Month: August 2012

“Unlike President Obama, I will not raise taxes on the middle class,” Republican presidential candidate Mitt Romney said during his acceptance speech. It was a startling statement because it describes one of the facts about Romney’s own tax plan and attributes it to the policies of his opponent, President Obama.

Romney’s Tax Plan: Breaks for the Rich No Matter How You Look at It, Leaving the Bill for Low- and Middle-Income Americans

A recent CTJ report shows that the basics of Romney’s tax plan would give out huge tax cuts to those who make between half a million and one million dollars and those who make over a million dollars, no matter how the missing details are filled in. Romney cannot possibly meet his goal of offsetting the costs of the tax cuts (besides the enormous Bush tax cuts, which he doesn’t think need to be paid for) without raising taxes on people farther down on the income ladder.

The CTJ report finds that Romney’s proposed tax cuts would reduce taxes by an average $80,000 for people who make between half a million and one million dollars and by an average $400,000 for people who make over a million dollars.

Now, Romney promises to offset the cost of these tax cuts (aside from the enormous Bush tax cuts, which he would make permanent) by reducing or eliminating “tax expenditures,” which are the credits, deductions, exclusions and loopholes that lower people’s tax bills. But even if Romney made the very rich give up all the tax expenditures that he has put on the table, they’d still be getting huge tax cuts —  an average $48,000 for people who make between half a million and one million dollars, and an average $250,000 for people who make over a million dollars.[1]

If Romney’s plan is going to be revenue-neutral (not counting the huge cost of the Bush tax cuts) as he claims, then someone is going to have to pay higher taxes than they do now so that the people who make over half a million dollars a year can pay less. The loss of tax expenditures for low- and middle-income people can be larger than the benefits they receive from Romney’s rate reductions and other proposed breaks, meaning they face a net tax increase. In fact, this must happen for Romney to keep his promise about not losing more revenue, as the Tax Policy Center has already pointed out.

Obama’s Problem Is that He’s Cut Taxes Too Much, Not that He Raised Taxes

Romney’s claim that Obama has raised taxes on the middle-class is initially hard to understand, given Obama’s two-year extension of all the Bush tax cuts and his call to again extend the Bush tax cuts entirely for 98 percent of Americans while letting them expire partially for the richest 2 percent of Americans. (In fact, we pointed out that many of the taxpayers within the richest 2 percent, like those with incomes just over $250,000, would only have to give up a tiny fraction of their tax cuts under Obama’s plan.)

Romney’s claim that Obama has raised taxes on the middle-class appears to refer to the new mandate to obtain health insurance, which the Chief Justice of the Supreme Court decided was actually a tax and therefore within the Constitutional powers of Congress.

As we pointed out at the time the Supreme Court ruled on the health care mandate, very few people would ever actually pay the “tax,” which is the fee that will be imposed on people who choose to go without health insurance. As we explained,

It’s a tax that hardly anyone will pay.

That’s because for the vast majority of Americans who don’t have employer health coverage, the government subsidies to buy insurance will be so large that it would be foolish not to buy insurance.

For starters, any family with income less than 133 percent of the poverty line (that means all families of four with incomes of $30,000 or less) will be eligible to sign up for free coverage under Medicaid.

Above that level of income, the government will provide cash subsidies to buy insurance, starting at almost 100 percent of the cost and gradually phasing down. But the subsidies won’t disappear for a family of four until its income exceeds about $90,000.

An Urban Institute study found that fewer than 3 percent of households would be subject to the fee.

Another point that Romney and his allies seem to forget is that the 2009 economic recovery act that they criticize so much actually cut taxes for 98 percent of working families. (See the national and state-by-state estimates from CTJ.)  

If President Obama has made any mistakes on taxes, it’s that he has been entirely too willing to extend too many tax cuts for too many Americans at a time when we desperately need revenue.

[1] Notice we say that the $48,000 and $250,000 figures are the tax cuts these groups would get if they had to give up all the tax expenditures that Romney has put on the table. That’s because he has pledged to keep the tax expenditures that benefit the rich the most — breaks for investment, like the low rates for capital gains and stock dividends.

The GOP’s core philosophy about tax policy is perfectly distilled in its 2012 platform where it states simply that “[l]owering taxes promotes substantial economic growth.” What this one-sided analysis misses is that lower taxes do not promote economic growth, because they inevitably require (PDF) the government to either cut spending or to increase the deficit.

(Our GOP platform review Part II, Tax Ideas on the Fringe, is here.)

Supports More Individual Tax Cuts

The fact that the GOP platform does not make the connection between tax cuts and deficits is starkly demonstrated by the platform’s warning that the US faces an “unprecedented legacy of enormous and unsustainable debt,” while at the same time calling for a complete extension of the Bush tax cuts, at a cost of $5.4 trillion (PDF). While some GOP leaders like to say that tax cuts boost the economy so much that they pay for themselves, there is no evidence to support that claim, and even economists from the Bush Administration and a former Reagan advisor have conceded that over the long run, the Bush tax cuts have no real discernable affect on economic growth.

Supports More Corporate Tax Cuts

Another misguided tax proposal in the GOP platform is the call for a lower corporate tax rate. For one, the platform rests on the mistaken assumption  that “American businesses now face the world’s highest corporate tax rate.” While it may be true that the US has the highest statutory rate on paper, the actual amount of taxes paid by US corporations is nowhere near the statutory rate because of the large swath of corporate tax breaks and loopholes that allow many enormously profitable companies, like General Electric and Verizon, to pay nothing at all in taxes.

Comparatively, the amount of corporate taxes paid as a percentage of GDP in the US is the second lowest in the developed world. In fact, a recent CTJ analysis found that two-thirds of the largest US multinational corporations with significant foreign profits paid a lower corporate tax rate on their US profits than the rate they paid to foreign governments on their foreign profits.

Rather than dealing with the breaks and loopholes that plague our corporate tax system, the GOP platform advocates expanding them, most notably by moving the US to a territorial tax system under which corporations would have a greater incentive to move profits and jobs offshore (a problem that can be solved by ending deferral).

The new Republican platform identifies high rates as the core problem with our current tax system, but the real problem is decades of cuts and proliferating breaks and loopholes are making it impossible over the long term for the government to provide critical services without dangerously increasing the national debt.

Romney and Ryan Both Propose Plans that Would Give Millionaires Average Breaks of at Least $250,000, and Possibly as High as $400,000

Presidential candidate Mitt Romney and his running mate, Congressman Paul Ryan, have both proposed tax plans that would make the Bush tax cuts permanent, further slash personal income tax rates, reduce the corporate income tax rate, and enact several other tax cuts.

Both candidates also say that they would reduce or eliminate many “tax expenditures” (deductions, credits, exclusions and loopholes) so that their plans would cost no more than making all the Bush tax cuts permanent would cost. That’s hard to believe because neither has specified a single tax expenditure they would target. But one thing is clear: for the richest Americans, the rate reductions and other breaks would be far more valuable than any tax expenditures they could lose under either plan. (The details of the Romney and Ryan tax plans are in the appendix.)

Both Romney and Ryan’s plans would give people making over $1 million an average tax cut of about $250,000 if these millionaires had to give up all of their tax expenditures. If Romney or Ryan’s plan was implemented without closing any tax expenditures for the rich, then people making over $1 million would receive an average tax cut of around $400,000.
 
Read the report.

The GOP’s 2012 platform contains many of the policies that you would expect from the party, such as calling for the extension of the Bush tax cuts and reducing corporate tax rates. Here we focus, however, on three planks in the platform that fall far outside the mainstream of tax policy.

(Our GOP platform review Part I, Same Old Supply Side Stuff, is here.)

1. Support for a Radical Constitutional Amendment to Restrict Taxes and Budgets

Following efforts by the House GOP last year to pass the most extreme balanced-budget amendment ever, the GOP platform calls for the passage of a constitutional amendment that would require that the federal government have a balanced budget, cap federal spending at its historical average share of GDP (around 18 percent), and require a super-majority for any tax increase (with an exception for war or national emergency). This kind of amendment poses all kinds of problems, not the least of which is that it would immediately cause unemployment to double (according to nonpartisan, private sector economists) and drive the economy into a deep recession.  Balanced budget amendments in all their forms (including state level versions) are disastrous, because they essentially tie the hands of legislators and cripple government functions.

2. Nod to National Consumption Tax

Warning that we must “guard against hypertaxation of the American people,” the GOP platform says that the creation of a national sales tax or value-added tax (VAT) can only happen in conjunction with the repeal of the Sixteenth Amendment, which allowed for the federal income tax.

On the one hand, this plank is odd because a national sales tax or VAT is not a political possibility; even the hint of it prompted the US Senate to pass a resolution explicitly rejecting a VAT by an 85 to 13 vote just a couple of years ago.  Anyway, the fear that a national consumption tax would lead to some sort of “hypertaxation” is unfounded. Its implementation in Canada (PDF) is a case study showing how overall taxes can actually decrease following the creation of a national consumption tax.

On the other hand, the existence of this plank in the GOP platform suggests that the Republican party’s establishment might actually be considering a radically regressive policy like the so-called “Fair Tax” (which is just a national sales tax) and elimination of the federal income tax (the primary source of fairness in the tax code and sustainable, sensible revenue source).

3. Opposition to a United Nations Global Tax

Perhaps the most inexplicable plank in the entire GOP platform is opposition to “any form of UN Global Tax.” While there are conspiracy theories, such as how the UN may very well invade in Texas in order to enforce its radical tax agenda during Obama’s second term, the reality is that no one takes the possibility of a UN global tax seriously. To be clear, there is no indication of support among US lawmakers to implement such a UN tax, nor does the UN have the power to impose one.

by Robert S. McIntyre, CTJ Director

Almost a year ago, long before Mitt Romney became the Republican presidential nominee, CTJ was the first to figure out just how little Romney pays in federal income taxes. Based on Romney’s limited but useful financial disclosures at the time, we calculated that his 2010 effective federal tax rate was a ridiculously low 14 percent (on his reported income) — less than half of what Warren Buffett’s famous secretary pays.

Michael Scherer of Time Magazine, who’d asked us to do the analysis, posted our results on Time’s website on Oct. 3, 2011. The story got widespread attention, and led to growing demands that Romney release his actual federal income tax returns. After months of stonewalling, Romney finally released his 2010 return, which confirmed our prediction that he’d paid only 14 percent in federal income taxes.

Since then, Romney has adamantly refused to release any of his earlier tax returns, causing speculation that he has something even more damaging to hide (and keeping CTJ busy fielding media questions about what such things might be).

Looking at Romney’s past tax returns could provide some valuable information, not just about Romney himself but also about the egregious loopholes that allow him to pay so little.

But Romney is hiding a much more important tax secret: the truth about how the tax plan he’s campaigning on would affect the rest of us.

So far, all Romney has told us about his individual income tax plan is the following: First, he would extend all of the Bush tax cuts and permanently repeal the Alternative Minimum Tax. Second, he would make interest, dividends and capital gains tax-exempt for people with other income up to certain levels ($200,000 for couples). Third, he would reduce all federal personal income tax rates by a fifth (so, for example, the top income tax rate would fall to 28 percent). Fourth, well, the fourth item is the big secret.

Romney says that he would partially pay for the $8 trillion ten-year cost of the income tax cuts he proposes  by getting rid of many personal tax breaks. But he refuses to specify even a single one of them! To be sure, at one point, he suggested he might curb the mortgage interest deduction for vacation homes, but he quickly backed off even that tiny reform.

How can voters calculate even roughly how they would be affected by Romney’s tax plan without knowing the crucial details of which tax breaks he wants to eliminate? Will he crack down on tax breaks for wealthy investors like himself? Well, no, he’s ruled that out. Will he eliminate deductions for mortgage interest and property taxes? Tax credits for middle- and low-income families with children? The tax exemption for employer-paid health insurance? Tax deductions for extraordinary medical expenses? Who knows?

It’s all well and good that analysts with high-powered tax models (like ITEP’s) can calculate that even if Romney eliminated all non-investment-related personal tax breaks, his gargantuan tax plan can’t possibly break even — and thus will mean huge increases in budget deficits. But American voters also deserve to know whether Romney plans to raise taxes on them, and by how much.

Barring a speech tonight that answers these questions, that’s the crucial tax secret that the public and the media should be clamoring for Romney to reveal.

Oklahoma Governor Mary Fallin is not backing down from her quest to phase out the Sooner State’s personal income tax.  Despite her best efforts, lawmakers adjourned earlier this summer after defeating every single tax cut proposal (more than half a dozen serious versions) debated during the session. But in an interview with the Wall Street Journal’s Stephen Moore (a frequent collaborator with Governor Fallin’s tax advisor, supply-sider Arthur Laffer) the governor vowed, “[w]e are going to get that tax cut done next year.” 

Hear, Hear! The Cleveland Plain Dealer editorializes that Ohio Governor John Kasich shouldn’t reduce income taxes anymore and should “leave Ohio’s income tax alone.” The Governor first tried (and failed) to pay for income tax cuts through increased fracking taxes, and now through increases in the sales tax. The progressive income tax (PDF) is the only major revenue source directly linked to a taxpayer’s ability to pay and the income tax can help to offset regressive sales and property taxes.

Wyoming’s gas tax is low by historical standards and shrinking, but perhaps not for long.  Members of an interim legislative committee on revenues approved a draft bill to increase the rate from 14 to 24 cents per gallon, which would raise an additional $72 million annually for road construction and repair.  It’s only one of several fixes Wyoming should make to restructure its gas tax, including, as the experts at Equality State Policy Center point out, provisions to “reduce the effect on lower-income residents in Wyoming” of a gas tax increase.

Both Republicans and Democrats are featuring governors at their national nominating conventions. Because convention speakers are chosen as the parties’ ambassadors to new audiences during these TV spectacles, the state policy team at the Institute on Taxation and Economic Policy are providing quick sketches of current governors from both parties who have been leaders – for better and for worse – in state tax policy. Below are profiles of two governors: Louisiana’s Bobby Jindal, who was scheduled to speak tonight but bowed out to handle Hurricane Isaac, and Susana Martinez of New Mexico.

Louisiana Governor Bobby Jindal: Last year, the Governor dismissed a legislative plan to eliminate the state’s personal and corporate income taxes as too radical. This year, the budget he ultimately signed was full of “one-time” money lifted from other parts of the budget to fill in gaps. Still, as he turns his attention toward reforming the state’s tax structure, he is opposed to raising more revenue, saying, “[w]e are not going to do anything that raises revenue. It needs to be revenue-neutral.”

New Mexico Governor Susana Martinez:  In her 2011 State of the State Address, Governor Martinez waxed eloquent about supporting small business, saying, “It’s the small businesses — the mom-and-pop shops, the small startups — that get lost in the layers of red tape….We will help them….”  But the fact is, Martinez failed even in her ill-advised effort to exempt roughly half the state’s small businesses – those earning less than $50,000 per year – from the gross receipts tax. And, when she had a chance to sign a bill that really did support small business owners (and that had widespread support from business groups in her state!), Martinez vetoed it. She always said she would, actually, oppose combined reporting, which is a smart rule that levels the playing field for small business by preventing large corporations from creating subsidiaries in other states to avoid paying taxes.

Presidential candidate Mitt Romney has been doing a lot of media interviews lately, and when the editors at Politico wrote up their sit-down with the GOP nominee, they characterized Romney’s answers to their questions as “the clearest window yet into how the lessons he gained in the corporate world would be applied to the presidency.

So what did he say? Romney told Politico “I learned leadership by watching people,” and named J.W. “Bill” Marriott, a fellow Mormon and the CEO of the hotel chain of the same name, as one of the people from whom he’s learned a lot about leadership. He put Marriott right up there with his mentor, Bill Bain.

While we can’t speak to Bill Marriott’s management style, we can tell you that during his 40-year tenure as CEO of Marriott International, the company engaged in aggressive tax avoiding – so aggressive that it later got them into trouble with the IRS.

The company used a tax shelter known as “Son of BOSS,” generating capital losses that a federal court deemed “fictitious,” “artificial” and a “scheme.” The government criminally prosecuted the promoters of this particular tax shelter and people are now serving federal prison sentences for it. In fact Romney himself, as a member of Marriott’s audit board, most likely signed off on this tax evasion strategy. The company has used other aggressive tax planning vehicles, too, even claiming a questionable tax credit for synthetic fuels.

Marriott also shows an ever-increasing ability to shift and shelter its profits offshore. While 3,122 of its 3,718 hotel properties are in the United States, the company pays more income tax in foreign jurisdictions than in the US, even though the majority of its profits must surely be generated here.

Marriott has over a hundred subsidiaries in known tax haven countries. For example, while it has only one hotel in the Cayman Islands, Marriott has 15 subsidiary companies there.  And in Luxembourg, where it has nine subsidiaries but zero hotels, Marriott uses one of its subsidiaries to collect royalties on its various brand names which the US cannot tax.

Does Romney admire and endorse these kinds of shenanigans? Hard to say for sure. But given his widely recognized use of some pretty aggressive (though legal, far as we know) strategies to avoid paying his personal taxes, we now have a glimpse into the values that inform his views on corporate tax policy.  We are beginning to sense a pattern in this presidential candidate, and it looks a little like disdain for our nation’s tax laws.

Both Republicans and Democrats are featuring governors at their national nominating conventions. Because convention speakers are chosen as the parties’ ambassadors to new audiences during these TV spectacles, the state policy team at the Institute on Taxation and Economic Policy are providing quick sketches of current governors from both parties who have been leaders – for better and for worse – in state tax policy. Below are profiles of more of Tuesday night’s prime time speakers.

Oklahoma Governor Mary Fallin:  Governor Mary Fallin led an unsuccessful (hooray!) attempt this year to wreak havoc on Oklahoma’s tax system which included eventual elimination of the Sooner State’s personal income tax.  To pay for the preliminary rate cuts, Fallin wanted to eliminate the personal exemption, Earned Income Tax Credit, and other credits – all tax provisions that overwhelmingly benefit low and moderate income Oklahomans.  The legislature generally supported her plan and introduced about a dozen versions of tax reform.  Every plan had one common feature: they would have raised taxes on a majority of Oklahoman families while cutting them – dramatically – for the richest.

Fortunately, despite strong legislative support to deliver a large tax cut package (and the expertise of Fallin’s supply-side consultant, Arthur Laffer), all efforts stalled this year.  But the fight to preserve Oklahoma’s personal income tax and protect the state’s poorest residents is far from over. Governor Fallin recently vowed, “[w]e are going to get that tax cut done next year.” 

Ohio Governor John Kasich: When he was running for office, candidate Kasich supported eliminating the state’s personal income tax altogether. And though he later softened his radical stance, citing the inability of the state to afford such a massive change, it is clear that cutting the personal income tax has been on his agenda ever since. As governor, he first advocated paying for income tax rate cuts with revenue from a new fracking tax, but that failed. Now, he’s exploring eliminating some tax exemptions to pay for income tax reductions. Clearly, Kasich has it out for the income tax even though he already succeeded in eliminating Ohio’s estate tax and pushing through a tax credit that benefits investors.

Governor Brian Sandoval: Of all the GOP governors across the country, Brian Sandoval stands out as the one most likely to put his constituents over politics.  Working with Republicans and Democrats, Sandoval extended $620 million in temporary taxes first in 2011 and again this year to avoid deep cuts to education spending.  Significantly, Sandoval even abandoned on Grover Norquist’s “no-tax pledge” after taking a careful look at the fiscal conditions in Nevada. 

Wisconsin Governor Scott Walker: Governor Walker’s tax policy positions make him no friend to low income working families. The budget he signed reduced the value of the state’s earned income tax credit and froze the state’s circuit breaker (for low income property owners). The Governor’s budget also includes $2.3 billion in tax breaks over the next decade in the form of a domestic production activities credit (a needless business tax giveaway), two different capital gains tax breaks (that benefit the most affluent), and a variety of new sales tax exemptions.

South Carolina Governor Nikki Haley: Governor Haley’s tax policy position is clear – she’s on the side of corporations and businesses rather than working South Carolina families. Governor Haley has long supported eliminating the state’s corporate income tax.