872 million in profits over the last five years. Read our one-pager here.
With just eight weeks to go until Election Day, Republican Presidential nominee Mitt Romney continues to channel former First Lady Nancy Reagan's "Just Say No" campaign. Romney first said "no" to releasing more of his federal income tax returns and now he's saying "no" to releasing details of his plans to change the tax code for the rest of us. But in the same way adults respond to a terrible-twos child with a serious case of the “No’s”, the adults are starting to demand better answers.
Only yesterday, editorials from both the New York Times and the Los Angeles Times took Romney to task over his and running mate Paul Ryan's failure to explain to the American taxpayer just what they would do tax policy-wise. And the Washington Post was clear in its editorial that Americans deserve to know whether Romney plans to follow in the footsteps of former President George W. Bush, who “enacted tax cuts that plunged the nation into debt.”
Politico, meanwhile, reported that Republicans and movement conservatives (from George Pataki to the Wall Street Journal) are warning that the GOP ticket better come clean on its policy plans or risk losing the election. (Evidently believing that once voters hear about their plans to coddle the rich and soak everyone else they will sweep them to electoral victory.)
Two weeks ago, CTJ’s Bob McIntyre also called for Romney to stop stalling and level with the public about his secret tax plan. We, too, have written at length on the lack of math (serious or otherwise) coming from the top of the Republican ticket.
Romney's refusal to release any more of his federal income tax returns tells us he doesn't want people to know how he made his money. Is his refusal to reveal the details of how, if elected, he'd change the tax code an indication he doesn't want you to know what might happen to your money?
In its 2012 Platform, the Democratic Party broadly calls for a tax system that asks “the wealthiest and corporations to pay their fair share,” while also taking “decisive steps to restore fiscal responsibility.” The actual policy proposals called for in the platform, however, are wholly inadequate to achieve either tax fairness or fiscal sustainability.
The Bush Tax Cuts
The most important platform plank on the individual side of the tax system is the call to allow the “Bush tax cuts for the wealthiest to expire,” which reflects President Obama’s proposal to allow the Bush tax cuts to expire for income over $250,000. Under the president’s proposal, 98.1% of Americans would continue receiving the entirety of their Bush tax cuts. It’s important to note that while the wealthiest Americans would lose part of their tax cuts under President Obama’s proposal, they would still receive generous tax breaks because any income up to $250,000 (or $200,000 for singles) would continue to be taxed at the low, Bush tax cut rates. As a result, the wealthiest 1%, for example, would get an average tax break of $20,130 in 2013.
It is also important to note that even this partial extension of the Bush tax cuts the president proposes would increase the deficit by an astounding $4.2 trillion over the next decade. To be sure, President Obama’s plan is much more fiscally responsible than a full extension of the Bush tax cuts, which would increase the deficit by $5.4 trillion. But fiscal responsibility will eventually require something bolder than simply extending most of the tax cuts that are responsible for most of the deficit.
Corporate Tax Reform
Turning to corporate taxes, the Democratic platform follows the misguided “Framework for Corporate Tax Reform,” introduced by President Obama earlier this year, which proposes to use the closure of corporate tax loopholes to pay for lower corporate tax rates. It also proposes an expansion of the research and manufacturing tax credits. What this framework gets right is a call to end the egregious loopholes and tax breaks that allow major corporations to pay an average effective tax rate of half the statutory rate, with many corporations paying nothing at all.
The problem is that instead of using the revenue raised by eliminating tax loopholes and breaks to fund desperately needed government investments and reduce the deficit, the Democratic platform, like the president’s framework, squanders the revenue on lower corporate tax rates and/or additional wasteful tax breaks. In other words, this kind of “revenue-neutral” corporate tax reform is not what the US needs; instead, we need revenue-positive reform.
Stuck in the Anti-Tax Mindset
The Democratic Party 2012 platform reveals a party deeply committed to the anti-tax mindset that historically is associated with the Republican Party. Rather than laying out the cold, hard truth about how the US needs to raise a substantial amount of revenue to meet its commitment to future generations, the Democratic platform seems an attempt to one–up Republicans on the virtues of tax cutting by touting the wide variety of cuts Democrats already enacted, and the massive amount they plan to extend. Given the enormous need for revenue to fund public investments and eventually reduce the deficit, a record of tax-cutting should be a source of embarrassment rather than pride or celebration.
More and more people are asking if Bain Capital’s tax avoidance strategies are more than merely aggressive. On August 23, Gawker.com released a staggering 950 pages of documents related to Bain, the private equity firm that Mitt Romney founded, that confirm a lot of what we had previously surmised, including the fact that the Bain private equity funds set up “blocker” corporations to help tax-exempt investors avoid the unrelated business income tax and help foreign investors avoid tax in the U.S. and in their home countries.
CTJ senior counsel Rebecca Wilkins summarized it for Huffington Post: “The Bain documents posted yesterday show that Bain Capital will go to great lengths to help its partners and its investors avoid tax. Beyond simply putting their funds offshore, the Bain private equity funds are using aggressive tax-planning techniques such as blocker corporations, equity swaps, alternative investment vehicles, and management fee conversions.”
The management fee conversions, detailed in several of the fund documents, do what they sound like they do: they convert some of the private equity firms’ annual management fees from clients, which would be taxed as ordinary income, into increased shares of partnership profits known as “carried interest”. Carried interest is how these firms have structured their performance-based compensation from managing their clients’ investments, and carried interest is taxed at the special low rate at which capital gains are taxed. The management fee conversion is an effort to get yet another form of client compensation taxed at the capital gains rate, which is less than half the rate at which it would be taxed if it were ordinary income. These conversions save private equity firms’ partners millions of dollars in income taxes (the Bain partners alone have saved an estimated $220 million).
Colorado Law Professor Vic Fleischer, an expert on the taxation of private equity, quickly branded the management fee conversions as improper. “Unlike carried interest, which is unseemly but perfectly legal, Bain’s management fee conversions are not legal.”
It looks as though the New York Attorney General agrees. In July, weeks before the Gawker document dump, AG Eric Schneiderman served subpoenas on more than a dozen private equity firms, including Bain Capital. The AG’s office is seeking documents related to whether the firms improperly converted management fees into additional carried interest, and running the investigation through its Taxpayer Protection Bureau.
As controversial as private equity firm tax practices have become (thanks to Mitt Romney’s candidacy), we are likely to be hearing more about this investigation soon. Stay tuned.
The GOP’s core philosophy about tax policy is perfectly distilled in its 2012 platform where it states simply that “[l]owering taxes promotes substantial economic growth.” What this one-sided analysis misses is that lower taxes do not promote economic growth, because they inevitably require (PDF) the government to either cut spending or to increase the deficit.
(Our GOP platform review Part II, Tax Ideas on the Fringe, is here.)
Supports More Individual Tax Cuts
The fact that the GOP platform does not make the connection between tax cuts and deficits is starkly demonstrated by the platform’s warning that the US faces an “unprecedented legacy of enormous and unsustainable debt,” while at the same time calling for a complete extension of the Bush tax cuts, at a cost of $5.4 trillion (PDF). While some GOP leaders like to say that tax cuts boost the economy so much that they pay for themselves, there is no evidence to support that claim, and even economists from the Bush Administration and a former Reagan advisor have conceded that over the long run, the Bush tax cuts have no real discernable affect on economic growth.
Supports More Corporate Tax Cuts
Another misguided tax proposal in the GOP platform is the call for a lower corporate tax rate. For one, the platform rests on the mistaken assumption that “American businesses now face the world’s highest corporate tax rate.” While it may be true that the US has the highest statutory rate on paper, the actual amount of taxes paid by US corporations is nowhere near the statutory rate because of the large swath of corporate tax breaks and loopholes that allow many enormously profitable companies, like General Electric and Verizon, to pay nothing at all in taxes.
Comparatively, the amount of corporate taxes paid as a percentage of GDP in the US is the second lowest in the developed world. In fact, a recent CTJ analysis found that two-thirds of the largest US multinational corporations with significant foreign profits paid a lower corporate tax rate on their US profits than the rate they paid to foreign governments on their foreign profits.
Rather than dealing with the breaks and loopholes that plague our corporate tax system, the GOP platform advocates expanding them, most notably by moving the US to a territorial tax system under which corporations would have a greater incentive to move profits and jobs offshore (a problem that can be solved by ending deferral).
The new Republican platform identifies high rates as the core problem with our current tax system, but the real problem is decades of cuts and proliferating breaks and loopholes are making it impossible over the long term for the government to provide critical services without dangerously increasing the national debt.
The GOP’s 2012 platform contains many of the policies that you would expect from the party, such as calling for the extension of the Bush tax cuts and reducing corporate tax rates. Here we focus, however, on three planks in the platform that fall far outside the mainstream of tax policy.
(Our GOP platform review Part I, Same Old Supply Side Stuff, is here.)
1. Support for a Radical Constitutional Amendment to Restrict Taxes and Budgets
Following efforts by the House GOP last year to pass the most extreme balanced-budget amendment ever, the GOP platform calls for the passage of a constitutional amendment that would require that the federal government have a balanced budget, cap federal spending at its historical average share of GDP (around 18 percent), and require a super-majority for any tax increase (with an exception for war or national emergency). This kind of amendment poses all kinds of problems, not the least of which is that it would immediately cause unemployment to double (according to nonpartisan, private sector economists) and drive the economy into a deep recession. Balanced budget amendments in all their forms (including state level versions) are disastrous, because they essentially tie the hands of legislators and cripple government functions.
2. Nod to National Consumption Tax
Warning that we must “guard against hypertaxation of the American people,” the GOP platform says that the creation of a national sales tax or value-added tax (VAT) can only happen in conjunction with the repeal of the Sixteenth Amendment, which allowed for the federal income tax.
On the one hand, this plank is odd because a national sales tax or VAT is not a political possibility; even the hint of it prompted the US Senate to pass a resolution explicitly rejecting a VAT by an 85 to 13 vote just a couple of years ago. Anyway, the fear that a national consumption tax would lead to some sort of “hypertaxation” is unfounded. Its implementation in Canada (PDF) is a case study showing how overall taxes can actually decrease following the creation of a national consumption tax.
On the other hand, the existence of this plank in the GOP platform suggests that the Republican party’s establishment might actually be considering a radically regressive policy like the so-called “Fair Tax” (which is just a national sales tax) and elimination of the federal income tax (the primary source of fairness in the tax code and sustainable, sensible revenue source).
3. Opposition to a United Nations Global Tax
Perhaps the most inexplicable plank in the entire GOP platform is opposition to “any form of UN Global Tax.” While there are conspiracy theories, such as how the UN may very well invade in Texas in order to enforce its radical tax agenda during Obama’s second term, the reality is that no one takes the possibility of a UN global tax seriously. To be clear, there is no indication of support among US lawmakers to implement such a UN tax, nor does the UN have the power to impose one.
by Robert S. McIntyre, CTJ Director
Almost a year ago, long before Mitt Romney became the Republican presidential nominee, CTJ was the first to figure out just how little Romney pays in federal income taxes. Based on Romney’s limited but useful financial disclosures at the time, we calculated that his 2010 effective federal tax rate was a ridiculously low 14 percent (on his reported income) — less than half of what Warren Buffett’s famous secretary pays.
Michael Scherer of Time Magazine, who’d asked us to do the analysis, posted our results on Time’s website on Oct. 3, 2011. The story got widespread attention, and led to growing demands that Romney release his actual federal income tax returns. After months of stonewalling, Romney finally released his 2010 return, which confirmed our prediction that he’d paid only 14 percent in federal income taxes.
Since then, Romney has adamantly refused to release any of his earlier tax returns, causing speculation that he has something even more damaging to hide (and keeping CTJ busy fielding media questions about what such things might be).
Looking at Romney’s past tax returns could provide some valuable information, not just about Romney himself but also about the egregious loopholes that allow him to pay so little.
But Romney is hiding a much more important tax secret: the truth about how the tax plan he’s campaigning on would affect the rest of us.
So far, all Romney has told us about his individual income tax plan is the following: First, he would extend all of the Bush tax cuts and permanently repeal the Alternative Minimum Tax. Second, he would make interest, dividends and capital gains tax-exempt for people with other income up to certain levels ($200,000 for couples). Third, he would reduce all federal personal income tax rates by a fifth (so, for example, the top income tax rate would fall to 28 percent). Fourth, well, the fourth item is the big secret.
Romney says that he would partially pay for the $8 trillion ten-year cost of the income tax cuts he proposes by getting rid of many personal tax breaks. But he refuses to specify even a single one of them! To be sure, at one point, he suggested he might curb the mortgage interest deduction for vacation homes, but he quickly backed off even that tiny reform.
How can voters calculate even roughly how they would be affected by Romney’s tax plan without knowing the crucial details of which tax breaks he wants to eliminate? Will he crack down on tax breaks for wealthy investors like himself? Well, no, he’s ruled that out. Will he eliminate deductions for mortgage interest and property taxes? Tax credits for middle- and low-income families with children? The tax exemption for employer-paid health insurance? Tax deductions for extraordinary medical expenses? Who knows?
It’s all well and good that analysts with high-powered tax models (like ITEP’s) can calculate that even if Romney eliminated all non-investment-related personal tax breaks, his gargantuan tax plan can’t possibly break even — and thus will mean huge increases in budget deficits. But American voters also deserve to know whether Romney plans to raise taxes on them, and by how much.
Barring a speech tonight that answers these questions, that’s the crucial tax secret that the public and the media should be clamoring for Romney to reveal.
Presidential candidate Mitt Romney has been doing a lot of media interviews lately, and when the editors at Politico wrote up their sit-down with the GOP nominee, they characterized Romney’s answers to their questions as “the clearest window yet into how the lessons he gained in the corporate world would be applied to the presidency.
So what did he say? Romney told Politico “I learned leadership by watching people,” and named J.W. “Bill” Marriott, a fellow Mormon and the CEO of the hotel chain of the same name, as one of the people from whom he’s learned a lot about leadership. He put Marriott right up there with his mentor, Bill Bain.
While we can’t speak to Bill Marriott’s management style, we can tell you that during his 40-year tenure as CEO of Marriott International, the company engaged in aggressive tax avoiding – so aggressive that it later got them into trouble with the IRS.
The company used a tax shelter known as “Son of BOSS,” generating capital losses that a federal court deemed “fictitious,” “artificial” and a “scheme.” The government criminally prosecuted the promoters of this particular tax shelter and people are now serving federal prison sentences for it. In fact Romney himself, as a member of Marriott’s audit board, most likely signed off on this tax evasion strategy. The company has used other aggressive tax planning vehicles, too, even claiming a questionable tax credit for synthetic fuels.
Marriott also shows an ever-increasing ability to shift and shelter its profits offshore. While 3,122 of its 3,718 hotel properties are in the United States, the company pays more income tax in foreign jurisdictions than in the US, even though the majority of its profits must surely be generated here.
Marriott has over a hundred subsidiaries in known tax haven countries. For example, while it has only one hotel in the Cayman Islands, Marriott has 15 subsidiary companies there. And in Luxembourg, where it has nine subsidiaries but zero hotels, Marriott uses one of its subsidiaries to collect royalties on its various brand names which the US cannot tax.
Does Romney admire and endorse these kinds of shenanigans? Hard to say for sure. But given his widely recognized use of some pretty aggressive (though legal, far as we know) strategies to avoid paying his personal taxes, we now have a glimpse into the values that inform his views on corporate tax policy. We are beginning to sense a pattern in this presidential candidate, and it looks a little like disdain for our nation’s tax laws.
Mitt Romney appears to have a lot at stake in the upcoming election when it comes to his own federal taxes.
If Obama wins and gets his tax plan adopted, then Romney will pay an effective federal tax rate of 34.3 percent.
If Romney wins and he successfully promotes the tax plan that his running mate, Paul Ryan, proposed in 2010 (the only Romney-Ryan tax plan spelled out in any detail), then Romney will pay only 0.4 percent.
The dollar difference, per year: $7.7 million!
In contrast, Obama would actually raise his own tax rate to 28.4 percent and Romney would lower it 18.1 percent, saving Obama some $67,000.
Note: All these figures are based on the income and deductions reported on Romney’s 2010 federal tax return, the only return he has yet been willing to release.
When news broke last week that a Senator on the GOP vice presidential short list had introduced one of the dumbest, most opportunistic and transparently political pieces of tax legislation of all time, we wrote:
How, at a time when Congress faces vital decisions over the basic structure of our tax system, did the Senator identify the tax treatment of Olympic bonuses as a pressing issue? It turns out that Americans for Tax Reform (ATR) put out a press release saying that medal winners will face a tax bill of almost $9,000 if they win a gold medal. Rubio’s spokesperson said that’s what caught Rubio’s eye. But the ATR numbers are complete bunk….
And then, in a facepalm moment to eclipse all others (for us, anyway), President Obama said this week that he would sign Senator Rubio’s utterly stupid bill exempting Olympic winnings from taxes if it reached his desk. The President’s spokesman said we should “ensure that we are doing everything we can to honor and support our Olympic athletes who have volunteered to represent our nation at the Olympic Games.”
The young Senator’s Olympic Tax Elimination Act, however, may not have such an easy journey to the President’s desk. GOP Senator Tom Coburn’s office said, “If tax code gymnastics was an Olympic sport this idea might get a medal. Like the carve outs for NASCAR, rum makers and electric motorcycles, tax earmarks are a tax increase for everyone who doesn't receive the benefit.”
In a more elaborate argument against this new bill, wonk blogger Matthew Yglesias makes the important point that “taxes aren’t supposed to be a cosmic judgment on the underlying worthiness of people’s activities.” They are supposed to raise revenues, but as long as Congress keeps using the tax system to dole out favors, hope for the kind reform we need are slim. “[P]oliticians have to be willing to actually articulate the benefits of a broad tax base—less evasion, less distortion of economic resources, the possibility of lower rates—and Democrats in particular need to be willing to make the case that public services are worth paying for.”
Best of all, here a CPA who happens to have prepared some Olympians’ returns explains the obvious. He identifies a massive loophole and notes that the bill, “as currently written, would exclude all of these bonuses from taxation.” By these bonuses, he means massive amounts of money from corporate endorsements (e.g. their picture on a box of Wheaties) Olympic medalists receive. And the bigger your endorsement, the bigger the tax break.
We’re’ rooting for common sense.
For someone who’s not interested in a high profile job like Vice President, Florida Senator Marco Rubio sure knows where the limelight shines. Earlier this week he introduced legislation that would create a new federal income tax break for the cash bonuses received by U.S. Olympic medalists. (It turns out that the United States Olympic Committee gives gold medal winners $25,000 cash bonuses, with smaller awards for silver or bronze.) With no apparent irony, Rubio issued a press release noting that the “tax code is a complicated and burdensome mess,” and then proposed a new tax break that would make it even more so.
How, at a time when Congress faces vital decisions over the basic structure of our tax system, did the Senator identify the tax treatment of Olympic bonuses as a pressing issue? It turns out that Americans for Tax Reform (ATR) put out a press release saying that medal winners will face a tax bill of almost $9,000 if they win a gold medal. Rubio’s spokesperson said that’s what caught Rubio’s eye.
But the ATR numbers are complete bunk. Their calculations assume that a medal winner will pay tax at the 35 percent top rate, but less than one percent of Americans pay anything, even a dollar of income, at the 35 percent rate. (Politifact agrees, and rates ATR’s claim “mostly false.”) We can only think of a dozen or so gold medal winners who might, in fact, pay 35 percent on their gold medals: they are members of the US basketball team, and they are all millionaires.
What Senator Rubio and his counterparts in the House are proposing is to add yet another exemption to our tax code, which is, of course, the main reason it’s so complicated – Congress insists on flagging more and more special types of income for special tax breaks.
If Rubio’s bill is really an honest attempt at tax reform rather than an attempt to capitalize on Olympics-related publicity, it’s actually doubly sad: not only did he get duped by misleading numbers from Grover Norquist, he also just doesn’t seem to understand that the “complicated and burdensome tax code” he bemoans will become even more so if his bill passes!
If, on the other hand, Rubio’s bill is the cynical grandstanding that it appears to be, it’s a real shame. As we've said elsewhere, our revenues are dwindling, the rich pay less and less in taxes every year and the tax code is a Rube Goldberg-ian mess. But it seems Senator Rubio is more interested in compounding these problems than solving them.
Photo from Politifact.com
A new study by Ernst and Young is grabbing headlines by purporting to show that President Obama’s plan to end most of the Bush tax cuts for the richest 2% of Americans would cause job losses over the long term. This study is highly suspect however because it makes methodological assumptions that are out of line with other independent studies, which actually show that the expiration of the Bush tax cuts would lead to increased economic growth over the long term.
As the White House explains, the study assumes an entirely unrealistic drop in the labor supply by medium and high income earners due to higher tax rates. Their expected labor supply response is nearly 10 times higher than the non-partisan Congressional Budget Office (CBO) assumes when it makes similar estimates on labor supply effects.
In addition, the Ernst and Young study makes the bizarre assumption that all of the additional tax revenue will be used for additional spending, rather than for deficit reduction. While it does not explain any reason for this assumption, the effect of it is to eliminate the possibility that the additional revenue will increase private investment by reducing the deficit’s “crowding out” effect.
When the non-partisan CBO performed a study in January 2012 on the economic effects of allowing the Bush tax cuts to expire using its much more robust assumptions, it found that the extension of all of the Bush tax cuts and other expiring measures would reduce Gross Domestic Product (GDP) by as much as 2.1 percent in 2022 and would reduce Gross National Product (GNP) by as much as 3.7 percent in 2022.
Building on this, Citizens for Tax Justice’s Bob McIntyre notes that even President George W. Bush’s own Treasury Department, which was “managed by Bush appointees who profess a deep affection for Bush’s tax-cutting policies,” found that over the long term extending the Bush tax cuts would have “essentially no beneficial effect on the U.S. economy at all.”
Ernst and Young’s reliance on a radical methodology, putting it out-of-line with even the Bush Administration’s Treasury Department, is not be much of a surprise considering that the study was paid for by conservative anti-tax groups like the US Chamber of Commerce and the National Federation of Independent Business. Both these groups have proven in the past that they are willing to distort the facts in order to protect the wallets of the country’s wealthiest corporations and CEOs.
Photo of US Chamber Logo via Truth Out Creative Commons Attribution License 2.0
Earlier today, the U.S. House of Representatives’ Ways and Means Committee held a hearing on “tax reform and the U.S. manufacturing sector.” With no apparent irony, the Committee invited Susan Ford, a senior official from champion corporate tax-avoider Corning, Inc., to testify on how Congress ought to make the U.S. tax code more friendly for manufacturing.
Ford raised eyebrows with her claim that in 2011, Corning paid a U.S. tax rate of 36 percent and a foreign tax rate of 17 percent.
It’s unclear how Ms. Ford comes up with a 36 percent rate, but clearly one thing she’s doing is counting Corning’s “deferred” U.S. taxes (taxes not yet paid) as well as “current” taxes (U.S. taxes actually paid in 2011). Of course, those “deferred” taxes may eventually be paid. If and when they are paid, they will be included in Corning’s “current” taxes in the year(s) they are paid.
But current taxes are what Corning actually pays each year, and Corning has amassed an impressive record of paying nothing, or less than nothing, in current U.S. taxes. CTJ and ITEP’s November 2011 corporate tax avoidance report found that between 2008 and 2010, Corning didn’t pay a dime in federal corporate income taxes, actually receiving a $4 million refund to add to its $1.9 billion in U.S. profits during this period. And a more recent CTJ report found that in 2011, Corning earned almost $1 billion in U.S. pretax income, and once again didn’t pay a dime in federal income tax. These data paint a dramatically different picture from the “36 percent” claim made by Corning before Congress today.
Ford’s testimony also includes a common but false claim about how U.S. taxes compare to foreign taxes:
“American manufacturers are at a distinct disadvantage to competitors headquartered in other countries. Specifically, foreign manufacturers uniformly face a lower corporate tax rate than U.S. manufacturers…”
In fact, over the 2008-2010 period, Corning paid a higher effective corporate income tax rate to foreign governments than it paid to the US government. (Which wasn’t hard to do, since it paid nothing to the U.S. government.) CTJ’s November 2011 report shows that over the 2008-2010 period, Corning paid -0.2 percent (negative 0.2 percent) of its US profits in US corporate income taxes, but paid 8.6 percent (positive 8.6 percent) of its foreign profits in foreign corporate income taxes.
During the Congressional hearing, 3M executive Henry W. Gjersdal made a similar, and equally misleading, claim, in his testimony before the Committee, arguing that “[i]n an increasingly global marketplace, 3M’s high effective tax rate is a competitive disadvantage.”
But if 3M has a high worldwide effective tax rate, it’s not because the U.S. corporate income tax is high. In fact, like Corning, 3M paid a higher effective corporate income tax rate to foreign governments than it paid to the U.S. government between 2008 and 2010. Specifically, it paid an effective 23.8 percent rate on its US profits in US corporate income taxes and 27.1 percent on its foreign profits in foreign corporate income taxes, according to CTJ’s report.
Let’s remember that Corning also spent $2.8 million on lobbying during the 2008-10 period they spent enjoying a tax-free ride from the federal government. There are companies across the country paying their fair share in taxes and still making enough to grow their business and please their shareholders. Those are the kinds of companies Congress should be hearing from.
The National Governors Association is meeting this week and our clickable yearbook of 22 governors is assigning honors to some and detention to others for the tax policies they pushed in 2011 and 2012.
(Single Infographic Version)
School vouchers are always controversial, but a front-page story in the New York Times describes how at least eight states have embarked on a quiet strategy of back-door vouchers which divert taxpayer money through tax rebates to private donors. While two states allow individuals to exploit this tax break, most are structured as corporate tax breaks. So they are like conventional vouchers, except minus the accountability, and offering a special tax shelter for corporate profits.
You’d think you can’t make this stuff up, but somebody did.
Sometimes called “neo-vouchers,” (PDF) the system involves corporate tax credits being doled out to businesses that contribute money to private-school scholarship funds. At their worst, they allow profitable corporations to actually make money from these contributions (they also get a write-off for charitable contributions on top of the dollar-for-dollar tax break match), reducing their income taxes by more than they actually contributed to schools. And of course, this funnels needed public school funds (and those are taxpayer dollars) to private schools that often aren’t even subject to the same educational standards as a state’s public schools.
This trend is especially troubling now because elementary and secondary school funding already faces a perfect storm: the bursting of the home-value bubble is depressing property tax collections nationwide, and the end of stimulus-related federal aid to states has further constrained education funding. And as the Times documents, these tax credits cum vouchers are often poorly designed and subject to little oversight: some states don’t require the private schools receiving these scholarships to administer the same achievement tests as public schools, while others have no mechanism for directing scholarships to needy families. In fact, there is anecdotal evidence that some students benefitting from the scholarships would have attended these private schools anyway—which means their parents are being paid, by other taxpayers in their state, to do what they were planning to do anyway.
Why, at a time when adequately funding K-12 education has been so difficult for states, are lawmakers in these states so cheerful about directly siphoning tax revenue away from cash-starved public schools through these “neo-vouchers?” Maybe because they think that tax breaks aren’t the same thing as direct government spending? One source tells the Times, “there are private dollars coming from a private individual and going to a private foundation. It drives the N.E.A. completely off the wall because they can’t say this is government funding.” Another piece similarly argues that “[v]ouchers and tax-credits vary in important ways. Both programs enable students to attend public or private schools of their parents’ choice, but unlike tax-credit scholarships, vouchers are publicly funded, paid for with government appropriations.”
But these statements are both ludicrous. When a state government provides tax breaks for corporate contributions to private schools, the effect on state budgets is exactly the same as if the government had spent the money directly. It’s “government funding” either way. The critical difference is that tax breaks typically involve less oversight and public debate than dilrect spending, even as they divert public resources away from families still enrolled in underfunded public schools.
Some advocates of these tax giveaways have argued that this approach actually saves money, because the per-pupil cost of educating children in the private schools receiving the scholarships is lower than the per-pupil cost of public schools. Yet as a helpful new analysis from the National Education Policy Center shows, this claim assumes that the credit allows parents to move their children from public schools to private schools—and there is no evidence that it is having that effect.
And on top of all this, neo-vouchers are an actual money-maker for corporations. Remember, the system offers not only dollar-for-dollar state tax credits for contributions, but the ability of corporations to write off charitable contributions on their federal tax forms. Companies can actually make a profit from these tax giveaways, collecting more in federal and state tax breaks than they actually spent on the contribution! And Florida’s credit, which was expanded by lawmakers earlier this year, is now the single most expensive (PDF) corporate tax credit allowed by the state, at $72 million a year.
So far, despite growing scrutiny of these perverse tax breaks in Georgia (PDF) and other states, lawmakers in New Jersey and North Carolina (details) appear undeterred and are poised to enact similar plans.
Photo of North Carolina Private School Students via Harris Walker Creative Commons Attribution License 2.0
In another example of Representation Without Taxation, on Thursday the House Ways and Means Committee reported out a bill that would repeal the medical device excise tax that was enacted as part of the Affordable Care Act and scheduled to go into effect next year. This week it goes to the floor for a vote which, according to the Associated Press, is largely a political maneuver which allows the House GOP to look like they’re fighting for jobs while conveniently unraveling funding for the Democrats’ health care reform; GOP leader John Boehner concedes the latter himself.
The medical device industry successfully lobbied to cut the rate down on the proposed excise tax, and now they are lobbying to repeal the tax entirely, threatening job losses, reduced innovation and higher costs – the usual corporate response to the suggestion of a tax.
And as usual, most of their claims are unfounded, indeed “not credible,” as a Bloomberg analysis concluded. Bloomberg and others cite one fundamental flaw in the industry’s own analysis: it ignores the increased profits from boosted demand for their product that will be created by the health care reform law.
Another (familiar) ploy the industry is using is hiding behind small businesses, communities and entrepreneurs, but the truth is that about 85 percent of the tax will be paid by very large firms like Johnson & Johnson, GE Healthcare, and Medtronic. Of course, it’s no coincidence that Medtronic, with its $16 billion in revenues last year, is located in the congressional district of the House bill’s sponsor, Rep. Erik Paulsen (R-MN).
While many healthcare companies pay substantial federal income tax, there are companies working to repeal the excise tax that happen to be long-time tax dodgers. For example, General Electric, the parent company of GE Healthcare, has paid an average 2 percent federal income tax rate over the last ten years. Our recent Corporate Taxpayers and Corporate Tax Dodgers study showed medical giant Baxter International had a 2008-2010 average federal income tax rate of negative 7.1 percent.
Curiously, Abbott Laboratories, the seventh-largest medical device manufacturer, has 32 offshore tax haven subsidiaries. That might explain why the company reports that it makes a lot of money in foreign countries, but generates losses in the U.S. – even though half of its revenues are here. Boston Scientific’s SEC filings suggest a similar strategy.
The medical device industry, which has been floundering for reasons of its own making, is squealing about a modest tax it’s likely to pass along to customers anyway. Directing more of its budget to innovation rather than lobbying might be a better solution for them, and for America’s health care consumers.
On Wednesday, CTJ heard that House Minority Leader Nancy Pelosi had sent a letter to Speaker John Boehner asking for an immediate vote on extending the Bush tax cuts for incomes up to $1 million. We crunched a few numbers and shot off a press release pointing out the fiscal folly of the plan. Bloggers, reporters, pundits, outlets of all stripes and one very important editorial board cited CTJ’s numbers about the staggering cost of moving the threshold from the $250,000 mark previously set by President Obama.
In his article at RollingStone.com called “Democrats About to Give Away the Store on Bush Tax Cuts. Seriously?,” Jared Bernstein writes that “the (excellent) Citizens for Tax Justice – CTJ also points out that about half the benefits of this higher threshold accrue to – wait for it – millionaires.” He opined that moving the threshold to $1 million is “a bad genie to let out of the bottle.”
Also citing CTJ’s numbers, a Washington Post editorial decried Pelosi’s “risky pander” on the tax cuts, commenting on the minority leader’s “interesting definition of what constitutes the middle class.” The editorial ended with this question: “Do Democrats really want their new slogan to be ‘Almost as irresponsible as the Republicans?’”
The tax geek publication Bureau of National Affairs Daily Tax Report (subscription required) noted that “Citizens for Tax Justice skewered Pelosi’s request, saying that what she is actually proposing is a ‘windfall for millionaires.’”
In noting, “This town may never agree on who is middle-class, but surely we can agree it doesn't include anyone who makes over a million dollars a year,” CTJ’s Bob McIntyre helped frame the early coverage of what we hope will be a short lived idea on Capitol Hill.
Over 30 million Americans will take to the roads this Memorial Day weekend, and it’s all but guaranteed that many of them will be unhappy about the price of gas. But while it’s easy to get frustrated by high prices at the pump, it’s also important that motorists realize gas taxes are not to blame for those high prices, and that gas taxes are absolutely essential to the safety and efficiency of the infrastructure we use everyday.
As the Institute on Taxation and Economic Policy (ITEP) explains in a pair of new policy briefs, federal and state gas taxes are the main sources of funding for the roads, bridges, and transit systems that keep our economy moving (and that make our summer vacations possible). Roughly 90 percent of federal transportation revenues come from the federal gas tax, while state gas taxes are the single most important source of transportation revenue under the control of state lawmakers.
Moreover, the amount of money we’re spending on gas taxes is much lower than what we used to pay. Families today are spending a smaller share of their household budgets on gas taxes than they have in about three decades—and that share is continuing to decline.
Of course, a low gas tax has a cost. The federal government is increasingly using borrowed money to pay for our roads and bridges, while states that lack the luxury of borrowing are taking money away from education and other priorities in order to fund basic road repairs. Meanwhile, even with these infusions of cash, the condition of our transportation infrastructure is continuing to decline.
ITEP’s new policy briefs put this issue into perspective by explaining how gas taxes work, their importance as a transportation revenue source, the specific problems confronting gas taxes, and the types of gas tax reforms that are needed to overcome these problems.
- The Federal Gas Tax: Long Overdue for Reform (2-page brief)
- State Gasoline Taxes: Built to Fail, But Fixable (2-page brief)
- Building a Better Gas Tax (ITEP’s 50-state report from December 2011)
Photo of man pumping gas via Teresia Creative Commons Attribution License 2.0
Minority Leader Pelosi's "Middle Class" Tax Plan Benefits Millionaires, According to New Citizens for Tax Justice Estimate
For Immediate Release: May 23, 2012
Minority Leader Pelosi’s “Middle Class” Tax Plan Benefits Millionaires, According to New Citizens for Tax Justice Estimate
Washington, DC – In seeking an immediate vote in the House of Representatives to extend tax cuts on incomes up to $1 million, House Minority Leader Nancy Pelosi is actually proposing a windfall for millionaires, according to a preliminary analysis from Citizens for Tax Justice. Pelosi’s proposal to extend the Bush income tax cuts for taxpayers’ first $1 million of income is a departure from President Obama’s proposal to extend the tax cuts for the first $250,000 that a married couple makes and the first $200,000 a single person makes.
“This town may never agree on who is middle-class, but surely we can agree it doesn’t include anyone who makes over a million dollars a year,” said Robert McIntyre, director of Citizens for Tax Justice.
■ Pelosi’s proposal would save 43 percent less revenue than Obama’s plan.
CTJ’s preliminary estimates show that Obama’s proposal to extend the Bush tax cuts for the first $250,000 or $200,000 of income a taxpayer makes would save between $60 billion and $70 billion in 2013 compared to the GOP proposal to extend all the tax cuts, depending on economic conditions. Leader Pelosi’s proposal to extend the Bush tax cuts for the first $1 million of income would save 43 percent less revenue than Obama’s proposal.
■ 50 percent of the additional tax cuts proposed by Pelosi would go to millionaires.
The additional tax cut that would result from Pelosi’s plan compared to Obama’s plan (the additional tax cut resulting from extending the Bush tax provisions for taxpayers’ first $1 million of income instead of “just” their first $250,000 or $200,000 of income) would not be targeted towards the “middle class.” In fact, 50 percent of this additional tax cut would go to taxpayers with adjusted gross income (AGI) in excess of $1 million.
This would result because under Pelosi’s proposal, a married couple making $3 million a year, for example, would continue to pay the lower tax rates (enacted under President Bush) on $1 million of their income. Under Obama’s proposal, a married couple making $3 million a year would continue to pay the lower tax rates on just $250,000 of their income.
Taxpayers with incomes exceeding $1 million would therefore receive substantially larger tax cuts under Pelosi’s proposal than they would under Obama’s proposal.
Also see our fact sheet about these figures.
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).
Facebook® co-founder Eduardo Saverin is facing mounting public scorn for renouncing his US citizenship, presumably to save some tax money (which he says is not the case). There are even two US Senators after him! He left in September but the pile-on is happening this week because of Facebook’s Initial Public Offering (IPO) of its stock: Saverin’s share will be worth somewhere in the neighborhood of $4 billion.
Saving Capital Gains Taxes
If Eduardo Saverin were a US citizen and sold his stock, most of that income would be subject to special low rate capital gains taxes of 15 percent (or 20 percent in future years if the new rate goes into effect January 1 as scheduled). By renouncing his citizenship, Saverin avoids paying those current and future capital gains taxes (and he would never have to pay the full income tax rate that Facebook employees exercising their stock options will be paying), but he does have to pay an "exit tax" (see below). Saverin now lives in Singapore, which doesn’t have a capital gains tax.
Lowering the “Exit Tax”
When wealthy Americans give up their citizenship, they must pay an “exit tax” which treats all of their assets as if they’d been sold for fair market value (the actual tax payment can be deferred until the assets are sold). The fair market value of publicly-traded stock is what it traded for that day; privately-held stock must be appraised.
A spokesman for Saverin said that he renounced his citizenship last September, well ahead of this week’s Facebook IPO. Therefore, the stock’s valuation for “exit tax” purposes was likely substantially below its expected $38 IPO value, allowing Saverin to reduce his exit tax cost.
Not Tax, But Financial Decision
According to a spokesman, Saverin is expatriating for financial, not tax reasons. He doesn’t mind paying tax, he says, he just dislikes the complicated rules. He claims that the US rules, like the recently enacted Foreign Account Tax Compliance Act (FATCA), are preventing him from making some foreign investments he’d like to make.
Why It Feels Like Treason
Saverin emigrated to the US with his family at age 13 when his name turned up on a list of potential kidnap victims in his native Brazil where criminal gangs target the children of wealthy citizens and hold them for ransom. In the US, not only was Saverin safe from such violence, but he benefited enormously from government investment in education, the court system, and the Internet. Would he be a billionaire today if his family had relocated somewhere else?
Farhad Manjoo, a fellow immigrant, wrote a brilliant post (one of many, including this one) on the IT blog PandoDaily about what Eduardo Saverin owes America (nearly everything) including, quite possibly, his life. Taxes are the least of it.
In February, we noted that Facebook® will get huge federal and state income tax refunds and pay no tax for years to come because of an absurd tax break related to the stock options it granted to employees.
When employees exercise their stock options, they pay income tax on the difference between what they paid for the stock (its exercise price) and its fair market value (what it’s trading for). The employer, meanwhile, gets a tax deduction equal to the amount of that difference their employees report – even though the employer isn’t actually out any cash.
This week we have a vivid example of why this deduction makes no sense, and why Senator Carl Levin wants to see this loophole closed, too.
In February, Facebook estimated its tax deduction for the stock options it gave its employees to be $7.5 billion, based on the price of its soon-to-be publicly offered shares. But with its IPO price going up and up, the company has revised its estimated tax deduction. In documents filed with the SEC on May 15, Facebook now estimates the employee stock options that will be exercised in connection with the IPO will result in tax deductions for the company of $16 billion – more than twice their initial estimate! This massive deduction will cost the federal and state governments about $6.4 billion in lost tax revenue.
The stock option loophole overall will cost the US treasury and taxpayers $25 billion over the next ten years. Surely there’s a better use of that money than making Mark Zuckerberg richer.
Photo of Facebook Logo via Dull Hunk Creative Commons Attribution License 2.0
House Ways and Means chair Paul Ryan’s budget proposal drew plaudits from some observers who didn’t notice its fundamental weakness: its utter failure to specify which tax “loopholes” it would close to pay for deficit reduction. As we’ve noted in the past, Ryan has a good reason not to disclose details on the tax side of his plan: they don’t add up. CTJ has shown that the Ryan plan’s promised top income tax rate of 25 percent would be insufficient to pay for federal spending at Reagan-era levels, let alone the current decade.
Now, as details of Ryan’s plan emerge, it’s becoming clearer that its spending cuts are equally illusory, relying on alleged cost-saving measures that would likely cost more in the long term than they help right now. Case in point: Ryan’s plan to eviscerate the Census Bureau and eliminate its American Community Survey (ACS), an annual survey that provides a rapid-response supplement to the decennial Census.
As Businessweek notes, cuts to Census budgets in the past decade prevented Congress and the Obama administration from being able to quickly diagnose the scope of the financial sector’s collapse in 2007. One expert observed, “The government saved $8 million, but how many trillions were lost as a result of not being able to see the crisis coming?”
Ironically, as the New York Times explains, the ACS itself was actually created as a sensible cost-cutting strategy, designed to provide more timely data than the decennial Census could. Even the US Chamber of Commerce has vocally opposed further cuts to Census funding because it helps businesses large and small to inform their planning. Which is why top conservative policy think tanks support the ACS, too.
An adequately funded Census Bureau is the best vehicle we have for finding a path to sustained economic growth for all of us; there is widespread agreement that without its data, we will be flying blind.
The CEOs of 18 large corporations have published an open letter to the Treasury Secretary seeking to extend tax breaks on investment income that overwhelmingly benefit the very wealthy. Barring Congressional intervention, these special breaks for capital gains and dividends will expire at the end of this year, along with all of the 2001 and 2003 Bush tax cuts.
In an era when fiscal austerity is a reality in America, what makes this request even more obscene is that of these 18 CEOs, four of them head corporations which have paid less than zero in federal income taxes in recent years, in spite of consistent profits. Another two barely paid any, and another five have paid well below the statutory 35 percent corporate tax rate. In fact, among these CEOs is Lowell McAdam of Verizon, one of the most notorious tax dodging companies in the U.S.
The 11 corporations among the 18 that have paid less than the legal federal income tax rate are:
Gale E. Klappa, Wisconsin Energy Corp. — Average Negative 13.2% tax rate 2008-11
David M. McClanahan, CenterPoint Energy — Average Negative 11.3 tax rate 2008-11
Lowell McAdam, Verizon Communications Inc. — Average Negative 3.8% tax rate 2008-11
James E. Rogers, Duke Energy Corp. — Average Negative 3.5% tax rate 2008-11
Benjamin G.S. Fowke III, Xcel Energy — Average 1.0% tax rate 2008-10
Gerard M. Anderson, DTE Energy Co. — Average 0.2% tax rate 2008-11
Gregory L. Ebel, Spectra Energy Corp. — Average 13.6% tax rate 2008-10
Thomas A. Fanning, Southern Co. — Average 17.4% tax rate 2008-10
Glen F. Post III, CenturyLink Inc. —Average 23.5% tax rate 2008-10
Thomas Farrell II, Dominion Resources Inc. — Average 24% tax rate 2008-10
D. Scott Davis, United Parcel Service — Average 24.1% tax rate 2008-10
To bolster their case, these CEO’s are parroting the common claim that ending special preferences for dividends and capital gains (both of which are predominantly held by the wealthy) will depress economic activity. History shows this is not the case.
The fact is, about 85 percent of the expiring tax breaks for capital gains and dividends go to the richest five percent of Americans; most people won’t even notice if they expire.
The fact is, two thirds of all dividends are not subject to any personal income tax because they go to tax exempt entities rather than individuals.
Why is it that when corporate CEOs speak out on tax issues, they are treated like objective financial experts, as if they had no agenda other than job growth? You only have to think for a moment to realize that CEOs, for starters, typically own substantial amounts of stock in the companies they head, so in asking for reduced taxes on investment income, these 18 CEOs are pushing for substantial personal tax cuts for themselves – on top of the huge tax breaks their companies already receive. Futher, the corporate boards who hire and fire these CEOs are populated by the super rich who’d benefit from things like capital gains tax breaks, so they are also serving their bosses.
These 18 captains of industry are part of an ongoing and well financed effort to limit taxes on business and on the rich. Why? Because it serves their interest. Our media and lawmakers need to bear that in mind.
Remember the Tea Party? Well, freshman Kentucky Senator Rand Paul is living up to his reputation as the darling of the Taxed Enough Already movement that shook the 2010 elections.
Rand Paul, son of Libertarian firebrand and GOP presidential candidate Ron Paul, is currently blocking the Senate’s ratification of an amendment to the US-Swiss tax treaty, apparently worried about the right of tax evaders to financial privacy. He says the language is too “sweeping” and might jeopardize US constitutional protections against unreasonable search and seizure. But as one former Treasury Department official said, Paul's move “smacks of protecting financial secrecy for those who may have committed criminal tax fraud in the US.”
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.
Many tax haven countries were hiding behind their bank secrecy laws to deflect requests for account holder information, and the IRS and Justice Department have been investigating 11 Swiss financial institutions on criminal charges of facilitating tax evasion.
The Senate must ratify the treaty changes – which is normally a routine procedure.
By blocking the ratification, Senator Paul is holding up the exchange of information in the UBS case (and others) and hampering IRS efforts to crack down on tax evasion by Americans.
Tax evasion by individual taxpayers is estimated to deprive the US Treasury of as much as $70 billion per year (corporate offshore tax avoidance is estimated to cost the Treasury an additional $90 billion per year).
Given Senator Paul’s obvious concern about the deficit, he might have a hard time explaining to honest American taxpayers how he justifies protecting tax evaders with Swiss bank accounts as the deficit grows ever larger.
Photo of Rand Paul via Gage Skidmore Creative Commons Attribution License 2.0