Recently in Federal Tax Issues Category

President Obama’s proposal to extend most, but not all, of the Bush tax cuts, would result in 1.9 percent of Americans losing some portion of the Bush income tax cuts. In 22 states, less than 1.5 percent of residents would lose some portion of their income tax cuts under the President’s proposal.

Read the fact sheet.

How U.S. taxpayers and taxpayers in each state would be affected by two competing approaches to the Bush tax cuts. Report with figures for the entire U.S. plus reports with figures specific to each state and the District of Columbia.

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Read the PDF version of this document.

Nothing better illustrates the difference between President Obama and Mitt Romney when it comes to taxes than how each of them would fare under their competing tax plans.

Citizens for Tax Justice has done the calculations for 2013, based on what the two candidates have proposed. The differences are striking.

In a nutshell, Obama thinks that very high income people, especially the super-rich like Romney, ought to pay more in taxes to support the country that helped make their success possible. Romney thinks that the big winners in our society, especially the biggest winners like himself, ought to pay a lot less.

Mitt Romney:

  • Under his own tax plan, Mitt Romney would pay only 13.1 percent of his $23 million income in federal income tax, Social Security tax and Medicare tax.
  • Under Obama’s plan, Romney would pay a 34.3 percent federal tax rate

President Obama:

  • Under his own tax plan, President Obama would pay 28.4 percent of his $874,000 income in federal income tax, Social Security tax and Medicare tax.
  • Under Romney’s plan, Obama would pay only an 18.1 percent federal tax rate.

CTJ’s calculations are based the latest tax returns released by the candidates, for 2011 in the case of President Obama and for 2010 in the case of Mitt Romney. The income figures were adjusted for inflation to put both at 2013 levels.

Obama’s tax plan, which is spelled out in detail in his budget proposals, would extend the Bush income tax cuts for all but the highest earners. He would also repeal the loophole that allows wages earned as a “carried interest” to be treated as lightly taxed capital gains. And he would limit the tax savings from itemized deductions to 28 percent of the amount deducted.

Romney’s tax plan would extend all of the Bush income tax cuts, reduce regular income tax rates (on non-capital gains and dividend income) by 20 percent, and repeal the Medicare tax expansion enacted in the Affordable Health Care Act. Romney has said he would also eliminate some tax breaks, but he has not specified even one of them. But clearly he does not plan to close the loopholes that matter most to him, i.e., the special low rates on capital gains and qualified dividends (which are part of the Bush tax cuts he has pledged to extend) and the special treatment of wages received as a “carried interest” as capital gains (asked whether he would close the “carried interest” loophole, Romney has said, “With regard to carried interest associated with venture capital, real estate, private equity, I do not believe in raising taxes”).

Tables with more details below:

 

Read the PDF Version of this Report.

The tax cuts enacted in 2001 and 2003 under President Bush are scheduled to expire at the end of 2012. As we approach the expiration date, there’s a growing debate about whether and how much of these temporary tax breaks should be extended. President Obama has proposed extending the Bush tax cuts for all taxpayers on incomes up to $250,000 ($200,000 for single filers). Some lawmakers have suggested moving the threshold to $1 million.

Based on our preliminary estimates:

  • High-income taxpayers still get a big tax cut. Using either threshold, even high income taxpayers still get to keep most of their Bush tax cuts. That’s because thetax cuts – primarily lower rates – still apply to income below the thresholdamount.
  • Ending the breaks for incomes over $250,000 saves substantial revenue. Extending the Bush tax cuts for only the first $250,000 of families’ incomes saves the U.S. Treasury an estimated $60-70 billion in revenue for one year alone, 2013, compared to extending all of the tax cuts.
  • Moving the threshold to $1 million is costly. Extending the Bush tax cuts for the first $1 million of a family’s income saves 43 percent less revenue than the savings estimated with a $250,000 threshold.
  • Millionaires get 50 percent of the additional tax breaks from moving the threshold to $1 million. About half of the additional tax breaks resulting from moving the threshold from $250,000 to $1 million actually go to taxpayers with income over $1 million – because they’re getting additional tax breaks on all of their income up to $1 million.

Read the PDF version of this document.

On Friday, May 4, the New York Times ran a letter from CTJ’s director, Robert McIntyre, responding to a recent Times article describing Apple’s tax dodging. McIntyre explains,

“In its latest annual report, Apple said that as of last September, it had a staggering $54 billion parked offshore (since grown, as the Times points out, to $74 billion).  Almost all of this huge hoard is accumulated in tax havens and has never been taxed by any government. More to the point, most of these untaxed profits are almost certainly United States profits that Apple has artificially shifted offshore to avoid its United States tax responsibilities.

“There’s a simple way to curb this kind of corporate tax dodging, of which Apple is only one prominent example: repeal the tax rule that indefinitely exempts offshore profits from United States corporate income tax. If those profits were taxable (with a credit for any foreign taxes paid), then Apple alone would have paid an additional $17 billion in federal income taxes over the past decade. That would have tripled the federal income taxes that Apple actually paid.

“Congressional scorekeepers estimate that ending the offshore corporate tax exemption would increase overall federal revenues by about $600 billion over the next decade. That’s money that could be put to good use in these times of strained budgets.”

Postscript: In our major study of corporate tax rates last November (Corporate Taxpayers & Corporate Tax Dodgers), we reluctantly included figures on Apple that reported the company’s 2008-10 effective federal tax rate on its reported U.S. profits to be 31.3%. In our notes we pointed out, “For better or worse, we did, with grave reservations, include some potential “liar companies” that we highly suspect made a lot more in the U.S., and less overseas, than they reported to their shareholders (e.g., Apple . . . ). We urge our readers to treat these companies’ true “ef­fec­tive U.S. income tax rates” as possibly much lower than what we reluctantly report. We will be working more on this issue.”

Since then, we have spent quite a bit more time studying Apple’s annual reports. As our letter to the New York Times above notes, at the end of Apple’s 2011 fiscal year, it had accumulated $54 billion in cash offshore, almost all of it in tax havens, and almost all untaxed by any government. Since Apple’s profits stem mainly from its U.S.-created technology, most, if not all, of these untaxed profits are almost certainly United States profits that Apple has artificially shifted offshore.

If we treat all of the untaxed portion of Apple’s offshore profits as really U.S. profits that were artificially shifted to offshore tax havens, then Apple’s U.S. tax rate is much lower than Apple reports. Under this approach, Apple’s 2008-10 effective federal tax rate comes to only 13.4%, and its effective federal tax rate over the last six years (2006-11) was only 12.1%. (Likewise, Apple’s revised effective state tax rate in 2008-10 was only 3.6%, instead of the 8.0% we reported in our state corporate tax study issued last December.)

This alternative calculation is not necessarily perfect, since some of the profits Apple booked in tax havens may have been shifted from foreign countries in which it actually does real business (such as countries in Europe). But even if only three-quarters of the untaxed tax-haven profits are really U.S. profits, then Apple’s actual 2006-11 federal tax rate is still only 14%, less than half of the 31% tax rate that Apple’s annual reports indicate.

A table showing the alternative calculations for Apple’s effective tax rate is at the bottom of this page.

Post-postscript: How do we know that Apple paid no tax to any government on almost all of its offshore cash hoard? Surprisingly, Apple actually tells us, although it takes a close reading of Apple’s annual reports and a knowledge of U.S. tax laws to understand.

The key is this: the U.S. indefinitely exempts U.S. companies from tax on the profits of their offshore subsidiaries. Only if a foreign subsidiary pays a dividend to its U.S. parent are those profits taxable. If the subsidiary has already paid income tax to foreign governments, the parent company gets a “foreign tax credit” against its U.S. tax for that foreign tax.

So here’s what Apple reveals in it annual reports: Apple says that if it told its foreign subsidiaries to pay Apple the whole $54 billion offshore amount as a dividend, then Apple would owe $17 billion in U.S. federal income taxes. That reflects a $19 billion tax at 35 percent, less a $2 billion foreign tax credit (the sum of all the foreign income taxes that Apple has ever paid). Which means, with a little more arithmetic, that about 90 percent of the $54 billion in accumulated offshore profits has never been taxed by any government.

This one page fact sheet includes the information you need to understand the debates taking place around Tax Day.

Read the fact sheet.

Tax Tips with Mitt

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Read the PDF of this report.

Tax Planning for the Super Wealthy

Millions of Americans will spend part of this upcoming weekend trying to navigate tax preparation software or filling out the actual paper forms to file their income tax returns before the Tuesday deadline. For those wishing they could pay less tax, outlined below are some tax planning ideas taken from a review of presidential candidate Mitt Romney’s tax returns.

Don't Work for a Living

The single best way to reduce your income tax bill is to make sure that your income is subject to the lower preferential rates for dividends and capital gains. The federal tax system taxes “ordinary” income, like salaries and wages, at much higher rates (up to 35%) than investment income (maximum 15%). Many states have capital gains tax breaks, too. The low capital gains tax rate explains Romney’s 14 percent effective federal income tax rate. Almost all of his income is taxed at the low rate — the ordinary income he does have, from interest and speaking fees, is mostly offset by his itemized deductions.

At any level of income, a taxpayer with income from capital gains and dividends will pay less than half of the federal income tax paid by a taxpayer with the same amount of wages. Here are some examples:

Federal Income Tax

If Wages

If Capital Gains

Single, doesn’t itemize, $60,000 income

$8,750

$2,400

Married, itemizes, $250,000 income

$43,400

$19,300

Married, itemizes, $20 million income

$6,276,000

$2,695,200


The wage earner pays payroll taxes on top of the income tax. So it’s best, like Romney, to be unemployed.

Federal Income and Payroll Taxes

If Wages

If Capital Gains

Single, doesn’t itemize, $60,000 income

$17,930

$2,400

Married, itemizes, $250,000 income

$63,900

$19,300

Married, itemizes, $20 million income

$6,867,100

$2,695,20


If You Do Work, Disguise Your Compensation as Capital Gains

Romney’s return does report quite a bit of compensation (in addition to that “not very much” in speaking fees of $529,000), but it’s disguised as capital gains, to make it subject to that special low rate. About half of the $15 million in capital gain and dividend income reported on his 2010 tax return is compensation from Romney’s partnership interests in Bain Capital funds.

These “carried interests” were earned by Romney in exchange for the services he performed while at Bain Capital. Private equity, hedge fund, and other investment fund managers structure their compensation so that most of it is received in the form of a partnership interest — a piece of the deal — and the income from those carried interests is taxed at the capital gain rate. In addition to paying a much lower income tax rate, Romney also avoids paying the Medicare payroll tax on the income.

Give to Charity — But Not Cash

If you give a gift of appreciated property, like stock, to a charity, your deduction is the value of the stock, even though you may have paid far less for it. In Romney’s return, there’s a deduction for just under $1.5 million worth of Domino’s Pizza stock (which he likely received in a Bain Capital deal) to the Tyler Foundation (more about that below). The price he paid for the stock was zero or something so close to zero that the accountant didn’t bother reporting it. Giving the stock to the foundation saved Romney an estimated $220,000 in taxes that he would have owed if he had sold the stock and given cash instead.

Give to Charity — But Not Now

In Romney’s tax return, there’s income from the W. Mitt Romney 1996 CRUT (that’s a Charitable Remainder UniTrust). That means Romney set up a charitable trust in 1996 (with a half million dollars or more) and he kept the right to receive income from the trust for a certain number of years or, quite likely, for the rest of his life.

In 1996 Romney got an income tax deduction for what will go to charity when the trust ends. The charity won’t get a dime until that trust ends (and it’s already been 15 years since the contribution), but Romney got a big deduction on his 1996 return (it’s hard to know how big without seeing the return). In addition, he or one of his close advisors can be the trustee of the trust and control the money until the trust ends.

In addition, the trust is a tax-exempt entity, so it can sell whatever assets are in the trust and pay no capital gains taxes, diversify Romney’s portfolio, and increase his investment return. Of course, at the end of the trust’s term, whatever remains in the trust must be distributed to a charity. In the meantime, Romney has enjoyed some generous tax benefits.

Give to Charity — Your Own

Of the almost $3 million in charitable contributions on Romney’s 2010 tax return, about half went to The Tyler Charitable Foundation which Mitt and Ann Romney set up in 1999. When Romney makes a contribution to the foundation, it is fully deductible on his personal income tax return that year.

The foundation itself doesn’t provide direct services like a soup kitchen does. The “private” foundation (whose donations come from only one or a few supporters) gives money to charities like the Boys and Girls Club (known as “public” charities because their support is from the public more broadly) that generally do provide direct services.

The foundation only has to distribute 5 percent of its assets each year. So while Romney got a $1.5 deduction for the amounts transferred to the foundation in 2010, the foundation can take its sweet time getting the money in the hands of a public charity. At the end of 2010, the foundation had over $10 million in assets.

Use Offshore Investment Vehicles

An American citizen is taxable on all of his income, no matter where he lives or where the income is earned. If the income is subject to any foreign tax, the taxpayer gets a credit against his U.S. tax, to avoid double taxation. Romney reduced his U.S. tax bill by almost $130,000 in foreign tax credits on his 2010 return.

The earnings on any foreign investments would be fully taxable in the year earned, so it seems there would be no tax advantage to investing offshore. But using certain foreign investment vehicles allows a U.S. taxpayer to avoid some rules and thereby save some tax.

(For tax nerds: Investing in a Bain Capital fund formed in the Cayman Islands through a PFIC (Passive Foreign Investment Corporation), for example, can save an individual investor tax by avoiding the limitations on miscellaneous itemized deductions. A tax-exempt investor, like Romney’s Individual Retirement Account, can avoid the Unrelated Business Income Tax (UBIT) by investing through a foreign corporation as well, instead of investing in the fund directly.)

There are reports that Romney may have taken advantage of the tax savings offered by investing through these offshore vehicles, although it’s not apparent from the tax return. The return does have 55 pages of forms for reporting Romney’s transactions with foreign corporations, foreign partnerships, and PFICs. At least eleven of the entities from which Romney earns income are located in countries considered to be offshore tax havens, such as Bermuda, the Cayman Islands, and Luxembourg.

Invest in Sexier Financial Instruments

If you’re investing in plain vanilla stock and bonds, you’re missing some tax planning opportunities. For example, Romney’s return includes a $415,000 gain from certain investments that get special treatment under the tax rules (for tax nerds: section 1256 contracts).

The gain on these investments is treated as 60 percent long-term capital gain and 40 percent short-term gain, no matter how long you’ve actually held the investment — even if it’s for only one day! The amount treated as long-term gain gets taxed at that special low capital gains rate. Romney’s return also discloses income from foreign currency transactions, swaps and other derivatives, and investments which are written up to market value each year.

Borrow Money Only to Invest

If you borrow money to buy a car, the interest is not deductible even if you need your car to get to work. If you use a credit card to buy personal items, that interest is not deductible. If you borrow money to buy a house, the interest is deductible but only on a loan of $1 million or less. (Romney’s three homes are valued in the neighborhood of $25 million.) If you borrow money against the equity in your home, interest on only $100,000 of principal is deductible.

But if, like Romney, your interest expense is “investment interest expense,” it is deductible, limited only by the amount of your investment income. When your investment income is in the millions of dollars, you can deduct a lot of interest.

Be Aggressive in Your Tax Planning

When a taxpayer engages in a type of transaction that the Internal Revenue Service has identified as potentially abusive, he must disclose that in his tax return. It’s called a “reportable transaction” and the taxpayer has to file a Form 8886 to tell the IRS about it. Romney’s 2010 return included six Forms 8886 (16 pages) related to investments in hedge funds and private equity funds.

But Don’t Do Anything Illegal

There’s nothing in Romney’s tax return that indicates anything necessarily illegal or improper. On the contrary, it appears that he has been conscientious in filing the necessary forms and disclosures.

In addition to the disclosures noted above, on Schedule B, Interest and Dividends, the “yes” box is marked on that pesky question about foreign financial accounts and “Switzerland” is shown as where the account is located. If Romney was going to use offshore accounts to illegally evade taxes (as opposed to merely avoid them), he might decide not to complete that part of the return or he might omit some of those disclosure forms.

For Your Return

While in theory any taxpayer could use the tax planning techniques outlined above, in reality only the wealthy can take advantage of them. It takes a substantial amount of money to set up a charitable trust, for example. In addition to the money you put in the trust, you have to pay the attorney who draws up the trust documents and the accountant who files the trust’s annual tax returns. So unless you’re making a pretty substantial contribution, the costs would outweigh the tax benefits.

You have to have significant resources to be able to structure your debt for the best tax result. Or to set up a private foundation. Or make offshore investments. Or structure your compensation as capital gains.

The fact that there doesn’t appear to be anything improper in Romney’s tax return — and yet the return is full of ways only a wealthy person can reduce his tax bill — is the problem.

Read the PDF of this Report. 

Last November, Citizens for Tax Justice and the Institute on Taxation and Economic Policy issued a major study of the federal income taxes paid, or not paid, by 280 big, profitable Fortune 500 corporations. That report found, among other things, that 30 of the companies paid no net federal income tax from 2008 through 2010. New information for 2011 shows that almost all these 30 companies have maintained their tax dodging ways.

In fact, all but four of the 30 companies remained in the no-federal-income-tax category over the 2008-11 period.

Over the four years:

  • 26 of the 30 companies continued to enjoy negative federal income tax rates. That means they still made more money after tax than before tax over the four years!

 

  • Of the remaining four companies, three paid fouryear effective tax rates of less than 4 percent (specifically, 0.2%, 2.0% and 3.8%). One company paid a 2008-11 tax rate of 10.9 percent.

 

  • In total, 2008-11 federal income taxes for the 30 companies remained negative, despite $205 billion in pretax U.S. profits. Overall, they enjoyed an average effective federal income tax rate of –3.1 percent over the four years.

“These big, profitable corporations are continuing to shift their tax burden onto average Americans,” said Citizens for Tax Justice director Bob McIntyre. “This isn’t fair to the rest of us, it makes no economic sense, and it’s part of the reason our government is running huge budget deficits.”

The Size of the Tax Subsidies:

Had these 30 companies paid the full 35 percent corporate tax rate over the 2008-11 period, they would have paid $78.3 billion more in federal income taxes. Or put another way, over the four years, the 30 companies received more than $78 billion in total tax subsidies. Wells Fargo alone garnered $21.6 billion in tax subsidies over the four years, followed by General Electric ($10.6 billion), Verizon ($7.7 billion), and Boeing ($6.0 billion).

Taxes in 2011:

In 2011 alone, 24 of the 30 companies paid effective tax rates of less than 4 percent, including 15 that paid zero or less in federal income taxes in that year. For all 30 companies, the average 2011 effective federal income tax rate was a paltry 7.1% — only a fifth of the statutory 35 percent federal corporate tax rate.

The Bottom Line:


The information on these 30 companies helps illustrate why overall federal corporate income tax collections are so low. The Treasury Department reports that corporate taxes fell to only 1.2 percent of our gross domestic product over the past three fiscal years. That’s lower than at any time since the 1940s except for one single year during President Reagan’s first term. By comparison, corporate taxes averaged almost 4 percent of our GDP during the 1960s.

“Getting rid of corporate tax subsidies that cause such widespread tax avoidance ought to be a key part of any deficit-reduction program,” said McIntyre. “As a bonus, revenue-raising corporate tax reform would make it much easier to fund the investments we need to improve education and repair our crumbling roads and bridges — things that would actually help businesses and our economy grow.”

Note: The 30 no-tax corporations over the 2008-10 period reported in CTJ’s November 2011 report included Computer Sciences, which had a negative 18.3% tax rate over the three years. Computer Sciences has an odd fiscal year, and will not file its financial statements until this summer. However, in entering 2011 data for Apache, we discovered that we had missed a well-hidden entry in Apache’s financial statements for excess stock option tax benefits. Including these tax benefits lowered Apache’s effective 2008-10 tax rate from +0.6% to –1.5%. As a result, we have included Apache in the 2008-10 notax list for this updated report.

For more charts and appendixes read the PDF here.

Who Pays Taxes in America?

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Read the PDF of this report.

It’s often claimed that the richest Americans pay a disproportionate share of taxes while those in the bottom half pay nothing. These claims ignore the many taxes that most Americans are subject to — federal payroll taxes, federal excise taxes, state and local taxes — and focus instead on just one tax, the federal personal income tax. The other taxes are mostly regressive, meaning they take a larger share of income from a poor or middle-income family than they take from a rich family.[1]

Many Americans do not have enough income to owe federal personal income taxes, but do pay these other taxes. The federal personal income tax is a progressive tax, and the combination of this tax with the other (mostly regressive) taxes results in a tax system that is, overall, just barely progressive. Total tax obligations are, on average, fairly proportional to income.

This table illustrates the share of total taxes (all federal, state and local taxes) paid by Americans in different income groups in 2011.

 

• The share of total taxes paid by each income group is similar to that group’s share of total income.

• The share of total taxes paid by the richest one percent (21.6 percent) is almost identical to that group’s share of total income (21.0 percent).

• The total effective tax rate for the richest one percent (29.0 percent) is only about four percentage points higher than the total effective tax rate for the middle fifth of taxpayers (25.2 percent).[2]

• The share of total taxes paid by the poorest fifth of Americans (2.1 percent) is only slightly less than this group’s share of total income (3.4 percent).

Virtually every person in America pays some type of tax. Everyone who works pays federal payroll taxes. Everyone who buys gasoline pays federal and state gas taxes. People who shop in stores pay the sales taxes that most state and local governments impose. State and local property taxes affect everyone who owns or rents a home. (Even renters pay property taxes because landlords pass some of the tax on to them in the form of higher rents). Most states also have income taxes, most of which are not particularly progressive.

 

 

Why the Federal Personal Income Tax Is Progressive

We need the federal personal income tax to be progressive to offset the regressive impacts of these other taxes. 

For example, the federal personal income tax provides refundable tax credits like the Earned Income Tax Credit and the Child Tax Credit, which can reduce or eliminate personal income tax liability and even result in negative personal income tax liability, meaning families receive a check from the IRS. These tax credits are only available to taxpayers who work, and who therefore pay federal payroll taxes, not to mention the other taxes that disproportionately affect low- and middle-income Americans.

In other words, the parts of the federal personal income tax that seem like a boon to the poor are justified because they offset some of the other taxes that poor and middle-income families must pay.

As these figures illustrate, America’s tax system as a whole is just barely progressive.

 


[1] For a state-by-state break down of the distribution of state and local taxes, see Institute on Taxation and Economic Policy, Who Pays: A Distributional Analysis of the Tax System in All 50 States, November 2009. http://www.itepnet.org/whopays.htm   

[2] There are some high-income individuals who have effective federal tax rates that are much lower than average for their income group. See Citizens for Tax Justice, “How to Implement the Buffett Rule,” October 19, 2011. http://www.ctj.org/pdf/buffettruleremedies.pdf

 

Read the pdf of this report.

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

 

Tax Revenue Would Not Be Enough to Pay for Reagan-Era Spending

First, the Ryan budget would lock in the low revenue levels that are the result of the Bush tax cuts, which will expire at the end of this year if Congress simply does nothing.

The Ryan budget plan indicates that this level of revenue would equal 18 or 19 percent of GDP (that is, 18 or 19 percent of our overall economy) in the following decades. Federal spending has been greater than this for most of the past 50 years.

In fact, even during the Reagan administration, federal spending ranged from 21.3 percent to 23.5 percent of GDP. And that was at a time when America was not fighting any wars, the baby-boomers were not retiring, and health care costs had not yet skyrocketed the way they have today.[1]

Millionaires Would Receive Average Income Tax Cut of at Least $187,000 in 2014

Second, the Ryan budget would replace the existing personal income tax with a personal income tax that has just two rates, 10 percent and 25 percent, repeal the Alternative Minimum Tax (AMT), and offset the costs by closing unspecified tax loopholes and tax expenditures. The table on the first page illustrates that taxpayers with adjusted gross income (AGI) exceeding $1 million would enjoy a tax cut of at least $187,000 under this plan no matter how it is implemented.

The figures in the table were calculated under the assumption that taxpayers with AGI exceeding $1 million would have to give up all the major tax loopholes and tax expenditures that Rep. Ryan could conceivably target for repeal. While Rep. Ryan does not specify which tax provisions he would repeal, these calculations assume he would repeal all itemized deductions, all tax credits, the exclusion for employer-provided health insurance, and the deduction for health insurance for the self-employed.[2]

Even under these assumptions, over 92 percent of these very high-income taxpayers would enjoy a net tax cut, and the average income tax change for these taxpayers would be a reduction of $187,000 in 2014.

The reason is that reducing the top personal income tax rate (which will be 39.6 percent in 2014 under current law) to 25 percent would provide a benefit to millionaires that would far exceed their loss of any deductions, credits, or breaks for health care.

By way of comparison, millionaires would receive an average income tax cut of $115,000 in 2014 if the Bush tax cuts are extended through that year.[3] 

The Ryan budget document calls for closing enough tax loopholes and tax expenditures to ensure that this simplified personal income tax would collect as much revenue as the current system would collect if the Bush tax cuts were made permanent for everyone. This is a very low revenue goal, but Rep. Ryan’s tax proposals would almost certainly fail to meet it nonetheless.

Budget Plan Would Slash Corporate Taxes and Exempt Profits Shifted Overseas

Third, the Ryan budget would replace the statutory corporate income tax rate of 35 percent  — which Rep. Ryan criticizes as one of the world’s highest — with a statutory rate of just 25 percent. The budget document comes close to admitting that the effective corporate income tax rate — the percentage of profits that corporations actually pay after accounting for the loopholes they enjoy — is far lower than 35 percent. (CTJ recently found that the 3-year effective tax rate for consistently profitable Fortune 500 corporations averaged just 18.5 percent.)[4]

It’s unclear if the Ryan budget is intended to repeal enough corporate tax subsidies to offset the cost of reducing the statutory corporate tax rate from 35 percent to 25 percent, but the non-partisan Joint Committee on Taxation (JCT) has already concluded that this is impossible in any case.

Last year, House Ways and Means Committee Chairman Dave Camp (who Ryan cites as involved in his budget overhaul effort) proposed to reduce the statutory corporate income tax rate to 25 percent and offset the costs by repealing tax subsidies. Around the same time, the Joint Committee on Taxation (JCT) concluded that repealing all corporate tax subsidies would raise enough revenue to offset the cost of reducing the corporate income tax rate to 28 percent, and no lower, for a decade. Beyond the first decade, repealing all corporate tax subsidies would raise even less revenue, meaning the corporate income tax rate would have to be higher than 28 percent to be part of any revenue-neutral corporate tax reform.[5]

Another idea that Ryan’s budget borrows from Camp’s proposal is the introduction of a “territorial” tax system, which is a euphemism for exempting the offshore profits of U.S. corporations from the corporate income tax.

A territorial system would increase the existing incentives for U.S. corporations to move their operations offshore or use accounting gimmicks to make their U.S. profits appear to be “foreign” profits generated in offshore tax havens.[6]

The tax system already encourages corporations to engage in these abuses because it allows them to “defer” (delay) paying U.S. corporate income taxes on any profits that are generated offshore or made to appear that they were generated offshore.

If allowing corporations to defer their U.S. taxes on offshore profits encourages these abuses, then exempting those offshore profits from U.S. taxes entirely would logically increase this incentive.

The only way to prevent these abuses is for Congress to enact a tax reform that repeals “deferral.” This would mean that U.S. corporations would not pay lower taxes on profits that they generate (or appear to generate) in countries with lower corporate income taxes than the U.S. And, just as in the current system, U.S. corporations would be allowed a credit for taxes paid to foreign governments, to prevent double-taxation.[7]

Why the Ryan Budget Plan Does Not Specify How It Would Pay for Tax Rate Reductions

As explained already, the Ryan budget plan calls for closing tax loopholes and tax subsidies to offset the costs of reducing tax rates (beyond the rate reductions that are part of the Bush tax cuts) but does not name any particular tax loophole or tax subsidy to be repealed.

There may be a very specific reason for this vagueness. Two years ago, when Rep. Ryan offered a budget plan that would allow individuals to pay income taxes at a top rate of 25 percent and repeal the corporate income tax, he did propose a specific way to offset the costs — a regressive value-added tax (VAT).

Citizens for Tax Justice analyzed the tax components of that plan and found that, on average, taxpayers among the richest ten percent would pay less in taxes while taxpayers among the bottom 90 percent would pay more.  We also found that the plan would reduce revenues by $2 trillion over ten years.[8]

The truth is that it is very difficult to lower the top income tax rate to 25 percent and offset the costs simply by eliminating or reducing tax expenditures. That’s why Ryan’s previous plan relied on a regressive VAT. Rep. Ryan probably (correctly) decided the budget plans he would present last year and this year would seem more appealing if he left that detail out of it.

 


[1] Office of Management and Budget, Historical Tables, Table 1.2. http://www.whitehouse.gov/omb/budget/Historicals/

[2] Other major tax expenditures are supposedly incentives for savings and investments and would surely not be repealed because the Ryan budget plan specifically objects to “raising taxes on investing.” For example, the preferential rates for capital gains and stock dividends and various breaks for retirement savings are clearly not among those tax expenditures Ryan would repeal, given that language in the budget document.

[3] These figures refer to federal personal income taxes. Millionaires would receive other types of tax cuts under the Ryan budget plan. For example, the plan does not specify what would be done with the federal estate tax, but it strongly implies that it would not allow the estate tax cut in effect this year to expire. The Ryan budget plan would also repeal a reform of the Medicare tax (which was included in President Obama’s health care reform) that increases the Medicare tax from 2.9 percent to 3.8 percent for wages of high-income individuals and applies the 3.8 percent Medicare tax to investment income as well.

[4] Citizens for Tax Justice, “Corporate Taxpayers & Corporate Tax Dodgers, 2008-2010,” November 3, 2011. http://ctj.org/corporatetaxdodgers

[5] Letter from Thomas A. Barthold, Joint Committee on Taxation, October 27, 2011. http://democrats.waysandmeans.house.gov/media/pdf/112/JCTRevenueestimatesFinal.pdf

[6] A CTJ fact sheet explains why Congress should reject any proposal to exempt offshore corporate profits from U.S. taxes. Citizens for Tax Justice, “Why Congress Should Reject A ‘Territorial’ System and a ‘Repatriation’ Amnesty: Both Proposals Would Remove Taxes on Corporations’ Offshore Profits,” October 19, 2011. http://www.ctj.org/pdf/corporateinternationalfactsheet.pdf

[7] For more, see Citizens for Tax Justice, “Congress Should End ‘Deferral’ Rather than Adopt a ‘Territorial’ Tax System,” March 23, 2011. http://www.ctj.org/pdf/internationalcorptax2011.pdf

[8] Citizens for Tax Justice, “Rep. Ryan’s House GOP Budget Plan: Federal Government Would Collect $2 Trillion Less Over a Decade and Yet Require Bottom 90 Percent to Pay Higher Taxes,” March 9, 2010. http://www.ctj.org/pdf/ryanplan2010.pdf

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