Thursday, April 25, 2013
Earlier this year, Citizens for Tax Justice reported that Facebook Inc. had used a single tax break, for executive stock options, to avoid paying even a dime of federal and state income taxes in 2012. Since then, CTJ has investigated the extent to which other large companies are using the same tax break. This short report presents data for 280 Fortune 500 corporations that, like Facebook, disclose a portion of the tax benefits they receive from this tax break.
- These 280 corporations reduced their federal and state corporate income taxes by a total of $27.3 billion over the last three years, by using the so-called “excess stock option” tax break.
- In 2012 alone, the tax break cut Fortune 500 income taxes by $11.2 billion.
- Just 25 companies received more than half of the total excess stock option tax benefits accruing to Fortune 500 corporations over the past three years.
- Apple alone received 12 percent of the total excess stock option tax benefits during this period, enjoying $3.2 billion in stock option tax breaks during the past three years. JP Morgan, Goldman Sachs and ExxonMobil collectively enjoyed 10 percent of the total.
- In 2012, Facebook wiped out its entire U.S. income tax liability by using excess stock option tax breaks.
- Over the past three years, Apple slashed its federal and state income taxes by 20 percent using this single tax break.
How It Works: Companies Deduct Executive Compensation Costs They Never Actually Paid
Most big corporations give their executives (and sometimes other employees) options to buy the company’s stock at a favorable price in the future. When those options are exercised, corporations can take a tax deduction for the difference between what the employees pay for the stock and what it’s worth (while employees report this difference as taxable wages).
Before 2006, companies could deduct the “cost” of the stock options on their tax returns, reducing their taxable profits as reported to the IRS, but didn’t have to reduce the profits they reported to their shareholders in the same way, creating a big gap between “book” and “tax” income. Some observers, including CTJ, argued that the most sensible way to resolve this would be to deny companies any tax deduction for an alleged “cost” that doesn’t require an actual cash outlay, and to require the same treatment for shareholder reporting purposes.
But instead, rules in place since 2006 maintained the tax write-off, but now require companies to lower their “book” profits somewhat to take account of options. But the book write-offs are still usually considerably less than what the companies take as tax deductions. That’s because the oddly-designed rules require the value of the stock options for book purposes to be calculated — or guessed at — when the options are issued, while the tax deductions reflect the actual value when the options are exercised. Because companies typically low-ball the estimated values, they usually end up with much bigger tax write-offs than the amounts they deduct in computing the profits they report to shareholders.
- Forbes: Stock Options Meant Big Tax Savings For Apple And JPMorgan, As Well As Facebook, by Janet Novack
- Huffington Post: McDonald's, Starbucks, Apple Reaping Billions Of Dollars From Little-Known Tax Break: Study, by Jillian Berman
- Tax Update Blog: Is it a Loophole if it Increases Taxes?, by Joe Kristan
(Hat Tip: Francine Lipman.)
Thursday, April 18, 2013
Today is Tax Freedom Day, the day on which Americans will have earned enough money to pay all federal, state, and local taxes for the year:
Tax Freedom Day is the day when the nation as a whole has earned enough money to pay its total tax bill for the year. A vivid, calendar based illustration of the cost of government, Tax Freedom Day divides all federal, state, and local taxes by the nation’s income. In 2013, Americans will pay $2.76 trillion in federal taxes and $1.45 trillion in state taxes, for a total tax bill of $4.22 trillion, or 29.4 percent of income. April 18 is 29.4 percent, or 108 days, into the year.
Tax Freedom Day is five days later than last year, due mainly to the fiscal cliff deal that raised federal taxes on individual income and payroll. Additionally, the Affordable Care Act’s investment tax and excise tax went into effect. Finally, despite these tax increases, the economy is expected to continue its slow recovery, boosting profits, incomes, and tax revenues. ...
The total tax burden borne by residents of different states varies considerably, due to differing state tax policies and because of the steep progressivity of the federal tax system. This means higher income states celebrate Tax Freedom Day later: Connecticut (May 13), New York (May 6), and New Jersey (May 4). Residents of Mississippi will bear the lowest average tax burden in 2013, with Tax Freedom Day arriving for them on March 29. Also early are Louisiana (March 29) and Tennessee (April 2).
to Pay Taxes
Tax Freedom Day
Citizens for Tax Justice, Ten (of Many) Reasons Why We Need Corporate Tax Reform:
This CTJ report illustrates how profitable Fortune 500 companies in a range of sectors of the U.S. economy have been remarkably successful in manipulating the tax system to avoid paying even a dime of tax on billions of dollars in profits. These ten corporations’ tax situations shed light on the widespread nature of corporate tax avoidance. As a group, the ten companies paid no federal income tax on $16 billion in profits in 2012, and they paid zero federal income tax on $57 billion in profits over the past five years. All but one paid less than zero federal income tax in 2012; all paid exceedingly low rates over five years.
Sunday, April 14, 2013
Tuesday, April 9, 2013
The Transactional Records Access Clearinghouse at Syracuse University has released a report, IRS Audits Slump, Staff Down Long-term Impact Uncertain:
The IRS plans to expend 18% percent less effort auditing businesses with assets of $10 million or more compared with just two years ago, according to a very timely IRS planning document.
For the same period, the IRS also projects a 14% drop in the amount of available time for the specialized revenue agents it needs to conduct these audits in FY 2013 — the year ending on September 30 — compared to what it was in FY 2011.
These declines — neither of which take into account the probable impact of the sequestration cuts in the months ahead — were described in a special agency report now being made available to the Transactional Records Access Clearinghouse (TRAC) on a monthly basis. This series of internal IRS management reports — the last one covers the period ending in January 2013 — are provided by the IRS thanks to a court order granted TRAC as a result of a suit filed under the Freedom of Information Act.
IRS Large Business and International Division Direct Examination Staff Years
Change 2013 v. 2011
Annual Plan Total 3,567 3,320 2,935 -18% Individual 189 173 306 62% Corporations 1,103 1,043 807 -27% Partnership 191 196 159 -17% Subchapter S Corp 184 180 115 -37% Coordinated Industry Cases 1,083 1,081 1,011 -7% Other 816 647 537 -34% Actual Revenue Agent Years Total 3,319 3,155 2,852 -14% Individual 258 214 283 9% Corporations 864 912 762 -12% Partnership 211 215 179 -15% Subchapter S Corp 185 225 205 11% Coordinated Industry Cases 1,011 952 865 -14% Other 790 637 559 -29%
Citizens for Tax Justice, The U.S. Continues to Be One of the Least Taxed of the Developed Countries:
The U.S. was the third least taxed country in the Organization for Economic Cooperation and Development (OECD) in 2010, the most recent year for which OECD has complete data.
Of all the OECD countries, which are essentially the countries the U.S. trades with and competes with, only Chile and Mexico collect less taxes as a percentage of their overall economy (as a percentage of gross domestic product, or GDP).
This sharply contradicts the widely held view among many members of Congress that taxes are already high enough in the U.S. and that any efforts to reduce the federal deficit should therefore take the form of cuts in government spending.
As the graph to the right illustrates, in 2010, the total (federal, state and local) tax revenue collected in the U.S. was equal to 24.8 percent of the U.S.’s GDP.
The total taxes collected by other OECD countries that year was equal to 33.4 percent of combined GDP of those countries....
In 1979, the U.S. had the 16th highest taxes as a percentage of GDP, out of 24 countries at that time.
In 2010, the U.S. had the 32nd highest taxes as a percentage of GDP, out of 34 OECD countries.
Friday, April 5, 2013
- International Consortium of Investigative Journalists, Secrecy for Sale: Inside the Global Offshore Money Maze
- U.S. Public Interest Research Group, Picking up the Tab: Average Citizens and Small Businesses Pay the Price for Offshore Tax Havens
Press and blogosphere coverage:
- New York Times, Data Leak Shakes Notion of Secret Offshore Havens and, Possibly, Nerves
- Slate, The Secret World of Tax Havens Just Got a Whole Lot Less Secret
- Tax Justice Network, Offshore Secrets: Time Is Ripe for a European FATCA
- Washington Post, 2.5 Million Leaked Files Reveal Stunning Extent of Global Tax Havens
- Washington Post, Piercing the Secrecy of Offshore Tax Havens
- Washington Post, Tax Haven Data Leak Names Names, Raises Questions About Future of Offshore Bank Accounts
Thursday, April 4, 2013
According to the OECD, the present situation calls for a review of the fundamentals of the international tax system. Changes to the current international tax rules should reflect how MNCs operate today, and seek to redress the unjust distribution of the global tax base. MNCs should report their profits and pay their taxes where their economic activities and investment are actually located, rather than in jurisdictions where the presence of the MNC is sometimes fictitious and explained by the adoption of tax-avoidance strategies.
Given the relevance of the analysis provided by the OECD in its report, which is supported by the findings of our own research, we suggest that the OECD and the United Nations Tax Committee jointly explore to what extent would an evolution towards unitary taxation with profit apportionment be more appropriate for the taxation of MNCs and lead to a fairer international tax system.
(Hat Tip: Mike McIntyre.)
Wednesday, April 3, 2013
Peterson Institute for International Economics, Corporate Taxation and U.S. MNCs: Ensuring a Competitive Economy (April 2013):
The debate about “tax reform,” a focus of the 2012 presidential race and the congressional budget battles this year, has centered on closing loopholes, creating new incentives for growth, and of course raising revenue through higher personal taxation of well-off Americans. This emphasis is understandable in light of the need to close the federal deficit and the fact that a majority of federal revenue comes from personal taxes. But the debate overlooks an important priority for future U.S. economic growth: the urgent need to reform the corporate tax. Without reform, U.S.-based multinational corporations (MNCs) will continue to be hobbled by an outmoded tax structure as they compete in the age of globalization. Reform would not only make American MNCs stronger competitors in markets abroad but also enable them to expand and invest more at home.
This policy brief proposes that tax rates should be lowered, both on profits earned in the United States and profits earned abroad. These reforms will encourage greater, not less, investment at home, as well as expanded foreign direct investment abroad by American MNCs. This is the best path toward more employment, investment, exports and R&D in the United States. Yes, this proposal might seem counterintuitive to some. Indeed the Obama administration has suggested that taxes should be used to discourage outward FDI by American MNCs, on the ground that such investment hinders U.S. prosperity. We present evidence that the administration’s concern is the wrong starting point for launching corporate tax reforms. This policy brief first summarizes research that shows a complementary relationship between outward foreign direct investment by U.S. MNCs and positive effects in the U.S. economy, and then proceeds to suggest constructive corporate tax reforms. The policy brief argues that fears of lost revenues from lowering taxes on corporate profits earned at home and abroad are exaggerated, and that MNCs which engage in FDI are in the best position to create jobs and promote prosperity at home.
(Hat Tip: Bruce Bartlett.)
Tuesday, April 2, 2013
Citizens for Tax Justice, Who Pays Taxes in America in 2013?:
It is sometimes claimed that many low- and middle-income Americans don’t pay taxes while the richest Americans pay a hugely disproportionate share of taxes, especially after enactment of the “fiscal cliff” deal that allowed some taxes to go up.
As the table ... illustrates, America’s tax system is just barely progressive even after the fiscal cliff deal’s effects. Claims that the rich pay a disproportionate share of taxes often focus only on the federal personal income tax and ignore the other taxes that people pay, like federal payroll taxes, federal excise taxes, and state and local taxes. Many of these other taxes are regressive, meaning they take a larger share of income from poor and middle-income families than they take from the rich.
The table shows the share of total taxes (all federal, state and local taxes) that will be paid by Americans in different income.
- Citizens for Tax Justice, New Tax Laws in Effect in 2013 Have Modest Progressive Impact
Thursday, March 21, 2013
The Urban Institute announced yesterday that Donald Marron, the director of the Urban-Brookings Tax Policy Center, will become the Institute's first director of economic policy initiatives in June. Len Burman, former director of the Tax Policy Center and currently a professor at Syracuse University, will return to lead the center he co-founded in 2002
Donald Marron, Director of Economic Policy Initiatives
A former member of the Council of Economic Advisers and former acting director of the Congressional Budget Office, Marron has led the Urban-Brookings Tax Policy Center since 2010. This year, he sought a new perch that would enable him to explore a broader range of economic and fiscal policy issues across the Urban Institute. In his new role, Marron will direct a diverse portfolio of research initiatives. His work will deepen the Urban Institute’s engagement with the policy community and bring the Institute’s independent and rigorous research to new audiences.
“Donald Marron has wide-ranging interests and an unparalleled ability to explain clearly complex economic concepts and analyses,” said Sarah Rosen Wartell, president of the Urban Institute. “In his new role, he can design cross-cutting research, drawing upon the breadth of the organization’s expertise and analytic tools, to inform high-level policymakers tackling the biggest spending, revenue, and growth issues facing the nation.”
Len Burman, Director, Tax Policy Center
Burman served as director of the Urban-Brookings Tax Policy Center from 2002 to 2009, and he has remained an Urban Institute affiliated scholar while at Syracuse. After working on the Tax Reform Act at the U.S. Treasury Department in the 1980s, Burman went on to the Congressional Budget Office. He later served as deputy assistant secretary of the Treasury in 1998.
“In searching for a successor to Donald, we were thrilled to entice back TPC’s very own co-founder, Len Burman,” continued Wartell. ... Urban Institute Trustee Erskine Bowles has described TPC as a “national treasure,” noting that the Simpson-Bowles Commission recently relied upon the center for assistance in developing the tax elements of its deficit reduction plans. ...
Burman noted, “Working as a scholar at the Maxwell School of Syracuse University for the past four years, I’ve developed a new appreciation for how TPC’s clear, timely, and impartial analysis informs the tax policy debate outside the Beltway. I’m excited about rejoining the fantastic TPC team at a time when tax policy is sure to be front and center on the national nd state and local agendas." ...
Other original members of the TPC leadership team will remain in their current roles: co-directors Bill Gale (Brookings Institution) and Eric Toder (Urban Institute) as well as Urban Institute Fellow Eugene Steuerle.
Monday, March 18, 2013
Following up on my previous post, Do Capital Income Taxes Hinder Growth?: Chris William Sanchirico (Pennsylvania), “Common Sense” Aside, What Do We Really Know About Capital Income Taxes and Growth?:
If you’re discussing tax policy with someone who asserts that his or her point is “just common sense,” this could indicate one of two things: Either no deep thought is required—as the person would have you believe. Or no deep thought has been applied. The “common sense” notion that capital income taxes hinder growth seems to be more a case of the latter. Long term capital gains are taxed only when the asset is sold and at roughly half the rate on wages and salaries. Dare to suggest that the rate on investment profits could be raised a bit—so that perhaps the rate on labor income could lowered—and you’re liable to be reprimanded for failing to understand something as plain as the nose on your face: To tax capital income is to tax the reward for saving and thus to discourage saving. Less saving means less investment and less investment means slower growth, fewer jobs, and lower wages.
Everyone knows that.
Everyone, that is, except the people who study the issue.
Economic theory teaches that the impact of capital income taxes on savings is robustly ambiguous. Empirical research has yielded mixed results, but overall the data seem to indicate that reducing capital income taxes decreases rather than increases savings. In addition, lowering capital income taxes is likely to go hand in hand with raising labor income taxes or government borrowing, both of which are arguably at least as harmful to growth as capital income taxation. ... [T]rying to spur growth by keeping capital income taxes low seems—at best—like trying to fix one side of the roof with shingles from the other.
Tuesday, March 12, 2013
The American Prospect: Five Lessons for Progressives From Our First Century of Income Taxes:
- Steeply graduated income tax rates can help societies do big things
- Progressive tax rates can do much more than raise significant amounts of revenue
- Progressive income tax rates don’t just happen. People have to battle for them
- Tax loopholes cost our society more than just tax revenue
- Just copying our progressive tax-rate past won’t ensure a progressive tax future
By learning the lessons from our income tax past, these and other progressive forces will have a better chance of pushing through the tax changes we need to allow our society to do big things in the century ahead.
Thursday, March 7, 2013
Aparna Mathur (American Enterprise Institute) has posted several tax papers on SSRN:
- An Empirical Analysis of Middle Class Welfare: Testing Alternative Approaches (2006)
- Predicting Tax Reform (2007)
- The Consumer Burden of a Carbon Tax on Gasoline (2009)
- A Spatial Model of the Impact of Bankruptcy Law on Entrepreneurship (2009)
- Taxes Around the World: A Brief History of World Tax Policy, 1981-2007 (2009)
- The Effect of Labor Market Regulations on Educational Attainment (2010)
- Spatial Tax Competition and Domestic Wages (2010)
- Corporate Tax Burden on Labor: Theory and Empirical Evidence (2011)
- Foreign Direct Investment, Corruption, and Democracy (2011)
- The Impact of Improved Detection Technology on Drug Quality: A Case Study of Lagos, Nigeria (2011)
- Distributional Effects of a Carbon Tax in Broader US Fiscal Reform (2012)
- Health Expenditures and Personal Bankruptcies (2012)
- A New Measure of Consumption Inequality (2012)
Monday, March 4, 2013
The Tax Policy Center hosts a program today on States in Flux: State Tax Reform, the ACA, and Sequestration at noon-1:30 p.m. EST (webcast here):
State governments face extraordinary challenges in coming years. Tepid recovery from the Great Recession has limited the ability of state governments to expand and add jobs, unlike past recoveries. Concerned about traditional revenue streams, some governors and state legislatures are proposing drastic changes to their tax structures. And the rapidly changing federal landscape—notably health reforms in the Affordable Care Act and budget caps and threat of sequester from the Budget Control Act—pose further challenges for state governments.
This forum will address key challenges facing states. Topics include:
- How have state governments contributed to this recovery compared to past recoveries?
- How might state revenue streams change in the future? What are the consequences of these changes?
- How will the sequester affect the states?
- How are states keeping up with new market reforms in the Affordable Care Act?
- Teresa Coughlin (Urban Institute)
- Zachary Goldfarb (Washington Post) (moderator)
- Ben Harris (Urban Institute)
- Joseph Henchman (Tax Foundation)
- Nick Johnson (Center on Budget and Policy Priorities)
Friday, March 1, 2013
One of the main arguments against raising capital income tax rates is that doing so discourages savings and investment and hinders economic growth. However, academic research on taxes and growth suggests that this argument has no real basis. And the primary alternatives to capital income taxation—labor income taxes and increased government borrowing—carry their own potentially adverse effects on growth.
Thursday, February 28, 2013
The Tax Policy Center hosts a program today on The Charitable Deduction: A View from the Other Side of the Cliff (free webcast here):
As the vehicle of state leaned over one fiscal cliff, Congress pulled it back but kept the motor running. In this session, we will examine the recent debate over tax changes, the resulting effect on charities, and the likely forthcoming debate in early 2013. Panelists will discuss how federal fiscal policy and proposed changes to tax law, in particular the charitable deduction, may affect charitable giving and the political scene for nonprofits going forward into an uncertain future.
Looking Back at the Cliff
This panel will take a look back at the debate leading up to the “fiscal cliff.” The panelists will discuss the various proposals that would have affected the charitable deduction, the response of the nonprofit sector, and the effect of the ultimate deal that was reached.
Moderator: Eugene Steuerle, Urban Institute
Diana Aviv, Independent Sector
Jon Bakija, Williams College
Rick Cohen, Nonprofit Quarterly
Joseph Rosenberg, Urban-Brookings Tax Policy Center
The Road Forward
This panel will discuss what lies ahead for the charitable deduction in an environment of continued budget pressure. The speakers will describe various proposed reforms to the charitable deduction and discuss how these reforms may affect nonprofits, for better or for worse.
Moderator: Elizabeth Boris, Urban Institute
Joseph Cordes, George Washington University
Tim Delaney, National Council of Nonprofits
Brian Flahaven, Council for Advancement and Support of Education
Jane Gravelle, Congressional Research Service
With Washington gearing up for additional high-stakes budget battles over the next few months, Congress has continued to ignore a solution worth about $90 billion annually: closing loopholes that allow corporations to avoid taxes by pretending their profits are earned in offshore tax havens. Corporate lobbyists often claim that closing these loopholes would drive companies to flee the U.S. and re-register themselves in low-tax countries. U.S. PIRG’s new analysis explains why this is not the case.
Thursday, February 21, 2013
Tax Foundation: The High Burden of State and Federal Capital Gains Taxes:
As Congress begins to debate tax reform in the coming months, there is one tax that they should pay close attention to: the capital gains tax. The capital gains tax is a tax on profit through the sale of property or investments. At the beginning of this year, the top marginal statutory capital gains tax rate was increased to 23.8% from 15%. Although lower than the tax on ordinary income, states also tax capital gains, some of them as high as 13.3%, adding an additional tax burden to savers and investors. Some taxpayers could pay up to a 33% tax on capital gains, a rate that far exceeds rates throughout the world. This high tax rate has long-term negative implications for the economy as people save and invest less and capital seeks higher returns in other countries.
Long-term Capital Gains Rate
Capital Gains Rate
District of Columbia
Wednesday, February 20, 2013
Center on Budget and Policy Priorities: Cutting State Personal Income Taxes Won’t Help Small Businesses Create Jobs and May Harm State Economies, by Michael Mazerov:
There is almost nothing in economic theory or empirical research to support an assertion that cutting state personal income taxes will have a significant impact on the emergence, success, or job-creation performance of small businesses. The vast majority of any revenue forgone from such tax cuts will flow to people who don’t own businesses, and of the limited tax savings that does happen to flow to business owners, the vast majority will be received by people with no intent or authority to hire additional people. State personal income tax cuts do not increase the cash flow of most small businesses sufficiently to finance the creation of new jobs, and, conversely, small businesses with good growth prospects do not need to rely on their own cash flow to finance expansion.
Neither economic theory nor empirical research support the assertion that personal income tax cuts inherently encourage increased work-effort on the part of small business owners that could generate additional hiring as a side-effect. Nor is there any evidence that entrepreneurs on the cusp of starting their ventures are likely to be attracted to a state merely because it cuts its personal income taxes. Perhaps most importantly, a very detailed and careful empirical study commissioned by the U.S. Small Business Administration concluded, in the words of the authors, that there is “no evidence of an economically significant effect of state tax [policy] portfolios on entrepreneurial activity. . . .”
While there is no compelling evidence that the large state income tax cuts promoted by a number of governors would be a cost-effective means of encouraging entrepreneurship, there is a significant risk that the cuts would seriously impair the ability of these states to fund infrastructure, education, public safety, and other services that are a critical underpinning of a healthy state economy. Policymakers should therefore reject proposals for state personal income tax cuts as a means of encouraging the birth and growth of small businesses and focus instead on more targeted approaches to assisting these firms.
Saturday, February 16, 2013
Tax Foundation: State and Local Sales Tax Rates in 2013:
1. Tennessee (9.44%)
2. Arizona (9.16%)
3. Louisiana (8.87%)
4. Washington (8.86%)
5. Oklahoma (8.67%)
6. Arkansas (8.61%)
7. New York (8.48%)
8. Alabama (8.45%)
9. California (8.38%)
10. Kansas (8.25%)
41. Wisconsin (5.43%)
42. Wyoming (5.34%)
43. Maine (5.00%)
43. Virginia (5.00%)
45. Hawaii (4.35%)
46. Alaska (1.69%)
47. Delaware (None)
47. Montana (None)
47. New Hampshire (None)
47. Oregon (None)
Thursday, February 14, 2013
This paper examines the pros and cons of using a carbon tax to help finance corporate tax reform. Revenues from a plausible carbon tax would be large relative to corporate tax revenues and could thus help finance lower corporate tax rates, extension of business tax preferences, or other corporate tax reforms. Done well, such a tax swap could reduce the environmental risks of carbon emissions and improve the efficiency of America’s corporate tax system. But a carbon-for-corporate tax swap poses a significant distributional challenge. A carbon tax would fall disproportionately on low-income families, while a reduction in corporate taxes would disproportionately benefit those with high incomes. Policymakers can offset some of those impacts through other policy measures, such as paying lump-sum tax rebates. But doing so would reduce the swap’s efficiency benefits. Policymakers may also want to use some carbon revenues for deficit reduction. One option would be to aim for revenue neutrality over an initial period, after which a widening spread between growing carbon revenues and relatively stable corporate tax cuts would reduce the deficit.
Wednesday, February 13, 2013
Adam J. Hoffer (University of Wisconsin-La Crosse, Department of Economics), William F. Shughart II (Utah State University, Hunstman School of Business) & Michael D. Thomas (Utah State University, Hunstman School of Business), Sin Taxes: Size, Growth, and Creation of the Sindustry (Mercatus Center, George Mason University):
Revenue shortfalls have undermined states’ ability to balance their budgets. Particularly attractive places for new revenue creation are taxes levied selectively on specific goods whose consumption public policy makers want to discourage, arguing that they impair the consumer’s health, generate negative externalities, or both. These selective taxes collectively are known as “sin taxes” because of their historical association with vice. This paper explores three criticisms of sin taxes. First, the taxation of selected goods as a source of general budget revenue contradicts the standard Pigouvian social welfare argument. Second, the economic burden of sin taxes falls disproportionately on low-income households. Third, the expanding number of goods being taxed in this way results in unproductive preventive and defensive lobbying by the affected industries.
Tuesday, February 12, 2013
The Tax Policy Center hosts a program tomorrow on Tax Expenditures and the Deficit: Time to Rethink Retirement Saving Policy?:
As policymakers continue to search for ways to shore up the nation’s fiscal status, tax subsidies may be ripe for the picking. Tax subsidies for retirement saving account for more than $90 billion annually in lost Treasury revenue. New research suggests that the tax subsidy for contributions to retirement accounts only affects the behavior of certain financially sophisticated households and does not raise overall saving significantly, however, automatic enrollment can raise both retirement saving and overall saving. Over 60 million Americans participate in 401(k) plans. Are there less expensive, more progressive ways to generate the same or more retirement saving and overall saving than the current tax treatment of contributions to retirement accounts? ...
[A] new study ... examines whether a nudge or a subsidy is a better way to increase saving. [Active vs. Passive Decisions and Crowd-Out in Retirement Savings Accounts] The study also draws crucial distinctions between active and passive savers and the implications of the two groups for retirement saving policy. Speakers include study co-authors Raj Chetty and John Friedman of Harvard University, as well as Director of the Retirement Security Project William Gale.
Wednesday, February 6, 2013
American Council for an Energy-Efficient Economy, Tax Reforms to Advance Energy Efficiency:
At the beginning of President Obama’s second term, tax reform has become a frequently-cited concern. Both Democrats and Republicans are supporting tax reform and actual work on legislation is likely to begin in 2013. Key elements of reform are likely to include simplifying the tax code in some respects and reducing marginal tax rates by eliminating many credits and deductions.
Tax reform provides us with an opportunity to remove barriers to efficiency investments imbedded in the current tax code and to use the tax code as a tool to support energy efficiency in the future more than current provisions do. In this report, we suggest policies in six areas that could be used to encourage energy efficiency: existing energy efficiency tax incentives; depreciation; low-cost strategies for promoting investment in manufacturing; fees on emissions; treatment of expenses in business taxes; and ending or reducing subsidies for fossil fuels. We propose several policy options designed to encourage investment in energy efficiency that may be used as a starting point for future tax policy discussion.
Tuesday, February 5, 2013
Tax havens are countries or jurisdictions with minimal or no taxes. Corporations and individuals shift earnings to financial institutions in these countries to reduce their U.S. income tax liability—costing the federal government $150 billion in lost revenues each year.
Federal taxpayers are not the only victims of offshore tax havens. Tax havens deprive state governments of billions of dollars in badly needed revenues as well. Based how much income is federally reported in each state, and on state tax rates, it is possible to calculate how much each of the state governments lose as a result of offshore tax dodging.
In 2011, states lost approximately $39.8 billion in tax revenues from corporations and wealthy individuals who sheltered money in foreign tax havens. Multinational corporations account for more than $26 billion of the lost tax revenue, and wealthy individuals account for the rest.
Thursday, January 31, 2013
Steve Rosenthal (Tax Policy Center), Taxing Private Equity Funds as Corporate 'Developers', 138 Tax Notes 361 (Jan. 21, 2013):
Private equity funds manage vast amounts of money: $2.5 trillion in 2010, much more than the $100 billion in 1994. They earn immense profits, largely from selling the stock of acquired and improved companies. This article focuses on the character of the funds' profits. It recommends that the IRS write new regulations to treat the funds' profits as ordinary income in light of the law, Congress's original intent, and tax policy.
All Tax Analysts content is available through the LexisNexis® services.
U.S. wireless consumers pay an average 17.18% in taxes and fees on their cell phone bill, including 11.36% in state and local charges, according to a newly released study that identifies and calculates wireless taxes and fees.
In Nebraska, the combined federal-state-local average rate is 24.49%, and in six other states (Washington, New York, Florida, Illinois, Rhode Island, and Missouri) it exceeds 20%. Twenty-six states have average state-local wireless taxes and fees in excess of 10%, and taking into account the infamous federal telephone excise tax (dating to the Spanish-American War and partly repealed in 2006), cell phone subscribers in seven states pay more than 20 percent in taxes. (See the table for a full list.)
Table: Taxes and Fees on Wireless Service, July 2012
Combined Federal-State-Local Rate
U.S. Simple Average
U.S. Weighted Average
District of Columbia
Wednesday, January 30, 2013
The Institute on Taxation & Economic Policy today released Who Pays? A Distributional Analysis of the Tax Systems in All 50 States (4th ed. Jan. 2013):
The 2013 Who Pays: A Distributional Analysis of the Tax Systems in All Fifty States (the fourth edition of the report) assesses the fairness of state and local tax systems. The report measures the state and local taxes paid by different income groups in 2013 (at 2010 income levels including the impact of tax changes enacted through January 2, 2013) as shares of income for every state and the District of Columbia. It discusses state tax policy features and includes detailed state-by-state profiles providing essential baseline data for lawmakers seeking to understand the effect tax reform proposals will have on constituents at all income levels.
The main finding of this report is that virtually every state’s tax system is fundamentally unfair, taking a much greater share of income from middle- and low-income families than from wealthy families. The absence of a graduated personal income tax and the over reliance on consumption taxes exacerbate this problem in many states. ...
Ten states rank as having the most regressive overall tax systems. In these “Terrible Ten” states, the bottom 20 percent pay up to six times as much of their income in taxes as their wealthy counterparts.
Center on Budget and Policy Priorities: “Pease” Provision in Fiscal Cliff Deal Doesn’t Discourage Charitable Giving and Leaves Room for More Tax Expenditure Reform:
The recent “fiscal cliff” deal reinstated a limit on itemized deductions for high-income taxpayers known as the “Pease” provision, which policymakers created as part of the 1990 bipartisan deficit-reduction package but which the Bush tax cuts phased out between 2006 and 2010. In recent days, some pundits and leaders of some charitable organizations have suggested that because Pease limits the total amount of itemized deductions that high-income filers can claim, it will reduce the incentive for taxpayers to donate to charity. That suggestion is incorrect, however, as a close look at Pease makes clear.
As an important new paper from the Urban Institute and Tax Policy Center shows, the fiscal cliff law’s tax provisions will increase charitable giving, not reduce it. The analysis — whose authors include C. Eugene Steuerle, a leading expert on these issues — estimates that the new law will boost charitable giving by $3.3 billion a year, or 1.3%, compared to what it would have been if policymakers had extended the tax laws that were in place in 2012. The increase results mainly from the rise in the top marginal income tax rate to 39.6%, which raisesthe value of the charitable deduction.
The Urban Institute-TPC analysis also explains that “the Pease limitation has negligible effects on the tax incentive for charitable giving” (emphasis added). It shows that for people in the top income tax bracket, the tax benefit of making charitable donations will rise from 35 cents in less tax liability for each additional dollar in charitable giving to 39.6 cents per dollar — an increase in the tax incentive that Pease does not affect.
Tuesday, January 22, 2013
Friday, January 18, 2013
Center on Budget and Policy Priorities: The “Fiscal Cliff” Deal and Income Inequality:
Any evaluation of the recent “fiscal cliff” budget deal needs to consider its impact on one of the most powerful and troubling economic trends of recent decades: the sharp rise in income inequality. The deal shifts tax policy in a favorable direction by raising taxes on the nation’s highest-income people, but the increase is modest when compared to the effects of growing inequality. ...
Saturday, January 12, 2013
Friday, January 11, 2013
Tax Policy Center: Tax Provisions in the American Taxpayer Relief Act of 2012 (ATRA), by Jim Nunns & Jeff Rohaly:
The fiscal cliff debate culminated in the passage of the American Taxpayer Relief Act of 2012 (ATRA). ATRA makes permanent most of the tax cuts enacted in 2001 and 2003, permanently patches the alternative minimum tax, extends for five years the enhancements to individual income tax credits originally enacted in the 2009 stimulus legislation, and temporarily extends certain other tax provisions. This paper provides a detailed description of the individual, corporate, and estate tax provisions in ATRA.
Joint filing has been a source of confusion ever since the filing status was created in 1949. Marriage has the potential to create a significant tax penalty, but it can also lead to a tax bonus in other situations, and for most taxpayers, determining the effect is anything but simple.
To illustrate how filing status affects tax liability, we’ve created a chart (above) that plots the two most important variables against each other—on the Y axis, equality of incomes between the two spouses, and on the X axis, total household wage income. The color represents the theoretical marriage penalty or bonus for a household with only wage income, no children, and no itemized deductions.
In general, there tends to be a marriage tax bonus when the two partners have widely disparate incomes and a marriage tax penalty when they have similar or equal incomes. There are two countervailing forces at work—on the one hand, the higher tax rate brackets kick in at greater income levels for joint filers than for single filers, but on the other hand, adding two incomes together can more than compensate for this effect. The need to balance these two effects is inherent in any tax system with a joint filing status—efforts to reduce the marriage bonus for certain filers will necessarily lead to a marriage penalty for others and vice versa.
Wednesday, January 9, 2013
Tax Foundation: CRS Study on Tax Rates and Growth Still Flunks the Test, by Stephen J. Entin:
Studies issued by the Congressional Research Service are intended to inform the Congress as it develops public policy and enacts legislation. A recent CRS publication on the effect of the top statutory tax rates on economic activity [Taxes and the Economy: An Economic Analysis of the Top Tax Rates Since 1945] may have influenced the debate over taxing the rich during the election and may have influenced the tax changes just enacted in the fiscal cliff legislation.
It is critical that such studies reflect the best guidance that the economics and tax professions can provide. The CRS study on the top tax rates did not meet that high standard. Its original release in the fall was met with widespread and justified disbelief, and it was withdrawn for review and examination of its methodology. It has now been reissued in an updated form. However, the re-issued CRS study does not contain any changes of note that would redeem the original report.
The paper purports to determine the link (or lack thereof) between changes in the top marginal tax rates on income and capital gains and the growth rate of the economy. Unfortunately, the method used to determine the relationship depends mainly on timing, looking to see if a change in the growth rate of the economy coincides with or follows soon after a rise or fall in the tax rates. The study makes no effort to determine the channels through which the tax changes ought to work to affect the economy, looks at the wrong measure of progress over the wrong time frame, and takes inadequate account of what other tax or economic events are occurring at the same time that might mask the results. ...
The CRS study omits important variables and poisons its results by not holding other factors constant. The variables it does examine are indirectly related to the relationship one should be studying, but the study does not follow them for long enough to get the whole picture. The study is as weak now as it was when it was first issued. Grade: F.
Prior TaxProf Blog posts:
- CRS: An Economic Analysis of the Top Tax Rates Since 1945 (Sept. 17, 2012)
- Dems, GOP Trade Barbs After CRS Pulls Report on Tax Rates and Economic Growth (Nov. 2, 2012)
- Republican Staff Study: CRS Report on Tax Rates Is Flawed (Nov. 14, 2012)
- CRS Re-issues Report: Tax Rates on Rich Have 'Negligible' Effect on Economic Growth (Dec. 14, 2012)
Wednesday, January 2, 2013
BP’s recent $4.5 billion legal settlement with the Justice Department for its misdeeds in the Gulf oil spill was historic for being the largest ever criminal settlement. But it was historic for another reason as well—none of it is allowed to be tax deductible. Unfortunately, too many settlements for wrongdoing end up as tax deductions.
Corporations accused of wrongdoing commonly settle legal disputes with government regulators out of court. Doing so allows both the company and the government to avoid going to trial and the agency gets to appear as if it is teaching the company a lesson for its misdeeds. However, very often the corporations deduct the costs of the settlement on their taxes as an ordinary business expense, shifting a significant portion of the burden onto ordinary taxpayers to pick up the tab. ...
Taxpayers should not subsidize BP’s recklessness and deception in the Gulf, big banks’ costly tampering with interest rates in the Libor scandal, or other wrongdoing.
The law clearly states that punitive penalties and fines issued by government agencies are not tax-deductible, but agencies that negotiate settlements all too rarely make clear what portion of a settlement should be regarded as punitive. Corporate tax lawyers can take advantage of this ambiguity by acting as if none of the settlement was meant to be punishment for misdeeds. The IRS is ill prepared to challenge these claims, and taxpayers end up holding the bag.
To help ensure that corporate wrongdoing is not publicly subsidized and that taxpayers are not saddled with the burden, U.S. PIRG offers the following policy recommendations that could save billions of dollars each year.
Suppose someone proposed a special tax on businesses that make their ownership shares publicly available in affordable, easy-to-sell units. Such an idea would probably generate a lot of push-back. Efficiency advocates might complain that it taxed the very attributes that make equity markets efficient. Progressivity advocates might object on the grounds that it taxed those who have no alternative to publicly available investment opportunities.
In fact we already have such a tax. We call it the corporate income tax.
In what sense is the corporate tax a special levy on being publicly traded? And what do we know about the policy implications of such a charge?
Saturday, December 29, 2012
Chris Edwards (Cato Institute), Advantages of Low Capital Gains Tax Rates:
The top federal capital gains tax rate is scheduled to increase from 15% to 23.8% next year. Some policymakers think that a reduced rate for capital gains is an unjustified tax preference. However, capital gains are different than ordinary income and have been subject to special low rates since 1922. Nearly every country has reduced tax rates on individual long-term capital gains, with some countries imposing no tax at all.
This bulletin describes why policymakers should keep capital gains taxes low, and it presents data on capital gains tax rates for the 34 nations in the OECD. If the U.S. capital gains tax rate rises next year as scheduled, it will be much higher than the average OECD rate.
Policymakers should reconsider capital gains tax policy. Capital gains taxes raise less than five percent of federal revenues, yet they do substantial damage. Higher rates will harm investment, entrepreneurship, and growth, and will raise little, if any, added federal revenue.
Related op-ed: Six Reasons To Keep Capital Gains Tax Rates Low
Wednesday, December 19, 2012
Tax Foundation: What Is the Evidence on Taxes and Growth?:
[W]hat does the academic literature say about the empirical relationship between taxes and economic growth? While there are a variety of methods and data sources, the results consistently point to significant negative effects of taxes on economic growth even after controlling for various other factors such as government spending, business cycle conditions, and monetary policy. In this review of the literature, I find twenty-six such studies going back to 1983, and all but three of those studies, and every study in the last fifteen years, find a negative effect of taxes on growth. Of those studies that distinguish between types of taxes, corporate income taxes are found to be most harmful, followed by personal income taxes, consumption taxes and property taxes. ...
[T]he lesson from the studies conducted is that long-term economic growth is to a significant degree a function of tax policy. Our current economic doldrums are the result of many factors, but having the highest corporate rate in the industrialized world does not help. Nor does the prospect of higher taxes on shareholders and workers. If we intend to spur investment, we should lower taxes on the earnings of capital. If we intend to increase employment, we should lower taxes on workers and the businesses that hire them.
Saturday, December 15, 2012
Citizens for Tax Justice: Fortune 500 Corporations Holding $1.6 Trillion in Profits Offshore:
Among the Fortune 500 corporations, 290 have revealed that they, collectively, held nearly $1.6 trillion in profits outside the United States at the end of 2011. This is one indication of how much they might benefit from a so-called “territorial” tax system, which would permanently exempt these offshore profits from U.S. taxes.
Just 20 of the corporations — including household names like GE, Microsoft, Apple, IBM, Coca-Cola and Goldman Sachs — held $794 billion offshore, half of the total. The data are compiled from figures buried deep in the footnotes of the “10-K” financial reports filed by the companies annually with the Securities and Exchange Commission.
Thursday, December 13, 2012
The Pew Charitable Trusts, Avoiding Blank Checks: Creating Fiscally Sound State Tax Incentives:
Reliable cost estimates and annual cost controls for tax incentives have helped states promote job creation and economic growth while avoiding unexpected budget challenges. But Pew’s analysis shows that policy makers often create tax credits, deductions, and exemptions without these tools, raising the risk of budget shortfalls and unplanned spending cuts or tax increases to close them.
Wednesday, December 12, 2012
The Tax Foundation map below looks at "how much of each state's budget comes from the federal government. Mississippi tops the list with 49% of its general revenue coming from Washington; Alaska, by contrast, gets only 24% of its general revenue from the feds."
Wednesday, December 5, 2012
Tax Foundation: Raising Revenue: The Least Worst Options:
With the fiscal cliff looming, lawmakers are looking for new revenues as a component of any bipartisan deal to reduce the federal deficit. While raising new revenues may be politically necessary to seal a deal, lawmakers must keep in mind that not all revenue raisers are equal. Some will have far more harmful economic consequences than others.
Indeed, after careful study, OECD economists have established a hierarchy of which taxes are most and least harmful for long-term economic growth. They determined that the corporate income tax is the most harmful for long-term economic growth, followed by high personal income taxes. Consumption taxes and property taxes were found to be less harmful to economic growth relative to taxes on capital and income.
Why this hierarchy? It is determined by which factors are most mobile and, thus, most sensitive to high tax rates. Capital is the most mobile factor in the economy and therefore most sensitive to a hike in tax rates. Naturally, land is the least mobile and less sensitive to high tax rates. This is not to say that high taxes won’t affect consumption and property patterns but their impact will simply be less than the impact of taxes on capital and income.
With these rules of thumb in mind, here is a short list of ways to raise new revenues ranking from least harmful to most harmful:
- (Least Harmful) Economic Growth
- Asset Sales or Require Government Sponsored Enterprises (GSEs) and Federally-Owned Businesses to Pay Federal Income Taxes
- User Fees and Leases
- Tax Certain Non-Taxed Business Activities
- Premium and Co-Pay Increases
- Federal Employee Contributions
- Sales/Excise Taxes
- Raising the Payroll Tax Rate and/or Raising the Wage Base to Which It Applies
- Raising the Alternative Minimum Tax and/or a "Buffett Rule"-Type Minimum Tax
- Allowing "Temporary" Expensing to Expire
- Raising Top Individual Income Tax Rates
- Raising the Tax Rate on Estates
- Raising Tax Rates on Capital Gains and Dividends
- (Most Harmful) Raising Corporate Income Tax Rates
Friday, November 30, 2012
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:
- 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.
- 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.
- 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.
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.
Thursday, November 29, 2012
Real Clear Politics, Buffett: Tax Hikes On Rich Would "Raise Morale Of The Middle Class":
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.
Wednesday, November 21, 2012
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.
Sunday, November 18, 2012
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
2011 Median Family Income
Tax Increase 2011 to 2013
Tax Increase as % of Income
Table 2. Bottom 10 States
2011 Median Family Income
Tax Increase 2011 to 2013
Tax Increase as % of Income
Friday, November 16, 2012
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.