TaxProf Blog

Tax Policy Center Releases Fiscal Cliff Tax Calculator

The Tax Policy Center has created a new Tax Calculator that lets users examine the effects of four potential outcomes of negotiations over the upcoming fiscal cliff:

1. 2012 tax law (with an AMT patch). This is what you’re paying this year, assuming Congress gets around to patching the alternative minimum tax for 2012.
2. 2013 tax law. This is what you’ll pay if Congress doesn’t act and we go over the fiscal cliff for all of next year.
3. The Senate Democratic plan, which would extend the expiring Bush-era income tax cuts for a year for all except the top 2 percent of taxpayers and extend the credits originally enacted by President Obama in 2009, but allow the temporary payroll tax cut to expire.
4. The Senate Republican plan, which would extend the Bush-era income tax cuts for everyone, but would allow the 2009 credits and the temporary payroll tax cut to expire.
   (More details on these scenarios, including their treatment of the AMT and estate taxes, are available here.)

The calculator does not include options to cap or eliminate itemized deductions but you can see the effects of such options simply by reducing or zeroing out the input values for some or all deductions. And, as in earlier versions of the calculator, you can look at ready-made examples or create your own case.

Warren Buffett: Tax Hikes on Rich Would 'Raise Morale of the Middle Class'

Real Clear Politics, Buffett: Tax Hikes On Rich Would "Raise Morale Of The Middle Class":

Visit NBCNews.com for breaking news, world news, and news about the economy

MATT LAUER, TODAY: So bottom line, would raising taxes on the wealthiest Americans have a chilling effect on hiring in this country?

WARREN BUFFETT: No, and I think would have a great effect in terms of the morale of the middle class, who have seen themselves paying high payroll taxes, income taxes. And then they watch guys like me end up paying a rate that's below that, you know, paid by the people in my office.

Slate: Return of the 47% -- The Right’s Latest Tax Lie

Slate:  Return of the 47 Percent: The Right’s Latest Tax Lie, by Michael Lind (New American Foundation):

I am amused to report that my former colleagues at the Heritage Foundation have lost none of their willingness to sacrifice truth to propaganda. The Heritage Foundation has published an Index of Dependence on Government by William W. Beach and Patrick Tyrrell that seeks to bolster Mitt Romney’s theme that at least 47% of Americans are parasitic, government-dependent “takers” rather than “makers”:

Today, more people than ever before depend on the federal government for housing, food, income, student aid, or other assistance once considered to be the responsibility of individuals, families, neighborhoods, churches, and other civil society institutions. The United States reached another milestone in 2010: For the first time in history, half the population pays no federal income taxes. It is the conjunction of these two trends — higher spending on dependence-creating programs, and an ever-shrinking number of taxpayers who pay for these programs — that concerns those interested in the fate of the American form of government.

What caught my eye in this latest piece of Heritage agitprop was this sentence: The United States reached a milestone in 2012 — or the first time in history, half the population pays no federal income taxes.

This is not just wrong.  It is an error embarrassing enough to shame even a shameless propaganda mill like the Heritage Foundation.

Heritage implies that a majority of Americans paid federal income taxes throughout American history, presumably back to the 1790s. Nothing could be further from the truth. For much of American history, 100% of the population paid no federal income taxes, because there were none. And the federal income tax began to fall on the middle-class masses, not just the upper classes, only in the 1940s. ... According to the conservative Tax Foundation, which has a friendlier relationship with facts than does the Heritage Foundation, as recently as 1940 the percentage of those who filed (a group smaller than the working-age population) who owed federal income taxes was 49.4%. In that year, Republican presidential candidate Wendell Willkie missed the opportunity to sneer at “the 49%.”

It was only during World War II, with the institution of the income tax withholding system, that a majority of Americans became subject to federal income taxation. If it were accurate, the sentence in the Heritage Foundation’s “Index of Dependence on Government” would read: The United States reached a milestone in 2012 — for the first time since World War II, half the population pays no federal income taxes.

Tax Foundation: State-by-State Impact of the Fiscal Cliff

Tax Foundation:  How Would the Fiscal Cliff Affect Typical Families in Each State?:

To illustrate the potential impact on typical families, we have used Census and IRS data to estimate income and deductions for the median two-child family in each of the fifty states. We then ran these returns through our online tax calculator under two scenarios — 2011 tax law (chosen because it is the latest year that an AMT patch was in effect), and 2013 law, assuming all Bush-era and Obama tax cuts expire and AMT remains unpatched.

Table 1. Top 10 States
State	2011 Median Family Income	Tax Increase 2011 to 2013	Tax Increase as % of Income	Rank
NJ	$101,682	$6,933	6.82%	1
MD	$106,707	$7,194	6.74%	2
CT	$100,451	$6,653	6.62%	3
MA	$101,523	$6,632	6.53%	4
NH	$97,441	$5,660	5.81%	5
ND	$84,896	$4,825	5.68%	6
WV	$65,403	$3,612	5.52%	7
SD	$72,460	$3,997	5.52%	8
AR	$55,444	$3,056	5.51%	9
MS	$58,047	$3,108	5.36%	10

 

Table 2. Bottom 10 States
State	2011 Median Family Income	Tax Increase 2011 to 2013	Tax Increase as % of Income	Rank
ME	$78,310	$3,489	4.46%	41
IA	$76,777	$3,383	4.41%	42
NE	$75,495	$3,289	4.36%	43
DE	$83,424	$3,622	4.34%	44
CA	$74,122	$3,212	4.33%	45
IL	$79,138	$3,417	4.32%	46
KS	$74,853	$3,227	4.31%	47
CO	$85,027	$3,646	4.29%	48
HI	$82,973	$3,453	4.16%	49
WA	$81,582	$3,362	4.12%	50

TPC: State Estate Taxes After the Fiscal Cliff

Tax Policy Center:  Back from the Dead: State Estate Taxes After the Fiscal Cliff:

Historically, the federal estate tax provided a credit for state estate and inheritance taxes. This credit, which offset dollar-for-dollar up to 16 percent of an estate’s value against federal taxes, gave states a strong incentive to impose estate or inheritance taxes: states could raise revenue without increasing the net tax burden on their citizens. As a result, all 50 states and the District of Columbia had such taxes directly linked to the maximum value of the credit. The 2001 tax act phased out the credit and replaced it in 2005 with a less-valuable deduction. States responded in three different ways. Some simply repealed their estate taxes. Others decoupled from the federal law, either establishing a stand-alone tax or explicitly linking their taxes to the 2001 law. But most states did nothing, effectively eliminating their estate taxes but leaving in place the legislation that set their estate tax equal to the federal credit. If the 2001–10 tax cuts expire as scheduled on January 1, 2013, the federal estate tax will revert to its 2001 status, bringing back the credit and, with it, the estate taxes of the latter group of states. As a result, 30 states will resume collecting estate taxes, boosting their revenue by about $3 billion in 2013. Whether the state credit revives, the recent history of the federal estate tax highlights both the interrelationship between the federal and state tax systems and the uncertainty federal temporary actions create for taxpayers and other levels of government.

CBPP: State-by-State Income Inequality

Center on Budget and Policy Priorities:  Pulling Apart: A State-by-State Analysis of Income Trends:

A state-by-state examination finds that income inequality has grown in most parts of the country since the late 1970s.  Over the past three business cycles prior to 2007, the incomes of the country’s highest-income households climbed substantially, while middle- and lower-income households saw only modest increases.

During the recession of 2007 through 2009, households at all income levels, including the wealthiest, saw declines in real income due to widespread job losses and the loss of realized capital gains.  But the incomes of the richest households have begun to grow again while the incomes of those at the bottom and middle continue to stagnate and wide gaps remain between high-income households and poor and middle-income households.  As of the late 2000s (2008-2010, the most recent data available at the time of this analysis):

Update:  Wall Street Journal: Liberal Blues.

Tax Foundation: The Fiscal Cliff: A Primer

Tax Foundation, The Fiscal Cliff: A Primer:

The fiscal cliff is the culmination of a decade of “temporary” tax and budget bills that have postponed resolution of key policy differences. Should the tax code be used to heavily promote income distribution or aim instead to raise revenue in the least distortive manner possible? How large should federal spending be? Should PPACA be modified or repealed? Should there be a federal estate tax and if so, at what level? Should the payroll tax be reduced and if so, how should we fund Social Security and Medicare? What should Social Security, Medicare, and Medicaid look like as the population ages?

While most observers recognize the importance of dealing with the fiscal cliff before it happens, the divided political landscape can encourage brinksmanship to improve negotiating positions. No political actor wants the fiscal cliff to take permanent effect in full; the next few months will determine whether that happens anyways despite those intentions. Table 1 ... illustrates the revenue impact of the fiscal cliff provisions. ...

In 2001 and 2003, President George W. Bush signed into law significant tax reductions for nearly all taxpayers. These cuts included marginal rate reductions, the introduction of a new 10% tax bracket, an expansion of the child tax credit, and a variety of other provisions (see Table 2 for complete list). ...

The sheer size of the fiscal cliff in scope, importance, and dollars signifies the uncertainty faced by American taxpayers. With so much of the tax and budget system on short-term lease, and with the proposed permanent fixes so widely varying, speedy economic growth becomes untenable. While past practice suggests Washington will once again duct tape together another short-term extension and put off the hard choices, anything can happen.

Table 1: Tax Changes Taking Effect January 1, 2013
Tax Change	Tax Increase (2013 over 2012)
Expiration of the 2001-03 tax cuts (not including estate)		$156 billion
Expiration of the payroll tax holiday	$125 billion
Failure to patch the Alternative Minimum Tax	$88 billion
Expiration of business expensing	$48 billion
Expiration of other “tax extenders”	$40 billion
New PPACA (Obamacare) taxes	$36 billion
Expiration of the 2009 stimulus	$11 billion
Estate tax increase	$10 billion
Total, Tax Increases	$514 billion
Source: Tax Foundation; CBO; Joint Committee on Taxation; Office of Management & Budget.

_

Table 2: Major Bush Tax Cut Income Tax Provisions, 2001-2013
Tax Category	2000	2001	2002	2003	2004	2005	2006	2007	2008	2009	2010-2012	2013*
Income Tax Brackets	-- 15% 28% 31% 36% 39.6%	10% 15% 27.5% 30.5% 35.5% 39.1%	10% 15% 27% 30% 35% 38.6%	10% 15% 25% 28% 33% 35%								-- 15% 28% 31% 36% 39.6%
Capital Gains Tax (max)	20%			16.7%	15%							23.8%
Dividend Tax (max)	39.6%	39.1%	38.6%	15%								43.4%
Estate tax (top rate)	55%	55%	50%	49%	48%	47%	46%	45%**				55%
Estate tax exemption	$675,000		$1,000,000		$1,500,000		$2,000,000			$3,500,000**		$1,000,000
PEP & Pease	Full						Minus 1/3		Minus 2/3		Repealed	Full
Marriage Penalty	Joint Filer = 1.67 x Single			Joint Filer = 2 x Single								Joint Filer = 1.67 x Single
Child Tax Credit	$500	$600		$1,000								$500
Source: Tax Foundation *Absent further congressional action. **Estate tax was repealed completely for calendar year 2010.

Five Challenges for Obama’s Tough Second-Term

Tax Vox Blog:  Five Challenges for Obama’s Tough Second-Term, by Howard Gleckman:

Barack Obama has pulled off the easy part. He got re-elected. Now, he faces a second term full of painful choices. ... Here is what is likely to happen with five major domestic issues:

1. The Fiscal Cliff
2. The 2001-2010 Tax Cuts
3. Tax Reform
4. Medicare and Medicaid
5. Health Reform

The biggest question for the next couple of years is not about Obama, however. It is about congressional Republicans. Will they respond to yesterday’s defeat by doubling down on their no new taxes pledge? Or will they accept a fiscal grand bargain that includes both tax hikes and serious efforts to slow the growth of Medicare and Medicaid. If they do, it is a good bet that Obama will meet them somewhere in the middle.

CBPP: Ten Estate Tax Myths and Realities

Center on Budget and Policy Priorities:  10 Myths and Realities About the Estate Tax:

One of the lesser-known tax breaks that would expire at year-end under current law is a 2010 cut in the estate tax, which had already shrunk considerably between 2001 and 2009 due to President Bush’s 2001 tax cuts. With policymakers expected to consider what to do about the tax in the coming weeks, we’ve updated a paper that corrects the 10 most common myths about it:

1. The estate tax is best characterized as the “death tax"
2. The estate tax forces estates to turn over half of their assets to the government
3. Weakening the estate tax wouldn’t significantly worsen the deficit because the tax doesn’t raise much revenue
4. The cost of complying with the estate tax nearly equals the amount of revenue the tax raises
5. Many small, family-owned farms and businesses must be liquidated to pay estate taxes
6. The estate tax constitutes “double taxation” because it applies to assets that already have been taxed once as income
7. If policymakers decide to retain the estate tax, the logical top rate would be 15%, the same as the capital gains rate
8. Eliminating the estate tax would encourage people to save and thereby make more capital available for investment
9. The estate tax unfairly punishes success
10. The United States taxes estates more heavily than do other countries

Economic Effects of the Obama and Romney Tax Plans

Tax Foundation:  A Comparison of the Long-Term Economic Effects of the Obama and Romney Tax Plans:

Over the past several weeks, Tax Foundation economists have published a series of studies that analyze the long-term economic and distributional effects of the tax plans outlined by President Barack Obama and Governor Mitt Romney. These comprehensive assessments were done using the Tax Foundation’s Tax Simulation and Macroeconomic Model which measures how changes in tax policies affect the economic levers that determine economic growth, workers’ incomes, and the distribution of the tax burden.

CBPP: The Tension Between Reducing Tax Rates and Reducing Deficits

Center on Budget and Policy Priorities:  The Tension Between Reducing Tax Rates and Reducing Deficits:

Over the past few months, a number of analyses have highlighted the difficulty of cutting income tax rates deeply, producing a significant revenue contribution to deficit reduction (as part of a larger deficit-reduction package), and maintaining the progressivity of the tax code. [Joint Committee on Taxation; Committee for a Responsible Federal Budget]   ...

As policymakers assess the import of these analyses, we encourage them to be sure to include one important ingredient:  a healthy dose of political reality.  A finding that it is technically possible to achieve sufficient tax-expenditure savings to pay for sizeable reductions in tax rates is not the same thing as such a course being politically viable.  Policymakers should avoid committing to a specific, lower top income tax rate until they know what measures to shrink tax expenditures Congress can actually pass and how much savings those measures will produce. Otherwise, the most critical goal of tax reform at this time — producing a significant contribution to deficit reduction (while maintaining or improving the progressivity of the tax code) — will likely be lost.

Tax Foundation: President Obama's Tax Policy Would Reduce Economic Growth and Incomes

The Tax Foundation released a report yesterday arguing that President Obama’s proposal to raise taxes on individuals earning more than $200,000 would slow economic growth and reduce future incomes:

The amount of income that would be lost over the next ten years because of higher taxes varies by state, ranging from $2 billion in Vermont to as much as $241 billion in California.

In dollar terms, the states most affected are large, high-income states. California stands to lose $241 billion over ten years as a result of the president’s tax policies, followed by New York at $186 billion, Texas at $131 billion, Florida at $104 billion, and Illinois at $74 billion.

As a percent of income, Wyoming is most affected, losing 1.82% of income in 2013, followed by Connecticut at 1.76%, New York at 1.61%, Delaware at 1.49%, and Massachusetts at 1.40%. In all, thirteen states are set to lose at least 1% of income as a result of these tax increases, and every state loses at least 0.5% of income.

How States Would be Affected by Obama’s Proposed Tax Increases on High-Income Earners.

Highest (and Lowest) State & Local Tax Burdens

Tax Foundation, Annual State-Local Tax Burden Ranking:

For nearly two decades the Tax Foundation has published an estimate of the combined state and local tax burden shouldered by the residents of each of the fifty states. For each state, we compute this measure of tax burden by totaling the amount of state and local taxes paid by state residents to both their own and other governments and then divide these totals by each state’s total income.

1	New York	12.8%
2	New Jersey	12.4%
3	Connecticut	12.3%
4	California	11.2%
5	Wisconsin	11.1%
6	Rhode Island	10.9%
7	Minnesota	10.8%
8	Massachusetts	10.4%
9	Maine	10.3%
10	Pennsylvania	10.2%
41	South Carolina	8.4%
42	Nevada	8.2%
43	Alabama	8.2%
44	New Hampshire	8.1%
45	Texas	7.9%
46	Wyoming	7.8%
47	Louisiana	7.8%
48	Tennessee	7.7%
49	South Dakota	7.6%
50	Alaska	7.0%

Interestingly, the ten states with the highest per capita tax burden voted for Barack Obama in the 2008 presidential election, and eight of the ten states with the lowest per capita tax burden voted for John McCain

CRFB: Repealing Deductions Could Lead to 30% Tax Rate Cut (Not Merely 20% Claimed by Romney)

Committee for a Responsible Federal Budget:  Tax Reform: Reducing Tax Rates and the Deficit:

There is a growing bipartisan consensus on the merits of enacting comprehensive tax reform that lowers tax rates and broadens the tax base – as was done in the 1986 tax reforms – while also reducing the deficit. Combining rate reduction with substantial cuts to tax preferences has the potential to not only help address our growing debt, but also to reduce economic distortions and promote robust economic growth.

Some commentators have used a recent experiment conducted by the Joint Committee on Taxation (JCT) to suggest that such tax reform is not possible since the experiment reduced the current law top rate from 39.6% down to only 38%. That conclusion is false and most comparisons between the JCT experiment and existing comprehensive tax reform plans are highly misleading. In this paper, we explain why. ...

[T]he full elimination of all tax expenditures would allow the top tax rate to fall to 23% while still putting aside more than $1 trillion for deficit reduction. An actual tax reform plan would be highly unlikely to achieve these same rate levels because there would be an interest in keeping, reforming, or at least slowly phasing out many tax expenditures repealed immediately in this exercise. However, this 23% top rate can serve as a helpful starting point for thinking about bold tax reforms.

Cato: The Misuse of Top 1% Income Shares as a Measure of Inequality

Cato Institute: The Misuse of Top 1 Percent Income Shares as a Measure of Inequality, by Alan Reynolds:

This paper confirms recent studies which find little or no sustained increase in the inequality of disposable income for the U.S. population as a whole over the past 20 years, even though estimates of the top 1%’s share of pretax, pretransfer (market) income spiked upward in 1986-88, 1997-2000 and 2003-2007.

It has become commonplace to use top 1% shares of market income as a shorthand measure of inequality, and as an argument for greater taxes on higher incomes and/or larger transfer payments to the bottom 90%. This paper finds the data inappropriate for such purposes for several reasons:

• Excluding rapidly increased transfer payments and employer-financed benefits from total income results in exaggerating the rise in the top 1%’s share between 1979 and 2010 by 23% because a growing share of other income is missing.
• Using estimates of the top 1%’s share of pretax, pretransfer income (Piketty and Saez 2003) as an argument for higher tax rates on top incomes or larger transfer payments to others is illogical and contradictory because the data exclude taxes and transfers.
• Using highly cyclical top 1% shares as a measure of overall inequality leads, paradoxically, to describing most recessions as a welcome reduction in inequality, because poverty and unemployment rates typically rise when the top 1%’s share falls, and fall when the top 1%’s share rises.
• Top 1% incomes are shown to be extremely sensitive (“elastic”) to changes in the highest tax rates on ordinary income, capital gains and dividends. Although estimates of the elasticity of ordinary income for the top 1% range from 0.62 (Saez 2004) to 1.99 (Moffitt and Wilhelm), those estimates fail to account for demonstrably dramatic responses to changes in the highest tax rate on capital gains and dividends.

I estimate that more than half of the increase in the top 1%’s share of pretax, pretransfer income since 1983, and all of the increase since 2000, is attributable to behavioral reactions to lower marginal tax rates on salaries, unincorporated businesses, dividends and capital gains. After reviewing numerous data sources, I find no compelling evidence of any large and sustained increase in the inequality of disposable income over the past two decades.

2013 Business Tax Climate: Chilliest in Blue States

The Tax Foundation today released the 2013 State Business Tax Climate Index (10th ed.) which ranks the fifty states according to five indices: corporate tax, individual income tax, sales tax, unemployment insurance tax, and property tax. Here are the ten states with the best and worst business tax climates:

1	Wyoming	41	Maryland
2	South Dakota	42	Iowa
3	Nevada	43	Wisconsin
4	Alaska	44	North Carolina
5	Florida	45	Minnesota
6	Washington	46	Rhode Island
7	New Hampshire	47	Vermont
8	Montana	48	California
9	Texas	49	New Jersey
10	Utah	50	New York

Interestingly, all ten of the states with the worst business tax climates voted for Barack Obama in the 2008 presidential election, and five of the ten states with the best business tax climates voted for John McCain (and eight of the ten voted for George Bush in 2004).

CBPP: 2-to-1 Spending Cut/Tax Increase Ratio in Simpson-Bowles Is Now 0.5-to-1

Center on Budget and Policy Priorities: What Was Actually in Bowles-Simpson — And How Can We Compare it With Other Plans?:

Many policymakers have said that they “support,” “endorse,” or otherwise look favorably on “Bowles-Simpson” — the budget plan that Erskine Bowles and Alan Simpson issued in December 2010 as co-chairs of President Obama’s National Commission on Fiscal Responsibility and Reform. But despite this apparent widespread support, many policymakers and opinion leaders do not understand the specifics of what Bowles-Simpson actually included....

Bowles-Simpson was balanced almost equally between revenue increases and spending cuts: $2.6 trillion of the former, $2.9 trillion of the latter (if measured through 2022). ...  The authors built a significant share of their revenue increases into the “baseline” they used. They also counted interest savings as a spending cut. Under this approach to measuring the plan’s deficit reduction, the Bowles-Simpson plan was presented as containing $2 in spending reductions for every $1 in revenue increases.

Of the $2.9 trillion in program cuts (through 2022) that Bowles-Simpson contemplated, policymakers enacted half of them within a year of the plan’s publication through statutory caps on discretionary spending. These caps mean that the amount of Bowles-Simpson deficit reduction that policymakers have not yet achieved comprises another $1.4 trillion in program cuts, mostly from mandatory or entitlement programs, $2.5 trillion in revenue increases, and additional savings from both spending and revenues if the Social Security proposals are included. Put more simply, the remaining, un-achieved portion of Bowles-Simpson comprises $0.54 in program cuts for every $1 in revenue increases. In short, the real Bowles-Simpson plan embodies a ratio quite different from the 2-to-1 ratio that is frequently discussed. 

Tax Foundation: Romney Plan Would Cut Middle Class Taxes (Using 1% Dynamic Scoring Model)

Tax Foundation:  Would the Romney Tax Plan Necessarily Reduce After-Tax Incomes for the Middle Class?:

In August, the Urban-Brookings Tax Policy Center (TPC) released a report [updated here] claiming to show that Mitt Romney's tax reform plan would necessarily raise taxes on middle-class taxpayers and reduce their after-tax incomes, while giving a significant tax cut to high-income taxpayers. This conclusion is based on a distributional analysis that assumes Romney's revenue-neutral tax reform plan, which includes an across-the-board 20% cut in marginal income tax rates and an elimination of the alternative minimum tax, would require a significant reduction in most tax expenditures, including most notably the child tax credit, mortgage interest deduction, state and local tax deduction, and the exclusion of employer-provided health insurance.

This TPC study showing Romney's tax plan as "raising taxes on the middle-class yet cutting taxes for the rich" has generated quite a bit of attention. Some economists such as Martin Feldstein and Harvey Rosen have taken issue with the study, arguing that Romney's tax plan would not necessarily require raising taxes on the middle class.

One shortcoming of the TPC paper pointed out by Rosen is its "static" nature, meaning it fails to account for any income growth effects from the tax reform plan. Most economists would agree that revenue-neutral tax reform like that pushed by Romney would reduce economic distortions in the tax code and thereby increase economic efficiency and incomes by some degree over the long-term. Furthermore, unlike tax cuts that require debate over the economic effects of their financing, revenue-neutral tax reform does not need financing. In fact, if the plan was revenue-neutral on a static basis, it would likely raise revenue because it increases the size of the overall income tax base in the long-run.

[I]f one assumes a 1% dynamic income growth effect under Romney's plan (as interpreted by the TPC), then low-and-middle income earners would experience a slight increase in after-tax income as opposed to a decrease. A more modest growth of less than 1% would imply a decrease in after-tax income for low-and-middle-income earners, but a more robust growth of more than 1% would imply a substantive increase in after-tax income.

• Wall Street Journal:  The Romney Hood Tax Fairy Tale (Aug. 9, 2012)
• Forbes:  The Romney Tax Plan, the Tax Policy Center, and the Wall Street Journal (Aug. 10, 2012)
• Wall Street Journal:  Mathematically Possible -- Correcting the False Assumptions of Obama's Tax Gurus (Aug. 14, 2012)
• FactCheck.org: Do Five Economic Studies Support Romney's Tax Plan? (Sept. 22, 2012)
• Heritage Foundation: The Tax Policy Center’s Skewed Analysis of Romney's Tax Plan (Sept. 25, 2012)

Update:  Tax Foundation: Simulating the Economic Effects of Romney’s Tax Plan:

While the debate over tax reform has been consumed with distributional issues, the economy continues to limp along in the worst recovery since the Great Depression. To be sure, this economy faces headwinds that even an ideal tax code will not address, but pro-growth tax reform can provide substantial benefits. Our results indicate that by lowering tax rates on investment and labor, the Romney tax plan would grow the economy by 7.4%, the capital stock by almost 19%, wages by almost 5%, and hours worked by 3%. The benefits would be widely enjoyed, as every income group would experience at least a 7% increase in after-tax income. It would benefit the federal budget as well, in that fully 60% of the static revenue loss from Romney’s plan would be recovered from taxing a larger economy.

Urban Institute Hosts Program Today on Taxes and the Fiscal Cliff

The Urban Institute hosts a lunchtime program today on Danger Ahead? Taxes and the Fiscal Cliff (webcast here):

As 2012 becomes 2013, more than confetti will be up in the air. Along with it will be the expiring tax cuts of 2001, 2003, and 2010, the end of the 2011 payroll tax cut, new taxes to pay for health care, and restoration of the Clinton-era estate tax. And if Congress doesn’t act, tens of millions of additional taxpayers will be subject to the alternative minimum tax (AMT) in tax year 2012 and others will see their AMT liability soar. On the spending side, sequesters in the Budget Control Act of 2011 will slash defense and social spending, and Medicare reimbursements to doctors will drop sharply. So whether one calls it a fiscal cliff, taxmageddon, or a train wreck in the making, the decision clock is winding down for policymakers, politicians, and the public.

What’s in store for taxpayers if Washington fails to act on the tax increases or if only some of them are repealed or deferred? A forthcoming Tax Policy Center analysis will have some of the answers. This forum’s panel will discuss the findings, debate what the presidential candidates and Congress should say and do, and forecast the fallout for the U.S. economy.

• Howard Gleckman (Fellow, Urban Institute; Editor, TaxVox blog) (moderator)
• Robert Greenstein (President, Center for Budget and Policy Priorities)
• Douglas Holtz-Eakin (President, American Action Forum)
• Donald Marron (Director, Tax Policy Center)
• Diane Lim Rogers (Chief Economist, Concord Coalition)

CRFB Releases Corporate Tax Reform Report and Calculator

The Committee for a Responsible Federal Budget has released a policy paper on corporate tax reform (Reforming the Corporate Tax Code) along with an interactive Corporate Tax Reform Calculator that allows users to design their own corporate tax reform plan.

The policy paper argues that with the highest statutory corporate tax rates in the developed world, the United States is badly in need of corporate tax reform. However, any reforms must be done in a fiscally responsible way. Specifically, the paper discusses the following:

• Why rate lowering tax reform is important to promote growth, reduce compliance costs, and boost international competitiveness.
• How corporate tax reform can be done in a fiscally responsible manner by broadening the tax base to reduce distortions and inequities in the current tax code.
• What approach several prominent proposals -- including from the Simpson-Bowles Commission, President Obama, House Budget Committee Chairman Dave Camp, and Senators Ron Wyden and Dan Coats -- would take in reforming the corporate tax code and business taxes more generally.

The Corporate Tax Reform Calculator gives users a hands-on opportunity to see how various reforms discussed in the paper could play out. Users can see how their choices would affect the corporate tax rate and can also set a revenue target that could reduce or increase future deficits and debt -- but it's important that any choices be fiscally responsible.

Where the 47% Live

TPC: Five Myths About the 47 Percent

Tax Policy Center:  Five Myths About the 47 Percent:

As Mitt Romney recently noted, about 47% of U.S. households do not pay federal income taxes. Some see this as evidence of a welfare state run amok. Others think that gimmicks and loopholes let both rich and poor Americans duck their taxes. This commentary corrects some misconceptions about this group, now colloquially called the 47%.

Heritage Foundation: The Tax Policy Center’s Skewed Analysis of Romney's Tax Plan

Heritage Foundation:  Tax Policy Center’s Skewed Analysis of Governor Romney's Tax Plan:

The Tax Policy Center recently released a report that erroneously concludes that Governor Mitt Romney’s tax reform plan would necessarily cut taxes for the rich and raise them for middle-income and low-income taxpayers. However, despite the authors’ claims, their analysis is far from definitive. Instead, their conclusion is the result of a series of carefully made choices. These choices, not the underlying nature of the Romney plan, cause them to arrive at their selected result. This finding is harming the debate on tax reform.

Tax Foundation: Putting a Face on America’s Tax Returns -- A Chart Book

Tax Foundation, Putting a Face on America’s Tax Returns: A Chart Book:

Inequality has been at the forefront of the nation’s political discourse recently thanks to a number of published reports purporting to show the rich getting richer while the rest of America is stuck in neutral. Indeed, one report suggests that Americans have not been this unequal since the Great Depression in 1929.

Spurred by this news, support is growing in both Washington and among the public to raise tax rates on the “rich” to reduce inequality in America. Indeed, many believe that the tax policies enacted in 2001 and 2003—which lowered marginal tax rates for all taxpayers—are a root cause of today’s inequality. Therefore, critics conclude, raising tax rates on high-income Americans will halt the growth of inequality.

As this book shows, much of the perceived rise in inequality is really the natural result of the business cycle as well as social and demographic forces far beyond the role of tax policy. Indeed, there is no evidence of a long-term trend in inequality over the last 20 years, only wide swings up and down.

Thanks to misdirected tax policy, America is becoming divided between a shrinking group of taxpayers who are bearing the lion’s share of the cost of government today and a growing group of taxpayers who are disconnected from the basic cost of government.

The goal of this book is to put a face on the ever-changing demographics of American taxpayers. The failure to understand these changes has produced poor tax policy and threatens to undermine efforts to overhaul the tax code.

2012 Corporate Tax Competitiveness Rankings

Cato Institute:  Corporate Tax Competitiveness Rankings for 2012, by Duanjie Chen & Jack Mintz (both of University of Calgary, School of Public Policy):

Corporate income tax reform is receiving serious consideration in Washington. The Obama administration has suggested reducing the federal corporate tax rate from 35% to 28% while broadening the tax base. Presidential candidate Mitt Romney has said that he would cut the corporate tax rate to 25% if elected. ...

This bulletin presents new estimates of marginal effective tax rates (METRs) on corporate investment for 90 countries. We find that the U.S. effective tax rate on new corporate investment is 35.6% in 2012, which is almost twice the average rate for the 90 countries studied, and it is also the highest rate among the major industrial nations. These results underscore the need for U.S. policymakers to tackle corporate tax reform.

Effective Tax Rates for 2012 Figure 1 summarizes our corporate tax rate calculations. The U.S. METR is 35.6% in 2012, or almost twice the 90-country average of 18.2%. The average rate for the 34 Organization for Economic Cooperation and Development (OECD) nations is just 19.4%. While the U.S. corporate tax rate has remained high, the global trend for both statutory and effective corporate tax rates has been downward.

Table 1 on the next page shows METR calculations for 90 countries, including separate figures for the services and manufacturing sectors. The United States has the fourth highest effective tax rate on corporate investment in the world after Argentina, Chad, and Uzbekistan.

The United States has a high METR, a high statutory tax rate, and numerous special preferences in its corporate tax system. This noncompetitive and nonneutral tax structure is harmful to growth, and it results in relatively low government revenues because the high rates induce businesses to shift their investments and profits abroad.

Why Progressives Should Want to End the Estate Tax, Too

Huffington Post: Why Progressives Should Want to End the Estate Tax, Too, by Scott Drenkard (Tax Foundation):

[T]here is a large and growing body of research by economists that generally lean left-of-center pointing toward repeal of the estate tax....

Nobel laureate economist Joseph Stiglitz, who served as chairman on Bill Clinton's Council of Economic Advisors, authored a paper which argued that the estate tax actually increases inequality by reducing savings and driving up returns on capital (which largely benefit wealthy holders of capital).

Economist Larry Summers, former Treasury Secretary under President Clinton, co-authored a paper in 1981 that showed that the estate tax has severe impacts on the accumulation of privately held capital. Using Summers' methodology, a July 2012 study by the Joint Economic Committee Republicans showed that since its inception, the estate tax has reduced the capital stock by approximately $1.1 trillion. ...

Perhaps the worst aspect of the estate tax is how uneven its impact is in practice. By utilizing careful estate planning, many wealthy taxpayers are able to shield much of their income from taxation upon their death. The people that tend to get hit the hardest are those that die unexpectedly, or, like farmers, have their assets tied up in illiquid holdings.

The estate planning industry has grown in size over the years as estate law becomes more complex. Three studies have even found that the compliance costs associated with the collection of the estate tax are actually higher than the amount of revenue the tax brings in! Almost the entire estate planning industry can be thought of as economic waste, because it would not exist without the estate tax, and the high-skilled labor and capital utilized in that industry would be applied to other, more productive economic endeavors if the estate tax were repealed.

Upon careful examination, we find that at worst, the estate tax can break down family businesses and increase inequality, but even at its best, it simply creates large compliance costs, which are a drag on the economy.

S&P State Credit Ratings

CTJ: Democrats' Tax Plan Is Too Republican

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

In its 2012 Platform, the Democratic Party broadly calls for a tax system that asks “the wealthiest and corporations to pay their fair share,” while also taking “decisive steps to restore fiscal responsibility.” The actual policy proposals called for in the platform, however, are wholly inadequate to achieve either tax fairness or fiscal sustainability....

The Democratic Party 2012 platform reveals a party deeply committed to the anti-tax mindset that historically is associated with the Republican Party. Rather than laying out the cold, hard truth about how the US needs to raise a substantial amount of revenue to meet its commitment to future generations, the Democratic platform seems an attempt to one–up Republicans on the virtues of tax cutting by touting the wide variety of cuts Democrats already enacted, and the massive amount they plan to extend. Given the enormous need for revenue to fund public investments and eventually reduce the deficit, a record of tax-cutting should be a source of embarrassment rather than pride or celebration.

Tax Foundation: Romney's Tax Plan Is Far Closer to Simpson-Bowles Than Obama's Tax Plan

Tax Foundation:  Romney, Obama, & Simpson-Bowles: How Do the Tax Reform Plans Stack Up?:

Among the tax reform plans of the major presidential candidates, Mitt Romney’s proposal to lower rates and eliminate credits and deductions comes far closer than that of President Obama to the widely-praised and bipartisan framework of the Simpson-Bowles tax reform commission.

Mitt Romney’s plan aims for a Simpson-Bowles style reform, with lower rates and fewer tax expenditures, but without additional penalties on saving and investing. The top rate on personal income would be 28% and the bottom rate would be 8%, making the rate structure more progressive than under Simpson-Bowles. In terms of tax expenditures and simplification, Romney has said he would target credits and deductions for “people at the high end” while preserving some preferences targeted at the middle-class such as deductions for mortgage interest and charitable giving.

President Obama’s tax plan, however, is largely at odds with any commonly held notion of tax reform, including Simpson-Bowles. It would result in dramatically higher tax rates, on the order of 50% to 90% higher than the Simpson-Bowles rates on personal income and investment income. While the president has voiced support for eliminating tax expenditures, his specific proposals tend to add more than are taken away, although he has proposed limiting them for high-income earners. Not only does this fail to simplify the tax code, it fails to spur the economy, ultimately resulting in insufficient tax revenue and perpetual deficits.

Real tax reform would produce a tax code that is simple and treats all taxpayers equally. It would also treat all consumption equally, whether that consumption occurs now or, as a result of saving, later. This would best be accomplished by lowering tax rates on saving and investment to match the current zero tax rate on consumption.

Heritage: Clinton Tax Hikes Slowed Growth of Economy, Wages

Heritage Foundation: Clinton Tax Hikes Slowed Growth, by Curtis S. Dubay:

President Obama argues that President Clinton’s economic record is proof that the current economy would grow if Congress passed the tax hikes he has long proposed. The American public should not fall for this misleading argument.

The historical record is clear: The economy grew slower than it should have in the years after Clinton’s 1993 tax hike. The strong economic growth that is associated with his presidency occurred only after he agreed with Congress to cut taxes in his second term.

President Obama’s cursory and errant analysis of recent history has serious implications for policymaking today. If Congress raises taxes based on the faulty notion that tax hikes have no ill effects on economic growth, it will impede the still-struggling recovery and keep millions of Americans on the unemployment rolls far too long.

Tax Foundation: The Estate Tax Is Even Worse Than Republicans Say

Tax Foundation, The Estate Tax: Even Worse Than Republicans Say:

A recent study issued by the Republican staff of Congress’ Joint Economic Committee detailed many of the failings of the estate tax, calling for either a significant reform or outright repeal of the estate tax. The report, which referenced four separate Tax Foundation studies and testimonies, reached similar conclusions to those which Tax Foundation analysts have reached with regard to the estate tax.

This new analysis, however, strengthens the case for repeal with additional evidence of the compliance burdens inherent to the estate tax. These costs are larger than is often understood, so much so that tax revenue is likely to actually increase upon repeal in the coming years.

Research has indicated that income and capital gains tax revenues will increase significantly if the estate tax is repealed even without an increase in economic growth. Several articles have found that repeal would be revenue neutral over all, or even revenue positive, over a 10 year period if both the tax changes and economic growth are considered together.

Pew: 58% Say the Rich Should Pay More Taxes

Pew Research Center:  Yes, the Rich Are Different:

Another widely held perception of the rich is that they do not pay their fair share in taxes.

A majority of adults (58%) say that upper-income people pay too little in federal taxes. One-in-four (26%) say upper-income people pay their fair share in taxes, and 8% say they pay too much in taxes. Even among those who consider themselves upper or upper-middle class, fully 52% say upper-income people pay too little. Only 10% of this group says upper-class adults say people pay too much in taxes.

The public is divided over whether lower-income people pay the appropriate amount in federal taxes. Some 37% say lower-income people pay too much in taxes, while roughly as many (34%) say lower-income people pay their fair share in taxes. One-in-five adults say lower-income people pay too little in taxes. There is little agreement across social classes on this issue, with a plurality of lower-class adults (48%) saying lower-income people pay too much in taxes and a plurality (39%) of upper-income adults saying lower-income people pay their fair share.

When it comes to the middle-class tax burden, there is no clear consensus among the public. Half of all adults say middle-income people pay their fair share in federal taxes. Nearly four-in-ten (38%) say middle-income people pay too much in taxes, and 6% say they pay too little.

Partisanship is closely linked to views about federal taxes, and the biggest gaps emerge over tax rates for the rich. A solid majority of Republicans say upper-income people pay either their fair share (44%) or too much (14%). Among Democrats, a strong majority (78%) say upper-income people pay too little in taxes; only 33% of Republicans agree. Some 13% of Democrats say upper-income people pay their fair share in taxes, while 4% say the rich are paying too much.

Partisans also divide over whether low-income people pay the right amount of taxes. A plurality of Democrats (48%) say low-income people pay too much, while Republicans are divided over whether low-income people pay their fair share (34%) or too little (30%). Only 23% of Republicans say lower-income people pay too much.

These partisan differences fade away on the issue of middle-class taxes. Democrats and Republicans have nearly identical views about the tax burden faced by middle-income Americans. Roughly half say middle-income people pay their fair share in taxes (52% of Republicans and 51% of Democrats). Nearly four-in-ten say middle-income people pay too much in taxes (39% of Republicans and 37% of Democrats). Very few from either party say middle-income people pay too little (3% of Republicans and 8% of Democrats).

Tax Foundation: Media Leaves Out Key Things in Covering Poll Showing Support for Taxing Rich:

[A]s tax policy goes, it offers nothing new. Much of the media coverage is leaving out a few key points:

• The survey did not ask respondents what they think the rich should pay, or what the rich pay now. 
• Nearly all Americans view the wealthy as someone else, which is why support for taxing them is higher in abstract questions than in actual proposals.
• Support for increasing taxes on the rich has been dropping over time, not increasing.

What's clear is that issues of tax complexity, fairness, and burdens continue to be important to the American people. The debate over the economic growth impact of higher tax rates is also an important one. But a poll showing that Americans abstractly support taxing someone who is not them is nothing new.

The Impact of Tax Rates on Economic Productivity and Fairness

Manhattan Institute:  The U.S. Tax System: Who Really Pays?, by Stephen Moore (Wall Street Journal):

“It is a paradoxical truth that tax rates are too high today, and tax revenues are too low and the soundest way to raise the revenues in the long run is to cut the tax rates…. [A]n economy constrained by high tax rates will never produce enough revenue to balance the budget, just as it will never create enough jobs or enough profits.” —John F. Kennedy, 1963

Even if most policymakers and members of the public instinctively understand the wisdom of President Kennedy’s words, tax rates are set to go way up, not down, next year because of the scheduled expiration of the Bush tax cuts at the beginning of 2013. The Obamacare law also raises tax rates on wealthy individuals by an additional 3.8 percentage points next year. President Obama and others in Congress argue that these higher tax rates are justified because of the growing consensus that the rich don’t pay their fair share of taxes. Unless we do something to spread the burden more equitably, the argument goes, American society will become more unfair and the economy more unsustainable with each passing year.

At first glance, the tax rate issue seems inseparable from the tax fairness issue, since higher taxes are expected to shift society’s wealth from the private sector to the public sector, where, broadly speaking, it is redistributed to lower-wage earners and the needy. In reality, the people at the bottom of the scale have benefited directly and indirectly from every tax rate reduction dating back to Kennedy’s rate reductions in the early 1960s and through the tax cuts adopted early in the administration of George W. Bush. If those lower rates, along with the Alternative Minimum Tax fix, are allowed to expire, the poor will be burdened even more than the wealthy because the whole economic pie will shrink. ...

Below are a series of statements reflecting popular conceptions and misconceptions about the impact of tax rates on economic productivity and fairness. We’ll address these statements (and debunk attendant myths) one at a time.

1. To become fairer, the tax code needs to tax the rich more heavily.

2. The rich are paying less in income taxes than they have in the past 50 years.

3. When all the other taxes are counted, the rich get off easy.

4. Tax cuts are just Robin Hood in reverse, taking from the poor to give to the rich.

5. Lower tax rates can make the tax burden fairer.

6. All those tax cuts created deficits that have mortgaged our children’s future.

7. Ordinary Americans pay more than their fair share of taxes.

8. The 15 percent tax on investment income, which is well below the income-tax rate that most salaried workers pay, is a gift to the wealthy.

9. A higher capital-gains rate would just level the playing field.

10. The "wealthy" are likely to be the people next door.

11. It is increasingly harder to climb the economic ladder, and changing the tax code will help.

Goolsbee: Mitt Romney's Tax Plan and the Middle Class

Wall Street Journal op-ed:  Mitt Romney's Tax Plan and the Middle Class, by Austan Goolsbee (University of Chicago, Booth School of Business):

Researchers for the Tax Policy Center, a project of Brookings and the Urban Institute, found that Romney's plan would cut taxes for individuals by about $4 trillion over the next 10 years, on top of the costs of extending the Bush tax cuts, by cutting rates by 20%, abolishing the estate tax, and abolishing the Alternative Minimum Tax, among other things.

For high-income people, that lost revenue exceeds the value of all the relevant deductions and exemptions in the tax code combined—charitable giving, mortgage interest, state and local taxes, health insurance not counting as taxable income, etc. So to keep the deficit from increasing, middle-class tax increases are inevitable.

Mr. Romney declared the study "garbage." This editorial page condemned it for leaving out other exemptions that Mr. Romney could, theoretically, try to eliminate.

Many economists on the left were upset that the study wasn't tougher on Mr. Romney's plan. You couldn't completely abolish every single deduction and exemption for high-income people, and any realistic plan to limit them generates so much less revenue that the Romney tax plan could impose a trillion-dollar tax increase on the middle class while still managing to increase the deficit by an additional $2 trillion.

In the wake of the study, the Romney camp would not disclose the details of what they would do. Instead, they just reiterated that their plan was a variation on the December 2010 plan of the Bowles-Simpson commission....

As we approach the election in November, let us hope that whoever wins will negotiate an agreement that helps us avoid the so-called fiscal cliff at the end of the year when hundreds of billions of dollars of tax cuts expire and huge automatic spending cuts kick in. Let us hope they will avoid a debilitating showdown over government default; that they will invest in the country's growth potential; and will address the fiscal imbalance we have known about for 40 years and not solved....

The Bowles-Simpson plan was designed to facilitate such a deal. Mr. Romney's plan was designed to wreck it.

Sixteen States Have Marriage Penalties

Tax Foundation:  Does Your State Have a Marriage Penalty?:

In a progressive tax system, higher incomes are taxed at higher rates, and in states where the same tax brackets apply to both single and married filers, the effective tax rate on the combined income of two earners can be significantly more than if the two incomes were taxed separately. In 2011, sixteen states had some form of marriage penalty in their income tax system.

Six Policies Economists Love (And Politicians Hate)

NPR, Six Policies Economists Love (And Politicians Hate): 

1. Eliminate the mortgage tax deduction. ...
2. End the tax deduction companies get for providing health-care to employees. ...
3. Eliminate the corporate income tax. ...
4. Eliminate all income and payroll taxes. All of them. For everyone. Taxes discourage whatever you're taxing, but we like income, so why tax it? Payroll taxes discourage creating jobs. Not such a good idea. Instead, impose a consumption tax, designed to be progressive to protect lower-income households.
5. Tax carbon emissions. ...
6. Legalize marijuana. ...

(Hat Tip: The Volokh Cospiracy.)

CBPP: Where Do Federal Tax Revenues Come From?

Center on Budget and Policy Priorities, Where Do Federal Tax Revenues Come From?:

In fiscal year 2011, the federal government spent $3.6 trillion on the services it provides, such as national defense, health care programs like Medicare and Medicaid, Social Security benefits for the elderly and disabled, and investments in infrastructure and education, in addition to interest on the debt. ... Of that $3.6 trillion, $2.2 trillion was financed by federal tax revenues and $83 billion by excess profits on assets held by the Federal Reserve.  (The remaining $1.3 trillion was financed by borrowing.) ... The three main sources of federal tax revenue are individual income taxes, payroll taxes, and corporate income taxes; other sources of tax revenue include excise taxes, the estate tax, and other taxes and fees.

Tax Policy Center Takes on WSJ, Doubles Down on Criticism of Romney Tax Plan

Tax Policy Center, Implications of Governor Romney's Tax Proposals: FAQs and Responses:

A recent TPC paper examined tradeoffs among revenues, progressivity and tax rates in tax reform. It concluded that, under certain assumptions, any revenue-neutral plan along the lines Governor Romney has outlined would reduce taxes for high-income households, thus requiring higher taxes on other, even if the plan's financing is as progressive as possible, given the available tax expenditures. This paper addresses questions about that study and discusses new estimates that incorporate the taxation of municipal bond interest and the taxation of inside buildup in life insurance vehicles. These additions do not change the basic results.

• The Atlantic
• Bloomberg
• The Hill
• Huffington Post
• New York Times

Prior TaxProf Blog coverage:

• WSJ: The Romney Hood Tax Fairy Tale (Aug. 9, 2012)
• The Romney Tax Plan, the Tax Policy Center, and the Wall Street Journal (Aug. 10, 2012)
• WSJ: Mathematically Possible -- Correcting the False Assumptions of Obama's Tax Gurus (Aug. 14, 2012)

Tax Foundation: A Global Perspective on Territorial Taxation

Tax Foundation:  A Global Perspective on Territorial Taxation:

Catherine the Great is supposed to have said, “A great wind is blowing, and that gives you either imagination or a headache.” In Washington, winds are stirring for corporate tax reform. But while there is broad bipartisan agreement that tax rates should be reduced, there is less consensus regarding what the tax rate should be, how to pay for a tax cut, or generally how to treat international business income. These considerations are inextricably intertwined because the U.S. assesses its corporations on worldwide income.

Beyond imposing the highest top marginal tax rate in the developed world, the U.S. tax system’s treatment of international business income is exceptionally burdensome. It inflicts tremendous compliance costs, creates enormous distortions of economic activity, deters companies from headquartering in the U.S., awards tax preferences to politically connected industries, and traps huge amounts of U.S. corporate profits overseas. To add insult to injury, despite these punitive features, the system captures a meager stream of tax revenue.

To address these structural flaws, recent years have witnessed a steady march of tax reform proposals from both sides of the aisle and from several independent advisory boards and agencies. Though reform plans vary widely in their specific provisions, they follow one of two general approaches to taxing international business income: “worldwide” basis versus “territorial” basis.

Under the worldwide approach, all income of domestically-headquartered companies is subject to tax, including income earned abroad. To avoid double taxation of the same income base, worldwide systems provide credits for taxes paid to foreign governments. The overarching purpose of the worldwide design is to “create equality among resident taxpayers,” so as not to distort the investment decisions of domestically headquartered companies toward low-tax countries.

Under the territorial approach, a country collects tax only on income earned within its borders. This is typically accomplished by exempting from the domestic tax base the dividends received from foreign subsidiaries. The territorial design thus equalizes the tax costs between international competitors operating in the same jurisdiction, so that all firms may compete on a level playing field, and capital may flow to where it can achieve the best after-tax return on investment.

Figure 1. Territorial and Worldwide Systems in the OECD
Territorial Systems	Transition Since 2000	Worldwide Systems	Top Marginal Tax Rate
Australia		Chile	20%
Austria		Greece	20%
Belgium		Ireland	12.5%
Canada		Israel	24%
Czech Republic	2004	Korea	24.2%
Denmark		Mexico	30%
Estonia	2005	United States	39.2%
Finland
France
Germany
Hungary
Iceland	2003
Italy
Japan	2009
Luxembourg
Netherlands
New Zealand	2009
Norway	2004
Poland	2007
Portugal
Slovak Republic	2004
Slovenia
Spain
Sweden
Switzerland
Turkey	2005
United Kingdom	2009

The U.S. system is considered a worldwide system though like other worldwide systems it allows its companies to defer tax liability on foreign “active” income until it is repatriated (i.e., returned) to the United States. Deferral has been noted as critical to the stability of the U.S. international business tax system because it enables U.S. companies to compete on a near-level playing field with companies domiciled within more favorable tax climates, as long as those companies can afford to keep the resulting earnings abroad.

Overwhelmingly, developed economies are turning to the territorial approach. While as recently as 2000, worldwide systems represented 66 percent of total OECD GDP, this figure has dropped to 45 percent heavily weighted by the U.S. Now, 27 of the 34 OECD member countries employ some form of territoriality, which is up from 17 just a decade ago (Figure 1, above). Additionally, every independent U.S. advisory board, working group, and federal agency tasked with exploring tax reform has recommended that the U.S. pivot toward a territorial system. These include President Obama’s Economic Recovery Advisory Board, Council on Jobs and Competitiveness, and Commission on Fiscal Responsibility and Reform. The House Committee on Ways and Means last year issued a draft bill for comprehensive tax reform which includes territorial taxation.

It is not by coincidence that the territorial system has gained so many adherents; it provides very real economic advantages over its worldwide counterpart. In the case of the U.S., a transition to territorial taxation would free the $1.7 trillion dollars currently locked out of the U.S, place U.S.-based companies on equal footing with competitors in every market, reduce complexity and compliance costs, reduce the incentive to reincorporate abroad, and could be accompanied by improvements to anti-abuse protections.

Yet President Obama and like-minded lawmakers want to purify the worldwide elements of the U.S. system. They see foreign investment by U.S. companies as displacing investment in the U.S. and seek to increase the U.S. tax penalty for investing abroad by repealing or further limiting deferral. Accordingly, advocates of the worldwide system consider territorial taxation an egregious concession to multinational corporations and claim it would result in a transfer of jobs, investment, and tax revenue to foreign countries.

The Romney Tax Plan, the Tax Policy Center, and the Wall Street Journal

Following up on yesterday's post, WSJ: The Romney Hood Tax Fairy Tale:

• Tax Policy Center: Understanding TPC’s Analysis of Governor Romney’s Tax Plan, by David Marron:

The Tax Policy Center’s latest research report went viral last week, drawing attention in the presidential campaign and sparking a constructive discussion of the practical challenges of tax reform. Unfortunately, the response has also included some unwarranted inferences from one side and unwarranted vitriol from the other, distracting from the fundamental message of the study: tax reform is hard.

• Forbes:  GOP Establishment's Shameless Attack on Nonpartisan Think Tank, by Len Burman (Syracuse University, Maxwell School):

The GOP establishment is in full attack mode after a Tax Policy Center report concluded that Mitt Romney couldn’t offset the effect of his proposed tax cuts by simply closing loopholes benefiting the rich. Either he would have to raise taxes on middle- and/or lower-income households, or his proposal will increase the deficit.

The Obama campaign ran with the first possibility and started saying that Mr. Romney was proposing a giant tax increase on the middle class. The Romney campaign attacked the study–perhaps not surprisingly (TPC was attacked from both sides for their analysis of the 2008 campaign proposals) and then its various surrogates started attacking the credibility of the TPC.

I’ll admit that I am certainly not unbiased on this issue as I was a co-founder of the TPC and served as its director until 2009, when I moved to Syracuse University. I’m enormously proud of TPC and think it has done a great deal to shed light on the tax policy debate, which had previously been incomprehensible to all but a few Washington insiders and academics. ... I should also point out that there has never ever been a political litmus test for employment at TPC, although there is a very high bar for competence.  Several top TPC affiliates, including director Donald Marron, have held high level  Republican appointments in the executive branch and CBO. Several have held positions in Democratic Administrations.

The Ten Most Profitable U.S. Companies Paid a 9% Federal Tax Rate

Linda Beale (Wayne State), Corporations Don't Need More Tax Breaks:

If you listen to the corporate lobbyists, and the right-wingers who plead their cases for them in Congress and in the media, you'd think that corporations are so heavily taxed that it is threatening their ability to continue to conduct business and be competitive in world markets. But is that really the case? This blog has often pointed out two obvious shortcomings in the corporate whine: first, the corporate statutory rate of 35% is honored in the breach--most corporations pay actual tax rates so significantly lower than 35% that the statutory rate is an illusion; and second, as far as global competitiveness is concerned, the corporate tax rate is the only significant tax that US corporations pay, whereas most other countries have both corporate income taxes and VAT taxes, often paid at each transactional stage of production.

A site called "NerdWallet" provides considerable information based on analysis of the financial statements of companies, providing greater transparency for investors and, lucky for us, for those of us interested in tax facts.   See, e.g., the NerdWallet study, Top Companies Paid 9% Tax Rate (July 24, 2012).

Because tax provision includes both domestic and foreign, current and deferred taxes, NerdWallet researched further to find how much was actually paid by these American companies to the U.S. federal government in the most recent tax year.  By dividing the current portion of federal taxes by pre-tax income, NerdWallet was able to calculate the percentage of these companies’ earnings that was paid to the U.S. government. For the ten American companies with highest earnings in the most recent fiscal year, this number averaged 9%. NerdWallet Study (emphasis added).

A press release about the study notes just how much corporate taxation has shrunk as a source of revenue in the US, as corporations pay lower rates than ordinary Americans.

A new NerdWallet study found the 10 most profitable U.S. companies paid an average of just 9% in federal taxes last year. These low rates are particularly shocking given that the official tax rate is 35%. The study also revealed that more than half of the 500 largest U.S. companies paid a lower tax rate than the average American.  NerdWallet press release (July 30 2012).

1. Exxon Mobil Pre-tax Earnings: $73.3 Billion; Actual Taxes Paid: $1.5 Billion (2%)
2. Chevron Pre-tax Earnings: $46.6 Billion; Actual Taxes Paid: $1.9 Billion (4%)
3. Apple Pre-tax Earnings: $34.2 Billion; Actual Taxes Paid $3.9 Billion (11%)
4. Microsoft Pre-tax Earnings: $28.1 Billion; Actual Taxes Paid: $3.1 Billion (11%)
5. JPMorgan Chase & Co Pre-tax Earnings: $26.7 Billion; Actual Taxes Paid $3.7 Billion (14%)

Jumping Off the Tax Cliff

• Tax Policy Center:  The Fiscal Cliff? Let's Pass Right Over It, by William Gale (Brookings):

The expiration of the Bush tax cuts and the automatic spending cuts slated to take effect in a few months offer a rare chance to do what policymakers have not, so far, been able to do - deal seriously with the 10-year budget deficits looming over the economy. Legislators should embrace that opportunity while also tending to the short-term needs of the economy.

• Start Making Sense:  New Tax Policy Center Reports, by Dan Shaviro (NYU):

One could put this same point -- clearly correct, in my view -- as follows.  Suppose we take allowing the fiscal cliff changes to take effect as the baseline. Against that baseline, we need stimulus. Of course, given the ongoing unemployment crisis, we already need stimulus today. But the changes would increase the amount of stimulus that is needed. Could anyone seriously maintain that, from the standpoint of optimally designing the extra stimulus, we would have it take the form of extending the Bush tax cuts, etcetera? That view cannot be seriously defended, unless one also favors them as long-term policy.

TPC: Romney Plan Would Cut Taxes for Rich, Raise Taxes on Middle Class and Poor

Tax Policy Center:  On the Distributional Effects of Base-Broadening Income Tax Reform, by Samuel Brown, William Gale & Adam Looney:

This paper examines the tradeoffs among three competing goals that are inherent in a revenue-neutral income tax reform—maintaining tax revenues, ensuring a progressive tax system, and lowering marginal tax rates—drawing on the example of the tax policies advanced in presidential candidate Mitt Romney’s tax plan. Our major conclusion is that any revenue-neutral individual income tax change that incorporates the features Governor Romney has proposed would provide large tax cuts to high-income households, and increase the tax burdens on middle- and/or lower-income taxpayers.

• Angry Bear, Tax Policy Center Says Romney Lies
• Bloomberg, Romney’s Tax Plan Doesn’t Cover Rate Cut Cost, Study Says
• Bloomberg, Surprise! Romney Tax Plan Favors the Rich
• CBS News, Study: Romney Tax Plan Helps Rich, Hurts Poor
• FactCheck.org, Romney’s Impossible Tax Promise
• The Hill, Report: Romney Plan Would Shift Tax Burden From Rich
• New York Times, Who Would Gain in a Romney Tax Overhaul
• Reuters, Romney Tax Plan Helps Rich, Hurts Middle Class: Study
• Dan Shaviro (NYU), New Tax Policy Center Reports
• Wall Street Journal, Study: Romney’s Tax Plan Hits Middle Class
• Washington Post, Study: Romney Tax Plan Would Result in Cuts for Rich, Higher Burden for Others

CBPP: Bush Tax Cuts Have Made Tax Code Less Progressive, Delivered Windfall to Rich

Center on Budget and Policy Priorities:  Bush Tax Cuts Have Provided Extremely Large Benefits to Wealthiest Americans Over Last Nine Years:

The tax cuts first enacted under President Bush in 2001 and 2003 have made the tax code less progressive and delivered a large windfall to the highest-income taxpayers. Tax Policy Center estimates for the years 2004 to 2012 (the years for which TPC provides data that are comparable from year to year) give us a sense of the cumulative effect of these tax cuts:

• The average tax cut that people making over $1 million received exceeded $110,000 in each of the last nine years — for a total of more than $1 million over this period.
• The tax cuts made the tax system less progressive. In each of the nine years from 2004 through 2012, the tax cuts increased the after-tax income of the highest-income taxpayers by a far larger percentage than they did for middle- and low-income taxpayers. For example, in 2010, the year in which all of the Bush income and estate tax cuts were fully phased in, they increased the after-tax income of people making over $1 million by more than 7.3%, but increased the after-tax income of the middle 20% of households by just 2.8%.

At a time of pressing fiscal problems and growing income inequality, continuing such large windfalls for the highest-income taxpayers is unaffordable.

Tax Foundation: CBO Data Shows Increasing Redistribution in Tax Code

Tax Foundation:  CBO Report Shows Increasing Redistribution in the Tax Code Despite No Long-term Trend in Income Inequality:

Earlier this month, President Obama renewed his pledge to raise taxes on high-income earners, premised upon the belief that they do not pay their “fair share.” However, the latest data reveals that their share, whether fair or not, has actually gone up in recent years, while the share paid by everyone else has gone down.

 

Tax Foundation: Tax Equity and the Growth in Nonpayers

Tax Foundation:  Tax Equity and the Growth in Nonpayers:

• In 2010, 41% of all tax returns filed had no income tax liability. This represents over 58 million income tax filers.
• Nonpayers have grown substantially over the last two decades. In 1990, only about 21 percent of returns had no tax liability, about half of what it is today.
• The expansion of tax credits is the primary driver of the increased number of nonpayers. The budgetary cost of tax credits reached $224 billion in 2010.
• Though most nonpayers of the income tax are generally low income, the number of nonpayers in middle income categories has grown. The median income of nonpayers has increased by 40% over the last 9 years.
• The threshold at which a typical married couple with two children will likely be a nonpayer is now $47,000.

Bartlett: Will Defense Cuts Kill the Anti-Tax Pledge?

The Fiscal Times:  Will Defense Cuts Kill the Anti-Tax Pledge?, by Bruce Bartlett:

Republicans are between the rock of defense cuts that they view as unpalatable and the tax pledge hard place. There is no doubt that Democrats would agree to a tax increase to offset the defense sequester, but would oppose any other alternative except, perhaps, putting off the entire sequester, including domestic spending cuts, for a year. It’s doubtful that the GOP’s Tea Party wing would support that.

Republicans are not yet ready to embrace a tax increase even to prevent defense cuts. But it is clear that they are ultimately going to have to choose one or the other.

CBPP: Allowing High-Income Bush Tax Cuts to Expire Would Affect Few Small Businesses

Center on Budget and Policy Priorities:  Allowing High-Income Bush Tax Cuts to Expire Would Affect Few Small Businesses:

Allowing the top two marginal tax rates to return to pre-2001 levels as scheduled next year would affect very few small businesses, a recent Treasury Department study found. The study shows that only 2.5% of small business owners face the top two rates. ... [A]n extension of the high-income Bush tax cuts would, in essence, constitute a massive tax cut for very wealthy individuals who overwhelmingly aren’t small business operators. ...

The arguments against allowing the high-end tax cuts to expire on schedule echo those made against President Clinton’s proposed 1993 tax increases, which set marginal rates at the levels to which they are set to return when the Bush rate cuts expire.  Critics claimed at the time that those tax increases would seriously harm economic growth and even send the economy back into recession.  As it turned out, job creation and economic growth proved significantly stronger following the 1993 tax increases than following the 2001 Bush tax cuts.  Further, small businesses generated jobs at twice the rate during the Clinton years than they did under the Bush tax code (see Figure 1).

CBPP: A Federal Renters’ Tax Credit

Center on Budget and Policy Priorities, Renters’ Tax Credit Would Promote Equity and Advance Balanced Housing Policy:

Over the past several decades, the nation’s housing policy has focused predominantly on increasing homeownership.  Most federal housing expenditures now benefit families with relatively little need for assistance.  About 75 percent of federal housing expenditures support homeownership, when both direct spending and tax subsidies are counted.  The bulk of homeownership expenditures go to the top fifth of households by income, who typically could afford to purchase a home without subsidies.  Overall, more than half of federal spending on housing benefits households with incomes above $100,000.

Meanwhile, low-income renters are far more likely than higher-income households to pay a very high share of their income for housing and to face other serious housing-related problems.  Research has shown that rental assistance sharply reduces homelessness and housing instability — conditions that have a major long-term impact on children’s health and development — and generates other important benefits.   Yet, federal rental assistance programs only reach about one in four eligible low-income renters, due to funding limitations. 

The time is right to implement a more balanced housing policy.  Policymakers in both parties have proposed reforms to homeownership tax expenditures that would make them more efficient andraise added revenues to reduce the deficit.  The Bowles-Simpson and Rivlin-Domenici deficit reduction commissions and the Bush Administration’s Advisory Panel on Federal Tax Reform each proposed to convert the mortgage interest deduction to a credit that would increase revenues and reach a broader share of low- and middle-income homeowners.  Congress could further improve the effectiveness and fairness of the nation’s housing expenditures by directing a modest share of the savings from reform of homeownership subsidies to address part of the unmet need for housing assistance among lower income renters, in the form of a federal renters’ tax credit.

TPC: How Hard Is It to Cut Tax Preferences to Pay for Lower Tax Rates?

Tax Policy Center, How Hard Is It to Cut Tax Preferences to Pay for Lower Tax Rates?:

Some political leaders have proposed to lower individual income tax rates and make up the lost revenue by eliminating tax preferences. To help inform the discussion of such proposals, we examine illustrative revenue-neutral combinations of lower rates and cuts in tax preferences and their effects on the distribution of tax burdens. We conclude that paying for lower rates would require substantial reductions in broadly-used and popular preferences. In addition, requiring that changes maintain the current progressivity of the federal income tax would make it much harder to find a politically acceptable mix of preferences to curtail.

• The Atlantic, Why Romney's Plan Could Mean Higher Taxes for All but the Richest
• Bloomberg, Romney-Style Plan Means Sharp Tax-Break Cuts, Study Says
• CNN, High Price of Lower Tax Rates
• Forbes, Do the Math: Why Trimming Tax Breaks Won't Allow U.S. to Easily Cut Rates
• Reuters, Romney Tax Plan Would Eat Into Popular Breaks: Study
• Tax Vox Blog, Trimming Tax Breaks to Cut Rates is a Lot Harder Than It Looks
• Wall Street Journal, Tax Reform: Why It’s So Hard
• Washington Post, It’s Hard to Raise Revenues by ‘Lowering Rates and Broadening the Base’