Regressive Tax Proposals News


New Movie Aims to Scare Public by Depicting IRS as Jack-Booted Thugs


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Looking for a good scare this Halloween? Right-wing film producer John Sullivan will have you hiding under your covers with his portrayal of jack-booted IRS thugs going door to door looking for any Christian, veteran or true freedom-loving American that they can squash.

Pulling no punches, Lori Marcus, a commentator in the recently released documentary "Unfair: Exposing the IRS," says that if the IRS is not stopped then the next boxcar will be coming for you, an allusion to the boxcars used to carry Jews to Nazi concentration camps. Nazi allusions are part and parcel of Sullivan, whose right-wing propagandist films such as"2016: Obama's America" and "Expelled: No Intelligence Allowed," are chock full of factual errors and hyperbole in service of perpetuating a sense of mortal fear of all things Obama or progressive.

With Unfair, Sullivan uses the IRS's recent scandals as a jumping off point to argue that the IRS is an inherently criminal organization at the forefront of turning America into a "fascist state." In reality, the real scandal is how years of woefully underfunding the IRS has seriously hamstrung the agency's ability to perform its even its most basic tax collection duties. The lack of adequate funds for computer infrastructure, staff and training is more the cause of the scandals than any fake conspiracy dreamed up by Sullivan.

Rather than pushing for adequately funding the IRS, the film calls for  abolishing the agency through the enactment of the so-called "Fair Tax," which is a proposal that would essentially replace all federal taxes with a national sales tax. The film fails to mention that a realistic version of the Fair Tax would be extremely regressive, increasing taxes on the bottom 80 percent of taxpayers by an average of $3,200 annually, while cutting taxes for the top 1 percent of taxpayers by an average of $225,000 annually. In addition, the assertion that a Fair Tax system would "Abolish the IRS" is misleading in that it leaves out that fact that the IRS would simply need to be replaced by a complicated system of mini-IRS's at the state level.

In other words, the Fair Tax plan promoted by the movie is really just a bait and switch, promising low taxes and the end of any tax collection issues, but delivering higher taxes for most taxpayers and a whole new set of state tax collection issues.

Unfortunately, the push to abolish the IRS and/or enacting the Fair Tax is not just the province of right-wing filmmakers. The Fair Tax Act, for example, has actually gained some legislative traction, earning as many as 76 sponsors in the House of Representatives and 9 sponsors in the Senate. Even scarier, the Republican National Committee is now parroting the Fair Tax playbook by fundraising on the promise to "Abolish the IRS," though they did not exactly explain how they would go about doing this.

Rather than believing spun up stories about the ghouls and goblins having taken over the IRS this October, Congress should instead take its role seriously by substantially increasing the IRS's budget, so the agency can more effectively collect critically needed revenue and provide better service to U.S. taxpayers. 


House GOP Bill Combines Worst Tax Break Ideas of 2014 for Half-a-Trillion Dollar Giveaway


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With very few days left to legislate before the election, House Republicans are rushing through the Jobs for America Act, which includes several provisions to curb regulations as well as a grab bag of over $520 billion in tax breaks for businesses over the next decade. These tax cuts will do more to expand the deficit than expand employment.

The House already approved each of these tax breaks as separate pieces of legislation that went nowhere in the Senate. The first three of the breaks described below are usually temporarily extended as part of the “tax extenders” legislation that Congress usually enacts every couple of years. Making these breaks permanent, as this House bill would do, would destroy any hope that lawmakers will ever come to their senses and end this wasteful practice.

The five important tax provisions of the Jobs for America Act are as follows:

Make Permanent Bonus Depreciation - Bonus depreciation is a significant expansion of existing breaks for business investment. The Congressional Research Service's (CRS) review of the research on bonus depreciation found that it does not affect the overwhelming majority of firms’ investment decisions. It cites CBO research concluding that bonus depreciation increases economic output by $0.20 to $1.00 for every dollar given up, while increased unemployment benefits increase economic output by $0.70 to $1.90 for every dollar given up. This suggests that throwing $269 billion more in bonus depreciation breaks at businesses over the next decade would be an enormous boondoggle.

Companies are allowed to deduct from their taxable income the expenses of running the business, so that what’s taxed is net profit. Businesses can also deduct the costs of purchases of machinery, software, buildings and so forth, but since these capital investments don’t lose value right away, these deductions are taken over time. In other words, capital expenses (expenditures to acquire assets that generate income over a long period of time) usually must be deducted over a number of years to reflect their ongoing usefulness.

Bonus depreciation is a temporary expansion of the existing breaks that allow businesses to deduct these costs more quickly than is warranted by the equipment’s loss of value or any other economic rationale. Unfortunately, Congress does not seem to understand that business people make decisions about investing and expanding their operations based on whether or not there are customers who want to buy whatever product or service they provide.

Make Permanent Section 179 Small Business Expensing - Like bonus depreciation, section 179 is a depreciation break, meaning it allows firms to deduct the costs of investment in equipment more quickly than they can under current law. As with bonus depreciation, a systematic review of section 179 by the CRS has found the tax break to be ineffective at promoting growth. Making it permanent would cost $73 billion over the next decade.

Section 179 allows firms to deduct the entire cost of a capital purchase (to “expense” the cost of a capital purchase) up to a limit. The provision in this bill would allow expensing of up to $500,000 of purchases of certain capital investments (generally, equipment but not land or buildings). The deduction is reduced a dollar for each dollar of capital purchases exceeding $2 million, and the total amount expensed cannot exceed the business income of the taxpayer. This means that this break is targeted to companies smaller than, say, General Electric, even if the beneficiaries are not exactly what most Americans think of as “small businesses.”

Make Permanent the Research Credit - The research credit is a wasteful tax break that is used primarily to subsidize activities that would have been carried out by companies even without any tax incentive. One of many problems is that accounting firms are helping companies obtain the credit to subsidize redesigning food packaging and other activities that most Americans would see no reason to subsidize. A CTJ report explains why Congress should either substantially reform the research credit or simply let it stay expired. Making the research credit permanent would cost $156 billion over the next decade.

Repeal of the Medical Device Tax - Enacted as part of healthcare reform, the medical device tax raises a critically needed $26 billion over the next ten years to help pay for the costs of expanding healthcare to millions of Americans. While some medical device companies complain that the tax will harm them, these hyperbolic claims ignore the fact that the healthcare expansion that is partly funded by this tax will massively expand the market for their products.

Ban States From Taxing Internet Access - While the argument for restricting state and local governments from placing any tax on internet access was weak back in 1998, it makes zero sense in 2014 to continue to coddle the goliath internet companies by allowing them to escape the kinds of taxes that states impose on other services. This legislation is actually worse than previous extensions of this policy in that it would disallow the seven states with grandfathered taxes on internet access from continuing them, resulting in an annual loss of over $500 million in revenues for those states.


The Koch Brothers' Ugly Vision for Tax Deform


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

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

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


Chairman of House Tax-Writing Committee Reported to Push Ryan Plan as Tax Reform


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Republican Congressman Dave Camp of Michigan, chairman of the House Ways and Means Committee, reportedly told members of his committee on Wednesday that he would propose a tax reform based on the framework spelled out in the House budget resolution – also known as the “Ryan plan,” because it was developed by House Budget Committee chairman Paul Ryan.

The Ryan plan calls for Congress to enact some very specific tax cuts and offset their costs by eliminating or limiting tax expenditures that are left unspecified. A report from Citizens for Tax Justice concludes that no matter how the details of the plan are filled in, people who make over $500,000 would pay tens of thousands of dollars less each year and people who make over $1 million would pay hundreds of thousands of dollars less each year, than they do under the current tax system.

The Ryan plan calls on Congress to replace the current progressive rates in the federal personal income tax with just two rates, 10 percent and 25 percent, eliminate the AMT, reduce the corporate income tax rate from 35 percent to 25 percent, and enact other tax cuts. It calls on Congress to offset the costs of these tax cuts by eliminating or reducing tax expenditures which are left unspecified, although it is fairly clear that tax breaks for investment income (most of which goes to the richest one percent of Americans) would not be limited in any way.

CTJ’s report found that even if high-income Americans had to give up all the tax expenditures that could be eliminated under the Ryan plan, they would still benefit because the rate reductions under the plan are so significant. If Congress fills in the details of the plan in a way that makes it “revenue-neutral,” which Camp proposes, that can only mean that low- and middle-income people must pay more to make up the difference.

According to The Hill, on Wednesday Camp “told Ways and Means Committee members that he planned to push a framework similar to the tax revamp that was passed in the House GOP budget this year. That plan collapsed the current seven individual tax brackets into two — a 10 percent and a 25 percent bracket — while scrapping the Alternative Minimum Tax. Corporations’ top rate would drop from 35 percent to 25 percent under the plan, which would neither raise nor reduce revenue to the Treasury.”

Congressman Camp and Democratic Senator Max Baucus of Montana, the chairman of the Senate Finance Committee, have recently toured the country, making appearances in Minneapolis, Philadelphia, and suburban New Jersey to promote an overhaul of the tax code even though they do not say what that overhaul would look like during their appearances. As the Republican and Democratic chairmen of the two tax-writing committees, they argue that Congress can enact a bipartisan tax reform. However, the Ryan budget plan, which Camp says will be the basis of his proposal, failed to receive a single Democratic vote when versions of it were approved by the House in 2011, 2012 and 2013.

The Hill also reported that Camp planned to mark up a bill before Congress acts to raise the debt ceiling, and that tax reform could be linked to legislation to raise the debt ceiling. The administration has already announced that it will not negotiate over the debt ceiling, and that instead Congress must pass a “clean” bill to raise the ceiling to prevent a default on U.S. debt obligations and the economic tailspin that would result. 

Read CTJ's new report on the latest budget plan from House Budget Chairman Paul Ryan.

Paul Ryan’s budget plan for fiscal year 2014 and beyond includes a specific package of tax cuts (including reducing income tax rates to 25 percent and 10 percent) and no details on how Congress would offset their costs, all the while proposing to maintain the level of revenue that will be collected by the federal government under current law.

The revenue loss would presumably be offset by reducing or eliminating tax expenditures (tax breaks targeted to certain activities or groups), as in his previous budget plans.

CTJ's new report find that for taxpayers with income exceeding $1 million, the benefit of Ryan’s tax rate reductions and other proposed tax cuts would far exceed the loss of any tax expenditures. In fact, under Ryan’s plan taxpayers with income exceeding $1 million in 2014 would receive an average net tax decrease of over $200,000 that year even if they had to give up all of their tax expenditures.

Because these very high-income taxpayers would pay less than they do today in either scenario, the average net impact of Ryan’s plan on some taxpayers at lower income levels would necessarily be a tax increase in order to fulfill Ryan’s goal of collecting the same amount of revenue as expected under current law.


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. 


Boehner's Fake Offer of Compromise on Taxes


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Speaker Boehner Uses Different Words to Repeat Unchanged Opposition to Giving Up Tax Cuts for the Rich

On Wednesday, Republican House Speaker John Boehner repeated his stance that his caucus would not approve any increase in tax revenue except for a revenue boost driven by economic growth that they claim will result from the sort of tax overhaul proposed by Mitt Romney.

Boehner attempted to present this position as a compromise, saying his caucus is “willing to accept some additional revenues” but then went on to say, “There’s a model for tax reform that supports economic growth. It happened in 1986 with a Democrat House run by Tip O’Neill, and a Republican President named Ronald Reagan.”

The Tax Reform Act of 1986 was projected by Congress’s official revenue-estimators to be “revenue-neutral.” The law ended many tax loopholes and special breaks, but used the revenue saved to offset reductions in rates, just as Mitt Romney claimed (but failed to demonstrate) his plan would do.

Nonetheless, Boehner argued that this sort of tax reform improves the economy so much that the resulting increased incomes lead to increases in the amount of tax revenue collected. He said that by “creating a fairer, simpler, cleaner tax code, we can give our country a stronger, healthier economy. A stronger economy means more revenue, which is what the President seeks.”

But the projections of revenue-neutrality in 1986 were correct. Several studies on the impacts of the 1986 reform were done by economists on all sides of the tax issue in the 1990s, and none found evidence that it expanded the entire economy in a way that would boost revenue as Boehner claims.

The 1986 reform did a lot of good, but it was revenue-neutral and it was very different from what Republicans have been talking about today. The 1986 reform enhanced fairness by ending tax breaks for investment income that allowed wealthy investors to pay lower effective tax rates than middle-income people, and these reforms were sustained for several years before these breaks were brought back into the tax code. But Congressional Republicans want to expand those breaks or at least make permanent the Bush-era provisions that expanded them (the 15 percent special top rate for capital gains and stock dividends).

The 1986 reform also made U.S. corporations collectively pay higher taxes, by closing loopholes and cracking down on offshore profit-shifting, largely by curbing “deferral” on taxes on U.S. profits that companies artificially shifted to tax havens (reforms that have largely been eroded since then). Higher corporate taxes made it possible to reduce personal income tax rates, while keeping some popular and useful personal tax deductions and credits. But Congressional Republicans, and sadly even President Obama, propose that the corporate part of tax reform should, by itself, be revenue-neutral (if not revenue-negative).

Curbing unwarranted tax breaks, as happened in 1986, is an excellent idea. But the revenues from such reforms should be used to make public investments or cut the deficit, not reduce tax rates. In fact, the highest priority of tax reform should be raising revenue — real revenue, not the voodoo-economics sort of revenue gains that Boehner mistakenly claims will come from tax-rate reductions.

Most people forget that President Reagan actually increased taxes substantially (and repeatedly) after his 1981 tax reductions failed to achieve the economic goals he had been told to expect by his “supply-side” advisers (whom Reagan fired). Congressional Republicans, who say they admire Reagan, should emulate his responsible later policies, rather than try to repeat his early (and admitted) mistakes.

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 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.


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 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



 

On Tuesday, House Republicans released a proposal, H.R. 6169, that would relax some of Congress’s normal procedural rules in order to enact an overhaul of the tax code — so long as the tax overhaul meets the objectives laid out in the House budget plan authored by House Budget Committee Chairman Paul Ryan.

H.R. 6169 was introduced on Tuesday by House Ways and Means Committee Chairman Dave Camp and House Rules Committee Chairman David Dreier and lays out several components that the tax overhaul legislation must have in order to be passed through the easier legislative procedure. All of these components are identical to those laid out in the Ryan Plan

The required components of the tax overhaul, which are also those laid out in the Ryan Plan, include:

  • replacing the personal income tax rates with just two rates, 10 percent and 25 percent (or less)
  • repeal of the Alternative Minimum Tax (AMT)
  • reducing the statutory corporate income tax rate to 25 percent (or less)
  • adoption of a “territorial” tax system (exempting offshore profits of corporations from U.S. taxes)
  • collecting revenue equal to between 18 and 19 percent of GDP

The “findings” section of the bill states that revenue will “rise to 21.2 percent of GDP under current law,” meaning its proposed revenue target of between 18 and 19 percent of GDP is an explicit cut in revenue.

A Huge Tax Break for Millionaires No Matter How It’s Structured

CTJ issued a report in March concluding that Ryan’s proposed changes to the personal income tax would provide taxpayers with income exceeding $1 million in 2014 an income tax cut of at least $187,000 on average

Like Ryan’s plan, the bill introduced by Camp and Dreier does not say which tax loopholes and tax subsidies should be closed to ensure that the tax system still collects revenue equaling between 18 and 19 percent of GDP even after the plan’s steep rate reductions and the repeal of the AMT are in effect.

We estimated that even if those with incomes exceeding $1 million were forced to give up all the tax expenditures Ryan could possibly want to take away from them — all their itemized deductions, tax credits, the exclusion for employer-provided health insurance and the deduction for health insurance for the self-employed — even then the net result for these taxpayers would be an average income tax cut of $187,000 in 2014. That’s because the income tax rate reductions Ryan proposed are so deep that they would far outweigh the loss of all these tax loopholes and tax subsidies.

Increasing Incentives for Corporate Tax Dodging

The CTJ report on the Ryan plan also explains that reducing the statutory corporate income tax to 25 percent would likely lose revenue when we should be raising revenue from corporate tax reform. (CTJ’s major study last year of most of the profitable Fortune 500 corporations found that their effective tax rate, the percentage of profits they actually pay in taxes, was just 18.5 percent, far less than the statutory rate of 35 percent that Ryan and Camp complain about.)

CTJ’s report on the Ryan Plan also explains that a territorial tax system — exempting offshore profits of corporations from U.S. taxes — can only increase the incentives that U.S. corporations already have to disguise their U.S. profits as “foreign” profits through shady transactions that shift their earnings (on paper) into offshore tax havens.

Photo of Rep. Dave Camp via Michael Jolley Creative Commons Attribution License 2.0


Why Would Grover Norquist Misrepresent CTJ?


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 Recent evidence has lead Citizens for Tax Justice to wonder: do the “experts” over at Grover Norquist’s Americans for Tax Reform intentionally lie, or are they just sloppy?

Here’s what we’re looking at:

In their recent policy brief, Americans for Tax Reform links to one of our reports and writes:

"…[E]ven the left-wing Center for Tax Justice admits that “in some parts of the country, $250,000 is really not very much to raise a family on and it’s unclear whether families in such a position can afford to pay higher taxes.”

The problem is that the quote they attribute as the position of Center for Tax Justice (who’s that?) is actually us here at Citizens for Tax Justice (thank you very much) reporting something from the New York Times, and it’s something that we clearly oppose. Here’s the full quote from CTJ’s report:

“Recent articles in the New York Times and the Fiscal Times quote observers and analyses questioning President Obama’s proposal to allow the Bush income tax cuts to expire for adjusted gross income (AGI) in excess of $250,000. One theme of these articles is that in some parts of the country, $250,000 is really not very much to raise a family on and it’s unclear whether families in such a position can afford to pay higher taxes. The idea that Obama’s income tax plan will result in unaffordable tax increases for people who make $250,000 a year is wrong on several levels”

On the one hand, supporting the theory that this misquote results from pure sloppiness is their error of accidently calling us Center for Tax Justice – something busy journalists do all the time.

On the other hand, supporting the theory that Grover’s Americans for Tax Reform is intentionally misrepresenting the position of Citizens for Tax Justice is that our report was a laundry list of reasons why families who make $250,000 can afford to pay higher taxes, making it almost impossible for any semi-literate person to have missed that point. (Plus it’s no secret CTJ supports tax increases for this group.)

Which theory sounds right to you?

Did Grover Norquist's Americans for Tax Reform intentionally lie about CTJ or are they just really sloppy?

 

 

 

 

 

Hard to tell.

  

pollcode.com free polls 


Photo of Grover Norquist via
Gage Skidmore Creative Commons Attribution License 2.0


Oklahomans Reject Laffer Plan, Preserve Their Income Tax


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Oklahoma Governor Mary Fallin admitted last week that she and her allies had failed in their efforts to roll back the state’s income tax this legislative session, despite high hopes among supply siders that the tax would be not only cut but entirely repealed.  As The Oklahoman explains, however, both voters and businesses recognized that reducing taxes would mean further cuts in education and public safety piled on top of those already inflicted in recent years.  Public opposition aside, however, it did seem all too possible that Arthur Laffer (the Governor’s tax advisor) and his colleagues’ pitch that shredding the tax code would lead to economic rebirth was going to be enough to get an income tax cut through the legislature.

Over a half dozen tax cut plans were given serious consideration this year in Oklahoma, most of which would have, in fact, raised taxes on low-income families by repealing important tax credits, and all of which would have tilted Oklahoma’s overall tax system even more heavily in favor of the wealthy.  Some of the proposals, like the modified version of Arthur Laffer’s plan pushed by Governor Fallin, would have repealed the income tax entirely.

In the final days of the session, it looked like lawmakers had come to an agreement on a comparatively modest plan to cut the top personal income tax rate from 5.25 to 4.8 percent, and then possibly to 4.5 percent a few years later.  Noticeably absent from the proposal, fortunately, was any repeal of low-income credits— likely due in part to analyses by the Institute on Taxation and Economic Policy (ITEP) showing that repealing these tax credits would mean a significant tax increase for a large number of the state’s most vulnerable residents.

Instead, lawmakers hoped to pay for their proposed rate cuts with a combination of spending cuts, repealing various business tax credits and eliminating a handful of tax breaks for individuals.  Even then, however, analyses by ITEP and the Oklahoma Tax Commission showed that a significant number of low- and middle-income Oklahomans would see their taxes rise under the plan.  And just as the state’s largest newspaper editorialized about these revelatory analyses, support evaporated in the state House of Representatives.

As the Oklahoma Policy Institute explained last week, “The failure of every tax cut proposal that was debated this session is a victory for Oklahoma… We know, however, that this is just a brief intermission in a long battle over the right tax policy for Oklahoma.  We need to look with renewed seriousness at our outdated tax system and do away with unnecessary tax preferences. And we must improve tax fairness and not allow middle- and low-income families to shoulder a larger share of the load.” 

(Photo from NPR State Impact)


Kansas Joins Uniquely Regressive Bad Tax Policy Club


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Last week Kansas Governor Sam Brownback signed into law Senate Substitute for House Bill 2117, a tax bill that dramatically changes the Kansas income tax structure and makes Kansas a real outlier when it comes to tax fairness. ITEP released a report which finds that the legislation includes a broad tax cut that will cost the state over $760 million a year, and yet will actually increase taxes on some low- and middle-income families – while the wealthiest Kansans will see their taxes reduced by $21,000 on average.

As a result of this legislation, Kansas is now a member of a uniquely regressive tax policy club; it joins Mississippi and Alabama in taxing food, but not offering any targeted tax relief for the poorest families who have to spend a larger portion of their budgets on groceries.  Until last week’s bill signing, Kansas offered a Food Sales Tax Rebate (FSTR) that targeted tax relief to Kansans over 55 and those with children and an income less than $35,400. Families with income of less than $17,700 could claim a flat $91 per family member to offset the sales tax they paid on food.

Even after cutting income tax rates and increasing the standard deduction, a family of four with $17,000 of income will still lose $294 because of the elimination of the food sales tax credit.

For more on the new law and to learn more about the various tax plans that were debated in Kansas this legislative session, check out ITEP’s Kansas Tax Policy Hub.

(Photo courtesy Wikipedia)


Virginia Gov. McDonnell Says He Wants Tax Reform, But....


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Virginia Governor Bob McDonnell wants to make tax reform a top priority during his upcoming (and final) year as Governor, according to the Associated Press (AP).  But while Virginia’s tax code is no doubt in need of reform, it’s hard to tell from the AP article what kind of change Virginians can realistically expect.

Virginia currently foregoes some $12.5 billion in tax revenue every year as a result of special breaks buried in the state tax code—almost as much as the $14.3 billion in annual revenues the Commonwealth takes in.  McDonnell said, “I think it’s time to take a look at all those tax preferences, both in income and sales, and see if there is not some way … we can save some money and put it into transportation.”

While such a development would be a positive one, McDonnell contradicts himself when he says that raising revenue is out of the question, and that the tax reform he has in mind might even reduce revenue overall.  Given that commitment, Virginians might expect the condition of their ailing transportation system to improve, but at a cost to other state services.

Moreover, there’s reason to be skeptical about how committed McDonnell really is to broadening the tax base.  While he’s right to point out that services like car repairs and pedicures should be subject to the state sales tax, his actual track record is not inspiring. Just two months ago, for example, McDonnell signed into law an expansion of a wasteful corporate tax giveaway that narrowed the tax base, despite very good reasons to doubt its effectiveness.

On transportation funding, too, McDonnell’s track record conflicts with his talk of tax reform. He has consistently refused to support tying—or “indexing”—the state’s stagnant gas tax rate to inflation, but now he says that “there may be a way to do that in the overall context of tax reform.”

That’s hardly a ringing endorsement of the idea, but at least it’s a start.  The Institute on Taxation and Economic Policy (ITEP) recently found that only Alaska has gone longer than Virginia without raising its gas tax. And if Virginia lawmakers had indexed the state gas tax to construction costs the last time the tax was raised, annual revenues would be some $578 million higher.

But indexing by itself is not enough to fix the state’s legendary transportation problems.  Indexing helps prevent future construction cost increases from eating into gas tax revenue, but it doesn’t address the cost increases that have already occurred. According to ITEP, Virginia’s gas tax would have to immediately rise by 14.5 cents just to offset the last two and a half decades of transportation cost growth. 

But even if McDonnell believed the state’s gas tax needs to be raised and indexed, his opposition to raising any new revenue overall is almost guaranteed make his reform agenda bad for the state.  That’s because every dollar in new revenue McDonnell might generate for transportation would have to be offset with a dollar in tax cuts elsewhere in the budget—presumably from a tax that funds education, human services, public safety, and other core government functions.  The AP story says McDonnell sees a reformed tax code as his own legacy, but what about the legacy he leaves the Commonwealth?

Photo of Rand Paul via Gage Skidmore Creative Commons Attribution License 2.0


Are States Really "Racing" To Repeal Income Taxes?


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Arthur Laffer recently teamed up with Stephen Moore, his friend on The Wall Street Journal’s editorial board, to pen yet another opinion piece on the benefits of shunning progressive personal income taxes.  Most of the article’s so-called “analysis” is ripped from Laffer reports that we’ve already written about, but there was one new claim that stands out.  According to Laffer and Moore, “Georgia, Kansas, Missouri and Oklahoma are now racing to become America's 10th state without an income tax.”  If this is true, it’s news to us.  So let’s take a look at the most recent reporting on these states’ tax policy debates.

In Georgia, the state’s legislative session ended almost a month ago with the passage of a modest tax package.  Last year, Georgia lawmakers debated levying a flat-rate income tax, but that effort (which should have been easy compared to outright income tax repeal) failed and left lawmakers with little interest in returning to the issue.

The debate over the income tax debate in Kansas isn’t quite done yet, but the most recent news from The Kansas City Star is that “lawmakers say the tax reform package they'll consider next week almost certainly will fall far short of the no-income-tax goal.”

In Missouri, a number of media outlets are reporting that the push to get income tax repeal on the November ballot is all but over because a judge ruled that the ballot initiative summary that proponents of repeal proposed to put before voters was “insufficient and unfair.”

And in Oklahoma, what started as an enthusiastic push for big cuts or even outright repeal of the income tax has since been watered down into something less ambitious.  The most likely outcome is a cut in the top rate of no more than one percent, although lawmakers are still toying with the idea of tacking on a provision would repeal the income tax slowly over time (so the hard decisions about what services to cut won’t have to be made for a number of years).  But in any case, budget realities have left lawmakers in a position where they’re hardly “racing” to scrap this vital revenue source.

Photo of Art Laffer via  Republican Conference Creative Commons Attribution License 2.0


HOUSE GOP LEADER CALLS FOR TAX INCREASES ON LOWER-INCOME AMERICANS


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Yesterday, Eric Cantor, the Republican House Majority Leader, announced that those taxpayers who pay federal payroll taxes and other types of taxes, but who don’t have enough income to owe federal personal income taxes, should be required to pay the federal personal income tax as well. Cantor made his remarks at an event (subscription required) hosted by Bank of America.

“We also know that over 45 percent of the people in this country don’t pay income taxes at all,” Cantor said, “and we have to question whether that’s fair. And should we broaden the base in a way that we can lower the rates for everybody that pays taxes... Should they even have a dollar in the game on income taxes, which is the notion of broadening the base.”

When asked if this would mean “a tax increase on the 45 percent who right now pay no federal income tax,” Cantor said, “I’m saying that, just in a macro way of looking at it, you’ve got to discuss that issue.”

CTJ’s figures show that Americans in every income group do, in fact, pay taxes and that the tax system as a whole (including all the types of taxes that Americans pay) is just barely progressive.

For example, in 2011 the richest one percent of Americans paid 21.6 percent of the total (federal, state and local) taxes but also received 21 percent of the total income in the U.S. that year. Similarly, the poorest fifth of Americans paid just 2.1 percent of the total taxes in the U.S., but only received 3.4 percent of the total income in the U.S. In other words, the richest one percent are not paying more than their share, and the poorest Americans are not getting much largesse from the tax system.

The term “broadening the base” has often been used to describe a tax reform that would end the various loopholes and tax subsidies that reduce the amount of revenue a given tax at given rates can collect.

Republican House Budget Chairman Paul Ryan recently made it clear that his idea of base-broadening would not involve repealing those tax loopholes and tax subsidies that benefit wealthy investors (the tax preferences for capital gains and stock dividends which mostly benefit the richest one percent). Cantor’s comments suggest that, like Rep. Ryan, he is interested in ending those tax subsidies that benefit the lower-income or middle-income households but not those benefitting the rich.

Several tax expenditures in the federal personal income tax reduce or eliminate the federal personal income tax for many lower-income and middle-income Americans. The refundable Earned Income Tax Credit and the Child Tax Credit are available only to those who work and therefore pay federal payroll taxes. The rules exempting most Social Security income benefits people who paid taxes over the course of their working lives. The standard deduction and personal exemptions ensure that people whose income does not meet a basic threshold are not subject to the personal income tax, similar to how corporations that are not profitable are not expected to pay the corporate tax. (Our complaints about corporations are limited to those that are profitable and still manage to pay no corporate income taxes.)

It’s unclear if Cantor is proposing to repeal the EITC and the Child Tax Credit, or the rule exempting most Social Security benefits from income taxes, or the standard deduction and personal exemptions, or what exactly. Any of these options would take a tax system that is just barely progressive and make it regressive.


Rick Perry Pulls a Grover With No-Tax Pledge


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Rick Perry’s Texas has some of the lowest taxes in the nation and it trails the national average in important economic indicators.  But that’s not stopping Governor Perry from traveling the state promoting his new Texas Budget Compact, the center of which is an opposition to any new taxes or tax increases, which, he argues, will make the state stronger.  Politically, the compact is Perry’s effort to set the terms of election year debates, influence the next legislative session (eight months from now!) and assert his role as the Lone Star State’s conservative-in-chief.  In addition to opposing any new taxes, the Compact calls for: a Constitutional limit on spending tied to the growth of population and inflation; more program and agencies cuts; using the state’s Rainy Day Fund only for emergency purposes; making a temporary small business tax exemption permanent; and “truth in budgeting.”

Borrowing a page from anti-tax crusader Grover Norquist’s playbook, Perry said on Monday, “Each and every member of the Legislature or anyone aspiring to become a member of the Legislature should sign on.”  And right on the Governor’s website, individuals and lawmakers can sign on to the Compact: Yes, I stand with Governor Perry and I support his Texas Budget Compact. I want my state representatives in the Texas Legislature to sign on to Governor Perry's Texas Budget Compact.

Asked specifically, however, whether or not he would be keeping track of who has signed on or not, Perry responded, “I’m not going to have a pledge for anybody to sign. People are either going to be for them or they’re not. There’s not a lot of gray area.” 

Regardless of Perry’s intentions, the Compact smacks of the kind of binding pledge that ties lawmakers’ hands and restricts their ability to do the jobs they were elected to do.  (Happily, more and more lawmakers who took Norquist’s pledge are abandoning it on these very grounds.)

But worse than distorting the political process, the principles Perry promotes in his Compact could wreak havoc on Texas if fully embraced. 

As Texas State Rep. Mike Villarreal said in a statement released in response to the Compact:

"Governor Perry loves to talk about his principles in the abstract, but he doesn't want to discuss the disabled kids who lose health services when he won't close corporate tax loopholes, or the students crowded into full classrooms when he won't touch the Rainy Day Fund. After the deep and unnecessary education cuts that Governor Perry championed, it's no surprise that his Compact doesn't say a word about educating schoolchildren.

"The Governor doesn't seem to understand that we must educate our children if we are going to build our economy and create jobs."

News is that Rick Perry wants to run for president again in 2016. His hard line on taxes would certainly help him with his party’s base, even as it harms the state that already elected him.

Photo of Rick Perry via Gage Skidmore Creative Commons Attribution License 2.0


The Herminator Is Back - With His 9-9-9 Plan


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When CTJ analyzed Herman Cain’s 9-9-9 tax plan last year, we concluded it would cut taxes for the richest one percent by $210,000 on average and raise taxes for the bottom three-fifths of Americans by $2,000, on average if in effect in 2011. This did not surprise us, since the 9-9-9 plan incorporates elements of a “flat tax” and a national sales tax (often misleadingly called a “Fair Tax”) which are both far more regressive than our current tax system. We also concluded that the 9-9-9 plan would collect $340 billion less than our existing tax system in 2011 alone. What does surprise us is that people are still talking about the former pizza CEO’s tax plan, which is the focus of a two-day “Patriot Summit” that Cain is hosting today in Washington.

Today, Cain’s Revolution on the Hill will  roll out “the 9-9-9 educational campaign that will sweep the country in the Summer of 2012.” 

Flat tax and national sales tax plans vary, but they all would leave investment income – most of which goes to the richest Americans – untaxed. The “flat tax,” which is promoted by Dick Armey’s FreedomWorks, does not consist of one flat tax rate but actually two tax rates when you include the zero percent rate for investment income.

The national sales tax, which is promoted by the organization FairTax.org, is a straight-forward consumption tax, and this is likely to have the greatest impact on lower-income families who have no choice but to put all of their income towards consumption. (The other national, broad-based consumption tax you hear a lot about is a value-added tax, or VAT).

Cain is not the only presidential candidate to propose these types of radical changes to our tax system. Texas Governor Rick Perry flirted with both the flat tax and a national sales tax. Both Perry and Newt Gingrich eventually settled on a “flat tax” that would, like other flat tax proposals, exempt investment income from tax.

Watch this space for a look at other flat or fair tax proposals that surface during this election year.

 


Arthur Laffer's Rich States, Poor States Is More Wish List Than Analysis


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Arthur Laffer and the American Legislative Exchange Council (ALEC) have just released the 5th edition of their Rich States, Poor States report.  If you’ve fallen behind on your Laffer reading, Rich States, Poor States is mostly a collection of Laffer’s other reports from throughout the year, copy-pasted into one convenient location.

The centerpiece of this “new” report is the “ALEC-Laffer State Economic Competitiveness Index,” which is essentially a 15-item wish list of policies that Laffer and ALEC would like to see enacted in every state.  Over half the items in the Index are related to low or regressive taxes, while the others are mostly related to labor issues.

As we’ve pointed out before, the most laughable thing about the Index is the way it claims to provide a look at the important “policy variables” under the control of state lawmakers, but then ignores the ones that actually matter. For instance, few people would argue that good schools or basic infrastructure (power, transit, roads) are unimportant to states’ economic performance.  But the ALEC-Laffer rankings give states no credit for either of these outcomes. On the contrary, adequately funding any public service actually reduces states’ rankings since Laffer assumes that tax revenue is detrimental to economic growth (all research from ITEP and academic economists to the contrary).

Rich States, Poor States also attempts to rebut recent research from the Institute on Taxation and Economic Policy (ITEP) that we’d be remiss not to mention here.  According to ALEC and Laffer, “In its latest study, ITEP reaches a pro-tax conclusion by deliberately manipulating the data. It focuses on per-capita income instead of absolute income, which hides the economic losses of high tax states.”

ITEP explains in detail its reasons for using per-capita income growth as a measure of state economic performance in the report cited by Laffer. Indeed, while Rich States, Poor States is perhaps best known for the 15-item wish list, every edition of the report (first published in 2008) has also contained a section ranking states based on their actual, measurable economic performance.  And that ranking has always been based on what Laffer calls “three important variables:” absolute domestic migration, non-farm payroll employment, and per-capita personal income growth.

What’s more, ever since the first edition, Rich States, Poor States has included a set of state-specific fact sheets at the end of the report, the top of each being – that’s right – a graph of the state’s per-capita personal income growth.

The fact that this variable appears in the evidence-based section of Rich States, Poor States suggests they think it’s a reliable variable; the fact that Laffer et al characterize the variable as manipulative in the fiction-based portion of their report suggests that if there’s any deliberate manipulation going on, it’s being done by these so-called experts.

Photo of Art Laffer via  Republican Conference Creative Commons Attribution License 2.0


New Fiction from Arthur Laffer: Estate Tax Killed 220,000 Jobs in Tennessee


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Tennessee lawmakers are seriously considering repealing their state estate tax, in part because of a comically flawed report from supply-side economist Arthur Laffer.  The report’s bottom-line conclusion is that Tennessee would have benefited from 220,000 more jobs in 2010 if lawmakers had simply repealed the Tennessee estate tax one decade earlier.  But as the Institute on Taxation and Economic Policy (ITEP) explains in a new brief, while 220,000 jobs is certainly an impressive number, the reasoning Laffer used to arrive at that figure is far from convincing.

Laffer begins his argument by pointing to the “Laffer-ALEC State Competitiveness Index,” which is basically a wish list of fifteen conservative policies he would like to see states enact (low income taxes, low corporate taxes, low minimum wage, etc).  Tennessee ranks 8th overall on the Laffer-ALEC Index, and if the Index has any predictive power whatsoever, that means Tennessee’s economy should be doing pretty well.  But as Laffer admits, the reality is exactly the opposite.

Tennessee’s low economic and employment growth is particularly puzzling to Laffer because in a series of prior reports, he’s argued that states without income taxes (of which Tennessee is one) are outperforming the rest of the country.  So how then does Laffer explain Tennessee’s disappointing growth?  He decides to ignore a slew of factors that affect state economies in today’s complex world, and instead place all of the blame in one place: the state estate tax.

According to Laffer’s reasoning, if Tennessee had jettisoned its estate tax one decade ago, employment and economic growth more broadly would have sped up to a rate exactly equal to the average among all states not levying an income tax.  The natural result of this would be 220,000 more jobs in 2010, as well as $36 billion in additional yearly economic output.

Laffer says he can think of “no reason to believe” that things wouldn’t have played out this way.  But as ITEP explains in its brief, differences in economic growth rates are influenced by a range of factors that don’t appear to have even crossed Laffer’s mind, like differences in natural resource endowments, educational attainment, and infrastructure quality.  The unavoidable conclusion is that Laffer’s choice of scapegoat in Tennessee had a lot more to do with his ideology than with any sort of rigorous economic analysis.

For a closer look at Laffer’s deeply flawed argument in favor of repealing Tennessee’s estate tax, be sure to read ITEP’s full brief.

Photo of Art Laffer via  Republican Conference Creative Commons Attribution License 2.0


CTJ Report: Ryan's Budget Cuts Income Taxes for Millionaires by at Least $187,000


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House Budget Committee Chairman Paul Ryan has introduced a budget plan that, if implemented, would reduce revenues so significantly that they would be inadequate to pay for the federal spending under the Reagan administration, let alone the spending required in the years ahead.  The Ryan budget would provide income tax cuts for millionaires averaging at least $187,000 in 2014. The plan would also reduce corporate income taxes and would increase the (already considerable) incentives for corporations to shift profits and jobs overseas.

Each of these three problems is described in detail in a new report from Citizens for Tax Justice. Read the full report.

 


New Report: Arthur Laffer's Bad Data Misleads Lawmakers


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In an attempt to bolster income tax repeal efforts in states like Oklahoma, Kansas, and Missouri, supply-side economist Arthur Laffer recently teamed up with an Oklahoma-based group to perform an analysis that predicts huge economic gains as a result of cutting state personal income taxes.  A new report from the Institute on Taxation and Economic Policy (ITEP) shows, however, that the analysis is fundamentally flawed.

Bear with us as we guide you through a few methodological weeds.

At issue here is what’s called a regression analysis – a statistical tool used to explain the relationship between one set of variables and another.  In this case, Laffer has attempted to explain how state income tax rates affect economic growth, and, according to Laffer’s regression, the effect is enormous. He shows an inverse relationship between taxes and growth. That is, the lower the tax rates, the greater the economic growth.  Repealing Oklahoma’s income tax, he therefore predicts, will more than double the rate of personal income growth and state GDP growth, and create 312,000 jobs in the process.

If this sounds too good to be true, that’s because it is.

As ITEP’s new report explains, Laffer performs a data sleight of hand to produce his result.  He includes federal tax rates in an analysis supposedly aimed at explaining a state tax system. And as it turns out, this decision hugely distorts the results.  It allows him to include in his overall “tax rate” figures the Bush tax cuts – which caused a 4.1 percent drop in the top federal tax rate.  At the same time, his measure of economic growth just happens to be taken from the early 2000’s, when the country was climbing out of the post 9/11 recession. That is, the economic growth indicators were improving just as the Bush tax cuts were going into effect.

Laffer essentially creates a bogus measure (federal and state tax rates combined) and maps it onto an exceptional moment in economic history.  This allows him to create the illusion that cuts in state tax rates between 2001 and 2003 fueled economic growth later in the decade.  If the analysis is refocused on just state tax rates, the findings fall apart entirely, as the regression no longer shows any relationship between state tax rates and economic growth.

But Laffer’s analysis is plagued by more problems than these.  Also notable, as covered in an earlier report from ITEP, is its complete failure to measure the impact of other factors, from sunshine to oil production, that contribute to state economic growth.  The flaws in Laffer’s analysis are so fundamental that its findings cannot be taken seriously. 

ITEP’s two companion critiques of why Arthur Laffer’s analysis should not be trusted can be found here.

Photo of Art Laffer via Republican Conference Creative Commons Attribution License 2.0


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. 


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.

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


House Ways and Means Committee Considers a National Sales Tax Proposal that Would Increase Taxes on Low- and Middle-Income Households


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On Tuesday, the House Ways and Means Committee held a hearing to consider a national sales tax (often misleadingly called a “Fair Tax” by its proponents) and a value-added tax (VAT).

A national sales tax and a VAT are both consumption taxes and therefore both have the same regressive effect. Poor families have little choice but to spend all of their income on consumption while rich families tend to save most of their income. So a tax on consumption will naturally take a much larger share of income from poor and middle-income families than from rich families.

Proposals to implement a VAT take many forms and are usually discussed as a supplement to existing revenue sources. Proponents of a national sales tax, however, are usually describing a very specific proposal (and a specific bill that is reintroduced each year) misleadingly called a “Fair Tax.”

The so-called “Fair Tax” would replace the federal personal income tax, corporate income tax and estate and gift taxes with a 30 percent sales tax. (Proponents use a convoluted calculation to claim that it’s actually a 23 percent rate.) The tax would apply to all types of consumption, including those that would be difficult or impossible to tax in the real world (like rent, health care services, and, oddly, government spending.)

The proposal includes a rebate to all families that proponents claim mitigates the gross unfairness of the sales tax. The rebate would basically be a cash grant that would vary only by family size.

But as Citizens for Tax Justice and its research wing, the Institute on Taxation and Economic Policy (ITEP), have long explained, the national sales tax would be extremely regressive. ITEP’s classic report from 2004 illustrates that the poor and middle class would pay much more under a national sales tax (the so-called “Fair Tax”) in every state. (State-by-state figures are included in the report.)

Unfairness is not the only problem. Proponents of a national sales tax vastly understate what the sales tax rate would have to be in order to replace the revenue collected under the current federal tax system. As the ITEP report explains, sales-tax proponents’ convoluted claim that the national sales tax rate would be 23 percent instead of 30 percent is only the beginning of the distortions. To truly raise as much revenue as the current federal tax system, the theoretical rate would have to be between 45 and 53 percent. And because such a high rate would encourage cheating, the real rate would have to be higher still.

Sales-tax advocates sometimes try to make their plan look less regressive by focusing on the taxes people pay over their entire lifetimes. Professor Laurence Kotlikoff of Boston University used this technique during his testimony before the Ways and Means Committee to argue that the “Fair Tax” can be progressive! The non-partisan Congressional Research Service notes however that the use these sorts of “highly stylized life cycle models” is actually rather controversial.

Kotlikoff seems to be arguing that because everyone is going to use their income for consumption sooner or later, then a tax on consumption is not inherently any more regressive than a tax on income. A flat 30 percent tax applied to spending, he asserts, would have the same effect as a flat 23 percent tax applied to income over the course of someone’s life. Adding the rebate included in the Fair Tax proposal, Kotlikoff and other proponents claim, makes it progressive.

Here’s why this argument is all wrong. First, rich people don’t eventually use all of their income for consumption but leave a great deal of it to others after they die.

Second, a flat 23 percent tax on income would, of course, be more regressive than our current system, which taxes poor and middle-income people at rates below that and rich people at rates above that.

Third, the rebates included in the Fair Tax would not be enough to offset this regressive impact since the current income tax provides negative taxes for many low-income families.

Other advocates of a national sales tax have made even wilder arguments, like the claim that retail prices will somehow not rise even when the new national sales tax is included in the price, or the claim that the IRS would become unnecessary because states would voluntary collect the tax and remit it to the federal government. (This sounds a lot like the failed Articles of Confederacy, which were replaced by the U.S. Constitution in order to give the federal government the power to raise revenues on its own, rather than relying on voluntary contributions by the states.)

Many of the pro-sales-tax arguments were cogently refuted in testimony given by Bruce Bartlett, a former Reagan administration official. Bartlett has written a great deal about the Fair Tax and its history, starting with the original sales-tax proposal by the Church of Scientology.

Photo via John Beagle & Chasing Fun Creative Commons Attribution License 2.0


"Duck, Dodge, and Dismantle" Bill Passes House, Faces Defeat in Senate


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On Tuesday night, the House of Representatives passed the Cut, Cap, and Balance Act (CCBA), which would cap spending at levels set forth in the Ryan budget and allow an increase in the debt ceiling only after the adoption of a constitutional amendment severely restricting future budget and tax measures.

The balanced budget amendment required as a precondition to the debt ceiling increase would be even more extreme than previous incarnations. It would limit spending to about 16.7 percent of gross domestic product and require a two-thirds majority for any increase in revenue, in addition of course to requiring that government spending equal government revenue.

Although the CCBA passed with 234 votes, the tally signaled that the ultimate adoption of a balanced budget amendment in the House is unlikely. A constitutional amendment would require a two-thirds vote to be adopted, and that’s 56 more votes than CCBA received.

A less extreme amendment received 300 votes in 1995.

Fortunately, the CCBA faces “stiff opposition” in the Senate, where it is unlikely to pass at all. (Update: The CCBA was defeated in the Senate a 51-46 vote.)

President Obama has threatened to veto the CCBA if it passes the Senate and labeled the measure an attempt to “duck, dodge, and dismantle.” Nine of the Republican presidential candidates, including current frontrunner Mitt Romney, support the CCBA.

The Center on Budget and Policy Priorities has blasted the balanced budget amendment called for by the CCBA, noting how it would tie the hands of lawmakers to react to changing economic conditions. Five Nobel Laureate economists voiced their opposition to the amendment in a letter to the President and Congress.

The radical spending cap provision would force draconian cuts to essential government programs like Medicare and Social Security, which main stream economists believe would reduce consumer demand and make it far more difficult to create jobs. The amendment would require nearly $9 trillion in cuts over 10 years, which goes well beyond the extreme measures of the infamous Ryan budget.

The proposed amendment would be so damaging that over 240 national organizations have come together to oppose it.

Even the Wall Street Journal editorial page, well known for its extremism and willingness to disregard the facts to support spending and tax cuts, opposes the BBA. The paper notes that not even Ronald Reagan’s policies would have passed muster under the radically stringent amendment.

Former Republican Senator Judd Gregg summed up the debate over the CCBA perfectly, writing, “Lord save us from the well intentioned and those who are trying to score political points or raise money” by pursing this form of “conservative misdirection.”

Photo via Speaker Boehner Creative Commons Attribution License 2.0


As Tax Repatriation Gains Steam, Important Questions Need Answering


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On June 15, 2011, think tank Third Way held the event "The Next Stimulus? Bringing Corporate Tax Dollars Home to Work in America" supporting a tax repatriation holiday. When the panel was opened up for questions, they faced tough questioning from critics of the repatriation holiday, not all of which they could answer adequately.

Listen to an excerpt of the questions and answers here:

Questioning on Repatriation Holiday by taxjustice

Question 1: Steve Wamhoff, Legislator Director, Citizens for Tax Justice (0:00)
I just want to clarify your views on some of the other research that has been done. I think what your saying is that the bipartisan Congressional Research Service was wrong in issuing it’s study that said the last time this was tried it did not create jobs. And that the non-partisan Joint Committee on Taxation was wrong recently when it put out it’s analysis saying that if we repeat this repatriation holiday it will cost $79 billion over 10 years partially because some of those profits would’ve been brought back anyway, partially because ultimately corporation will shift even more profits offshore. Meaning even if your only goal is to get more of these profits to the US, even in that limited goal you fail on that. So do I understand you correctly that you think that the Congressional Research Service and the non-partisan Joint Committee on Taxation are incorrect and that Congress should ignore these analyses?

For the Congressional Research Service Analysis click here.

For the Joint Committee on Taxation Analysis click here.

Question 2: Richard Phillips, Research Analyst, Institute on Taxation and Economic Policy (3:40)
I’d like to ask a question based on this point we’re just talking about. Wouldn’t a better alternative to a tax repatriation holiday be to end deferral of offshore profits and go to a system where all companies have to pay taxes on offshore profits?

For more information on moving to a full worldwide system and ending deferral check out Citizens for Tax Justice's report here.

Question 3: Nicole Tichon, Executive Director, Tax Justice Network USA (6:22)
I think Mr. Rogers you said that we didn’t have as much offshore [then] as we do today in your comments. Doesn’t that speak to the issue that this actually incentivizes companies to keep their money offshore if they think they can just have a holiday every 5 or 6 years?

For more information on Tax Justice Network USA's take on the repatriation holiday see their op-ed in the Huffington Post.

Question 4: Scott Klinger, Tax Policy Director, Business for Shared Prosperity (9:56)
I think one of you noted that some companies are devoting a lot of effort to accounting way of moving profits offshore, through things like regressive transfer pricing. Some of our small business members think that that’s a pretty big loophole that needs closing that’s caused this swelling of offshore assets. Would you be in favor of looking at closing some of the tax haven loopholes and tightening transfer pricing restrictions as part of this repatriation bill?

For more information on Business for Shared Prosperity's take on the repatriation holiday see their website.


Most Extreme Balanced-Budget Amendment Ever Moves Forward in the House


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Last Wednesday, the House Judiciary Committee approved H.J.Res 1, the newest incarnation of the potentially disastrous balanced-budget amendment. As passed out of committee, the balanced-budget amendment is more extreme than versions proposed in the past, as it would not only require that government outlays equal receipts, but would also limit spending to about 16.7 percent of gross domestic product and require a 2/3’s majority for any increase in revenue.

In its comprehensive rebuke of the balanced-budget amendment, the Center on Budget and Priorities (CBPP) explains that the amendment has potential for “serious economic harm,” as it would force cuts in automatic stabilizers like unemployment insurance during recessions when they are needed most. It’s precisely for this reason that more than 1,000 economists, including 11 Nobel laureates, signed a statement in 1997 opposing the balanced-budget amendment that Congress nearly approved that year.

The spending cap would require catastrophic cuts to government services even when the country is economically prosperous. The amendment would cut spending to 18 percent of the previous year’s GDP, which is typically about 16.7 percent of the current year’s GDP.

As CBPP explains, the required cuts would go well beyond those in Rep. Paul Ryan’s plan and be more on the scale of the much more extreme Republican Study Committee’s plan, which includes cutting in half the Medicaid, Supplemental Nutrition Assistance Program (SNAP, formerly food stamps), and Supplemental Security Income programs, just to name a few, on top of dramatic cuts to Medicare and Social Security.

Fortunately, passage of the amendment is no easy task. It requires a 2/3’s majority of both chambers of Congress and ratification by 3/4’s of the states. A test vote in the Senate on a resolution expressing support of a balanced-budget amendment in March garnered only 58 of the 67 votes required, showing that proponents of the amendment may have an uphill fight. On the other hand, the 1997 amendment came within one vote of approval in the Senate.

Radical anti-tax and Tea Party groups believe they can change this equation by pushing the amendment as part of their new “Cut, Cap, Balance” plan, which calls on lawmakers to require the passage of the amendment as a condition for increasing the debt ceiling. In fact, conservative groups are pushing Congressional Republican’s to hold off having a vote on the amendment, knowing that the threat of the debt ceiling vote is their best opportunity to pass it.

Lawmakers need to stand up to these groups who are attempting to hold our economy hostage (by not raising the debt ceiling) in order to pass a radical budget amendment as a Trojan Horse for draconian service cuts.

Former Republican Senator Judd Gregg recently commented, “Lord save us from the well intentioned and those who are trying to score political points or raise money” by pursing this form of “conservative misdirection.”


What Is Congressman Jared Polis Thinking?


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The latest idea from Congressman Jared Polis (D-CO) is to protect the ability of tax professionals who have thought up creative tax avoidance schemes to get as much profit from these schemes as they possibly can.

Rep. Polis first made a name for himself in the tax world during the health care reform debate, when he drafted and circulated a letter that was signed by several freshmen House Democrats who opposed the surcharge that the Democratic caucus was considering to help finance health care reform.

Recently, Polis joined a group of five lawmakers in cosponsoring an amnesty for corporate tax dodgers, which he and other proponents call a “repatriation holiday.”

Now Rep. Polis is going to bat for lawyers and accountants who want to patent the creative tax avoidance schemes they have dreamed up. Tax strategy patents have to be one of the worst ideas of the last couple of decades. These patents allow tax professionals to obtain a patent on a particular tax planning strategy and charge royalties to taxpayers to allow them to use it.

The Senate has passed a major patent bill (H.R. 1249, the America Invest Act) that includes a provision banning the issuance of patents for tax strategies. Colorado representative Jared Polis has offered an amendment changing the effective date of the ban to allow patents to be issued in cases where the applications have already been filed. About 160 tax strategy patent applications are pending. A spokesman for the congressman said that it was a matter of protecting applicants that had already revealed their strategies.

No one should be able to have a monopoly over part of the tax code and taxpayers shouldn't have to pay royalties or defend themselves against lawsuits for legally using the tax laws. None of these types of patents should ever have been issued and there's no good reason to allow the patent office to issue any more.

Photo via Studio08Denver Creative Commons Attribution License 2.0


CTJ Figures Used in Budget Debate Show Ryan Plan Would Give Huge Tax Cut to Millionaires


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conrad ctj chart.gifOn Wednesday, May 25, Senator Kent Conrad, chairman of the Senate Budget Committee, delivered comments on the Senate floor about the budget, the deficit and why he rejects the House budget plan from Rep. Paul Ryan.

Senator Conrad cited new figures from Citizens for Tax Justice showing that taxpayers with income exceeding a million dollars would enjoy an average tax cut of at least $192,500 in 2013 if Congressman Paul Ryan's budget plan was enacted. Taxpayers with income exceeding $10 million in 2013 would get an average tax cut of at least $1,450,650 under the Ryan plan.

Conrad explains the obvious math that a deficit problem isn't solved by reducing revenues, and that it especially makes no sense to reduce revenues by cutting taxes for the super rich. His graphic illustrates the analysis CTJ provided. The Senate ulitmately voted against the House plan 57-40.

Watch Senator Conrad's remarks below:

Any rational proposal to balance the federal budget would rely on a mix of spending reductions and revenue increases. But, as explained in a new CTJ report, the House Republican budget plan relies on draconian spending cuts and actually reduces revenue.

The plan is motivated not by a desire to balance the budget but rather by the ideological goal of reducing the size of government to something that would be unrecognizable to Americans today.

The plan’s author, House Budget Committee Chairman Paul Ryan, is intentionally vague about his plans to overhaul the tax system. That may be because his previous attempt to explain how he would reduce the top income tax rate to 25 percent made it clear that the result would be a big tax increase for all income groups except the richest ten percent.

Read the report.


Not Just a Tax Cut: CTJ Exposes the Folly of John Boehner's "CutGO"


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Presumptive House Speaker John Boehner recently confessed that "what Washington sometimes calls 'tax cuts' are really just poorly disguised spending programs that expand the role of government in the lives of individuals and employers."  We couldn’t agree more.  What’s odd, though, is that Rep. Boehner has proposed moving Congress toward a “cut-as-you-go” system (or “CutGO”) that would actually make it easier for the government to overspend on these types of programs.  The folly of CutGO, and several much more sensible solutions, are the topic of this recent op-ed from Citizens for Tax Justice.

Read the op-ed


Tell Congress: Don't Cut Off Help for the Unemployed and Slash Taxes for Millionaires!


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Congress is about to make a choice that will define this moment in history: Support those unemployed by this recession, or give tax cuts to millionaires.

Your Senators need to hear from you today! Please call right now. Tell them you're a constituent. Tell them it's outrageous for lawmakers to say we can't afford to extend unemployment insurance for people laid off through no fault of their own — even as these same lawmakers support extending the Bush tax cuts for the very richest Americans.

We don’t have a choice — if Congress fails to continue the unemployment programs, 2 million people in December alone will be left with no income. In the next five months it will be almost 6 million people. Local economies will be devastated if the unemployed have no income to spend in local stores.

Click on the link below and all the information you need to make the call will be provided.

Call Now


Extending Tax Cuts for the Rich Is Only the Beginning for the Tea Party


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While attending the second annual 9/12 Tea Party rally in Washington, one could not escape the focus by speakers and participants on tax policy. If there was one overarching theme of the rally, it was that the Obama Administration has sought to dramatically increase the size of the federal government by proposing and enacting dramatic increases in taxes and government spending. (For a reality check, remember that President Obama cut taxes for 98 percent of working Americans last year, proposes to leave the Bush tax cuts in place for 98 percent of taxpayers this year, and enacted a health care reform that reduces the deficit.)

What Tea Party rally attendees support is awfully murky, but what they oppose is clearer. They are against the healthcare reform, the bailouts, the recovery act that created so many jobs, cap and trade, and allowing any of the Bush tax cuts to expire. This opposition was taken to an extreme by some of the individual Tea Party attendees whose signs argued that allowing the tax cuts to expire is equivalent to sexually abusing children or that Obama’s expansion of government made him comparable to Hitler, the Soviet Union, or just a plain old socialist.

Deftly mirroring the anger of the crowd, Rep. Mike Pence (R - IN) elicited enormous cheers saying that “No American should face a tax increase in January, not one. We will not compromise our economy to accommodate the class warfare rhetoric of the American left or of this Administration.” In reality, it's the possibility of a Republican filibuster of President Obama's tax plan that might lead to all Americans having more income taxes withheld from their paychecks starting in January.

The disconnect from reality doesn't end there. The anti-tax rhetoric was not followed by substantive and fundamental calls for equally large decreases in government spending. There were no signs or speakers calling for the enormous cuts to Medicare, Social Security, or Medicaid that would be required to make lower taxes possible. There was certainly no articulation of what cuts would be needed to make up for the $700 billion in lost revenue if the Bush tax cuts for the wealthiest Americans were extended.

The sponsors and speakers of the rally also promoted extremely regressive and radical changes to the tax system. Freedom Works, the chief sponsor of the event, advocates replacing the current system with a single flat rate income tax, which was promoted by its representatives who spoke at the rally. In addition, several speakers also alluded to the need for a single national sales tax, which is also known as the "Fair Tax," to "fix" our tax system. Echoing both sentiments without specifying one over the other, the Tea Party-backed “Contract From America” states that the current tax system should be replaced with a single rate tax set forth in a law that is not longer than the Constitution.

As Citizens for Tax Justice demonstrated over and over and over again in the 1990’s, the single rate flat income tax proposed by Dick Armey (the leader of Freedom Works) would dramatically raise taxes on all but the richest Americans while also massively increasing deficits unless the single rate was much higher than proposed.

Similarly, the Institute on Taxation and Economic Policy showed in its 2004 analysis of the "Fair Tax" that it would actually increase taxes by an average of $3,200, or roughly 50%, for the average individual in the bottom 80% of income earners. In addition, in order to raise the amount of revenue currently being spent, the rate would have to be between 45% and 53%, rather than the 23% that flat tax supporters advocate.

While calls for the flat or "fair" tax incited some excitement, the crowd seemed more enthusiastic about basic calls for lower taxes or a simpler tax system rather than the radical tax changes advocated by the rally’s sponsors.

In both opposing President Obama’s policies and advocating for a regressive tax overhaul, the Tea Party leaders are attempting to get away with promising lower taxes and better government without facing the real consequences of specific policies.

On Tuesday, CTJ participated in a press conference with reporters, along with House Majority Leader Steny Hoyer and the Center for American Progress, to discuss the House Republican Study Committee's so-called "Economic Freedom Act," H.R. 5029. Afterwards, CTJ was  misquoted as saying Congress would be "spinning its wheels" if it enacted this bill. What CTJ actually said, and what its new report on H.R. 5029 concludes, is much harsher than that.

The report finds that the plan would cost $7 trillion over a decade. If one adds the cost of extending the Bush tax cuts (which the sponsors of this plan clearly support) the cost would come to around $10 trillion over a decade. By the second year it's in effect, about 62 percent of the benefits would go to the richest 1 percent of taxpayers, and about three fourths would go to the richest 5 percent.

Read the report.


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.


BILL CLINTON IS WRONG ABOUT THE VAT


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Former President Bill Clinton Endorses Regressive US National Sales Tax at Billionaire’s Conference, Recites Bogus Claim about Sales Tax Helping US Trade

Former President Bill Clinton recently endorsed enactment of a regressive U.S. national sales tax — a.k.a. a value-added tax or VAT. In doing so, he parroted a long-discredited argument that a sales tax would curb imports into the United State and encourage exports.

Clinton made his remarks in an interview at an April 28, 2010 conference sponsored by the Peterson Institute for International Economics, one of many organizations founded by Peter G. Peterson, a billionaire investment banker who has long advocated big cuts in Social Security and lower taxes on capital gains (i.e., on himself).

According to Clinton, “the one thing that blue collar America should like about [a sales tax] is it’s good for exports and it in effect, it doesn’t allow quite so much subsidy of imports — when other countries subsidize their production for export at least they get slapped with a value-added tax when it comes in here.”

Clinton seems to have failed to notice a critical flaw in his argument.

It’s true, as Clinton says, that American consumers would pay a U.S. national sales tax when they buy imported products. But that’s no help to U.S. manufacturers. After all, Americans would have to pay the same sales tax when they buy products made in the USA. How does that give an advantage to U.S.-made goods?

As for exports from the U.S., well, obviously Americans wouldn’t pay a U.S. sales tax on products sold abroad (i.e., Americans won’t be taxed on products they don’t buy). But that doesn’t help U.S. exports. How could it? (Meanwhile, foreign customers pay whatever sales taxes their own governments impose, whether the products are American-made, made in their own countries, or elsewhere.)

The bottom line is that a national sales tax would have no effect, positive or negative, on U.S. exports or imports.

As the congressional Joint Committee on Taxation put it in a report back in 1991, “even though imports are subject to tax, U.S. buyers’ choice between imported and domestically produced [goods] is not altered. Similarly, foreign consumers’ choice between goods produced in the U.S. and goods produced in their own country is not altered even though U.S.-produced goods [aren’t subject to U.S. sales tax] when exported.”

Think of it this way: Chinese companies export hundreds of billions of dollars a year in products to the United States. If the products are sold in California, customers will pay a sales tax of as much as 10 percent. Of course, they’ll pay the same sales tax if they buy products made in the United States. Conversely, Delaware has no sales tax, so Delaware customers pay no sales tax on either Chinese or American products. Is California at a competitive advantage versus Delaware because it has a steep sales tax? Of course not.

Everyone agrees that a national sales tax, like state and local sales taxes, would be hugely regressive, hitting the poor and the middle class hard, and the rich very lightly. Clinton knows this, and he does vaguely suggest implausible “adjustments in the other tax bills to make it — to keep the progressivity of our tax system.” But ultimately, his message to middle- and low-income Americans is simple and harsh: suck it up. “It’s a big leap,” Clinton said. “But if you look at it, people in Europe — just like any other sales tax — they just get used to payin’ it.”

By the way, in the same report cited above, the Joint Committee on Taxation noted that “providing a realistic number of employees to administer a U.S. VAT could mean a near-doubling of the size of the IRS.” That’s an extraordinary amount of added paperwork, complexity and bureaucracy. For what? A more regressive tax system?

We don’t need and shouldn’t tolerate a new and grossly unfair sales tax, whose alleged benefits to U.S. trade are nonexistent. Instead, we should attack the budget deficit by making our tax system fairer, in particular by closing unwarranted and hugely costly income tax loopholes that unjustly favor big corporations and the wealthy. Bill Clinton ought to know better.

It's difficult to design a tax plan that will lose $2 trillion over a decade even while requiring 90 percent of taxpayers to pay more. But Congressman Paul Ryan has met that daunting challenge. A new CTJ report shows that Congressman Ryan's budget plan has nothing to do with balancing the budget, but has everything to do with creating a tax system that takes more from the poor and less from the rich.

If the extensive tax proposals in his plan were fully in effect in 2011:

  • The federal government would collect $183 billion less in 2011 and more than $2 trillion less over a decade than it would if Congress adopted President Obama's tax proposals.

  • Federal taxes would be lower for the richest ten percent, and higher for all other income groups, than they would be if President Obama's proposals were enacted.

  • The bottom 80 percent of taxpayers would pay about $1,700 more, on average, than they would if President Obama's proposals were enacted.

  • The richest one percent would pay about $211,300 less on average than they would if President Obama's proposals were enacted.

  • The poorest 20 percent would pay 12.3 percent of their income more than what they would pay under the President's proposal, while the richest one percent would pay 15 percent of their income less than they would pay under the President's proposal.

Read the report.

Citizens for Tax Justice has a new report on the "flat tax" proposal introduced in each session of Congress since 1995 by Senator Arlen Specter of Pennsylvania. This single-rate tax would replace the existing progressive personal income tax, as well as the corporate income tax and estate tax.

The Specter plan is 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.”

Our analysis of the Specter plan confirms this is true. We find that Senator Specter’s flat tax will result in:

- Enormous tax cuts for the richest five percent of taxpayers, including an average tax cut of $209,562 for the richest one percent in 2010.

- Tax hikes for all other income groups. The bottom 95 percent of taxpayers would pay an average of $2,887 more in federal taxes in 2010.

- Low-income Americans would lose the refundable credits that they receive under the current income tax.

- The form of income that mostly flows to the wealthy — investment income — would be exempt from the personal income component of the flat tax, while all compensation for work, including wages and even employer-provided health care benefits, would be taxed.

- There would be little simplification in taxes for the majority of Americans.

Read the report.

When anti-tax activists and lawmakers complain that Congress and the President are pursuing policies that will cause taxes to be too high, the first question anyone should ask is: Compared to what? What exactly is the alternative to allowing the Bush tax cuts to end (at least for the rich) and finding new ways to raise revenue?

This week the House GOP showed us what the alternative is and it's frightening. On Wednesday, the ranking Republican on the U.S. House of Representatives' Budget Committee, Congressman Paul Ryan (R-Wisc.), released a budget plan which he argues is a more fiscally responsible alternative to the budget outline proposed by President Obama and the similar budget resolutions approved by both chambers last night. His proposal is apparently an update of the plan that House GOP leaders introduced last week and is different in some key respects.

The revised House GOP budget plan would move towards cutting and privatizing Medicare, convert Medicaid into limited block grants to states, and even cut Social Security benefits for some retirees. The plan would deeply cut the relatively small amount of government spending devoted to non-military, non-mandatory programs by refusing to adjust the budgets of these programs for inflation and population growth for five years. The House GOP plan would repeal the recently enacted economic stimulus law (the American Recovery and Reinvestment Act of 2009, or ARRA) a year before its expiration at the end of 2010.

A report from Citizens for Tax Justice compares the income tax proposals in the House GOP plan to the income tax proposals in the House Democratic plan in 2010, and finds that:

  • Over a third of taxpayers, mostly low- and middle-income families, would pay more in taxes under the House GOP plan than they would under the House Democratic plan in 2010.
  • The richest one percent of taxpayers would pay $75,000 less, on average, in income taxes under the House GOP plan than they would under the Democratic plan in 2010.
  • The income tax proposals in the House GOP plan, which is presented as a fiscally responsible alternative to the Democratic plan, would cost over $225 billion more than the Democratic plan's income tax policies in 2010 alone.

Read the report.

Yesterday, the Republican leadership in the U.S. House of Representatives released the outlines of a tax and spending plan that they argue is a more fiscally responsible alternative to the budget outline proposed by President Obama and the similar budget resolutions working their way through the House and Senate.

A new report from Citizens for Tax Justice compares the income tax proposals in the House GOP plan to the income tax proposals in the President's plan and finds that:

  • Over a fourth of taxpayers, mostly low-income families, would pay more in taxes under the House GOP plan than they would under the President's plan.
  • The richest one percent of taxpayers would pay $100,000 less, on average, under the House GOP plan than they would under the President's plan.
  • The income tax proposals in the House GOP plan, which is presented as a fiscally responsible alternative to the President's plan, would cost over $300 billion more than the Obama income tax cuts in 2011 alone.

Read the report.


THE FAILURE OF SUPPLY-SIDE TAX CUTS


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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

Two recent reports help explain supply-side economics, its logical inconsistencies and its failures in practice. One is "Take a Walk on the Supply Side: Tax Cuts on Profits, Savings, and the Wealthy Fail to Spur Economic Growth" by Michael Ettlinger of the Center for American Progress and John Irons of the Economic Policy Institute. The report spends some time pointing out how supply-side economics is questionable even on a theoretical level. Do we really know that tax cuts always result in more work or more savings? What if you have a certain earnings goal or savings goal and you have to work or save less to reach that goal as the result of a tax cut? And how do we know more savings would mean more investment? Couldn't it lead to investment overseas, or maybe lower consumption which could in turn be harmful to the economy?

But things get even more interesting when Ettlinger and Irons look at the empirical evidence to compare economic performance after supply-side tax cuts during the Reagan and Bush II eras to economic performance after the deficit-reduction policies in the Clinton era. They look at the evidence in two ways: first, measuring economic indicators in a period immediately following the introduction of the new tax policy, and second, measuring economic indicators during the first economic expansion to take place after the introduction of the new tax policy. Investment is found to be stronger during the Clinton era than during the two supply-side eras. The same goes for GDP growth and several other indicators.

The second report is "Tax-Cut Snake Oil: Two Conservative Theories Contradict Each Other and the Facts," by Jeffrey Frankel at the Economic Policy Institute. Frankel adds to our understanding of the supply-side theory and the evidence that has discredited it after the tax cutting under Reagan and Bush II. He also adds a lot of interesting information about the key players involved. For example, he provides quotes from economists who worked for Reagan and George W. Bush saying that tax cuts cannot lead to increased revenues, as well as quotes of their bosses saying that they can.

But Frankel describes another development in the anti-tax movement that sits very strangely with supply-side economics: the "Starve the Beast" hypothesis put forward by many conservatives that cutting taxes will reduce revenues, run up deficits, and force politicians to shrink government. (This is put forward by those who believe shrinking the government would be inherently good.)

Frankel points out that it's not at all obvious why lawmakers would feel more constrained from spending under such a regime. Clearly, if constituents are told that increased spending might require tax increases now to pay for it, that might give some pause. But if taxpayers are told that increased spending will result in some future tax increase, that is surely less threatening to constituents and those who depend on their votes, and so there might be less pressure on lawmakers to limit spending. This is exactly what happens under the supply-side regime as deficits soar as a result of tax cuts. And of course, as Frankel points out, the Starve the Beast hypothesis should now be discredited by the explosive spending in the Reagan and Bush II eras.

Most amazing of all is that these two ideas -- cutting taxes is OK because it will lead to increased revenues, and, cutting taxes is good because it will lead to decreased revenues and thus smaller government -- somehow coexist within the same anti-tax movement.


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.

Read the report: http://www.ctj.org/pdf/gophousetaxplan20080707.pdf

Representative Paul Ryan (R-Wisc.), the ranking Republican on the House Budget Committee, introduced legislation on May 21 that would cut Social Security benefits and create private accounts, end Medicare as it is currently structured, dramatically reduce the revenues available to fund federal public services, and radically reduce the fairness of the federal tax system.

A new report from CTJ shows that the tax provisions in this legislation would increase taxes on the poorest four-fifths of taxpayers while slashing taxes on those at the top of the income scale. The upper-income tax cuts would far outweigh the tax increases on everyone else, with a net annual reduction in federal revenues of $286 billion if the plan were in effect this year.


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.


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.

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