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.
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.
Saturday, November 10, 2012
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
(2013 over 2012)
Expiration of the 2001-03 tax cuts (not including estate)
Expiration of the payroll tax holiday
Failure to patch the Alternative Minimum Tax
Expiration of business expensing
Expiration of other “tax extenders”
New PPACA (Obamacare) taxes
Expiration of the 2009 stimulus
Estate tax increase
Total, Tax Increases
Source: Tax Foundation; CBO; Joint Committee on Taxation; Office of Management & Budget.
Table 2: Major Bush Tax Cut Income Tax Provisions, 2001-2013
Income Tax Brackets
Capital Gains Tax (max)
Dividend Tax (max)
Estate tax (top rate)
Estate tax exemption
PEP & Pease
Joint Filer = 1.67 x Single
Joint Filer = 2 x Single
Joint Filer = 1.67 x Single
Child Tax Credit
Source: Tax Foundation
*Absent further congressional action.
**Estate tax was repealed completely for calendar year 2010.
Wednesday, November 7, 2012
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:
- The Fiscal Cliff
- The 2001-2010 Tax Cuts
- Tax Reform
- Medicare and Medicaid
- 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.
Tuesday, November 6, 2012
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:
- The estate tax is best characterized as the “death tax"
- The estate tax forces estates to turn over half of their assets to the government
- Weakening the estate tax wouldn’t significantly worsen the deficit because the tax doesn’t raise much revenue
- The cost of complying with the estate tax nearly equals the amount of revenue the tax raises
- Many small, family-owned farms and businesses must be liquidated to pay estate taxes
- The estate tax constitutes “double taxation” because it applies to assets that already have been taxed once as income
- If policymakers decide to retain the estate tax, the logical top rate would be 15%, the same as the capital gains rate
- Eliminating the estate tax would encourage people to save and thereby make more capital available for investment
- The estate tax unfairly punishes success
- The United States taxes estates more heavily than do other countries
Friday, November 2, 2012
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.
Sunday, October 28, 2012
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.
Friday, October 26, 2012
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.
Tuesday, October 23, 2012
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.
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
Tuesday, October 16, 2012
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.
Thursday, October 11, 2012
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.
Tuesday, October 9, 2012
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:
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).
Wednesday, October 3, 2012
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.
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.
Tuesday, October 2, 2012
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)
Monday, October 1, 2012
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.
Thursday, September 27, 2012
Tuesday, September 25, 2012
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: 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.
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.
Saturday, September 22, 2012
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.
Sunday, September 16, 2012
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.
Friday, September 14, 2012