Month: September 2012

Former Virginia Governor and current Senate candidate Tim Kaine found himself in hot water after a Senatorial debate last week in which he expressed a willingness to consider “a proposal that would have some minimum tax level for everyone.” Perhaps even worse, Kaine has also proposed a so-called “Middle-Ground” approach to the Bush tax cuts, which he says in his TV ad is fiscally responsible. His middle ground position – putting him between a tax-averse Democratic president and a tax-loathing Republican rival – would extend the Bush tax cuts for the first $500,000 that a taxpayer makes in a year.

His fiscally irresponsible ideas about the expiring Bush tax cuts merit their own outrage. Kaine’s proposal to raise the income threshold above which the Bush tax cuts expire to $500,000 would save 22 percent less revenue than Obama’s $250,000 threshold, and 73 percent of the lost revenue would be paying for tax cuts for people making over $500,000.  A full 30 percent of the cost of Kaine’s extra tax cuts would go to people making over $1 million!

It’s not surprising that his statements regarding a minimum tax have caused an uproar considering that such proposals are usually the province of radical conservatives like Minnesota Republican Michelle Bachman, rather than that of moderate Democrats. Ironically, Kaine himself made a strong case against such a proposal in the debate when he noted that “everyone pays taxes,” a point Citizens for Tax Justice repeatedly makes.

What’s so disturbing about Kaine’s Bush tax cut proposal, as opposed to his openness to a minimum tax (which he’s already walked back), is that it isn’t out of the realm of possibility. Last May, Democratic House Minority Leader Nancy Pelosi proposed to raise the income threshold over which the Bush tax cuts should expire even higher, from $250,000 to $1 million. Kaine and like-minded Democrats need to reconsider their position because allowing even more of the Bush tax cuts to stay in place makes about zero fiscal sense.

Front Page Photo of Tim Kaine via Third Way Creative Commons Attribution License 2.0

Looks like the “spin room” in Topeka has been busy lately. Read how Kansas Governor Brownback and his staff “fashion[ed] a new budget narrative” in reaction to criticism over massive budget cuts he signed (PDF) earlier this year and possible further reductions. Insisting that revenue lost to his pet tax cuts (which take effect next year) won’t be responsible for budget shortfalls, the governor is saying that somehow the European debt crisis and other things beyond the state’s control are forcing spending cuts.

It’s been a while since we’ve heard much about “marriage penalties” imposed by state tax structures (a so-called marriage penalty is imposed when single filers pay more tax as married couples than if they filed as two single filers). But the issue is rearing its head in Wisconsin and this thoughtful blog post from the Wisconsin Budget Projects helps to put the concept in context.

In order to debunk the absurdity of Mitt Romney’s 47 percent claim, an opinion piece in the Las Vegas Sun reminds Nevadans — by pointing to research from the Institute on Taxation and Economic Policy — that low income people are paying more than their fair overall share because of state and local taxes.

Here the Charlotte Observer editorial board decries both gubernatorial candidates’ calls for politically popular rate reductions and their failure to commit to genuine, comprehensive reform for North Carolina. “Today’s tax code is riddled with exemptions, loopholes and preferential treatment that sap the state of needed revenue… [and] it’s time for tax code reform to take a prominent place on the agenda of the state’s chief executive. The public – the voting public – should insist on it.”

Kentucky’s tax structure is broken – so broken that policymakers have convened 12 commissions since 1982 to study the state’s revenue stream.  And yet the Institute on Taxation and Economic Policy (ITEP) found that still the state continues to tax low and middle-income people at a higher rate than the wealthy. This year the Governor Beshear formed the Blue Ribbon Commission on Tax Reform, and the consulting economists assisting the Commission have released their report (PDF) which offers a variety of recommendations that are worth legislative consideration. The full commission, consisting of stakeholders and leaders from organizations across the state, will release its recommendations in November.

The Commission was tasked with analyzing the tax structure with these five goals in mind: fairness, competitiveness, simplicity and compliance, elasticity, and adequacy. The economic consultants found (and most analysts agree) that “a broader tax base is needed so that revenue can keep pace with future economic growth.” The report predicts a dire future for the state’s finances unless the tax structure is improved, “Without fundamental reforms Kentucky could face a $1 billion shortfall by 2020, and could find itself at a competitive disadvantage to neighboring states for business growth, retention, and recruitment.”

The experts’ comprehensive report included some common sense, positive proposals like eliminating itemized deductions, instituting an Earned Income Tax Credit, and broadening the sales tax base to more personal services. The Louisville Courier Journal, in the culmination of three months of quality, in-depth reporting on the issue notes that, “many lawmakers and others expect the governor’s effort will fall far short of any significant reform — just as reform attempts by most of Beshear’s immediate predecessors failed.” The reason? Getting legislators to agree to any tax increase (even if other taxes are lowered) may be a political bridge too far.

The Governor, however, has said that he is not abandoning the idea of a special session focused solely on tax reform. He admits, “It’s always difficult to address the issue of taxes. But I think it is do-able if we all will work together.” The full tax commission is expected to come out with its recommendations by November 15. The question remains whether Kentucky can not only study its tax system, but also reform it.

A hearing on offshore profit shifting last week exposed aggressive tax planning strategies employed by Microsoft and Hewlett-Packard (HP) and illustrated the critical need for more disclosure.

On September 20, the Senate Permanent Subcommittee on Investigations held a hearing on “Offshore Profit Shifting and the U.S. Tax Code.” Witnesses from academia, the Internal Revenue Service, U.S. multinational corporations, international tax and accounting firms and the nonprofit Financial Accounting Standards Board (FASB) answered questions from the Senators about how tax and accounting rules allow U.S. multinationals to shift profits offshore using dubious transactions and complicated corporate structures.

The committee looked at two case studies investigated by the committee staff. In the Microsoft case, the committee investigation found that 55 percent of the company’s profits were “booked” (claimed for accounting purposes) in three offshore tax haven subsidiaries whose employees account for only two percent of its global workforce. Microsoft did that by selling intellectual property rights in products developed in the U.S. (and subsidized by the research tax credit) to offshore tax haven subsidiaries, then creating transactions to shift related profits there.

Hewlett-Packard used a loophole in the regulations to use offshore cash to pay for its U.S. operations without paying any U.S. tax on the repatriated income.  Rather than having offshore subsidiaries pay taxable dividends to the U.S. parent company, HP had two subsidiaries alternately loan funds to the parent in back-to-back-to-back-to-back 45-day loans. In the first three quarters of 2010, there was never a day that HP did not have an outstanding loan of $6 to $9 billion from one of its foreign subsidiaries.

In the tax footnote to their public financial statements, companies disclose the amount of their foreign subsidiaries’ earnings which are “indefinitely reinvested.” They do not record U.S. tax expense on these profits, ostensibly because they don’t plan to bring them back to the U.S. anytime soon. But they must disclose the total amount of their unrepatriated profits and estimate the U.S. tax that would be due if the earnings were repatriated.

The FASB representative, in a conversation with CTJ Senior Counsel Rebecca Wilkins after the hearing, noted that the accounting standards require disclosure. If companies do have a reasonable estimate and are not disclosing the amounts, that would be an “audit failure” by the accounting firm auditing the financial statements and subject to possible disciplinary action by the Public Company Accounting Oversight Board (established by Congress in 2002).

Most companies have not disclosed the potential U.S. taxes they would owe, but they must know it’s enough that they don’t want to repatriate the earnings and pay it. Chances are, they know those amounts down to the dollar.

It’s outrageous that many of the companies who are lobbying hardest for a repatriation holiday won’t tell Congress whether these foreign earnings are sitting in a tax haven right now or how much U.S. tax they would owe on them. Lawmakers should demand to know.

Last year, when billionaire investor Warren Buffett created a storm by arguing that Congress should reform the tax system that allows him to pay a lower effective rate than his secretary, Senate Republican Leader Mitch McConnell quipped, “if he’s feeling guilty about it, I think he should send in a check.”

This is the common refrain from anti-tax lawmakers and pundits: rich people like Buffett who believe they pay too little in taxes should just make a voluntary contribution to the IRS and stop pestering Congress to raise taxes. Republicans in both chambers of Congress introduced bills to encourage such voluntary contributions, and one was approved by the House of Representatives last week.

Last week, we also learned that presidential candidate Mitt Romney, did, in effect, make a voluntary contribution to the IRS when he decided to forego almost half of the $4 million in charitable deductions that he was allowed under the law for 2011.

Clearly, we can’t expect this sort of voluntary contribution to occur very often. Romney initially resisted the idea strongly, going so far as to state, in January, “I pay all the taxes that are legally required and not a dollar more. I don’t think you want someone as the candidate for president who pays more taxes than he owes.”

But this recent disclosure from Romney’s trustee says that Romney decided to forgo the charitable deductions so that his effective tax rate would “conform” with his earlier statements that he always paid at least 13 percent of his income in federal income taxes. CTJ senior counsel Rebecca Wilkins calculated that his effective tax rate would have been around 10.5 percent if he took all the charitable deductions he was allowed for 2011.

So aside from the occasional multi-millionaire who runs for president and wants to avoid answering difficult questions about the policies that allow him to pay so little, can we expect many wealthy Americans to voluntarily pay for public services and public investments?

No. We cannot pay for roads, schools, aircraft carriers and many, many other public goods with voluntary contributions. Even conservative writers for the Economist have skewered the idea, explaining that

A rationally self-interested individual will not voluntarily pay for public goods if she believes others will pay and she can get a free ride. But if we’re all rationally self-interested, and we know we’re all rationally self-interested, we know everyone else will also try to get a free ride, in which case it is doubly irrational to voluntarily pitch in. Even if you’re not inclined to ride for free, why throw good money at an enterprise bound to fail?

In other words, “game theory” suggests that we would not bother to make a voluntary contribution to, say, build a highway, because we know the task will require contributions from many people who are unlikely to make them. As a result, we end up without the new highway, even if the majority of us want it to be built.

That highway can’t be built with the contributions of the occasional public figure who’s embarrassed about his tax loopholes. Not even one with Mitt Romney’s wealth.

A new survey of 250 economists in the business community by the National Association for Business Economics released on Monday revealed their strong support for increasing fiscal stimulus in the short term and taking a balanced approach to deficit reduction (including revenue increases as well as spending cuts) over the long term. This agreement among business economists stands in direct contrast to many conservative lawmakers in Washington, who increasingly favor spending cuts in the short term and actually decreasing taxes over the long term.

Of the economists surveyed, 67 percent favored maintaining or even increasing the current level of fiscal stimulus in 2013. Moving in the opposite direction, Congress actually enacted $984 billion in spending cuts (known as sequestration) last year, which go into effect starting in 2013; a full three quarters of the economists polled outright oppose allowing those sequestration cuts to take effect.

Although a majority of the business economists did favor extending tax cuts in 2013 to help stimulate the economy (although there was no majority for making all the tax cuts permanent), the reason more of them favor preserving government spending is likely explained by the fact that government spending typically has a much greater positive impact on economic growth than tax cuts.

Turning to the long haul, a full 90 percent of those surveyed believe that Congress should take a balanced approach to deficit reduction, meaning a combination of tax increases and spending cuts. And while there is near universal consensus among these economists for tax increases, neither the Democratic nor Republican party platforms support increasing tax revenue as part of a balanced approach to deficit reduction. Both parties instead call for reducing revenue by trillions of dollars (compared to what our tax system would collect if the tax cuts were all allowed to simply expire).

While the business community is often portrayed as being hindered by budget deficits and higher taxes, this survey reveals that they actually favor higher budget deficits in the short term and higher taxes over the long term. It’s time Congress begins listening to the actual business community rather than the anti-tax activists who pretend to speak for them.

First there was the Congressional hearing last Thursday, then the release of Republican Presidential candidate Mitt Romney’s 2011 tax return on Friday. While one of them was big news and the other not so much, both events highlight the biggest subsidy high-income taxpayers get from the tax system – the preferential rate on capital gains and dividends. While we tax “ordinary” income such as salary and wages at rates up to 35 percent, capital gains and dividends are never taxed higher than 15 percent.

The upshot is that a taxpayer with investment income will pay less than half of the federal income tax that someone with the same amount of regular wage or salary income will pay. This is true at any income level – whether comparing two taxpayers that make $60,000 or two taxpayers that make $60 million. This fundamental unfairness in the tax code is the primary reason why Warren Buffett pays a lower tax rate than his secretary, why Mitt Romney pays a lower tax rate than many middle-income Americans and is the reason behind that feeling most Americans have that the tax code is rigged in favor of the wealthy.

A CTJ review of Romney’s 2011 federal income tax return found that he saved $1.2 million in federal income taxes in 2011 because of the preferential capital gains tax rate. Without that special break, he would have paid total federal income taxes of $3.1 million and his tax rate would have been almost 23 percent.

This benefit of this particular tax subsidy goes overwhelmingly to the richest Americans. A CTJ report released Thursday shows that 83 percent of capital gains and 60 percent of dividends are earned by the richest five percent of taxpayers. As Colorado venture capitalist Bill Stanfill testified in the Senate hearing, this tax break is “simply a windfall for wealthy investors.” He urged lawmakers to eliminate the special treatment.

Also at that rare, joint House Ways and Means and Senate Finance Committee hearing was a panel of experts from across the political continuum who all agreed that addressing the huge discrepancy between the ordinary income and capital gains tax rates will be key to any comprehensive tax reform. Len Burman, a professor at Syracuse and former director of the Tax Policy Center, noted, as did CTJ’s report, that the huge differential in tax rates creates enormous complexity in the tax code – which is exacerbated by more people pushing the limits of the code to structure their income as a capital gain, to which lawmakers respond with even more rules, and so on. (Two of the witnesses guessed that this ridiculousness accounts for about half the pages in the tax code!)  David Brockaway, chief of staff of the Joint Committee on Taxation during the tax reform battles of 1986, said the revenue gained from raising the capital gains rate then was essential to pay for the other changes, calling it “a gateway issue.” Even Lawrence Lindsey, former director of the National Economic Council and an architect of the Bush tax cuts, said the ordinary and capital gain tax rates shouldn’t be so far apart.

Mitt Romney’s plan to keep the low capital gains tax rate is the primary reason why his tax proposal will be a huge break for millionaires. Even if all of their other deductions and exclusions are eliminated, taxpayers making over $1 million would get an average federal income tax cut of at least $250,000 and as much as $400,000 under Romney’s plan (to the extent we can know, anyway). For his part, President Obama has proposed to keep the current low capital gains rates for taxpayers with less than $250,000 in income, but to let the rates for taxpayers with higher income revert to the pre-Bush levels of 20 percent – a rate still substantially below the ordinary income rate.

It is clear that the special low rate on capital gains must be completely eliminated to simplify the tax code, end economically-damaging tax shelters, and enable comprehensive tax reform. It would also make the tax system dramatically more fair by taxing income from wealth the same as income from work.

Mitt Romney’s 2011 Returns Reveal a Tax Code Stacked in Favor of the Very Rich Because of Loopholes and Special Rates Not Available to Ordinary Taxpayers

Washington, DC – Since Citizens for Tax Justice (CTJ) first calculated that GOP Presidential candidate Mitt Romney likely paid a 2010 federal income tax rate of 14 percent in October of 2011, CTJ’s analysts have been helping to explain the features of our tax code that allow high wealth individuals like Romney to pay such a low federal income tax rate. The explanation is that loopholes in the tax code benefit the most affluent. 

After reviewing Mitt Romney’s 2011 return (an estimate of which he released in January), and the 20-year summary of the candidate’s taxes issued by his lawyer, CTJ’s Senior Counsel for Federal Tax Policy, Rebecca Wilkins, issued the following statement:

“It’s an indictment of the federal tax code that a man of Mitt Romney’s wealth could pay a federal tax rate as low as 10 percent. While he chose to forgo deductions for charitable contributions in order to keep his “commitment to the public that his tax rate would be above 13 percent,” bringing his rate up to 14 percent for 2011, it is still outrageous that the code allows such a low rate.

“He also takes advantage of a special low rate on investment income. The preferential rate on capital gains and dividends saved Mitt Romney a whopping $1.2 million in taxes in 2011, cutting his tax bill almost in half.  He would have paid $3.1 million in taxes without that special treatment. And much of his low-rate income is really compensation from Bain Capital that should have been taxed like regular wages or salary, but is disguised as capital gains using the “carried interest” loophole.

“Romney also paid $675,000 under the Alternative Minimum Tax (AMT). If his own tax plan, which eliminates the AMT, had been in place in 2011, he would have saved himself an additional $675,000, or one third of his entire federal tax bill, and reduced his effective rate to 9 percent.

“Also notice that Mitt Romney’s tax return for 2011 is almost twice as long as it was in 2010. It is 379 pages long, and 250 pages are foreign entity disclosure forms. Put simply, that’s 250 pages about his offshore investments.

“Further, the summary provided by his lawyer is playing games by averaging Romney’s 20-year tax rate. Including the years 1992-97 skewed his rate upwards because during those years, the capital gains rate was 28 percent instead of the 15 percent it is now. If they’d averaged only the last 15 years, his rate would have been much lower.

“And one final point is that Romney continued to work and make lots of money even when his capital gains tax rate was almost double the current rate, the rate he wants to retain.  Yet he says that the low capital gains rate is essential to incentivizing rich people to do what they do.  How does he explain that?”

***

Citizens for Tax Justice (CTJ), founded in 1979, is a 501 (c)(4) public interest research and advocacy organization focusing on federal, state and local tax policies and their impact upon our nation (www.ctj.org).

When the Supreme Court ruled in June that the new penalty for not obtaining health care was actually a tax (and therefore permissible under Congress’s taxing power) we pointed out that hardly anyone would pay it because low-income families would be eligible for Medicaid, and because subsidies would be available to help make coverage affordable for middle-income families (making up to $90,000 for a family of four).

We also pointed to a study from the Urban Institute and Robert Wood Johnson Foundation concluding that “About 7.3 million people—two percent of the total population (three percent of the population under age 65)—are not offered any financial assistance under the ACA and will be subject to penalties if they do not obtain coverage.”

This week, the Congressional Budget Office (CBO) released estimates that a smaller number than that — 6 million people — would be subject to the penalty for not obtaining health insurance. Naturally, some anti-tax politicians like Governor Bobby Jindal of Louisiana have pounced on this as evidence of a crushing tax increase during the Obama administration.

CBO explains that their previous estimate, that only 4 million people would pay the penalty, had to be revised for several reasons, like continuing gloomy unemployment figures and technical changes. But CBO also says that:

A small share—about 15 percent—of the increase in the number of uninsured people expected to pay the penalty results from the recent Supreme Court decision [which also allows states to opt of the Medicaid expansion that was part of health care reform]. As a result of that decision, CBO and JCT now anticipate that some states will not expand their Medicaid programs at all or will not expand coverage to the full extent authorized by the ACA. Such state decisions are projected to increase the number of uninsured, a small percentage of whom will be subject to the penalty tax.

And who are these governors that will opt to not have their states participate in the Medicaid expansion and thus increase the number of people subject to the penalty for not having health insurance? Well, one of them is Governor Jindal of Louisiana.

Photos of Bobby Jindal via Gage Skidmore Creative Commons Attribution License 2.0

The Washington Post explains why so-called “budget surpluses” in Maryland and Virginia are nothing to get excited about: “In both cases, the surpluses are modest, amounting to no more than a percentage point or two of state spending. And in both cases, the states’ present and pending obligations have sponged up most of the so-called extra cash. In a budgetary environment that remains severely austere, no one should equate a surplus with a windfall.”

Missouri is not alone in planning to give corporate income tax credits a much closer look in 2013. The head of a special committee tasked with reviewing Oklahoma’s tax credits said that he will push for a two-year moratorium on over two dozen corporate tax credits.  He will also propose eliminating the “transferability” of tax credits, which allows companies that don’t owe any income tax to benefit from tax credits nonetheless, by selling them to other individuals or businesses.

Iowa State Senator and chairman of the senate’s Ways and Means Committee recently wrote in the DesMoines-Register that Governor Terry Branstad should “strengthen the best anti-poverty program this nation has ever had: the earned income tax credit. This state tax cut will put more money in the pockets of working Iowa families with incomes less than $45,000. That’s money that will be spent in communities across the state.”  

Progressive tax advocates will be happy to hear that Minnesota Governor Mark Dayton has recommitted himself to advocating for legislation in the next legislative session that raises taxes on the wealthiest Minnesotans.