Elections News

Clinton Family Finances Highlight Issues with Taxation of the Wealthy

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

When Avoiding the Estate Tax Becomes the "Standard"

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

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

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

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

Noting the Difference between the Tax Treatment Investment and Wage Income

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

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

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

Go Read This New Research on Corporate Taxes, Lobbyists and Our New Fiscal Reality

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While Citizens for Tax Justice has been taking a deep dive into offshore-tax sheltering and why the corporate tax is indispensable, some friends and allies have put out a series of reports over the past week on the economic impact (or not) of corporate taxes, the enduring dominance of corporate lobbyists and the need to revisit our fiscal policy debate in light of new evidence. Below we highlight the most crucial findings of these must-read reports.

Economic Policy Institute: Corporate Tax Rates and Economic Growth Since 1947

The Economic Policy Institute's (EPI) most recent report on corporate taxes by Thomas Hungerford (author of that high profile Congressional Research Service report showing income tax cuts create more inequality than jobs) debunks the pervasive myth that the US's corporate tax rate is harmful to the economy. For one, Hungerford notes that although the US has a high on-paper marginal rate compared to other countries, its effective corporate tax rate is just about average compared to other rich, developed countries. In addition, Hungerford notes that despite all the claims about corporate taxes preventing growth, corporate profits in the US are actually at an historic high.

Backing up these points (for our stats-minded readers), Hungerford performed a multivariate analysis comparing GDP growth and corporate tax rates and found that corporate tax rates (including the effective and statutory rate) have no correlation with economic growth. This conclusion even held true when controlling for other economic factors and for a lag effect on growth. In other words, the idea that cutting corporate taxes will increase growth in the US has no basis in the historic evidence.

Public Citizen: Lax Taxes

In it's report Lax Taxes, Public Citizen makes case studies of the lobbying around three pieces of progressive tax legislation to demonstrate the disproportionate firepower of corporate lobbyists versus public interest groups. Appallingly (though not surprisingly), Public Citizen found that 86 percent of the lobbyists who reported lobbying on the Stop Tax Haven Abuse Act (STHA), the CUT Loopholes Act, and the Wall Street Trading and Speculators Tax Act represented corporate clients. Looking at the STHA specifically, the group found that for every one pro-tax reform lobbyist there were 20 lobbyists representing industry interests.

Perhaps even more disturbing, Public Citizen found that of those lobbyists with previous government experience working on these bills, 96 percent of them represented corporate clients rather than ordinary Americans. This dynamic not only means that industry advocates have deeper connections to Congress, but also that current lawmakers and Congressional staffers have an incentive to appease corporate interests if they themselves want to get a job a lobbying gig after they leave Capitol Hill.

Further, Public Citizen also notes that groups opposing these pieces of legislation donated about four times as much in campaign contributions to lawmakers that those supporting them, which may explain why these common sense reforms have failed to move despite overwhelming public support for closing corporate tax loopholes.

Center for American Progress: It's Time to Hit the Reset Button on the Fiscal Debate

The prevailing ethos in Washington over the past few years is that budget deficits are out of control and that austerity measures must be taken in order to prevent economic catastrophe. A new report from the Center for American Progress (CAP) shows that this conventional wisdom is all wrong given recent policy actions and mounting evidence.

Most importantly, CAP points out in their report that Congress and the President have already enacted $2.5 trillion worth of deficit reduction (three-quarters of which took the form of spending cuts) since the start of fiscal year 2011. While many lawmakers and pundits are still warning that without additional and immediate deficit reduction the debt will spin out of control, the reality is that the current level of deficit reduction is already enough to stabilize the debt as a percentage of GDP through 2023.

CAP also notes that a research paper often cited by debt alarmists to argue for immediate deficit reduction has been pretty thoroughly debunked. Specifically, the claim by Carmen Reinhart and Kenneth Rogoff that a debt level over 90 percent of GDP jeopardizes economic growth is based on a calculation error (oops!) and does not take into account that causation can work both ways. 

One final important point in CAP’s report is growing evidence from Europe that austerity has actually made the economic situation there worse rather than better. Why? Budget cuts create a downward spiral by increasing unemployment and reducing consumption, which then results in even lower revenues and higher deficits. Some proponents of austerity have tried to counter this evidence by arguing that it's austerity in the form of tax increases that is driving lower growth, but this logic has also been debunked.

Tax Rules for the Rich are Different, Just Ask Commerce Nominee Pritzker and Senate Candidate Gomez

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First it was Mitt Romney, and now two more aspiring public servants are in the spotlight for questionable tax maneuvers – Penny Pritzker, President Obama’s Commerce Secretary Nominee, and Massachusetts Republican Senate candidate, Gabriel Gomez.  The complex tax avoidance strategies exercised by both these two candidates for federal office demonstrate the stunning extent to which wealthy individuals of all stripes can play by a different set of tax rules than everyone else.

Avoiding Every Last Penny of Taxes

While many wealthy families go to great lengths to avoid taxes, the Pritzker family (most famous for it’s ownership of the Hyatt hotel chain) is unique in its role as “pioneers” in the use of offshore tax shelters. Many of its existing offshore trusts were set up as long as five decades ago, and some have allowed the family to continue benefitting from tax loopholes that have long since been closed.

As the graphic below from a 2003 Forbes story details, one of the primary ways the Pritzker family uses offshore trusts to avoid taxes is by having income from their businesses funneled into offshore trusts. Those trusts then pay debt service to a bank, owned by the family trust, that loans that money right back to the business. The upshot is that all the taxable profits disappear and the family wealth accumulates unabated. A more recent Forbes article looking at the Pritzker family fortune notes that these trusts were not at the margin but rather “played a substantial role in the growth of the Pritzker fortune.” The same article notes that this fortune makes up the vast majority of Pritzker’s $1.85 billion empire and has allowed 10 members of the Pritzker family to earn a spot on the list of Forbes 400 richest people in America.

When the New York Times asked Penny Pritzker for her thoughts on the ethical implications of her family’s use of offshore trusts, she remarked that the trust was set up when she was only a child, after all, and that she does not control how the offshore trusts are administered. Her continued vagueness on these issues makes it likely that she will face more questions about her views of offshore tax avoidance more generally next week when she goes before the Senate for her confirmation hearing.

While Pritzker’s personal involvement with her family’s most infamous tax avoidance legacy is unclear, it is clear that she has actively used tax avoidance strategies in her own professional and private life. For example, a family member in this Bloomberg News profile from 2008 recounts one of her very first assignments working for Hyatt, which was to set up a like-kind property exchange to help avoid taxes on a property owned by Hyatt.

It turned out Penny was a natural at this particular tax avoidance scheme, in which a company takes deductions for the purported depreciation of their property and then sells the property at an appreciated price, but avoids paying capital gains tax by swapping the property for another like-kind property. (Originally created for use by farmers trading acreage, this tax break is a perfect example of a loophole in the tax code that is abused by companies and should be eliminated (PDF).)

In her personal finances, Penny Pritzker has run into criticism for making 10 appeals to lower the property tax assessment for her mansion in Chicago’s Lincoln Park. Like many wealthy taxpayers, Pritzker is able to retain lawyers who, through repeated appeals, have been able to save her an estimated $175,905 (PDF), even though their appeals have only succeeded half the time.

Gabriel Gomez and the Façade of Charitable Donations

While not on the same scale, according to the Boston Globe, U.S. Senate candidate Gabriel Gomez claimed a $281,500 income tax deduction in 2005 for “pledging not to make any visible changes to the façade of his 112-year-old Cohasset home” because the value of such an agreement is considered a charitable deduction by federal law. The only problem is that local laws already prohibit he and his wife from making any changes to the exterior of their home, meaning that his “agreement” to leave the façade alone is more like complying with local laws rather than a choice, so it may not have an actual “value” that is deductible.

In fact, just five weeks after Gomez claimed this deduction, the IRS listed the abuse of historic façade easements as one of its “Dirty Dozen” tax scams. Moreover, the organization with which Gomez made the agreement, the Trust for Architectural Easements, has been criticized by the IRS, Department of Justice, and Congress for encouraging tax avoidance. Altogether the IRS estimates that the Trust cost American taxpayers $250 million in lost revenue.

Fortunately for Gomez, the IRS did not challenge his use of this deduction, as it has with hundreds of others. If they had done so, they likely would have rejected the deduction and Gomez would have had to pay thousands in back taxes and an additional penalty. For his part, Gomez’s lawyer argues that the restrictiveness of the agreement goes further than local zoning laws, but it appears unlikely that the additional restrictions are so great as to justify such a substantial deduction.

State of the Union Address: Good on Principles, Weak on Policy

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During his State of the Union Address, President Barack Obama reiterated the principle that the United States must prioritize getting rid of tax loopholes for the wealthiest individuals and most profitable corporations in order to ensure that everyone is paying their “fair share” to reduce the deficit. While in principle it’s hard to argue with this approach, the tax policy agenda the President laid out during his speech does not go nearly as far as it should both in terms of deficit reduction and correcting the inequities in our tax code.

Buffett Rule Not Enough to Ensure Fairness
For example, during the speech President Obama called for a tax code that would ensure that “billionaires with high-powered accountants” do not pay a lower tax rate that their “hard-working secretaries.” His proposal to accompany this principle has been the so-called “Buffett Rule,” which would require everyone making over a million dollars to pay a minimum effective tax rate over at least 30 percent.

But this would still leave in place the preferential rate on capital gains and dividends that is the primary reason that wealthy investors like Warren Buffett have such low effective tax rates. A better approach would be to end the special treatment of capital gains and dividends, which would both raise more revenue and deal with the core issue of fairness.

Truly Ending Offshore Corporate Tax Dodging Requires More
Turning to corporate taxes, President Obama said that we need a tax code that “lowers incentives to move jobs overseas and lowers tax rates for businesses and manufacturers that are creating jobs right here in the United States of America.”

To start, rather than calling for a measure that simply “lowers incentives,” Obama should address the problem at its root, by repealing the rule allowing corporations to defer – indefinitely – taxes on their offshore profits.  (Those profits, of course, are often artificially shifted offshore with the goal of avoiding taxes.) This exact reform was recently introduced in both the House and Senate in the “Corporate Tax Dodging Prevention Act.”

Corporate Tax Reform Must Raise Revenue

In addition, while it’s great that President Obama is proposing to get rid of a myriad of corporate tax breaks, it is not entirely clear that he intends to wisely use the revenues it would generate. His 2012 corporate tax framework, for example, calls for the revenue generated by closing loopholes to be spent on lowering the overall corporate tax rate and even expanding some of the breaks for manufacturers (which really don’t warrant the special treatment); this proposal to keep corporate tax reform revenue-neutral meant that corporations would continue to pay a low effective corporate tax rate overall and have no positive impact on the budget.

In his State of the Union Speech, however, he implied that corporate tax reform should also result in revenues to help bring down the deficit, and this more recent rhetoric about using the revenues for deficit reduction is certainly promising. What should come next is a clear rejection of revenue-neutral corporate tax reform and an explicit commitment to boosting corporate tax revenues in order to fund investments that benefit all Americans, including the consumers that keep corporations profitable.

Balanced Approach? Spending Cuts for Deficit-Reduction Have Already Been Enacted

Addressing the sequestration cuts scheduled to kick in March 1, President Obama used the State of the Union address to reiterate his commitment to include a mix of revenues and spending cuts as part of a “balanced approach” to deficit reduction, saying we should not “make deeper cuts to education and Medicare just to protect special interest tax breaks." Citizens for Tax Justice has noted (as did the President in his speech) that the last several rounds of deficit reduction have already relied primarily on spending cuts.  Logically, then, to achieve true “balance” in reducing the deficit, the sequester should be replaced almost entirely by revenue increases.  That makes the President’s offer of more cuts unwarranted.

If enacted as is, the tax ideas President Obama outlined in his State of the Union address would be important steps towards reducing the deficit and improving the fairness of our tax system. If enacted following legislative compromise, they would likely be much smaller steps. But in any event, the President’s articulated goals would still leave gaping inequities in our tax code, and not do enough to ensure that we have the resources to make critical investments in our long term economic health. 

What Obama Should Tell America: Reducing the Deficit is Not that Hard

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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.

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).


Election Day Polls Empower President, Congress To Raise Taxes

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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.

Grover Norquist Becoming A Political Ball and Chain?

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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. 

The Voters Have Spoken: It's Time to Get Real About Taxes

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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.

Romney's Tax Rate Is Not "Fair," And Neither Are His Tax Policies

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In a 60 Minutes interview after his 2011 tax returns were released, Republican presidential candidate Mitt Romney was asked if his federal income tax rate was fair.

CBS’s Scott Pelley: And you paid 14 percent in federal taxes. That's the capital gains rate. Is that fair to the guy who makes $50,000 and paid a higher rate than you did?

Romney: It is a low rate. And one of the reasons why the capital gains tax rate is lower is because capital has already been taxed once at the corporate level, as high as 35 percent.

Pelley: So you think it is fair?

Romney: Yeah, I think it's the right way to encourage economic growth, to get people to invest, to start businesses, to put people to work.

Mitt Romney is wrong, and so is the tax system that he defends. His proposals would make it even worse.

In defending his tax rate, Romney is relying on the double taxation argument – that it’s fair to tax capital gain and dividend income at a much lower rate than other income, like salaries and wages, because it’s already been taxed once at the corporate level.

Here are three reasons why the double-taxation argument is unconvincing:

Ÿ1) Much of the income qualifying for the low rate is not related to corporations
2) Even the income that is related to corporations may not have been previously taxed
3) Romney’s income in particular is not from corporate profits

For one thing, all kinds of income that didn’t come from corporations is taxed at the special low rate, such as profits from selling office buildings, corn futures and exotic sports cars. Romney’s own reported income is dominated by so-called capital gains that are really “carried interest” – compensation from managing Bain Capital, his leveraged-buyout firm, that he can restructure as investment income so it doesn’t get taxed like ordinary salary or wages. Romney also has millions in gains from hedge funds, bonds, and foreign corporations, none of which was subject to the U.S. corporate income tax.

Even when corporate dividends are paid to shareholders, it’s highly likely that the corporation hasn’t paid much tax on the income they use to cover those dividend payments. Take G.E., for example. Over the last decade the company has paid out $87 billion in dividends but paid an average federal income tax rate of just 1.8 percent.

Significantly, many of the companies managed by Romney’s Bain Capital aren’t paying income tax either. Sensata Technologies, for example, used to pay tax – before Bain loaded it up with debt and started moving its operations offshore. Now it doesn’t have any U.S. income to tax

But wait, defenders of low- or no-capital gains taxes say – the money Romney earned to make those investments was taxed when he earned it, and then the government taxes it again when the investments go up in value. Not true! Only the appreciation in the investments is taxed when you sell. The original investment isn’t taxed again.

When all is said and done, the low capital gains tax rate is a windfall for the wealthy. In 2013, it’s estimated that the share of capital gains going to the top five percent will be 83 percent. This low tax rate on capital gains and dividends is also the reason that Warren Buffett pays a lower tax rate than his secretary and that Mitt Romney pays a lower rate than the middle-income worker 60 Minutes asked him about.

Whether you make $60,000 or $60 million, if your income is from work you’ll pay more than twice as much federal income tax than someone whose income is from wealth, and you’ll pay payroll taxes on top of that.  Romney’s tax plan would make it even worse because he’s proposing to completely exempt up to $200,000 of interest, dividends, and capital gains from income taxes.

Now, this might sound great to a lot of middle-income Americans who have a little bit of investment income – saving the tax on their interest from the bank or on dividends from that mutual fund. But consider this: under Romney’s plan, an heiress or day trader with $200,000 of investment income but no salary or business income would pay zero federal income tax, while working Americans with that much income would pay plenty of tax on their salaries and wages.

Getting rid of the unwarranted tax breaks for wealthy investors and treating working taxpayers more fairly should be at the heart of real tax reform. But real tax reform is just the opposite of what Mitt Romney has in mind.

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.

Tax Policy Invades the Foreign Policy Presidential Debate

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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.

The International Relations Issue the Candidates Probably Won't Debate: Territorial Taxes

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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 

Context Lacking in Presidential Town Hall Tax Debate

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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.

About that Cayman Islands Trust....

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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.

Romney's Three Biggest Tax Whoppers in the Town Hall Presidential Debate

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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.

Top Ten Tax Moments from the VP Debate

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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.

Debate Debrief: What Romney and Obama Got Wrong on Business Taxes

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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.

Debate Debrief: Romney and Obama Compare Tax Policies

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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.

Tax Questions and Tax Facts for the Presidential Candidates

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Read the PDF version of this document.

As President Barack Obama and former Massachusetts Governor Mitt Romney face off in their first debate, a number of big-picture questions about tax policy remain unanswered by either candidate.

Given the budget deficit, why should we extend all of the Bush tax cuts (as Romney proposes) or most of the Bush tax cuts (as Obama proposes)?

■ The Congressional Budget Office estimates that a full extension of the Bush tax cuts, which Governor Romney supports, would cost about $5.2 trillion over ten years, including interest, while President Obama’s proposal to extend most, but not all, of those tax cuts will cost about $4.3 trillion over ten years, including interest.

■ That means if Congress enacts one of these approaches, we lose either $5.2 trillion or $4.3 trillion, compared to current law (compared to what would happen if Congress does nothing).

Given that the Bush tax cuts, taken together, disproportionately benefit the rich, why should we extend all or most of them?

■ Citizens for Tax Justice estimates that the richest one percent of Americans would receive 32 percent of the benefits of a full extension of the Bush tax cuts, which Governor Romney supports.

■ CTJ finds that the richest one percent would receive 11 percent of the benefits from Obama’s proposal to extend most, but not all, of the Bush tax cuts (and the other tax cuts Obama wants to extend).

■ By way of comparison, the poorest fifth of Americans would get just one percent of the benefits from the Republican approach and just 3 percent of the benefits from Obama’s approach.

Why have neither Obama nor Romney proposed to end the tax loophole that is targeted to the richest one percent of taxpayers — the special, low tax rate for capital gains?

■ Romney proposes to enact new tax cuts (on top of extending the Bush tax cuts) but claims that he can offset the costs by limiting tax expenditures (tax deductions, exclusions, credits and other special breaks). But Romney pledges to retain the most unfair tax expenditure of all, the lower rate for capital gains, which allows wealthy investors like himself and Warren Buffett to pay a lower effective tax rate than many working people.

■ Meanwhile, Obama proposes to limit the value of each dollar of deductions and exclusions for the rich to 28 cents, and he would impose a minimum tax on people making more than $1 million. Both measures are relatively complicated and neither would entirely eliminate situations in which wealthy investors pay a lower effective tax rate than wage-earners.

■ The most straightforward reform would be to eliminate the most unfair tax expenditure by repealing the special rate for capital gains and simply taxing all personal income under the same tax rates. CTJ estimates this would raise at least $533 billion over a decade.

Why does neither candidate propose to raise needed revenue from corporate tax reform?

■ President Obama has proposed to close corporate tax loopholes, while Governor Romney has been unclear on this point. But any revenue saved from corporate loophole-closing under either candidate would be given back to corporations in the form of a reduction in their tax rate. Both candidates have proposed to reduce the official 35 percent corporate income tax rate (to 28 percent in the case of Obama and 25 percent in the case of Romney).

■ Corporations claim that they are burdened by the statutory tax rate of 35 percent, but their effective tax rate (the percentage of profits they actually pay in taxes) is usually far lower than that because they use loopholes to shield much of their profits from taxes.

■ Each of the reasons used by corporate lobbyists to argue for lower taxes is easily refuted. For example, they claim that the corporate tax is ultimately borne by the workers, but if that was true, then corporations wouldn’t bother lobbying Congress to lower it.

■ An obvious way to address our fiscal problems is to close corporate tax loopholes and use the revenue to reduce the deficit or pay for education, infrastructure or other investments.


Play Presidential Debate Tax Bingo

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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


Romney's Idea to Limit Deductions to $17,000 Cannot Make His Tax Plan Work

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CTJ Analysis Shows That Millionaires Would Get Average Tax Cut of $250,000 Even If Deductions and Exclusions Are Limited to Zero

Today, presidential candidate and former Massachusetts Governor Mitt Romney suggested that one way to offset the cost of his proposed tax cuts would be to limit deductions to $17,000.

“As an option you could say everybody’s going to get up to a $17,000 deduction; and you could use your charitable deduction, your home mortgage deduction, or others – your healthcare deduction. And you can fill that bucket, if you will, that $17,000 bucket that way,” he said on a local Denver news show. “And higher income people might have a lower number.”

In September, Romney argued that he would eliminate enough deductions, exclusions and other special breaks to offset the costs of the new tax cuts he proposes, and that the net result would not be a tax increase for the middle-class or a tax cut for the rich.

But an August analysis from Citizens for Tax Justice demonstrated that even if itemized deductions and exclusions were eliminated entirely, people who make over $1 million would still see an average net tax break of $250,000 in 2013 under Romney’s plan.

That’s partly because the new tax breaks that Romney proposes are so generous to the rich that they would outweigh the loss of any deductions or exclusions. In addition to making permanent all the Bush tax cuts, Romney would reduce income tax rates by a fifth and eliminate the AMT and the estate tax.

Another reason is that Romney pledges to keep the special breaks that benefit the wealthy most of all — breaks for investment and savings like the special low rate for capital gains.

As a result, there is simply no way to Romney could fill in the details of his tax plan in a way that will not result in huge tax cuts for the very rich.

For low- and middle-income people, the loss of tax expenditures (tax deductions, exclusions, credits and other breaks) under Romney’s plan could outweigh any gains from the tax rate reductions and other new tax cuts, resulting in a net tax increase. In fact, this result is inevitable if Romney is to accomplish his goal of not further increasing the deficit while at the same time cutting taxes for millionaires by at least $250,000 on average.

Tim Kaine Lurches Right in Quest for "Middle Ground"

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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

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

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

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

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

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

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

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

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

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

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

Mitt Romney's 2011 Returns Reveal a Tax Code Stacked in Favor of the Very Rich

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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).

Three Things Romney Forgot to Say About Who Pays Taxes

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

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

1. All Americans Pay Taxes

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




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

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

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

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

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

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

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

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

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

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

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

Fact Check: Romney Energy Adviser's Oil Company Pays 2.2 Percent Federal Tax Rate

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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.

Romney Gets It From All Sides: Stop Dodging Tax Policy Details

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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?  

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

* * *

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






How the Democratic National Convention Ended Better than We Expected

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

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

Joe Biden Blasts Romney’s “Territorial” Tax

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

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

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

Bill Clinton Dismantles Romney’s Tax Plan

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

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

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

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

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

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

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

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

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

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

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

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

Tax Ideas in the Democratic Platform: Obama as Tax-Cutter-In-Chief

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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.

Convention Speaker Profiles: Govenors Malloy, Hickenlooper, Markell & Schweitzer

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

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

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

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

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

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

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

Convention Speaker Profiles: Govenors Perdue, Quinn, Chafee, Patrick & O'Malley

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

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

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

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

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

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

On Taxes, Romney Projects onto His Opponent

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“Unlike President Obama, I will not raise taxes on the middle class,” Republican presidential candidate Mitt Romney said during his acceptance speech. It was a startling statement because it describes one of the facts about Romney’s own tax plan and attributes it to the policies of his opponent, President Obama.

Romney’s Tax Plan: Breaks for the Rich No Matter How You Look at It, Leaving the Bill for Low- and Middle-Income Americans

A recent CTJ report shows that the basics of Romney’s tax plan would give out huge tax cuts to those who make between half a million and one million dollars and those who make over a million dollars, no matter how the missing details are filled in. Romney cannot possibly meet his goal of offsetting the costs of the tax cuts (besides the enormous Bush tax cuts, which he doesn’t think need to be paid for) without raising taxes on people farther down on the income ladder.

The CTJ report finds that Romney’s proposed tax cuts would reduce taxes by an average $80,000 for people who make between half a million and one million dollars and by an average $400,000 for people who make over a million dollars.

Now, Romney promises to offset the cost of these tax cuts (aside from the enormous Bush tax cuts, which he would make permanent) by reducing or eliminating “tax expenditures,” which are the credits, deductions, exclusions and loopholes that lower people’s tax bills. But even if Romney made the very rich give up all the tax expenditures that he has put on the table, they’d still be getting huge tax cuts —  an average $48,000 for people who make between half a million and one million dollars, and an average $250,000 for people who make over a million dollars.[1]

If Romney’s plan is going to be revenue-neutral (not counting the huge cost of the Bush tax cuts) as he claims, then someone is going to have to pay higher taxes than they do now so that the people who make over half a million dollars a year can pay less. The loss of tax expenditures for low- and middle-income people can be larger than the benefits they receive from Romney’s rate reductions and other proposed breaks, meaning they face a net tax increase. In fact, this must happen for Romney to keep his promise about not losing more revenue, as the Tax Policy Center has already pointed out.

Obama’s Problem Is that He’s Cut Taxes Too Much, Not that He Raised Taxes

Romney’s claim that Obama has raised taxes on the middle-class is initially hard to understand, given Obama’s two-year extension of all the Bush tax cuts and his call to again extend the Bush tax cuts entirely for 98 percent of Americans while letting them expire partially for the richest 2 percent of Americans. (In fact, we pointed out that many of the taxpayers within the richest 2 percent, like those with incomes just over $250,000, would only have to give up a tiny fraction of their tax cuts under Obama’s plan.)

Romney’s claim that Obama has raised taxes on the middle-class appears to refer to the new mandate to obtain health insurance, which the Chief Justice of the Supreme Court decided was actually a tax and therefore within the Constitutional powers of Congress.

As we pointed out at the time the Supreme Court ruled on the health care mandate, very few people would ever actually pay the “tax,” which is the fee that will be imposed on people who choose to go without health insurance. As we explained,

It’s a tax that hardly anyone will pay.

That’s because for the vast majority of Americans who don’t have employer health coverage, the government subsidies to buy insurance will be so large that it would be foolish not to buy insurance.

For starters, any family with income less than 133 percent of the poverty line (that means all families of four with incomes of $30,000 or less) will be eligible to sign up for free coverage under Medicaid.

Above that level of income, the government will provide cash subsidies to buy insurance, starting at almost 100 percent of the cost and gradually phasing down. But the subsidies won’t disappear for a family of four until its income exceeds about $90,000.

An Urban Institute study found that fewer than 3 percent of households would be subject to the fee.

Another point that Romney and his allies seem to forget is that the 2009 economic recovery act that they criticize so much actually cut taxes for 98 percent of working families. (See the national and state-by-state estimates from CTJ.)  

If President Obama has made any mistakes on taxes, it’s that he has been entirely too willing to extend too many tax cuts for too many Americans at a time when we desperately need revenue.



[1] Notice we say that the $48,000 and $250,000 figures are the tax cuts these groups would get if they had to give up all the tax expenditures that Romney has put on the table. That’s because he has pledged to keep the tax expenditures that benefit the rich the most — breaks for investment, like the low rates for capital gains and stock dividends.


Tax Ideas in the Republican Platform, Part I: Same Old Supply-Side Stuff

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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.

CTJ Report: How Big Is the Romney-Ryan Tax Cut for Millionaires?

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Romney and Ryan Both Propose Plans that Would Give Millionaires Average Breaks of at Least $250,000, and Possibly as High as $400,000

Presidential candidate Mitt Romney and his running mate, Congressman Paul Ryan, have both proposed tax plans that would make the Bush tax cuts permanent, further slash personal income tax rates, reduce the corporate income tax rate, and enact several other tax cuts.

Both candidates also say that they would reduce or eliminate many “tax expenditures” (deductions, credits, exclusions and loopholes) so that their plans would cost no more than making all the Bush tax cuts permanent would cost. That’s hard to believe because neither has specified a single tax expenditure they would target. But one thing is clear: for the richest Americans, the rate reductions and other breaks would be far more valuable than any tax expenditures they could lose under either plan. (The details of the Romney and Ryan tax plans are in the appendix.)

Both Romney and Ryan’s plans would give people making over $1 million an average tax cut of about $250,000 if these millionaires had to give up all of their tax expenditures. If Romney or Ryan’s plan was implemented without closing any tax expenditures for the rich, then people making over $1 million would receive an average tax cut of around $400,000.
Read the report.

Tax Ideas in the Republican Platform, Part II: On the Fringe

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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.

Mitt Romney's Much More Important Tax Secret

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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.

Convention Speaker Profiles: Governors Bobby Jindal and Susana Martinez

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Both Republicans and Democrats are featuring governors at their national nominating conventions. Because convention speakers are chosen as the parties’ ambassadors to new audiences during these TV spectacles, the state policy team at the Institute on Taxation and Economic Policy are providing quick sketches of current governors from both parties who have been leaders – for better and for worse – in state tax policy. Below are profiles of two governors: Louisiana's Bobby Jindal, who was scheduled to speak tonight but bowed out to handle Hurricane Isaac, and Susana Martinez of New Mexico.

Louisiana Governor Bobby Jindal: Last year, the Governor dismissed a legislative plan to eliminate the state’s personal and corporate income taxes as too radical. This year, the budget he ultimately signed was full of “one-time” money lifted from other parts of the budget to fill in gaps. Still, as he turns his attention toward reforming the state’s tax structure, he is opposed to raising more revenue, saying, “[w]e are not going to do anything that raises revenue. It needs to be revenue-neutral.”

New Mexico Governor Susana Martinez:  In her 2011 State of the State Address, Governor Martinez waxed eloquent about supporting small business, saying, "It's the small businesses — the mom-and-pop shops, the small startups — that get lost in the layers of red tape….We will help them…."  But the fact is, Martinez failed even in her ill-advised effort to exempt roughly half the state’s small businesses - those earning less than $50,000 per year - from the gross receipts tax. And, when she had a chance to sign a bill that really did support small business owners (and that had widespread support from business groups in her state!), Martinez vetoed it. She always said she would, actually, oppose combined reporting, which is a smart rule that levels the playing field for small business by preventing large corporations from creating subsidiaries in other states to avoid paying taxes.

Mitt Romney: I "Learned Leadership" From Tax Dodging Marriott CEO

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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.


Convention Speaker Profile: Governor Chris Christie (R-NJ)

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Both Republicans and Democrats are featuring governors at their national nominating conventions. Because convention speakers are chosen as the parties’ ambassadors to new audiences during these TV spectacles, the state policy team at the Institute on Taxation and Economic Policy are providing quick sketches of current governors from both parties who have been leaders – for better and for worse – in state tax policy.

[UPDATE 8/30/12: The good people at FactCheck.org reviewed Governor Christie's RNC speech and call it a Fact Free Keynote. Read why here.]

Tonight, America will hear from New Jersey's Governor Chris Christie, a man known for his bombastic, no-apologies approach and who we crowned "Fiscal Drama Queen" in our 2012 gubernatorial yearbook.

Since taking the reigns as the Garden State’s leader in January 2010, Governor Christie’s fiscal agenda has done “serious damage to virtually every constituency imaginable in this state – except for corporations and the super-rich.”  Christie raised taxes on the working poor and on fixed-income seniors while at the same time insisting on tax cuts that disproportionately benefit the wealthiest New Jerseyans.  He has thrice vetoed a temporary millionaire’s tax (impacting a mere .2 percent of the state’s taxpayers, temporarily!) that would have prevented hundreds of millions of dollars in spending cuts to schools, health care for working families and legal assistance for low-income individuals, to name just a few programs impacted by Christie’s priorities. 

And now, Governor Christie wants a significant income tax cut so much that he continues to swear by a fantastical revenue forecast despite consensus among nonpartisan experts that 2013 revenues are likely to fall a staggering $1.3 billion below that projection, (much like the last fiscal year, which ended with $542 million less in the bank than predicted).

An ideologue with political ambitions who fails to serve his constituents, Christie is nonetheless the keynote darling of the 2012 GOP.


Mitt Romney's Huge Personal Financial Stake in the Upcoming Election

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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.

The Paul Ryan Budget Roundup

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On Saturday morning, Republican Presidential Candidate Mitt Romney announced Wisconsin Representive Paul Ryan as his vice presidential running mate. Over the past six years, Citizens for Tax Justice has crunched the numbers and provided in-depth analysis on the succession of regressive budget plans proposed by Rep. Ryan as the former Ranking Member, and current chairman, of the House Budget Committee.

Below is a roundup of our reports and commentary on Rep. Ryan's current and past budget plans:

Top GOP Tax-Writer Proposes Fast-Track for Ryan Plan Tax Changes, Giving Millionaires Average Tax Cut of at Least $187,000 in 2014
- July 26, 2012

Starving the Census in the House GOP Budget: Penny Wise, and Dumb
- May 14, 2012

Ryan Budget Plan Would Cut Income Taxes for Millionaires by at Least $187,000 Annually and Facilitate Corporate Tax Avoidance
- March 22, 2012

CTJ Figures Used in Budget Debate Show Ryan Plan Would Give Huge Tax Cut to Millionaires
- May 26, 2011

Obama Blasts Ryan Budget Plan
- April 15, 2011

House Budget Chairman Paul Ryan's Goal Is to Shrink Government, Not the Deficit
- April 8, 2011

Rep. Ryan's House GOP Budget Plan: Federal Government Would Collect $2 Trillion Less Over a Decade and Yet Require Bottom 90 Percent to Pay Higher Taxes
- March 9, 2010

Update on House GOP Budget Plan
- April 2, 2009

House GOP Leaders' Budget Plan: Poor Pay More and Rich Pay Less Under Plan that Costs $300 Billion More Annually than President's Plan
- March 27, 2009

House GOP Tax and Entitlement Plan Would Raise Taxes on Four Fifths of Americans While Slashing Taxes on the Wealthy
- July 7, 2008

House GOP Pins Comeback Hopes on Social Security Privatization, Dismantling Medicare, and Slashing Public Services
- May 23, 2008

Republicans Call for Replacing Alternative Minimum Tax with Alternative Maximum Tax
- October 12, 2007


Anti-Tax Grandstanding of Olympic Proportions

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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


Bill Clinton Falls for the Fiscal Cliff

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Former President Bill Clinton told CNBC that extending all the Bush tax cuts past their scheduled expiration at the end of the year “is probably the best thing to do right now” to help Congress and the country “avoid the fiscal cliff” of expiring tax cuts and scheduled spending cuts. The former policy-wonk-in-chief did not endorse extending the cuts permanently, but said “I don't have any problem with extending all of it now, including the current spending level.”

This is not helpful.

The term “fiscal cliff” sounds scary and implies a situation in which the budget deficit will dramatically worsen if no one intervenes.  But the undeniable fact is it would dramatically improve if Congress simply does nothing – and stops extending the tax cuts! In fact, the CBO has published yet another report indicating that the federal budget deficit would stabilize if not for the budget-busting legislation that most observers expect Congress to enact when it extends all kinds of tax breaks into 2013.  And the report confirms that the measure that would add the most to the deficit would be an extension of the Bush tax cuts.

Of course, it’s entirely true that Congress should set aside concerns about the budget deficit for the time-being and focus on job creation.  The thing is, this focus should lead to increasing federal spending, and NOT to tax cuts. As is often noted, most economists agree that spending measures would do more to stimulate job creation than making the Bush tax cuts permanent.

For example, the widely respected economist (and former adviser to John McCain) Mark Zandi has concluded that for every dollar of revenue the federal government would lose from making permanent the Bush income tax cuts, U.S. economic output would increase by only 35 cents. On the other hand, this private sector economist finds that for every dollar the federal government spends on increased food stamps, work share programs, or unemployment benefits, U.S. economic output would increase by $1.71, $1.64, and $1.55 respectively. Versus 35 cents. Tax cuts don’t work; spending does.

Extending the Bush tax cuts is not about protecting a fragile economy. At its worst, it’s about an ideology that most Americans reject, and at best, it’s passing the buck and kicking the can down the road and every other idiom we have for short-sighted and irresponsible fiscal behavior. Anyone with the clout, credibility and smarts of Bill Clinton knows that and should be making an unambiguous call for these disastrous tax breaks to expire, once and for all, at the end of this year.

(Photo courtesy PBS.org.)

Media Blast Pelosi's Move on Bush Tax Cuts, Cite CTJ

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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.

What's Really "Nauseating": Tax Subsidies for Bain Capital Partners

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If your family makes around $60,000 a year and you work for a living, there’s a good chance you pay a larger percentage of your income in federal taxes than Mitt Romney and the other partners at Bain Capital.

We have explained before that a good portion of millionaires who live off investments pay a lower effective tax rate than people who work for their $60,000 a year.  Worse, the “carried interest” loophole allows people like Romney to enjoy the special low tax rate for investment income even though their income is really from work. CTJ’s Bob McIntyre was the first to predict that Mitt Romney’s effective federal rate was under 15 percent as a result.

Now comes Newark’s Democratic mayor, Cory Booker, defending Bain Capital and other “private equity” firms (really, buyout firms), calling attacks on Romney’s old firm “nauseating.”

Let’s put aside for a moment that fact that private equity firms buy up companies and fire people, and the fact that Mitt Romney doesn’t seem to see the difference between his former job of maximizing profits for investors and the job he seeks, which should be to maximize opportunities for all Americans.

Even if you accept all of that, do you believe that what Mitt Romney did at Bain Capital is so good for America that we should subsidize him through the tax code? Do you believe that discussing the role played by these buyout funds in our economy and in our public policies is off-limits?

Members of Congress, including Democrats and Republicans, have made claims in support of the carried interest loophole that defy common sense. They argue that millionaire fund managers like Mitt Romney should continue to enjoy this tax loophole because, for example, it encourages development in poor communities, helps minorities rise in the financial world, and helps cancer patients receive life-saving treatments.

These arguments are nonsensical for reasons we’ve explained before. The carried interest loophole does not encourage investment in poor communities or new technology or anything at all because it doesn’t affect the people who actually put up money to invest. The loophole subsidizes the people who manage the money, the fund managers who enjoy the special low tax rate on the compensation they receive so long as they maximize profits.

The arguments made in defense of the buyout firms’ privileges are so absurd that they beg the question of what really motivates their proponents in both parties. We cannot say why Mayor Booker does not express any outrage that the Bain partners can pay a lower effective tax rate than many working people in his city. But we are not blind to the many, many articles about campaign contributions from these fund managers and how they have attempted to use this money to protect their privileges. Now that’s nauseating.

Senator Rand Paul: Champion of Secret Swiss Bank Accounts

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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

Romney: I Was For Closing The Mortgage Loophole on Second Homes Before I Was Against It

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Political leaders love to claim fealty to the idea of “loophole-closing” tax reform, but refuse to provide details on the specific tax breaks they would eliminate. As we’ve recently noted, House Budget Chair, Rep. Paul Ryan, is one of the worst offenders when it comes to punting on specific tax breaks he’d eliminate. President Obama has also avoided naming closeable loopholes in his outline for corporate tax reform. Yes, lawmakers are glad to pose convincingly as advocates of tax reform without assuming any of the political risks involved with real loophole-closing reforms.

Earlier this month, presidential candidate Mitt Romney took a welcome departure from this pattern, signaled by the headline, “Romney Specifies Deductions He'd Cut.”  The presumptive GOP nominee told a Florida audience that his plans for tax reform included eliminating the second home mortgage interest deduction for high earners.

This is a perfectly sensible reform, and is one that many tax reform advocates on both sides of the aisle (most recently, President Bush’s tax reform commission) have agreed on.  It also allows us to take Romney’s tax proposals a bit more seriously, since he has said he plans to cut income tax rates by 20 percent and pay for it with (as yet unspecified) loophole-closing reforms.

A few days later, however, Romney’s campaign backed away from this reform after Newt Gingrich accused him of surrenderring to "class warfare rhetoric of the Left." This and other pushback from within his own party led one Romney surrogate to explain it this way: the candidate “was just discussing ideas that came up on the campaign trail” with some friendly donors.

This strategic retreat may make sense politically (think of all the second homes in battleground states), but it also puts Romney’s tax plan squarely in talk-is-cheap territory—asking all the easy questions but answering none of the hard ones.

Photo of Mitt Romney via Dave Lawrence Creative Commons Attribution License 2.0

Step Aside, Tea Party - A New Kind of Tax Protest is Here

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On Tax Day 2012, thousands of people throughout the country rallied in favor of progressive taxation and against the low (or sometimes zero rates) paid by the wealthiest Americans and corporations. These protests were the latest in the growing progressive tax movement dubbed “Tax Revolt 2.0” for its focus on tax fairness rather than tax cuts.  As one commentator declared, "Tax Day doesn't belong to the Tea Party anymore."

The popularity of these protests should be no surprise considering that 68 percent of Americans believe the current tax system benefits the rich and is unfair to ordinary workers. While efforts by grassroots groups have begun to change the conversation about tax fairness, these tax day 2012 protests reveal a reach and momentum that show no signs of receding.

You could hardly travel around the US on tax day this year without running into one of over 200 rallies including: Los Angeles, Fort Worth, Kansas City, Boston, Duluth, Grand Rapids, Bangor, Chicago, Pittsburgh, Green Bay, New York City, Ames, Toledo, Kalamazoo, Newark, Seattle, and many, many more.

While the broad theme of the nationwide protests was tax fairness, the targets differed. In Jersey City, NJ for instance, protestors rallied at their local Wells Fargo bank to call out the company for its role as an infamous tax dodger, while protestors in Tuscon, AZ held their rally at a local post office to highlight how the failure to tax wealth results in the loss of jobs and critical public institutions like the Postal Service.

To be sure, the anti-tax lobby is well established, but you gotta’ believe that activists as energetic and creative as these will win the day:


Photo of the "Tax Dodgers" via  D*Unit Creative Commons Attribution License 2.0

Americans Want Fair Taxes. When Will Washington Listen?

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According to a CNN/ORC poll, one of many polls released around Tax Day 2012, a solid 68 percent of Americans said the current tax system benefits the rich and is unfair to ordinary workers. While this result is consistent with past poll results, a shocking number of lawmakers in Washington seem indifferent to the public’s hunger for more progressive taxes.

For example, one modest step toward tax fairness is the Buffet Rule, which would impose a minimum tax, equal to 30 percent of income, on millionaires in order to ensure that wealthy investors like Warren Buffett or Mitt Romney do not pay a lower tax rate than middle income Americans. Despite the fact that the Buffett Rule is favored by an overwhelming 72 percent of the American public, it was defeated in the US Senate on Monday and will likely not even come up for a vote in the House of Representatives.

Another tax day poll by Reuters/Ipsos found that 60 percent of Americans believe that tax revenues should play some part in deficit reduction efforts, while only 22 percent believe that spending cuts alone are the solution. This poll also reflects Washington’s huge disconnect with the American public as last year’s deficit reduction deal resulted in trillions of dollars of spending cuts and not a cent of additional revenue.

Even in the arena of corporate tax reform lawmakers find themselves at odds with public sentiment. In its tax day polling, Gallup found that 64 percent of Americans believe that corporations pay too little in taxes, meaning that the public would clearly favor revenue-positive corporate tax reform. And yet Republican and Democratic leaders, including the President, are proposing revenue-neutral corporate tax reform instead.

Washington’s conservative intransigence on tax issues is not going unnoticed by the public. Grassroots movements are spreading in protest of the unfairness of our tax system and pushing for progressive change. Lawmakers will find it increasingly difficult to ignore their constituents, especially as it becomes clear that other types of deficit reduction proposals (cuts in Social Security, Medicare, services for children) are far less popular than progressive tax increases.

American Taxpayers Subsidize Monday Night Racing

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Romney: I Have Friends Who Own NASCAR Teams

The 2012 NASCAR season kicked off Monday with the Daytona 500. The much-celebrated start to the racing season is a chance to remind Congress and the administration that it's time to end track owners' special tax break.

In 2004, President Bush signed a tax bill chock-full of special interest tax breaks, including one for his NASCAR friends. The legislation allowed track owners to write off the cost of motorsports facilities (track, grandstand, etc.) over seven years for tax purposes. For accounting purposes, these assets are written off over their useful lives, ranging from ten to thirty years. The accelerated write-off allowed by the tax break costs the U.S. Treasury an estimated $40 million per year.

This particular tax break, along with many others known as “the extenders,” expired on December 31 of 2011. With the projected deficits and the clamor for base-broadening corporate tax reform, you’d think this special-interest loophole would be an easy one to keep off the books. Even Oklahoma Republican Senator Coburn has called for its elimination. But Florida Rep. Vern Buchanan is pushing for bringing back the NASCAR tax break, while he's busy collecting campaign contributions from the industry. And President Obama's budget proposal also calls for extending it.

An interesting question is whether GOP Presidential hopeful Mitt Romney is a supporter of this tax break, too. As he said in an interview Sunday, "I have friends who own NASCAR teams," and it turns out some of those friends are also campaign donors.

As governor in Massachusetts, Romney made the decision to close a slew of corporate loopholes that brought in some $370 million to his state's treasury. Presidential candidate, Romney, however, doesn't like to talk about that.

So we will see: will we have a presidential race featuring two candidates who try to bolster their blue collar bona fides by supporting the NASCAR track owners' loophole, or two candidates who mean it when they say they want to simplify the tax code?

Photos of Nascar related materials via Side Hike  and Brian C Creative Commons Attribution License 2.0

New Polls Show Growing Sentiment that Wealthy and Corporations Don't Pay Enough Taxes

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A new Washington Post-ABC News poll shows that only nine percent of Americans believe the tax system works for the middle class, with 68 percent saying it actually favors the wealthy. The survey shows a public overwhelmingly convinced that our tax system is unfair and that taxes should be raised on wealthy Americans.

The belief that the tax system is unfair has surely been fueled by the recent revelation of presidential candidate Mitt Romney’s super low 14% tax rate on his $21 million income. In fact, the same poll found that 66 percent of the public generally – and even a near majority of Republicans! – believe that Romney is not paying his fair share in taxes.

Not surprisingly, then, Americans overwhelmingly support increasing taxes on the wealthy, according to this poll, with 72 percent saying that taxes should be increased on millionaires. Of course, time and time again polls have shown the public’s robust support for progressive taxation.

A Growing Gap Between Small and Big Business

In related news, a nationwide survey released by the American Sustainable Business Council, Main Street Alliance and Small Business Majority shows that small business owners are fed up with how our corporate tax system favors big corporations at the expense of small businesses.

Indeed, 9 out of 10 small business owners said that big corporations use loopholes to avoid taxes that small businesses have to pay, with three quarters of the small business owners noting that their business is harmed by such loopholes. The same survey found that 67 percent of small business owners believe big corporations pay less than their fair share.

Even when small and large busineses agree that they want more tax handouts from Congress, they're talking about very different things, according to a new Bloomberg (subscription only) poll.  Asked what tax changes would help them most, advisors to smaller businesses prioritize things like reducing payroll taxes on employers and making permanent the deduction for self-employment. Big business priorities included 100 percent expensing (a.k.a. bonus depreciation) of equipment and complete overhaul of the corporate tax code – including a reduced tax rate.

These studies are more reason corporate lobbyists and their patrons in Congress should stop pretending they’re all about small business. They’re not.

Breaking Down the Most Notable Quotes from the GOP Debates

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The rapid-fire succession of GOP debates has continued, with four more occurring in just the last couple weeks. Here we deconstruct the most ludicrous or notable quotes from each candidate:

Former House Speaker Newt Gingrich: …when I was speaker, we had four consecutive balanced budgets...

It was exciting to see Ron Paul finally call Gingrich out during the latest debate for repeatedly claiming that he balanced the federal budget four years in a row. Citizens for Tax Justice’s Bob McIntyre thoroughly debunked this claim over 9 months ago when Gingrich first starting making it, yet until now none of the GOP candidates have called him out for it.

Former Governor Mitt Romney:
I'm proud of the fact that I pay a lot of taxes.

Romney does not pay “a lot of taxes.” He paid an effective tax rate of less than 14% on his $22 million in 2010, which is actually a lower rate than many individuals making just $60,000 pay.

Former House Speaker Newt Gingrich: I'm prepared to describe my 15 percent flat tax as the Mitt Romney flat tax. I'd like to bring everybody else down to Mitt's rate, not try to bring him up to some other rate.

Gingrich’s $18 trillion tax plan would not bring everyone down to the rate that Romney pays because it would actually further reduce Romney’s tax rate to almost zero. Even Romney seemed to think that reducing his tax rate to zero would be going too far and went out of his way during a recent Republican debate to point this out to Gingrich.

Former Senator Rick Santorum: I talk about five areas where I allow deductions… one of them would be, be able to deduct losses from the sale of your home. Right now, you can't do that. You have to pay gains, depending on the amount, but you can't deduct the losses.

Ever trying to play the role of a blue collar populist, Santorum highlighted his idea to allow taxpayers to deduct losses from the sale of their home. He left out the fact that current law already allows an individual to exclude up to $250,000 of capital gains from the sale of a home. How could it be fair to exclude the gains but deduct the losses? He also ignores the fact that homeowners are already subsidized to the tune of $75 billion through the home mortgage interest deduction. A much more effective approach to helping struggling homeowners (and renters for that matter) would be for state lawmakers to enact strong property tax circuit breakers, which are better targeted to low-income households.

Representative Ron Paul: I would like to see income tax reduced to near zero as possible.

Although he has not laid out a specific long term tax plan, Paul has frequently called for the complete repeal of the 16th amendment (which allows the creation of the income tax) and might seek to replace it with a national sales or flat tax. He does not typically mention that such a plan would be extremely regressive no matter how you structure it.

CTJ Director in American Prospect: Gingrich and Romney's Capital Games

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Citizens for Tax Justice director Bob McIntyre wrote in the American Prospect this week, “With the two leading Republican presidential contenders arguing over whether super-wealthy investors should pay 15 percent or zero percent in federal taxes, it would seem that President Barack Obama has a potent campaign issue against either of them… Sadly, Obama hasn’t yet proposed to let all of the Bush tax cuts for the rich expire.”  

                                                                   Read the article.

After Mitt Romney conceded that CTJ’s estimate of his effective tax rate of 14 percent was correct, Newt Gingrich said that he believed everyone should pay a similar effective tax rate and that this was an argument for his proposed optional 15 percent “flat tax.” Gingrich fails to mention that his plan would actually lower Romney’s effective tax rate almost to zero percent.

CTJ epxlained to TIME that the optional “flat tax” in Gingrich’s plan actually has two tax rates — 15 percent for the income that most of us earn, and zero percent for the investment income that Romney lives on.

TIME also reported on CTJ’s findings that Romney would save $3.4 million a year under his own plan, but would save $6.4 million under Gingrich’s plan.

CTJ Analysis Shows Romney's Plan Would Cut His Own Taxes Almost in Half

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The Washington Posts's Greg Sargent cites figures from CTJ and concludes

If Romney, whose wealth is estimated at as much as $250 million, is elected president and gets his way on tax policy, he would pay barely more than half as much in taxes than he would if Obama is reelected and gets his way — and the Bush tax cuts on the wealthy expire and an additional Medicare tax as part of the Affordable Care Act kicks in.

Read the article.

Romney Confirms CTJ Calculation of His Super-Low Tax Rate, Demonstrates Why We Need Buffett Rule

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Three months ago, CTJ's Bob McIntyre told TIME that GOP candidate Mitt Romney likely has an effective federal tax rate of around 14 percent because of the tax break for investment income that Romney enjoys. Today, the candidate said, “What’s the effective rate I've been paying? It's probably closer to the 15 percent rate than anything.”

Romney went on to say, “Because my last 10 years, I've ... my income comes overwhelmingly from investments made in the past, rather than ordinary income or rather than earned annual.”

In other words, a wealthy person like Romney can receive most of his income in the form of capital gains and stock dividends, which are subject to a top rate of just 15 percent under the personal income tax and not subject to payroll taxes.

A CTJ report from last year explains that about one third of people with income in excess of $10 million annually get the majority of their income from investments and, because of these tax preferences, pay a lower effective tax rate than many middle-income taxpayers, who typically get their income from work. Romney is a member of this lucky group of wealthy individuals.

Ending the tax preference for capital gains and stock dividends is therefore the primary way to implement President Obama’s Buffett Rule, the principle that tax reform should reduce or eliminate those situations in which millionaires pay lower effective tax rates than middle-income people.

In Romney’s case, there is actually a very specific loophole that probably allows his income to be taxed as capital gains (taxed at the 15 percent rate) even when it is actually compensation for work. We call this the Romney Loophole, which allows wealthy fund managers to treat their “carried interest” (profits that they receive as compensation for their work) as capital gains and thus subject to the low 15 percent tax rate.

President Obama’s budget plans all contain a proposal to close the Romney Loophole, which would at least end the very worst abuse of the tax preference for capital gains and stock dividends. But to truly implement the Buffett Rule, the tax preference for investment income must be eliminated entirely.

Rhetoric vs. Reality: Judging the Latest from the GOP Presidential Candidates

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With the Republican primaries now in full swing, the GOP candidates’ rhetoric on taxes has become even more disconnected from reality.

Santorum is No Blue-Collar Populist

Former Senator Rick Santorum used his new spotlight during last Saturday’s ABC-Yahoo GOP presidential candidate debate to highlight his plan to cut the corporate tax rate in half and eliminate the tax entirely for domestic manufacturing. Santorum explained the need for cutting the 35 percent tax rate by arguing that our corporate tax rate is the “highest in the world.”

While we have the second highest statutory corporate tax rate on-paper, the excess of tax breaks and loopholes in our corporate tax code make it so the effective corporate tax rate (the amount actually paid) is close to half of that. In fact, the US actually has the second lowest level of corporate taxes, as a share of its overall economy, of any developed country in the world.

Although Santorum promotes the populist aspects of his tax plan, the truth is that the majority of his proposed tax cuts would go to the richest five percent of Americans. A new analysis by Citizens for Tax Justice shows that his tax plan would provide an average tax cut of $217,500 to the richest 1 percent, which is over 100 times the size of the average tax cut the middle fifth of Americans would receive.

Gingrich on a Tax By Any Other Name

Former House Speaker Newt Gingrich usually offers nothing but hot air when it comes to taxes, but this week the Gingrich campaign brought up an interesting point in a new campaign ad attacking Romney for raising user fees in Massachusetts. The ad uses Romney’s support of user fees to question his anti-tax credentials because it says that user fees are essentially a “tax by another name.”

Of course, Gingrich’s ultimate conclusion is mistaken in that he assumes Romney should not have raised user fees or taxes but should simply have left public services unfunded.

But Gingrich’s criticism nonetheless acknowledges the trend among even the most infamous anti-tax governors to substantially increase user fees to avoid officially raising taxes. In fact, since 1979 virtually every state in the nation has begun to rely more heavily on user fees to raise revenue.

Huntsman’s Tax Loophole Consolidation Plan

Rhetorically, former Governor Huntsman hit it out of the park during the NBC-Facebook GOP presidential candidate debate last Sunday by declaring that we need to “say so long to corporate welfare and subsidies” and that our tax code is chuck full of loop holes and deductions” which weigh it down to the tune of $1.1 trillion.

Unfortunately however, his tax plan, like the other GOP candidates’ tax plans, includes a “territorial” system that would exempt the offshore profits of U.S. corporations from U.S. taxes. This is essentially a way to expand and consolidate the existing loopholes that encourage U.S. companies to shift their investments offshore.

Similarly, Huntsman’s proposed changes to the personal income tax would actually add huge loopholes for the rich by exempting taxes on capital gains and stock dividends. In addition, while his plan would end a substantial amount of wasteful tax subsidies, it would also eliminate invaluable tax credits like the earned income tax credit.

In other words, Huntsman’s plan is more of a tax loophole consolidation plan for the rich and powerful, rather than a tax reform for everyone.

Comparing the GOP Presidential Candidates Tax Plans in Every State

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A new CTJ report shows how taxpayers in each state would be affected by the tax plans proposed by the Republican presidential candidates. The report finds that the cost of the tax plans would range from $6.6 trillion to $18 trillion over a decade. The share of tax cuts going to the richest one percent of Americans under these plans would range from over a third to almost half. The average tax cuts received by the richest one percent would be up to 270 times as large as the average tax cut received by middle-income Americans.

Read the report.

The Top Five Tax Myths to Watch Out for this Election Season

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As the presidential campaigns rev up, taxes are emerging as the defining issue of the election. Unfortunately, a lot of misinformation and myths about taxes are spreading as candidates and commentators look to push their different economic agendas.

To start the election season off, here is a breakdown of the five biggest tax whoppers being told by the candidates and commentators alike.

1) Myth: 47 Percent of Americans Do Not Pay Taxes

Fact: All Americans Pay Taxes

Pundits and politicians will continue to rile up audiences this election season by claiming that half of Americans in the U.S. do not pay any taxes. This talking point is used to deflect questions about why the rich should pay their fair share.

The basis of this claim is data showing that 47 percent of Americans did not owe federal income taxes in 2009, which the recession was at it's peak. The claim ignores the much more regressive federal payroll taxes or state and local sales, income, and property taxes that all Americans pay. The reality is that three-quarters of American households actually pay more in payroll taxes than federal income taxes.

Adding to this, the very reason many low income Americans do not pay federal income taxes is because they benefit from highly effective tax credits like the earned income tax credit (EITC), which incentivize work while providing much needed support to working low and middle class family budgets.

2) Myth: The American People and Corporations Pay High Taxes

Fact: The US Has the Third Lowest Taxes of Any Developed Country in the World

Total US taxes are actually at the lowest level they’ve been since 1958. The US has the third lowest level of total taxes of the Organisation for Economic Co-operation and Development (OECD) countries, with the exception of only Chile and Mexico. President Obama, who is often falsely accused of raising taxes, actually cut taxes for 98 percent of the country on top of temporarily extending the entirety of the Bush tax cuts.

A related claim is that the US has the second highest corporate tax rate in the world. This is misleading because it’s based on the on-paper (statutory) corporate rate rather than the actual (effective) rate that corporations pay. Because of the plethora of corporate tax breaks and loopholes, the US actually has the second lowest coporate taxes as a share of GDP in the OECD. In fact, 30 major corporations, including Verizon, Boeing and General Electric, paid nothing in corporate taxes over the last 3 years.  Rather than cutting corporate taxes, the sensible solution is to pass revenue-positive corporate tax reform.

3) Myth: Cutting Taxes Creates Jobs and Raises Revenue

Fact: Tax Cuts Reduce Revenue And Are Not Associated with Economic Growth

Since the rise of supply-side economics, tax cuts for the rich have been regarded as a magic elixir that could unleash economic growth, while simultaneously increasing government revenue.

The reality is that the tax cuts that have been tried for over 30 years have proven to be a stunning failure in all regards. In fact, history has shown that the tax rate on the wealthy simply has nothing to do with economic growth. Just consider the strong growth that occurred after President Clinton increased taxes versus the dismal growth following the Bush tax cuts.

Not surprisingly, tax cuts have been definitely proven to reduce revenue. Even President Bush's own Treasury Department concluded that tax cuts do not create enough economic growth to to come close to offsetting their costs or raising revenue. The Bush tax cuts cost $2.5 trillion in their first decade and the Reagan tax cuts cost $582 billion.

4) Myth: The US tax system is very progressive because wealthy individuals already pay a disproportionate amount of taxes.

Fact: At a Time of Growing Income Inequality, the US Tax System is Basically Flat.

Conservative commentators and politicians claim that it would be unfair to raise taxes on wealthy individuals because they already pay a disproportionate amount of taxes, usually citing the fact that the top one percent of income earners pay 38 percent of federal income taxes. Once again, such claims ignore the fact that the federal income tax is just one of many taxes that individuals pay.

When you take into account all of the taxes that individuals pay, the truth is that our tax system is relatively flat. The top one percent of income earners receives 20.3 percent of total income while paying 21.5 percent of total taxes and the lowest 20 percent of income earners receive 3.5 percent of total income while still paying out two percent of total taxes.

In other words, wealthy individuals pay a high percentage of taxes because they earn a highly disproportionate amount of income. This is, of course, a consequence of growing income inequality in the United States, which is at a level not seen since before the Great Depression

5) Myth : The “Fair Tax” or a flat tax would be more “fair”

Fact: The “Fair Tax” or a Flat Tax Would Make Our Tax System Even More Regressive

Whether it’s Steve Forbes promoting his flat tax proposal in 1996 and 2000 or Rick Perry and Newt Gingrich in the 2012 presidential race today, the idea to sweep away our current tax system and replace it with a single rate, flat income or national sales tax (called the “Fair Tax”) has become a perennial campaign issue for Republican presidential candidates.

The simplicity of these proposals has much appeal for many Americans, who believe they would make filing taxes less complex and, at the same time, stop wealthy individuals from being able to game the tax system.

A deeper look, however, reveals that both the “fair” and flat tax are very regressive compared to our current system. One recent analysis of a typical flat tax proposal from last year shows that it would result in an average tax increase of $2,887 for the bottom 95 percent of Americans, while those in the top one percent would receive an average tax cut of over $209,562. Furthermore, the Institute on Taxation and Economic Policy’s analysis of the Fair Tax points out the under this system, the sales tax rate would have to be set at a politically and administratively unfeasible rate of at least 45 percent, and, the result would be the bottom 80 percent of American’s paying an average of 51 percent more in taxes compared to our current system.

It’s also important to note that “complexity in the tax code,” which a flat tax system purports to fix, is not caused by our progressive rate structure; rather, it’s the multitude of loopholes and tax breaks, all of which could easily be eliminated while keeping a progressive tax rate structure in place. 


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UPDATE: Candidate Mitt Romney told MSNBC on December 22 that he does not intend to release his tax returns, even if he becomes his party's nominee. Watch CTJ's Rebecca Wilkins explain to ABC News Brian Ross what Romney's tax returns would show about his offshore investments and "carried interest" income. ABC video at this link.

End the Loophole Allowing Romney and other Fund Managers to have "Carried Interest" Taxed as "Capital Gains"

GOP presidential hopeful Mitt Romney's personal wealth, estimated at $190 to $250 million, has been in the news a lot lately, including the sweet retirement deal he negotiated with Bain Capital, the private equity firm he used to head. The stories confirm CTJ director Bob McIntyre's comments to Time Magazine that Romney's multi-million dollar income is likely taxed at the special low 15 percent rate imposed on dividends and long-term capital gains.

This makes Romney a good poster child for the "Buffett Rule," the principle that millionaires should not pay lower effective tax rates than middle-income people. One step towards implementing the Buffet Rule is to close the loophole that allows "carried interest" (the fund managers' share of the deal they get as compensation) to be taxed at the 15 percent rate even though it is not truly capital gain.

Much of Romney's income that is taxed at that super-low rate is actually compensation in the form of a "carried interest" in the private equity deals of Bain Capital. While CEO's, actors, and athletes with multi-million dollar salaries, bonuses, or stock options pay income tax rates of 35 percent (and payroll taxes) on their compensation, managers of private equity firms, hedge funds, and other investment funds pay only 15 percent income tax (and no payroll tax) on their share of the funds' profits that they get in exchange for their management services. Even some managers who benefit from the low rate admit it's not justified.

Since this loophole benefits those who make millions, hundreds of millions and sometimes over a billion dollars in a single year, it is truly a case of the richest one percent being subsidized by the other 99 percent who pay higher taxes or get less in services to pay for this tax break.

Various proposals have been offered to close this loophole and, in the last Congress, one of those measures passed the House (three times!) but didn't make it through the Senate. Republicans and many Democrats in the Senate claimed that the loophole somehow helps encourage investment in poor neighborhoods, helps minorities, small businesses and even cancer patients.

The truth is that it does not encourage any type of investment in any part of the country because it does not benefit the people putting up money for investment. It merely allows those who manage this money to pretend that they have invested their own cash and thus receive the capital gains tax break that is ostensibly in place to encourage investment.

Now that this loophole has the face of a very wealthy presidential candidate on it, perhaps the American public will start to notice and demand that it be eliminated. If you believe the tax code shouldn't favor the richest 1 percent over the 99 percent, here's a place to start: Close the Romney Loophole.

Putting a Cap on Gingrich's Tax Policy Hot Air

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Despite receiving increased attention after becoming the new GOP presidential frontrunner, former House Speaker Newt Gingrich continued his blunder-filled forays into tax policy at the ABC News Iowa Republican primary debate last Saturday.

The most outstanding of the Gingrich tax policy foibles in the debate was a flat-out lie about his past support of a cap-and-trade system to deal with climate change.

Responding to Minnesota Rep. Michele Bachmann’s charge that he supported cap-and-trade, Gingrich replied “I oppose cap-and-trade” and went on to say that he helped “defeat it in the Senate.” In reality however, Gingrich has said in the past that he would “strongly support” cap-and-trade and has repeatedly backed similar efforts to reduce carbon emissions.

Gingrich’s attempt to hide his past position on this issue highlights how anti-tax absolutists have pushed the entire Republican presidential field away from any policy that could increase revenue, even if it would help prevent a climate crisis. Economists agree that a cap and trade system, which would raise revenue, has the same effect as a direct tax on carbon-producing activities. Of course, Gingrich has tried to rewrite history before, and has been called out by CTJ’s director Bob McIntyre.

Gingrich also went on the offensive against former Massachusetts Governor Mitt Romney, criticizing Romney’s proposal to make capital gains tax-free only for taxpayers with income under $200,000 whereas Gingrich would make them tax-free for all taxpayers.  

What Gingrich failed to mention is how he would offset the $1.3 trillion revenue loss that would result or that the wealthiest 1 percent of taxpayers alone would receive three-quarters of the benefits. A fairer and more sustainable tax policy would actually be to end the special low income tax rate for capital gains so that they are treated like any other form of income.

As the new GOP frontrunner, Gingrich will quickly learn that people are paying close attention to his tax policy pronouncements, and CTJ will provide the missing facts whenever needed.

Michele Bachmann's Happy Meal Tax

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While all of the 2012 GOP presidential candidates have had their fair share of tax policy blunders, Minnesota Republican Representative Michele Bachmann has stood out among the field for her outrageous and often factually incorrect statements about our tax system.

During the recent CNBC GOP Debate, Bachmann mentioned “47 percent of Americans who pay no federal income tax” and then took this point a step further saying that “even if it means paying the price of two Happy Meals a year, like $10, everyone can afford at least that.”

Bachmann’s statement is intentionally misleading. While many Americans do not pay federal income taxes, all Americans pay other taxes such as payroll, property, sales taxes (often on the Happy Meals they buy), and other largely regressive taxes.

Some taxpayers don’t pay federal income taxes because they are working poor families who receive the refundable parts of the Earned Income Tax Credit and the Child Tax Credit (which are available only if an adult in the family is working). Other taxpayers don’t pay federal income taxes because they are recipients of Social Security benefits, most of which are not taxed.

One recent report from CTJ found that if we set aside Social Security recipients and combine just two taxes, federal income taxes and payroll taxes, the number of Americans “not paying” drops to 15 percent, and these are concentrated among the poor.

Michelle Bachmann said other wildly inaccurate things about taxes during the same debate. For example, she claimed that the United States has an “effective” corporate tax rate of about 40 percent. She apparently was referring to the federal statutory corporate tax rate of 35 percent, which, combined with the average state statutory corporate tax rate would be around 40 percent. Of course, this is entirely different from the effective corporate tax rate, which is the percentage of profits that corporations actually pay in taxes after accounting for the wide range of tax breaks and loopholes.

The recent CTJ-ITEP report “Corporate Taxpayers & Tax Dodgers,” examines most of the Fortune 500 companies that were profitable over the last three years and finds that their effective corporate income tax rate was just 18.5 percent on average. Many major corporations like General Electric or Verizon paid nothing at all.

These corporate tax breaks and loopholes have spun so out of control in the US that despite having the second highest statutory corporate tax rate in the developed world, the US actually has the second lowest rate of corporate tax collected as a percentage of GDP.

Although Bachmann was especially brazen in the most recent debate, she has a history of outrageous tax policy statements. For example, she has advocated for the elimination of all taxes, rewritten fiscal history by claiming that the Bush tax cuts aren’t the main driver of the deficit, and promoted a job killing corporate tax amnesty program.

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CTJ Statement on Rick Perry's Tax Plan

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Like many other presidential candidates, Texas Governor Rick Perry proposes massive tax cuts for the richest Americans, but he proposes to do so in the most complicated way possible. His plan would have taxpayers calculate their taxes twice — once under the existing rules, and again under an optional 20 percent “flat tax,” to see which would be a better deal.

This would not make anyone’s life easier on tax day — except the wealthy Americans whose investment income would be exempt from taxes under Perry’s optional flat tax. These lucky taxpayers would quickly find that the optional “flat tax” actually has two tax rates: zero percent for the investment income that mostly goes to the rich and 20 percent for the types of income that most of us depend on.

It’s also clear that the individual tax under Perry’s plan would lose a huge amount of revenue compared to the existing personal income tax. How could it not? If taxpayers are offered an alternative way to file, we assume they will choose this alternative only if it lowers their tax bills. The result will be, inevitably, a loss of revenue. If taxpayers truly preferred a simple tax over a lower tax, they could choose simplification right now by giving up the various adjustments, deductions and credits that lower their tax bills but make filing more complicated. We doubt many choose this.

Most plans to exempt investment income from taxes and shift towards a consumption tax result in tax increases for the poor. (This would be the result of the “flat tax” proposed by Senator Arlen Specter for several years and the “9-9-9” plan proposed by Herman Cain.) However, in recent years, Presidential candidate John McCain, House Budget Chairman Paul Ryan and other GOP leaders have tried to limit the terrible optics involved in raising taxes on the poor by making their regressive tax plans “optional.” This means that wealthy taxpayers with investment income would usually choose the alternative tax that exempts this income, while most ordinary people earning wages would end up sticking with the current rules.

What would stop taxpayers from simply switching back and forth each year, depending on which set of rules results in lower taxes? It’s unclear how Perry’s plan would address this, but some previous versions of this proposal claimed to address this by forcing taxpayers to choose which system to file under and then locking them into that choice for years to come. They would be allowed to change their minds one time during their lives and could also change whenever their filing status changes because they become married or divorced. For this reason, we have long thought of these proposals as a Divorce Lawyers Jobs Creation Act.

As more details of the plan become available, Citizens for Tax Justice will estimate its impacts on taxpayers at different income levels and its impact on revenue. But even the limited details available now make clear that this plan is not designed to help the working class.

Photos via Gage Skidmore Creative Commons Attribution License 2.0

Pizza Deal from Hell? Cain Struggles to Defend 9-9-9 Plan from Fellow Republican Candidates, CTJ and Others

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With his recent dramatic rise to second place in the polls, Former CEO of Godfather’s Pizza Herman Cain and his infamous 9-9-9 plan were the belles of the ball at the last two Republican debates.

According to a full analysis by Citizens for Tax Justice, if Cain’s 9-9-9 plan was in effect in 2011 the poorest 60 percent of taxpayers would pay an average of $2,000 more in taxes, while the richest 1 percent of taxpayers would each pay an average of $210,000 less in annual taxes. Making matters worse, the plan would have actually raised $340 billion less in revenue in 2011, meaning that it would make our deficit much worse rather than better.

Since the CTJ analysis was released, the Cain campaign has been dribbling out additional details that change the plan in an ad-hoc fashion as he struggles to defend his tax proposals.

The Washington Post and Bloomberg economic debate on October 11 broke the record for most colorful tax policy jabs, as Former Utah Governor Jon Huntsman said he confused the 9-9-9 plan with “the price of a pizza”, while Minnesota Representative Michele Bachmann observed that “when you take the 999 plan and you turn it upside down, I think the devil is in the details.”

During the CNN Western debate on October 18, the candidates piled on the 9-9-9 plan, arguing that the imposition of a 9 percent new sales tax would ultimately lead to higher taxes because it would give the federal government another revenue stream and could be raised in the future. Interestingly, this particular charge is not borne out by the evidence from a plethora of countries that have imposed consumption taxes, including in Canada where total revenue collected actually went down after the imposition of its value-added tax.

As we have noted a few times, however, the regressiveness of the 9-9-9 plan is no joke. The plan would replace the entire federal tax code with a nine percent national sales tax, nine percent flat income tax, and a nine percent business flat tax. It’s important to note that although the last component is called a ‘business flat tax’, it’s essentially a payroll tax rather than a flat corporate income tax as the name would imply.

For his part, Cain defended the plan saying that reading his campaign’s full analysis of the 9-9-9 plan (which was only made available publically halfway through the CNN debate) would address the “knee-jerk” reactions to his plan.

His team’s own analysis directly contradicted Cain’s point during the debate that his plan does not contain a “value-added tax.” In reality, the report refers to the business flat tax as a “subtraction method value-added tax.”

Another problem for Cain is that his campaign’s own analysis provides no evidence that the 9-9-9 plan would not be extremely regressive, though it does include a previously unmentioned “poverty grant.”

Apparently, Cain himself knows that this “poverty grant” does not allay the concerns about the plan’s regressive impact, because Cain said the next day that he’s “not going to throw the people at the poverty level under the bus” and that he has “already made provisions for that,” but hasn’t “told the public and my opponents” about what those provisions are yet.

And just today Cain announced even more significant changes to his plan. His tax plan has always included “empowerment zones” that were not defined. The Cain campaign now calls these “opportunity zones” because the word “empowerment” sounded too liberal. It’s still unclear how living in or working in an “opportunity zone” would change one’s tax bill under Cain’s plan, but he announced today that these designated areas could be free of building codes and minimum wage laws.

The Washington Post reports that he will also change his individual tax from a single-rate tax to one with several brackets. If true, this means that Cain’s plan no longer consists of three flat 9 percent taxes… which means he has given up the “9-9-9” plan.

Republican Candidates Test Outer Limits of Their Own Anti-Tax Ideology

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The question from a Tea Party voter was this: “Out of every dollar I earn, how much do you think that I deserve to keep?”

It came during the Fox News and Google Republican presidential candidates debate last Thursday, and was directed at Minnesota Rep. Michele Bachmann.  It was her second crack at the question, so she’d had plenty of time to think it through. And her reply was this: “I think you earned every dollar. You should get to keep every dollar you earn.”

A few sentences later, however, the Congresswoman added, “Obviously, we have to give money back to the government so that we can run the government….”

The anti-tax orthodoxy has become so rigid that candidates like Bachmann, who also chairs the House Tea Party Caucus, must try to reconcile the position that no American should have to pay taxes even when they work for the government who collects those taxes and know perfectly that taxes are required to “run the government.”

Bachmann may have had the most telling (and head-exploding) tax policy moment during the last weekend’s three day series of major Republican presidential candidate events, but she was not alone among the candidates in stumbling over tax issues.

Former Utah Governor Jon Huntsman faced a tough question from the debate moderator Megyn Kelly who asked, “Is there any scenario under which you could side with the 66 percent of people who believe that it is a good idea to raise taxes on millionaires?” Despite his status as most moderate Republican candidate this season, Huntsman delivered the prefabricated anti-tax response: “This is the worst time to be raising taxes, and everybody knows that.”

Clearly, not “everybody” knows that. As Kelly’s question suggested, 66% of American’s support increasing taxes on the wealthy. Hewing to their anti-tax orthodoxy, Huntsman and the rest of the GOP field find themselves at odds with two thirds of the American public.

Former New Mexico Gov. Gary Johnson made his first major GOP debate appearance memorable by using his limited speaking time to call twice for replacing our current income tax system with the, so-called, Fair Tax, which is essentially a 30% national sales tax. As the Institute on Taxation and Economic Policy showed in its report on the Fair Tax, the plan is both unworkable and extremely regressive.

Although Gary Johnson is probably the most forthright in his support of the Fair Tax, at least half of the Republican field (and most notably current front-runner Texas Governor Rick Perry) have come out in favor of it. The one exception is former Massachusetts Governor Mitt Romney, who came out against the Fair Tax in the last debate, noting, quite sensibly and correctly, that it would cut taxes for the rich while increasing them on middle income families.

Former CEO of Godfather’s Pizza Herman Cain had a strong weekend, winning the Florida Straw poll with a surprising 37 percent of the vote. ABC News notes that his success was partially due to his ability to ‘strike a chord’ with his “9-9-9” tax plan, which he also touted proudly during the debate. His plan would replace the entire federal tax system with a 9 percent national sales tax, 9 percent income tax, and 9 percent business flax tax. As we’ve pointed out before, every aspect of this gimmicky and regressive plan would mean higher taxes on lower and middle income families and much lower taxes on the wealthy.

Former House Speaker Newt Gingrich took the debate as an opportunity to – and not for the first time – rewrite fiscal history by claiming that his ‘leadership’ led to four consecutive years of balanced budgets. We’ve said it once, we’ve said it twice, and we’ll say it again: sorry Newt, you never balanced the budget.

Watch this space for reviews of all things tax as the political campaign season kicks into high gear.

Fact Checking the Tea Party Debate: Republican Candidates Stumble on Tax Issues

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As soon as you thought you’d finally had a chance to catch your breath from last week’s Republican debate, the candidates were at it again Monday at CNN’s Tea Party Debate. As you may have to come to expect from anything associated with the Tea Party, the debate was heavy on misinformation about tax policy.
Here are some of the tax-related highlights and missteps:

Former Massachusetts Governor Mitt Romney made misleading statements about President Barack Obama’s tax record, claiming that Obama “had raised taxes $500 billion.” What’s deceptive about this is that while Obama raised taxes by $500 billion dollars (mostly through the progressive tax included in the healthcare reform bill), he has simultaneously cut taxes overall by more than double that. Specifically, Obama cut taxes by $243 billion as part of the economic recovery act in 2009, $654 billion as part of the tax compromise he signed at the end of 2010, and is now proposing $240 billion in additional payroll tax cuts, to say nothing of his proposal to continue 81 percent  of the Bush tax cuts and other smaller tax cuts at a cost of an additional $3.5 trillion.

Later in the debate however Romney got it right when asked by a member of the audience if he supported the so-called Fair Tax (a proposed national sales tax). Romney expressed skepticism toward the proposal saying that it would decrease taxes for the “very highest income folks” while increasing taxes for “middle income people.” An analysis by the Institute on Taxation and Economic Policy confirms this point showing that a Fair Tax would primarily benefit the super-wealthy, while increasing the taxes paid by the bottom 80 percent by more than half.

While rejecting the radically regressive Fair Tax may seem like a logical move for any presidential candidate who wants to be taken seriously, Romney is actually bucking at least half of the Republican field (and most notably current front-runner Texas Governor Rick Perry) who have come out in favor of it. 

Minnesota Rep. Michele Bachmann attempted to rewrite fiscal history by claiming that the reason the deficit went “up and up and up” during the past decade was not due to the Bush tax cuts, but rather trillions in increased spending. In reality however, the Bush tax cuts were the primary driver of the deficit during the Bush years, adding some $2.5 trillion to the deficit from 2001-2010.

Bachmann went on to call for a tax repatriation amnesty, making herself the latest of the GOP presidential candidates (joining with Herman Cain and Rick Santorum) to explicitly call for a tax amnesty during the debates. Bachmann and the other candidates all claim the amnesty will create jobs, though in reality it will actually encourage companies to move more jobs and profits offshore.

Former House Speaker Next Gingrich
brought up the topic of General Electric’s negative corporate tax rate in attempt to bash Obama’s choice of GE’s CEO Jeffrey Immelt as an adviser. Gingrich’s goal was to score points by arguing Obama’s choice of Immelt contradicts his own call to close tax loopholes.

Gingrich proceeded to contradict his own argument by saying that he is “cheerfully opposed” to raising taxes by closing the sorts of corporate loopholes that benefit GE and other corporations, while also conveniently leaving out that he actually works as an advisor to GE.


Just the (Tax) Facts: GOP Candidates Parade Terrible Tax Ideas, Huntsman Bucks Grover Norquist

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On Wednesday night, the GOP presidential candidates gathered at the Reagan Library for a particularly spirited debate in which candidates repeatedly turned back to tax policy. As with past debates, the GOP candidates attempted to rewrite tax history and reinforce their complete intransience on raising revenue, though there were a few glimmers of moderation.

Here are the highlights:

Former Utah Governor Jon Huntsman, in the most striking moment of the debate, called out the other candidates for signing Grover Norquist’s No-Tax Pledge, saying that he would “love to get everybody to sign a pledge to take no pledges,” noting that taking such pledges “jeopardizes your ability to lead.”

Unfortunately, he followed up this statement by pointing to his record of tax cuts in Utah, which Citizens for Tax Justice (CTJ) has called this a case study in bad tax policy. Adding to this, Huntsman’s recently released tax plan is regressive and is best characterized as tax loophole consolidation for the rich. He starts with a simplified tax system recommended by the Bowles Simpson commission, then adds huge loopholes for the rich by eliminating taxes on capital gains and stock dividends.

Texas Governor Rick Perry sought to make a name for himself at his first debate appearance by supporting the radical balanced budget amendment (BBA) promoted by Congressional Republicans, calling it a way to “start getting the snake’s head cut off.” Rather than killing some metaphoric government snake however, it is much more likely that a BBA would tie the hands of lawmakers to react to changing economic conditions and force immediate catastrophic cuts to critical government programs like Social Security, food inspection, and housing. Although Perry is one of the BBA’s most outspoken advocates, all of the GOP presidential candidates have voiced their support for it in principle.

Minnesota Rep. Michele Bachmann rewrote the legacy of Ronald Reagan in claiming that, like the entirely of the Republican field, Reagan would not embrace a deal involving $10 in spending cuts for every $1 increase in tax revenues. Her reasoning is that Reagan’s own 1982 3-to-1 deficit reduction deal failed because the spending cuts did not fully materialize (which is disputed). Bachmann’s logic break downs, however, when you consider that Reagan did not support increasing taxes just this one time, but actually increased taxes 10 more times after the 1982 deal. If anything, the lesson is that Reagan was more willing to compromise, as shown by his willingness to embrace much less lopsided deals than the candidates today reject outright.

Former Massachusetts Governor Mitt Romney did reject the claim that 47% of Americans pay no federal income taxes (a popular conservative talking point) when prompted by the moderator. Instead, Romney rightfully noted that every American feels that they are contributing “through the income tax or through other tax vehicles” and that he does not want “to raise taxes on the American people,” presumably even on those on low end who pay very little. 

Americans are, in fact, justified in feeling they contribute to government, and CTJ has provided estimates showing that all Americans pay taxes. Although Romney signaled his intention to not raise taxes on the poor, his recently released economic plan provides insignificant token relief for lower income Americans and heavily favors tax breaks for the wealthy and corporations.

Former CEO of Godfather’s Pizza Herman Cain was asked a fantastic question by the moderator on whether General Electric’s infamously low tax bill is fair. He answered that “the government needs to get out of the business of trying to figure out who gets a tax break here, who get’s a tax break there.” Though he started off well, Cain then pivoted into promoting his rather ridiculous “9-9-9” plan to replace the entire federal tax system with a 9% national sales tax, 9% income tax, and 9% corporate income tax rate. Needless to say, any plan advocating a national sales tax, a flat tax, and a 75% cut in the corporate income rate would be extremely regressive and almost certainly not raise enough revenue to fund basic government functions.

Former Georgia Rep. Newt Gingrich must not have read Bob McIntyre’s piece debunking the former House Speaker’s claims that he balanced the federal budget. Gingrich claimed during the debate that, as Speaker of the House, he “balanced the budget four straight years.” The problem, of course, is that economic growth and the 1993 repeal of the Reagan tax cuts (which every Republican including Gingrich opposed at the time) were what really led to the balanced budgets.

Former Pennsylvania Sen. Rick Santorum added his name to the long list of supporters of a repatriation amnesty, noting that such a provision is included in his plan to create jobs. In advocating for a repatriation amnesty, Santorum is following the leadership of the Republican Party and Cain, who has been the proposal’s most vocal proponent during the GOP debates.

Texas Rep. Ron Paul took his anti-government and anti-tax beliefs to their logical extreme in defending a letter he wrote during the Reagan administration informing the President that he was leaving the Republican Party. Whereas the rest of the Republican field admires Reagan without reservation, Paul called Reagan’s fiscal record during the 1980’s “a bad scene,” explaining that Reagan taxed and spent too much, leading to massive deficits. Though it’s absurd to claim Reagan taxed too much, Paul is right to point out that Reagan presided over such massive deficits that by the end of his tenure the national debt had tripled.

Corporations Are People... Who Should Pay More Taxes

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By now everyone has heard about presidential candidate Mitt Romney’s statement that “corporations are people.” “Everything corporations earn ultimately goes to people,” Romney explained to hecklers in Iowa.

Of course, it’s true that corporate earnings eventually go to people and that taxes on corporate earnings are borne by people. Those people are primarily the shareholders, who receive smaller stock dividends and or capital gains because companies pay corporate income taxes. Corporate executive pay is also affected by corporate taxes because so much of it is in the form of stock options and similar vehicles.

The serious problem is that the shareholders who own these corporations are not paying enough, thanks to the loopholes that allow corporations like GE, Boeing, Verizon and others to avoid taxation entirely.

However, some corporate lobbyists and economists who sympathize with them now argue that the people who ultimately pay corporate income taxes are actually the workers. Up to 80 percent of corporate income taxes, they claim, actually fall on labor, rather than the owners of capital. This happens, they argue, because corporations will respond to U.S. taxes by lowering wages or moving operations and jobs to countries with lower taxes, which will also hurt American workers.

They’re wrong. As we have advocated reforms to raise revenue by closing corporate tax loopholes, some have cited these misguided economic models and asked us whether or not higher corporate taxes would ultimately harm the working people we want to help. The answer is absolutely not. 

Tax expert Lee Sheppard makes the obvious point that we’ve often made (subscription required): “if labor bore 80 percent of the burden of the corporate income tax, corporations wouldn't care about it at all. They don't fight high value added taxes in Europe, because the burden is clearly borne by consumers.”

Indeed, corporations lobby Congress furiously for reduced corporate income taxes, and they would not bother if they did not believe their shareholders were the ones affected by them.

Higher Taxes Won’t Drive U.S. Corporations Offshore

American corporations certainly have been moving operations and jobs overseas in the past decades. But low labor costs in many foreign countries appears to the main force driving this trend, not lower foreign income taxes.

A recent article explains that GE has shifted operations offshore, but it actually pays higher taxes in those foreign countries than it does in the U.S. (Of course, one feature of our tax system, “deferral,” probably does encourage companies to move jobs offshore and we have urged Congress to repeal it.)

The Debate among Economists

ITEP and other organizations that provide distributional analyses of tax policies, including the non-partisan Congressional Budget Office, assume that corporate income taxes are ultimately borne by the owners of capital (corporate shareholders and owners of other businesses indirectly affected).  Since capital is disproportionately owned by the wealthy, corporate income taxes are therefore very progressive taxes.

But in recent years some economists have claimed that corporate taxes simply push investment out of the country, meaning workers in the U.S. lose their jobs or settle for lower-paying jobs (meaning labor ultimately bears the burden of the tax). 

But other economists and analysts disagree. For example, a working paper from the Congressional Budget Office suggests that investment cannot move across international borders with perfect ease and that goods produced in one country are not always perfectly substitutable for those produced in another country.

The working paper further suggests a model that takes into account the corporate taxes of other countries, meaning corporations cannot escape taxation so easily because most places where they could reasonably operate will have some level of corporate taxation.

When the economic models take all this into account, they lead to the conclusion that most of the corporate income tax is borne by capital.

The People Who Own Corporations Are Not Paying Enough in Taxes

Once we establish that the owners of capital are ultimately paying the corporate income tax, the next question is whether or not they should be paying more than they do now. Mitt Romney seems to believe they pay more than enough already.

As middle-class Americans are told they must sacrifice some of their public services in order to help balance the federal budget, the obvious question is whether or not the owners of capital, who ultimately pay corporate income taxes, can afford to sacrifice as well. The answer is: absolutely.

Many corporations use loopholes to avoid paying the corporate income tax, as our recent report on 12 corporate tax dodgers demonstrates.

Corporate profits can accumulate tax-free before they are paid out as dividends, and two-thirds of those dividends will go to tax-exempt entities like pension funds or university endowments where they can continue to accumulate tax-free before they reach any individuals. The one-third of corporate stock dividends that do go directly to individuals are currently taxed at a low, top rate of 15 percent. (We have explained before that these are reasons why corporate profits are not double-taxed, as some believe they are.)

So the short answer to Mitt Romney is, yes, corporate taxes are ultimately paid by people, the shareholders, and Congress needs to close the loopholes that currently allow them to avoid these taxes.

Photos via Gage Skidmore and IMF Creative Commons Attribution License 2.0

Texas Governor and presidential candidate Rick Perry has endorsed both the concept of a flat income tax and the so-called “Fair Tax,” which is a national sales tax. A three-page report from CTJ explains that both of these proposals would result in substantial tax increases for the poor and middle-class and significant tax cuts for the rich.

Read the report.

Photos via Gage Skidmore Creative Commons Attribution License 2.0

Texas Governor and presidential candidate Rick Perry said that he is “dismayed at the injustice that nearly half of all Americans don’t even pay any income tax.”

He should know that Americans pay other types of federal taxes besides just federal income taxes, and that they also pay state and local taxes. A two-page statement from CTJ explains that this is particularly true in Texas, which, despite its reputation, is actually a high-tax state for the poor.

The statement cites a recent ITEP finding that Texas imposes higher taxes on its poorest 20 percent of non-elderly residents than 45 other states. In other words, Texas has the fifth highest taxes for low-income families.  Texas also has the 17th highest taxes on the next 20 percent of non-elderly residents. These are the same families that Governor Perry believes should contribute more in taxes.

Photos via Gage Skidmore Creative Commons Attribution License 2.0

Grover Norquist Real Winner of Republican Debate

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Republican Candidates Completely Walk Away from Balanced Approach

“Just making sure everyone at home and everyone here knows that they all raised their hands. They’re all saying that they feel so strongly about not raising taxes that a 10 [spending cuts] to one [tax revenues] deal, they would walk away from,” Fox News host Bret Baier confirmed for the audience at the first Iowa Republican Primary debate.

With a simple raising of hands, the debate revealed that the entire Republican field would reject any sort of compromise measure that included revenue increases, even if such a compromise heavily favored spending cuts. Even a deal raising just one dollar in revenue for ten dollars in spending cuts is now off the table for the Republican candidates.

This no-compromise approach on taxes demonstrates that ultimately the winner of Thursday night’s Republican debate is Grover Norquist, whose no-tax pledge has become an absolute requirement which every Republican presidential candidate must religiously abide.

Republican Candidates Run Away from Previous Compromises

Not only did the candidates promise to not increase any taxes in the future, many of them ran away from their own record of raising taxes in the past.

During the debate, the Washington Examiner’s Byron York asked former Governors Tim Pawlenty, Mitt Romney, and Representative Michele Bachmann in turn about specific times that they had voted for or signed some form of a (gasp!) tax increase.

Each in turn, attempted to explain away their former support for the tax increases. Bachmann blamed Pawlenty for forcing her into a box, saying that she had to vote for the tax increase in order to support abortion restrictions. Pawlenty emphasized his high ratings from the CATO Institute and said that he regretted the cigarette fee he had agreed to in order to end a government shutdown. Romney did not dispute the specific incident brought up from his record, but he emphasized that he decreased taxes overall and that he had managed to get Massachusetts’s credit rating to be increased.

None of the candidates were willing to stand up and defend the core truth at issue: responsible lawmakers are sometimes required to make compromises based on the realities they face.

Each of these Republican candidates was forced at some point to make the responsible decision to vote for tax increases and defy Norquist’s absolutist pledge.

What makes these attempts to run away from their tax record particularly ironic is that both Romney and Pawlenty have long catered to anti-tax forces by advocating fiscally irresponsible policies.

Jon Huntsman Wrong on Flat Tax, Herman Cain Still Wrong on Repatriation

Although touting one’s opposition to any tax increase was the theme of the night, a couple candidates advocated their own problematic approaches to tax reform.

Former Utah Governor Jon Huntsman lauded his creation of a flat tax in Utah, saying that such an approach is “exactly what needs to happen in this country.” As Citizens for Tax Justice has noted before however, Huntsman’s flat tax made the state’s tax system even more regressive and lost an unexpectedly large amount of revenue, making it a case study of bad tax policy.

For his part, former CEO of Godfather’s Pizza Herman Cain had a moment of surprising candor when discussing the proposed repatriation holiday. When pressed on the failure of the 2004 repatriation holiday to create jobs, Cain admitted that he was “not concerned” with what actually happens to offshore corporate profits repatriated under the holiday, so long as the are back in the US. In other words, he does not care whether corporate tax breaks lead to job creation.

As we noted during the last debate, what Cain fails to realize is that a permanent or even temporary tax holiday on repatriated profits would ultimately incentivize companies to move more of their investment and jobs offshore.

Check out a complete transcript of the debate here

Getting Taxes Wrong: Fact-Checking the Republican Primary Debate

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With the Iowa Caucuses almost 8 months away, the Republican primary was in full swing on Monday night as 7 of the Republican contenders battled it out during a debate on CNN. Tax policy took center stage as every single one of the Republican contenders promoted lower taxes as central to their economic platform.

Predictably however, the candidates stayed relatively vague about their specific tax plans.

Former Minnesota governor Tim Pawlenty is the only candidate so far to release an official tax plan, which, among other things, proposes to eliminate the capital gains tax, create only two income tax brackets, and reduce the corporate income tax rate from 35 to 15%. Citizens for Tax Justice estimates that the plan would result in a 73% income tax cut for the Top 400 Taxpayers and cut taxes 41% for millionaires generally.

Even without getting into too many specific plans, the Republican contenders made a few curious claims about tax policy that are in dire need of fact checking:

Representative Michele Bachmann, Minnesota: “What we need to do is today the United States has the second highest corporate tax rate in the world…We've got to bring that tax rate down substantially so that we're among the lowest in the industrialized world.”

While Bachmann would be correct in claiming the United States' statutory tax rate of 39% (the federal income tax rate is 35 percent and the average state corporate income tax rate is about 4 percent) is on paper the second highest in the industrialized world, she fails to take into account the effect of special tax breaks and loopholes which make the effective rate paid by companies relatively low. According to a 2007 study by the Bush Treasury Department, between 2000-2005 US corporations paid only 13.4% of their profits in corporate income taxes, well below the Organization of Economic Cooperation and Development (OECD) average of 16.1%. The OECD is what Bachmann means by "industrialized world."

Demonstrating how big the difference between statutory and effective rates can be, a recent CTJ study showed that 12 US corporations together paid an effective corporate income tax rate of (negative) -1.5%, while earning $171 billion in profits over 3 years.

Former House Speaker Newt Gingrich: “The Reagan recovery, which I participated in passing…raised federal revenue by $800 billion a year in terms of the current economy, and clearly it worked. It's a historic fact.”

Rather than telling a ‘historic fact’, Gingrich is weaving a complete fiction. In claiming that Reagan’s tax cut efforts raised federal revenue $800 billion, Gingrich is assuming that all economic growth was due to Reagan’s efforts, while simultaneously ignoring the effect of inflation and population growth.

Citizens for Tax Justice’s internal estimates put the real cost of lost revenue due to the Reagan tax cuts at 3.97% of GDP or the equivalent of $581.2 billion today. Even former Reagan White House Senior Policy Analyst Bruce Bartlett admits that the Reagan tax cuts DECREASED revenue, adjusting for inflation, by $473.7 billion. In addition, it’s odd that Gingrich would point to the Reagan era to establish his fiscal credentials considering that the national debt tripled during Reagan’s two terms.

This is not Gingrich’s first foray into rewriting historic fiscal realities and it probably will not be his last.

Herman Cain, Godfather Pizza CEO: “We need an engine called the private sector. That means lower taxes…suspend taxes on repatriated profits, then make them permanent.”

Herman Cain’s call for an end to taxing repatriated profits puts him in good company with Republican establishment figures like Republican Speaker of the House John Boehner, who believe that moving the United States toward a territorial system of taxation would stimulate the economy by bringing home offshore capital.

In reality however, such a move would be disastrous for the US economy. Rather than encouraging investment in the United States, US corporations would have a much greater incentive to shift actual operations and jobs offshore because they would not have to pay US taxes on these profits. A better approach would be to end deferral, which would stop these current tax incentives pushing jobs offshore while also encouraging companies to bring more than a trillion dollars in offshore capital back to the US.

New from CTJ: Pawlenty Plan Would Cut Income Taxes for Richest 400 Americans by 73 Percent

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Plan Would Cut Personal Income Taxes by at Least 41 Percent for Millionaires Generally

Former Minnesota governor and presidential candidate Tim Pawlenty has released his proposed tax plan, including very specific rate cuts and exemptions for investment income, and vague promises to eliminate tax loopholes. Even if he eliminates all itemized deductions and credits, millionaires would still receive an enormous income tax break under the plan.

Read the report.

Results of Tax-Related Ballot Initiatives

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Earlier this week, voters in states across the nation voted overwhelmingly against implementing major changes to their states’ tax codes. Voters in Massachusetts defeated an effort to slash the state’s sales tax, preserving much-needed revenue to fund education, public safety and other vital services. In Colorado, three anti-tax measures that would have wreaked havoc on the state’s budget were also soundly defeated. Washington State voters rejected a plan that would have created an income tax while rolling back other taxes.

In other states, big business successfully used its money to influence the outcomes of ballot measures on tax issues. Voters in Missouri and Montana passed initiatives designed to ensure that neither state could implement a tax on the transfer of real estate. Neither state currently has a real estate transfer tax, yet the real estate lobby spent millions trying to pass the initiatives. In Washington and Massachusetts, the beverage and alcohol industries poured millions of dollars into campaigns to see that sales taxes levied on their products were rolled back.

And in California, corporations spent millions to defeat a ballot measure that would have repealed several poorly-thought out corporate tax breaks. As the New York Times noted earlier this week, Fox News aired a critical piece on the ballot measure as part of their "War on Business" series, as parent company News Corporation gave $1.3 million to defeat the measure. Fox executives said they "didn't know" the parent company had made these contributions.

Unfortunately, voters in a number of states also ratified measures that will make it harder to raise revenues going forward. California and Washington each face tighter supermajority constraints on revenue-raising, Indiana voters enshrined property tax caps in their constitution, and voters in Massachusetts and Washington retroactively rejected small tax increases enacted by state legislatures in the past year.

Here are the results of initiatives we’ve been following.

Personal Income Tax

Washington: Initiative 1098 - FAILED
Initiative 1098 would have introduced a limited personal income tax applicable only to the richest Washingtonians, reduced the state property tax and eliminated the Business and Occupation tax for many businesses.

Colorado: Proposition 101 - FAILED
Proposition 101 would have reduced Colorado’s income tax rate and eliminated various fees resulting in an estimated loss of $2.9 billion in state and local revenue once fully implemented.

Business Tax Breaks

California: Proposition 24 - FAILED
Proposition 24 would have eliminated several business tax breaks enacted in 2008 and 2009 and would have increased state revenues by more than $1.3 billion.

Super Majority Voting Requirements

California: Proposition 25 - PASSED
California: Proposition 26 - PASSED

The passage of California’s Proposition 25 removes the current two thirds super majority requirement needed to pass the state budget (replacing it with a simple majority vote). However, Proposition 26 institutes a new super majority requirement for raising certain fees (classifying them as taxes, which still require a two thirds vote).

Washington: Initiative 1053 - PASSED
Initiative 1053 will ensure that all tax increases (no matter their size) be approved either by a two thirds majority in the legislature or a public vote of the people.

Earnings Tax

Missouri: Proposition A - PASSED
Proposition A requires voters to decide whether two local earnings taxes levied in St. Louis and Kansas City should exist and also prohibits other localities from levying a local income tax.

Sales Taxes

Massachusetts: Question 1PASSED
Massachusetts: Question 3 - FAILED

Question 3 would have cut the state’s sales tax rate from 6.25 to 3 percent, resulting in an annual revenue loss of $2.5 billion.  Question 1 removes the sales tax on alcohol, which was just added last year in order to raise $80 million for substance abuse programs.

Washington: Initiative 1107 - PASSED
Initiative 1107 repeals a recently enacted sales tax increase on a variety of goods including soda, bottled water, and candy.

Property Tax Exemptions

Missouri: Constitutional Amendment 2 - PASSED
This constitutional amendment fully exempts disabled prisoners of war (POWs) from paying property taxes.

Virginia: Question 2 - PASSED
Question 2 changes Virginia’s constitution to exempt disabled veterans and their surviving spouses from paying property taxes.

Property Tax Caps

Indiana: Public Question #1 - PASSED
The amendment to Indiana’s state constitution permanently limits property taxes to 1 percent of assessed value for owner occupied residences, 2 percent for rental and farm property and 3 percent for business property. These limits already existed in statute. This ballot measure simply makes them more difficult to repeal.

Colorado: Amendment 60FAILED
Amendment 60 would have taken away the ability of voters to opt out of Colorado’s TABOR limitations as they relate to property taxes and require school districts to cut property tax rates in half over the next ten years, replacing the lost revenue for K-12 schools with state funding.

Real Estate Transfer Fees

Montana: Constitutional Initiative 105 - PASSED
Initiative 105 prohibits the state from enacting any type of real estate transfer tax.  

Missouri: Constitutional Amendment 3 - PASSED
Amendment 3 prohibits the state from enacting any type of real estate transfer tax.

Government Borrowing

Colorado: Amendment 61FAILED
Amendment 61 would have prohibited or restricted all levels and divisions of government from financing public infrastructure projects (such as building or repairing roads and schools) through borrowing.

California: Proposition 22PASSED
Proposition 22 amends California’s Constitution to take away the state’s ability to borrow or shift revenues that fund transportation programs.

Voters Embrace Higher Taxes at the Local Level

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Last week, the Associated Press took a close look at how local-level tax increases have fared on the ballot leading up to this week’s election.  Out of the 39 states surveyed by the AP, 22 of them held local primary elections or special elections where tax measures were voted on in 2010, and a whopping 19 of those states saw their residents approve more than half of all proposed local tax increases.

Some of the more interesting results highlighted by the AP include the approval of 83% of local tax increases in Louisiana, 72% in Ohio, and 66% in ArizonaKansas, Nebraska, and Washington also approved particularly high percentages of local tax increases.

It’s important to note that the AP study was conducted before this week’s election, and therefore doesn’t tell us how local measures fared on November 2.  Moreover, as the AP points out in their review, there is no single source for information on the results of local ballot measures, and even most states fail to publicize local results in a centralized location. 

Unless and until a study of this week’s local measures is completed, we’ll be left to wonder whether trends from earlier this year have continued to hold.  If they have, there could very well be many more stories of local ballot successes like this one in Colorado.

Federal Tax Policy and Election 2010: CTJ's Federal Tax Resources

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Over the past several months, CTJ has produced several resources that will help you to be informed about the tax issues at stake in the upcoming election. The first question many people will ask themselves on election day is, "What have the two parties done so far about taxes?" The second question is, "What do the two parties promise to do about taxes going forward?"

Our resources will help you answer both of those questions.

What Have the President and Congress Done So Far about Taxes?

The recovery act, which President Obama signed into law after it passed Congress without a single Republican vote in the House and just a few Republican votes in the Senate, cut taxes for 98 percent of working Americans. See CTJ's report and fact sheets:

President Obama Cut Taxes for 98 Percent of Working Families in 2009

State-by-state fact sheets are included.

What Do President Obama and the Congressional Democrats and Republicans Promise to Do about Taxes Going Forward?

CTJ has produced a report and state-by-state fact sheets comparing the impact of President Obama's tax plan and Congressional Republicans' tax plan on taxpayers in different income groups:

Comparing President Obama's Tax Plan and Senate Republicans' Tax Plan

CTJ has also created an online tax calculator that allows you to see how a given taxpayer would be affected by the competing tax plans.

CTJ's Online Income Tax Calculator

State Tax Policy and Election 2010: CTJ's News about Races and Ballot Measures in Your State

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Click on your state below to see what CTJ has written over the past several months about state-level races and ballot measures that will affect you.

State Tax Issues on the Ballot on Election Day

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The stakes will be high for state tax policy on Election Day, with tax-related issues on the ballot in several states. With a couple of notable exceptions (a new income tax in Washington and rollback of corporate tax breaks in California), these ballot initiatives would make state taxes less fair or less adequate (or both).

Personal Income Tax

Colorado: Proposition 101 would reduce or eliminate various fees and immediately reduce the state’s income tax rate from 4.63 to 4.5 percent and eventually to 3.5 percent).  If passed, Proposition 101 will result in an estimated loss of $2.9 billion in state and local revenue once fully implemented.

Washington: Initiative 1098 would introduce a personal income tax, reduce the state property tax and eliminate the Business and Occupation tax for small businesses. If passed, this legislation would improve tax fairness in the state with the most regressive tax structure in the country.  For more read CTJ's Digest articles about this initiative.

Business Tax Breaks

California: Proposition 24 would eliminate several business tax breaks enacted in 2008 and 2009 and increase state revenues by more than $1.3 billion.  For more details on these tax breaks, read the California Budget Project's Budget Brief on the initiative.

Super-Majority Voting Requirements

California: Proposition 25 would remove the current two-thirds super-majority requirement needed to pass the state budget (replacing it with a simple majority vote), while Proposition 26 would institute a new super-majority requirement for raising certain fees (classifying them as taxes).  For more details on these initiatives, read the California Budget Project’s initiative summaries.

Washington: Initiative 1053 would, if approved, ensure that no tax increases (no matter their size) become law without either approval by a two-thirds majority in the legislature or a public vote of the people. The Washington Budget and Policy Center gives a helpful summary of the initiative and its potential impact.   

Earnings Taxes

Missouri: Proposition A, if approved, would require that voters be asked every five years to decide whether or not local earnings taxes levied in St. Louis and Kansas City should exist. (If voters then decide to not allow them, they will be phased out over a ten-year period). The Proposition would also exclude any other local government from levying its own earnings taxes. For more on Proposition A, read Missouri Budget Project’s fact sheet.

Sales Taxes

Massachusetts: Question 1 and Question 3
A diverse coalition of businesses, advocacy organizations, citizens groups and political leaders have joined together to defeat Question 3, an initiative that would cut the state’s sales tax rate from 6.25 to 3 percent, resulting in an annual revenue loss of $2.5 billion.  Question 1 would remove the sales tax on alcohol which was just added last year in order to raise $80 million for substance abuse programs.

Washington: Initiative 1107 would repeal the new sales taxes on a variety of goods including soda, bottled water, and candy. For more information, read CTJ's Digest article on the issue and the Washington Budget and Policy Center’s summary.

Despite the regressive nature of the sales tax, it's an important revenue source. Slashing it in either Washington or Massachusetts without replacing the lost revenue with another source would cripple the ability of those states to provide core services such as education and public safety to their residents.

Property Tax Exemptions

Missouri: Constitutional Amendment 2 would exempt fully disabled prisoners of war (POWs) from paying property taxes. Read Missourians for Tax Justice’s take on this issue.

Virginia: Question 2 would change Virginia’s constitution to exempt veterans and their surviving spouse from paying property taxes if the veteran is 100 percent disabled.

Property Tax Caps

Colorado: Amendment 60 would take away the ability of voters to opt out of Colorado’s TABOR limitations as they relate to property taxes.  Currently, voters can approve an increase in property tax rates above the constitutional limit which caps increases at the rate of inflation plus a small measure of local growth.  The amendment would also require school districts to cut property tax rates in half over the next ten years and replace the lost revenue for K-12 schools with state funding (an estimated $1.5 billion will be required from the state, meaning reductions will have to made to other services to support an increase in K-12 spending).

Indiana: Public Question #1 will ask Indianans to decide if their state's constitution should be permanently altered to limit property taxes to 1 percent of assessed value for owner occupied residences, 2 percent for rental and farm property and 3 percent for business property. Voters may find it helpful to read this brief from the Indiana Institute for Working Families.

Real Estate Transfer Fees

Missouri: Constitutional Amendment 3 would prohibit the state from enacting any type of real estate transfer tax. Missouri currently doesn’t levy any such tax.  Placing the question before voters is seen as a preemptive move by the Missouri Association of Realtors to ensure that the state can’t create a transfer tax.

Montana: Constitutional Initiative 105 would, if approved, prohibit the state from enacting any type of real estate transfer tax.  The state currently doesn’t levy such a tax. The Billings Gazette has weighed in on this Initiative.

Government Borrowing

California: Proposition 22 would amend California’s Constitution to take away the state’s ability to borrow or shift revenues that fund transportation programs.  For more information, read the California Budget Project’s brief on the initiative.

Colorado: Amendment 61 would prohibit or restrict all levels and divisions of government from financing public infrastructure projects (such as building or repairing roads and schools) through borrowing.

Arlen Specter, Proponent of Regressive "Flat Tax," Loses Primary Battle

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Arlen Specter, a long-time U.S. Senator for Pennsylvania who recently switched from the Republican party to the Democratic party, lost his primary battle on Tuesday against Representative Joe Sestak.

Since 1995, Senator Specter introduced legislation to create a federal “flat tax” in every session of Congress, including this session.  This single-rate tax would replace the existing progressive personal income tax, as well as the corporate income tax and estate tax.

A recent report from Citizens for Tax Justice found that Specter's proposal would cut taxes for the richest five percent of taxpayers and raise taxes for everyone else.

The Specter plan was based on the “Flat Tax,” first proposed in a 1983 book by Robert Hall and Alvin Rabushka. The Flat-Tax authors wrote that it “will be a tremendous boon to the economic elite” and also admitted that “it is an obvious mathematical law that lower taxes on the successful will have to be made up by higher taxes on average people.”

Sestak will go on to face Republican Pat Toomey, a former Representative and a former president of the right-wing Club for Growth.


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Charges that Progressive Taxes Are "Socialism" Fail to Rally Support for Candidate McCain

Senator Barack Obama, who ran for president partly on a platform of ending George W. Bush's policies of cutting taxes for the wealthiest Americans, will be our new president starting January 20, 2009. He will have the support of a House of Representatives and Senate led by opponents of the Bush tax cuts.

His opponent, Senator John McCain, tried several times to frame the tax debate in a way that would lead average Americans to support tax cuts for the very wealthiest taxpayers. None of these attempts succeeded. At one point, the McCain campaign tried to get the public to pay more attention to Obama's vote for a non-binding budget resolution than Obama's actual tax plan. Later, a McCain surrogate argued that allowing the expiration of tax cuts for the richest 1.4 million taxpayers would be a tax increase on 23 million business owners. Near the end, McCain made an argument implying that the EITC, and really any progressive income tax, was socialism. Americans were not impressed with these arguments.

The 2008 election has important lessons for lawmakers regarding taxes. Arguments that taxes must be lowered for even the richest Americans simply do not work. Americans don't buy it. Nor do Americans buy it when proponents of tax cuts attempt to blur the details about who would benefit the most. There has always been polling that shows Americans do not support any and all tax cuts, but it took an election to make this real for many lawmakers.

The Path Ahead

Some people may speculate about whether the new President will muster the support needed to enact the proposals dear to them. We also feel this uncertainty, but it is mitigated by the crucial fact that the Bush tax cuts expire at the end of 2010. To put it a different way, if Congress simply does nothing, we will return to the tax policies in effect during the Clinton years, when the economy performed better than it does now, and when Americans were generally more positive about the direction of the country. That would be fine with us.

We know that Congress is not likely to do nothing. Congress, with President Obama's leadership, may enact tax cuts, including extending the Bush tax cuts for those who are not rich. (Since such a gigantic share of the Bush tax cuts currently goes to the rich, Obama's proposal will lose much less revenue than would candidate McCain's proposal to extend them for even the richest families.) And Congress is likely to act on at least some of President Obama's proposals to enact brand new tax cuts for low- and middle-income Americans.

But those lawmakers who insist on extending the Bush tax cuts for the even the richest Americans have no cards left to play. Their cherished handouts for the rich expire in a couple years and the new president is not likely to sign any bill that extends this party for the most privileged.

Of course, a great many details must be worked out. Obama wants to repeal the Bush tax cuts before they expire for the very richest families, and some lawmakers will dig in their heels to oppose this. Another question is the extent to which new tax cuts will be paid for. While most analysts agree that balancing the budget is not a priority during a severe economic downturn, we certainly hope that Congress will not enact huge, permanent tax cuts without replacing most of the revenue -- revenue needed to fund health care initiatives and other investments that have been short-changed during the Bush administration. There are ways that Congress can raise revenue that go beyond what is included in Obama's tax plan, and we will be making these suggestions to the new administration. And of course there are some tax cuts that Obama supports that would benefit the wealthy -- like a partial extension of the Bush tax cuts for dividends and estates -- and we're going to have an interesting conversation about that.

But the most salient fact is that the surreal era of leaders telling us that taxes must be cut most dramatically for the wealthy is over. This is a sea change. We may have trouble explaining to future generations how such a bizarre ideology ever took hold. But we will have no trouble explaining that on Tuesday Americans looked at the long list of problems facing this country and decided that cutting taxes for the rich should not be considered a priority.

For eight years we have had a White House fixated on tax cuts for the rich, at the expense of all other priorities. Now, the millions of Americans who lack health insurance or who are underinsured, the newly unemployed, the families losing their homes, and Americans serving their nation in the armed forces all know that their struggles are finally back at the top of the agenda in Washington.

The Effects of the Candidates' Tax Plans on Households at Different Income Levels: Examples

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New Report from Citizens for Tax Justice

A new report from Citizens for Tax Justice examines hypothetical households that are representative of different income groups to determine how they would fare under the tax plans proposed by the presidential candidates The report calculates the income tax liability of each hypothetical household under the tax plans and explains how and why the plans would affect them differently.

We find that our hypothetical households in the low- and middle-income groups would receive a larger tax cut under Obama's plan than under McCain's plan. Our hypothetical households in the top one percent would have a tax increase that would be fairly small (as a percentage of their income) under Obama's tax plan, but they would receive breathtaking tax cuts exceeding $270,000 under McCain's plan.

While presidential candidate John McCain has promised to make permanent the Bush income tax cuts for all Americans, his opponent, Barack Obama, promises to make them permanent for almost all Americans. A new analysis from Citizens for Tax Justice shows that only a small percentage of the taxpayers in each state would lose a portion of the Bush income tax cuts if Obama's plan is enacted. For these very rich taxpayers, Obama would repeal most of the Bush income tax cuts before their expiration date at the end of 2010. For everyone else -- for 97.5 percent of taxpayers nationally -- all of these tax cuts would be made permanent.

Obama proposes to make all of the Bush income tax cuts permanent for married couples with adjusted gross income (AGI) below $250,000 and unmarried taxpayers with AGI below $200,000.

Nationally, we find that only 2.5 percent of taxpayers will fall above the $250,000/$200,000 AGI threshold in 2009. The state with the largest percentage of taxpayers above this threshold is Connecticut (5.1 percent) and the state with the lowest is West Virginia (1.0 percent).

"Senator Obama wants to extend the Bush income tax cuts for 97.5 percent of taxpayers, and then enact more tax cuts for middle-income families," said CTJ director Robert McIntyre. "Obama even wants to extend a portion of the Bush income tax cuts for that richest 2.5 percent of taxpayers. Senator McCain defines a 'painful tax increase' as any plan that does not continue Bush's policy of giving huge tax cuts to these very richest taxpayers and having future generations of average Americans pick up the tab."


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The financial collapse and the economic downturn of the past months begs the question of whether the economic policies of the Bush administration will be repudiated. Supply-side economics, the ideology that has driven the economic agenda of President Bush, has survived for years despite its complete failure in practice. For example, some anti-tax lawmakers and activists now claim that the answer to the economic crisis is... more tax cuts for investors. But now that we have seen two presidents over the last thirty years run up massive budget deficits through supply-side tax cuts that did not seem to make the economy any stronger, there is reason to think that politicians may finally start to see the failures of this ideology.

The Supply-Side Theory

This issue of the Tax Justice Digest explores supply-side economics, which is generally the idea that policies, particularly tax cuts for investment or for those who invest, can change incentives to invest in a way that will yield huge increases in economic growth. Most incredibly of all, this resulting economic growth is often argued to result in so much new tax revenue that the tax cut can be cost-free or can even lead to increased revenues. Keep in mind there is no actual evidence that tax cuts can pay for themselves or actually lead to increased revenues. The Treasury Department under President Bush issued a report finding that there was no evidence for this, and Bush's current budget director has also said that tax cuts do not pay for themselves or lead to increased revenue. And yet, President Bush and many of his allies (including, recently, John McCain) have stated numerous times that tax cuts cause increases in revenue.

The Laffer Curve

This idea of revenue increases resulting from tax cuts -- the crown jewel of the supply-side belief system -- could of course be true in some conceivable context. The concept is illustrated by the Laffer curve, named after its creator, which is basically a diagram showing that tax hikes will increase revenues only up to a point, after which tax hikes will actually lead to a decrease in revenue because incentives to work and invest are so severely damaged. If profits are already taxed at 95 percent, raising that rate might, in fact, lead to less revenue, as people realize there is little to be gained from investing or running a business and there are consequently less profits to be taxed. Lowering that rate could instead lead to more business activity, more business profits, and even more taxes paid on business profits. (Or at the very least, more business profits might be reported, leading to more taxes paid.)

But supply-siders often take this idea, which might apply in very few situations in real life, and apply it to the United States today.

While this is the most bizarre form that supply-side economics takes, even the ideology's more mainstream adherents seem to believe that tax cuts will lead to economic growth that is so great that higher budget deficits and starved public services should be considered nothing more than a minor side-effect.

Lawmakers and Media: The At-Risk Community

When a person brings up the idea that a tax cut might lead to increased revenues, serious economists laugh, but lawmakers and reporters often find themselves strangely mesmerized. An idea that justifies offering constituents both a tax cut and higher spending on services is like a narcotic for some lawmakers, impossible to resist even though its ill effects are obvious to all observers. Meanwhile, reporters who find economics to be outside of their area of expertise give uncritical and expansive coverage to an idea that almost no serious economist actually believes in.

How It Began

The supply-side movement began with, to put it mildly, a colorful cast of characters, as Jonathan Chait describes in his excellent book, The Big Con. One is George Gilder, whose book Wealth and Poverty, helped launch the movement. He is also known for such quotes as "There is no such thing as a reasonably intelligent feminist," and he is a strong proponent of ESP (extrasensory perception). Another is Jude Wanniski, who wrote another important book (The Way the World Works) and preached that high taxes led to all evils, including Hitler's decision to invade his neighbors. He later compared Slobedan Milosevic to Abraham Lincoln and insisted that Saddam Hussein never gassed his people.

Then, of course, there is Arthur Laffer, who met with Wanniski and Dick Cheney one day, drew his diagram on a cocktail napkin and convinced Cheney that tax cuts could result in increased revenues. The Laffer curve was born, and progressives have been trying to throw it back into the fires of Mordor ever since.

Rather than dwelling on these interesting characters, we have decided to provide the following information for those who would like to know what supply-side economics is about, how it has influenced policy-making and how we can respond to it.

Two New Reports Explore the Strange Allure of Supply-Side Economic Policies and the Overwhelming Evidence of Their Failure

Supply-Side Ideas Influence the Presidential Race

Isn't It Time to Reassess the Bush Tax Cuts for Investment Income?

Supply-Side Disasters in the Making at the State Level

Supply-Side Ideas Influence the Presidential Race

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Presidential candidate John McCain has made statements in the last year indicating that he believes tax cuts pay for themselves. Whether he actually believes this and how he came to this conclusion is all very murky. Senator McCain famously voted against the Bush tax cuts in 2001 and 2003 and has now reversed himself by favoring a permanent extension of all the Bush tax cuts even for the richest Americans, plus a lower rate for corporations and other cuts for business. When asked to explain his previous votes and his reversals, McCain has always given baffling and incoherent answers.

John McCain now says that he opposed the Bush tax cuts in 2001 and 2003 because he thought they needed to be accompanied by cuts in spending to keep the budget deficit under control. Actually, what he said in 2000 about then-Governor George W. Bush's tax plan was, "I don't think the governor's tax cut is too big-it's just misplaced. Sixty percent of the benefits from his tax cuts go to the wealthiest 10% of Americans-and that's not the kind of tax relief that Americans need."

But even if we take his word that he was concerned about the budget, wouldn't that only mean he would be even more opposed to the Bush tax cuts now that we have deficits instead of surpluses? He explained at a debate on September 5 that he voted against the 2001 and 2003 tax cuts because they did not include cuts in spending, which he thought were also necessary. But then he claims that "it's very clear that the increase in revenue we've experienced is directly related to the tax cuts that were enacted, and they need to be permanent."

McCain claims he went from worrying about how tax cuts might damage a budget in surplus to believing tax cuts will help a budget that is in deficit. His conversion may be inexplicable, but it's very real. His tax plan would extend the Bush tax cuts for the rich and slash taxes for corporations, which would benefit stock-holders. He would create an alternative "simplified" tax that would generally make the tax code more complicated. Since it would be voluntary, people would calculate their taxes under the regular system and under the alternative system to see which yields a lower tax. Our estimates show that it would cost in the neighborhood of $98 billion in 2012, half of which would go to the richest one percent.

During his 2000 presidential campaign, Senator McCain said, "There's one big difference between me and the others -- I won't take every last dime of the surplus and spend it on tax cuts that mostly benefit the wealthy. I'll use the bulk of the surplus to secure Social Security far into the future to keep our promise to the greatest generation."

So McCain once said he won't spend an entire budget surplus on tax cuts for the wealthy, but apparently he has no problem cutting taxes for the wealthy when the budget is in deficit. We would like to say this reversal is surprising but, sadly, we've seen it before.

What about McCain's opponent? One would hope that presidential candidate Barack Obama would represent a clean break with the supply-side thinking of the past, but the reality is slightly more complicated. During his speech at the Democratic convention in Denver, Senator Obama said, "Change means a tax code that doesn't reward the lobbyists who wrote it, but the American workers and small businesses who deserve it." Curiously then, Senator Obama proposes to keep in place a loophole for corporate dividends created in the Bush years. President Bush and his allies in Congress enacted a special loophole for dividends (a top rate of 15 percent) that will expire at the end of 2010 along with the rest of the Bush tax cuts if Congress simply does nothing. Instead of allowing the dividends loophole to completely expire, Senator Obama wants dividends to be taxed at a top rate of 20 percent for, roughly, the richest two and a half percent of Americans and a top rate of 15 percent for everyone else.

At the time the dividend tax cut was enacted in 2003, Michael Kinsley pointed out that "[u]nlike, say, interest on a savings account or money-market fund, which are taxed every year, corporate profits are allowed to compound tax-free until they are paid out as dividends or the stock is sold. A notorious quirk in the tax law wipes out a lifetime of taxes on stock that is passed on to your heirs. Dividends and capital gains are also exempt from the Social Security and Medicare taxes. One way or another, it is the rare dollar of corporate profits that bears a tax burden heavier than the burden on an employee's wages."

True, Senator Obama does want to allow tax rates on ordinary income to revert to the rates that existed under Clinton for the very richest Americans, and he will allow the tax subsidy for capital gains to shrink back to the level that existed under Clinton (a top rate of 20 percent instead 15). But apparently Obama agrees with President Bush that taxing dividends just like the income most people receive as wages would be either unfair, or damaging to the economy, or both.

Of course, Obama certainly has never claimed that tax cuts can pay for themselves. But the less insane aspects of the supply-side ideology have influenced some of what he has said about taxes. In particular, he seems to believe that not allowing most Americans to keep the taxes they received under Bush would be bad for the economy. He told the multitudes in Denver, "I will -- listen now -- I will cut taxes -- cut taxes -- for 95 percent of all working families, because, in an economy like this, the last thing we should do is raise taxes on the middle class." We could probably think of all sorts of things that would be the "last" thing we want to do in an economy like this (cutting back on education spending, allowing the health care system to plod along in its current inefficient manner) and that would be worse than having a higher tax bill.

So Obama is certainly not a supply-sider, but he's not exactly facing down the supply-siders either. Allowing everyone but the richest 2 and a half percent to keep the Bush tax cuts (and even extending some cuts for these very richest taxpayers) is not exactly a clean break with the failed supply-side policies of Bush. At the same time, his tax cuts would be aimed at the middle-class and would make the tax code more progressive overall, which would be an enormous improvement over the policies of the current president.

(See CTJ's recent report, "The Tax Proposals of Presidential Candidates John McCain and Barack Obama.")

New Reports on McCain, Obama, and Tax Cuts from Citizens for Tax Justice

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Citizens for Tax Justice has recently released several reports on the tax issues being debated during this presidential election season.

1. The Tax Proposals of Presidential Candidates John McCain and Barack Obama

Last week CTJ released this 15-page report on the tax plans offered by the two candidates. The report includes estimates of the distributional and fiscal effects of both candidates' plans in 2012, a year when almost all of the provisions of either plan would be in effect if enacted. These estimates include the effects of making the Bush tax cuts permanent (partially, in Obama's plan, and almost entirely, in McCain's plan) as well as their proposed changes to the AMT, corporate tax, and the other tax changes they propose.

The report finds that Obama's tax plan would give a larger tax cut, on average, to taxpayers in the bottom 60 percent of the income distribution than McCain's plan. Interestingly, while Obama's plan would give a small tax cut, on average, to the richest one percent, McCain's plan would give this group an average tax cut that is 43 times as large.

2. Obama and McCain Propose New Stimulus Plans, Including More Tax Breaks

In addition to the tax plans that both candidates have been promoting for months, McCain and Obama both have recently proposed new, temporary tax cuts as a way to stimulate the economy and help people avoid the consequences of the downturn in the market. As this report explains, neither of the candidates' tax cuts seem very promising when it comes to helping Americans who are genuinely struggling, but McCain's proposals are particularly alarming because their benefits would be heavily targeted to the rich. He proposes to slash the capital gains rate, which would further bias the tax code against work and in favor of people who live off their wealth, and we estimate that over three fourths of the benefits would go to the richest one percent.

McCain also proposes that withdrawals of up to $50,000 from 401(k)s and IRAs, which are currently taxed as ordinary income, be subject to a top income tax rate of 10 percent. This obviously does nothing for a senior whose income is too low to trigger income tax liability or whose taxable income does not exceed the 10 percent bracket. But it would be a real boon for a very rich senior who would otherwise pay income taxes at a rate of 35 percent on such a withdrawal.

3. McCain's Proposal to Increase the Tax Loophole for Capital Gains Would Be Unfair and Counterproductive

This report explains in more detail why lawmakers should not take up McCain's proposal to expand the existing loophole for capital gains, and why they should move in the opposite direction and start taxing investment income just like any other income. Anyone who thinks that doing away with the lower rates for capital gains and dividends is too radical an idea is reminded that Congress has done it before -- under the leadership of President Reagan.

4. Does Joe the Plumber Need a Tax Break?

No discussion about this presidential race would be complete without some mention of Joe the Plumber, the man who asked Obama about how he would be affected by Obama's tax plan if he became a small business owner. Obama responded that someone like Joe needs a tax cut now, when he's working his way up and saving money, rather than later on when he's joined the ranks of the very richest Americans. We also note the oddity of McCain professing to be worried about a tax code that punishes this man's hard work while proposing to expand the very loopholes that bias the tax code against work.

Does the Government Have a Right to Put Conditions on Tax-Exempt Status?

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Just like individuals, entities that have any sort of income are required to pay taxes on that income. This is how we pay for roads, schools, tanks and many other things. But because life is complicated, we have made exceptions for some entities, allowing them to claim tax-exempt status. One would think that the taxpayers, acting through their elected officials, should be able to decide what the conditions are for enjoying such tax-exempt status. For example, there seems to be no reason to grant a tax subsidy to an organization that endorses a political candidate. Most people would agree that we should not grant a tax subsidy for activities geared towards winning political power for an individual or party.

But there is at least one organization that disagrees. The conservative Alliance Defense Fund seems to believe that Congress has no right to set such conditions on an entity enjoying tax-exempt status. The ADF sponsored what it called "Pulpit Freedom Sunday" a week ago, which consisted of 33 conservative pastors endorsing presidential candidate John McCain during church services. If any church loses its tax-exempt status, the ADF wants to challenge this action by the IRS on the grounds that the right to free speech under the First Amendment is being violated.

As one preacher in Minnesota recently put it, "The scripture is very clear about our need to obey all laws," he said. "I want people to realize that there are two laws here that compete with each other. The IRS says that I cannot talk about politics. The Constitution says I can. Unless there's a court battle, we don't know which law to obey."

Actually, there is no conflict, and such a challenge will not stand up in court. Every organization is free to endorse whomever it wants for any political race. The law simply says the government will not grant any organization doing so an exemption from taxes.

Some of the pastors involved actually seemed quite aware of this. The same Minnesota pastor said he was aware that his church could lose its tax-exempt status "but it's not that big a deal... The church will go on." That's actually a rather startling admission. If the churches don't actually need a tax exemption, then there really is no conflict here after all.


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Fox News Anchor Demands that McCain Campaign Official Explain Why He Is Lying About Obama's Tax Plan

Think Progress caught Fox News anchor Megyn Kelly last week pushing back at McCain spokesman Tucker Bounds for defending his campaign's claims that Barack Obama intends to raise taxes on working-class people.

"But you guys have suggested he's going to raise taxes on the middle class and virtually every independent analyst who took a look at that claim said that's not true," Kelly said. "he'll raise it on people making $200,000 or $250,000, but not the middle class." When Bounds tried to defend his boss's honor, Kelly shot back, "I'm not giving him any credit. I'm saying what the independent analysts say. They say that claim is false."

Citizens for Tax Justice, along with many others, has made the same point in recent weeks. Last week CTJ released a fact sheet that refuted the McCain campaign's claims that Obama proposes "painful tax increases on working American families." Obama has proposed to repeal the Bush tax cuts for only married couples with incomes above $250,000 and singles with incomes above $200,000. Since the Bush tax cuts expire at the end of 2010 anyway, this means that for years after 2010, there would simply be no change in the law affecting taxpayers with incomes above those levels (except that a couple of Obama's tax cuts would benefit even these wealthy taxpayers). For everyone else, Obama proposes to extend the Bush tax cuts past 2010 and he also proposes a raft of new tax cuts targeting the middle-class.

Earlier this year CTJ found that only 2.1 percent of taxpayers have adjusted gross income (AGI) above $250,000 and only 3.2 percent have AGI over $200,000. Senator McCain has been telling crowds that "Senator Obama will raise your taxes." Unless Senator McCain is addressing only the richest 2 or 3 percent of Americans (which seems an unlikely campaign strategy) it's hard to avoid the conclusion that McCain has decided to mislead the public. In fact, it's so hard to avoid this conclusion that even Fox News has begun to accept it.

A new fact sheet from Citizens for Tax Justice clarifies some of the myths about presidential candidate Barack Obama's tax plan that have been perpetuated by the campaign of his opponent, John McCain. While CTJ does not think that new tax cuts will improve the lives of ordinary Americans, we do feel that the public should receive accurate information about the tax cuts both candidates are offering.

President Bush and his allies in Congress enacted tax cuts that are scheduled to expire after 2010. Obama would repeal the Bush tax cuts for the richest 2 or 3 percent, which means that for years after 2010 there would simply be no change in the law for these taxpayers. For everyone else, Senator Obama would change the law to make the Bush tax cuts permanent, and he also proposes many additional tax cuts for the middle-class. Even the richest taxpayers would enjoy some tax cuts under Obama's plan after 2010 that they would not receive under current law (a partial extension of the cut in the estate tax and a partial extension of the loophole for dividends).

Senator McCain voted against the Bush tax cuts but now insists that they must all be made permanent for all Americans regardless of how rich they are. The fact that Obama would not make them all permanent for the richest 2 or 3 percent has been falsely presented by the McCain campaign as "painful tax increases on working American families."

Both candidates also propose additional new tax cuts, but Obama's target low- and middle-income families while McCain's generally target businesses and corporations.

Read the fact sheet.

For someone who wants to make the Bush tax cuts permanent for all but the richest 2 or 3 percent of Americans, and add on top of that a lot of new tax cuts for middle-class Americans, it's surprising how often Senator Barack Obama is accused of proposing "painful tax increases" on American "families."

Few people remember the Clinton years as a time when the economy was strangled by taxes, but today almost no one in politics seems to consider allowing all of the Bush tax cuts to expire at the end of 2010, as they are scheduled to under current law. In keeping with this trend, Senator Obama proposes to make the Bush tax cuts permanent, except for those with incomes over $250,000 (or $200,000 for single people). Families with incomes under these levels would keep their Bush tax cuts and many would benefit from Obama's Making Work Pay Credit, his refundable education credit, his refundable mortgage credit and many other provisions. (In January CTJ found that only 3.2 percent of households in the U.S. will have adjusted gross income above $200,000 in 2008 and only 2.1 percent will have AGI over $250,000).

McCain Commercials Panned as Deceptive

Nonetheless, the McCain campaign has tried to paint Obama as a major tax-hiker. The campaign started out by trying to make hay of Obama's vote for the Democratic budget resolution for 2008 that assumed the extension of many -- but not all -- of the Bush tax cuts. That budget resolution assumed that the 25 percent rate would expire and revert to 28 percent, which could cause a tax increase for a single person with taxable income above $32,550, which comes out to almost $42,000 in total income.

Never mind that budget resolutions are not law and do not raise taxes. And never mind that Obama has repeated over and over that he would extend the Bush tax cuts for everyone except those with incomes over $250,000 (or $200,000 for singles).

As FactCheck explains, the McCain campaign aired a commercial saying Obama wanted to raise taxes for everyone making $32,000 a year, but even they realized this was an outright lie since taxable income is not the same thing as total income. So then they aired a commercial telling viewers that Obama would raise taxes on people making $42,000 a year and showed a woman reading to her two children. Of course, the $42,000 figure refers to a single person, and a head of household with two children could make more than $62,000 before falling into the bracket subject to the increased rate. And of course, none of this matters, because it is not part of Obama's tax plan.

The Latest Deceptions

The McCain people haven't stopped. The campaign has a new ad that speaks of Obama's "painful tax increases on working American families." Surrogates for the campaign have made statements that seem to indicate they are either proudly ignorant of the facts or outright liars. Media Matters points out that Senator Richard Burr (R-NC) told Tom Brokaw that Obama would raise taxes "across the board on the American people without exception."

McCain's Advisers Know Their Campaign Is Lying

The most damning aspect of these statements is that the chief economic adviser to Senator McCain has acknowledged that the Obama tax plan does not raise taxes. TIME's Michael Sherer wrote, back in July:

"Here is Douglas Holtz-Eakin, McCain's chief economic policy adviser. 'I used to say that Barack Obama raises taxes and John McCain cuts them, and I was convinced,' he told me in a phone interview this week. 'I stand corrected [about Obama's plans].'"

Right Wing Announces It Opposes Tax Cuts... For the Poor and Middle-Class

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Some anti-tax commentators and right-wing blogs have apparently given up trying to paint Barack Obama's tax plan as a tax increase on the middle-class (since that would be untrue in any interpretation humanly possible). Instead, they have settled on a novel argument: The Obama tax plan would unacceptably raise marginal tax rates on low- and middle-income people, as argued by Alex Brill and Allen Viard of the American Enterprise Institute.

People who don't live and breathe tax policy might scratch their heads and say, "Wait, I thought I heard that Obama wants to cut taxes for everyone except the rich."

He does. The critics' new argument is not that he would raise taxes but that he would raise the marginal rates, meaning the tax rate applicable to an additional dollar of income, for people in specific income ranges. This would occur, they complain, because the various new or improved tax credits that Obama proposes would be phased out for people above certain income levels.

Imagine a working person paying income taxes at the 25 percent rate. Imagine also that in 2009 this person benefits from a newly enacted tax credit that is phased out for people with higher income, at a rate of $100 for each $1,000 of income over some threshold, and that this taxpayer's earnings are just one dollar above that threshold. The critics reason that this would translate into a tax rate of 10 percent for each additional dollar earned, on top of the ordinary income tax rate of 25 percent, resulting in a marginal rate of 35 percent. This would be true even though the taxpayer has lower taxes as a result of the new credit. Surely, the critics argue, this person would be better off if she never received the tax credit, because then her marginal rate would be just 25 percent, and she would have greater incentive to work and save.

The right-wing critics want this working person to pay higher taxes? Are they against tax cuts? Yes, actually, if they're targeted towards poor or middle-class people. These critics are essentially against any tax benefit (or any public benefit, for that matter) that is made available only to people with incomes below a certain level because such income-targeting, in their view, discourages people from working harder to increase their income.

So would low-income people or middle-income people see a new credit on their federal tax form and decide that they should work fewer hours? No. Common sense, and the academic literature on this topic, tell us that people do not respond this way to tax policy.

The evidence that marginal tax rates really impact decisions about work is weak or nonexistent. The last time the right trotted this line out, it was to support the Bush income tax cuts, which reduced marginal rates, with most of the benefits going towards the well-off. (Put aside for a moment the tax cuts Bush has showered on people who live off their investments.) As the Center on Budget and Policy Priorities pointed out back when the 2001 Bush tax cut was being debated, it's not clear that higher marginal rates discourage work or savings, and they may even encourage it. Logically, if someone has a particular earnings goal or savings goal, the result of a higher marginal tax rate could be that they work more in order to meet that goal. The Center on Budget cited several economists who found that the evidence pointing towards reduced work was very weak.

It is extremely doubtful to us that cutting taxes for any income group is a wise policy right now given the budget deficit and the fact that people are paying relatively low taxes already. But Senator Obama has proposed tax cuts nonetheless, and he at least has ensured that the bulk of them would go to people who are not super-rich. Some right-wing activists feel like they've won the argument about whether tax cuts are good -- both candidates seem to think they are -- so now they want to argue with Obama because he refuses to target most of his tax cuts towards the wealthy instead of the poor and middle-class. It's a telling moment for the right. And it shows us what happens when you start to give in to anti-tax rhetoric.

Obama Calls for Tax Rebates Funded by Windfall Profits Tax on Oil Companies

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Presidential candidate Barack Obama has talked up several proposals relating to energy and taxes over the past couple weeks, including a one-time tax rebate of $500 per spouse that would be funded by a five-year windfall profits tax on oil companies. He also proposes a $7,000 tax credit for "advanced technology vehicles" which include hybrid cars that can be plugged into an electrical socket and flexible fuel vehicles (which can run on gasoline or ethanol). Obama has also supported eliminating tax loopholes for oil and gas companies. He also supports a cap and trade program in which businesses must obtain an allowance to emit carbon pollutants and all of these allowances (rather than just a portion of them) would be auctioned off, raising revenue that can be reinvested into alternative fuels and assistance to keep families from being harmed by the increased cost of energy.

His recent statements have caused some controversy, particularly his call to release oil from the Strategic Petroleum Reserve and his statement that he could be open to repealing the ban on offshore drilling if it was part of a larger compromise on energy policy. But some of the more strident criticism has been aimed at his desire to close tax loopholes and implement a windfall profits tax. Critics argue that many businesses have a period of unusually high profits and it's not clear why targeting the oil industry for a change in tax treatment makes any sense.

But that argument largely misses the point. The oil and gas industry has not just profited enormously. It has profited enormously partly because Americans are subsidizing it through the tax code -- and these tax subsidies have resulted in no clear benefit for the American public. Even if the tax subsidies are repealed, the public will never recoup the revenue showered on the oil and gas industry over the past years unless a windfall profits tax is implemented. The windfall profits tax blocked by Senate Republicans earlier this summer would sensibly ensure that any profits reinvested in renewable energy would not be subject to the tax.

A report released by Citizens for Tax Justice in July makes this argument and explains just how well oil and gas company stockholders are doing, just how little they invest in alternative energy, and how much they have siphoned from federal revenue through tax loopholes. For example, the report cites the American Petroleum Institute (API) which admits that in the six years stretching from 2000 through 2005 the oil industry only put a total of $1.2 billion towards investment in alternatives to fossil fuels, which is just 0.3 percent of its $383 billion in net profits over that period. If this figure had increased since then, the industry would surely be publicizing that fact.

But while the public has not benefited from the tax subsidies for the oil and gas industry, stockholders surely have. As the report explains, if you invested $10,000 in the top five oil companies 20 years ago, your portfolio would now be worth $100,000. That same $10,000 invested in an S&P 500 index fund is now worth $60,000. Oil shareholders enjoy a big advantage, and hardly seem in need of tax subsidies.

Whether a small tax rebate is what working families really need right now seems doubtful, but closing tax loopholes for oil and gas companies is a common sense policy, and a windfall profits tax might be a sensible supplement to this policy.

Some Politicians Cutting Their Own Taxes by Not Paying Them

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This week brought news that many politicians who see tax cuts as the solution to our economic woes tend to unilaterally cut their own taxes -- by not paying them. Needless to say, political candidates running on a platform of fiscal responsibility strain credibility when it's revealed that they cannot even keep their own fiscal house in order. On Wednesday, The Politico ran an article with a list of House challengers and incumbents who have suffered tax penalties for reasons ranging from misreporting to late payments of their property, business, and income taxes. Some even continue to have tax bills outstanding during their candidacies.

For example, Keith Fimian, a Republican running for an open seat in Northern Virginia was charged $16,000 for a lien filed against his home appraisal business in 2005 after the company lost track of some of its 5,000 subcontractors. Republican Luke Puckett running for a U.S. House seat in Indiana still owes nearly $2000 in property taxes due in 2006.

It's easy to be cynical when you see politicians like Mr. Fimian and Mr. Puckett respectively calling for "lower and fewer taxes" and "mak[ing] the Bush Tax Cuts permanent." Taxation is a necessary requirement of democratic governance and we expect our politicians, who should know better than anyone the importance of adequate tax revenues, to set a good example by paying their taxes in-full and on-time.

Unfortunately, one of this year's presidential candidates has had some oversights in the tax department himself. Newsweek reported several weeks ago that the McCain family failed to pay property taxes on one of their homes in La Jolla, California for four straight years.

Separately, Time Magazine reported that Sen. McCain commonly spends several thousands of dollars shooting craps at casinos. Yet for the past two years, he has failed to report any gambling gains or losses on his tax return. You're required to file a Form W-G if you win more than $600 at any one time.

Perhaps, we should give Senator McCain the benefit of the doubt and assume that he never purposely avoided paying taxes but merely erred unintentionally in these matters. This lack of attention to detail is not very comforting, especially when we consider some of the promises he has made that do not add up.

Carly Fiorina, a surrogate for the presidential campaign of Senator John McCain, said last week that under the tax plan of McCain's opponent, Senator Barack Obama, "23 million small businesses will see their taxes raised" because "23 million small businesses file their income tax as individuals."

Senator Obama has promised that, if elected, he will allow the Bush tax cuts to expire (as current law provides) only for people making more than $250,000 a year. Analysts generally agree that this means the lower rates Bush enacted for the top two tax brackets will expire. According to the U.S. Treasury Department, only 1.4 million taxpayers will be in the top two tax brackets this year.

Although it's impossible to determine how many of those 1.4 million taxpayers are small-business owners, two things are crystal clear: It's a lot less than all of them, and it's certainly not 23 million.

"John McCain has admitted that economics is not his strong suit," noted Robert S. McIntyre, director of Citizens for Tax Justice. "Apparently, he and his surrogates don't even grasp basic arithmetic."

Fiorina previously achieved notoriety as head of Hewlett-Packard, where she spearheaded HP's 2002 merger with Compaq Computer. That merger, which led to Fiorina's firing, turned out to be one of the biggest corporate follies since Dick Cheney, as head of Halliburton, bought an asbestos company in 1998, a deal that subsequently cost Halliburton billions of dollars to settle hundreds of thousands of medical-injury claims.

For more details, see the CTJ press release.

Media Matters for America Catches Numerous Attempts to Distort Obama's Tax Plan

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The right-wing talk show circuit has lately worked itself into a frenzy over one of its latest causes: trying to convince America that Barack Obama's tax plan will crush working class families and destroy the economy. Media Matters for America has done an incredible job of tracking the inaccurate statements that have been made on the air about Obama's tax plan without being challenged or corrected. Unsurprisingly, a number of these incidents occur on Fox News.

On June 11 they caught Ben Stein making the outlandish claim that people "that have incomes in the five digits" would pay more because of Obama's proposed changes in the capital gains tax rate. As pointed out in a recent report by CTJ, over 70 percent of the Bush tax cut for capital gains and dividends goes to the richest one percent of taxpayers. The bottom 60 percent of taxpayers only get about 2 percent of that tax cut -- and an average tax cut of about $16!

On June 15 Media Matters caught Mara Liasson telling America that the Tax Policy Center's report on the candidates' tax plans found that Obama's tax plan would increase the deficit more than McCain's tax plan. In fact, the report found the exact opposite.

Then on June 16 they found a Republican strategist claiming, without being challenged or questioned by the anchor, that under Obama's plan, taxes for "an average family making $61,000 -- just alone letting the tax cuts expire -- would go up $2,100. That's a lot of money for an average family." Of course, Obama's plans don't call for repealing the Bush tax cuts for anyone with an income lower than $250,000. (We wish Obama would repeal the Bush tax cuts for a far larger number of taxpayers. A report released by CTJ in January showed that only 2.1 percent of taxpayers will have incomes above this level in 2008.)

Keeping track of right-wing distortions about tax policy in the media is a hard job (covering Fox News alone is daunting) so Media Matters is an invaluable asset to us all.

Senator John McCain continues to make misleading and plainly incorrect statements about tax policy while on the campaign trail. On June 10 he told a group of small business owners that Senator Obama's tax plan would constitute the biggest tax increase since World War II. Annenberg Political Fact Check correctly points out that Obama's plan mainly involves allowing some of the Bush tax cuts to expire, and that expiration was written into law by President Bush and his allies in Congress, so it's difficult to see Obama's proposal as a "new" tax or a tax "increase." (Even if this did constitute a tax increase, measured as a percentage of gross domestic product this would constitute only the fifth largest since World War II.)

Even worse, McCain continues to claim that "Americans of every background would see their taxes rise" if any attempt is made to reduce the tax subsidy for capital gains and dividends. CTJ's recent report on this subject shows that 70 percent of the benefits of the Bush tax cuts for capital gains and dividends go to the richest one percent of Americans. The poorest 60 percent of Americans get next to nothing from this tax break. Most stock owned by middle-income people is in 401(k) plans, Individual Retirement Accounts (IRAs) or other similar retirement savings vehicles. Taxes on these investments are deferred until retirement, at which point they are taxed as "ordinary income," meaning they don't benefit from the tax cuts for capital gains and dividends.

The Clinton-McCain Gas Tax Proposal: Get Half a Tank Free This Summer

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This week, Senator Hillary Clinton came out in support of lifting the federal tax on gasoline during the summer months, an idea originally proposed by Senator John McCain. Senator Barack Obama publicly scoffed at the idea, saying "this isn't an idea designed to get you through the summer, it's designed to get them through an election." Obama explained that the overall savings for a family over the summer would probably average about "$25 to $30. Half a tank of gas."

The federal gas tax is currently 18.4 cents per gallon for gasoline and 24.4 cents per gallon for diesel. With the average gasoline price $3.60 per gallon this week, the federal gas tax is only around 5 percent of the total cost of gasoline.

While the benefit to the consumer may be too small to even notice, this proposal could have a very real and very negative effect on the Highway Trust Fund which is supported by the gas tax and which we depend on to fix and improve congested highways and roads in need or repair. The American Society of Civil Engineers points out that every dollar spent on highway construction is estimated to bring $5.40 in benefits and every billion dollars spent on highway construction generates about 30,000 jobs each year, according to the Department of Transportation. Repealing the gas tax for a summer would cost the Highway Trust Fund about $8.5 billion.

It's true that the gas tax is a regressive tax, requiring low-income drivers to pay more of their income in tax than wealthier drivers. But the gas tax is different from most other taxes in ways that minimize the importance of tax fairness. Most notably, the gas tax can serve to help reduce demand in a market where many would agree demand is far too high. With gasoline in limited supply (Paul Krugman explains that the supply is actually fixed for the next few months), environmental concerns continuing to mount, and traffic congestion remaining a problem, any effect the gas tax has on reducing demand should be a welcome one.

Senator Clinton would replace the money in the Highway Trust Fund by enacting a new windfall profits tax for oil companies. With a White House opposed to anything that can conceivably be called a tax increase and a Senate that has trouble paying its bills, it's hard to imagine this part of the proposal being enacted during this Congress. President Bush said he was open to considering the idea of a gas tax holiday, but there appears to be no chance he would ever support a windfall tax on oil companies to pay for it.

John McCain: If the Issue Is Health Care, the Answer Is... Tax Cuts!

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On Tuesday, Senator John McCain refined his health care proposal a little bit in a speech in Florida. The main thrust of his plan is still to allow a tax credit for the purchase of health insurance, including non-group insurance (insurance purchased on the individual market rather than through an employer). The credit amount would be $2,500 for individuals and $5,000 for families.

To pay for this, McCain would eliminate the exemption for employer-provided health insurance. This would basically make the tax code tilted towards individually purchased health care and perhaps even high-deductible health care. There would no longer be any tax incentive for employers to provide health care, so many could "cash out" the health care benefits they currently offer, meaning some employees would receive additional monetary compensation instead of health insurance.

The problem is that these employees would have to turn to the individual health insurance market, where plans offered are much more expensive and less generous.

Responding to criticisms that people with preexisting health conditions would never be offered adequate health insurance, McCain on Tuesday added a detail that he calls a "Guaranteed Access Plan" which would "reflect the best experience of the states to ensure these patients have access to health coverage." Jonathan Cohn at The New Republic explains why the programs set up by the states to do this so far utterly fail to provide affordable care to the people who have a preexisting condition. In these state plans the premiums can run in the neighborhood of $600-$850 per month, cost-sharing runs in the thousands and the preexisting condition won't even be covered for at least several months.

McCain also wants to pass legislation that would make it easier for health insurance companies to sell policies across state lines, but health care advocates have opposed similar legislation because it would make null and void the differing regulations and standards that states have enacted for health insurance companies operating within their borders. McCain also said he would expand Health Savings Accounts (HSAs). Introduced as part of the Medicare prescription drug law in 2003, HSAs are accounts to which individuals can make tax-deductible contributions and which are connected with a high-deductible health insurance plan. They offer the most benefit to those who are in the highest tax bracket and need no or little medical care, and can therefore serve as tax shelters. The Government Accountability Office just found that HSAs are typically used by people with incomes far higher than average.

McCain's Transformation Complete: Tax Cuts for the Rich, Even if We Cannot Pay for Them

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Last week Senator John McCain finally completed a process that has been underway for some time now. McCain has worked his way back into his party's good graces by coming out in support of running massive budget deficits to extend the Bush tax breaks and give new tax breaks to business.

It's difficult to remember now, but Senator McCain had said back in 2000, "There's one big difference between me and the others -- I won't take every last dime of the surplus and spend it on tax cuts that mostly benefit the wealthy." He also said of the tax plan George W. Bush proposed while running for president in 2000, "Sixty percent of the benefits from his tax cuts go to the wealthiest 10% of Americans -- and that's not the kind of tax relief that Americans need."

The New John McCain

Let's compare this to the new John McCain, who fleshed out his latest ideas a bit more during a tax day speech in Pittsburgh.

McCain said he would extend the Bush tax cuts, even though over half of the benefits would go to the richest one percent and the cost would be $5 trillion over a decade. He would cut the corporate tax rate down from 35 percent to 25 percent, even though measured as a percentage of GDP, U.S. corporate taxes are among the lowest of any developed country. He would double the personal income tax exemption for dependents to $7,000, which would do the most for those families in higher income tax rates and nothing for low-income people who pay payroll taxes but who do not have taxable income (meaning a family of four with income of less than $25,000). He would abolish the Alternative Minimum Tax, even though about 9 tenths of it is paid by people with incomes over $100,000.

He would enact first-year deduction or "expensing" of "equipment and technology investments, which, along with a lower corporate tax rate, will create new opportunities for tax sheltering by the wealthy. He would ban internet and cell phone taxes permanently because he seems to believe that new technologies need to be granted a waiver from taxes that lasts forever. (If only Thomas Edison had thought to lobby for laws shielding his inventions from taxes.) He would make permanent the research and development credit because he believes innovation comes from the private sector, except not really, because apparently he also believes that no one will invent anything unless we give them a subsidy through the tax code.

And, most tantalizingly, he would offer a simplified alternative income tax that people can choose, at their option, to file. It's optional, presumably because everyone claims they want a simpler tax form but no one can agree on actually giving up the various deductions and credits that make filing ones' taxes complicated. Rather than simplifying tax filing, this will probably lead some people to calculate their tax liability under two different systems to determine which will result in lower taxes.

Massive Cuts in Public Services Would Be Necessary to Pay for McCain's Tax Plan

The Tax Policy Center has calculated that McCain's plans would cost $553 billion in 2012 alone. That's not even including the interest payments on the additional debt that will result, but let's put that aside for a second. McCain claims he can avoid increasing the national debt, at least to a degree, by cutting spending. But the cost of his plan in 2012 is about 17 percent of all projected federal spending that year according to estimates from the OMB (on page 134 for anyone interested). That's a whole lot of spending to cut. Looked at another way, it's more than all the non-defense discretionary spending that year and about equal to discretionary spending on defense.

During his Pittsburgh speech, McCain said he could get $100 billion in "savings from earmark, program review, and other budget reforms" but was not any more specific. The Senator's oft-mentioned earmarks are said to account for only around $18 billion at the most.

McCain has also said that he will obtain $30 billion in revenue by closing corporate tax loopholes. But his corporate tax cut alone is estimated to cost $143 in 2012.

Actually, You Should Just Bill My Grandkids

Then finally, on Sunday, McCain said on ABC's "This Week" that his tax cuts would take priority over balancing the budget.

To get a sense of what a huge shift this is for McCain, remember that during presidential debates he tried to explain away his opposition to President Bush's tax cuts in 2001 and 2003 by claiming that he thought cuts in federal spending should have accompanied those tax cuts to ensure that the nation's fiscal health would not deteriorate.

Of course, what he said back in 2000 also touched on the fact that the benefits of the Bush tax cuts would go mostly to the rich, but the new McCain is apparently unwilling to remind anyone about this.

On "This Week," George Stephanopoulos asked McCain, "If Congress does not give you the spending cuts you say you can get, will you hold off on signing the tax cuts?"

McCain replied, "Uh, no, of course not, because we don't want to increase people's taxes during a recession..."

It's worth pointing out that none of the candidates are actually talking about raising taxes (with the possible exception of the capital gains tax). Allowing parts of the tax cuts to expire exactly as the Republican House, Republican Senate and Republican White House wrote them to expire can hardly be called a tax increase. Further, it would be interesting to know how McCain might explain the prosperity that followed Clinton's tax increase or the economic doldrums that have followed George W. Bush's tax cuts.

Charlie Gibson Repeats Misinformation at Democratic Presidential Debate

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ABC news anchor Charlie Gibson perpetuated a myth about taxes at the Democratic presidential debate on Wednesday night. Gibson said of the capital gains tax that "in each instance, when the rate dropped, revenues from the tax increased. The government took in more money. And in the 1980s, when the tax was increased to 28 percent, the revenues went down." He asked Senator Obama, who has signaled that he would raise the capital gains tax from its current level of 15 percent to 28 percent, why he would bother doing this if it would actually reduce revenues.

There is just one problem. What Charlie Gibson said is not true. Revenues from capital gains do not rise when the tax is cut. They rise when the economy is booming and they collapse when the economy tanks. In fact, revenue from capital gains taxes is currently well below the peak it reached during the Clinton era ¢Â€Â” when taxes were higher.

A small group of ideologues associated with "supply-side economics" believes that tax cuts can actually increase revenues. While this notion is rejected by most mainstream economists and sounds ludicrous to the average person, members of the media and Congress seem unusually susceptible to being hoodwinked into believing it. Their general idea is that if we lower capital gains taxes, there will be more capital gains realizations (meaning more people sell their property that has gone up in value) because the tax on that profit has been cut, and this will lead to revenue increasing overall.

Even if there are more realizations as a result of a capital gains tax cut, the resulting revenue will be nowhere near enough to make the tax cut budget-neutral, much less revenue-enhancing.

The ups and downs in revenue collected by the capital gains tax seem to have more to do with what's happening in the broader economy than with tax policy. In the early and mid-1990s, when the top capital gains tax rate was 28 percent, the revenues collected by the tax shot through the roof. They continued to climb after the rate was lowered to 20 percent in 1997, but this looks more like the continuation of a preexisting trend linked to economic prosperity rather than a response to the change in the rate. Then in 2001 and 2002 the revenues collected by this tax fell precipitously. This was not following any change in tax policy at all, but clearly linked to the bursting of the dot.com bubble and its ramifications on the stock market.

Capital gains tax revenue did increase after 2003, when the rate was cut again to 15 percent, but we would expect the revenue to rise from the low point of the recession, regardless of what changes were made to the tax code. More importantly, the revenue obviously has not reached the high level of the Clinton years when the rate was higher. Measured as a percentage of GDP, the capital gains tax will probably collect only half as much revenue this year as it did in 2000, when the rate was higher.

Can support for the supply-siders' argument be found if one looks further back in time? No. Charlie Gibson seems to think that capital gains tax revenue fell when the rate was raised as part of the 1986 Tax Reform Act that was signed by President Reagan. The reality is that capital gains realizations surged in anticipation of the rate increase (which took effect in 1987). In other words, an increase in the rate actually increased revenues, albeit temporarily. After that, with fewer gains to realize, realizations predictably declined, and eventually returned to their normal level -- until the Clinton adminstration, when the stock market went up so much that realizations boomed.

When Gibson pressed Senator Obama a second time, insisting that cutting the capital gains tax rate would raise revenue, Obama replied, "Well, that might happen or it might not. It depends on what's happening on Wall Street and how business is going." Obama also brought up the issue of fairness in the tax code, and the fact that wealthy people with capital gains can pay less in taxes than middle-class Americans, which is an unacceptable feature of our system.

Senator Clinton, however, stated, "wouldn't raise [the capital gains tax rate] above the 20 percent if I raised it at all. I would not raise it above what it was during the Clinton administration." This is an unfortunate response. The rate was higher than 20 percent during most of the Clinton administration and the economy thrived and revenues poured in. And, since the revenue "baseline" used by Congress already assumes that the rate will revert to 20 percent when the Bush tax cuts expire at the end of 2010, no "new" revenue will be raised to pay for the candidates' health care proposals or other new initiatives by simply letting the rate revert to 20 percent.

A new report from the Center for American Progress examines presidential candidate John McCain's tax plan and finds that it costs even more than the Bush tax cuts and is even more regressive. The report assumes the extension of the Bush tax cuts, which McCain has promised to champion despite his opposition in years past. It also assumes that the Alternative Minimum Tax (AMT) will continue to be "patched," meaning most middle-income families will be exempt from it.

The report focuses on the additional components of McCain's plan: reducing the nominal corporate tax rate from 35 percent to 25 percent, allowing investments in equipment and technology to be deducted immediately (expensed), and eliminating the AMT (which would benefit those who aren't already exempted from it by the patch).

These changes are projected to cost over $2 trillion over ten years -- and that's not including the extension of the Bush tax cuts and the AMT patch that the authors assume. And that's not even counting the additional interest on the national debt that will result, since there is almost no way that these tax cuts would be anything other than deficit-financed. The authors find that 58 percent of the benefits of these tax breaks would go to the richest one percent of Americans, that they would increase the gap between how the government taxes income from wealth compared to income from work, and that immediate expensing and the low corporate tax rate would create vast new opportunities for tax sheltering.

As bad as all this is, perhaps the most alarming finding is that this plan seems to fit nicely with the goals of anti-tax radical Grover Norquist to create a consumption tax on the sly. Norquist has already spelled out several steps that would indirectly lead to a consumption tax -- like eliminating the estate tax, eliminating taxes on capital gains and dividends and interest, abolishing the corporate tax, and flattening tax rates, which Bush has partially accomplished. McCain would further these goals along.

John McCain's views on taxes are either extremely mysterious or just totally unprincipled. As we have discussed before at length, he swung from a conservative position in the 1980s and 1990s to opposing tax cuts for the rich in the early part of George W. Bush's administration and now has swung back to the right with a plan that his own advisers admit would cause the deficit to grow.

John McCain: Straight Talk on Taxes?

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We thought it was difficult to keep track of the tax positions of all the GOP presidential candidates. But with the GOP primary essentially over, we're finding that wasn't nearly as difficult as keeping track of the tax positions of one particular candidate: John McCain.

Now that the Arizona senator is the presumptive Republican nominee, it's worth asking what sorts of tax policies he would push for as President. Our honest answer: We have no idea. He has held several views and his recent explanations don't quite explain his various policy permutations. As our Congressional report card covering the years 2001 through 2006 shows, CTJ has given McCain an "A" in some years and an "F" in other years. But one might think that the "real" John McCain could be found by digging deeper, farther back into his history.

So it's worth looking at McCain's record before he ran for president in 2000. As explained in a report issued by CTJ on the senator's record back then, McCain often voted against bills that would reduce the deficit by closing tax loopholes (apparently "pork" is OK in his eyes if it's done through the tax code) or raising tax rates. He did vote in favor of the sweeping revenue-neutral tax reform bill in 1986 (along with an almost unanimous senate), but after the Republicans took over Congress in the 1990s, he sided with his party on bills to provide unaffordable and unnecessary tax cuts.

During his campaign for president in 2000 and for quite a while thereafter, something strange happened to John McCain. He strongly opposed the most central planks in the GOP platform and the driving force behind the conservative movement: tax cuts. Specifically, McCain was one of only two Republican senators to vote against both the 2001 and 2003 tax cuts. It is hard to exaggerate how amazing these votes are, since tax cuts have been the main policy proposal offered by Republican presidential candidates in almost every election since 1980. (Taxes weren't McCain's only deviation from conservative ideology; Jonathan Chait's recent article provides a long list of the ways McCain became a functional Democrat.)

Then, as he contemplated another run for the presidency, McCain had another change of heart. The key provision of the 2003 tax cut bill that he had opposed was the tax cut for capital gains and dividends. But In 2005 he voted for the budget reconciliation bill that extended that very gift to the wealthy for an additional two years.

McCain had earlier complained that "repeal of the estate tax would provide massive benefits solely to the wealthiest and highest-income taxpayers in the country," but in 2006 he decided that repealing most of the estate tax was just fine by him. He voted that year for the bill to gut the estate tax, which won a majority of votes in the Senate but failed to obtain the 60 votes needed for passage.

Now McCain has fully channeled his party's orthodoxy against taxes on the wealthy. He says he wants to make the Bush tax cuts permanent. He wants to slash the corporate tax rate from 35 percent to 25 percent (even though the tax "burden" on corporations in the United States is already among the lowest in industrialized countries).

Now, it would be one thing if John McCain actually offered some "straight talk" to explain all this. If he simply said he was wrong, or he was temporarily blinded by his rage at the GOP, that would be at least understandable. But instead, he has offered an explanation so convoluted that it defies belief.

John McCain now says that he opposed the Bush tax cuts in 2001 and 2003 because he thought they needed to be accompanied by cuts in spending to keep the budget deficit under control. Actually, what he said in 2000 about then-Governor George W. Bush's tax plan was, "I don't think the governor's tax cut is too big... it's just misplaced. Sixty percent of the benefits from his tax cuts go to the wealthiest 10% of Americans... and that's not the kind of tax relief that Americans need."

But for the sake of argument let's just take his word that he was concerned about budget deficits. How does he explain his position now, since the deficit is worse than ever? Here's a typical answer given by McCain: He explained at a debate on September 5 that he voted against the 2001 and 2003 tax cuts because they did not include cuts in spending, which he thought were also necessary. But at the same time, he also makes the claim that "it's very clear that the increase in revenue we've experienced is directly related to the tax cuts that were enacted, and they need to be permanent."

This is both baffling and astounding. It's baffling because if tax cuts actually could cause revenues to increase, then we would never need to cut spending ever. In fact, we could cut taxes and the resulting new revenue could be used for increased spending!

But it's also astounding because even Bush's Treasury Department has admitted (in a report released in 2006) that tax cuts cannot possibly pay for themselves. Sure, lower taxes might create some incentive to work and invest, resulting in some more income and thus more tax revenue, but that will never make up for more than a small fraction of the cost of a tax cut.

Does McCain believe, contrary to almost every mainstream economist, the ludicrous proposition that we can raise revenue by cutting taxes? Or has he been altering his view to win over an extreme fringe within his party to win its nomination?

So we have a riddle, and like any ancient sphinx, John McCain is not giving any clear answers. It almost makes us sad that we won't hear more about how Mike Huckabee wants to implement a proposal from the Church of Scientology to abolish the IRS. At least we know where he stands.

Republican Presidential Candidates Vie to Offer the Biggest Tax Cuts

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The Republican presidential candidates have all promised to make the Bush tax cuts permanent if elected. This would cost $5 trillion in the first decade alone and most of the benefits would flow to the top 5 percent (or 1 percent if the AMT is not fixed). Any attempt to put our fiscal house in order while extending these tax cuts would require a scaling back of public services that would be truly dramatic and unthinkable, as we've pointed out before. Nonetheless, the GOP candidates are trying to prove that they're even more anti-tax than President Bush. They have apparently decided that the Republican primary voters will not be mobilized and energized by a promise to extend the policies that appear to be in place today. The Republican base wants something more and something new.

Romney's "Stimulus"

Former Massachusetts governor Mitt Romney unveiled a new tax plan last weekend, calling his proposal an "economic stimulus plan" even though most of the provisions would be permanent rather than limited to any temporary, recessionary period. Romney would cut the lowest federal income tax rate (10 percent) down to 7.5 percent, and he would make this change retroactive to 2007 for those with incomes below $97,500. He would also eliminate payroll taxes for people over 65 who are still working and repeats his intention to make interest, capital gains and dividends tax-free for those with incomes below $200,000, even though most people below this level don't enjoy much in the way of investment income.

Who Can Cut Corporate Taxes the Most?

For business, Romney would allow 100 percent "expensing" of equipment for two years retroactive to 2007 and he would cut the corporate tax rate from the current 35 percent down to 20 percent over two years. Last week we reported that Senator John McCain and former New York mayor Rudy Giuliani both want to reduce the corporate tax rate to 25 percent. While some conservatives like to point out that our nominal corporate tax rate is high compared to that of certain other countries, the effective corporate tax rate is certainly quite low because of the loopholes businesses use to avoid taxes. Last year Citizens for Tax Justice found that, measured as a share of GDP, our corporate tax ranks among the lowest among industrialized countries. Both Giuliani's and McCain's plans would create a permanent research credit, and McCain would, like Romney, allow "expensing" of "equipment and technology investments."

Giuliani's Friends Introduce His "Simplification"

Meanwhile, Giuliani's friends in Congress have introduced a bill to implement the former mayor's tax proposal. Called the "Fair and Simple Tax" or FAST, it would lower the corporate rate to 25 percent, lower the capital gains rate to 10 percent, repeal the estate tax, and allow taxpayers the option of using a simplified tax that has three rates, 10 percent, 15 percent and 30 percent. This would be a huge tax break for the wealthy. The 30 percent rate begins at income of $150,000 and we've reported before that most of the current capital gains and dividends tax break goes to the richest 0.6 percent.

Citizens for Tax Justice has produced preliminary estimates showing that Giuliani's tax plan would cost, at least, an eye-popping $11 trillion over a decade.

Who's Rich? New CTJ Paper Analyzes Presidential Candidates' Definitions of "Rich"

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Several Presidential candidates have proposed allowing the Bush tax cuts to expire for wealthy Americans. For Senators Hillary Clinton and Barack Obama, "wealthy" means those with income above $250,000, while for former Senator John Edwards, this means those who make more than $200,000. John Edwards thinks people with incomes higher than $200,000 should pay more in Social Security payroll taxes, while Mitt Romney thinks that people with incomes below $200,000 need a new tax break for investments.

There seems to be a perception that people with incomes below $200,000 or $250,000, depending on who you talk to, are "middle-class" people who deserve every tax break they have ever received.

A new paper from Citizens for Tax Justice finds that in 2008, only 3.2 percent of taxpayers nationwide will have adjusted gross income (AGI) greater than $200,000 and only 2.1 percent will have AGI over $250,000. The paper also shows how many taxpayers have incomes higher than these levels in each state.

It further explores how people are often even more confused when the discussion revolves around the "richest one percent," partly because about a fifth of the public seems to believe they're in the top one percent.

Giuliani and McCain Release Tax Plans

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Former New York mayor Rudy Giuliani proposed new tax cuts last week that go beyond making permanent the Bush tax cuts (which in itself would cost $5 trillion over ten years). Giuliani proposes to also cut the capital gains rate from its current level of 15 percent down to 10 percent, and to cut the corporate tax rate from 35 percent to 25 percent.

CTJ published a paper this past summer showing that the current tax subsidy for capital gains and dividends cost $92 billion in 2005 alone, and nearly three quarters of that went to the richest 0.6 percent of taxpayers. This regressive tax break would become more costly under Giuliani's proposal.

Senator John McCain of Arizona released his tax plan on Thursday. McCain would also lower the corporate tax rate to 25 percent.

Another CTJ paper from last year found that U.S. corporate taxes as a percentage of GDP are already among the lowest in the developed world, meaning American corporations are not unduly burdened, or made less competitive than those in other countries, by our corporate tax.

McCain would create a permanent credit for research and development. CTJ has criticized the current research credit which, we've noted, has a peculiar following among lawmakers who usually argue that the free market works without government interference. McCain also proposes first-year deduction or "expensing" of "equipment and technology investments." Accelerated depreciation and expensing have in the past been a cause of tax sheltering and distortions in the economy. They can result in certain investments becoming more profitable after-tax than before-tax.

The Republican Presidential Primary: And In This Ring...

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McCain's Tax Plan: I Was Wrong About Everything

Senator John McCain (R-AZ) released his tax plan on Wednesday, which consists of repealing the Alternative Minimum Tax (AMT) without paying for it, extending the Bush tax cuts without paying for them, and requiring a 3/5 majority of both chambers of Congress to enact any tax increase.

Remarkably, this is the same senator who voted against the biggest of the Bush tax cut packages in 2001 and 2003. During a debate on September 5 he explained that he voted against those bills because they did not include cuts in spending, which he thought were also necessary. But at the same time, he also makes the claim that the tax cuts have boosted revenues, which would seem to imply that no cuts in spending are ever needed to pay for tax breaks.

This seems to be the position he has settled on, since he has no plans to pay for any of his tax cuts and has a somewhat vague proposal to require a "3/5 majority vote in Congress to raise taxes." Since even revenue-neutral bills are considered tax increases by the GOP now (because they offset the costs of, say a lower corporate rate by closing tax loopholes that benefit somebody) this apparently means a supermajority would be needed to enact any basic tax reform. John McCain is now committed to the idea that tax cuts will pay for themselves and even raise revenues.

(Those who are tuning in late to this ongoing debate may be utterly confused as to why anyone thinks tax cuts could cause revenues to increase. Anti-tax activists have convinced some conservative politicians that cutting taxes actually increases revenues because tax cuts encourage work and investment so much that incomes and profits increase enormously, in turn increasing tax collections by more than enough to make up for the costs of the cuts. Mainstream economists do not believe this and Bush's own Treasury Department and OMB director have admitted that they don't believe it either.)

Also, McCain would like to stop taxing "innovation" by making permanent the ban on internet access taxes and by banning taxes on cell phone use. As we've argued before, it's a shame that Thomas Edison didn't think to lobby for a moratorium on taxing electric devices, or that Henry Ford didn't lobby for a moratorium on taxes on automobiles, since those products were innovations for their time. McCain would also make permanent the research credit, which is a tax subsidy for certain companies supported by politicians who can't decide whether the free market works or doesn't work.

Huckabee's 50% Sales Tax

Now that former Arkansas governor Mike Huckabee has been climbing in the polls, reporters are suddenly inconvenienced by the need to read up on and explain the tax proposal Huckabee has been touting for months. His proposal is often described as a 23 percent national sales tax, but supporters prefer to call it the "Fair Tax," because they've apparently figured that the idea of a new sales tax is not inherently appealing to people. Actually the tax would be 30 cents on an item that costs a dollar, which most of us would call a 30 percent tax, but supporters argue that 30 cents is only 23 percent of $1.30. But that's not even half of the problem. Citizens for Tax Justice studied this proposal back in 2004 and found that to actually replace all the revenue collected by our current tax system, the national sales tax would actually have to be set at a rate of 50 percent.

So to recap:
  • The proposed national sales tax rate claimed by Fair Tax supporters: 23%

  • The proposed rate as any normal person would define it: 30%

  • The rate necessary for the Treasury to break even under realistic assumptions: 50%

  • The chances of anything like this being enacted: 0%

Giuliani's' Mind: A Place More Peaceful than Reality

Most Republican candidates reveal some sort of ambivalence or inner-conflicts over tax and fiscal matters. On one hand, they're all fairly intelligent people who must understand that revenues cannot be increased by tax cuts. On the other hand, they must find some way to appeal to the masses who want to hear the good news of free tax cuts without any troubling analysis that might disprove this appealing message. Hence you see McCain's convoluted explanations of his votes, Huckabee's attempts to avoid discussing the less right-wing aspects of his governorship, and Romney's policy acrobatics.

Former New York mayor Rudy Giuliani's mind appears to be serene and untroubled by such turmoil. He has been able to maintain throughout his campaign so far that the way to raise revenue for any initiative is to cut taxes, apparently freeing himself from any complicated thinking. He continued hammering this appealing message home at the debate on December 12. He argued that the solution to our national debt is that "the federal government has to restrain its spending" and that we need a policy "leaving more money in the pockets of the American people" without showing the slightest awareness of how little sense this makes.

Romney's Offshore Tax Evasion

Meanwhile, it has come to light that former Massachusetts governor Mitt Romney "was listed as a general partner and personally invested in BCIP Associates III Cayman, a private equity fund that is registered at a post office box on Grand Cayman Island and that indirectly buys equity in US companies." In other words, Romney was using a shell company -- a company located, on paper only, in a tax haven country -- to avoid paying taxes on money he was investing for his clients and himself. He had a similar arrangement in Bermuda. His campaign staff maintains that this was all perfectly legal. As far as we're concerned, that is the real scandal.

What the Presidential Candidates Are Saying about Taxes: Update

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The Republican candidates are in many ways stuck in a routine that does not look very promising. They all support lower taxes but are unable to square this with the fact that Americans aren't clamoring for the drastic cutbacks in public services that new tax cuts would inevitably require. They have generally tried to wish this fact away with the claim that tax cuts actually result in increased revenues (because tax breaks encourage work and investment and thus profits and incomes explode, pushing revenues up). Unfortunately for them, President Bush's own Treasury Department has refuted the idea that tax cuts come even close to paying for themselves, and recently OMB director Jim Nussle also conceded the same thing.

But we still hear this claim made at the Republican presidential debates as candidates pander to anti-tax extremists. All of them support making the Bush tax cuts permanent and must explain away the fact that this will cost $5 trillion over ten years.

Giuliani and McCain: Denying Reality to Win Over Republican Voters

To cite just one example, former New York City mayor Rudy Giuliani said on October 9 that as mayor he cut taxes 23 times, including cutting income taxes by 24 percent, which he says resulted in a 42 percent increase in the revenue collected from the income tax. (It would have been inconvenient for him if any of his opponents had pointed out that he happened to run the city during a stock market surge that boosted incomes, but no one seemed interested in making that point.) Some people have questioned his claim to have cut taxes 23 times.

Senator John McCain still presents one of the more interesting attempts to rationalize a tax policy that is truly irrational. One would like to believe that he is among the saner candidates at the GOP debates since he voted against the tax cut bills enacted in 2001 and 2003. He explained once again on September 5 that he voted against those bills because they did not include cuts in spending, which he thought were also necessary. But at the same time, he also makes the claim that "it's very clear that the increase in revenue we've experienced is directly related to the tax cuts that were enacted, and they need to be permanent." This is baffling. Why was he adamant about cuts in spending if tax cuts actually raise revenue? Under his logic, he can afford even more spending if we cut taxes.

Both these candidates are also known for their proposals to use the tax code to push families toward the individual health insurance market (the market for coverage that is not employer-based). Individual-based health coverage is usually much more expensive, has less generous benefits, and may be more likely to involve high deductibles that discourage people from getting care they actually need. Giuliani would offer deductions for such health care, while McCain would offer credits (which are slightly fairer but still have the same underlying problem).

Romney: Make the President All-Powerful and We'll Get the Budget Under Control

Former Massachusetts Governor Mitt Romney at least seems to acknowledge some relationship between taxes and public spending that coincides at times with reality. However, he claims to stand for smaller government and his strategy to bring about reduced spending, to go along with reduced taxes, is a "line-item veto." He criticized Giuliani for opposing the line-item veto that President Clinton exercised briefly before it was struck down by the Supreme Court. But the proposal Romney favors now is different and technically not a true line-item veto, although it's still possibly unconstitutional.

The legislation he's talking about would probably be similar to what the Republican House passed last year, which would allow the President to single out spending provisions in an appropriation bill (or a bill to expand entitlements), withhold funds and force Congress to vote to approve or reject the rescission (cancellation of the spending). The President would be allowed to withhold funds for a total of 90 days, even if Congress rejects the rescission. This would obviously be an unprecedented expansion of the President's power, and it's not at all clear that a president would necessarily use this power to reduce deficits (it could be used to expand them, actually).

Romney favors making permanent the Bush tax cuts for capital gains and dividends (which resulted in the current 15 percent tax rate for those forms of income) but would go further by eliminating taxes on income from interest, capital gains and dividends for families with incomes less than $200,000. Few middle-class people could really benefit from these sorts of tax cuts. Roughly three fourths of the current tax break for capital gains and dividends went to the richest 0.6 percent in 2005 (as Citizens for Tax Justice pointed out recently).

Thompson: Alternative Maximum Tax, Paid for by Cutting Social Security

Former Senator Fred Thompson recently introduced his own tax plan, which involves eliminating the AMT, extending the Bush tax breaks, and cutting the corporate rate to 27 percent. His plan also allows taxpayers to choose to pay under the existing system (minus the AMT and with the Bush tax cuts) or under a simplified system that would have just a 10 percent rate and a 25 percent rate and almost no deductions or credits. This is essentially a plan introduced last month by the House Republicans that CTJ dubbed the "Alternative Maximum Tax." Because the "simplified" option would eliminate refundable tax credits now available to low-income working families, it would be of no benefit to the poorest one-third of Americans. Wealthy families, however, would get huge tax reductions.

When asked recently how he would pay for his plan, Thompson said that his tax cuts would cause "growth in the economy" that would result in more revenue. The only change in spending he mentioned was his plan to cut back the Social Security benefits that are promised to future retirees.

Huckabee: The National Sales Tax

Former Arkansas Governor Mike Huckabee continues to tout his plan for a 23 percent national sales tax to replace all other federal taxes. Supporters call this plan a "Fair Tax." CTJ studied the idea of a national sales tax in 2004 and found that in order to maintain current revenue levels, this sales tax would have to be around 50 percent. Low-income households would pay more for everything they buy, while the wealthy would hit the jackpot with tax-free capital gains, dividends and interest.

At the October 9 debate Huckabee made the astounding claim that this national sales tax plan "untaxes the poor in our culture." The "Fair Tax" plan does include a monthly, prepaid rebate to households that would theoretically balance some of the regressive effects of the tax on low-income households. But CTJ's study in 2004 of a similar plan found that even after accounting for these "prebates" as supporters call them, the plan still increases taxes on the poor and cuts them for the rich. Further, if the rate would really be as low as 23 percent, that implies massive cuts in public services will be necessary -- and these cuts probably would not come at the expense of the wealthiest families.

Democrats: Social Security Stealing the Show

The recent debating among the Democratic candidates has been a little more sane but still confused. A disproportionate amount of time and energy has been focused on whether or not the cap on earnings subject to Social Security payroll taxes (currently at $97,500) should be raised to deal with the alleged crisis the program is facing.

On October 30, Senator Hillary Clinton made the important point that the talk of "crisis" is generally a talking point used by conservatives who want to privatize the program. This is largely true. The assumptions used to make dour projections about Social Security's insolvency starting in 2041 are considered unreasonably pessimistic by many economists. It's also important to remember that benefits rise with wages, which usually rise faster than inflation. As a result, even if the pessimistic economic assumptions are borne out and benefits scheduled to be paid in 2041 must be reduced by 25 percent, they would still be larger in real terms than those benefits paid today.

Clinton also made the valid point that the most important thing we can do now for Social Security is to start with "fiscal responsibility." The only real problem Social Security has right now is that through the Bush years Congress and the President have spent the Social Security surplus. Social Security currently is taking in more in payroll taxes than it pays out in benefits, and this surplus can be used to pay down the national debt, thus making it easier for us to pay benefits when the baby boomers retire in large numbers. However, Presidents and members of Congress have typically spent these surpluses on other things, except for a period during the 1990s under President Clinton. Finding a way to balance the budget without spending the Social Security surpluses, in other words, basic fiscal responsibility, is indeed the place to start.

Senator Clinton did falter however, when she argued that raising the payroll tax cap would be a tax increase on middle-class Americans. Senator Barack Obama pointed out at the next debate on November 15 that only 6 percent of taxpayers have incomes above the cap so it's simply dishonest to say that raising the cap would constitute a tax increase on "middle-class" people.

But then again, Obama himself seemed to be accepting this logic on October 30, when he said that perhaps they should raise the cap, "potentially exempting folks in the middle -- middle-class folks..." Most people probably took that to mean something like what John Edwards has proposed, which would not raise the cap for people with earnings between the current cap and $200,000 but then raise it for those with incomes beyond $200,000. This would of course create a very peculiar "donut-hole" in the Social Security payroll tax between $97,500 and $200,000 in earnings.

It's also important to note that Social Security replaces a proportion of earnings (a smaller proportion for high-income people), but only those earnings that are actually covered by the Social Security payroll tax. So just as there is a limit on what wages are taxed for Social Security, there is a limit on how much a wealthy person can collect in benefits. It's unclear whether or not plans to raise the cap on wages covered by Social Security payroll taxes would also raise this limit on benefits that can be collected by wealthy individuals.

The Need to Focus on Undoing the Bush Tax Cuts

Lately, the Democratic debates have not focused on the most important tax issue of all, which is also the one they largely agree on. Will the Bush tax cuts be made permanent or not? None of the Democratic candidates would make them permanent (at least not entirely). This is crucial. CTJ projects the total cost of the Bush tax cuts over the 2001-2010 period to be about $2.4 trillion, all deficit-financed. Even if the Bush tax cuts are allowed to expire at the end of 2010, as they are scheduled to under current law, the interest on the increased debt resulting from these tax cuts would keep costing us -- to the tune of $1.5 trillion in the 2011-2020 period. Then, if the tax cuts are made permanent on top of all that, that would cost another $5 trillion from 2011 through 2020.

But the Democratic candidates want to hold on to some tax cuts for the "middle-class." Which tax breaks to extend therefore becomes a trickier question. Each of the Democrats wants to stand up for the middle-class, but there is some confusion about what that would even mean. Former Senator John Edwards would repeal the Bush tax cuts for those with incomes above $200,000, but IRS data for 2005 show that only 2.7 percent of taxpayers had adjusted gross income above this level. The top 2.7 are the only folks who would lose their tax cuts.

Senator Barack Obama tries equally hard to appear pro-middle-class. His plan would cut taxes for 150 million Americans at a cost of $85 billion a year. He would give families a credit of $1000 (or $500 for unmarried taxpayers) and eliminate income taxes for seniors whose income is below $50,000 (although seniors in this category pay little in income taxes anyway). The credit would essentially offset payroll taxes on the first $8,100 in earnings. But it's not entirely obvious that what people in this income category really need is more tax cuts when the revenue spent on this plan could be spent on health care, retirement security or energy efficiency.

But Edwards and Obama both are certainly moving in the right direction. They would both restore the progressivity of the tax code that has been reduced dramatically under Bush. They also want to reduce the tax code's bias for income from wealth over income from work. Edwards would increase the tax rate for capital gains to 28 percent for those with incomes above $200,000 and Obama would raise it to as much as 28 percent for those with incomes over $250,000. When Bush took office, capital gains, which flow mostly to the wealthy, were already taxed at a special low rate of 20 percent. In 2003 that was reduced to 15 percent and dividends, which were previously taxed as ordinary income, were also made subject to the special 15 percent rate. As a result, people who live off of their investments or inherited wealth can actually pay federal taxes at a lower rate than many middle-income people. Edwards and Obama would both end this outrageous feature of the tax code with their higher rates for capital gains.

There are some minor variations among these plans. Edwards wants to make the first $250 in income from wealth (interest, capital gains, dividends) tax-free, which could save a middle-income family $63 at most each year. Obama would eliminate capital gains taxes on startup businesses, which is a strange idea because capital gains is not involved in the starting up of businesses but rather in the selling of assets. But these details are far less important than the overall progressive direction in which both candidates would take tax code.

Senator Clinton has spoken in more general terms about her ideas on taxes. She would also restore much of the progressivity lost during the Bush years by repealing the Bush tax cuts for those with incomes above $250,000. She has not stated whether she would also propose further tax changes for capital gains.

The Democrats' Plans Still Have Costs

But even these more progressive tax plans have costs that must be addressed. The Bush tax cuts expire at the end of 2010. That means that when Democratic candidates say they will do away with the Bush tax cuts for families above a certain income level, that really means they're going to extend the tax cuts for families with incomes below that level. In other words, new tax cuts are being offered, just not to the richest Americans. Whether and how we would pay for these new tax cuts, along with the health care plans and other initiatives promised by each Democratic candidate, is crucial and has not been fully explained yet by any of them.

Democratic Presidential Candidates Address Fiscal Issues in Debates

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Democratic Presidential candidates participated in debates on September 20 and September 26 that addressed taxes, Social Security, health care, and other issues.

Health Care

The candidates seem to vary in how they claim their health care reform plans would be paid for. Even if his numbers don't always add up, former Senator John Edwards is relatively honest about his plans. He cited his proposal to eliminate the Bush tax breaks for those making over $200,000 and raising the rate for capital gains to 27 percent.

Senator Hillary Clinton seemed to suggest on the 20th that increasing efficiency with electronic records and other reforms can raise billions of dollars and pay for her plan to provide families the same health insurance options that federal employees have as well as tax credits for those who cannot otherwise afford to buy these plans. New Mexico Governor Bill Richardson said he disagrees with John Edwards and that no new taxes are needed. But then he said he would "eliminate the two percent" by which we think he means ending the tax breaks for the wealthiest two percent (which sounds an awful lot like what John Edwards wants to do actually) as well as raise $77 billion by cutting corporate welfare.

Social Security

On Social Security, Richardson is slightly less confused. On the 26th, he pointed to the fact that the program may not really be in grave danger because the assumptions used to make the oft-cited projections of insolvency are overly pessimistic. The other candidates seemed more convinced that Social Security really does face a crisis. Senators Christopher Dodd and Joe Biden said the cap on wages subject to Social Security taxes should be raised, while Senator Barack Obama (who was present on the 26th but not the 20th) would rather remove the cap entirely so that all earnings are subject to Social Security taxes.

Clinton won't say what she would do for Social Security exactly. On both nights, Edwards put forth the peculiar idea of creating a donut hole in Social Security taxes. The first $97,500 of earnings would be subject to the tax as is the case currently, then earnings between that amount and $200,000 would not be, and then all earnings over $200,000 would be subject to the tax.

Besides the question of whether Congress can actually constrain itself from spending Social Security surpluses as discussed above, these proposals also raise the question of whether or not support for the program would erode to any significant degree if the funding mechanism was made this progressive. The wealthy people who would be affected by these proposals see a much smaller fraction of their wages replaced by Social Security benefits than low- and middle-income people. On the other hand, it's not clear that support for Social Security is really linked to how it's funded.

Tax Incentives

The candidates also vary in the extent to which they're willing to use the tax code to affect behavior. Senators Dodd and Gravel favor a tax on carbon to reduce emissions that contribute to global warming. Governor Richardson favors using the tax code to encourage everything from higher wages to technology companies to unionization. We would argue that Governor Richardson's proposals stray a bit from the function and purpose of the tax code, which is to fund government services.

Barack Obama Releases Tax Plan

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This week presidential candidate Barack Obama announced the broad outlines of his plan to cut taxes for 150 million Americans at a cost of $85 billion a year. The plan would give families a credit of $1000 (or $500 for unmarried taxpayers) and eliminate income taxes for seniors whose income is below $50,000. The credit would essentially offset payroll taxes on the first $8,100 in earnings.

Low- and middle-income seniors (who generally don't face payroll taxes) could benefit from being removed from the federal income tax rolls, although that demographic is not paying a whole lot in federal income taxes anyway. The plan also includes a tax credit for home mortgage interest, since the current home mortgage interest deduction is not available to non-itemizers and is regressive since it is worth less to those in lower tax brackets.

Reducing the Tax Break for Capital Gains

To pay for the plan, the tax rate on capital gains would be raised to some unspecified level and loopholes and offshore tax avoidance would be targeted. Citizens for Tax Justice has recently decried the regressive nature of the current tax break for capital gains (which John Edwards also wants to reduce) as well as offshore tax evasion.

It's Progressive, But Is This What We Need?

Obama's plan would certainly move the federal tax code in a progressive direction, but it's not entirely clear that the thing low- and middle-income Americans need right now is a tax cut.

"I have no problem with them trying to undo all or most of the Bush tax cuts for the wealthy even if it's only for a couple of years, but there are so many huge fiscal problems that we should be very careful about proposing new trivial programs when there's so many real big programs we need to do something about," Robert McIntyre, director of Citizens for Tax Justice, told the Wall Street Journal after the Obama plan was announced.

Romney Tax Plan Unlikely to Help Middle-Class

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Presidential candidate Mitt Romney has presented a plan to allow income from wealth to go tax-free for people with incomes below $200,000. Romney favors making permanent the Bush tax cuts for capital gains and dividends (which resulted in the current 15 percent tax rate for those forms of income) but would go further by eliminating tax on income from interest, capital gains and dividends for families with incomes less than $200,000.

The plan is being presented as a boon for middle-class families who are trying to save, but few of the beneficiaries would be truly middle-class. Roughly three fourths of the current tax break for capital gains and dividends went to the richest 0.6 percent in 2005 (as Citizens for Tax Justice pointed out recently). The truth is that most wealth and savings are in the hands of the richest Americans.

"For people earning below $100,000, cutting the tax rate on interest, dividends, and capital gains means almost nothing," said Robert S. McIntyre, director of Citizens for Tax Justice, as quoted in the Boston Globe. "For those people earning between $100,000 and $200,000, you might be talking several hundred dollars in tax savings. Then, the question is, does he really have a plan that cuts off exactly at $200,000? That would be nuts - the person who makes $200,001 would be kind of angry."

At least one other presidential candidate has moved in a different direction. John Edwards would allow families a tax exemption of the first $250 of income from interest, capital gains or dividends, but he would raise the top capital gains tax rate to 28 percent while also expanding the EITC and child tax credit and matching savings up to certain limit for low-income families.

The Presidential Candidates on Taxes

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Given that the 2008 presidential race started two years before the election, one can be forgiven for failing to keep up on all the candidates' views on tax fairness. We have already been subjected to a dozen debates, a bewildering number of candidates and a variety of tax proposals. If you have not attentively followed the race so far, don't worry, because we've done the work for you. Here is a quick review of the ideas the 2008 presidential candidates have put forward so far.

Bad Ideas

Make Permanent the Bush Tax Cuts

The tax cuts enacted under President Bush are scheduled to expire at the end of 2010. The Republican candidates want to make them permanent, including John McCain, a candidate who actually voted against the biggest tax cut bills in 2001 and 2003. It seems that all the Democrats would let at least some parts of the Bush tax cuts expire. New Mexico Governor Bill Richardson has made noises indicating that he doesn't want to be associated with opposition to any sort of tax breaks. Even he seems to have indicated (in a debate on June 28) that any tax cut for the richest two percent "has to go," but he would replace those with new tax cuts for the middle-class or for certain companies that train and pay workers above the prevailing wage. (You can see whether those candidates who were in Congress during the Bush years voted for or against the Bush tax cuts by looking up their records in CTJ's Congressional Tax Report Card.)

Repeal the Estate Tax

The estate tax is a federal tax placed on substantial inheritances, much of which consist of capital gains that were never taxed. The Republican candidates would repeal it while most of the Democrats probably would not. Those Democrats who were in Congress at the time, Joe Biden, Hillary Clinton, Christopher Dodd, Dennis Kucinich, and Barack Obama, all voted against the Republican proposal to slash the estate tax last year. John Edwards would make permanent the estate tax rules that apply this year, which exempt an estate worth $4 million for a married couple. A report from CTJ put out early this year shows that the estate tax affected only the largest 0.8 percent of the estates of those who died in 2005 (the most recent year for which data are available).

National Sales Tax

A proposal that anti-tax radicals call a "Fair Tax" is basically a national sales tax that replaces all other federal taxes. It's misleadingly described as a federal sales tax of 23 percent, and former Arkansas Governor Mike Huckabee claimed at a May 15 debate that the transition to this tax would be revenue-neutral. CTJ studied the idea of a national sales tax in 2004 and found that in order to maintain current revenue levels, this sales tax would have to be around 50 percent. It is also very regressive. Low-income households would pay more for everything they buy, while the wealthy would hit the jackpot with tax-free capital gains, dividends and interest. We are fairly confident that this proposal will go nowhere when people realize that a house that costs, say, $200,000 would cost $300,000 under this plan.

Republican candidates Duncan Hunter, Tom Tancredo, Ron Paul, Mike Huckabee, and even John McCain have expressed support for the "Fair Tax" proposal. Former Senator Mike Gravel seems to be the only Democratic candidate in favor of this notion, and has claimed that a national sales tax would even solve global warming.

Flat Tax

Some Republicans favor a flat federal income tax rate as opposed to progressive rates. The idea is to tax all income at the same rate and its proponents misleadingly argue that this will lead to simplification. (Of course, in reality it's the various deductions and credits and other factors in the tax code, not progressive rates, that makes taxes complicated.) Mike Huckabee, Rudy Giuliani, and Sam Brownback are in favor of this plan, although Brownback has a plan to employ an optional flat tax system that will keep both progressive and flat tax rates available. Brownback's idea is perhaps the most bizarre because it's even more difficult to see how we could simplify anything by having two different tax systems.

But of course the bigger problem with the flat tax is that it's just blatantly, unapologetically, regressive. Currently the wealthy pay income taxes at higher rates than middle-income and low-income families. (This helps balance out the regressivity of other taxes, like federal payroll taxes and state sales taxes.) A flat tax has just one income tax rate, which will be lower than the rates paid now by the wealthy and probably higher than the rates paid now by the middle-class. If the switch to a flat income tax is revenue-neutral, that means poor people will pay more in income taxes and rich people will pay less. If everyone can pay less, well, then it can't be revenue-neutral and must involve massive cuts in government spending. We'll take a wild guess that any such spending cuts won't be at the expense of the wealthy.

Increase Revenue by Cutting Taxes

Giuliani has said that new revenue can be generated by cutting taxes, which will cause the economy to grow so much that tax revenues paid to the federal government will actually increase. Giuliani, remarkably, told an audience on August 5 that we can raise revenue to fix collapsing bridges not by increasing the federal gas tax but by lowering taxes. And Giuliani is not alone among Republicans who believe this fantasy. In the May 15th Republican debate John McCain also claimed that the Bush tax cuts resulted in "dramatically increased revenues."

What's remarkable is that McCain explains his votes against the Bush tax cuts in 2001 and 2003 by saying that needed spending reductions were not being made at the time taxes were lowered. But if tax cuts raise revenues, why should anyone care whether or not spending is reduced? Why not just keep cutting taxes until the revenues grow enough to pay for whatever spending we want? It's hard to believe that McCain doesn't see how absurd this theory is. One could be forgiven for thinking that he is contorting his positions in order to win over the conservative voters in the Republican primaries.

There's wisdom in the saying, "If it sounds too good to be true, it probably is." This saying applies to the theory that tax cuts raise revenues. President Bush's own Treasury Department issued a report last year that refuted the claim that tax breaks spark so much economic growth that they pay for themselves.

Tax Breaks for Healthcare

Rudy Giuliani's healthcare plan consists of a tax deduction of up to $7,500 for individuals and $15,000 for families who purchase health insurance. But a tax deduction is worth the amount of the deduction times the top tax rate a family is subject to, so this offers more for the rich families in higher income brackets than middle-income or low-income families who actually need help obtaining health insurance. And low-income people who pay payroll taxes, but not federal income taxes, get no benefit, even though they're the group most likely to be without healthcare. John McCain has proposed a $3,000 credit for healthcare. A credit is more progressive than a deduction since its value doesn't depend on the income tax bracket a family is in, but if it's not refundable it still won't help those who pay federal payroll taxes but not federal income taxes.

But the more important problem is that we should not use the tax code to push families towards the individual health insurance market (the market for coverage that is not employer-based). Individual health coverage is usually much more expensive, has less generous benefits, and may be more likely to involve high deductibles that discourage people from getting care they actually need.

Eliminate the IRS

Mike Huckabee and Ron Paul, two Republican candidates, are both in favor of abolishing the Internal Revenue Service. It's not entirely clear who would administer the national sales tax these candidates support if there was no IRS.

Better Ideas

Repeal Bush Tax Cuts to Fund Other Priorities

While probably all the Democratic candidates would let at least some parts of the Bush tax cuts expire at the end of 2010, some have expressed interest in repealing certain parts of them before that time and using the revenue for other priorities like health care. Barack Obama and John Edwards both favor some version of this maneuver to fund their healthcare plans, with Obama repealing some tax breaks for families with incomes of $250,000 or more, and Edwards doing the same for families at $200,000 or more.

No reasonable person could disagree in principle with the idea of rolling back some of the tax cuts. By substantially cutting taxes, mostly for the rich, President Bush has managed to add $2.4 trillion to the national debt already, despite facing a small surplus when he came to office. By 2010, most of the benefits of those tax breaks will go to the richest 1 percent under the administration's budget plans.

However, repealing the Bush tax cuts does not create much new revenue compared to the budget baseline that Congress already uses, which assumes the Bush tax cuts will be allowed to expire at the end of 2010.

Obama has not specified how his healthcare program will be funded past the first year. Edwards, on the other hand, claims that his healthcare plan with be funded permanently through the repeal of the 2001 tax cuts for those with income over $200,000. The cost of extending the tax cuts for those with incomes below $200,000 would reduce revenues, a cost that he has not yet accounted for. Although his heart is in the right place when it comes to healthcare, his plan could be improved with additional provisions to raise needed revenue.

But at least these candidates are facing the fact that taxes must be raised. Clinton is still "wrestling" with whether or not to increase taxes and she and Richardson (and to an extent, Obama) both seem to think that they can pay for their plans partly by eliminating inefficiencies in the healthcare system.

Stop Taxing Work More than Wealth

One extremely good idea proposed by John Edwards is to end the tax subsidy for people who have capital gains. One signature tax cut enacted by President Bush reduced the tax rate on capital gains from 20 percent to 15 percent and made dividends, which had been taxed as ordinary income, also taxed at 15 percent. At the end of 2010, that break will expire if Congress doesn't extend it and dividends will be taxed as ordinary income and capital gains will be taxed at 20 percent again.

But even the 20 percent tax rate is a break for the wealthy investors whose other income is mostly taxed at the highest ordinary income rate (currently 35 percent). CTJ recently found that the cost of the current tax treatment of capital gains and dividends was about $92 billion in 2005 alone and three fourths of that went to the richest 0.6 percent. Edwards has proposed taxing capital gains at 28 percent, which is certainly a huge step in the right direction.

Unfortunately, the Republican candidates would like to make permanent the tax breaks for capital gains and dividends and those who support a flat tax or national sales tax generally assume capital gains and dividends won't be taxed at all. Mitt Romney has the strange idea of making interest, capital gains and dividends tax-free for "middle-income" people. It's unclear how he defines middle-income given the CTJ data showing that capital gains and dividends mostly benefit the wealthy.

Close the Loophole for Carried Interest

The only thing more senseless than a huge capital gains tax break is allowing it for income that isn't a capital gain. Private equity fund managers, who can earn hundreds of millions of dollars, use a tax loophole to have part of their compensation that they call "carried interest" taxed as capital gains, and thus at the 15 percent rate instead of the 35 percent rate that applies to their ordinary income. Various arguments are being put forth by the industry to support this tax break, most of which are easily refuted. The bottom line is that they are getting paid for the work they do, just like the rest of us, and yet they pay a lower tax rate on the hundreds of millions they earn.

Hillary Clinton, Barack Obama, and John Edwards have all come out in favor of legislation proposed by Congressman Sander Levin (D-MI) to close this loophole. Chris Dodd has expressed some misgivings about the legislation but has not taken a position yet.

Taxing Carbon Emissions

Democratic candidate Chris Dodd has come out for a corporate carbon tax as a way to reduce energy consumption and reduce emissions of carbon dioxide into the atmosphere. Clinton, Edwards and Obama are for a cap and trade program, which could have the same effect. A cap and trade program would involve a cap on the total amount of carbon that can be emitted and would allow companies to buy and sell the rights to emit carbon.

The only fear among some progressives is that under either a carbon tax or a cap and trade program, the added cost would likely be passed on to consumers in the form of higher prices that disproportionately burden low-income families. An increase in the cost of gasoline, for example, might have only a minuscule effect on the total budget of wealthy family, who would anyway be more able to rearrange their life to reduce driving. Eventually our concerns about the environment may have to be balanced against our concerns about the incidence of the cost of such policy changes. The outcome of that debate will hinge on what can be done to lower the costs for those who can least afford to pay them.

It should be noted that several candidates have expressed interest in ending tax subsidies for oil companies. During the debates, Biden, Edwards, and Clinton all expressed interest in taking this step in some form or another. These tax subsidies are described in CTJ's paper calling for their repeal and they make little sense at a time when oil companies are making record profits while the public wants to reduce and reverse global warming.

Dodd Becomes the First Presidential Candidate to Endorse Tax on Emissions

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Presidential candidate and Senator Chris Dodd (D-CT) announced his support this week for a tax on carbon emissions as a way to reduce global warming. Other candidates have avoided any talk of raising taxes as a way to combat CO2 emissions and most have avoided talk of tax increases altogether. But even conservative economists have been publicly promoting the carbon tax for some time now.

While most Democrats in Congress have been considering several "cap-and-trade" programs that would limit the overall amount of CO2 emissions and allow companies to trade rights to pollute amongst themselves, several economists and even business leaders have lately argued that a carbon tax would be less burdensome. Part of the reason is the great bureaucracy required to measure emissions from individual plants under a cap-and-trade system. Another reason is that a carbon tax would create more certainty about how much it costs to pollute.

Some environmental groups, however, worry that a carbon tax sets no overall limit on pollution the way a cap-and-trade system would. The challenge for proponents of the carbon tax is to design it in a progressive way. Otherwise, it would be passed onto consumers and therefore act much like a consumption tax, which is always regressive. Working families probably don't use less gasoline than rich families, but if they pay the same carbon taxes (indirectly) that means the carbon tax will take a greater percentage of a working family's income. A progressive version might have to somehow target offsetting tax cuts towards those hardest hit by the carbon tax.

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