Month: July 2012

At a hearing before the House Ways and Mean Committee today, witnesses from Corning, Inc. and 3M called for a “territorial” tax system, which would exempt offshore corporate profits from U.S. taxes, and which is part of Mitt Romney’s tax plan. Both companies said that their ability to compete internationally is harmed by the current system, in which U.S. corporations pay U.S. taxes on foreign profits when they bring them back to the U.S. (U.S. taxes minus a credit for whatever they already paid in foreign taxes).

As we explain in another post, our 2011 corporate tax study found that both of these companies actually pay higher effective tax rates in the other countries where they do business than they pay in the U.S., raising the question of how our tax system could be making them less able to compete.

Our 2011 study examined most of the Fortune 500 corporations that had been profitable for three years straight and found that two thirds of those corporations with significant foreign profits paid higher taxes to the foreign governments than they paid to the U.S. on their domestic profits.

Despite the U.S. having a relatively high statutory corporate tax rate, the effective U.S. corporate tax rate (the percentage of profits that U.S. corporations actually pay in income taxes) is clearly lower than that of most other countries (not counting tax havens, where companies don’t do any real business).

A refreshing dose of honesty was provided by the witness from Ford Motor Company, who said Ford’s offshore operations are, in fact, in “high-tax” countries and that Ford has no position on whether or not we should adopt a territorial system.

As we explain in a fact sheet and in a more detailed report, adopting a territorial system would mainly increase the incentives to shift operations (and jobs) to a handful of countries that really do have low corporate tax rates, or to simply disguise their U.S. profits as “foreign” profits generated in countries with low (or no) corporate taxes.

As we also explain in our report, the expansion of U.S. corporations’ operations in foreign countries may not be in the interest of U.S. workers.

In some situations those offshore operations may be substitutes for U.S. operations, meaning U.S. jobs are shipped offshore. In other situations those offshore operations may compliment U.S. operations, meaning U.S. jobs are created, particularly in corporate headquarters and research facilities, to support the offshore operations. Data from recent years shows that the former effect is more pronounced than the latter.

But either way, America does not need a tax system that favors offshore operations over U.S. operations — which is exactly what a territorial system would do. 

We’re not alone in this view. Last year, several small business associations, labor unions, and good government groups joined a letter opposing a territorial system. And today, the New York Times editorialized that the “corporate tax system needs reform, to raise more revenue, more fairly. The territorial tax system does not meet those criteria.”

A new study by Ernst and Young is grabbing headlines by purporting to show that President Obama’s plan to end most of the Bush tax cuts for the richest 2% of Americans would cause job losses over the long term. This study is highly suspect however because it makes methodological assumptions that are out of line with other independent studies, which actually show that  the expiration of the Bush tax cuts would lead to increased economic growth over the long term.

As the White House explains, the study assumes an entirely unrealistic drop in the labor supply by medium and high income earners due to higher tax rates. Their expected labor supply response is nearly 10 times higher than the non-partisan Congressional Budget Office (CBO) assumes when it makes similar estimates on labor supply effects. 

In addition, the Ernst and Young study makes the bizarre assumption that all of the additional tax revenue will be used for additional spending, rather than for deficit reduction. While it does not explain any reason for this assumption, the effect of it is to eliminate the possibility that the additional revenue will increase private investment by reducing the deficit’s “crowding out” effect.

When the non-partisan CBO performed a study in January 2012 on the economic effects of allowing the Bush tax cuts to expire using its much more robust assumptions, it found that the extension of all of the Bush tax cuts and other expiring measures would reduce Gross Domestic Product (GDP) by as much as 2.1 percent in 2022 and would reduce Gross National Product (GNP) by as much as 3.7 percent in 2022.

Building on this, Citizens for Tax Justice’s Bob McIntyre notes that even President George W. Bush’s own Treasury Department, which was “managed by Bush appointees who profess a deep affection for Bush’s tax-cutting policies,” found that over the long term extending the Bush tax cuts would have “essentially no beneficial effect on the U.S. economy at all.”

Ernst and Young’s reliance on a radical methodology, putting it out-of-line with even the Bush Administration’s Treasury Department, is not be much of a surprise considering that the study was paid for by conservative anti-tax groups like the US Chamber of Commerce and the National Federation of Independent Business. Both these groups have proven in the past that they are willing to distort the facts in order to protect the wallets of the country’s wealthiest corporations and CEOs.

Photo of US Chamber Logo via Truth Out Creative Commons Attribution License 2.0

Earlier today, the U.S. House of Representatives’ Ways and Means Committee held a hearing on “tax reform and the U.S. manufacturing sector.”  With no apparent irony, the Committee invited Susan Ford, a senior official from champion corporate tax-avoider Corning, Inc., to testify on how Congress ought to make the U.S. tax code more friendly for manufacturing.

Ford raised eyebrows with her claim that in 2011, Corning paid a U.S. tax rate of 36 percent and a foreign tax rate of 17 percent.

It’s unclear how Ms. Ford comes up with a 36 percent rate, but clearly one thing she’s doing is counting Corning’s “deferred” U.S. taxes (taxes not yet paid) as well as “current” taxes (U.S. taxes actually paid in 2011). Of course, those “deferred” taxes may eventually be paid. If and when they are paid, they will be included in Corning’s “current” taxes in the year(s) they are paid.

But current taxes are what Corning actually pays each year, and Corning has amassed an impressive record of paying nothing, or less than nothing, in current U.S. taxes. CTJ and ITEP’s November 2011 corporate tax avoidance report found that between 2008 and 2010, Corning didn’t pay a dime in federal corporate income taxes, actually receiving a $4 million refund to add to its $1.9 billion in U.S. profits during this period. And a more recent CTJ report found that in 2011, Corning earned almost $1 billion in U.S. pretax income, and once again didn’t pay a dime in federal income tax. These data paint a dramatically different picture from the “36 percent” claim made by Corning before Congress today.

Ford’s testimony also includes a common but false claim about how U.S. taxes compare to foreign taxes:

“American manufacturers are at a distinct disadvantage to competitors headquartered in other countries. Specifically, foreign manufacturers uniformly face a lower corporate tax rate than U.S. manufacturers…”

In fact, over the 2008-2010 period, Corning paid a higher effective corporate income tax rate to foreign governments than it paid to the US government. (Which wasn’t hard to do, since it paid nothing to the U.S. government.) CTJ’s November 2011 report shows that over the 2008-2010 period, Corning paid  -0.2 percent (negative 0.2 percent) of its US profits in US corporate income taxes, but paid 8.6 percent (positive 8.6 percent) of its foreign profits in foreign corporate income taxes.

During the Congressional hearing, 3M executive Henry W. Gjersdal made a similar, and equally misleading, claim, in his testimony before the Committee, arguing that “[i]n an increasingly global marketplace, 3M’s high effective tax rate is a competitive disadvantage.”

But if 3M has a high worldwide effective tax rate, it’s not because the U.S. corporate income tax is high. In fact, like Corning, 3M paid a higher effective corporate income tax rate to foreign governments than it paid to the U.S. government between 2008 and 2010. Specifically, it paid an effective 23.8 percent rate on its US profits in US corporate income taxes and 27.1 percent on its foreign profits in foreign corporate income taxes, according to CTJ’s report.

Let’s remember that Corning also spent $2.8 million on lobbying during the 2008-10 period they spent enjoying a tax-free ride from the federal government. There are companies across the country paying their fair share in taxes and still making enough to grow their business and please their shareholders. Those are the kinds of companies Congress should be hearing from.

A new poll from the Pew Research Center reports that Americans believe eliminating the Bush tax cuts for the rich would be both beneficial to the economy and make the tax system more fair. By a two-to-one margin, the public says raising taxes on income over $250,000 would help the economy (44%) rather than hurt it (22%), with (a particularly wise) 24% saying it would make no difference. By a similar 44%-to-21% margin, Americans say this tax increase on the rich would make the tax system more fair rather than less fair (25% say no difference would result).

This new finding from a polling organization with an impeccable record contradicts a recent McClatchy-Marist poll which concludes a majority of Americans favor extending all the Bush tax cuts. As an expert pollster with Americans for Tax Fairness (ATF) pointed out, the McClatchy question’s jumbled wording likely left respondents confused as to which groups would be affected by a tax increase. In contrast, the Pew Research Center poll simply asked (PDF): “Do you think raising taxes on income over $250,000 would” help or hurt the economy and make the tax system more or less fair? The Pew Research finding is also in line with other recent surveys, as ATF reminds us, from National Journal and NBC/Wall Street Journal that show most Americans oppose extending the Bush tax cuts for the rich.

As Citizens for Tax Justice has explained, raising taxes on income above $250,000 would result in just 1.9% of all Americans losing some portion of the Bush income tax cuts, and for most, the “loss” would be negligible. For example, an average married couple earning between $250,000 and $300,000 would lose only 2% of their total Bush income tax cuts, or $199, in 2013. This is because all taxpayers—even those in the top income bracket—benefit from the lower tax rates on income below the $250,000 threshold that are set to remain in place under such a plan.

The American public continues to support progressive and fair taxation; we just need our elected leaders to deliver it.

Chart from Pew Research poll overview.

A report from the conservative Heritage Foundation uses data from the Treasury Department to make the claim that President Obama’s approach to the Bush tax cuts will “hurt job creation.” Once again, the Heritage Foundation is wrong.

The Heritage report focuses on “flow-through” businesses, those businesses that are not organized as corporations that pay the corporate income tax, but rather are organized as entities whose profits are passed on to the owners and taxed as part of their income, under the personal income tax. These businesses are therefore impacted by the debate over the personal income tax cuts first enacted under President Bush.

The report makes much of the fact that most flow-through business income is concentrated among those taxpayers whose income exceeds $200,000, meaning they are close to, or above, the income threshold at which the Bush income tax cuts would expire under Obama’s approach. (President Obama proposes to extend the Bush income tax cuts for the first $250,000 that a married couple makes and the first $200,000 that a single taxpayer makes.)

The Heritage Foundation report is wrong in its conclusion about job creation for several reasons.

First, as CTJ has already demonstrated, single taxpayers can earn considerably more than $200,000 without losing any tax cuts under Obama’s proposal, and married taxpayers can earn considerably more than $250,000 without losing any tax cuts under Obama’s proposal.

Second, there is no reason whatsoever for a business person to create jobs just because his or her taxes are low. A business owner does not pay taxes on the part of business revenue that goes towards paying compensation to employees. Business owners are only taxed on what they take home after they’ve paid their employees and their other expenses. That means that a married couple with a business would need to take home over $250,000 in profits (meaning they take home more than that after paying their business expenses) before they would lose part of their Bush income tax cuts under Obama’s proposal. (And even then they would only pay the higher, pre-Bush tax rates on the portion of their net income exceeding $250,000).

If a business owner can profit by selling the goods or services produced by an additional employee, it makes sense to make that hire regardless of what the tax rate will be on that profit. If the choice is between profiting and paying taxes on the profit or passing up the opportunity to profit entirely, no reasonable person would choose the latter option.

Conversely, if hiring an additional employee will not result in a profit, then there is no reason to make the hire, no matter how low taxes are or how much cash the owner has available.

Anti-tax lawmakers and commentators sometimes claim that business owners will save their after-tax income to make investments that will expand their company and lead to more hiring, and that higher taxes make this impossible. This is generally wrong because large businesses typically borrow to make such investments, and any business that is truly a “small business” can use a provision (known as “section 179 expensing”) that allows them to deduct the entire cost of making those capital investments. President Obama is asking Congress to raise the limits on this tax break so that more small businesses can benefit from it.

Finally, the fact that a great deal of flow-through business income is concentrated among a few high-income owners of big companies does not logically lead to the conclusion that we must provide more tax breaks to the high-income owners of big companies.

The Heritage Foundation cites Table 15 of a Treasury study that looked at different ways of identifying flow-through businesses. The Treasury study found that in 2007 (the most recent year for which data are available) 34.8 million tax returns claimed flow-through income, but only 4.3 million of those represent business owners who employed workers. It also showed that only 1.2 million both employed workers and earned more than $200,000, meaning their income is at or close to the threshold at which they would lose some of the Bush tax cuts under Obama’s proposal. These 1.2 million business owners earned 91 percent of all the income earned by the flow-through businesses with employees.

According to the Heritage Foundation, this data means that the “businesses that earn almost all of the income are the most successful flow-through employer-businesses. That also means they are the businesses that create the most jobs.” This last assertion by Heritage seems particularly dubious, given that these “most successful” flow-through businesses include hedge funds and private equity funds like Bain Capital, law firms, lobbying firms and other extremely profitable companies with relatively few employees — not the companies most Americans think of when they hear the words “small business” or “job creators.”

The Heritage report concludes that Obama’s proposal would result in higher taxes on “almost all income earned by job creators.”

The fact that most flow-through business income is tied up in the hands of a minority of rich Americans does not logically lead to the conclusion that we should therefore keep taxes low for the richest Americans. The data from the Treasury study also shows that 50 percent of the income going to flow-through businesses with employees actually goes to taxpayers with income exceeding $1 million. Given everything explained above (that business people do not create jobs just because their taxes are low) this does not logically lead to the conclusion that we should keep taxes low for people making more than $1 million annually.

The Michigan government is facing an unprecedented lawsuit charging that some of its public schools are inadequate to the point that they violate state law.  You might think this would make lawmakers revisit the wisdom of their tax-cutting compulsion, but you would be wrong.

Last year, anti-tax lawmakers’ crowning achievement in the Great Lakes State was to slash business income taxes by some $1.6 billion, or 83 percent.  Some of that cut was funded with cuts in state services, though most of it was paid for with personal income tax hikes (PDF) on the state’s elderly and poor.  Some lawmakers viewed those personal income tax hikes as a political liability, however, so Gov. Snyder went ahead and signed a token tax cut, worth an average of ten dollars per taxpayer per year, conveniently designed to take effect about one month before voters head to the polls in November.

But more troubling than this political gamesmanship is a pair of larger tax cuts that lawmakers may try to enact this fall after returning from recess.

In May, the state Senate passed a bill, after many months of negotiations, that repeals the tax businesses pay on industrial and commercial personal property (equipment, furniture, and other items used for business purposes).  The Detroit Free Press said that “there’s general agreement across party lines and all levels of government” that the tax is bad for business and should be repealed, and noted that the House may follow the Senate in doing so this fall.

There is also consensus, however, that since the overwhelming majority of revenue generated by the business personal property tax flows to local governments, localities can’t absorb a cut that severe.  But while the state seems likely to make up part of the difference, there are also serious doubts regarding how much of the lost revenue the state can actually afford to replace, and whether that replacement revenue will dry up the next time the state’s budget is battered by a national recession.

But property tax cuts for businesses aren’t the only pricey tax cut on the legislature’s list. Last month, the House overwhelmingly voted to slash the state’s personal income tax rate, at a cost of $800 million per year by 2018.  The bill’s sponsor promises that revenue growth resulting from the cut will be so strong that it will “not lead to program cuts or shifted funds.” Forgive us if we’re skeptical of that claim.

Finally, to top things off, reversing these tax cuts if they prove destructive and unaffordable could soon become a lot harder.  That’s because the Koch-backed Americans for Prosperity-Michigan has just submitted the signatures needed to put a measure on the ballot amending the state’s constitution to require a supermajority vote of the legislature to raise taxes. Just so we’re clear, supermajority requirements are one of the worst tax ideas of all time.  The Michigan League for Human Services explains the problems with the supermajority proposal in this report (PDF), including how it could entrench special interest tax breaks, damage the state’s credit rating, and pressure local governments to the point of breaking when state funds run short.

Call both your Senators and your Representative today and tell them:

Support President Obama’s proposal to allow most of the Bush tax cuts for the richest 2 percent — couples making more than $250,000 and singles making more than $200,000 — to expire.

Oppose any extension of more tax cuts for the rich — even a temporary one.

Call the U.S. Capitol at 888-744-9958 (TOLL FREE)

The Senate will likely vote this week and the House may vote soon after. They need to hear from you NOW. 

The toll-free number is provided by Americans for Tax Fairness (ATF), a coalition of organizations including Citizens for Tax Justice and other advocacy organizations, think tanks, labor unions, small business associations and watchdog groups.
 
To learn more about how President Obama’s proposal compares to the Congressional Republicans’ proposal to extend all the tax cuts (even for the rich), check out these publications from Citizens for Tax Justice:

Bush Tax Cut Proposal Calculator: Find Out How Much You Would Pay

The Bush Tax Cuts: President Obama’s Approach vs. Congressional Republicans’ Approach (includes state-specific versions)

Fact Sheet: How Many People Are Rich Enough to Lose Part of the Bush Tax Cuts Under Obama’s Proposal? (state-by-state figures)

Fact Sheet: Married Couples with Incomes Between $250,000 and $300,000 Would Lose Only 2% of Their Bush Income Tax Cuts under Obama Plan versus GOP Plan

• Figures from the Institute on Taxation and Economic Policy (ITEP) are cited in this editorial explaining why making Kansas’ tax structure more like Texas’ is public policy at its worst.
• Dan Carpenter’s column in the Indianapolis Star explains who’s hurt by an Indiana law set to issue $300 million in automatic tax breaks as a result of the state’s allegedly rosy budget situation.  Taxpayers might be happy at first to see an extra $100 or $200 in their bank accounts, but at what cost?
• PolitiFact Oregon confirms what advocates long argued: special tax breaks are on autopilot and growing fast, while education and other services suffer as a result.
• North Carolina GOP gubernatorial candidate (and likely next Tarheel State governor) Pat McCrory is making big promises to cut taxes if elected.  What’s in his plan?  Cutting personal income taxes, lowering the state’s corporate income tax rate, and eliminating the state’s estate tax.  Sound familiar?
• Looking who’s playing politics now in New Jersey.  Just days after Governor Chris Christie chided Democrats for holding up his tax cut proposal for political reasons, the state’s Republican Party aired its second radio ad attacking Democrats.  From the ad: “Sadly, it’s the same old story from the Legislature.  Billions for special interest spending.  Not a dollar for tax cuts for New Jersey families.”
• A new budget and tax policy primer from the Open Sky Policy Institute offers a great overview of how Nebraska collects and spends public funds.  One of many important facts: Nebraska actually spends more on special tax breaks than it does on all General Fund appropriations combined.