Month: April 2012

April 10, 2012 11:52 AM | Permalink |

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Congress should approve Senator Sheldon Whitehouse’s proposal to implement the “Buffett Rule” to raise badly needed revenue and make our tax system fairer, but should also recognize that this must be followed by far more substantial reforms. In particular, Congress can’t stop at limiting breaks for millionaire investors but should completely repeal the personal income tax preference for investment income, as President Ronald Reagan did in 1986.[1]

A previous CTJ report concluded that Senator Whitehouse’s bill would raise $171 billion from 2013 through 2022.[2] The non-partisan Joint Committee on Taxation (JCT) has estimated that it would raise much less revenue, probably because JCT overestimates behavioral responses to changes in tax rates on investment income.[3] But even if Senator Whitehouse’s bill would raise $171 billion over a decade, that’s only a fraction of the $533 billion that CTJ estimates could be raised by completely ending the tax preference for investment income.

Why We Need the Buffett Rule

The “Buffett Rule” is the principle, proposed by President Barack Obama, that the tax system should be reformed to reduce or eliminate situations in which millionaires pay lower effective tax rates than many middle-income people.

An earlier report from Citizens for Tax Justice explains how multi-millionaires like Warren Buffett who live on investment income can pay a lower effective tax rate than working class people.[4] As the report explains, there are two reasons for this. First, the personal income tax has lower rates for two key types of investment income, long-term capital gains and stock dividends. Second, investment income is exempt from payroll taxes (which will change to a small degree when the health care reform law takes effect).[5]

The report compares two groups of taxpayers, those with income in the $60,000 to $65,000 range (around what Buffett’s secretary is said to make), and those with income exceeding $10 million.

For the first group, about 90 percent have very little investment income (less than a tenth of their income is from investments) and consequently have an average effective tax rate of 21.3 percent. For the second group (those with incomes exceeding $10 million), about a third get a majority of their income from investments and consequently have an average effective tax rate of 15.3 percent. This is the fairness problem that the “Buffett Rule” would address.

The Best Way to Implement the Buffett Rule: End the Tax Preference for Investment Income

The most straightforward way to implement the Buffett Rule would be to eliminate the personal income tax preferences for investment income. This would mean, first, allowing the parts of the Bush tax cuts that expanded those preferences to expire. Second, Congress would repeal the remaining preference for capital gains income, which would raise $533 billion over a decade.

When President George W. Bush took office, the top tax rate on long-term capital gains was 20 percent, and the tax changes he signed into law in 2003 reduced that top rate to 15 percent. The same law also applied the lower capital gains rates to stock dividends, which previously were taxed as ordinary income. If the Bush tax cuts, which were extended through 2012, are allowed to expire, then capital gains will again be taxed at a top income tax rate of 20 percent (meaning there will still be a tax preference for capital gains) and stock dividends will once again be taxed like any other type of income.

The Bush tax cuts for capital gains and dividends should be allowed to expire at the end of this year. In addition, Congress should repeal the capital gains break that will still exist (the special rates not exceeding 20 percent). Under this proposal, capital gains would simply be taxed at ordinary income tax rates. This would raise at least $533 billion over a decade. [6] The table above shows that 80 percent of the tax increase resulting from eliminating the capital gains preference would be paid by the richest one percent of taxpayers in 2014.

Senator Sheldon Whitehouse’s Buffett Rule Bill

Senator Sheldon Whitehouse of Rhode Island has introduced a bill that would take a more roundabout approach to implementing the Buffett Rule by imposing a minimum tax equal to 30 percent of income on millionaires. This would raise much less revenue than simply ending the break for capital gains, for several reasons.

First, taxing capital gains as ordinary income would subject capital gains to a top rate of 39.6 percent in years after 2012, while Senator Whitehouse’s minimum tax would have a top rate of just 30 percent. Second, the minimum tax for capital gains income would effectively be even less than 30 percent because it would take into account the 3.8 percent Medicare tax on investment income that was enacted as part of health care reform. Third, while most capital gains income goes to the richest one percent of taxpayers, there is a great deal of capital gains that goes to taxpayers who are among the richest five percent or even one percent but who are not millionaires and therefore not subject to the Whitehouse proposal.

Other reasons for the lower revenue impact of the Whitehouse proposal (compared to repealing the preference for capital gains) have to do with how it is designed. For example, Senator Whitehouse’s minimum tax would be phased in for people with incomes between $1 million and $2 million. Otherwise, a person with adjusted gross income of $999,999 who has effective tax rate of 15 percent could make $2 more and see his effective tax rate shoot up to 30 percent. Tax rules are generally designed to avoid this kind of unreasonable result.

The legislation also accommodates those millionaires who give to charity by applying the minimum tax of 30 percent to adjusted gross income less charitable deductions.

These provisions would not be necessary if Congress took the more straightforward approach of simply ending the tax preferences for investment income, which would simply require that all income be taxed at the same rates.

Photo of Warren Buffett and Sheldon Whitehouse via The White House and Transportation for America Creative Commons Attribution License 2.0

[1] The Tax Reform Act of 1986, signed into law by President Ronald Reagan, ended the tax preference for capital gains and resulted in a personal income tax that imposed the same rates on all types of income.

[2] Citizens for Tax Justice, “Policy Options to Raise Revenue,” March 8, 2012. https://ctj.sfo2.digitaloceanspaces.com/pdf/revenueraisers2012.pdf

[3] The Joint Committee on Taxation (JCT) estimated that Senator Whitehouse’s bill would raise $47 billion over a decade. James O’Toole, “Buffett Rule would Raise Less than $5 Billion in Taxes a Year,” March 20, 2012. http://money.cnn.com/2012/03/20/news/economy/buffett-rule-analysis/index.htm CTJ’s report, “Policy Options to Raise Revenue,” includes an appendix that describes the literature concluding that JCT overestimates behavioral responses to taxes on capital gains.

[4] Citizens for Tax Justice, “How to Implement the Buffett Rule,” October 19, 2011. https://ctj.sfo2.digitaloceanspaces.com/pdf/buffettruleremedies.pdf; Citizens for Tax Justice, “The Need for the ‘Buffett Rule’: How Millionaire Investors Pay a Lower Rate for Middle-Class Workers,” September 27, 2011. https://ctj.sfo2.digitaloceanspaces.com/pdf/buffettrulereport.pdf 

[5] The health care reform law effectively expanded the Medicare tax to include a top rate of 3.8 percent and to apply to investment income for taxpayers with adjusted gross income in excess of $250,000 for married couples and $200,000 for single taxpayers.

[6] Figures used here incorporate the assumptions of the Congressional Budget Office that capital gains income will decline in 2013, presumably in response to the end of the Bush tax cuts, and then quickly recover in years after that.

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April 9, 2012 09:33 AM | Permalink |

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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.

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April 5, 2012 01:27 PM | Permalink |

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The U.S. Has a Low Corporate Tax: Don’t Believe the Hype about Japan’s Corporate Tax Rate Reduction

America has one of the lowest corporate income taxes of any developed country, but you wouldn’t know it given the hysteria of corporate lobbying outfits like the Business Roundtable. They say that because Japan lowered its corporate tax rate by a few percentage points on April 1, the U.S. now has the most burdensome corporate tax in the world.

The problem with this argument is that large, profitable U.S. corporations only pay about half of the 35 percent corporate tax rate on average, and most U.S. multinational corporations actually pay higher taxes in other countries. So the large majority of Americans who tell pollsters that they want U.S. corporations to pay more in taxes are onto something.

Large Profitable Corporations Paying 18.5 Percent on Average, Some Pay Nothing

Citizens for Tax Justice recently examined 280 Fortune 500 companies that were profitable each year from 2008 through 2010, and found that their average effective U.S. tax rate was just 18.5 percent over that three-year period.[1]

In other words, their effective tax rate, which is simply the percentage of U.S. profits paid in federal corporate income taxes, is only about half the statutory federal corporate tax rate of 35 percent, thanks to the many tax loopholes these companies enjoy. 

Thirty of the corporations (including GE, Boeing, Wells Fargo and others) paid nothing in federal corporate income taxes over the 2008-2010 period.

You might think that these companies simply had some unusual circumstances during the years we examined, but we find similar tax dodging when we look at previous years and the new data for 2011.

For example, GE’s effective tax rate for the 2002-2011 period (the percentage of U.S. profits it paid in federal corporate income taxes over that decade) was just 1.8 percent.[2] Boeing’s effective federal tax rate over those ten years was negative 6.5 percent, (meaning the IRS is actually boosting Boeing’s profits rather than collecting a share of them).[3]

U.S. Multinational Corporations Pay Higher Taxes in Other Countries

Some corporations complain that their effective tax rates are higher than we have concluded, but they are talking about their worldwide tax rates, including the taxes paid to foreign governments on profits they generate in other countries.[4] Including the foreign taxes paid makes the effective tax rate appear higher in many cases because these companies actually are being taxed at higher effective rates in the other countries where they do business.

This is extremely telling, because the entire argument of the corporate lobbyists is that the U.S. corporate income tax is more burdensome than any other corporate tax in the world. Besides, if the problem that corporations are complaining about is actually the high taxes they pay to foreign governments, how could Congress possibly provide any remedy for that? Clearly, what corporations pay in U.S. taxes is what’s relevant to the corporate tax debate before Congress.

Of the 280 corporations CTJ examined, 134 had significant foreign profits, meaning at least 10 percent of their worldwide pre-tax profits were generated outside the U.S. We found that, for 87 of these companies (about two-thirds of the companies with significant foreign profits), the effective corporate tax rate paid on U.S. profits was lower than the effective corporate tax rate paid to foreign governments on foreign profits.[5]

Of course, there are some countries that have extremely low corporate tax rates (rates of zero percent or not much higher than zero). These countries are known as tax havens, and they typically are not places where much actual business is done. Think of places like the Cayman Islands or Bermuda.

U.S. corporations engage in various dodgy accounting gimmicks to make it appear that their U.S. profits are generated by their subsidiaries in these tax havens so that they won’t be taxed. (Often these subsidiary companies consist of nothing more than a post office box a few blocks from the beach.) Eliminating the loopholes that allow these dodgy accounting gimmicks should be one of the major goals of tax reform.

Majority of Americans Are Right: Congress Should Raise Revenue by Closing Corporate Loopholes

The U.S. corporate income tax certainly needs to be reformed, but not in the way that corporate lobbyists are calling for. Congress should eliminate corporate tax loopholes and use most of the revenue savings to fund public investments and address the budget deficit.[6]

Unfortunately, most proposals to close corporate tax loopholes (including President Obama’s) would give all the resulting revenue savings back to corporations in the form of new breaks.[7] President Obama proposes a “revenue-neutral” corporate tax reform which would close loopholes and reduce the corporate tax rate to 28 percent, while some Republicans have proposed to reduce the corporate tax rate to 25 percent (even if that reduces revenues).

Most Americans want corporations to pay more overall in taxes than they do today. From 2004 through 2009, the Gallup Poll asked survey respondents if corporations pay their “fair share” in taxes, or if they pay “to much,” “too little,” or they’re “unsure.” Each year, anywhere from 67 percent to 73 percent of respondents said corporations pay “too little.”

In October of last year, a CBS/New York Times survey asked, “In order to try to create jobs, do you think it is probably a good idea or a bad idea to lower taxes for large corporations?” and 67 percent responded that this was a “bad idea.”

It is unclear why lawmakers have ignored their constituents’ desire for a revenue-positive reform of the federal corporate income tax. One reason may be misunderstandings about who is ultimately affected by corporate income taxes. Several empirical studies have concluded that they are ultimately borne mostly by owners of corporate stocks and business assets, who are concentrated among the richest one percent of Americans.[8]

Corporate lobbyists have argued that American workers ultimately bear the cost of corporate income taxes, because the taxes cause companies to move operations out of the United States. Even if one is unconvinced by the empirical studies leading to the opposite conclusion, common sense would suggest that corporations would not be lobbying to have corporate income taxes reduced if they didn’t believe their shareholders were the people ultimately paying them.

Whatever the reason for lawmakers’ qualms about raising corporate tax revenue, the debate over the budget deficit will force lawmakers to make a choice: Should we cut spending on things like education, infrastructure, environmental protection, and Medicaid and Medicare while doing nothing to raise corporate tax revenue? What does more to help the economy, these public investments or reductions in the corporate taxes that are ultimately paid by stockholders? The answers to these questions are pretty obvious for most Americans.

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

[2] Citizens for Tax Justice, “General Electric’s Ten Year Tax Rate Only 2.3 Percent,” February 27, 2012. http://www.ctj.org/taxjusticedigest/archive/2012/02/press_release_general_electric.php 

[3] Citizens for Tax Justice, “Obama Promoting Tax Cuts at Boeing, a Company that Paid Nothing in Net Federal Taxes Over Past Decade,” February 16, 2012. https://ctj.sfo2.digitaloceanspaces.com/pdf/boeing2012.pdf

[4] For example, GE has lately responded to news about its low U.S. effective tax rate by simply stating that its worldwide effective tax rate is 29 percent. See Citizens for Tax Justice, “GE Tries to Change the Subject,” February 29, 2012. https://ctj.sfo2.digitaloceanspaces.com/pdf/gedistraction.pdf. Large oil companies also complain about their high tax rates but almost always cite their worldwide tax rate, not their U.S. tax rate. See Kim Dixon, “Analysis: Gas Price Spike Revives Fight Over Energy Taxes,” Reuters, March 26, 2012. http://www.reuters.com/article/2012/03/26/us-usa-tax-bigoil-idUSBRE82P0DX20120326

[5] Citizens for Tax Justice, “Corporate Taxpayers & Corporate Tax Dodgers, 2008-2010,” November 3, 2011, page 10. http://ctj.org/corporatetaxdodgers

[6] A CTJ fact sheet explains why corporate tax reform should be revenue-positive. Citizens for Tax Justice, “Why Congress Can and Should Raise Revenue through Corporate Tax Reform,” November 3, 2011. https://ctj.sfo2.digitaloceanspaces.com/pdf/corporatefactsheet.pdf. A longer CTJ report has more detail. Citizens for Tax Justice, “Revenue-Positive Reform of the Corporate Income Tax,” January 25, 2011, https://ctj.sfo2.digitaloceanspaces.com/pdf/corporatetaxreform.pdf

[7] Citizens for Tax Justice, “President Obama’s ‘Framework’ for Corporate Tax Reform Would Not Raise Revenue, Leaves Key Questions Unanswered,” February 23, 2012. http://ctj.org/ctjreports/2012/02/president_obamas_framework_for_corporate_tax_reform_would_not_raise_revenue_leaves_key_questions_una.php

[8] Jennifer C. Gravelle, “Corporate Tax Incidence: Review of General Equilibrium Estimates and Analysis,” Congressional Budget Office, May 2010, http://www.cbo.gov/ftpdocs/115xx/doc11519/05-2010-Working_Paper-Corp_Tax_Incidence-Review_of_Gen_Eq_Estimates.pdf; Gravelle, Jane G. and Kent A. Smetters. 2006. “Does the Open Economy Assumption Really Mean That Labor Bears the Burden of a Capital Income Tax.” Advances in Economic Analysis & Policy vol. 6:1.

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April 5, 2012 11:35 AM | Permalink |

For the 2011 tax year, 97 percent of the Alternative Minimum Tax (AMT) will be paid by the richest five percent of taxpayers and 58 percent of the AMT will be paid by the richest one percent of taxpayers. Even in the (very unlikely) event that Congress fails to enact AMT relief for 2012, the tax will still largely be borne by the well-off.

Read the fact sheet.

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April 4, 2012 02:47 PM | Permalink |

Click Here for the 2013 Edition of this Report

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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. https://ctj.sfo2.digitaloceanspaces.com/pdf/buffettruleremedies.pdf

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