New CTJ Reports Explain the Tax Provisions in President Obama’s Fiscal Year 2015 Budget Proposal
Two new reports from Citizens for Tax Justice break down the tax provisions in President Obama’s budget.
The first CTJ report explains the tax provisions that would benefit individuals, along with provisions that would raise revenue. The second CTJ report explains business loophole-closing provisions that the President proposes as part of an effort to reduce the corporate tax rate.
Both reports provide context that is not altogether apparent in the 300-page Treasury Department document explaining these proposals.
For example, the Treasury describes a “detailed set of proposals that close loopholes and provide incentives” that would be “enacted as part of long-run revenue-neutral tax reform” for businesses. What they actually mean is that the President, for some reason, has decided that the corporate tax rate should be dramatically lowered and he has come up with loophole-closing proposals that would offset about a fourth of the costs, so Congress is on its own to come up with the rest of the money.
To take another example, when the Treasury explains that the President proposes to “conform SECA taxes for professional service businesses,” what they actually mean is, “The President proposes to close the loophole that John Edwards and Newt Gingrich used to avoid paying the Medicare tax.”
And when the Treasury says the President proposes to “limit the total accrual of tax-favored retirement benefits,” what they really mean to say is, “We don’t know how Mitt Romney ended up with $87 million in a tax-subsidized retirement account, but we sure as hell don’t want to let that happen again.”
Read the CTJ reports:
The President’s FY 2015 Budget: Tax Provisions to Benefit Individuals and Raise Revenue
The President’s FY 2015 Budget: Tax Provisions Affecting Businesses
Tax Reform Options News
New CTJ Reports Explain the Tax Provisions in President Obama’s Fiscal Year 2015 Budget Proposal
House Ways and Means Committee Chairman Dave Camp Proposes Tax Overhaul that Fails to Raise Revenue, Enhance Fairness, or End Offshore Tax Shelters
The tax reform plan released last week by Congressman Dave Camp, the Republican chairman of the House Ways and Means Committee, fails to accomplish what should be the three basic goals for comprehensive tax reform: 1) raise revenue from individuals and corporations, 2) make our tax system more progressive than it is now, and 3) tax the offshore profits and domestic profits of our corporations at the same time and at the same rate. (See more details on these three goals.) As explained below, Camp’s plan also manages to restrict state and local governments’ ability to make important public investments.
Our lastest study documenting corporate tax avoidance dispels the myth that corporations need the sort of revenue-neutral tax reform that Rep. Camp proposes. But that is only one of many problems with his plan. Here are some other basic ways in which it fails.
FAILS TO RAISE REVENUE:
Tax reform should result in more revenue collected from both the personal income tax and the corporate income tax.
The United States is the least taxed of all OECD countries besides Chile and Mexico. Neither individuals nor corporations are taxed at high rates. American corporations even pay lower effective tax rates in the United States than they pay in other countries where they do business. At a time when Congress continues to bitterly argue whether we have the resources to fund important public investments that most Americans support like Head Start and medical research, we need to take a critical look at our nation’s tax structure and determine how we can raise more revenue in a way that is fair and just. Rep. Camp’s proposal makes no attempt to raise more revenue from wealthy individuals or profitable corporations.
We have been very critical of both Rep. Camp and President Obama for proposing that business tax reform be revenue-neutral. But Camp’s approach is far worse, proposing that all of tax reform (including changes that affect individuals, as well as changes affecting businesses) be revenue-neutral.
FAILS TO ENHANCE FAIRNESS:
Tax reform should result in a tax system that is more progressive than the one we have now.
When you account for the different federal, state and local taxes that people pay, the tax code is just barely progressive. Camp’s plan fails to address this. Partly this is because Camp’s plan would continue to tax capital gains and stock dividends, which mostly go to the wealthy, at lower rates than income from work.
Under Camp’s plan, the personal income tax would have two regular rates, 10 percent and 25 percent, and then a surcharge (an additional tax) of 10 percent would apply to very high-income people. The rules for the regular tax and the surcharge would be somewhat different. For example, no itemized deductions could be taken against the surcharge, except the charitable deduction. But the combination of the regular tax and the surcharge would be similar to having one tax with rates of 10 percent, 25 percent, and 35 percent.
The plan claims that capital gains and dividends would be taxed at the same rates as other income, but effectively they would be taxed at lower rates because 40 percent of capital gains and dividends would be excluded from taxable income. The top effective personal income tax rate on capital gains and dividends would be 21 percent. This is a one percentage point increase over the current top rate of 20 percent, which is probably enough to cause Grover Norquist to have an aneurism but will not address the fundamental unfairness of taxing income from wealth at lower rates than income from work.
Camp’s plan also reduces the EITC and eliminates personal exemptions while also increasing child tax credits and the standard deduction. Citizens for Tax Justice is currently producing estimates of how the combination of these changes would affect people in different income groups. But we already know that low-income families in certain situations would experience a substantial tax increase.
FAILS TO END OFFSHORE TAX SHELTERS:
Tax reform should result in rules that tax American corporations’ offshore profits and domestic profits at the same time and at the same rate.
This is the only way to end the tax incentives for corporations to shift jobs offshore and make their U.S. profits appear to be earned in offshore tax havens (countries where they are not taxed). Under the current system offshore profits and domestic profits are not taxed at the same time, because American corporations can indefinitely “defer” paying U.S. taxes on profits that are officially “offshore” until they are officially brought to the U.S. Under Camp’s plan, offshore profits and domestic profits would not be taxed at the same rate, and in fact the default rule would be for offshore profits to be taxed at a rate of 1.25 percent.
While Camp claims that various other measures he proposes would prevent corporate tax avoidance, it is impossible to believe that they would work since his overall proposal would dramatically increase rewards for any American corporation that can make its U.S. profits appear to be earned in offshore tax havens.
HURTS STATE AND LOCAL GOVERNMENTS:
Camp’s plan would hurt state and local governments by repealing the most justified deduction in the tax code.
Rep. Camp’s plan would limit and repeal many different tax breaks, but one of the most significant changes would be repeal of the deduction for state and local taxes. As the Institute on Taxation and Economic Policy (ITEP) has argued, this is the one of the most justified of all the deductions in the federal personal income tax.
The deduction for state and local taxes paid is often seen as a subsidy for state and local governments because it effectively transfers the cost of some state and local taxes away from the residents who directly pay them to the federal government. For example, if a state imposes a higher income tax rate on residents who are in the 39.6 percent federal income tax bracket, that means that each dollar of additional state income taxes can reduce federal income taxes on these high-income residents by almost 40 cents. The state government may thus be more willing to enact the tax increase because its high-income residents will really only pay 60.4 percent of the tax increase, while the federal government will effectively pay the remaining 39.6 percent. This is why Rep. Camp and many anti-government lawmakers want to do away with this particular deduction.
But viewed a different way, the deduction for state and local taxes is not a tax expenditure at all, but instead is a way to define the amount of income a taxpayer has available to pay federal income taxes. Another view is that the deduction encourages state and local governments to make public investments that they would otherwise underfund because the benefits spill outside their borders. For example, state and local governments provide roads that, in addition to serving local residents, facilitate interstate commerce. They also provide education to those who may leave the jurisdiction and boost the skill level of the nation as a whole, boosting the productivity of the national economy.
In this light, eliminating the deduction for state and local taxes is not a brave attempt to trim unnecessary breaks out of the tax code, but just one more attempt to restrict our ability to make the public investments that allow America’s economy and people to thrive.
A lot of gimmicky bills are proposed each Congressional session, but few are quite as ridiculous as the proposal by a bipartisan group of lawmakers in the House and Senate to create a new federal income tax break for the cash bonuses received by U.S. Olympic medalists. Not willing to be outdone by Congress, the Obama Administration has even voiced support for the legislation, saying that they want "to ensure that we’re doing everything we can to honor and support our Olympic athletes."
Unfortunately, this isn't the first time lawmakers have proposed a special carve-out for Olympic medalists. In fact, this latest push is just a rehashing of identical bills pushed during the 2012 Olympics, which led us back then to have a real facepalm moment.
First, the income tax system should be neutral in terms of how individuals earn their income and there is no moral or economic case for exempting the earnings of Olympic athletes over other categories of workers. Is the work being done by Olympic athletes really more noble than say the work being done by firefighters, EMTs or soldiers?
Second, aren’t lawmakers always claiming they want to make the tax code simpler? Isn’t it obviously more complicated to fill the tax code with provisions treating different groups of people differently?
And this proposal would, in fact, add provisions to the tax code to benefit a very small subset of people, around 100 or so US citizens who receive an Olympic medal every two years.
The way the proposal is being promoted is also wildly dishonest. The proponents of the bill have based their campaign on the eye-catching, yet false, claim that Olympic athletes could end up owing as much as $10,000 in taxes on the bonus from their gold medal. The reality is that this $10,000 figure is completely bunk because most Olympic athletes are not wealthy enough to pay the full 39.6 percent rate on the gold medal that the figure assumes. In addition, Olympic athletes could potentially wipe out the entirety of the tax by deducting the expense of their training and travel for the event.
As if all of this was not bad enough, it seems that the legislative language is so broadly written that it could actually allow exemptions for huge cash bonuses given to Olympic competitors through endorsement deals. For example, if the legislation passed, the well-known Olympic swimmer Michael Phelps could structure his future endorsement deals such that he receives $300,000 tax-free for each medal earned.
Hopefully, lawmakers will resist the clarion call of publicity surrounding these and other gimmicky tax proposals and push real tax reform options going forward.
Photo of Olympics via U.S. Army IMCOM Creative Commons Attribution License 2.0
The newly passed $1.1 trillion bipartisan budget appropriations bill includes myriad spending cuts, but the $526 million cut to the Internal Revenue Service (IRS) has to be the most foolish. Under the new budget, the IRS's 2014 budget will be $11.3 billion, which is $1.7 billion less than the administration requested and about $2.5 billion higher than the radical 25 percent cut proposed by some House Republicans earlier this year.
As Nina Olsen, the non-partisan United States Taxpayer Advocate, notes in her recent annual report, cutting the IRS budget makes very little sense since every "dollar spent on the IRS generates more than one dollar in return - it reduces the budget deficit." In fact, as we've noted before, every dollar invested in the IRS can generate as much as $200 in deficit reduction.
Unfortunately, lawmakers have not seen it this way in recent years. Since 2010, the IRS has been forced by an 8 percent cut in its budget (adjusting for inflation) to reduce its staff by 11,000 people and its spending on training its employees by 83 percent. These cuts have taken place even though there are now 11 percent more individual and 23 percent more business tax returns for the agency to handle. As IRS Commissioner John Koskinen testified at his confirmation hearing in December, a recent report by the Treasury Inspector General for Tax Administration (TIGTA) found that at least $8 billion had been lost in compliance revenue due to budget cuts.
The impact on customer service has also been dramatic. In 2013, customer service representatives from the IRS were only able to answer 61 percent of the calls made from taxpayers seeking help, which is a substantial drop from the 87 percent that were answered ten years ago. In other words, some 20 million calls by taxpayers seeking help went unanswered last year, even before this new round of budget cuts.
Ironically, many lawmakers have used the IRS “scandal” (the agency’s targeted scrutiny of organizations seeking tax-exempt status by screening for political words in their names) to argue that it be punished with these and even larger budget cuts. The reality is that the lack of budgetary resources was a major driver of the short-cuts that created the “scandal.” Further budget cuts will only create more problems at the agency.
If Congress is really interested in making the IRS work more effectively and in reducing the deficit, it should substantially increase the IRS's budget. When Congress cuts the IRS's budget, the only people who are really punished are the honest American taxpayers.
General Electric has long been a flashpoint in corporate tax reform debates. As long ago as 1984, CTJ’s revelation that GE and other large companies had managed to avoid paying even a dime of tax on billions in US profits prompted President Ronald Reagan to push for loophole-closing tax reform. And as our more recent research has shown, GE remains a topflight tax avoider, paying about two percent of its profits in US federal income taxes over the decade between 2002 and 2011.
So anytime one of the biggest tax dodges available to GE disappears, it should be seen as a victory for tax reform.
Why, then, is there so little excitement about the expiration, on December 31 of 2013, of the “active financing exception” that GE relies so heavily on to reduce its tax bill? Perhaps it’s because its expiration was an accidental byproduct of lawmakers’ inaction, and because Congressional tax writers have every intention of bringing this lamentable tax loophole back from the dead, as they have multiple times in the past decade. Repealed as part of the loophole-closing Tax Reform Act of 1986, the active financing loophole was temporarily reinstated in 1997 after fierce lobbying by GE and other multinational companies, and has been extended numerous times since them, usually for one or two years at a time.
The active financing exception is usually extended as part of the so-called “extenders,” the legislation that Congress enacts every couple of years to extend a package of (ostensibly temporary) tax breaks for business interests. The last extenders package was enacted as part of the fiscal cliff deal at the start of 2013, and it extended the active financing break retroactively into 2012 and prospectively through 2013. The two-year extension cost over $11 billion, making it the third most expensive of the extenders.
American corporations are allowed to indefinitely “defer” paying U.S. taxes on their offshore profits, but there is a general rule (often called “subpart F” in reference to the part of the tax code that spells it out) that corporations cannot defer U.S. taxes on dividends, interest or other types of “passive” income because these types of income are easy to shift around from one country to another to avoid taxes. The “active financing exception” is an exception to subpart F. As a result of this ”exception,” companies like GE can indefinitely avoid paying taxes to any nation on their financing income, simply by claiming that their US-based financing income is actually being earned in offshore tax havens.
GE won’t disclose just how valuable the active financing rule is to their bottom line. But when the tax break was set to expire in 2008, the head of the company’s tax department infamously went down on one knee in the office of the Ways and Means Committee chairman Charles Rangel to beg for its extension. And the company’s 2012 annual report’s discussion of risk factors facing the company’s bottom line says that “[i]f this provision is not extended, we expect our effective tax rate to increase significantly.”
And GE’s not the only company that is chomping at the bit to bring this tax break back. The active financing exception also plays a significant role in the ability of other large U.S.-based financial institutions to pay low effective rates. As a group, the financial industry has one of the lowest effective rates of all industries, averaging only 15.5% for the years 2008-2010.
With the lobbying power of GE and the financial services industry at their doors, it’s sadly no surprise that Congressional lawmakers are likely to ride to the rescue of these low-tax multinationals once again. But the $11.2 billion two-year price tag of the active-financing giveaway should be a good enough reason for Congress to sit on their hands and let this tax giveaway stay dead.
Sales taxes are the biggest tax fairness problem facing state and local governments: they inexorably fall hardest on the low-income families who are least able to pay them, while asking far less, as a share of income, from the very best-off taxpayers. So if the federal government enacts a tax break designed to offset the impact of sales taxes, that can’t be a bad thing, right? As it turns out, it IS a bad thing, as explained in a recent report from Citizens for Tax Justice.
A deduction for sales taxes existed in the past but was repealed as part of the loophole-closing Tax Reform Act of 1986. In 2004 Congress brought the concept back as the itemized deduction that federal income taxpayers can claim for state and local sales taxes they pay each year.
Spearheaded by then-House Majority Leader Tom DeLay, the provision, enacted as part of the “American Jobs Creation Act of 2004,” gave itemizers the choice of deducting either their state and local income taxes or their sales taxes. The provision was set to expire two years later–and that’s how it joined the big happy family of “tax extenders,” the motley crew of temporary tax giveaways Congress now extends every couple of years.
Almost a decade later, the sales tax deduction is once again set to expire at the end of 2013. However, the deduction has a vocal fan base among politicians in the nine states that have no broad-based income taxes and rely more on sales taxes to fund public services. Since these states include large states like Florida and Texas, it’s a constituency that is difficult to ignore. Their Congressional delegations argue that it’s unfair for the federal government to allow a deduction for state income taxes, but not for sales taxes, but this misses the larger point. The underlying problem with sales taxes is their impact on low-income families, and itemized deductions don’t help low-income people, who mostly take the standard deduction rather than itemizing. Also, the higher your income, the more the deduction is worth, since the tax benefit depends on your income tax bracket.
The table above includes taxpayer data from the IRS for 2011, the most recent year available, along with data generated from the Institute on Taxation and Economic Policy (ITEP) tax model to determine how different income groups would be affected by the deduction for sales taxes in the context of the federal income tax laws in effect today.
As illustrated in the table, people making less than $60,000 a year who take the sales-tax deduction receive an average tax break of just $100, and receive less than a fifth of the total tax benefit. Those with incomes between $100,000 and $200,000 enjoy a break of almost $500 and receive a third of the deduction, while those with incomes exceeding $200,000 save $1,130 and receive just over a fourth of the total tax benefit.
So the sales tax deduction is both complicated and regressive, not to mention an added burden on the vast majority who don’t use it but have to pay for it (in the form of higher tax rates or skimpier public services). Yet too many of our politicians seem to think “other than those flaws, what’s not to like?”
The good news is that all Congress has to do in order to make this bad dream end is... nothing. Since the tax break is set to expire on New Year’s Day, Congressional tax writers can achieve a small, but meaningful, victory for tax fairness and simplification by simply sitting on their hands.
In what has been a cherished annual tradition for tax accountants everywhere, the day is approaching—January 1, to be precise—when dozens of temporary federal income tax provisions are set to expire. The so-called “extenders”—tax breaks enacted by Congress on a temporary basis and extended at the last minute, usually because lawmakers can’t find a way to pay for making them permanent—include a rogue’s gallery of ineffective giveaways ranging from the research and experimentation tax credit to a special write-off for race horses. One of these temporary tax breaks is an increase in the income tax exclusion for employer-provided mass transit to make it equal the existing exclusion for employer-provided parking benefits. As an NPR story recently explained, the expiration of the mass transit increase would create a glaring inequity between workers who use mass transit and those who drive: come January 1, Americans who drive to work will be able to write off $250 a month in employer-provided benefits for commuting-related costs, while those relying on mass transit will only be able to exclude $130 a month of such expenses from income.
If this seems unjustifiably discriminatory, that’s because it is: there’s no defensible rationale for systematically giving car commuters a bigger tax break than those relying on mass transit. Policymakers sensibly want commuters to rely on public transit because it reduces highway gridlock and pollution—benefits that accrue to all Americans, however they get to work. No one thinks it’s a smart idea to encourage more Americans to drive to work rather than using mass transit—yet that could be the impact of allowing the mass transit subsidy to fall at year’s end.
One seemingly-obvious solution, promoted by Oregon Representative Earl Blumenauer, would maintain the status quo, which gives the exact same tax benefit for mass transit that is available for those driving to work. But this approach is disturbingly discriminatory as well: like any exclusion from the progressive federal income tax, it offers bigger benefits to the upper-income taxpayers who pay at the highest marginal rates—and offers the least to those low-income workers who earn too little to pay federal income taxes. (Since fringe benefits like parking subsidies are excluded from the federal payroll tax as well, the exclusion does offer some benefits to even the poorest workers.)
This isn’t to say that making commuting more affordable is a bad idea: for the many low-wage workers who can’t afford to live in the central cities where they work, a long and costly commute is often a harsh reality. Yet the current tax subsidies for driving and mass transit are at best an inefficient way of solving this problem. For every dollar of tax break given to a low-wage worker, these subsidies give a much bigger tax break to the best-off Americans. Allowing the temporary higher benefit for mass-transit commuters to expire would be the worst possible way of paring back this tax break. A more straightforward alternative would be to simply end all tax subsidies for costs of commuting to work and instead put this revenue toward public investment in better and more affordable transportation infrastructure.
A poll commissioned for Americans for Tax Fairness and released on November 13 shows almost no public support for the “revenue-neutral” approach to tax reform advanced by Rep. Dave Camp, the chairman of the House Ways and Means Committee.
One question put to respondents was how Congress should use revenue from “closing corporate loopholes and limiting deductions for the wealthy.”
To this, 82 percent preferred the option to “Reduce the deficit and make new investments,” while just 9 percent preferred the option to “Reduce tax rates on corporations and the wealthy.”
What 9 percent chose is basically the approach to tax reform laid out by House Budget Committee chairman Paul Ryan (in the various version of the infamous “Ryan Plan”) as well as the approach laid out by Ways and Means Chairman Dave Camp. Both have said that tax loopholes and tax breaks should be reduced and/or eliminated and the revenue savings should be used to offset reductions in tax rates, including reducing the top personal income tax rate and the corporate income tax rate to 25 percent.
Of course, Camp and Ryan present their approach as more than simply reducing rates for corporations and wealthy individuals. They will continue to make the case that they can include provisions that help middle-income Americans directly.
But this will be an impossible case for them to make. After Ryan released the most recent version of his plan, CTJ demonstrated that the tax reform section would provide those whose annual income exceeds a million dollars with an average tax cut each year of at least $200,000. In other words, even if Congress eliminated all of the tax loopholes and tax breaks that Ryan put on the table, millionaires would still end up with a huge net tax cut because of the rate reductions. And if the plan would be implemented in a way that is truly “revenue-neutral” as Ryan and Camp claim, that would mean someone further down on the income ladder would have to pay more than they pay today.
The budget resolution approved by the Democratic majority in the Senate in the spring called for raising $975 billion in taxes over a decade from corporations and wealthy individuals. President Obama has taken a disappointing middle ground, arguinug that reform of the personal income tax should raise revenue, but reform of the corporate income tax (and the personal income tax insofar as it affects businesses) should be revenue-neutral.
Citizens for Tax Justice released a detailed tax reform plan this week that accomplishes the goals we set out in an earlier report: raise revenue, enhance fairness, and reduce tax incentives for corporations to shift jobs and profits offshore.
A budget resolution approved by the House of Representatives in the spring called for a tax reform that raises no new revenue, while a budget resolution approved by the Senate called for $975 billion in new revenue over a decade. CTJ’s report on goals for tax reform explained why we need even more revenue than the Senate resolution calls for, and the plan we released this week would raise $2 trillion over a decade
Our proposal would accomplish this by ending some of the biggest breaks for wealthy individuals and corporations. The proposal includes the following reforms:
■ Repealing the special, low tax rates for capital gains and stock dividends, as well as the rule allowing accumulated capital gains to escape taxation when the owner of an asset dies.
■ Setting the top tax rate at 36 percent — which would be a significant tax increase on the wealthy because this rate would apply to the capital gains and stock dividends that mostly go to the richest Americans and which are now taxed at much lower rates.
■ Increasing the standard deduction by $2,200 for singles and twice that amount for married couples.
■ Replacing several “backdoor” taxes (like the Alternative Minimum Tax) with President Obama’s proposal to limit the tax savings of every dollar of deductions and exclusions to 28 cents.
■ Repealing several enormous corporate tax breaks, including the rule allowing American corporations to “defer” paying U.S. taxes on their offshore profits until those profits are officially brought to the U.S.
Read our tax reform reports:
Tax Reform Goals: Raise Revenue, Enhance Fairness, End Offshore Shelters
September 23, 2013
Tax Reform Details: An Example of Comprehensive Reform
October 23, 2013
Next Tuesday the federal gas tax will celebrate an unfortunate anniversary: 20 years stuck at a rate of exactly 18.4 cents per gallon. A unique new report from our partner organization, the Institute on Taxation and Economic Policy (ITEP), puts this occasion in context and explains why the gas tax has fallen some $215 billion short of what a better-designed tax would be raising. The report shows that Congress’ embarrassing failure to plan for growth in construction costs is the main cause of our transportation funding gaps.
To hear some gas tax naysayers tell it, hybrids and other fuel-efficient vehicles are consuming so little gasoline that the gas tax can’t possibly raise enough money to keep our infrastructure from falling apart. But ITEP’s new analysis shows that just 22 percent of the gas tax shortfall we’re experiencing today is due to growth in vehicle fuel-efficiency. By far the more important factor (accounting for the other 78 percent of the shortfall) has been Congress’ decision to stop the gas tax rate from rising alongside normal growth in the cost of asphalt, machinery, and other construction inputs.
Seventeen states, home to over half the country’s population, now use smarter “variable-rate” gas taxes that tend to rise over time. And we note that the federal government wisely allows other parts of the tax code to rise each year with inflation—like the personal exemption, standard deduction, and Earned Income Tax Credit (EITC), so similarly giving the gas tax room to grow shouldn’t be that hard.
ITEP’s report offers a better path forward, and explains how reform could have prevented our current funding predicament. By allowing the gas tax rate to grow alongside both construction cost inflation and fuel-efficiency, the federal transportation fund could have been brought from frequent deficits to consistent surpluses. ITEP finds that more than $215 billion in additional revenue could have been raised over the 1997-2013 period—money that would have made a real difference in putting people to work and improving the efficiency of our transportation network.
Tax reform is a serious undertaking. The majority party in the House of Representatives now proposes to allow the U.S. to default on its debt obligations — refuse to pay the debts built up by Congress itself — unless it can force through a “tax reform” that raises no new revenue, along with other controversial measures.
Don’t be fooled. Raising the debt ceiling to avoid a default on U.S. debt obligations is a matter that should not require much debate, while tax reform is a completely separate issue that will require a vast amount of discussion and debate. The two do not belong in the same bill.
When lawmakers are serious about tax reform, they should turn to a new report from Citizens for Tax Justice that lays out just what tax reform should accomplish. If Congress is going to spend time on a comprehensive overhaul of America’s tax system, this overhaul should raise revenue, make our tax system more progressive, and end the breaks that encourage large corporations to shift their profits and even jobs offshore.
What could be more lovable than a bipartisan effort to simplify the tax code? A bipartisan effort to simplify the tax code led by a couple of folksy guys in shirtsleeves who call themselves Max and Dave. No matter that they are two of the most powerful members of Congress, they have managed to craft a successful PR campaign playing on the public’s frustration with political partisanship and endemic dislike of the tax code.
Max and Dave, of course, are Senator Max Baucus, chair of the Senate Finance Committee, and Representative Dave Camp, chair of the House Ways and Means Committee. Their aw-shucks, let’s-get-a-beer-and-fix-the-tax-code routine has received friendly media coverage inside the Beltway and outside too, during their recently wrapped up road show, which took the pair to Minnesota, Philadelphia, Silicon Valley and Memphis.
But as we have said many, many times, if these two are serious about reforming the tax code, they need to get serious about revenues. Indeed, they need to get serious period. Stop putting the cart before the horse, quit with the campaign strategy and get down to policy.
Most recently, we made our point on the opinion pages of the Memphis Commercial Appeal, the day before Max and Dave showed up for a friendly roundtable with executives from FedEx, one of the squeakier (PDF) corporate wheels when it comes to tax reform. Our op-ed, “Most of Us Want Corporate Loopholes Shut,” asked why the Senator and Congressman would visit with FedEx for advice about tax reform.
“The venue is apt because FedEx’s taxpaying behavior is emblematic of the challenges facing anyone seeking to fix the United States’ corporate tax system; it’s awkward because FedEx is a heavy feeder on tax breaks enthusiastically supported over many years by bipartisan majorities in Congress.”
We then explained some of what we’d learned in reviewing FedEx’s latest financial statements.
“For example, my organization, the Institute on Taxation and Economic Policy, found that between 2008 and 2010, FedEx paid an effective federal income tax rate of just 0.9 percent on over $4.2 billion in U.S. profits. With two more years of tax filings now publicly available, we know that over the past five years, FedEx paid an average effective federal income tax rate of just 4.2 percent.”
And we took on that worn-out whine about corporations needing a lower corporate tax rate to be competitive.
“FedEx also demonstrates how the U.S. corporate income tax does not appear to make our companies less “competitive,” despite the insistence of legions of CEOs that it does. Between 2008 and 2010, FedEx paid an effective income tax rate of 45 percent in the foreign countries where it does business. That’s about 50 times higher than the 0.9 percent rate they faced in the U.S. In fact, of the Fortune 500 corporations that were consistently profitable and that had significant offshore profits during that same period, we found that two-thirds actually paid higher taxes in the foreign countries where they do business than they paid in the U.S.”
Our op-ed in Tennessee also made reference to FedEx’s vast offshore holdings and how it drives down its taxes using depreciation. You can read the whole thing here. You can also read a small business owner using the Max and Dave visit at FedEx to make a similar point in a Tennessean op-ed.
Our real target, of course, wasn’t FedEx but rather the tax reforming team of Baucus and Camp. We use individual corporations’ tax payments as case studies – little narratives to show what’s wrong with the corporate tax code. As these corporations like to say, their tax avoidance practices are generally legal because Congress made them legal, so we like to show Congress exactly how their laws are working when it comes to corporate tax revenues.
Sometimes, though, companies take it personally when we publicize their actual tax payments, (remember our back and forth with GE last year?). Sure enough, two days after our op-ed ran in Memphis, a FedEx V.P. took to the same opinion page to defend the company, using many of the shell games we’ve come to expect. For example, we had explained that FedEx paid a 4.2 percent effective federal income tax rate on its U.S. profits over five years. FedEx V.P. Michael Fryt retorted with a ten year total tax payments figure in dollars, cited its total bill for state, local and federal taxes over five years, and then wrote that FedEx’s effective tax rate has been between 35.3 and 37.9 percent since 2010 – and was even 85.6 percent in 2009.
Notice how those effective rate figures he cites are all actually higher than the federal statutory rate of 35 percent? There’s a reason for that. While we focused on the company’s federal corporate income tax as a percentage of its U.S. profits, like we always do, Fryt is trying to divert attention to other taxes and taxes that FedEx has not paid yet, as companies often do. It’s like CTJ shows the world an apple and these companies jump up and down demanding the world look at their oranges instead.
We have a full response to those oranges FedEx was pushing last week right here. Among other things, it’s a case of Fryt including taxes that FedEx paid not just to the U.S. Treasury but to every country and locality everywhere it does business, which is not something that Max Baucus or Dave Camp or any member of Congress has any control over. Members of Congress are debating how to reform federal taxes, and we assume that FedEx is lobbying (and lobbying) Congress to influence the shape of that same federal corporate income tax, not the taxes it pays to states or cities or foreign countries.
What Congress can legislate is the federal corporate tax rate and the loopholes, breaks and other special provisions that are increasingly eroding corporate taxes as a share of revenues. Senator Baucus has told his colleagues to assume the tax code will be wiped clean of such expenditures, even as he and Camp continue to meet with corporations who unapologetically defend their favorite tax breaks – and demand lower rates on top of that. Summer is over and with it, Max and Dave’s road trip. When they are ready to get back to work, we are ready to offer constructive ideas for tax reform that generates the revenues we need and delivers the fairness the public wants.
For several years, Citizens for Tax Justice has raised the alarm about a payroll tax loophole that allows many self-employed people, including two former lawmakers, John Edwards and Newt Gingrich, to use “S corporations” to avoid payroll taxes. Unfortunately, Congress passed up an opportunity to address this loophole as part of health care reform. Despite a few recent court decisions in favor of the IRS’s attempts to slightly restrict this loophole, it will continue to be a problem until Congress takes our advice and closes it.
The IRS and Tax Court Lets Some Self-Employed People Avoid Social Security and Payroll Taxes — Unless They Go Too Far
Payroll taxes are supposed to be paid on income from work. The Social Security payroll tax is paid on the first $113,700 in earnings (adjusted each year) and the Medicare payroll tax is paid on all earnings. These rules are supposed to apply both to wage-earners and self-employed people.
“S corporations” are essentially partnerships, except that they enjoy limited liability, like regular corporations. The owners of both types of businesses are subject to income tax on their share of the profits, and there is no corporate level tax. But the tax laws treat owners of S corporations quite differently from partners when it comes to Social Security and Medicare taxes. Partners are subject to these taxes on all of their “active” income, while active S corporation owners are supposed to determine what salary they would pay themselves if they treated themselves as employees.
Naturally, many S corporation owners make up a salary for themselves that is much less than their true work income.
The Tax Court recently found that a California man named Sean McAlary attempted to do this in 2006 with an S corporation. He was the sole owner of the company, and he had only a handful of other real estate agents working sporadically for him (as independent contractors).
In 2006, McAlary, through his S corporation, had net income (income left after paying the other agents and paying other expenses) of $231,453. McAlary, who worked 60 hours a week at his company, initially did not report any of this income as compensation for work. And thus he paid no payroll taxes on it. When the IRS challenged him, he later claimed that only $24,000 was compensation for work. The other 90 percent, he said, was profit, not subject to Social Security or Medicare tax.
Logically, one would think that all of the net income of the company was income from work, since it all stemmed from McAlary’s efforts in selling real estate (and to a slight degree, from managing his sales agents).
But the IRS and the Tax Court totally missed the point. First, the IRS decided that less than half of McAlary’s income, only $100,755, was earned income. It came to this figure by multiplying what it guessed should be McLary’s hourly wage times the number of hours he worked. The Tax Court adjusted that down to $83,200 by making up a slightly lower average hourly wage.
Imagine if such a rule applied to ordinary wage earners. “So you were paid $75,000,” the IRS might say, “but you claim you were only worth half that much. Well, you have a point, but we’d say you were worth $50,000.”
By engaging in such fictions, the IRS and the Tax Court go to absurd lengths to give Subchapter S owners a tax break — just not as absurd as the numbers that many of the owners make up.
Medicare Tax Reform Was Missed Opportunity to Close Loophole
Two famous politicians have gained notoriety for low-balling their work income from Subchapter S corporations. The first was former Senator John Edwards, who actually claimed that his name was an asset, and that this asset (rather than his labor) was generating most of the income from his one-man law firm. The second was former House Speaker Newt Gingrich, whose tax returns released during the 2012 Republican primary demonstrated that he, too, took advantage of this dicey tax dodge.
In 2009, as members of Congress considered revenue-raising proposals to pay for health care reform, they eventually looked at an idea from Citizens for Tax Justice to reform the Medicare tax. We proposed that the Medicare tax, which was a flat-rate tax on wages, should have a higher rate for higher-income workers and that Congress create a matching Medicare tax applying to investment income (excluding retirement income) for people above a certain income threshold.
We assumed that if our proposal was adopted, then what was called the “John Edward Loophole” (and later called the “Newt Gingrich Loophole”) would be closed. Essentially all income over a certain threshold (not counting retirement income) would be subject to the Medicare tax one way or the other. Most of the disputes between the IRS and S corporation owners over how much of their income constitutes compensation would become unnecessary.
But Congress had other ideas. Although the health care law as enacted did include most of our proposal, an exception was made for “active income” of S corporations that the owners do not characterize as compensation for work.
This has created a strange situation in which wages and salary are subject to the Medicare tax and even most investment income (capital gains, dividends, interest, royalties, rents, to the extent they make up a taxpayer’s income in excess of $250,000 for married couples and $200,000 for singles) is, effectively, subject to the same tax. But “active income” that can be characterized as not wages and salary still escapes the tax, and thus taxpayers like McAlary still have an incentive to mischaracterize this income.
The most obvious and simplest solution would be for Congress to simply apply the Medicare tax to all “active income” of S corporations.
Some lawmakers have proposed a more limited solution that is overly complicated but which would at least solve part of the problem. Such legislation was first introduced as part of a tax “extenders” bill in 2010 (in order to offset some of the cost of those tax breaks) and a version has been introduced this year by Congressman Charlie Rangel. This legislation would address situations in which an S corporation provides a service and generates most of its profits based on the reputation or skills of three or fewer people. If this rule had been in place, Edwards and Gingrich probably would not have been able to avoid their Medicare taxes. But it might have left the courts to deal with cases like McAlary’s (because his business arguably relied on the skills and reputation of more than three people).
While most comic books deal with spandex-suited superheroes saving the day, the protagonists in New York Public Interest Research Group's (NYPIRG) "Blood from a Stone: A Cartoon Guide to Tax Reform," published in 1977, are the everyday taxpayers who are getting shafted by a tax code increasingly riddled with loopholes that directly benefit the rich. The only full-fledged, full-length comic book we know of that’s dedicated to the issue of tax reform, "Blood from a Stone” offers a concise and witty introduction to the history of taxation and the need for progressive tax reform in the United States.
While the comic is now over 36 years old, it remains strikingly prescient considering that tax reform has once again become one of the dominant topics of debate in Washington. In fact, many of the specific tax breaks called out as in need of reform in the comic, such as the preferential rate for capital gains or accelerated depreciation, are on the top of the list of the breaks that still need to go!
We are proud to pluck this comic from its obscurity and to post, for the first time since its original release, a digitized copy of this fascinating comic in its entirety. We do so with gratitude and permission from the comic's original authors Larry Gonick and Steve Atlas. Enjoy!
This chapter traces the historic role and origins of taxation from the Assyrians in 700 BC through to modern day America. It highlights the considerable importance of taxation in the American Revolution – it’s true, our anti-tax roots run deep – and the origin of the income tax in America. Did you know Abraham Lincoln instituted the first income tax in the US?
This chapter explains the principle of progressive taxation and explores how a series of loopholes undermine the progressiveness of the tax code. Not only that, it turns out one of those loopholes, the special low rate on capital gains, for example, cost the U.S. Treasury $6 billion – and that was back in 1977. And it’s still the costliest break in the tax code.
Chapter 3: What's Wrong with Loopholes
This chapter dives deeper into how loopholes undermine the equity of the tax system, are economically inefficient, and have grown to huge proportions in recent years. Building on this, the chapter notes how the beneficiaries of these special preferences have used advertising, lobbying, and campaign contributions to keep them. It's a surprise to see that Exxon Mobil was among the groups called out for lobbying for special preferences, just as it still is today.
Chapter 4: Reform
This is the what-can-we-do chapter and it covers how concerned taxpayers can advocate for a tax reform bill that wipes away loopholes and improves the equity of our tax system. The chapter ends with a call for you to get informed and rock the boat, and we couldn't agree more!
The appendix is an archival document in its own right. It lists the most relevant tax reform groups in 1977, the comic's bibliography, the relevant members of Congress in 1977, NY PIRG publications in 1977, and information about NYPIRG. We're happy to see that the list includes Public Citizen's Tax Reform Research Group, where our Director Bob McIntyre was working at the time.
Complete Comic (PDF 8.1 MB)
If Senator Max Baucus and Congressman Dave Camp wanted to know what Intel thinks about the corporate tax code, they didn’t need to fly into Silicon Valley this week on the taxpayers’ dime to find out. They could just have sat down in Washington, DC with a lobbyist from the proliferating number of lobby alliances corporate America is subsidizing in advance of tax reform, including the four that Intel belongs to.
If these two self-appointed Congressional tax reformers, a.k.a. Max and Dave, had just pulled up Intel’s own position paper (PDF) on tax policy, they would have learned that it, like most major U.S. corporations, wants a lower tax rate, and to keep its favorite tax breaks, too.
One tax break Intel says it likes is “deferral.” Deferral – a company’s ability to defer paying U.S. taxes on profits generated and kept abroad – is a preferred loophole for companies with intellectual property. It is relatively easy for them (unlike infrastructure-dependent manufacturers) to rent a post office box and call it a “business” anywhere they like, including in tax havens where no business is actually happening. And based on Intel’s public reports, it has six subsidiaries in that most famous of tax havens, the Cayman Islands. Deferral is also one of the most expensive expenditures in the corporate tax code, and will cost U.S. taxpayers around $600 billion in lost revenues over the coming decade.
Intel’s financial reports tell us that it currently has $17.5 billion in profits held offshore (at least for tax and accounting purposes) which are therefore not taxable by the U.S. This doesn’t make Intel an unapologetic offshore cash hoarding champ like Apple, with its $102 billion parked offshore. Intel is more like Google (and HP and Cisco) in that it’s squirreling away billions but won’t report what that money is doing, or where. If the money is working in an economically developed country, Intel is paying taxes on it that would be deducted from its U.S. tax bill if it brought those billions home; if it’s in a tax haven, (say, in a Caymans subsidiary), Intel has paid no taxes on it to any government.
As it is, Intel has paid roughly a 27 percent tax rate on its reported domestic corporate profits over the last five years (and a mere 0.3 percent in state taxes). And while Intel says its taxes are too high, what should worry Americans is that the two lawmakers campaigning for tax reform seem sympathetic to this common corporate complaint. Both have said that the current corporate tax rate should be cut, and Camp promotes a form of deferral on steroids, a “territorial” system, and Baucus won’t rule that out.
Baucus and Camp went to Silicon Valley as part of their “Max and Dave Road Show” to drum up support for tax simplification, promoting their bipartisan folksiness but consistently dodging serious questions about what tax reform should accomplish for the American public.
A simpler tax code is a good idea and certainly a popular one, but it is also popular for corporations to pay their fair share. 83 percent of Americans say we should close corporate tax loopholes, and then use that money to invest in the economy and pay down our debt (rather than cut the corporate tax rate), and with good reason. The corporate taxes we collect as a share of the economy has rarely been lower, and is well below average for the developed world. The effective federal income tax rate that big, profitable companies pay is actually only about half of the statutory 35 percent rate they complain about.
Baucus and Camp didn’t need to give another CEO another platform to ask for a tax cut. (And now we learn Treasury Secretary Jack Lew is heading to Silicon Valley to visit Facebook. Don’t get us started!) What they need is to ask the public what we want out of tax reform. We want simple, sure, but we also want fair.
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.
Here’s a look at some of the best and worst ideas that Senators submitted as part of the “blank slate” tax reform process proposed by Senators Max Baucus and Orrin Hatch, the chairman and ranking member of the tax-writing committee in the Senate. In theory, the “blank slate” is supposed to be an approach that assumes Congress is drawing the tax code completely from scratch, with no “tax expenditures” (subsidies provided through the tax code) and Senators were asked to explain which tax expenditures they would want to preserve in a newly reformed tax system.
Of course, this list is not comprehensive. Only a minority of Senators both submitted letters to Baucus and Hatch and made their letters public.
While CTJ has criticized Baucus and Hatch’s “blank slate” approach as ignoring the most crucial issue (the dire need for increased revenue), we have also put forward an approach to determine which tax expenditures should be repealed or preserved. Lawmakers should repeal tax expenditures that are regressive and serve no policy goals, preserve tax expenditures like the EITC that are progressive and do accomplish policy goals, and reform those tax expenditures that fall somewhere in between. CTJ has also explained that revenue should be raised by closing tax expenditures for corporations, particularly those that encourage corporations to shift jobs and profits offshore.
Some Senators, like Bernie Sanders and Jay Rockefeller, submitted letters very much in agreement with our approach. Others, like Jeff Flake, Mike Enzi and Mike Crapo, submitted letters that run completely counter to our approach.
Worst Idea Submitted: Enact the Ryan Plan
Senator Jeff Flake of Arizona proposes that tax reform follow the approach taken by the House budget plan (also known as the Ryan plan), which would replace our progressive personal income tax rates with two rates of just 10 percent and 25 percent, and would lower the corporate income tax rate to 25 percent. CTJ has frequently pointed out that the Ryan plan would reduce taxes on the very rich no matter how the details are filled in, which means low- or middle-income people would have to pay more if the frequently cited goal of revenue-neutrality is to be achieved.
Senator Flake also repeats several myths about how certain types of income, like corporate stock dividends, are allegedly double-taxed. (CTJ has explained why dividends are rarely, if ever, double-taxed.)
Worst Proposal to EXPAND a Tax Expenditure for Corporations: Enact a “Territorial” Tax System
Senator Mike Enzi of Wyoming calls for enactment of his legislation, S. 2091 from the 112th Congress, to create a territorial tax system. In this context, a “territorial” tax system, which is also endorsed by Senator Mike Crapo of Idaho, is a euphemistic way of describing an exemption of offshore corporate profits from U.S. taxes.
Right now, U.S. corporations already get a big break from the rule that allows them to “defer” paying U.S. taxes on the profits of their offshore subsidiaries until those profits are brought to the U.S. “Deferral” is one of the biggest tax expenditures for corporations and, as we have explained, it encourages American corporations to shift operations offshore or engage in accounting gimmicks to make their U.S. profits appear to be generated in a country like Bermuda or the Cayman Islands that won’t tax them. Expanding deferral into an exemption for offshore profits would only increase these terrible incentives.
Worst Proposal to EXPAND a Tax Expenditure for Individuals: Cut Rates for Capital Gains
The letter from Senator Mike Crapo of Idaho lauds the approach to tax reform taken by the Simpson-Bowles plan — which would remove most tax expenditures and adopt a set of low rates — but then proposes to increase the most regressive tax expenditure of all, the preferential income tax rate for capital gains and stock dividends. A recent CTJ report explains that 68 percent of the benefits of this tax expenditure are estimated to go the richest one percent of Americans this year.
Senator Crapo also believes that further reducing the tax rates on capital gains and dividends will “stimulate investment, capital formation, and additional revenue.” Senator Crapo is referring to the argument made by Arthur Laffer that cutting tax rates on capital gains causes revenue to actually increase. The CTJ report explains that this idea has been disproven time and again by the revenue statistics.
Best Ideas for Ending Tax Expenditures: Eliminate Deferral and Preferential Rates for Capital Gains and Dividends
The letter from Senator Bernie Sanders of Vermont includes several proposals, and among the most significant are repeal of deferral and repeal of the preferential personal income tax rate for capital gains and stock dividends for the rich. Senator Sanders cites the two terrible incentives that deferral creates and that have already been mentioned (incentives to shift jobs offshore and make U.S. profits appear to be generated in offshore tax havens) and also explains that the capital gains and dividends break is the reason why wealthy investors like Warren Buffett can pay lower effective tax rates than many middle-income people.
Best Articulation of Key Principles for Tax Reform: Increase Progressivity and Raise Revenue
Senator Jay Rockefeller of West Virginia writes that his “highest priority for tax reform is to reduce income inequality.” While he praises Senators Baucus and Hatch for committing to maintain the tax code’s current progressivity, “we must go further, by requiring the wealthiest individuals and businesses to contribute more.” He writes that, “While incomes for the top one percent soared over the past two decades, effective tax rates for these same individuals declined dramatically,” and that “too many giant corporations pay no tax...”
Senator Rockefeller also writes that some tax expenditures like the EITC provide a “solid foundation for increasing opportunity and upward mobility for people who are low-income...” The recent CTJ report on individual tax expenditures explains how the EITC is the most progressive tax expenditure and is extremely effective at accomplishing policy goals like encouraging work.
Finally, Senator Rockefeller is refreshingly candid about the uselessness of any debate over tax reform that does not lead to increased revenue. “I can assure you that I will not support tax reform that does not raise real, sustainable revenue,” he writes. “Frankly, I would rather the tax reform process be delayed for another Congress than pass a bad bill this year that raises inadequate revenue.”
Congress Should End the Most Regressive Ones, Maintain the Progressive Ones, and Reform the Rest to Be More Progressive and Better Achieve Policy Goals
A new report from Citizens for Tax Justice explains how Senators responding to the “blank slate” approach to tax reform should prioritize which “tax expenditures” to preserve, repeal or reform.
Read the report.
Senators Max Baucus and Orrin Hatch, chairman and ranking member of the tax-writing committee in the Senate, have asked their colleagues to assume tax reform starts from a “blank slate,” meaning a tax code with no tax expenditures (special breaks and subsidies provided through the tax code). Senators are asked to provide letters to Baucus and Hatch by this Friday explaining which tax expenditures they would like to see retained in a new tax code.
CTJ’s report evaluates the ten costliest tax expenditures for individuals based on progressivity and effectiveness in achieving their stated non-tax policy goals — which include subsidizing home ownership and encouraging charitable giving, increasing investment, encouraging work, and many other stated goals.
CTJ’s report concludes that:
1. Tax expenditures that take the form of breaks for investment income (capital gains and stock dividends) are the most regressive and least effective in achieving their stated policy goals, and therefore should be repealed.
2. Tax expenditures that take the form of refundable credits based on earnings, like the Earned Income Tax Credit (EITC) and the Child Tax Credit, are progressive and achieve their other main policy goal (encouraging work) and therefore should be preserved.
3. Tax expenditures that take the form of itemized deductions are regressive and have mixed results in achieving their policy goals, and therefore should be reformed.
4. Tax expenditures that take the form of exclusions for some forms of compensation from taxable income (like the exclusion of employer-provided health insurance and pension contributions) are not particularly regressive and have some success in achieving their policy goals, and therefore should be generally preserved.
While President Barack Obama presented a myriad of new proposals to combat climate change in his new Climate Action Plan (PDF), one of the most striking aspects of the plan is that it does not contain any proposal for a carbon tax, which many experts consider the "missing link" in the president's new plan.
The basic idea behind putting a tax on carbon is that it would create a market incentive to develop low or zero carbon emission energy sources and simultaneously create a market disincentive to using carbon emitting energy sources. The market-based approach of the carbon tax explains why so many economists, from Joesph Stigliz on the left to Gregory Mankiw on the right, believe the carbon tax is the most efficient and least intrusive mechanism for dealing with emissions.
Reinforcing the case for the carbon tax just days before the release of Obama's climate plan, a new exhaustive study by the National Research Council (NRC) found that a carbon tax "will be both necessary" and a "more efficient" way to substantially reduce greenhouse gas emissions, especially compared to current energy tax policies. This conclusion is based on the NRC's economic analysis of how each provision of the tax code affects carbon emissions, which found that overall the $48 billion in energy-sector tax expenditures by the federal government between 2011 and 2012 do not necessarily decrease emissions at all. Compounding this, the report found that even the most effective tax expenditures in terms of reducing carbon emissions, resulted in "very little if any" reductions and came at a "substantial cost."
In contrast with tax expenditures which lose revenue, a carbon tax has the major advantage of generating revenue. For example, a recent Congressional Budget Office (CBO) report notes that a carbon tax that starts off at $20 per ton and then rises by 5.6 percent annually could raise as much as $1.2 trillion over ten years, while at the same time reducing carbon emissions by 8 percent over the same ten years. Such revenue could be extremely beneficial if it was used to reduce the deficit, fund critical public investments, and/or to provide financial relief to middle- and low-income families. This revenue should not however be plowed into tax breaks for corporations and the wealthy, while leaving everyone else worse off, as some groups are proposing.
Though a carbon tax may be politically difficult on the federal level in the short-term, the tax is getting some attention at the state level. For example, the state of California already adopted a carbon tax of sorts in 2013, with the implementation of it's cap-and-trade program, which raised $256 million in revenue so far this year. In addition, environmentalists are pushing for a ballot measure in Massachusetts that would create a small statewide carbon tax.
Although they do not like to admit it, even opponents of the carbon tax acknowledge that it may become politically viable as climate and budgetary pressures continue to mount and policymakers are faced with an increasingly unpopular set of alternatives.
Senators Max Baucus and Orrin Hatch, the Democratic chairman and the ranking Republican of the Senate Finance Committee, have invited all members of the Senate to begin the debate over tax reform without any basic agreement on how much revenue is needed.
Under their “blank slate” approach, they ask their Senate colleagues to start with the assumption that the tax code has no “tax expenditures” (exceptions to the overall rules in the form of tax breaks for specific activities or situations). They ask Senators to tell them which tax expenditures they think are warranted and should be preserved in a newly overhauled tax system.
But the entire point of this exercise, and the entire point of reducing or eliminating tax expenditures, is still not settled. In their letter to colleagues, Baucus and Hatch explain:
While Members of the Senate have different views on whether the revenue raised from eliminating tax expenditures or other reforms should be used to lower tax rates, reduce the deficit, or some combination of the two, we believe that everyone should understand the trade-offs involved when adding tax expenditures back to the tax code.
We will have more to say about how lawmakers should determine which tax expenditures to repeal, preserve or reform. But for now it’s worth noting that the Senate’s top tax-writers believe that lawmakers can and should engage in a detailed discussion of tax provisions before they come to any agreement on something as basic as how much revenue is needed to fund public services and public investments. It’s almost as if they forgot that the whole point of the tax system is to raise revenue.
As we have explained before, our current tax laws will collect revenue equal to 19.1 percent of the economy a decade from now. We know this is unsustainable because even during the Reagan years, government spending equaled between 21.3 percent to 23.5 percent of the economy.
Congressional Democrats seem to be vaguely aware of this but have been far too timid in their tax proposals. Most recently, the budget resolution approved by the Democratic majority in the Senate (with no Republican votes) would raise revenue equal to just 19.8 percent of the economy in a decade, and offers no specifics whatsoever on how to do that.
Meanwhile, the budget resolution approved by the Republican majority in the House of Representatives would raise the same revenue level as current law (19.1 percent of the economy), but would overhaul the tax rules so that the very rich pay a smaller share of the total.
Chairman Baucus has attempted for a long time to move the tax reform conversation forward despite this utter lack of consensus on the basic question of revenue. As we have argued before, “This would be like holding bipartisan talks on immigration reform - if one party supported a path to citizenship while the other party pledged to round up all undocumented immigrants and deport them without exceptions.”
To their credit, Baucus and Hatch, in their letter to colleagues, do mention “maintaining the current level of progressivity.” But we have already shown that America’s tax system overall is just barely progressive as it stands. Putting a great deal of time and energy into an overhaul of the tax code that does not make our tax system more progressive or raise more revenue than the current rules would be a waste of time and certainly would not be “reform.”
Some members of Congress are pushing ahead (or at least creating the appearance that they are pushing ahead) with tax reform without addressing the most important issue of the debate: revenue. As we have pointed out before, the $975 billion in tax increases called for in the recent Senate budget resolution would not even raise revenue high enough to fund the level of spending that Ronald Reagan presided over. To discuss addressing the tax code without raising any new revenue at all is simply absurd.
Lack of Attention to Revenue in House and Senate
In the Ways and Means Committee, the tax-writing committee in the House of Representatives, Republican chairman Dave Camp has made clear that he wants tax reform to be “revenue-neutral,” meaning loopholes and tax expenditures (subsidies provided through the tax code) may be reduced, but the revenue savings would all be used to offset the cost of reducing tax rates.
Camp split his committee members into working groups that spent several weeks focused on various tax issues and receiving comments from interested parties (dominated as usual by big business). The Congressional Joint Committee on Taxation (JCT) just published an enormous report summarizing different facets of the tax system and summarizing the comments and suggestions submitted to these working groups. The suggestions include everything imaginable, from reducing the tax expenditure for capital gains to boosting the tax expenditure for capital gains, from ending “deferral” of taxes on offshore corporate profits to exempting those profits completely with a territorial system.
But almost none of the suggestions summarized in the report actually touch upon the biggest question facing anyone trying to overhaul a tax system: How much revenue should we collect?
Meanwhile, Senator Max Baucus, the chairman of the Finance Committee, the tax-writing committee in the Senate, seems to believe that he can carry out a debate over tax reform without actually addressing how much revenue should be collected. A CTJ op-ed published last month criticized Baucus’s approach. We noted that
Democratic and Republican tax-writers are holding bipartisan talks to craft a tax reform bill, even though there is no agreement between the parties on what the basic goals of such reform ought to be. One party recognizes a need for more revenue while another has pledged to not raise more revenue. This would be like holding bipartisan talks on immigration reform — if one party supported a path to citizenship while the other party pledged to round up all undocumented immigrants and deport them without exceptions…
Some more recent comments from Senator Baucus have indicated that he at least might try to get some revenue from tax reform. He recently said during a hearing,
“We will close billions of dollars of loopholes. Some of this revenue should be used to cut taxes for America’s families and help our businesses create jobs, and some of the revenue raised in tax reform should also be used to reduce the deficit,” Baucus said. “It’s all about finding common ground.”
We’d feel better if Senator Baucus acknowledged that raising revenue should be the main purpose of tax reform because our most pressing need is revenue to fund public investments.
Deficit-Neutral Tax Reform Has No Place in a Plan to Address the Deficit
The most ridiculous idea aired recently is for Congressional Republicans to demand revenue-neutral tax reform in return for agreeing to President Obama’s request that the federal debt ceiling be raised.
The last time the Republican majority in the House of Representatives agreed to pleas of President Obama and the Senate to raise the debt ceiling, they demanded that the deficit be reduced by the sequestration that is in effect today. No revenue was raised in that deal.
Now, some Republican lawmakers are discussing extracting a different concession: an agreement that would provide a fast-track process to enact tax reform. But the tax reform they propose would be revenue-neutral (meaning it would be deficit-neutral). There is simply no logical connection between the deficits that require us to raise the debt ceiling and a tax reform that would do nothing to reduce those deficits.
Will “Dynamic Scoring” Paper Over the Revenue Question?
Some lawmakers have tried to confuse the debate by arguing that Congress should enact a tax reform that is revenue-neutral according to the revenue-scoring methods officially used by Congress but revenue-positive if Congress switches to a different method that they claim is more accurate. This method is known as “dynamic scoring,” which assumes that reducing tax rates increases incomes and profits so dramatically that the additional tax collected on the new income and profits would partially offset (or more than offset) the revenue lost as a result of the rate reduction. In other words, a tax cut (because it causes the economy to expand) could pay for itself or even raise revenue.
There is no evidence that the money channeled into the economy by reductions in tax rates expands the economy in this way. But even if we all agreed that it did, that would logically require us to agree that spending cuts could suck enough money out of the economy to have the opposite effect. But Chairman Camp and his colleagues support the spending cuts in the Ryan budget and would never want to admit that spending cuts have macroeconomic effects that blunt or even reverse any deficit-reduction that these lawmakers are trying to accomplish.
Members of Congress have a serious disagreement over revenue, and they can’t paper over it by using the gimmick of “dynamic scoring.” There is only one real resolution, and that’s to acknowledge a need for tax increases.
State Lawmakers are Celebrating: a State Tax Policy Expert Responds to Anticipated Senate Vote on Marketplace Fairness Act
Washington, DC – Today, the U.S. Senate is expected to pass the Marketplace Fairness Act, a bipartisan bill that would finally let state governments enforce their sales tax laws on purchases made over the Internet. Currently, retailers are only required to collect sales taxes from their customers if they have a store, warehouse, sales force, or other “physical presence” in the same state as the customer. In all other cases, online shoppers are required to pay the sales tax directly to their state government, but this requirement is unenforceable and routinely ignored. President Obama has indicated that he will sign the bill if it also passes the House of Representatives.
In anticipation of the vote, Carl Davis, senior analyst at the Institute on Taxation and Economic Policy (ITEP), issued the following statement:
“State lawmakers across the country will be celebrating today’s Senate vote aimed at ending the fiscal nightmare that online shopping has become. This vote begins to untie states’ hands in the fight against online sales tax evasion.
“Billions of dollars of revenue go uncollected every year because a court ruling from the days of floppy disks and dial-up allows online merchants to dodge their responsibility.
“We are not talking about a new tax here, these taxes are due by law. For the sales tax to work, retailers – no matter where they’re located – have to participate in collecting the tax from customers.
“State and local governments would have an additional 23 billion dollars a year to invest in education, infrastructure, law enforcement and other public services if they could collect online sales taxes due. Today they are one step closer to being able to make those investments.”
The Institute on Taxation and Economic Policy (ITEP) is a non-profit, non-partisan research organization, based in Washington, DC, that focuses on federal and state tax policy. ITEP's mission is to inform policymakers and the public of the effects of current and proposed tax policies on tax fairness, government budgets, and sound economic policy. More at www.itep.org.
President Obama has proposed to limit the tax savings for high-income taxpayers from itemized deductions and certain other deductions and exclusions to 28 cents for each dollar deducted or excluded. This proposal would raise more than half a trillion dollars in revenue over the upcoming decade.
A new report from Citizens for Tax Justice (CTJ) analyzes the proposal and models its effects on taxpayers nationally and state-by-state. Findings include:
- Only 3.6 percent of Americans would receive a tax increase under the plan in 2014, and their average tax increase would equal less than one percent of their income, or $5,950.
- The deduction for state and local taxes and the deduction for charitable giving together would make up just over half of the tax expenditures (deductions, etc.) limited under the proposal.
- Arkansas and West Virginia have the lowest percentage (1.6 percent) of taxpayers who would see a tax increase from this proposal; Washington, D.C. would have the largest percentage (8.9 percent) followed by Connecticut and New Jersey (both 6.7 percent).
Democratic Senator Max Baucus of Montana, chairman of the Senate Finance Committee which oversees tax legislation, announced today that he is retiring when his term closes at the end of 2014. Many people are asking how this will affect the tax reform that he hopes to shepherd through his committee. Last week, CTJ published an op-ed criticizing Baucus’s approach to tax reform.
Democratic and Republican tax-writers are holding bipartisan talks to craft a tax reform bill, even though there is no agreement between the parties on what the basic goals of such reform ought to be. One party recognizes a need for more revenue while another has pledged to not raise more revenue. This would be like holding bipartisan talks on immigration reform — if one party supported a path to citizenship while the other party pledged to round up all undocumented immigrants and deport them without exceptions…
A recent profile of Baucus's efforts informs us that “Baucus declined say whether he views tax reform as a way to raise revenue, although he did not rule it out. Instead, he said, that divisive question should be left unanswered until committee members have a chance to study areas of reform where they are more likely to agree.”
Read the op-ed.
The largest revenue-raising proposal put forth by President Obama, which is expected to be among the proposals the White House plans to release next week, would limit the tax savings of each dollar of certain deductions and exclusions to 28 cents. CTJ's new report on the President's proposal examines who would be affected and also breaks down the composition of the tax expenditures limited under the proposal.
For example, the report finds that Obama's proposal, which would only apply to married couples with AGI above $250,000 and singles with AGI above $200,000, would affect just 2.4 percent of taxpayers in 2014. The deduction for state and local taxes would make up over a third of the tax expenditures limited, and the deduction for state and local taxes along with the charitable deduction would, together, make up over half of the tax expenditures limited under the proposal.
Read the report.
Senate Budget Debate Shows Support for Increased Revenue, Sales Taxes on Internet Purchases, and More
On Saturday, the Senate approved the budget resolution that was crafted by Budget Chairman Patty Murray of Washington State, by 50 votes. (The resolution would have received 51 votes if New Jersey Senator Frank Lautenberg not been absent due to an illness.)
The most important implication of this vote is that a majority of Senators agreed that Congress should raise $975 billion over a decade and cut spending by the same amount, rather than attempt to achieve deficit-reduction entirely through spending cuts. Indeed, the Senate rejected several amendments that would have reduced or eliminated the revenue increase.
The description of the plan from Murray’s budget committee staff explains that revenue would be raised by “closing loopholes and cutting wasteful spending in the tax code that benefits the wealthiest Americans and biggest corporations.” But a great deal is left to be determined because, as we explained earlier, this budget resolution offers no details on which loopholes or wasteful tax expenditures might be limited.
Murray Plan in the Senate a Stark Contrast to the Ryan Plan in the House
In any event, the Senate budget resolution is so different from the resolution approved by the House (the plan crafted by House Budget Chairman Paul Ryan) that it’s difficult to imagine how a Senate-House conference committee could ever “reconcile” or “merge” the two documents. As CTJ has already demonstrated, the Ryan plan would provide millionaires an average net tax cut of at least $200,000, and possibly much more.
Senate Would Give States the Right to Require Online Retailers to Collect Sales Taxes
The Senate approved, by a vote of 75 to 24, an amendment to allow states to require out-of-state remote retailers (like Internet retailers) to collect sales taxes from their customers. This amendment has no binding effect but it shows that there are enough votes in the Senate to pass important legislation (the Marketplace Fairness Act) that would give states this authority.
Currently, a state is allowed to require a retailer to collect sales taxes from its customers only if the retailer is “physically present” in the state. This creates an unfair advantage for a company like Amazon, which is selling its products remotely, over a company like Target, which is physically present (because of its stores) almost everywhere it does business. Even worse, states are losing more and more revenue as more commerce happens online — a trend that can only increase with time.
It’s worth repeating (as CTJ has explained before) that this proposal would not actually increase taxes, but would only facilitate the collection of taxes that are due (but rarely paid) under current law.
Many Other Amendments Have Little Meaning
Votes taken on amendments during the Senate budget debate are generally not binding. Their greatest significance is that they show whether or not enough votes can be gathered to pass a given proposal in the Senate. For example, the vote on allowing states to require remote retailers to collect sales taxes demonstrates that there are more than the 60 votes needed in the Senate to approve that proposal when it comes to the floor as an actual bill.
But other amendments are not as helpful in determining support for actual legislation, and can be best described as posturing with little real meaning.
For example, the Senate rejected a Republican-sponsored amendment to repeal the estate tax, but then approved by 80-19 an amendment sponsored by Democratic Senator Mark Warner “to repeal or reduce the estate tax, but only if done in a fiscally responsible way.”
The Senate’s approval of this amendment does not indicate that an actual bill to reduce or repeal the estate tax would get 60 votes because an actual bill would either have to include specific provisions to offset the costs, or the bill would clearly increase the deficit. There have been votes on such bills in the Senate many times and they have never received the needed 60 votes, much less 80 votes.
To take another example, the Senate voted 79-20 to repeal a tax on medical device manufacturers that was enacted as part of health care reform. This was one of the taxes enacted with the idea that companies that would benefit from health care reform should share in its costs. The budget amendment says that legislation should be passed to repeal the tax “provided that such legislation would not increase the deficit.”
An actual bill to repeal this tax would require some sort of provisions to offset the cost, or it would increase the deficit, and Senators voting in favor would have to be ready to support those offsetting provisions or the increase in the deficit. It’s not obvious that any such bill would get 60 votes.
There are many other examples of amendments that were mostly about posturing, and many would be terrible policy if they were enacted as actual legislation. The estate tax, for example, has been gutted in recent years even though it’s the one tax that addresses concerns about income inequality and the richest one percent pulling away from everyone else. And the medical device tax was part of the intricate compromise that was necessary to enact virtually universal health coverage without increasing the budget deficit. It’s unfortunate that so many Senators feel a need to pander to the special interests who want to repeal these taxes.
There’s a lot of talk in the halls of Congress about reforming the federal tax code, but few people think about how that might impact state and local governments and their ability to raise enough revenue to fund the services their residents use on a daily basis.
As the tax-writing committee in the House of Representatives examined this issue on Tuesday, CTJ’s partner organization ITEP submitted written testimony to clear up some little-understood points.
The federal tax system accommodates the taxing authority of state and local governments in a few different ways, which could be altered for better or worse, depending on what Congress does.
The Deductions for State and Local Taxes
For example, the federal personal income tax allows a deduction for taxes one pays to state and local governments. ITEP’s testimony points out that in many ways this is one of the most justified of the federal tax deductions and therefore should not be eliminated. Most deductions are for spending that the taxpayer has control of — like home mortgage interest or charitable giving — but this is not true of state and local taxes. It makes more sense to think of state and local taxes as reducing the amount of income a taxpayer has to pay federal taxes.
Perhaps more importantly, eliminating the deduction would make state and local governments more hesitant to tax the incomes of wealthy residents (who know that the deduction offsets part of those taxes). This tax revenue is badly needed as the U.S. has underinvested in infrastructure, education and other goods that are largely funded with state and local taxes.
State and Local Bonds
Another accommodation made by the federal tax system is its exclusion of state and local bond interest from taxable income. State and local governments can borrow at lower interest rates, because the interest payments they make are not taxable for the bondholders (who are thus willing to accept lower rates than are paid on ordinary bonds).
But, as ITEP’s testimony explains, the current tax subsidy is inefficient because some of the revenue given up by the federal government falls into the hands of very high-income bond-holders rather than the state and local governments that the exclusion is ostensibly supposed to help.
The Obama administration has a proposal that would remedy this by reviving Build America Bonds. These bonds were available for two years under the economic recovery act Obama signed into law in 2009, and are designed differently so that they support state and local government projects without creating a windfall for the wealthy.
Marketplace Fairness Act
Congress has additional opportunities to accommodate state and local governments’ taxing authority. For example, we have written recently that anyone who lives in a state with a sales tax and purchases something online owes sales tax on that purchase. But states and local governments are not allowed to require remote sellers to collect these sales taxes, which they can and do require of retailers who are physically present in the state. The Marketplace Fairness Act (MFA) is a bill in Congress that would fix this.
The MFA is a common sense bill. It would not even increase taxes but only facilitate the collection of the sales taxes that people already owe but usually fail to pay.
The bottom line on the revenue proposals in the three budget plans in Congress today can be stated simply: The Congressional Progressive Caucus’s plan (for which CTJ provided some estimates) is sensible. House Budget Chairman Paul Ryan’s plan is absurd, and Senate Budget Chairman Patty Murray’s plan is in the middle.
As our new report explains, Paul Ryan promises a specific set of tax cuts but promises to maintain current law revenue levels, meaning some unspecified reduction or elimination of tax expenditures must take place. Our report explains that the richest Americans would see a net tax decrease under this plan even if they must give up all the tax expenditures that Ryan has put on the table. And if the richest Americans pay less, then obviously someone else must pay more, in order to meet Ryan’s goal of revenue-neutrality.
The other two budget plans at least recognize the need for more revenue. Some have suggested that Ryan is softening his stance on revenue because he accepts the overall revenue level projected under current law, which is more than he accepted in the past. But the current law revenue level is entirely inadequate and untenable.
Here’s why. Ryan’s plan notes that under current law, federal revenue will equal 19.1 percent of GDP (19.1 percent of the overall economy) in 2023, and observers have noted that this is more than his previous budgets would have allowed. But this level of revenue would not have balanced the budget even during the Reagan administration, when federal spending ranged from 21.3 percent to 23.5 percent of GDP.
Chairman Murray’s plan would raise revenue by $975 billion over a decade, so that federal revenue will equal 19.8 percent of GDP in 2023. The plan from the Congressional Progressive Caucus (CPC) would raise revenue by $5.7 trillion, so that revenue will reach 21.8 percent in 2023. In other words, only the Progressives would come close to funding the type of spending that Reagan presided over.
It’s helpful to think about a given budget plan’s projected revenue as a percentage of GDP for the purpose of comparison, but one should not overstate the usefulness of this number. Chairman Ryan has often talked as though the goal of the budget process is hitting a certain percentage, rather than fairly raising enough revenue to pay for the public investments that actually build the middle-class and the country.
Most Americans probably don’t care what revenue is as a percentage of GDP as long as the revenue collected is enough to adequately fund the schools they send their kids to, maintain the highways they drive to work on, and keep their health care costs from bankrupting them.
Ryan’s budget clearly slashes funding for anything that would address any of those issues. That’s what happens if you balance the budget in a decade without raising any revenue.
The Murray Plan
There are many good things to say about Senator Murray’s plan, in that it calls for badly needed tax increases and better-designed spending cuts to replace the sequestration (the scheduled cuts of over $1.2 trillion over the decade).
The Murray plan also makes the case for more revenue, explaining that the projected current law revenue is lower, as a percentage of GDP, than it was during the last five times the budget was balanced (going all the way back to 1969). It also explains that the level of revenue it envisions is still less than was proposed in the Simpson-Bowles plan and the other plans that lawmakers calling themselves “centrists” claim to admire.
But the Murray plan does not specify what tax increases or spending cuts would be acceptable. The plan says it would raise revenue by “closing loopholes and cutting wasteful spending in the tax code that benefits the wealthiest Americans and biggest corporations,” which is certainly moving in the right direction for those of us who believe that the overall tax system is not asking very much from wealthy individuals or from corporations.
The Murray budget plan would use the reconciliation process (the process that avoids filibusters in the Senate) to pass legislation raising the promised $975 billion, and it does specify that the progressivity of the tax code must be maintained. But the plan does not specify what the tax increases would be. The plan explains how tax expenditures like deductions and exclusions benefit the rich, but fails to mention the most regressive tax expenditure of all, the preferential rate for capitals gains and dividends. The plan explains how corporations avoid taxes through offshore tax havens, but does not suggest fixing the problem by ending the rule allowing U.S. corporations to “defer” their offshore taxes, and does not even suggest rejecting proposals for a “territorial” system that would exacerbate the problem.
The Congressional Progressive Caucus (CPC) Plan
The CPC plan addresses all of these issues, repealing the enormously regressive capital gains tax preference and closing several loopholes used to avoid taxes on capital gains, repealing “deferral” and explicitly rejecting a territorial system, introducing new tax brackets for high-income individuals and many very specific proposals that have been championed by Citizens for Tax Justice. No one will agree with every provision in the CPC budget plan, but it is certainly a plan for people who want to have substantive discussions about what Congress should actually do.
The plan’s list of tax provisions range from huge (raising over a trillion dollars by ending far more of the Bush tax cuts than were allowed to expire under the fiscal cliff deal) to small (ending the Facebook stock options loophole) to very small (eliminating write-offs for corporate jets).
Even supporters of Murray’s plan should find the CPC plan useful because it provides a list of proposals that can be used to fill in some of the blank spots in the Murray plan.
You're a Tax Cheat if You Don't Pay Sales Taxes on Amazon Purchases -- and a New Bill Might Make You Pay
The only thing worse than giving Amazon an unfair advantage over local businesses is creating that advantage by facilitating tax evasion.
And that’s exactly what the Supreme Court did in the early 1990s when it decided that the Commerce Clause of the Constitution barred state and local governments from requiring out-of-state retailers to collect sales taxes from their customers. Essentially, the court decided that a business without a “physical presence” in the state could not be required to collect sales taxes from customers the way that a company with a physical store in your state is required to collect sales taxes on whatever you buy there.
If you live in a state with a sales tax and you buy a product online from a company that has no physical presence in your state, you do owe sales tax on that purchase — but the state cannot make the online retailer collect it from you. You are supposed to pay the tax directly to the state (technically this tax is called a “use tax”). But this rule is obviously unenforceable and as a result most online buyers never pay that tax.
The Solution: The Marketplace Fairness Act of 2013
The Supreme Court’s decision does allow for Congress to explicitly authorize states to require these retailers (retailers with no physical presence in the state) to collect sales taxes, and this is the goal of a bill introduced in the House and Senate last week, the Marketplace Fairness Act (MFA) of 2013.
The MFA would essentially undo the effect of the Supreme Court decision for those states that adopt a minimal set of common rules (which mostly involve harmonizing sales tax rules for taxing jurisdictions within the state's borders). Twenty-four states have already joined what is called the Streamlined Sales and Use Tax Agreement (SSUTA), which includes a common set of sales tax rules, and would be authorized to require sales tax collection immediately under the MFA. Other states would be authorized if they meet the minimal standards set out in the bill.
Who Can Defend Tax Evasion?
The legislation has Republican and Democratic cosponsors in the House and Senate. This is not as surprising as it seems, given that the bill would not raise taxes but merely allow states to require retailers to collect the sales taxes that are already due.
It is difficult for opponents of the law to defend the current situation, which would basically be a defense of tax evasion. Opponents usually resort to claiming that it’s simply too difficult for online retailers to figure out what taxes would apply in the many different taxing jurisdictions where their customers are located.
But, as the Institute on Taxation and Economic Policy (ITEP) has explained, new technology, combined with the harmonized sales tax rules under SSUTA, would make it relatively easy for internet retailers to determine what sale taxes apply in a customer’s jurisdiction. We know this because major retailers that have a “physical presence” in numerous states, like Best Buy and Barnes and Noble, already collect sales taxes on sales made over the Internet, in addition to those made inside their physical stores. Similarly, Amazon collects sales tax on behalf of certain merchants located all around the country that sell via its website, though it mostly refuses to do so on items it sells directly.
Netflix’s CEO summed up the reality of the alleged tax complexity problem when he said, “We collect and provide to each of the states the correct sales tax. There are vendors that specialize in this... It’s not very hard.”
Increased Chances for Passage
The MFA has been introduced in various forms in previous Congresses, but there is reason to think that its chances of passage are greater than before. One reason is that sponsors have settled on a high exemption level — $1 million. While it seems ridiculous that a retailer could make $950,000 in sales in a year without being required to collect sales taxes from its online customers, this change will placate those concerned about the bill’s effect on “small businesses.”
Another reason the chances for passage are increasing is the changing nature of retail business. As we continue to charge ahead into the digital age, it’s becoming undeniable that a sales tax based only on retailers with a physical presence is simply not adequate for the 21st century.
During his State of the Union Address, President Barack Obama reiterated the principle that the United States must prioritize getting rid of tax loopholes for the wealthiest individuals and most profitable corporations in order to ensure that everyone is paying their “fair share” to reduce the deficit. While in principle it’s hard to argue with this approach, the tax policy agenda the President laid out during his speech does not go nearly as far as it should both in terms of deficit reduction and correcting the inequities in our tax code.
Buffett Rule Not Enough to Ensure Fairness
For example, during the speech President Obama called for a tax code that would ensure that “billionaires with high-powered accountants” do not pay a lower tax rate that their “hard-working secretaries.” His proposal to accompany this principle has been the so-called “Buffett Rule,” which would require everyone making over a million dollars to pay a minimum effective tax rate over at least 30 percent.
But this would still leave in place the preferential rate on capital gains and dividends that is the primary reason that wealthy investors like Warren Buffett have such low effective tax rates. A better approach would be to end the special treatment of capital gains and dividends, which would both raise more revenue and deal with the core issue of fairness.
Truly Ending Offshore Corporate Tax Dodging Requires More
Turning to corporate taxes, President Obama said that we need a tax code that “lowers incentives to move jobs overseas and lowers tax rates for businesses and manufacturers that are creating jobs right here in the United States of America.”
To start, rather than calling for a measure that simply “lowers incentives,” Obama should address the problem at its root, by repealing the rule allowing corporations to defer – indefinitely – taxes on their offshore profits. (Those profits, of course, are often artificially shifted offshore with the goal of avoiding taxes.) This exact reform was recently introduced in both the House and Senate in the “Corporate Tax Dodging Prevention Act.”
Corporate Tax Reform Must Raise Revenue
In addition, while it’s great that President Obama is proposing to get rid of a myriad of corporate tax breaks, it is not entirely clear that he intends to wisely use the revenues it would generate. His 2012 corporate tax framework, for example, calls for the revenue generated by closing loopholes to be spent on lowering the overall corporate tax rate and even expanding some of the breaks for manufacturers (which really don’t warrant the special treatment); this proposal to keep corporate tax reform revenue-neutral meant that corporations would continue to pay a low effective corporate tax rate overall and have no positive impact on the budget.
In his State of the Union Speech, however, he implied that corporate tax reform should also result in revenues to help bring down the deficit, and this more recent rhetoric about using the revenues for deficit reduction is certainly promising. What should come next is a clear rejection of revenue-neutral corporate tax reform and an explicit commitment to boosting corporate tax revenues in order to fund investments that benefit all Americans, including the consumers that keep corporations profitable.
Balanced Approach? Spending Cuts for Deficit-Reduction Have Already Been Enacted
Addressing the sequestration cuts scheduled to kick in March 1, President Obama used the State of the Union address to reiterate his commitment to include a mix of revenues and spending cuts as part of a “balanced approach” to deficit reduction, saying we should not “make deeper cuts to education and Medicare just to protect special interest tax breaks." Citizens for Tax Justice has noted (as did the President in his speech) that the last several rounds of deficit reduction have already relied primarily on spending cuts. Logically, then, to achieve true “balance” in reducing the deficit, the sequester should be replaced almost entirely by revenue increases. That makes the President’s offer of more cuts unwarranted.
If enacted as is, the tax ideas President Obama outlined in his State of the Union address would be important steps towards reducing the deficit and improving the fairness of our tax system. If enacted following legislative compromise, they would likely be much smaller steps. But in any event, the President’s articulated goals would still leave gaping inequities in our tax code, and not do enough to ensure that we have the resources to make critical investments in our long term economic health.
A new short report from Citizens for Tax Justice explains that House Ways and Means Committee Chairman Dave Camp has put forward an intriguing proposal to reform the tax treatment of derivatives — the complex financial instruments that played a starring role in the financial collapse. As the report explains, Camp unfortunately proposes to use any revenue saved from his reforms to pay for reductions in tax rates.
Derivatives can create huge opportunities for tax avoidance. To take just one example explained in the report, Ronald S. Lauder, heir to the Estée Lauder fortune, used a derivative called a “variable prepaid forward contract” to sell stock without paying taxes on the capital gains for a long time. Lauder entered into a contract to lend $72 million worth of stock to an investment bank and promised to sell the stock to the bank at a future date at a discounted price, in return for an immediate payment of cash. The contract also hedged against any loss in the value of the stock.
The contract put Lauder in a position that is economically the same as having sold the stock — he received cash for the stock and did not bear the risk of the stock losing value — and yet he does not have to pay tax on the capital gains until several years later, when the sale of the stock technically occurs under the contact.
The most significant of Chairman Camp’s proposals would subject most derivatives to what is called “mark-to-market” taxation. At the end of each year, gains and losses from derivatives would be included in income, even if the derivatives were not sold.
Assuming the mark-to-market system is implemented properly without loopholes or special exemptions for those with lobbying clout, the result would be that the types of tax dodges described above would no longer provide any benefit. The taxpayers would not bother to enter into those contracts because they would be taxed at the end of the year on the value of the contracts (meaning they are unable to defer taxes on capital gains) and the gains would be taxed at ordinary income tax rates.
The reform could be key to blocking the sort of tax dodges available only to the very rich.
CTJ’s recently updated working paper on tax reform options identifies three categories of reforms that would accomplish this. They include ending tax breaks and loopholes that allow wealthy individuals to shelter their investment income from taxation, ending breaks and loopholes that allow large, profitable corporations to shift their profits offshore to avoid U.S. taxes, and limiting the ability of wealthy individuals to use itemized deductions and exclusions to lower their taxes.
Sequestration: Spending Cuts No One Seems to Want
In 2011, President Obama and Congress agreed to across-the-board sequestration (automatic spending cuts) that they hoped to replace with more targeted, thought-out deficit-reduction measures.
Under the law they enacted, the Budget Control Act of 2011 (the BCA), the sequester was supposed to take effect in the beginning of this year. But the recent deal addressing the “fiscal cliff” replaced the first two months of sequester savings with some arcane accounting gimmicks, so now the sequester begins March 1 if Congress does not act. Between then and the end of the year, it would cut spending by $85 billion. Over a decade, the sequester will cut spending by $1.2 trillion.
Those cuts are spread evenly across defense and non-defense spending, affecting the programs favored by politicians of every ideological stripe. Lawmakers agree that they do not like the scheduled sequester. Congressional Republican leaders argue that it should be replaced entirely with spending cuts while Democratic leaders in Congress and President Obama insist that revenue increases must be involved.
Revenue Is the Answer
The Center on Budget and Policy Priorities points out that if the sequester is averted with spending cuts and no revenue increases, that will mean that the combination of all the deficit-reduction measures, which began in 2011, would include five times as much in spending cuts as revenue increases. The President is calling for any deficit reduction from this point on to include an equal share of spending cuts and revenue increases. But even this would mean that the combination of all these deficit-reduction measures would include twice as much in spending cuts as revenue increases.
A fair approach would be for Congress to replace the sequester entirely with new revenue. There are several reform options described in CTJ’s working paper that would raise hundreds of billions of dollars over the coming decade.
Some of these reform options could be enacted on their own, like President Obama’s proposal to limit the tax savings of each dollar of deductions and exclusions to 28 cents. Others are more likely to be part of a larger tax reform, like ending the rule allowing corporations to “defer” (not pay) U.S. taxes on their offshore profits or ending the provision in the personal income tax exempting capital gains at death. All of these reforms would end or cut back tax breaks that are hugely beneficial to extremely wealthy families and large corporations but not to low- and middle-income families.
A new working paper on tax reform options from Citizens for Tax Justice has a section describing a category of revenue-raising proposals that has not received much attention: ending tax shelters for investment income. As former Treasury Secretary Larry Summers noted in a recent op-ed: “What’s needed is an element that has largely been absent to date: [reducing] the numerous exclusions from the definition of adjusted gross income that enable the accumulation of great wealth with the payment of little or no taxes.”
The problem addressed by these proposals is partly related to the problem posed by the special, low rates that apply to capital gains and stock dividends. (Congress certainly needs to eliminate those special rates, so that investment income is taxed just like any other income.)
The breaks and loopholes criticized by Larry Summers and explained in CTJ’s new working paper allow wealthy individuals to delay or completely avoid paying taxes on their capital gains — at any rate. It does not matter what tax rate applies to capital gains so long as the wealthy can use these shelters to avoid paying any tax at all.
Path to Reform that Taxes All Income at the Same Rates
If these tax shelters are eliminated, that may make it easier for Congress to tackle the other problem with investment income — the special low rates that apply to investment income that takes the form of capital gains and stock dividends. Currently, the Joint Committee on Taxation (JCT), the official revenue estimator for Congress, assumes that people will respond to hikes in tax rates on capital gains by holding onto their assets or finding ways to avoid the tax, reducing the amount of revenue that can be raised from such a rate hike. (CTJ has explained why JCT’s assumptions are overblown in the appendix of our 2012 report on revenue-raising options.)
But if the various shelters that people use to avoid taxes on capital gains are closed off, JCT could logically assume that raising tax rates on capital gains will raise substantially more revenue.
Tax Capital Gains at Death
The tax shelter that is probably the largest, in terms of revenue, is the “stepped-up basis” for capital gains at death. Income that takes the form of capital gains on assets that are not sold during the owner’s lifetime escape taxation entirely. The heirs of the assets enjoy a “stepped-up basis” in the assets, meaning that any accrued gains at the time the decedent died are never taxed. (The estate tax once ensured that such gains would be subject to some taxation, but repeal of three-fourths of the estate tax has been made permanent in the fiscal cliff deal.)
The justification for the stepped-up basis seems to be the difficulty in ascertaining the basis (the purchase price, generally) of an asset that a taxpayer held for many years before leaving it to his or her heirs at death.
But this difficulty (which is decreasing rapidly because of digital records) does not justify the sweeping rule allowing stepped up basis for all assets left to heirs — even assets that have a clearly recorded value and assets that were only acquired right before death.
It is also not obvious that this difficultly with determining the basis is that different after the death of the owner of the asset. Consider an asset that was held for, say, 40 years and bequeathed at death and an asset that was held for 40 years and then sold to fund the taxpayer’s retirement. In the former situation, the gains that accrued over those 40 years are never taxed, but in the latter situation they are taxed. But any difficulties in determining basis would seem to be the same in these situations.
The proposal to tax capital gains at death, and the others described in the working paper, challenge some breaks that wealthy individuals and their accountants and lawyers are deeply attached to. But the vast majority of Americans whose income takes the form of wages are not able to use these maneuvers to delay or avoid taxes on their income. They would have trouble understanding why these tax shelters for the wealthy should be preserved while Congress considers dramatic cuts to public investments that support all Americans.
Senator Minority Leader Mitch McConnell argued on Sunday that, with the passage of the fiscal cliff deal, the “tax issue is finished” and that instead of raising more revenue we need to confront our “spending addiction” in order to reduce the deficit. What McConnell failed to mention was that lawmakers in Washington have already passed trillions of dollars in deficit-reducing spending cuts, while at the same time enacting trillions of dollars in deficit-increasing tax cuts.
Perhaps the biggest flaw in McConnell’s logic is the idea that lawmakers have already raised a substantial amount of revenue. According to the Joint Committee on Taxation (JCT), the official revenue estimators for Congress, the fiscal cliff deal will actually reduce revenue by $3.9 trillion over the next decade. The deal raises revenue only if compared to what would happen if Congress had extended all the tax cuts (which were set to expire by law at the end of 2012).
If you accept this baseline as touted by the President and others who supported the deal, the fiscal cliff resolution can be said to be a $620 billion tax “increase” on the rich. But even if you accept that logic, it is nonetheless true that the substantial spending cuts already enacted in order to reduce the deficit justify raising a lot more revenue.
According to the Center for American Progress, since fiscal 2011 nearly $3 in spending cuts were enacted for every $1 in revenue raised. In other words, even under the artificial baseline that allows us to pretend Congress just raised revenue, we would need to raise roughly $1.2 trillion in additional revenue before even reaching parity with the level of spending cuts already implemented.
Anti-tax lawmakers like Senator McConnell claim that spending is so out of control that we can’t possibly raise enough revenue from taxes to reverse the growth of the debt. But, according to the non-partisan Congressional Budget Office (CBO), the long-term debt crisis is largely driven by the persistence of the Bush tax cuts, rather than spending. In fact, the CBO’s long term budget outlook found that had Congress done nothing and simply allowed all the Bush era tax cuts to expire, the debt would have been on track to begin dropping substantially starting in 2015 and over the coming decades.
There is also the related matter of fairness in our tax code. The reality is that the fiscal cliff deal did very little to change the tax rate paid by wealthy investors like Warren Buffett or Mitt Romney and actually included an extension of many of the corporate tax breaks that allow companies like General Electric to avoid taxes altogether. As we’ve explained, these corporate tax breaks are likely to be extended again and again and end up costing more than was saved by ending some of the tax cuts for the rich.
Considering it’s centrality to fixing the debt and improving fairness, the “tax issue” is certainly not finished. It’s really just getting started.
Chutes and Ladders is more than simply a hilarious visual metaphor for the gargantuan decisions currently being deliberated in Washington. Indeed, CTJ is using this icon of family fun to help educate the American public about the historic and morally consequential political moment we are witnessing as the Beltway budget drama approaches its climax.
by CTJ Director, Robert McIntyre
In a speech at the National Press Club on October 9, Senator Chuck Schumer (D-NY) joined with President Obama in calling for revenue-raising tax reform, by closing loopholes and reversing the Bush tax cuts for the wealthy, to help address our nation’s long-term deficit problem.
“We must reduce the deficit, which is strangling our economic growth,” Schumer said. “And we must seek to control the rise in income inequality, which is hollowing out the middle class.”
Schumer added: “It would be a huge mistake to take the dollars we gain from closing loopholes and put them into reducing rates for the highest income brackets, rather than into reducing the deficit.”
Specifically, Sen. Schumer called for restoring the top personal income tax rate on top earners to the Clinton-era 39.6 percent and “reducing but not eliminating” the current huge gap between the extremely low tax rates on high-income investors and the much higher tax rates on working people.
So far pretty doggone good. But then Sen. Schumer stumbles. Here’s what he says about corporate (and other business) taxes:
“Some on the left have suggested corporate tax reform could be a source for new revenue, but I disagree. To preserve our international competitiveness, it is imperative that we seek to reduce the corporate tax rate from 35 percent and do it on a revenue-neutral basis.”
Oops! Despite the fact that U.S. corporate income taxes are almost the lowest in the developed world (PDF) as a share of the economy, Schumer seems to think that the amount we now collect in corporate income taxes is just about perfect. That’s simply ridiculous.
For one thing, the kind of “tax reform” that big corporations and their allies in Congress are promoting would be perverse. Their central goal is to eliminate U.S. taxes on corporations’ foreign profits. Of course, to keep their promise to break even, their version of “tax reform” would have to increase U.S. taxes on profits earned here in the United States.
One could point out that the U.S. already collects almost nothing in taxes on American corporations’ foreign profits. But corporate leaders would like to convert our current indefinite “deferral” of taxes on foreign profits into a permanent exemption.
Why would anyone think this approach would help our “international competitiveness”? Well, you have to understand what corporate leaders mean by that term. They don’t mean making it more attractive to invest and create jobs in the United States. Quite the contrary. They mean making it more attractive for companies to invest and create jobs in foreign countries.
Real corporate tax reform would do the opposite, by ending the indefinite deferral (PDF) of tax on foreign profits. Companies may still invest abroad for economic reasons, but at least we wouldn’t be subsidizing them to do so.
There’s a second point. Due to a plethora of tax subsidies, we also have very low taxes on corporate profits earned in the United States. And a fat lot of good that’s done us economically. So we should be increasing corporate taxes on U.S. profits, too. Not on all companies, to be sure. But on average, Fortune 500 corporations now pay only about half the official 35 percent corporate tax rate on their U.S. profits. A quarter of these giant corporations now pay less than 10 percent in U.S. taxes on their U.S. profits, including many that pay nothing at all.
Closing the loopholes that allow such rampant domestic corporate tax avoidance, including curbing loopholes that allow companies to artificially shift their U.S. profits into foreign tax havens, should be a key part of a balanced deficit reduction strategy. By doing so, we can not only help get deficits under control, we can also afford to make the investments in education and infrastructure that will really make investing and creating jobs in the United States more likely.
So Sen. Schumer, congratulations on pointing out the need for more revenue from wealthy individuals. Now, if you can just appreciate the equally important need to get more revenues from America’s tax-avoiding corporations, well, you’ll be a real tax reform hero for our time.
New Report: Ending the Capital Gains Tax Preference would Improve Fairness, Raise Revenue and Simplify the Tax Code
For Immediate Release: September 20, 2012
Rare Joint House-Senate Hearing on Tax Reform Will Fail without Commitment to Repeal Capital Gains Tax Break
New Report Shows All Current Proposals Give Richest Taxpayers a Break More than a Thousand Times Larger Than They Give Middle Income Taxpayers
Washington, DC – In advance of a rare joint House-Senate hearing on tax reform and capital gains, a new report finds that the special low tax rates for capital gains and stock dividends will continue to provide huge benefits mainly to the richest one percent of Americans, no matter how Congress resolves the standoff over the expiring Bush-era tax cuts.
The report, from Citizens for Tax Justice, finds that the richest one percent of Americans would enjoy an average break of $41,010 on capital gains and dividends next year under the bill passed last August by the Republican-controlled House to extend all the Bush tax cuts. They would enjoy a slightly lower average tax break of $40,990 under the bill passed by Senate Democrats last July to extend most, but not all, of the Bush tax cuts. Americans in the middle fifth of the income distribution would enjoy an average capital gains and dividend tax break of just $30 next year under either approach. The report is available at this link.
Capital gains, which are the profits obtained from selling assets for more than their purchase price, were already taxed at lower rates than other income when President George W. Bush took office. The Bush tax cuts lowered the capital gains rate further and expanded the break to apply to stock dividends.
“The bad news is that none of the approaches to extending the Bush tax cuts would change the fact that these lower tax rates for investment income are a huge break benefiting the very wealthiest Americans,” said Steve Wamhoff, Legislative Director at Citizens for Tax Justice (CTJ). “The good news is that both parties are talking about extending those tax cuts for only one year and then devising a comprehensive tax reform that makes dramatic changes. The question now is how Congress will define ‘reform.’”
The CTJ report, Ending the Capital Gains Tax Preference Would Improve Fairness, Raise Revenue and Simplify the Tax Code, released today makes five points.
1) The capital gains tax preference mainly benefits the richest one percent of Americans.
2) It reduces revenue, despite claims to the contrary.
3) It gives rise to tax shelters and makes the tax code overly complicated.
4) These problems will be mitigated, but certainly not eliminated, by the reform of the Hospital Insurance tax coming into effect in 2013.
5) The way to fully resolve the problems described here is to eliminate the special, low personal income tax rates for capital gains so that they are taxed just like any other income.
The hearing, which is scheduled for today at 10 a.m. EST, will be held jointly by the House Ways and Means Committee, which is controlled by Republicans, and the Senate Finance Committee, which is controlled by Democrats. The hearing is part of a series of unusual joint hearings to address topics related to tax reform.
Many members of the two committees have shown a willingness to retain, and even expand, some tax preference for investment income. The CTJ report recommends eliminating it altogether and points out that repealing this break completely is not a radical proposal – the Tax Reform Act of 1986 eliminated the capital gains tax break so that all income was taxed at the same rates. Preferential rates for capital gains were subsequently reintroduced into the tax code and the break was gradually increased by subsequent Presidents and Congresses. It was expanded dramatically under President George W. Bush.
“Any overhaul of the tax code that continues to tax the income of wealthy investors like Warren Buffett at lower rates than other income is not worthy of the term ‘reform,’” said Wamhoff.
Citizens for Tax Justice (CTJ), founded in 1979, is a 501 (c)(4) public interest research and advocacy organization focusing on federal, state and local tax policies and their impact upon our nation (www.ctj.org).
The Congressional Budget Office’s (CBO) latest 10 year budget and economic projections set off yet another firestorm of dire headlines warning of a “deep recession” if Congress does nothing to address the so-called “fiscal cliff.” While such headlines create a sense of crisis, the real danger is not that Congress will do nothing, but rather that cynical members of Congress will use our struggling economy as an excuse to extend the reckless policies of the last 12 years.
One of the key points missing from the fiscal cliff debate is the fact that doing nothing would be rather beneficial over the long run. As Citizens for Tax Justice (CTJ) pointed out earlier this year, if Congress were to just sit on its hands and do nothing, this would solve the entirety of our long term fiscal gap and would even allow the US government to start paying down the national debt by 2015.
For better or worse, however, there’s good reason to believe that Congress will do something. As CTJ’s Director Bob McIntyre pointed out in a recent op-ed, the gap between Republicans and Democrats on how to deal with the fiscal cliff is actually relatively small considering that it’s over whether or not to extend 78% of the Bush tax cuts (as President Obama is proposing) or all of the Bush tax cuts (as congressional Republicans are proposing). Under either scenario (or somewhere in between) this would wipe out most of the fiscal cliff and prevent the country from slipping back into recession.
The critical problem, however, is that both approaches would dramatically increase the deficit over the coming years. According to CTJ estimates, President Obama’s proposal to extend most of the Bush tax cuts would increase the deficit by $4.2 trillion, while the Republican proposal to extend all of the Bush tax cuts would add $5.4 trillion to the deficit over the next 10 years. In other words, while both approaches would help the economy in the short term, they would put the US on the path to fiscal ruin.
What, then, is the best way to deal with the fiscal cliff? Lawmakers should focus on extending a responsible portion of the tax cuts that go to low and middle income families, while at the same time enacting temporary stimulus programs, such as infrastructure investments, putting teachers back to work and other programs that directly create jobs. (which are far more stimulative than extending the Bush tax cuts). This approach would have the double benefit of helping the struggling economy in the short term, while setting the US on the path of deficit reduction over the long term.
Every year the Organization for Economic Co-Operation and Development (OECD) produces reports about each of its 34 member countries’ economic prospects. The one they just published about the United States points out the “disproportionate income growth for top earners over the past two decades,” that our tax system is a global underperformer when it comes to ameliorating poverty, and recommends that progressive tax reforms should play in a key role in tackling our increasing income inequality.
According the OECD, income inequality has grown continuously over the last four decades. In fact, of the 34 countries in the OECD, the U.S. has the fourth highest level of income inequality as measured by each country’s Gini coefficient. Reinforcing this trend, our current tax-and-transfer system is 30 percent less effective in reducing income inequality than it was in 1980.
One approach that the OECD proposes to counteract U.S. income inequality through the federal tax code is to limit the tax savings from each dollar of certain deductions and exclusions in the federal income tax code. This approach was recently proposed as part of President Barack Obama’s American Jobs Act. Such proposals would increase the progressivity of the tax code and reduce the economic distortions created by tax breaks.
While many of the report’s recommendations are progressive and smart, it also some recommendations that would please the most conservative policymakers (leaving us scratching our heads as to how AP could label it “left-leaning”). For example, it calls for a significant reduction in corporate tax rates and the continuation of the special low tax rates for capital income. Of course, what the U.S. needs to do is enact revenue-positive corporate tax reform and treat capital income as ordinary income because these moves would afford us the revenue to implement the OECD’s other more reasonable recommendations, such as increasing government spending on education and job training, to reduce income inequality.
Much of the spending that Americans see in their daily lives is the work of state and local governments, which build the roads, bridges and schools, and hire and train the teachers and police officers. In many ways, the most overlooked aspect of the debate over federal tax reform is the ways in which Congress might help — or seriously hinder — state and local governments from raising the revenue needed to pay for these public investments.
In response to a hearing held on this topic by the Senate Finance Committee, ITEP’s executive director Matthew Gardner submitted written testimony exploring this point. The testimony explains, for example, that the federal income tax deduction for state and local taxes has many justifications that do not apply to other tax expenditures. It also explains that President Obama’s Build America Bonds program would improve upon an existing federal subsidy (for state and local governments that borrow to finance capital investments) so that it will no longer provide a windfall to high-income individuals and corporations.
The testimony also addresses proposals to regulate state and local taxing power. Some of these proposals would facilitate efficient and fair tax collection (like the Marketplace Fairness Act, which is geared towards solving the internet sales tax problem). Others would simply restrict taxes and make taxes more complicated at the behest of corporate lobbyists (like the so-called “Business Activity Tax Simplification Act”).
While these proposals and details might sound awfully arcane, they ultimately will influence issues that are very central in our daily lives — like the class size in your neighborhood school or the length of your commute on local roads and highways.
According to a CNN/ORC poll, one of many polls released around Tax Day 2012, a solid 68 percent of Americans said the current tax system benefits the rich and is unfair to ordinary workers. While this result is consistent with past poll results, a shocking number of lawmakers in Washington seem indifferent to the public’s hunger for more progressive taxes.
For example, one modest step toward tax fairness is the Buffet Rule, which would impose a minimum tax, equal to 30 percent of income, on millionaires in order to ensure that wealthy investors like Warren Buffett or Mitt Romney do not pay a lower tax rate than middle income Americans. Despite the fact that the Buffett Rule is favored by an overwhelming 72 percent of the American public, it was defeated in the US Senate on Monday and will likely not even come up for a vote in the House of Representatives.
Another tax day poll by Reuters/Ipsos found that 60 percent of Americans believe that tax revenues should play some part in deficit reduction efforts, while only 22 percent believe that spending cuts alone are the solution. This poll also reflects Washington’s huge disconnect with the American public as last year’s deficit reduction deal resulted in trillions of dollars of spending cuts and not a cent of additional revenue.
Even in the arena of corporate tax reform lawmakers find themselves at odds with public sentiment. In its tax day polling, Gallup found that 64 percent of Americans believe that corporations pay too little in taxes, meaning that the public would clearly favor revenue-positive corporate tax reform. And yet Republican and Democratic leaders, including the President, are proposing revenue-neutral corporate tax reform instead.
Washington’s conservative intransigence on tax issues is not going unnoticed by the public. Grassroots movements are spreading in protest of the unfairness of our tax system and pushing for progressive change. Lawmakers will find it increasingly difficult to ignore their constituents, especially as it becomes clear that other types of deficit reduction proposals (cuts in Social Security, Medicare, services for children) are far less popular than progressive tax increases.
Senate Minority Blocks Even Minimal Tax Reform, Preserves Lower Effective Tax Rates for Millionaire Investors
Today, a minority of Senators demonstrated that they will filibuster even the most minimal step towards tax fairness.
The legislation, proposed by Senator Sheldon Whitehouse, would implement the Buffett Rule. It would not affect anyone except taxpayers who have incomes exceeding $1 million and yet manage to pay a smaller portion of their income in taxes than do many people who work for wages and salaries. Even the very basic step of requiring these millionaires to pay at least 30 percent of their income in income and payroll taxes proved too much for the Senate minority, which successfully filibustered this bill.
This legislation should be just the very beginning of the far more sweeping reforms that our tax system desperately needs. The main reason some millionaires pay low effective tax rates is that investment income is taxed at lower rates than other income under the federal personal income tax and is currently not touched at all by federal payroll taxes. The Buffett Rule would limit this tax preference for investment income for millionaires.
But ultimately Congress must go much further than the Buffett Rule. The way to truly make our tax system simpler and more efficient would be to completely repeal the personal income tax preference for investment income and tax all income at the same rates. This would raise over half a trillion dollars over a decade. Eighty percent of the resulting tax increase would be paid by the richest one percent of Americans, and 90 percent of the tax increase would be paid by the richest five percent of Americans. While the Wall Street Journal can be expected to call this tax reform “socialism” or “class warfare,” it was a major part of the tax reform signed into law by President Ronald Reagan in 1986.
Today we find that even the smallest step back to this Reagan-era policy is unacceptable for the Senate minority, who filibustered the Buffett Rule and apparently can be counted on to block anything resembling fair tax reform.
A new CTJ report explains why Congress should approve Senator Sheldon Whitehouse’s proposal to implement the “Buffett Rule” to raise badly needed revenue and make our tax system fairer, but should also recognize that this must be followed by far more substantial reforms. In particular, Congress can’t stop at limiting breaks for millionaire investors but should completely repeal the personal income tax preference for investment income, as President Ronald Reagan did in 1986.
A previous CTJ report concluded that Senator Whitehouse’s bill would raise $171 billion from 2013 through 2022. The non-partisan Joint Committee on Taxation (JCT) has estimated that it would raise much less revenue, probably because JCT overestimates behavioral responses to changes in tax rates on investment income. But even if Senator Whitehouse’s bill would raise $171 billion over a decade, that’s only a fraction of the $533 billion that CTJ estimates could be raised by completely ending the tax preference for investment income.
Read the report.
Photo of Warren Buffett via The White House Creative Commons Attribution License 2.0
While poll after poll has long confirmed the overwhelming public support for progressive taxation in principle and increased tax revenues for deficit reduction, some polls that pop up every so often seem to contradict these results. Below we deconstruct two common errors seen in recent polls.
Marginal vs. Effective Tax Rates
Some survey questions fail to distinguish between marginal and effective tax rates. A marginal tax rate is the percentage of the last dollar of income received (by a given taxpayer) that will be paid in taxes. An effective rate is the total amount of taxes a person pays as a percentage of his or her entire income.
For example, when we say a person is in the “25 percent income tax bracket” that means that (generally) 25 percent of the last dollar of income received by that person will go towards federal income taxes. This person has a marginal income tax rate of 25 percent. But his effective income rate might only be around 15 percent or less. That’s because some of his income is taxed at lower rates and because some of his income is not included in taxable income at all (because of deductions).
The recent poll from The Hill is a case study in how conflating the marginal and effective tax rate can create bogus poll results. The Hill survey asks what the respondent believes is the most appropriate “top tax rate” for families earning $250,000 or more and corporations, and then lists out percentage options.
The problem is that the survey does not clearly distinguish whether the “top rate” being discussed is the effective or marginal top rate. In their coverage of the poll, The Hill reports that about three-quarters of likely voters support lower taxes on corporations and wealthy individuals, which just doesn’t sync with what the majority of current polling tells us. The Center for American Progress’s Seth Hanlon explains why. He points out that if respondents believed that the ‘top rate’ mentioned in the survey was meant to indicate the effective rate, then most respondents actually came out in favor of higher taxes. For example 67 percent of the respondents favored a 25 percent or higher rate on corporations, which, according to one important measure, is more than twice the current effective rate.
Cutting Government vs. Cutting Specific Programs
Some misleading polls in recent years have concluded that the public prefers spending cuts over tax increases as the best method to decrease the deficit. The most recent example is an AP-GFK poll, which found that 56 percent of people prefer cutting government services, compared to just 31 percent who support tax increases.
As Citizens for Justice explained last year while examining a New York Times-CBS News poll, these questions are misleading because they ask about cutting “government services” more generally, rather than allowing the respondent to consider specific program spending cuts. When faced with a choice between vague service cuts and taxes, it’s not surprising that the public favors cutting spending because it’s not clear how they might lose out. Americans are famously wary of government spending, but ask them if they’re willing to cut, say, Medicare, the answer is a resounding ‘No!’.
When faced with specific choices, tax increases actually become one of the most popular ways to reduce the deficit. For example, a May 2011 Pew Research Poll which gave respondents a list of specific spending cuts and tax increases, found that two-thirds of the public favored raising income taxes on those making over $250,000 and raising the payroll tax cap, whereas nearly 60 percent opposed raising the Social Security retirement age and 73 percent opposed reducing funding to states for roads and education.
Next time you see news about a poll and it doesn’t sound right, it’s worth taking a look at the actual questions. The way they are worded makes the difference between good and bad polling.
CTJ Calculates Buffett Rule Would Raise $50 Billion in One Year and Affect Only the Richest 0.08 Percent of Taxpayers
Citizens for Tax Justice has calculated that President Obama’s “Buffett Rule” would, if in effect this year, raise $50 billion in a single year and affect only the richest 0.08 percent of taxpayers — that’s just eight percent of the richest one percent of taxpayers.
During his State of the Union address, President Obama proposed that Congress enact his Buffett Rule, inspired by billionaire Warren Buffett’s complaint that he has a lower effective tax rate than his secretary.
CTJ has long argued that the most straightforward way to fix this problem is to end the special low tax rate for capital gains and stock dividends.
A document released from the White House on Wednesday suggests the President would take a different approach. It explains that
the President is now specifically calling for measures to ensure everyone making over a million dollars a year pays a minimum effective tax rate of at least 30%. The Administration will work to ensure that this rule is implemented in a way that is equitable, including not disadvantaging individuals who make large charitable contributions.
The last sentence apparently means that charitable deductions for millionaires would not be affected.
To calculate the $50 billion figure, we assumed that there would be a minimum tax that applies to adjusted gross income (AGI) minus charitable deductions. (We’ll call this modified AGI.)
We assumed that a taxpayer with modified AGI greater than $1 million would face a minimum tax of 30 percent of modified AGI. The taxpayer would pay whichever is greater, their personal income tax under the existing rules or this minimum tax.
Revenue Impact Would Depend on Details
Of course, taxes always have to be a little more complicated than that. We had to assume that this minimum tax is phased in over a certain income range rather than allow it to kick in fully for everyone with exactly $1 million or more in modified AGI. Otherwise, a person with modified AGI of $999,999 might have an effective rate of 15 percent, and if they make $2 more their effective tax rate will shoot up to 30 percent. Congress generally avoids enacting any tax rules that have this sort of “cliff” effect.
So we assumed that the minimum tax would be phased in for taxpayers with income between $1 million and $2 million. That means that only half of the minimum tax applies if you make $1.5 million, and the entire minimum tax applies if you make $2 million or more. This means that the Buffett Rule could raise less revenue or more revenue if Congress chose different rules to phase it in.
CTJ Report Explains Need for Buffett Rule
A report from Citizens for Tax Justice explains how multi-millionaires like Romney and Buffett who live on investment income can pay a lower effective tax rate than working class people.
As the report explains, there are two reasons for this. First, the personal income tax has lower rates for two key types of investment income, capital gains and stock dividends. Second, investment income is exempt from payroll taxes (which will change to a small degree when the health care reform law takes effect).
The report compares two groups of taxpayers, those with income in the $60,000 to $65,000 range (around what Buffett’s famous secretary makes), and those with income exceeding $10 million.
For the first group, about 90 percent have very little investment income (less than a tenth of their income is from investments) and consequently have an average effective tax rate of 21.3 percent. For the second group (the Buffett and Romney group) about a third get the majority of their income from investments and consequently have an average effective tax rate of 15.2 percent. This is the problem that the Buffett Rule would solve.
Photo of Warren Buffett via Track Record Creative Commons Attribution License 2.0
During his State of the Union address, President Obama proposed that Congress enact his “Buffett Rule,” inspired by billionaire Warren Buffett’s complaint that he has a lower effective tax rate than his secretary.
President Obama said, “Tax reform should follow the Buffett rule: If you make more than $1 million a year, you should not pay less than 30 percent in taxes.”
This might mean that Congress would enact a new minimum tax of 30 percent for those with incomes over $1 million. But a simpler way to implement the Buffett Rule would be to simply end the tax preference for capital gains and stock dividends, which is the reason people like Mitt Romney and Warren Buffett can pay such low tax rates.
CTJ Report Explains Why Romney and Buffett Pay Such Low Tax Rates
A report from Citizens for Tax Justice explains how multi-millionaires like Romney and Buffett who live on investment income can pay a lower effective tax rate than working class people.
As the report explains, there are two reasons for this. First, the personal income tax has lower rates for two key types of investment income, capital gains and stock dividends. Second, investment income is exempt from payroll taxes (which will change to a small degree when the health care reform law takes effect).
The report compares two groups of taxpayers, those with income in the $60,000 to $65,000 range (around what Buffett’s famous secretary makes), and those with income exceeding $10 million.
For the first group, about 90 percent have very little investment income (less than a tenth of their income is from investments) and consequently have an average effective tax rate of 21.3 percent. For the second group (the Buffett and Romney group) about a third get the majority of their income from investments and consequently have an average effective tax rate of 15.2 percent.
This problem could be largely solved by doing what President Reagan did with the Tax Reform Act of 1986, which taxed all income at the same rates.
Massachusetts Democratic Representative Barney Frank made waves on Monday with the announcement that he will not seek reelection in 2012. During his 30 years serving in the House of Representative, Rep. Frank has become well known for being the most prominent gay politician in the United States, his leadership role on the House Financial Service Committee during the height of the financial crisis, and his infamously cheeky remarks on a wide variety of different issues.
Rep. Frank is less known for his many years of service standing up for good tax policy. During the George W. Bush years for example, his record on working against the irresponsible Bush tax cuts earned him a straight A’s on our Congressional Report Card. In fact, just last year Rep. Frank stood up against pressure from Republicans and the White House to become one of the strongest Democratic voices opposing the deal that extended the Bush tax cuts for two more years.
Because of his strong advocacy over the years, we were proud to have Rep. Frank as an honorary chairman of our 30th Anniversary Celebration a couple years back. We could not think of any better way to honor Rep. Frank than to share two of our favorite quotes of his on tax policy:
- “Tax cuts are fun, but I never saw a tax cut put out a fire. I never saw a tax cut make a bridge” Barney Frank, MSNBC, August 1, 2011
- “Remember that our debt crisis began when someone decided to get the joint prize, Nobel Prize, for economics and fiction by putting forward the theory that you could finance two wars with five tax cuts. That's what put us in the hole.” Barney Frank, CNBC, January 29, 2011
Photo of Barney Frank via World Economic Forum Creative Commons Attribution License 2.0
Coburn Report on Hand-Outs for Millionaires Misses the Worst of All
Republican Senator Tom Coburn of Oklahoma, who made news earlier this year when he broke with right-wing ideologues by suggesting that Congress could raise some amount of revenue greater than zero dollars, has issued a report this week claiming to lay bare the various spending subsidies and tax subsidies benefiting millionaires. There are many problems with this report but the most enormous is that it ignores the biggest and most unfair tax subsidy for the rich — the lower tax rates that apply to investment income like capital gains and stock dividends.
Remember, the entire reason why Warren Buffett complains that he pays a lower effective federal tax rate than his secretary, and the inspiration for President Obama’s Buffett Rule, is this tax subsidy for investment income.
It is quite a feat to write a 37-page report about various government hand-outs for millionaires and yet fail to mention the one that the Buffett Rule is designed to address. But Senator Coburn’s staff has done exactly that.
Investment income is taxed less than other types of income in two ways. First, the personal income tax has special, low rates for two key types of investment income (long-term capital gains and qualified stock dividends), including a top rate of 15 percent. The majority of this income goes to the richest one percent of taxpayers. Second, the payroll taxes that apply to wages do not apply to investment income.
A previous report from CTJ explained how these tax breaks for investment income allow millionaires in some situations to pay lower effective federal tax rates than many middle-income people. Another CTJ report compared taxpayers making between $60,000 and $65,000 with taxpayers who make over ten million annually. In the first group, only about 2 percent receive most of their income from investments, while in the second group, about a third receive most of their income from investments and consequently have a lower average effective federal tax rate than most of the $60,000-$65,000 taxpayers.
This is an outrageous situation and the Buffett Rule is the principle that tax reform should reduce or eliminate this unfairness. Any plan to end hand-outs for millionaires that fails to implement the Buffett Rule is not worth the paper it’s written on.
Writing for Tax Notes, CTJ director Bob McIntyre recalls “my story of CTJ’s role in the process that led to the monumental Tax Reform Act of 1986. It’s a lightly edited version of notes I took in the fall of 1986, after the bill was enacted, to remind me later of what we had done to help cause that miracle. The piece has remained unpublished until now. Of course, many others played key roles in producing TRA 1986. This is mainly just CTJ’s story, as written in the exuberance of that stars-were aligned moment.”
Read the article.
Some commentators have suggested that, because people with incomes exceeding $1 million, on average, pay higher effective tax rates than middle-income people, the problem targeted by President Obama’s “Buffett Rule” does not exist. As demonstrated in a new report from CTJ, the problem is not the effective tax rates of millionaires across the board but a particular class of millionaires whose income is mostly from investments. Investment income is taxed less than other types of income, allowing millionaire investors to pay a smaller percentage of their income in federal taxes than do many working-class people.
The report demonstrates that this problem is not isolated to rare cases. In fact, almost one third of taxpayers with income exceeding $10 million fall into this category (of taxpayers who rely on investment income for over half of their total income). Over 90 percent of taxpayers making between $60,000 and $65,000 (which includes Mr. Buffett’s famous secretary) rely on investment income for less than a tenth of their income — and pay a higher federal tax rate as a result.
The report also explains what Congress can do to implement the Buffett Rule and solve this problem. The first step, perhaps surprisingly, is to prevent repeal of health care reform, which includes a change in the Medicare tax that will take a limited first step in addressing this unfairness. Additional reforms are needed, which may include eliminating tax preferences for investment income or a surcharge on income exceeding $1 million as recently proposed by Senate Democrats.
Photo of Warren Buffett and Barack Obama via The White House Creative Commons Attribution License 2.0
If the following actions were taken, some of the inequity that is driving the Occupy Wall Street and other affiliated protests would be eliminated. Suggestions include making corporations pay their fair share in taxes, ending the tax break for corporations that shift jobs and profits overseas, implementing the "Buffett Rule," and imposing a tax on the "too-big-to-fail" banks...
Read the fact sheet.
Photo of Occupy Wall Street via Eye Wash Creative Commons Attribution License 2.0
Obama’s Plan a Massive Tax CUT Despite GOP Claims of “Largest Tax Hike in Modern History”
While House Republican Leader Eric Cantor’s staff and others have called President Obama’s jobs and deficit plan the “largest tax hike in modern history,” the unfortunate truth is that it actually cuts taxes overall and increases the deficit.
There is much to like about the plan, as explained below. Citizens for Tax Justice applauds President Obama’s vow yesterday to, in his words, “veto any bill that changes benefits for those who rely on Medicare but does not raise serious revenues by asking the wealthiest Americans or biggest corporations to pay their fair share.”
Unfortunately, however, President Obama’s proposals would ultimately reduce taxes far more than raise them, compared to current law.
The tables in the back of the President’s 80-page plan quietly remind us that the total cost of making permanent the Bush tax cuts would be $3.867 trillion over the next ten years, but the President says he will “raise revenue” by making permanent “only” $3.001 trillion of these tax cuts. We certainly applaud the President for refusing to extend the $866 billion of these tax cuts that would go exclusively to those with adjusted gross incomes in excess of $250,000, but it’s difficult to call this deficit reduction.
The President’s claims that he is raising revenue are based on the common, but misleading, practice of comparing a given proposal to an alternative “baseline” that assumes Congress has already increased the deficit enormously by making permanent the Bush tax cuts. By this logic, we do not see what stops the President from comparing his plan to a baseline that assumes Congress repealed the federal income tax, in which case his plan would “raise revenue” even more successfully.
Setting aside the $866 billion that the President proposes to “raise” by not extending that part of the Bush tax cuts, the net effect of the other tax provisions in the plan (excluding the parts used to help pay for his proposed new jobs provisions) is to raise only $259 billion over the next decade. That means that, overall, the President is proposing more than $2.7 trillion in deficit-increasing tax cuts through fiscal 2021!
The cost of these tax cuts is even greater when accounting for the additional interest payments on the national debt that will result.
Revenue could be raised by closing corporate tax loopholes, but unfortunately the President’s plan calls for a reform of the corporate income tax that is “deficit-neutral.” We believe that most, if not all, of the revenue-savings resulting from closing corporate tax loopholes should go towards deficit-reduction or job creation and public investments, rather than paying for more breaks for corporations. (See one-page fact sheet on why corporate tax reform can be “revenue-positive.”)
There are some good ideas in the President’s tax proposals that would raise revenue compared to current law and that would ask those whose incomes have grown the most in recent years to pay something closer to their fair share. This includes his proposal to limit deductions and exclusions for the wealthy, which we estimate would affect only 2.3 percent of taxpayers. (See related report.) Certainly Congress should pursue these types of tax provisions and loophole-closing measures.
But ultimately, our nation is going to need significantly increased revenues to pay for essential public programs and services. Starting off with a gigantic tax cut that makes 80 percent of the Bush tax cuts permanent, as Obama proposes, only digs our deficit hole deeper — and makes big reductions in Social Security and Medicare even more likely.
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
Hundreds of events from coast to coast are being organized to target corporations that fail to pay their fair share in taxes while lawmakers consider slashing public services that working Americans depend on.
MoveOn invites "frustrated taxpayers, underwater homeowners, vilified public servants, job-hunting students, and unemployed veterans—everyone facing cuts or cutbacks, a pink slip or a shrinking paycheck" to join demonstrations to demand that Congress cracks down on corporate tax dodgers and to deliver to these companies the tax bill they should pay. Find a MoveOn event near you.
U.S. Uncut is also organizing demonstrations and events targeting corporations, some of which are in cooperation with MoveOn. Find a U.S. Uncut event in your area.
Finally, U.S. PIRG and other organizations will have activities outside post offices on April 15 and April 18 in several states to create awareness about tax dodging by corporations and to press Congress to act. These events will target people whose minds are very much on taxes as they mail off their federal income tax returns.
See the list below for U.S. PIRG events in your state and contact information.
April 15, 2011
Event: U.S. Public Interest Research Group will be holding events outside of Post Offices across the country to try to get Congress to address tax dodging corporations with report releases and post-carding.
Portland OR, April 15th. Contact Jen Lavelle at firstname.lastname@example.org, 503.231.4181
AnnArbor MI, April 15th. Contact Megan Hess at email@example.com, 734.662.6597
Chicago IL, date TBD. Contact Brian Imus at firstname.lastname@example.org, 312-544-4433 x 210 (Federal Plaza, outside of main post office)
Hartford CT, April 15th, Contact Jenn Hatch at email@example.com, 860.233.7554
Albuquerque NM, date TBD, Contact Erin Eckelson at firstname.lastname@example.org, 505.254.1244
Philly area, date TBD. Contact Megan DeSmedt at email@example.com, 215.732.3747
Phenoix AZ, April 15th. Contact Seren Unrein at firstname.lastname@example.org, 602.252.9227
Des Moines IA, Date TBD, Contact Sonia Ashe at email@example.com, 515.282.4193
April 18, 2011
Event: U.S. Public Interest Research Group will be holding events outside of Post Offices across the country to try to get Congress to address tax dodging corporations with report releases and post-carding. U.S. PIRG is partnering with Citizen Action in a number of states: NJ, OR, IL, MI, MO, CT.
Trenton NJ, April 18th. Contact Jen Kim at firstname.lastname@example.org, 609.394.8155
Seattle WA, April 18th, Contact Lindsay Jacobson at email@example.com, 206.568.2854 (either at post office downtown, or in front of Microsoft).
Boston MA, April 19th, Contact Dee Cummings at firstname.lastname@example.org, 617.292.4805
Baltimore MD, April 18th, Contact Johanna Neumann at Johanna@marylandpirg.org, (410) 467-9389
St. Lois MO, TBD
A USA Today op-ed written by CTJ's Steve Wamhoff argues that we should approach corporate tax reform the way President Reagan did in 1986. He closed enough tax loopholes to raise new revenue from corporations, even while lowering the corporate tax rate.
Congresswoman Schakowsky Proposes Millionaires Tax as Alternative to Cutting Education, Health and Other Programs
On Wednesday, Rep. Jan Schakowsky introduced legislation to add additional brackets to the federal income tax so that millionaires and billionaires would be taxed at higher rates than they are today.
A rate of 45 percent would apply to taxable income starting at $1 million and rates would increase up to 49 percent for taxable incomes over $1 billion. Citizens for Tax Justice found that the bill would raise at least $78.9 billion if enacted for 2011. This is a little more than the $61 billion that Republicans would like to cut for the rest of this fiscal year from Pell Grants, nutrition, housing and other programs that struggling families rely on, particularly during this recession.
Millionaires make up about 0.2 percent (that's the richest one fifth of one percent) of taxpayers, and yet they received about 17.6 percent of the income tax cuts that were extended at the end of last year. (And millionaires certainly benefitted disproportionately from the estate tax cut that was part of that compromise.) And yet, none of the Republican spending proposals would require this group of taxpayers to share in the sacrifice that they claim is needed to reduce the budget deficit. Congresswoman Schakowsky's proposal demonstrates that there is a fairer way to reduce the deficit.
Ultimately, of course, we need fundamental tax reform that eliminates loopholes, raises revenue and makes the system fairer and simpler. Until that happens, the only fair alternative is to require the best off Americans to contribute at a higher rate than they do today.
CTJ Director Robert McIntyre: "President Obama Is Seriously Off Track" on Revenue-Neutral Goal for Corporate Tax Reform
Robert McIntyre, director of Citizens for Tax Justice, testified on March 9 before the Senate Budget Committee on tax subsidies for businesses. He explained that these tax breaks for business (1) are hugely expensive, (2) are often economically harmful, and (3) conflict with fundamental tax fairness.
Eliminating or reducing these tax subsidies can result in revenue that would help us address our long-term budget crisis. McIntyre said that "President Obama is seriously off track in proposing to devote all the savings that can be gained from curbing business tax subsidies not to deficit reduction, but rather to lowering the statutory corporate tax rate."
Here's an excerpt of the testimony:
...Today is the first day of Lent, and I’d like to suggest that members of Congress consider giving something up, not just until Easter, but perhaps until the federal budget is balanced (and even thereafter). What I hope you’ll give up is your enthusiasm for providing subsidies to those who don’t need them, in particular, for business subsidies administered by what seems to have become Congress’s favorite agency, the Internal Revenue Service.
A quarter of a century ago, President Ronald Reagan took on business tax subsidies in the Tax Reform Act of 1986. Among other things, Reagan’s tax act curbed offshore corporate profit shifting, leasing tax shelters and numerous industry-specific tax breaks, and despite a reduction in the statutory corporate tax rate, increased corporate tax payments by 34 percent. Reagan also equalized the personal income tax treatment of wages and realized capital gains, and he made the tax system more progressive overall.
But lobbyists for corporations and wealthy individuals didn’t give up after 1986. They worked hard to regain and expand the tax subsidies that Reagan had taken away. In the 1990s, the lobbyists persuaded the Clinton administration and the Congress to eviscerate the corporate Alternative Minimum Tax (designed to curb the huge tax advantages that go to highly-leveraged activities such as equipment leasing), adopt the so-called “check the box” and “active-financing” rules that vastly expanded offshore corporate tax-sheltering opportunities, and reestablish preferential tax rates on realized capital gains. During the George W. Bush administration, business and investment tax breaks were expanded considerably further. Both political parties are at fault in this sad repudiation of President Reagan’s tax legacy.
By the early 2000s, corporate subsidies had risen so much that the average effective U.S. federal corporate tax rate paid by America’s largest and most profitable corporations on their U.S. profits had fallen to only 18.4 percent — barely over half the 35 percent statutory rate. Those tax subsidies have grown even larger since then.
Our complaints about business tax subsidies fall into three categories. (1) They are hugely expensive. (2) They are often economically harmful. And (3) they conflict with fundamental tax fairness...
Read the full testimony
State governments face a budget crisis of historic proportions, and in recent months policymakers have responded with unpopular and frequently myopic spending cuts to close budget gaps. But there are alternatives. A new report, The ITEP Guide to Fair State and Local Taxes, explains that policymakers in virtually every state have sensible tax policy tools at their disposal to help reform their underperforming tax systems.
With the scheduled end of temporary federal aid to state governments later this year, state lawmakers will face even more pressure to find real, long-term solutions. The report is designed to help policymakers to approach both the short-term and long-term fiscal challenges they face.
The ITEP Guide takes a hard look at why state taxes have underperformed in the recent economic downturn, and recommends strategies for reforming these taxes to make them better able to fund public investments in the future.
The report includes separate chapters discussing each of the major revenue sources on which state and local governments rely, including personal income taxes, sales taxes, property taxes and corporate taxes. A common theme in ITEP’s analysis of each of these is that unwarranted loopholes make these taxes less fair, and less sustainable, than they should be.
The report also recommends a variety of procedural tax reforms that would make it much easier for state policymakers to identify and evaluate these harmful tax giveaways in the future. These reforms include regularly publishing detailed “tax expenditure reports,” which list the cost and rationale for every tax break currently weighing down state tax codes, and “tax incidence analyses” to help measure the tax fairness impact of proposed tax changes.
To view the report or request a copy be mailed to you, please visit: http://www.itepnet.org/state_reports/guide2011.php.
Next week the Senate is expected to take up the patent reform bill which, as of today, includes a provision to prohibit patents on tax strategies. Opponents are expected to offer amendments to weaken the language or completely strip this provision from the legislation.
Since 1998, when a federal appeals court ruled that business methods could be patented, the U.S. Patent Office has granted more than 115 tax strategy patents and more than 150 applications are in process. The holders of these patents can charge a fee to taxpayers that use their strategies.
Citizens for Tax Justice joined other national organizations in a letter to the Senate Judiciary Committee to make sure the provision banning tax strategy patents stays in the bill. As Senator Carl Levin has noted, the primary rationale for issuing patents is to encourage innovation and "the last thing we need is a further incentive for aggressive tax shelters."
As explained elsewhere in this Digest, House Republicans just significantly weakened Congress’ already loose control over tax code spending — or “tax expenditures.” But there was also significant good news for those of us seeking to better scrutinize the bevy of giveaways contained in our tax code. On Tuesday, President Obama signed a bipartisan bill that, among other things, requires the Executive Branch to finally incorporate tax expenditures into its evaluations of the government’s performance.
Specifically, the legislation signed by President Obama (HR 2142) updates the Government Performance and Results Act of 1993 (GPRA). As CTJ has explained before, one of the most significant problems with GPRA was that it did not require roughly $1 trillion in federal tax breaks, or “tax expenditures,” to be evaluated in terms of their success in fulfilling their intended purposes. The legislative history of GPRA made clear that Congress wanted these programs evaluated, but the lack of a legal requirement to do so allowed past Administrations to drag their feet for nearly two decades.
HR 2142 touches on a wide range of performance issues. But the requirement that tax expenditures (an area of the budget that rivals or even exceeds discretionary spending in size) be included in government performance evaluations is doubtless one of the most significant reforms contained in the new law. Much work remains to be done, however, to ensure that this new requirement is implemented properly.
Unlike the Washington State performance review system and the systems typically discussed in other states, HR 2142 does not require a systematic look at every tax expenditure. Rather, the new federal framework starts by requiring that the OMB and relevant federal agencies identify what goals they want to accomplish. From there, they are required to identify the various government functions (including tax expenditures, spending programs, regulations, etc) that are designed to contribute toward those ends, and assess how effectively they are contributing to those goals. And for certain “high priority” performance goals at risk of not being met, the OMB and agency officials will also be required to identify changes to tax expenditures and other programs that could improve government performance.
The main downside of this design is that it does not guarantee every tax expenditure will be evaluated. It’s not at all hard to imagine how many tax expenditures could slip through the cracks if OMB and/or agency officials do not consider them closely related to the performance goals they have identified.
But, while it’s too early to tell, this downside may be outweighed by the fact that this goal-based model looks at tax expenditures not in isolation, but alongside other policies, regulations, and agency activities aimed at achieving the same goals. If implemented well, this new reform has the potential to add some much needed rationality to debates over whether to pursue certain goals through spending programs or tax breaks.
All of the media attention over the deficit commission recommendations and the tax debate happening this month in Washington has initiated a fair amount of discussion about the possibilities for fundamental tax reform. The Washington Post had two editorials on the subject over the weekend, followed by an article this week in the Wall Street Journal.
In a New York Times op-ed, David Brooks encouraged the President to make tax reform a priority, beginning with the upcoming State of the Union address. While there are plenty of naysayers, Tax Analysts' Joe Thorndike makes the case for tackling the deficit and tax reform together.
But a big bump in the road ahead is Grover Norquist. You'd think his group called Americans for Tax Reform would actually be in favor of... well, tax reform. Their anti-tax bias is so fanatical, however, that they refuse to support any plan that raises revenue, even if it makes the tax code drastically simpler and more efficient. Specifically, while Norquist concedes that many tax expenditures (a tax break aimed at a particular industry or objective) are "horrible tax policy," he refuses to support eliminating them unless lawmakers promise not to use any of the money for deficit reduction. Instead, Norquist insists that the revenue produced from eliminating tax expenditures must entirely be used to lower tax rates.
Simply put, Norquist's first, second, and third priorities are lower taxes — deficit reduction and tax reform be damned. That's why Len Burman suggested renaming Norquist's group, Americans Against Tax Reform. One could argue that "Americans Against Taxes" would be even more fitting.
Lawmakers who are serious about addressing the budget problems and reforming the tax system would put everything on the table and turn off the noise from Norquist. Real tax reform would mean some winners and some losers. The end result would be a fairer, simpler tax code that raises enough money to pay for public services and promotes economic prosperity for all Americans. (Read more on CTJ's recommendations for reform.)
The Senate “compromise” tax bill unveiled last night has dropped an important provision that would have required the JCT and GAO to evaluate whether the so-called “tax extenders” are fulfilling their intended purposes. This provision was included in both the House-passed version of the extenders, and in the Senate version that Finance Committee Chair Max Baucus introduced just one week ago. Adding this study back into the bill would be a small but meaningful step that would signal Congress’ interest in tax reform, deficit reduction, and general government efficiency.
The “tax extenders” package consists of about 50 expiring tax provisions – costing nearly $30 billion each year – that Congress has repeatedly extended on a temporary basis. These tax breaks, or “tax expenditures,” are designed to encourage everything from railroad track maintenance to coal mine safety, but Congress has no idea whether they’re actually accomplishing these things at a reasonable cost. Rather than using the extenders repeated expiration as a chance to review their effectiveness, Congress routinely extends them at the last minute without any serious analysis (just as it seeks to do this year as part of a larger bill seeking to extend all of the Bush tax cuts). The JCT/GAO study, which until last night appeared to be closely wedded to the tax extenders package, would have filled this analytical void by examining each tax extender using ten different criteria designed to reveal whether they are effective in achieving their intended purposes.
While the White House continues to express concern that major changes to the compromise tax bill could unravel any bipartisan agreement, the addition of the tax extenders study is a modest, commonsense change that should not divide lawmakers along party lines. Indeed, the extenders study could actually broaden the base of support for the Senate compromise bill. In explaining the importance of the study, both the House-passed bill and the bill introduced by Senator Baucus last week cite the effect these provisions have on the “escalating public debt,” and the way in which these tax breaks complicate the tax code for individuals and the IRS. Adding this study back into the bill could signal to both deficit hawks and tax reform advocates that these tax provisions will not be allowed to continue unless very good reasons can be found to justify their existence.
In addition to widespread support for the study in the House, and apparently within the Senate Finance Committee, the sentiment behind the JCT/GAO study has also picked up significant support among outside groups. Eric Toder of the Tax Policy Center, the Center for American Progress, and a dozen other national groups have said that the study would be very useful in informing future debates over extending these provisions.
While not mentioning the tax extenders study specifically, President Obama’s Chief Performance Officer, the GAO, the Pew-Peterson Commission on Budget Reform, the OECD, and numerous, other, groups, have also cited the need for additional evaluation of tax breaks. The tax extenders study would be an important step forward in conducting these evaluations.
The President's fiscal commission rejected a deficit-reduction plan that CTJ and others found to be seriously unbalanced. The plan was supported by 11 of the 18 commission members, but the rules of the commission specified that a plan could not be approved without a super-majority of 14 of the 18 votes. House and Senate leaders had promised to bring to the floor any deficit reduction plan that was approved by the commission, which they are now not obligated or likely to do.
The plan could still, unfortunately, influence lawmakers in the future. It relies on cuts in public services for two-thirds of the deficit reduction it strives for, while relying on increased revenues for only one-third. In fact, the plan claims it would somehow “cap” federal revenue at the arbitrary level of 21 percent of the economy. As a result, the plan relies far too much on cuts in public services that will be impossible to make without adversely affecting Americans — including those with very modest incomes.
As CTJ's statement on the plan explains, part of the problem is the commission’s approach to closing tax loopholes. The plan makes bold proposals to close tax loopholes, but unfortunately uses most of the resulting revenue to lower tax rates! Since the goal of this commission is to reduce the budget deficit, it’s hard to fathom why lowering tax rates would be on its agenda at all.
Read CTJ's full statement on the deficit plan.
Last month, Citizens for Tax Justice (CTJ) released a report explaining how and why the budget process must be reformed in order to temper lawmakers’ obsession with “tax expenditures” — that is, government spending programs that happen to be administered via the tax code. The Pew-Peterson Commission — a group of nearly forty former lawmakers, CBO directors, OMB directors, and other prominent officials — echoed that sentiment this week in a new report proposing a variety of reforms to the federal budget process.
While some groups have expressed serious concerns over the Commission’s debt reduction target, their attempt to put tax expenditures on a more even footing with other types of government programs should be applauded. The Commission accurately identified tax expenditures as one of the “major drivers of long-term debt growth,” and lamented that they constitute “the largest single omission of fiscal resources from the budget.”
The Commission goes on to offer a variety of sensible recommendations designed to bring tax expenditure spending under control, and end the “invisibility” of these programs in the budget process. Among the reforms recommended by the Commission are:
• “Display tax expenditures and spending programs together in the budget so that resources allocated to one purpose by alternative means can be compared with total amounts allocated to other uses.”
• “Include tax expenditures in the budget resolution allocations and in reconciliation instructions to committees of jurisdiction.” (This is meant to erode the tax-writing committees' monopoly on this area of policy, and to allow the committees with actual expertise in program areas to weigh the relative merits of tax expenditure and traditional spending programs.)
• “Require the executive branch and CBO to provide information and analysis on the use, incidence, and efficiency of every major tax expenditure (preference) in comparison with alternative policy instruments.” (This is similar to the tax expenditure performance reviews recommended by CTJ late last year.)
Additionally, once tax expenditures have been reduced as part of dealing with the nation’s current fiscal imbalance, the Commission recommends a system of “caps and triggers” designed to ensure that tax expenditure growth will not continue at an unsustainable rate. Under this system, Congress would be required to keep tax expenditure spending below the specified “cap” level. If they failed to do so, pro rata adjustments to specific tax expenditures would be made automatically to bring their overall size under the cap.
Ultimately, it must be substantive policy decisions — not budget process reforms — that will bring the nation back into fiscal balance. Nonetheless, reforming the budget process as it relates to tax expenditures would help pave the way for vital, and lasting, reductions in tax expenditure spending.
The Committee for a Responsible Federal Budget (CRFB) is an organization with which Citizens for Tax Justice (CTJ) often disagrees. A new report released by CRFB this week, however, demonstrates that CTJ and CRFB have something in common when it comes to addressing the federal budget deficit. As CRFB explains, "reforming tax expenditures should be at the top of the budget reform agenda… [and] money raised from broadening the [tax] base will have to help close the fiscal gap rather than to pay for lower tax rates."
The CRFB recommendations appear to draw heavily on proposals from the Congressional Budget Office (CBO), President Bush’s 2005 tax reform panel, and President Obama’s Economic Recovery Advisory Board. CRFB’s report is quite bold, recommending the reform or outright repeal of multiple itemized deductions, including those for charitable contributions, mortgage interest, and state and local tax payments.
The report also discusses the possibility of enacting a broad limitation on all itemized deductions that’s even more aggressive than what President Obama has proposed — specifically, limiting the value of all itemized deductions to 15% of a taxpayer’s taxable income.
While the CRFB report focuses mostly on individual tax expenditures, it also mentions (however briefly) the importance of looking at corporate tax expenditures to "raise revenue, increase economic efficiency, and provide fairness." CRFB appears to have given up all hope of achieving this first objective, however, as its report simply states that "it is likely" that the repeal of corporate tax breaks "will be used to pay for revenue-neutral reform of the corporate income tax."
CRFB also recommends a number of changes to the budget process in order to make the tough uphill battle against tax expenditures just a bit easier. As their report correctly points out, "One of the problems … of tax expenditures is that they are not subject to annual budget review: they are created without the same level of scrutiny received by other areas of the budget, and then run open-ended with little review. Because they escape the normal budget process, policymakers have found them particularly attractive, and the tax expenditure budget has grown tremendously."
In order to bring these programs under control, the CRFB recommends "an immediate moratorium on new tax expenditures," or as a second-best solution, "a separate tax expenditure pay-as-you-go regime, so that any new tax expenditures would be paid for by reductions in other tax expenditures, thereby keeping policymakers from further expanding tax expenditures."
CRFB also recommends conducting tax expenditure performance reviews (which CTJ has pushed for as well), and coupling these reviews with "hard savings targets" for lawmakers to strive toward when determining how to reduce tax expenditure spending.
Following the comprehensive reform of tax expenditures, CRFB would like to see a "hard cap on this area of the budget," and the inclusion of tax expenditures "in the regular annual budget process" so that they can be "treated more similarly to other spending programs." No specifics are provided regarding CRFB’s preferred means of accomplishing this last recommendation.
For more information, see CRFB's report and CTJ’s comparison of tax expenditures and direct expenditures by budget category.
“Tax expenditures,” or special tax breaks targeted at particular activities or parties, are in desperate need of reform. In a report released by CTJ last November we explained how the current political climate, as well as dysfunctional procedural rules in Congress, have created a situation in which lawmakers have become much too willing to rely on tax breaks to accomplish their favored goals. Fortunately, a bill introduced by Rep. Mike Quigley (D-IL) just last week seeks to rein in some of the most destructive tendencies toward excessive tax breaks by counteracting the unwarranted advantages that tax breaks enjoy in the policymaking process.
While the first half of HR 5752 deals with general budget process reforms, it's the latter half of the bill with which CTJ is most interested. Among the tax expenditure reforms contained in this part of the bill is a requirement that all tax expenditures be reviewed by CBO at least every four years. Those reviews would result in a recommendation to Congress regarding what should be done with each tax expenditure, and in doing so would use many of the same criteria contained in the recently proposed “tax extenders study." This requirement somewhat resembles a proposal put forth in CTJ's November 2009 report that the Executive Branch conduct these reviews as part of their regular assessments of government performance.
HR 5752 also seeks to encourage lawmakers to make use of these CBO reviews, and of a variety of other improvements in tax expenditure data required by the bill. Specifically, HR 5752 would require that the tax-writing committees in both the House and Senate hold public hearings on the findings released by CBO. The Treasury Department and OMB would also be required to provide comments on the reviews.
More importantly, HR 5752 requires that any effort to enact a new tax expenditure (or enlarge an existing one) include a provision that would eliminate the tax expenditure at a point 10 years in the future. This sunset requirement would eliminate the “auto-pilot” feature enjoyed by many tax breaks by requiring lawmakers to periodically reconsider whether these policies are effective, and to vote on whether or not to continue them. While a 10-year sunset provision isn't the same thing as requiring regular reauthorization and reappropriation — as is done with discretionary spending — it is a meaningful step toward leveling the playing field between these two types of policies.
Another one of HR 5752's more important components is a requirement that bills enacting or expanding a tax expenditure receive approval not only from the tax-writing committee, but from the relevant subject-matter committee as well. Under HR 5752, for example, the House Ways & Means Committee would no longer be given sole jurisdiction over the plethora of tax breaks given to energy companies. Any bill seeking to expand upon such breaks would also have to receive approval from the House Committee on Energy and Commerce before being brought to the floor of the House. By allowing other relevant committees a say in measures related to their specific areas of policy, the power of the tax-writing committees to legislate on almost any issue imaginable could be scaled back by HR 5752.
For more on HR 5752, see this release from Rep. Quigley's office. And to see a comparison of tax expenditures and other spending programs in various policy areas, be sure to see this April report from CTJ.
On July 1st, Representative Bill Delahunt (D-MA) introduced the Main Street Fairness Act, the latest legislative attempt to close the unfair tax loophole that has let internet companies off the hook for tens of billions in unpaid sales taxes.
With so many states facing severe budget deficits, state governments are desperate to collect the unpaid sales taxes on purchases from out-of-state internet and catalogue retailers. According to the definitive study by researchers at the University of Tennessee, the loss in sales tax revenues due to the loophole allowing internet and catalogue retailers to avoid sales taxes could range anywhere from $8.6 to $9.92 billion in 2010 and could shoot up to nearly $34 billion from 2010 to 2012. The NCSL provides a useful interactive map highlighting the revenue loss due to the loophole in each state. Unfortunately, the loss will only increase going forward as internet sales continue to become a larger and larger portion of total sales.
Delahunt’s legislation would fix the loophole by allowing states that join the Streamlined Sales and Use Tax Agreement to collect sales tax and use taxes on out-of-state retailers. Joining the agreement entails simplifying and standardizing state sales and use tax codes in order to make the system less unwieldy for out-of-state retailers. Already 23 states are part of the agreement, with many more taking steps toward standardization. In addition, the bill would exempt many small businesses and provide some funds to help with the cost of compliance.
For decades, state governments have been trying to collect sales taxes from these retailers. A 1992 Supreme Court ruling in Quill v. North Dakota made the task almost impossible by preventing state governments from requiring sellers to collect sales taxes unless the seller has a physical presence in the state. The Court ruled that states can require companies without physical presence within their borders to collect sales taxes only if given permission by a law enacted by Congress. Delahunt's bill would provide that permission.
For Joe Rinzel, Vice President for State Government Relations for the Retail Industry Leaders Association, the issue presented by the loophole is really about “fairness for both businesses and consumers.” As a brief by the Institute on Taxation and Economic Policy explains, the loophole is inherently unfair because it provides a distinct advantage to online retailers over community stores, which have to collect sales taxes. Compounding this, the failure to tax internet sales places a disproportionate burden on consumers who (for economic or other reasons) do not use the internet for shopping.
Despite the need for federal legislation, Mike Zapler reports that states are trying to act on their own. New York attempted to get around the Supreme Court Ruling by redefining what constitutes a physical presence in New York. Taking a different approach, Colorado passed a law requiring out-of-state retailers to provide the states with the names and items bought from residents. In both cases, the laws were immediately met with lawsuits from industry supporters.
The passage of Delahunt’s Main Street Fairness Act would serve to stop the harm done to ‘brick and mortar’ retailers by the ending the loophole while providing desperately needed revenue to state governments.
A new report from Citizens for Tax Justice examines the amount of government "spending" done through the tax code in the form of special breaks and loopholes known as tax expenditures. The figures in the report illustrate that tax expenditures are a significant portion of federal spending and cannot be ignored as Congress addresses the budget deficit.
Read the report.
A simple example of a tax expenditure might be a break that Congress enacts in the corporate tax, giving a particular group of companies a benefit totaling $10 billion. The effect is the same as if Congress simply provided a subsidy through direct expenditures of $10 billion for those companies. Either way, the companies are $10 billion richer and there is $10 billion less to fund public services. In other words, other taxpayers who did not receive the special break have to pay for it through increased taxes or reduced public services.
Members of Congress often focus on discretionary expenditures, not because they make up most government spending but because they are politically easier to limit. In fact, the figures in this report show that discretionary expenditures are less significant than tax expenditures in many spending categories. The other problem with fixating on discretionary expenditures is the fact that most of them are for defense — and yet calls for capping discretionary expenditures are always limited to “non-defense” spending.
The tea partiers are sure to make their voices heard (loudly) today. There are plenty of things you can do to let Congress know that fairness doesn't mean continuing the Bush policies of slashing taxes for wealthy individuals and corporations. Here are examples of what you can do:
1. Sign a petition circulated by Wealth for the Common Good calling on Congress to end the Bush-era tax cuts for wealthy Americans.
2. Call your members of Congress using a toll-free number provided by Bread for the World and tell them to make permanent the improvements President Obama made in the Child Tax Credit and EITC for low-income families.
Americans know that taxes are necessary to fund the services government provides like roads, schools, and social security. We contribute so that our country can build and maintain the necessary infrastructure and public goods and provide a safety net for all of us. At the same time, Americans think that the wealthiest among us aren't paying their fair share.
And yet those who support the previous administration's policies of slashing taxes for the rich will be very effective in making their voices heard on Tax Day. They have a message that sounds appealing (usually involving lower taxes with no negative repercussions) and a network of supporters with plenty of cash to amplify their message.
The following list describes how you can cut through the nonsense and stand up for tax fairness this April 15.
CTJ: Obama Cut Taxes for 98 Percent of Working Americans
CTJ has a new fact sheet showing that President Obama has cut taxes for 98 percent of working Americans in 2009. State-by-state reports are included. Polls show that the vast majority of people think that Obama either raised their taxes or left them the same for 2009, and these publications aim to clear up that widespread misunderstanding.
US PIRG: How Much Tax Havens Cost Ordinary Americans
The U.S. Public Interest Research Group reminds taxpayers that, while we do our duty and file our taxes, there are corporations and individuals out there who shirk this responsibility by using offshore tax haven countries to hide assets. On April 15, U.S. PIRG is sponsoring post office demonstrations and releasing a new report Tax Shell Game: What Do Tax Dodgers Cost You? They are encouraging folks to send in post cards to their Members of Congress to send a message to Washington that the American people deserve a better system.
Jobs with Justice: Tax Wall Street Day of Action
Jobs with Justice is organizing a Tax Wall Street Day of Action on April 15th. They are calling on supporters to deliver letters to national banks and collect petition signatures at local post offices as Americans stop by to mail their tax returns. The petition will ask Congress to tax Wall Street speculation.
UFE: Take the Tax Fairness Pledge
United for a Fair Economy has created the Responsible Wealth Tax Fairness Pledge where you can estimate your savings from the Bush tax cuts and pledge them to an organization that works for tax fairness. By the end of 2010 the Bush tax cuts will have cost more than $2.5 trillion in revenue that could have been used for critical investments in education, infrastructure or to reduce the deficit.
Are You Tired of the Tea Party? Join the Other 95%
President Obama cut taxes for 95 percent of working Americans (or 98 percent, if you count AMT relief) in 2009. But only 12 percent know it. Join the "other 95 percent" and say "Thanks for our tax cut, President Obama."
Or Join the Coffee Party
Tired of the tempest in a teapot, Coffee Party USA was started to encourage folks to "get together and drink cappuccino and have real political dialogue with substance and compassion." You can join the movement or start your local chapter here. Their motto: Wake Up and Stand Up.
IPS: More About the Way the World Is
The Institute for Policy Studies offers an analysis of the federal income tax system that seems more like two different systems: one for the wealthy and powerful and another one for the rest of us. Their paper includes analyses of the "flat tax," the national debt, and the myths about tax cuts for the wealthy allegedly spurring the economy.
CBPP on the Tax Foundation Tax Freedom Day Report: If Only We Were Rich
The Center on Budget and Policy Priorities has published a report refuting the oft-quoted numbers from the Tax Foundation about how many days people work each year just to pay their federal income taxes. As CBPP points out, the analysis is heavily skewed by the amount of income tax paid by the wealthy. Eighty percent of U.S. households pay tax at a lower rate than the Tax Foundation's estimated "average" federal obligation.
Wealth for the Common Good: Shifting Responsibility
Wealth for the Common Good has released a report Shifting Reponsibility: How 50 Years of Tax Cuts Have Benefited America's Wealthiest Taxpayers detailing how America's highest earners have seen their taxes drop by as much as two-thirds over the last 50 years. The trend of "asking less from those with more" has contributed to perhaps the greatest income inequality the U.S. has ever seen. The report calls for various measures to mitigate this dangerous trend and restore revenue to the federal treasury.
NPP: Where Did Your 2009 Federal Income Tax Dollars Go?
The National Priorities Project has released a report Where Do Your Tax Dollars Go - Tax Day 2010 showing how federal tax dollars were spent in 2009. Out of every dollar, 26.5 cents goes for military-related spending, 13.6 cents goes to pay interest on the debt, and only 2 cents goes towards education.
CAP: Why Cutting Discretionary Spending Won't Solve Our Budget Imbalance
The Center for American Progress has developed an interactive pie chart to help you learn about the federal government's discretionary spending, including whether cuts in those programs will really help reduce the federal deficit. Look at What is Non-Defense Discretionary Spending here.
UFE: How Will the States Close Their Budget Gaps?
United for a Fair Economy's Tax Fairness Organizing Collaborative just published a report Solutions that Work for Main Street: Progressive Guidelines for Closing Recessionary State Budget Gaps." The report identifies pragmatic principles for closing state budget gaps in ways that enhance economic recovery, ongoing stability, and more widely shared prosperity. Also see their report Leaving Money on the Table showing that residents in states that rely heavily on the sales tax instead of an income tax pay much more federal income taxes as a result.
CTJ: Don't Believe the Hype About the Rich Paying All the Taxes
On Tax Day, you'll hear anti-tax people say that the rich are paying a disproportionate share of taxes. They're wrong. When you look at the tax system as a whole, including federal, local, and state income, payroll, excise, and sales taxes, the system is just barely progressive. A CTJ analysis shows that when you include those taxes, effective tax rates are almost flat.
This week, the United States Congress and President Obama gave us another reason to be proud that we are Americans. On Tuesday, the President signed into law a major health care overhaul. Yesterday, the House and Senate both approved a second bill that completes the job.
Events like this — the creation of Social Security, the passage of the Civil Rights Act, the first manned visit to the moon, comprehensive health care reform — don't happen very often. We feel privileged and awed to belong to a generation that has witnessed this sort of change.
There is work ahead to ensure that the health care reform is implemented properly and improved upon. And the reform itself must be protected from opponents who already call for its repeal.
But in the years to come, we will look back and remember this as the time when our health care system stopped being a black spot on the nation's conscience and started to grow into another reason to love this country.
This legislation to extend health insurance to 32 million Americans and protect Americans who already have insurance from the industry's abuses was nearly thwarted by several disputes over issues both real and imaginary, and some of these disputes were over taxes.
For thirty years, Citizens for Tax Justice has argued that the Americans who benefit the most from the educated workforce, infrastructure, stability and other public goods provided by government are those Americans who have made fortunes in this dynamic country. It is entirely reasonable that the richest Americans pay taxes at higher effective rates, particularly to finance concerted action to resolve the problems that threaten to unravel our society.
Over the last several years, lawmakers have moved dangerously far from that ideal. The tax cuts enacted during the previous administration went disproportionately to the wealthy investor class. The massive bailout for financial institutions enacted under the previous administration only seemed to shovel more benefits to the same wealthy investor class.
When it came time for Congress to consider how to finance health care reform, progressives demanded that the wealthy pay their fair share. Congress answered that call by reforming the Medicare tax, the one significant tax that we already have to pay for health care. It will be transformed from a regressive tax to a progressive tax that no longer exempts the income of wealthy investors.
The new health care legislation has many imperfections, and yet it undeniably is a vast improvement over the status quo. Tax policy is not the centerpiece of this reform, but disputes over tax policy could have sunk it altogether.
We applaud the House and Senate for working through these disputes and putting the public interest above special interests.
We hope that the lawmakers who supported reform like the way success feels. We hope that members of Congress realize that they're good at making history, and they should do it more often.
New CTJ Report on President Obama's FY2011 Budget Proposal: The Federal Government Should Collect at Least as Much Revenue as Obama Proposes
A new report from Citizens for Tax Justice explores the tax proposals included in the federal budget outline that President Obama submitted to Congress on February 1. Like the budget he submitted last year, it is a vast improvement over the policies of the Bush years and continues to outline a progressive reform agenda.
But, also similar to last year, the President’s budget could be greatly improved with more aggressive policies to raise revenue. Over the coming decade, the President proposes to cut taxes by $3.5 trillion. We include in this figure the cost of extending most of the Bush tax cuts and relief from the Alternative Minimum Tax (AMT) as well as additional tax cuts that President Obama proposes.
His budget would offset a portion of this cost with provisions that would raise $760 billion over a decade by limiting the benefits of itemized deductions for the wealthy, reforming the U.S. international tax system and enacting other reforms and loophole-closing measures.
The report concludes that the federal government should collect at least as much revenue as the President proposes in order to avoid larger budget deficits. There are two bare minimum requirements for Congress to achieve this. First, Congress must not extend any more of the Bush tax cuts than President Obama proposes to extend. Second, Congress must raise at least as much revenue as President Obama has proposed ($760 billion over ten years) through loophole-closers and new revenue measures.
Late last year, CTJ published a report examining the lack of scrutiny directed toward tax expenditures, and the repeated promises to address this problem made by past Administrations. Unfortunately, the President’s most recent budget proposal shows no signs of progress on this issue. As CTJ points out in an op-ed in today’s Sacramento Bee: “for the second year in a row, the Obama administration has chosen [in its budget] to simply copy-and-paste the Bush administration’s language on this issue, complete with all the same promises about what will be done at some point over the ‘next few years.’”
Read the op-ed.
At a hearing before the House Budget Committee this past Tuesday, the OMB’s Chief Performance Officer, Jeffrey Zients, expressed his full support for the basic proposal laid out in a report by Citizens for Tax Justice last week – namely, that the multitude of spending programs buried within our nation’s tax code need to be reviewed.
During his questioning of Mr. Zients, Representative Lloyd Doggett said that he was “encouraged by the comments in the President’s budget that ‘programs will … not be measured in isolation, but assessed in the context of other programs that are serving the same population or meeting the same goals.’” At the same time, however, Mr. Doggett explained that “I don’t see how you can evaluate … [for example] Pell grants, Perkins loans, and work study, without evaluating and comparing them with a rather substantial tax reduction … the higher education tax credit that I authored. … But I don’t see OMB doing anything on that.”
In response, Mr. Zients stated: “I totally agree with the horizontal approach, in that the tax expenditure side should be part of that along with the [spending] programs that we were talking about. So, 100% agreement there.” In addition, while admitting that tax expenditures had not yet been a focus during his brief tenure at OMB, Mr. Zients promised to make them a priority moving forward.
This statement from the OMB’s top performance official represents a major departure from the delays within the Executive Branch to which we’ve become accustomed. Over sixteen years ago, the legislative history behind the Government Performance and Results Act (GPRA) made clear that Congress wanted the Executive Branch’s performance review efforts to include the evaluation of tax expenditures. And for nearly fourteen years, the President’s budget has identified tax expenditure review as a “significant challenge” that should be addressed in the near future.
Both Mr. Zients and Mr. Doggett should be commended for recognizing the flaw in OMB’s narrow focus on only direct spending programs. The omission of tax expenditures from review is hardly a small issue – in total, the federal government actually “spends” more via special tax breaks than it does through the entire discretionary spending budget. Continuing to exclude these programs from review would cripple the ability of President Obama’s OMB to accurately gauge government performance.
For more detail on the need for tax expenditure review, the federal government’s past efforts toward creating a review system, and the potential issues associated with creating such a system, be sure to read the CTJ report: Judging Tax Expenditures.
A new report from Citizens for Tax Justice explains why it’s time for the federal government to finally follow through on its long-unfulfilled promise to evaluate the usefulness of special tax breaks.
Does the research and experimentation tax credit, for example, actually encourage research? Or does it simply enrich high-tech firms? Does the mortgage interest deduction increase homeownership, or does it only reward people who would have purchased homes anyway? Shockingly, these types of fundamental policy questions have not been addressed in any type of systematic and transparent fashion by our government.
In total, the federal government spends over $1 trillion each year on programs it administers via the tax code – i.e. “tax expenditures.” To put that in perspective, annual spending on tax expenditures is actually slightly larger than the entire discretionary spending budget (i.e. the portion of federal spending that Congress must approve each year).
The lack of scrutiny directed toward tax expenditures first gained attention in the late 1960’s when an official listing of tax expenditures was finally produced in an effort to highlight these programs’ size and importance. In 1993, Congress indicated a desire to take this concept one step further by suggesting that the performance of tax expenditures be regularly reviewed. Soon after this, the Executive Branch did make some slow progress toward reviewing tax expenditures before effectively abandoning the idea soon after the start of the Bush Administration.
CTJ's new report makes the case for resuming these efforts toward the creation of a tax expenditure review system. Among the reasons for moving forward on this issue now are:
- Tax expenditures, whether measured as a share of GDP or as a share of income taxes, have increased immensely over the past twenty years.
- Restoring fiscal sustainability will be nearly impossible without a closer look at the more than $1 trillion spent annually via the tax code.
- Creating a new “cross-program” performance review framework, of the type advocated by President Obama, will require the review of tax expenditures.
- Tax expenditure review fits perfectly into President Obama’s agenda to improve government transparency.
- A new dataset, described by the OMB as permitting “more extensive, and better, analyses of many tax provisions” will become available in the very near future.
- State efforts on the tax expenditure review front have provided the federal government with some powerful lessons from which to draw in creating a review system.
President Obama’s Economic Recovery Advisory Board (PERAB) recently requested ideas from the public about how the federal tax system could be reformed. The comments submitted by Citizens for Tax Justice yesterday begin "We want a fairer, simpler tax code that raises enough money to pay for public services and promotes economic prosperity for all Americans. Our current tax system falls far short of achieving these goals."
The comments note that:
- On the revenue side, even after the current recession ends, we can expect to be funding about a quarter of all non-Social Security spending with borrowed money (including amounts borrowed from the Social Security trust fund).
- As for simplicity and fairness, well, both parties have been guilty of using the tax code to promote a vast array of favored activities. One result is that taxpayers with similar incomes can be treated wildly differently depending on how they make their money or how they spend it.
- In fact, our current tax system allows many of our biggest and most profitable corporations to pay little or no tax.
The rest of the comments lay out principles for solving these problems.
On July 30, Rep. Jim McDermott (D-WA), along with six cosponsors, introduced the Taxpayer Responsibility, Accountability, and Consistency Act (H.R. 3408) which is aimed at stopping the misclassification of employees as independent contractors.
For each worker that a company "employs," it must withhold income and payroll taxes, pay benefits and unemployment insurance, and comply with labor laws. But companies do not have these expenses when they use "independent contractors" rather than "employees." Independent contractors are themselves responsible for paying the employer half of payroll taxes, as well as the employee half, and they generally don't receive other benefits like health insurance from companies that hire them.
As a result, some employers intentionally misclassify workers as "independent contractors" to avoid these costs.
It's unclear exactly how much misclassifying employees costs the U.S. Treasury. In theory, it would not matter to the Treasury whether payroll taxes are entirely paid by workers (as is the case for independent contractors) or half paid by employers (as is the case for employees) but the reality is that workers misclassified as independent contractors may be unable to shoulder the payroll taxes and are often unaware of this responsibility until the taxes are due. Or the income to independent contractors is simply not reported at all.
A Government Accountability Office (GAO) report issued earlier this year found that only 8 percent of small businesses with assets under $10 million submitted 1099-MISC forms that are due whenever independent contractors are used. It seems pretty unlikely that only 8 percent of those companies are really hiring independent contractors. When income is not reported to the IRS by a third party, the income is correctly reported only 46 percent of the time.
Many employers use a loophole created by Sec. 530 of the Revenue Act of 1978 which is commonly referred to as "Sec. 530 relief." It allows employers to classify workers as independent contractors if they have historically done so, or if it is the industry practice. H.R. 3408 would repeal Sec. 530 and replace it with a new test which would be more difficult to meet. The old "Sec. 530 relief" would continue to be available for one year after the new bill is enacted.
New Data from Citizens for Tax Justice Shows that Many Survey Respondents Saying Income Taxes Are Too High Will Pay No Income Taxes for 2008
A recent Gallup poll found that 61 percent of respondents felt that the federal income tax they will have to pay this year is "fair." When asked about the specific amount of federal income taxes they pay, just over half felt they pay the right amount or too little.
Fewer than half of those polled said they thought their federal income taxes are "too high." It appears, however, that some of these respondents are basing their answers on the right-wing, anti-tax propaganda they've heard rather than their own income tax liability. A new report from Citizens for Tax Justice finds that many of the respondents who say they pay too much are likely to owe no federal income taxes at all, suggesting that education about the tax system could change their views.
A Securities Transaction Tax Could Raise Revenue -- But Why Not Simply Remove the Loopholes for Investors in the Existing Income Tax?
On February 13, Rep. Peter DeFazio (D-OR) and seven co-sponsors introduced a bill that would impose a tax on securities transactions. The 0.25 percent tax would be imposed on the value of the securities traded. Rep. DeFazio proposes the measure as a way to pay for the various Wall Street bailouts.
This proposal would, in theory, raise revenue from the folks who benefitted from the bailouts. But there's another proposal we like better. Congress should simply eliminate the loophole in the income tax for long-term capital gains and corporate stock dividends, which subjects these forms of income to a top rate of just 15 percent.
People who earn wages must pay income taxes at progressive rates as high as 35 percent, and the first $102,000 a person earns in a year is, in addition, subject to payroll taxes of around 15 percent. So allowing people who live off their investments to pay a tax rate of only 15 percent is grossly unfair. As Warren Buffet recently pointed out, he pays a lower tax rate that his secretary, thanks largely to the loophole in the federal income tax for capital gains and dividends.
And it truly is the wealthy who primarily benefit. A report issued by CTJ in May of last year found that 70 percent of the benefits of President Bush's tax cut for capital gains and dividends goes to the richest one percent of taxpayers. The report also cited IRS data showing that in 2005, this loophole cost the Treasury $91.7 billion.
So getting back to Congressman DeFazio's proposal, we find several advantages of a higher capital gain rate over a securities transaction tax:
- Taxing capital gains at a higher rate would tax only those transactions that resulted in a gain, while a securities transaction tax would be imposed on every trade, whether or not there was a profit.
- A higher capital gains tax rate would be imposed on all capital gain transactions, not just those that arise from exchange-traded securities transactions. (Many derivative transactions are not traded on an exchange.)
- Taxing capital gains at ordinary tax rates would make the tax system much more fair and progressive. Taxpayers in the lower rate brackets would pay a lower rate on their capital gains while taxpayers in the higher brackets would pay a higher rate.
- Taxing capital gains at the same rate as ordinary income would eliminate the many, many tax avoidance schemes that taxpayers use to convert ordinary income to capital gains.
- Taxpayers would make decisions based on economics -- not on the tax treatment of different investments -- eliminating a lot of market distortion.
Unfortunately, many lawmakers feel a strong urge to expand the most egregious loophole in the federal income tax rather than repeal it. On the same day that the DeFazio proposal was introduced, Rep. Walter Jones (R-NC) introduced a bill to raise the capital loss limitation from the current $3,000 per year to $10,000 per year. This would provide another tax break for the wealthy. Generally, taxpayers can use capital losses to offset capital gains, and if they have net capital losses, they can deduct $3,000 of that against ordinary income. The rest is carried over to future years. If there were no limit, investors could choose to sell only assets that have a loss and offset other types of income, even though they might have unrealized gains in other capital assets. An October, 2008 CTJ report analyzed a similar proposal made by Senator John McCain (R-AZ) during his presidential campaign and criticized the idea for the same reason.
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
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.
Congressman Rangel's Tax Bill Would Make the Tax Code Simpler, More Progressive, and the Changes Are All Paid For
House Ways and Means Chairman Charles Rangel introduced his proposal Thursday to address the Alternative Minimum Tax and simplify the tax code without increasing the federal budget deficit. One title of the bill would address the income tax for individuals, including the AMT reform which would be paid for by reducing the Bush tax cuts for the wealthiest Americans and closing some unfair loopholes that benefit the very richest taxpayers. The other title of the bill would simplify the corporate tax by trading a lower corporate tax rate for the elimination of some inefficient loopholes. Lawmakers may take some of the provisions, such as a one-year fix for the AMT, and pass them more quickly as a separate, smaller bill.
Individual Income Taxes Would Be Simpler and More Progressive
Several Republican lawmakers demand that Congress repeal the AMT without replacing the revenue because it was never "intended" to be collected. This is nonsense, because the Bush Administration very intentionally declined to address the AMT when it passed tax cuts. The President's most recent budget assumes that the AMT will, in fact, expand its reach to millions of families after 2007.
Congressman Rangel's bill includes a "patch" for the AMT for this year and then repeals it altogether. The revenue is replaced largely with a surtax on families with incomes over $200,000. These families have benefited the most from the Bush tax cuts. Nearly half of the benefits from the Bush tax cuts flow to the richest five percent of taxpayers, whose income is above $170,000. In 2010 well over half of the benefits will flow to this group if the Bush tax breaks are not repealed. So Congressman Rangel's bill would reduce the bonanza of tax cuts enjoyed by this elite group of families to help pay for AMT relief for families who are somewhat more likely to be middle-class.
In addition, the bill would eliminate the loophole for "carried interest" as many advocates have urged because it allows wealthy fund managers to pay a lower tax rate than middle-income people.
Congressman Rangel's bill also includes important improvements in the Child Tax Credit and the EITC for childless workers. The Child Tax Credit is currently structured so that the poorest families cannot benefit from it, while the EITC for childless workers is currently so low that childless workers can live in poverty and still pay federal income taxes, in addition to federal payroll taxes.
Corporate Taxes Would Be Simpler and More Efficient
The bill reduces the corporate rate from the current 35 percent to 30.5 percent and replaces the revenue lost from this change by eliminating certain loopholes. Corporations should consider themselves lucky to be offered this lower rate. CTJ has argued recently that Congress should close corporate tax loopholes and not lower the corporate rate but instead use the new revenue for deficit-reduction or to address the many needs this country faces right now.
It's often said that the U.S. corporate tax rate of 35 percent is among the highest in the world, but really the effective rate is much lower because of the loopholes that corporations use to lower their taxes. The United States collects less in corporate taxes as a percentage of GDP than all but two OECD countries. In other words, corporations should be thankful they're being offered any tax breaks at all.
Wisely, the bill includes changes to offset the costs of the rate reduction. These include eliminating several existing tax provisions, including a tax subsidy for manufacturers, an accounting method that allows oil companies to understate their profits, and another provision that encourages companies to move operations offshore.
Republicans Defend Government Interference in the Economy Through the Tax Code, Defend Complexity in the Tax Code
Republicans in Congress have placed themselves in the strange position of defending a system that taxes some millionaires at lower rates than middle-class families, defending a tax system that provides subsidies to certain businesses at the expense of the rest of the taxpayers, and defending the complexity in a tax code that causes business decisions to be made for tax reasons rather than economic ones. Treasury Secretary Henry Paulson went so far as to say (subscription required) "The corporate proposals will hurt the ability of our businesses and workers to compete in a global economy." This is despite the fact that closing loopholes to pay for a lower tax rate is an idea that he and others in the Bush administration proposed during the summer.