Month: September 2012

Today the Census Bureau released new data showing that in 17 states, the number of Americans living in poverty increased in 2011.  Lawmakers and advocates interested in helping to lift families out of poverty can and should look to their states’ tax structures, which are often part of the problem but can also be part of the solution and play a role in helping to eliminate poverty.

When all the taxes imposed by state and local governments are taken into account, almost every state imposes a higher effective tax rate on low-income families than on upper- income taxpayers.  A new Institute on Taxation and Economic Policy report, “State Tax Codes as Poverty Fighting Tools,” recommends four key anti-poverty tax policies: the Earned Income Tax Credit, property tax circuit breakers, targeted low-income tax credits, and child-related tax credits.  The report identifies the states where each of these policies is in place, and finds that seven states (Alabama, Alaska, Florida, Mississippi, Nevada, Tennessee and Texas) don’t offer any of these four recommended anti-poverty tax policies.

The report also includes a survey of state-by-state anti-poverty tax policy decisions made this year and offers specific recommendations tailored to policymakers in each state as they work to combat poverty. Read ”State Tax Codes as Poverty Fighting Tools” here.

 A new study by the non-partisan Congressional Research Service (CRS) using data from the past 65 years found that there is no correlation (PDF) between top tax rates and economic growth. But it doesn’t stop there. The study also found that there is a correlation between the reduction in top tax rates and the increasing concentration of wealth toward the top of the income distribution. The report, Taxes and the Economy: An Economic Analysis of the Top Tax Rates Since 1945, is also clear that this is not only about tax rates on regular income, and points out (PDF) that “changes in capital gains and dividends were the largest contributor to the increase in income inequality since the mid-1990’s.”

This has to be just about the last nail in the tax-cutting, supply-side coffin. CRS is a bunch of smart people at the Library of Congress whose mission is “providing comprehensive and reliable legislative research and analysis that are timely, objective, authoritative, and confidential, thereby contributing to an informed national legislature.”  And while the study has earned volumes of media coverage, it’s worth noting that even the Wall Street Journal report didn’t quibble with the study’s finding that “tax cuts for the rich don’t seem to be associated with economic growth…. [but] can be linked to a different outcome: income inequality.”

The CRS findings fall in line with the increasing consensus showing that supply-side tax cuts touted by people like Arthur Laffer have been an enormous failure over the past several decades. As Citizens for Tax Justice’s Bob McIntyre has pointed out, even George W. Bush’s own Treasury Department conceded in 2006 that the Bush tax cuts (which were mostly targeted to the wealthiest Americans) would not have a significant effect on economic growth over the long term. And every few weeks in his New York Times blog post, Ronald Reagan’s former advisor, Bruce Bartlett, explains that tax cuts really can not and do not make an economy healthy.

For numbers crunchers, here are some details about the study. To explore the connection between top tax rates and economic growth, the CRS performed two regression analyses comparing the top income and capital gains tax rates to the private savings rate, productivity growth rate, and real per capita GDP from 1945 to 2010. The results of the analysis reveal that there is simply no statistically significant relationship between tax rates and savings, productivity, or real per capita GDP.

To examine the effect of top tax rates on income inequality, the CRS used a regression analysis comparing the top income and capital gains tax rates to the share of income earned by the top 0.1% and 0.01%. The analysis found that there is a statistically significant negative correlation between the share of income received by the top 0.1% and 0.01% of income earners and the level of the marginal tax rates. In other words, lowering top marginal tax rates has the effect of further increasing the disproportionate amount of income earned by the wealthiest of the wealthy.

Citizens for Tax Justice and other economic think tanks have been demonstrating the flaws in supply-side tax cuts for decades, and the public is increasingly catching on about taxes in particular and economic inequality more generally. With these two issues high on the election year agenda, maybe 2012 will be the year supply-siders, voodoo economists, wishful thinkers and other magical thinkers lose their credibility, once and for all.

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UPDATE, November 1, 2012: According to a New York Times story, “[t]he Congressional Research Service has withdrawn an economic report that found no correlation between top tax rates and economic growth, a central tenet of conservative economy theory, after Senate Republicans raised concerns about the paper’s findings and wording.” The study referred to is the one CTJ blogged here when it was first published in September 2012.

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UPDATE, December 13, 2013: The report has now been reissued with little changes and the same basic conclusions are contained in the original report.

For Immediate Release: September 20, 2012

Rare Joint House-Senate Hearing on Tax Reform Will Fail without Commitment to Repeal Capital Gains Tax Break

 New Report Shows All Current Proposals Give Richest Taxpayers a Break More than a Thousand Times Larger Than They Give Middle Income Taxpayers

Washington, DC – In advance of a rare joint House-Senate hearing on tax reform and capital gains, a new report finds that the special low tax rates for capital gains and stock dividends will continue to provide huge benefits mainly to the richest one percent of Americans, no matter how Congress resolves the standoff over the expiring Bush-era tax cuts.

The report, from Citizens for Tax Justice, finds that the richest one percent of Americans would enjoy an average break of $41,010 on capital gains and dividends next year under the bill passed last August by the Republican-controlled House to extend all the Bush tax cuts. They would enjoy a slightly lower average tax break of $40,990 under the bill passed by Senate Democrats last July to extend most, but not all, of the Bush tax cuts. Americans in the middle fifth of the income distribution would enjoy an average capital gains and dividend tax break of just $30 next year under either approach. The report is available at this link.

Capital gains, which are the profits obtained from selling assets for more than their purchase price, were already taxed at lower rates than other income when President George W. Bush took office. The Bush tax cuts lowered the capital gains rate further and expanded the break to apply to stock dividends.

“The bad news is that none of the approaches to extending the Bush tax cuts would change the fact that these lower tax rates for investment income are a huge break benefiting the very wealthiest Americans,” said Steve Wamhoff, Legislative Director at Citizens for Tax Justice (CTJ). “The good news is that both parties are talking about extending those tax cuts for only one year and then devising a comprehensive tax reform that makes dramatic changes. The question now is how Congress will define ‘reform.’”

The CTJ report, Ending the Capital Gains Tax Preference Would Improve Fairness, Raise Revenue and Simplify the Tax Code, released today makes five points.

1) The capital gains tax preference mainly benefits the richest one percent of Americans.
2) It reduces revenue, despite claims to the contrary.
3) It gives rise to tax shelters and makes the tax code overly complicated.
4) These problems will be mitigated, but certainly not eliminated, by the reform of the Hospital Insurance tax coming into effect in 2013.
5) The way to fully resolve the problems described here is to eliminate the special, low personal income tax rates for capital gains so that they are taxed just like any other income.

The hearing, which is scheduled for today at 10 a.m. EST, will be held jointly by the House Ways and Means Committee, which is controlled by Republicans, and the Senate Finance Committee, which is controlled by Democrats. The hearing is part of a series of unusual joint hearings to address topics related to tax reform.

Many members of the two committees have shown a willingness to retain, and even expand, some tax preference for investment income. The CTJ report recommends eliminating it altogether and points out that repealing this break completely is not a radical proposal – the Tax Reform Act of 1986 eliminated the capital gains tax break so that all income was taxed at the same rates. Preferential rates for capital gains were subsequently reintroduced into the tax code and the break was gradually increased by subsequent Presidents and Congresses. It was expanded dramatically under President George W. Bush.

“Any overhaul of the tax code that continues to tax the income of wealthy investors like Warren Buffett at lower rates than other income is not worthy of the term ‘reform,’” said Wamhoff.

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).

Republican Presidential Candidate Mitt Romney was caught on tape explaining to a group of prospective donors that 47 percent of Americans “pay no income tax” and generally fail to contribute their fair share. In identifying these presumed slackers who would never vote for him, Romney betrayed his own myopia about how the tax system works.

Here’s what Romney doesn’t talk about when he talks about taxes.

1. All Americans Pay Taxes

If you look at the tax system as a whole, the share of taxes paid by Americans in each income group is similar to their share of total income.

While Romney is about right that 47 percent of Americans do not specifically pay the federal income tax (according to Tax Policy Center Data), this statement is extremely misleading because it disappears the more than half of this same group that pays payroll taxes. And, every American pays state and local taxes – income, sales, property, etc.

In fact, the bottom 20 percent of taxpayers pays substantially more in state and local taxes as a percentage of their income than any other income group.

Are there people out there who don’t pay any taxes? When we went looking, we couldn’t find any, so we had to make one up.

2. Our Federal Tax System Rewards Work and Combats Poverty, and that’s Good

While every American pays some taxes, it is the case that about 18 percent of Americans pay neither payroll nor federal income taxes. Who are these alleged freeloaders? About 60 percent of them are elderly, meaning that they’re unable to work and are largely living on limited retirement income.

The rest of the households that don’t pay payroll or federal income taxes are low income households bringing in less than $20,000 each year, and who are benefitting from highly effective tax credits like the earned income tax credit (EITC) and child tax credit (CTC).  These credits incentivize work while providing much needed support to low and middle income family budgets, and in 2010 they were responsible for lifting 9.2 million people, including 4.9 million children, above the poverty line.

The effectiveness of these credits is so widely recognized across the political spectrum that every single president since Gerald Ford, from Reagan to Obama, has enacted expansions of the EITC or CTC.  Ronald Reagan once called the EITC the “the best anti-poverty, the best pro-family, the best job creation measure to come out of Congress,” and George W. Bush expanded it as part of his 2001 tax cuts.

3. Also Paying No Federal Income Tax Are High Wealth Individuals and Highly Profitable Corporations

Low income families who pay nothing in federal income taxes are using provisions that were written into the tax code by Congress, just like wealthy corporations and individuals (including Romney himself) do to bring down their tax bills.

On the corporate side, Citizens for Tax Justice found that from 2008-2011, 30 Fortune 500 companies, including the likes of General Electric and Verizon, made $205 billion in profits, yet their overall tax bill was actually negative. The corporate tax system has become so full of loopholes and tax breaks (yes, written by Congress) that what even the most profitable companies actually pay on average is roughly half the statutory corporate tax rate.

As far as the wealthiest Americans, a recent IRS study found that in 2009 a shocking 35,000 Americans making over $200,000 paid not a dime in federal income tax. Similarly, many of the country’s wealthiest Americans, like billionaire investor Warren Buffet, pay lower tax rates than middle class Americans, largely due to the tax break on capital gains income and a plethora of other tax loopholes.

Slow but steady progress toward enforcing state sales taxes on online purchases continues.  Amazon.com has agreed to begin collecting sales taxes in Pennsylvania, and the state’s Revenue Department plans to start auditing and penalizing other online retailers with a physical presence in the state that fail to collect the tax.

Promises from Iowa lawmakers to flatten and lower income tax rates and roll back business property taxes are worrisome. But when House Republicans and the governor recently sketched out their ideas for pursuing this agenda, they actually (and deliberately) “offered no specifics on any of their tax relief and reform commitments.”  The state requires a balanced budget, so these tax cuts will need to be paid for and the choices available are limited: cut services or increase other taxes

While state lawmakers love to offer tax breaks in the name of job creation, Missouri might be learning to resist the urge. Governor Jay Nixon has asked his Tax Credit Review Commission, which he created in 2010 to provide an independent review of the state’s many tax credits, to update its 2010 report, which was harshly critical of many Missouri tax credits. While the original report’s advice was never followed because the state legislature was unable to agree on paring back these tax breaks, House lawmakers are now signaling their interest in critically reviewing the tax breaks the state currently provides in the name of job creation – welcome news since there is remarkably little evidence (PDF) that state tax breaks are an effective job-creation strategy.

Last weekend, Louisiana shoppers took advantage of the Second Amendment sales tax holiday, which allows the purchase of guns and ammunition tax free.  Read why sales tax holidays are silly (PDF) and a political racket.

Bradley Birkenfeld, a former banker at the Swiss banking giant UBS, received a record-setting reward of $104 million from the Internal Revenue Service (IRS) for blowing the whistle on the bank’s systematic efforts to woo wealthy Americans investors and then help them evade taxes. Birkenfeld’s revelations resulted in UBS paying a $780 million fine to the US government, and the recovery of more than $5 billion from American taxpayers took part in the IRS’s amnesty program to avoid criminal charges for their own offshore tax evasion.

Birkenfeld participated in the UBS scheme (he served jail time and is now under house arrest). His insider disclosures led the IRS to other UBS bankers who had persuaded wealthy Americans to place $20 billion of assets in UBS in order to facilitate tax evasion that — obviously — boosted those clients’ returns. The IRS has charged two dozen offshore bankers and 50 American taxpayers with crimes, and at least 11 banks are still under criminal investigation.

The record payout to Birkenfeld is part of the IRS Whistleblower program that provides a substantial financial incentive, up to 30 percent of the taxes recovered, to encourage tipsters to come forward with information about tax evasion. This program is a smart piece of the IRS’s larger strategy to combat the estimated $40 to $70 billion in individual offshore tax evasion each year.

While the effort to combat offshore tax evasion has revved up over the past couple years, the IRS still lacks the tools it needs to fully confront evasion. To help fix this, Senator Carl Levin has proposed the Stop Tax Haven Abuse Act, which, among other things, would allow the Treasury to put more pressure on financial institutions that don’t cooperate with US tax enforcement. In addition, the Senate still needs to override Senator Rand Paul’s block and ratify the US-Swiss tax treaty so that the IRS can begin collecting critical information from Swiss banks about US tax evaders.

Even with the many hurdles the IRS faces, Stephen Kohn, the Executive Director of the National Whistleblowers Center, said that it had been a good day in the fight against tax evasion because the IRS sent “104 million messages to banks around the world – stop enabling tax cheats or you will get caught.”

It turns out that Mitt Romney’s energy policy adviser, Harold Hamm, is the CEO of an oil company called Continental Resources, and we all know that energy companies get some of the most generous breaks in the U.S. corporate income tax code. When we learned Hamm had submitted testimony to the House Energy and Commerce Committee claiming that his company pays a 38% effective tax rate, we had to fact check it.  We reviewed data from the company’s own financial reports and ran the numbers, and it turns out Continental Resources has paid a mere 2.2% federal corporate income tax rate on its $1,872 million in profits over the last five years.  Read our one-pager here.

CTJ’s legislative director testified before the Congressional Progressive Caucus on the role of revenue in addressing America’s economic and fiscal problems.

Read the written version of the testimony, which explains in detail each point that he made today:

– Tax cuts are usually an ineffective tool to spur job creation.
Congress’s devotion to tax cuts is making deficit-reduction impossible.
– The expiring tax cuts that help people truly in need are a tiny fraction of the overall package of tax cuts and are no reason to extend all of them.
– Most of the “grand bargains” being discussed to address the budget deficit (including the Simpson-Bowles plan) actually reduce revenue compared to current law (that is, compared to what would happen if Congress did nothing).
– The richest Americans can afford to pay more to support the society that made their wealth possible, and claims that the rich are already disproportionately taxed are untrue.
– One way to get the rich to pay their fair share is to get corporations to pay more taxes.