Month: January 2009

January 30, 2009 02:15 PM | Permalink |

“Congress can swear on two stacks of Bibles that it’ll never do it again, but they’ve lost their virginity.” H. David Rosenbloom, Director, NYU School of Law International Tax Program, commenting to the New York Times on July 24, 2007 on the “repatriation” provision in the American Jobs Creation Act of 2004.

In 2004, Congress did something that, it claimed, it would never do again. It allowed corporations that had shifted their profits offshore to “repatriate” those profits—that is, bring them back into the United States—and pay corporate income taxes on those profits at a almost nominal 5.25% rate instead of the normal 35% rate for corporate income.

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January 29, 2009 03:35 PM | Permalink |

Some members of Congress lately are fond of saying that refundable tax credit (credits against tax that can result in the IRS actually sending money to taxpayers instead of taking money from them) amount to “tax cuts for people who don’t pay taxes.” This is intentionally misleading. Essentially all working families pay federal payroll taxes (and excise taxes like the federal gasoline tax and tobacco taxes), but many do not earn enough to owe any federal income tax. Congress and presidents since Jimmy Carter (including President George W. Bush) created or expanded refundable income tax credits, which can result in families of modest income having negative income tax liability.

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January 28, 2009 12:04 PM | Permalink |

National and State-by-State Fact Sheets in Appendix

On Friday, January 23, House Republican Leader John Boehner (OH) and Republican Whip Eric Cantor (VA) presented their “Economic Recovery Plan” to President Obama. The Republican plan is based on income tax cuts for relatively well-off families, and business tax cuts. As a result, it is unlikely to provide the needed boost to consumption that economists believe can come from either direct government spending or putting money in the hands of working class people who are likely to spend it quickly.

The House GOP plan proposes to reduce the two lowest individual income tax rates from 15% to 10% and from 10% to 5%. To get the maximum tax cut of about $3,400 from this rate reduction, taxpayers would have to have enough taxable income to reach the start of the third income tax bracket. For example, a married couple with two children would typically need to earn more than $100,000. 1 That’s considerably more than most people earn. In fact, only one in five of all taxpayers hasenough income to reach the third income tax bracket and receive the full benefit of the proposed tax rate reduction

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January 26, 2009 12:12 PM | Permalink |

The tax cuts proposed as economic stimulus by Democrats in the U.S. House of Representatives are far more targeted towards working class people than the tax cuts proposed by their Republican counterparts. The Democratic proposal is therefore more likely to be effective stimulus, since it would put money in the hands of people likely to spend it quickly, providing an immediate boost to demand for goods and services.

The House Democrats have offered a plan (H.R. 598) that costs over $800 billion, and about $275 billion of that would go towards tax cuts that would (mostly) be in effect during 2009 and 2010. About half of the tax cut portion of the bill consists of a refundable “Making Work Pay Credit” worth up to $500 for most working people (or $1,000 for married couples). This is one of several provisions in H.R. 598 that include refundable credits, which would help those who work and pay federal payroll taxes but who do not earn enough to have federal income tax liability. Other provisions offer benefits to businesses and expand tax breaks for state and local tax-exempt bonds.

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January 9, 2009 12:15 PM | Permalink |

Senate Minority Leader Mitch McConnell (R-KY) has recently said that he does not believe that the stimulus proposal put forward by President-elect Barack Obama is sufficiently focused on tax cuts. While Obama’s proposal reportedly does include as much as $300 billion in tax cuts, Senator McConnell argues that we need even more tax cuts, in particular for what he calls “the middle class.” In pursuit of this alleged goal, McConnell proposes temporarily cutting the 25 percent income tax rate to 15 percent. There are at least three severe problems with this plan:

• By any reasonable measure, McConnell’s proposed tax cut is not targeted to middleincome people. Instead, three-quarters of the tax cut would go to the best-off fifth of all taxpayers.
• It is very likely that McConnell will initially try to cover up the true cost of his proposal, and then later insist that Congress spend vastly more money because his tax cut would otherwise expand the Alternative Minimum Tax (AMT).
• The McConnell plan would function poorly as an economic stimulus.

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January 9, 2009 12:13 PM | Permalink |

President-elect Obama and Congressional leaders are discussing plans for economic stimulus legislation to be enacted in the coming weeks or months. The two-year package being discussed is said to cost around $775 billion and a surprisingly large $300 billion of that would go towards tax cuts. All of it would be deficit-financed.

As explained in a previous report from Citizens for Tax Justice, a large increase in government spending, even if it is deficit-financed, may be justified as a way to boost demand and mitigate the current economic downturn. Most economists believe that the current recession is caused largely by a drop in demand for goods and services. The federal government can increase spending in ways that lead to an immediate boost in consumption so that businesses are less likely to have to cut staff or close, and thus help keep the downturn from reaching a level of severity that is truly destructive and more difficult to reverse.

Tax cuts are generally less effective in stimulating demand than direct government outlays. But tax cuts targeted to the people who are most likely to immediately spend any money they receive, namely low- and middle-income people, are more effective than upper-income tax reductions. Tax cuts for business are far less likely to be an effective stimulus.

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