Nike, Microsoft and Apple Admit to Offshore Tax Shenanigans; Other Companies Plead the Fifth

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While the presidential candidates debate whether the tax code rewards companies that move operations overseas, a new CTJ report shows that ten companies, including Apple and Microsoft, indicate in their own financial statements that most of their foreign earnings have never been taxed – anywhere. The statements the companies file with the SEC reveal that if they brought their foreign profits back to the U.S., they would pay the full 35 percent U.S. tax rate, which is how we can surmise that no foreign taxes were paid that would offset any of the 35 percent U.S. tax rate.

The most likely explanation of this is that these profits, instead of being earned by real, economically productive operations in developed countries, are actually U.S. profits that have been shifted overseas to offshore tax havens such as Bermuda and the Cayman Islands. This same type of offshore profit shifting was the focus of a recent Senate hearing where Microsoft and Hewlett-Packard found themselves in the hot seat.

In the tax footnote to their financial statements, companies disclose the amount of their foreign subsidiaries’ earnings which are “indefinitely reinvested,” that is, parked offshore. Calling it “indefinitely reinvested” allows them to embellish their bottom lines, on paper anyway, because they don’t have to account for the cost of U.S. taxes they’d pay on that offshore income. But, they must disclose the total amount of their unrepatriated profits, and also estimate the U.S. tax that would be due if those earnings were repatriated.

A new CTJ analysis of the Fortune 500 found that, although 285 companies reported unrepatriated foreign earnings, only 47 companies disclosed in their financial statements an estimate of the U.S. income tax liability they would face upon repatriation, although that disclosure is required by accounting standards. The remaining companies hid behind a common dodge that estimating the U.S. tax would be “not practicable.” Legions of lawyers and accountants help these companies avoid taxes but can’t calculate the costs to the U.S. treasury?

Which Fortune 500 Companies are Shifting Profits to Offshore Tax Havens? ranks the 47 companies that do disclose this figure by the tax rate they’d pay if they repatriated their foreign earnings. Seven of the top ten are members, either directly or through a trade association, of the WIN America campaign that is lobbying for a repatriation tax holiday (aka corporate tax amnesty) that would let them bring the foreign earnings home at a super-low rate.

It’s not as though the rest of the Fortune 500 is innocent. CTJ’s report notably says nothing about the 238 Fortune 500 companies that have admitted having offshore hoards but refuse to calculate how much tax they’d pay. These companies include suspected tax dodgers like Google and HP, each of which has subsidiaries in known tax haven countries. In all likelihood, many of these other companies have been as successful in avoiding tax as the ten companies ranked highest in CTJ’s report.  

The new CTJ report is another reminder of what U.S.-based multinationals will do to avoid paying tax and why changing the U.S. international tax system to a territorial system is such a bad idea. Moving to a territorial tax system, which is supported by Gov. Romney and Congressman Ryan, would give companies a permanent tax holiday and encourage even more aggressive offshore profit shifting. President Obama has proposed corporate tax reform that would include a “minimum tax” on foreign earnings, although the rate has not been specified. And Congress, it seems, will be taking up overhaul of the corporate tax code next year, so watch this space for the facts about corporate America’s campaign to make dodging taxes even easier.


About that Cayman Islands Trust….

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In last night’s presidential debate, Governor Romney pointed out that President Obama’s pension holds investments in Chinese companies and even in a Cayman Islands trust. Unlike Romney’s self-directed Individual Retirement Account, the President’s pension is in a system over which the President has absolutely no control; it’s an account with the Illinois General Assembly Defined Benefit Pension Plan. To somehow compare that with the vast wealth that Romney has personally placed offshore is ludicrous.

While Romney was at the helm of Bain Capital, the private equity firm began forming all of its new funds in the Cayman Islands through labyrinthine structures that allow investors to legally avoid – and illegally evade – tax. In addition, Gov. Romney has a Bermuda corporation which has never been explained and, of course, there is that famous Swiss bank account. Over 250 of the 379 pages of Romney’s 2011 tax return are devoted to disclosing transactions with offshore corporations and partnerships.

If Romney was trying to make the point that most investors have some holdings in companies outside of the U.S., we buy that. But if Romney’s point was that facilitating tax avoidance and evasion through complicated offshore structures is both normal and acceptable or in any way ordinary, we could not disagree more.

Romney’s Three Biggest Tax Whoppers in the Town Hall Presidential Debate

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During Tuesday night’s presidential candidate town hall debate, President Barack Obama and former Massachusetts Governor Mitt Romney went at it again over, among other things, their respective approaches to tax policy.  While both candidates come up short on proposing fair and sustainable tax policy, Romney was downright brazen in misrepresenting the facts about his own and Obama’s tax plans.  Here we break down his three biggest whoppers.

Romney Says “Of Course” His Tax Plan Adds Up

After months of criticism from all sides for failing to specify which deductions he would eliminate in order to make his tax plan add up,  Romney floated the idea during the debate of having a cap where each American gets up to $25,000 of deductions and credits. As Citizens for Tax Justice (CTJ) noted when Romney first floated a $17,000 cap a couple weeks ago, the reality is that even if Romney eliminated every single deduction for the wealthy, he would still violate his promise to “not under any circumstances reduce the share that’s being paid by the highest income taxpayers.” The tax cuts in his plan (which he does specify) would result in a net tax reduction of $250,000 on average for millionaires, even if they had to give up all the tax expenditures they currently enjoy.

Seeming to contradict his own point about the share of taxes the wealthiest Americans would pay, Romney also said that he particularly wanted to bring personal income tax rates down for individuals at the high end of the income spectrum because so many small businesses are taxed under the personal income tax. Romney is again missing the point that only 3 to 5 percent of business owners (and the richest ones at that) would be affected by a high end rate change, and it would only be on the profits those business owners take home.

When Romney defends the arithmetic of his tax plan, he emphasizes that he will not reduce “the share” of taxes paid by the wealthiest Americans. We suspect this is so he can argue later that since his across-the-board tax breaks would reduce the tax burden on different income groups equally, even if it gives the wealthiest the largest tax breaks, the ratios stay the same. Of course, it would be impossible for Romney to cut high end rates without breaking his pledge to make his plan revenue-neutral. But it’s already been established (as discussed above) that his revenue pledge conflicts with his pledge to make these specific tax cuts and pay for them without raising the net taxes paid by the middle-class.

Romney Claims Middle Class Will See $4,000 Rise in Taxes Under Obama

Trying to deflect the argument that he would have no choice but to raise taxes on the middle class to pay for his across-the-board tax cuts, Romney tried to throw it back at Obama, saying that “people in the middle class will see $4,000 per year in higher taxes” under the President’s budget plan. This is jujitsu of epic proportions.

First, Romney misrepresents a study by the conservative American Enterprise Institute (AEI) which is NOT about higher taxes that would be levied next year, as the Governor suggested, but rather provides an estimate of what people who make between $100,000 and $200,000 could have to pay to cover their share of the debt accumulated under President Obama’s policies (both those implemented and those proposed).  Second, he’s not even talking about the middle class, because a truly middle-income taxpayer makes much less than $100,000.  Third, and most importantly, if Romney wants to say that tax proposals that would increase the debt are equivalent to future tax increases, then he needs to admit that his own plan, which likely increases the debt much more than Obama’s, is equivalent to a massive tax increase.  Indeed, Romney still hasn’t explained how he would pay for $10 trillion in tax cuts and another trillion in increased defense spending over the next ten years.

Romney Says He will Create 12 Million Jobs

One of Romney’s boldest claims of the night was that he had a “five-point plan that gets America 12 million new jobs in four years.” The numbers the Romney campaign uses to make this assertion, however, are so blatantly bunk that Romney earned 4 Pinocchios from the Washington Post’s fact checker.

Romney’s 12 million jobs claim relies most heavily on a study of Romney’s tax plan which found that it would create seven million jobs over 10 (as opposed to four) years. That study (PDF), however, rests on two false foundations. First, it overestimates the positive economic impact of tax reform, an impact which has been proven to be minimal at best. Second, because Romney has not yet laid out a plan that is even mathematically possible or detailed enough to model, the study necessarily rests on a whole series of assumptions about the plan that border on fictitious.

Romney’s evidence supporting the power of his plan to create the other five million jobs is even weaker than those he claims from tax reform. Three million of his alleged new jobs are among those that would already be created over the next eight (not four) years under current energy policies, some of which Romney actually opposes. Similarly misleading, Romney regularly points to a study with a speculative estimate that Chinese violation of U.S. intellectual property rights is costing two million jobs.  Romney wants us to infer that he would somehow save two million jobs by preventing China from pursuing this practice, even though he has never identified a truly effective tool the U.S. has at its disposal for changing the behavior of Chinese counterfeiters.

Would Repealing the Tax Break for Capital Gains Raise Revenue?

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A lot of attention has been given to a recent report from Congress’s non-partisan Joint Committee on Taxation (JCT) on one possible approach to tax reform. Very generally, the gist of the findings is that getting rid of itemized deductions and the exemption for state and local bond interest can raise enough revenue to offset the cost of repealing certain tax provisions meant to limit tax expenditures for the well-off (the Alternative Minimum Tax being the most prominent among them) and offset the costs of a very small reduction in income tax rates.

There’s a lot to be said about the debate around this, but right now, we’d like to focus on one particularly confusing aspect of the report — its treatment of capital gains.

Currently, capital gains (profits from selling assets) are taxed at lower rates than other types of income like wages. Most capital gains go to the richest one percent of taxpayers, and this tax preference is the main reason why wealthy investors like Mitt Romney and Warren Buffett can pay a lower percentage of their income in federal taxes than many middle-income people.

So there’s an obvious fairness-based argument for ending special, low income tax rates on capital gains and simply taxing them at the same rates as other income, which would be a tax increase mostly on wealthy investors. But would this actually raise much revenue? Surprisingly, two non-partisan Congressional research agencies disagree on this point.

JCT seems to believe that little or no revenue can be raised from this reform, while the Congressional Research Service (CRS) believes JCT is too pessimistic. Citizens for Tax Justice recently followed the approaches supported by CRS, which seem far more plausible, and estimated that ending the preference for capital gains would raise $533 billion over a decade.

JCT assumes large behavioral effects on the part of investors, who (the argument goes) would be inclined to hold onto their assets longer if they will be taxed more upon selling them, resulting in fewer capital gains to be taxed. JCT finds these behavioral effects to be so large that it might estimate no revenue gain from taxing capital gains at the same rates as “ordinary” income. The recent JCT report on tax reform seems to suggest that taxing capital gains as ordinary income either loses some revenue or has no effect on revenue.

On the other hand, CRS has reviewed quantitative research and concluded that JCT significantly overestimates these behavioral impacts. CRS notes, for example, that several economists believe that there are some short-term behavioral effects that JCT and others confuse for long-term effects.

One of the economists cited by CRS is Len Burman, a professor at Syracuse University and former head of the Tax Policy Center, who testified in September before the House Ways and Means Committee and the Senate Finance Committee on the benefits of ending the tax preference for capital gains. CTJ’s $533 billion estimate is calculated assuming the behavioral effects found in Burman’s research, which are much smaller than what JCT assumes. (The appendix in our report on revenue-raising options goes into great detail on the methodology.)

It’s not obvious which approach lawmakers will find more convincing. JCT usually has the final say on revenue estimates, but not always. For example, JCT estimates that both the Republicans’ approach and the Democrats’ approach to the Bush tax cuts would cost trillions of dollars in revenue (because Republicans would extend all of those tax cuts while Democrats would extend most of those tax cuts). And yet, nearly everyone in Congress has ignored those estimates. But that’s a topic for another day.

Which Fortune 500 Companies Are Sheltering Income in Overseas Tax Havens?

October 17, 2012 10:28 AM | | Bookmark and Share

(Read the PDF)

Ten Corporations Admit Paying Little Tax on Offshore Income; More Likely Do the Same

Earlier this year, the United States Congress debated creating a “repatriation tax holiday” – an amnesty for offshore corporate profits – that would have provided a special lower corporate tax rate for multinational companies that bring overseas profits back to the United States. Some observers have argued that many multinationals have been sheltering their profits in overseas tax havens, based on the hope that Congress will repeat the same “tax holiday” experiment it previously undertook in 2004. A new CTJ analysis of the financial reports of the Fortune 500 companies shows that 285 of these corporations had accumulated more than $1.5 trillion in overseas profits by the end of 2011, and there is evidence that a significant portion of these profits are located in tax havens.

In particular, our analysis shows that ten corporations, representing over a sixth of the $1.5 trillion in unrepatriated profits, reveal sufficient information to show that they have paid little or no tax on their offshore profit hoards to any government. That implies that these profits have been artificially shifted out of the United States and other countries where the companies actually do business, and into foreign tax havens.

For hundreds of other companies with overseas cash holdings, Congress currently has little information at its disposal that could tell policymakers how much of these companies’ unrepatriated profits are, in fact, anything more than earnings artificially shifted into tax havens. Before taking any action to deal with these unrepatriated profits, policymakers should demand full disclosure about the taxes that have been paid, or not paid, on these offshore profit hoards.

Fortune 500 Companies Reported $1.5 Trillion in Unrepatriated Foreign Income in 2011

For 2011, most of the Fortune 500 biggest corporations published information, buried deep in their annual “10-K” financial reports, that discloses the amount of unrepatriated income the companies are “indefinitely” reinvesting abroad. CTJ has tabulated this information for each of the 285 companies that provided it in 2011. The table on this page and the detailed appendix at the end of this paper summarize this information. CTJ’s analysis shows that these 285 companies collectively reported $1.584 trillion in unrepatriated income. But this income is concentrated very heavily in the hands of a small number of companies: just 20 corporations accounted for $794 billion of this income—just over half the reported total—and the top 50 companies account for about three-quarters of the total. At the other end of the spectrum, the 100 corporations with the smallest reported unrepatriated income amounts represented just 2 percent of the total.

Many Companies Have Paid Little or No Foreign Tax On This Unrepatriated Income

For policymakers interested in ensuring that these profits are brought back to the U.S., one important question is whether the companies in question have paid any foreign income tax on these profits. This is important because the normal U.S. federal income tax on these profits when they are repatriated is not simply 35 percent. It’s 35 percent minus any income taxes paid to foreign jurisdictions.

For example, if a company’s unrepatriated foreign profits were earned in a country with a 25 percent tax rate, the normal tax upon repatriation to the U.S. would be 10 percent. But a company that has shifted its profits to a tax haven country with a zero percent tax rate would face the full 35 percent U.S. tax rate on repatriated income.

Astonishingly, policymakers generally have no way to know how much of the $1.584 trillion in Fortune 500 companies’ unrepatriated income is stashed in tax havens. This is primarily because only 47 of the 285 companies with foreign profit hoards were willing to disclose, in their annual 10-K reports, even a rough estimate of the amount of income tax liability they would face upon repatriation. Although accounting standards require such disclosure, many companies hide the facts behind a statement that estimating the U.S. tax on repatriation is “not practicable.”

Notably, many of the 47 disclosing companies estimate that repatriating their offshore profits would result in a tax bill quite close to the statutory federal rate of 35 percent—indicating that these companies have paid very little foreign income tax on these earnings. In particular, the table below shows that 10 of these companies, with total unrepatriated profits of $209 billion, would collectively pay a 33 percent U.S. tax rate on these profits if they were brought back to the U.S. The most likely explanation of this is that most of these earnings represent U.S. profits that have been shifted overseas to offshore tax havens such as Bermuda and the Cayman Islands.

Very Significant Revenues are at Stake

It’s impossible to know how much income tax would be paid, under current tax rates, upon repatriation by the 285 Fortune 500 companies that have admitted holding profits overseas but have failed to disclose how much U.S. tax would be due if the profits were repatriated. But if these companies paid at the same 27 percent average tax rate as the 47 disclosing companies, the resulting one-time tax would total $328 billion for these 235 companies. Added to the $105 billion tax bill estimated by the 47 companies who did disclose, this means that taxing all the “permanently reinvested” foreign income of the 285 companies could result in $433 billion in added corporate income tax revenue.


It’s hardly news that U.S. multinationals are sheltering income overseas. Advocates of a new repatriation holiday cite the presence of $1.5 trillion in unrepatriated income as an indication that Fortune 500 companies’ profits are “trapped” overseas, and that these companies would bring back much of this income to the U.S. if our corporate tax rate were reduced as part of a “repatriation tax holiday.” At the same time, advocates of loophole-closing tax reform see these huge overseas profit hoards as an indication that multinationals are systematically shifting U.S. income artificially to tax havens.

But, as CTJ’s analysis of Fortune 500 companies’ financial documents shows, in most cases policymakers simply don’t have the tools at their disposal to assess the truth of these arguments. There is certainly evidence that many of these companies are sheltering profits in tax havens, but for the vast majority of these companies their financial reports reveal nothing on this point. Before acting to resolve the thorny issues surrounding repatriation and other international tax changes, Congress should first demand access to basic information about whether the companies accumulating large amounts of profits offshore have paid any taxes on this income.

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Governor Brownback Considers Sales Tax as Band-Aid for Broken Budget

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When Kansas Governor Sam Brownback signed into law a $4.5 billion (over six years) tax cut package ealier this year, he told Kansans, “I think we are going to be in good shape.” He promised tens of thousands of new jobs and insisted “[w]e will meet the needs of our schools … Our roads will be built.”  But after claiming as recently as July that the state was in “an excellent fiscal position,” the Governor is conceding that even across-the-board spending cuts may not be enough to make up for the massive revenue losses (projected to be $2.5 billion over six years) from these tax cuts – that will go disproportionately to the state’s most affluent.  

The Governor received national praise from conservative quarters for the tax package he signed into law in May. The plan included income tax rate reductions, elimination of several low-income credits, completely eliminating taxes on some business income, and was supposed to put the state “on a road to faster growth.” But the reality is that tax cuts cost money and Governor Brownback is now indicating he is open to a sales tax hike to pay for them.

The current 6.3 percent sales tax (a temporary revenue fix from 2010) is scheduled to drop back to 5.7 percent in July.  The Governor’s own original tax package, proposed in January, would have permanently held that sales tax rate steady, and thus cost much less than the tax legislation he eventually signed.  His plan was also seriously flawed: the bottom 80 percent of Kansas taxpayers would have seen a tax hike under the Governor’s plan because it reduced reliance on the state’s income tax in exchange for a higher sales tax. But once again, Governor Brownback finds himself relying on a higher sales tax (even though he ran against it in his 2010 campaign) because of income tax cuts that gut his state’s budget.  He rationalizes the need for a sales tax increase by saying, “There’s going to be a two-year dip. That’s the nature of these, when you cut taxes. If you cut them right, you get growth on the other side, but there’s a dip first.”

Unlike a progressive income tax, sales taxes (PDF) require low and middle income taxpayers to pay more of their income in taxes than wealthier taxpayers. This way of handling what Brownback euphemistically calls a “dip” that results from radical tax cuts actually falls hardest on the Kansas families who can least afford it.

Top Ten Tax Moments from the VP Debate

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The first and only Vice Presidential Debate of the election season between Vice President Joe Biden and Wisconsin Congressman Paul Ryan featured a spirited discussion over their competing visions for tax policy. While watching, we began to genuinely wonder if Biden had spent time reading Citizens for Tax Justice (CTJ) materials considering that time and again he made precisely the points CTJ has been making for years. Ryan, on the other hand, repeatedly misrepresented the tax system and the two tickets’ tax plans.

Below we breakdown the most important tax policy moments in the debate:

1. Biden Highlights the Regressiveness of Extending All the Bush Tax Cuts

While the presidential candidates largely ignored the Bush tax cuts in their debate last week, Biden put them front and center during the VP debate when he pointed out that Romney and Ryan are proposing the “the continuation of a tax cut that will give an additional $500 billion in tax cuts to 120,000 families” over the next ten years, compared to the Obama Administration plan for the Bush tax cuts.

Biden’s formulation here is a little confusing but not incorrect. Of course, President Obama proposes to allow the Bush income tax cuts to expire for income in excess of $250,000 for couples and in excess of $200,000 for singles, and only 2 percent of taxpayers would lose any portion of their Bush income tax cuts under this approach. The administration has stated that this would cost $849 billion less, over ten years, than extending the Bush income tax cuts for all income levels, while our own estimate is that it would cost $887 billion less over ten years. Pretty close.

Biden is focusing specifically on the part of this figure that would benefit the richest 120,000 families, apparently based on figures from the Tax Policy Center. Our own calculations essentially back up Biden’s point. We estimate that the richest taxpayers with incomes exceeding $2 million in 2013 (the richest 135,000 families in 2013) would receive about 57 percent of the income tax cuts that would otherwise expire under Obama’s approach, which comes out to $507 billion over ten years.

2. Ryan Promises the Mathematically Impossible

In defending Romney’s tax plan, Ryan reiterated their ticket’s commitment to “lower tax rates across the board” and to “close loopholes,” while simultaneously sticking to the “bottom lines” of not raising the deficit, not increasing taxes on the middle class or lowering the share of income that is borne by high-income earners. But Ryan is defending a plan that CTJ has found is mathematically impossible. Even if Romney and Ryan eliminated all the tax expenditures for wealthy taxpayers that they have put on the table, our analysis has found that their across-the-board tax cuts would still require them to give an average tax break of $250,000 to individuals making over $1 million, which would violate their pledge not to lower the share of taxes borne by high-income earners.

Ryan said during the debate that there are six studies showing that their plan is possible, but Biden correctly pointed out that even the studies Ryan cites conclude that the plan would require increasing taxes on taxpayers who do not have particularly high incomes.

3. Biden Calls Ryan Out for Taking Capital Gains Tax Breaks Off the Table

One of the major reasons that the Romney campaign’s tax plan would be incapable of eliminating enough tax expenditures to add up is that Romney has specifically said that he would keep the tax breaks for capital gains and stock dividends. During the debate, Biden noted that this shows the lack of seriousness in Romney’s loophole-targeting approach because Romney has exempted the “biggest loophole” of all – the “capital gains loophole.”  As CTJ pointed out in a recent report, ending the capital gains tax preference would tremendously improve fairness, raise revenue, and simplify the tax code in one fell swoop. 

4. Ryan and Biden Dispute the Definition of Small Businesses

Repeating Romney’s line on small businesses from the first presidential debate, Ryan claimed that Obama is going to raise taxes on small businesses and kill 710,000 jobs by doing so. The reality, however, is that only the 3 to 5 percent richest business owners (individuals who could hardly be called “small business” owners) would lose any of their tax breaks, and the job loss claims are complete malarkey.

5. Biden Takes on Romney and Ryan’s Commitment to Grover Norquist

During the first presidential debate, Romney reiterated his pledge to not raise a single penny in revenue, even if the revenue was raised as part of a deal that included $10 in spending cuts for every $1 in revenue increases. Biden took issue with this commitment saying that “instead of signing pledges to Grover Norquist not to ask the wealthiest among us to contribute to bring back the middle class, they should be signing a pledge saying to the middle class we’re going to level the playing field.”

Biden is absolutely right that we need to reject the extreme anti-tax approach taken by individuals like Grover Norquist and instead embrace a balanced approach to deficit reduction. The question for Romney is when he will recognize that a balanced approach is not only what the American people want, but also what business experts support as well.

6. Ryan Misrepresents History of 1986 Tax Reform

Responding to the question of what specific loopholes he and Romney are proposing to close, Ryan attempted to dodge the question by arguing that they should not lay out specific loopholes they want to close because doing so would prevent them from following the model that allowed Ronald Reagan and Tip O’Neill to produce the 1986 tax reform. The reality, however, as recounted by CTJ Director Bob McIntyre – whose work was integral to the passage of the 1986 reform – is that Reagan’s Treasury Department released a detailed tax reform plan explicitly laying out exactly which tax expenditures the Administration would like to see closed. In other words, the 1986 tax reform experience actually proves the opposite of what Ryan is saying about vagueness being some kind of asset.

7. Biden Revives Romney’s 47% Remark

Continuing his efforts to upend tax myths during the debate, Biden took issue with Romney’s earlier statement that 47 percent of Americans aren’t paying their fair share, and he noted that many middle income people actually “pay more effective tax than Governor Romney in his federal income tax.” Biden was right to push back against the notion that any Americans are not contributing their fair share since, on average, any American’s share of total taxes is already roughly equal to their share of total income. In addition, CTJ has found that individuals making around $60,000 do in fact pay an effective federal tax rate of 21.3% on average, which is a lot compared to Romney’s tax rate of 14% in 2011.

8. Ryan Claims Obamacare Includes 12 Middle Class Tax Hikes

During the debate, Ryan asserted, “Of the 21 tax increases in Obamacare, 12 of them hit the middle class.” The reality, according to a CTJ analysis, is that 95 percent of the tax increases included in the healthcare reform legislation would be borne by either companies or households making over $250,000. Adding to this, Ryan’s specific point about the 12 tax provisions is mostly false because 4 of the 12 provisions are not really taxes at all.

9. Biden Stumbles on the Primary Cause of Great Recession

The only significant tax policy stumble for Biden came when he argued that Ryan helped create the Great Recession by “voting to put two wars on a credit card, to at the same time put a prescription drug benefit on the credit card, a trillion-dollar tax cut for the very wealthy.” The problem of course is that the Great Recession was due primarily to a financial crisis, not some sudden crisis in government spending and deficits.

While extraordinary increases in deficit spending and tax cuts for the rich during President George W. Bush’s presidency, (which Ryan did vote for), did not cause the recession, they certainly caused an explosion in the national debt. In fact, if continued, the Bush tax cuts and the cost of the wars will account for nearly half of the public debt by 2019.

10. Ryan Wrong on How Much Revenue Could Be Raised by Taxes on the Rich

In an attempt to discredit the idea that allowing the Bush tax cuts to expire for the wealthiest Americans will help fix the deficit, Ryan argued that “if you taxed every person and successful business making over $250,000 at 100 percent, it would only run the government for 98 days.” To start, the entire premise of this argument is bogus because the Obama administration is not proposing a revenue-only approach to deficit reduction; in fact it has already signed into law over $2 trillion in spending cuts. In addition, Ryan ironically failed to discern, even by his own calculations, that 98 days worth of government spending would be more than enough to close the projected budget deficits and would be more than enough to pay down the national debt in the coming years.

Quick Hits in State News: Don’t Be Like Louisiana, Don’t Be Like Kansas

Bad news out of Louisiana, where the chairman of a commission reviewing the state’s tax breaks says they will likely fail to make recommendations for which breaks should be reformed or eliminated.  Turns out no one has been collecting useful data on their cost and performance, and no methodology for comparing tax breaks against each other is available. Both of these shortcomings could have been prevented had the state followed ITEP’s five recommendations for tax expenditure reform .

Policy Matters Ohio has a new report reinforcing the idea that gambling revenue is not a panacea (PDF) for ailing state and local budgets.  The report’s major finding?  “New casino tax revenue will provide less than a quarter of the nearly $1 billion in annual losses local governments will see because of cuts in state aid… Ohio needs to boost its investment in schools, local governments and human services with additional revenue from those who can afford to pay. Revenue from gambling does not suffice.”

Here’s a great blog post from our friends at the Oklahoma Policy Institute (OKPolicy) about the diastrous tax plan that Kansas Governor Sam Brownback signed last May, and why Oklahoma policymakers shouldn’t pursue the same sorts of costly and regressive tax cuts enacted by their neighbors in the Sunflower State.  OKPolicy concludes, “Oklahoma does not need to be the next laboratory for Kansas’ radical tax experiment.”

Picking up on Mitt Romney’s infamous assertion about the 47 percent, this post from the Wisconsin Budget Project answers the question “Who’s in the “47%” in Wisconsin?” They use Census data and figures from the Center on Budget and Policy Priorities (CBPP) to figure out who really are the “moochers.” The Budget Project argues that there are “numerous Wisconsin workers who would probably love to earn enough to owe income taxes,” so the smart move would be implementing policy options to improve their compensation and help them join the tax -paying ranks.

California Voters to Choose Which Tax Proposals Will Pay for Schools on November 6

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In November, California voters will decide on two not-so-different revenue raising ballot measures.  Proposition 30, backed by Governor Jerry Brown, temporarily raises income taxes on the state’s wealthiest taxpayers and increases the sales tax by a quarter cent.  The rival measure, Proposition 38, temporarily raises personal income tax rates on all taxable income upwards of about $50,000.  Californians can technically vote for both measures on the ballot, but even if both “win” only the one with the most votes will become law, so voters must choose carefully.

Both measures would raise billions of dollars in much needed revenue for education spending, primarily from the wealthiest Californians. An Institute on Taxation and Economic Policy (ITEP) analysis published by the California Budget Project found that the wealthiest one percent of Californians, with incomes averaging $532,000, would pay for close to 80 percent of the tax increase under Proposition 30 and around 45 percent under Proposition 38.  

As ITEP’s Meg Wiehe explained it to the San Francisco Chronicle recently, the big question for voters is not so much a tax fairness one but more about “’where do I want the money to go?  They both have very different end goals with the amount of money raised.”

California is one of a dozen or so states handicapped by a law that says a supermajority of lawmakers must approve of any tax changes. (Just as invoking the filibuster rule requires 60 votes to get anything done in the U.S. Senate, and we’ve all seen how well that works!) Facing a multi-billion dollar budget gap, Governor Jerry Brown first tried to raise revenues via the normal legislative process, but was stopped short of the two-thirds support needed. So he turned to the ballot process – and the people – to get the revenue increase the state needed.  The revenue from Proposition 30 would go into a new Education Protection Account in the state’s General Fund, increasing funding for K-12 and community colleges and freeing up other general fund dollars to address other spending priorities.  Importantly, Brown also built $6 billion of trigger cuts into his FY12-13 budget if Proposition 30 does not pass in November.  In other words, the governor’s budget was built on the premise that the revenue from his measure would be available and if it loses, naturally spending would have to be reduced by that amount mid-year.

All revenues from Proposition 38 would go directly to K-12 schools and only K-12 schools. None of the revenue could be spent on any other budget priorities since it can only supplement rather than supplant current spending on K-12 education; however, about a third of the funds can be used to reduce state debt. Even with the billions of dollars in new revenue Proposition 38 would bring to the Golden State, if it gets more votes than Proposition 30, $6 billion in spending cuts would automatically go into effect as per the Governor’s budget, forcing reductions in vital programs such as community colleges, universities, corrections and others. 

In large part due to this one striking difference between the two measures – that Proposition 30 would prevent devastating spending cuts and Proposition 38 would not – both the LA Times and the San Francisco Chronicle have endorsed Proposition 30.

It’s worth mentioning that some opponents of both measures have hauled out the millionaire migration canard, suggesting California’s wealthiest residents will flee if asked to pay higher taxes. But as ITEP’s Carl Davis explained to the Silicon Valley Mercury News, “There just isn’t any persuasive evidence out there to make you think that there would be a significant number of Californians moving because of this tax change.” In fact, the newspaper’s own analysis found that over the past 15 years, the share of the country’s ultra rich living in California has gone unchanged, even with a series of temporary tax increases and a new millionaire’s tax in 2004.

For more detail on who would pay for each of the ballot initiatives, ITEP’s analysis can be found in three California Budget Project reports: What Would Proposition 30 Mean for California?, What Would Proposition 38 Mean for California?, and How do Propositions 30 and 38 Compare?



Senator Schumer Gets Tax Reform Partially Right

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by CTJ Director, Robert McIntyre

In a speech at the National Press Club on October 9, Senator Chuck Schumer (D-NY) joined with President Obama in calling for revenue-raising tax reform, by closing loopholes and reversing the Bush tax cuts for the wealthy, to help address our nation’s long-term deficit problem.

“We must reduce the deficit, which is strangling our economic growth,” Schumer said. “And we must seek to control the rise in income inequality, which is hollowing out the middle class.”

Schumer added: “It would be a huge mistake to take the dollars we gain from closing loopholes and put them into reducing rates for the highest income brackets, rather than into reducing the deficit.”

Specifically, Sen. Schumer called for restoring the top personal income tax rate on top earners to the Clinton-era 39.6 percent and “reducing but not eliminating” the current huge gap between the extremely low tax rates on high-income investors and the much higher tax rates on working people.

So far pretty doggone good. But then Sen. Schumer stumbles. Here’s what he says about corporate (and other business) taxes:

Some on the left have suggested corporate tax reform could be a source for new revenue, but I disagree. To preserve our international competitiveness, it is imperative that we seek to reduce the corporate tax rate from 35 percent and do it on a revenue-neutral basis.”

Oops! Despite the fact that U.S. corporate income taxes are almost the lowest in the developed world (PDF) as a share of the economy, Schumer seems to think that the amount we now collect in corporate income taxes is just about perfect. That’s simply ridiculous.

For one thing, the kind of “tax reform” that big corporations and their allies in Congress are promoting would be perverse. Their central goal is to eliminate U.S. taxes on corporations’ foreign profits. Of course, to keep their promise to break even, their version of “tax reform” would have to increase U.S. taxes on profits earned here in the United States.

One could point out that the U.S. already collects almost nothing in taxes on American corporations’ foreign profits. But corporate leaders would like to convert our current indefinite “deferral” of taxes on foreign profits into a permanent exemption.

Why would anyone think this approach would help our “international competitiveness”? Well, you have to understand what corporate leaders mean by that term. They don’t mean making it more attractive to invest and create jobs in the United States. Quite the contrary. They mean making it more attractive for companies to invest and create jobs in foreign countries.

Real corporate tax reform would do the opposite, by ending the indefinite deferral (PDF) of tax on foreign profits. Companies may still invest abroad for economic reasons, but at least we wouldn’t be subsidizing them to do so.

There’s a second point. Due to a plethora of tax subsidies, we also have very low taxes on corporate profits earned in the United States. And a fat lot of good that’s done us economically. So we should be increasing corporate taxes on U.S. profits, too. Not on all companies, to be sure. But on average, Fortune 500 corporations now pay only about half the official 35 percent corporate tax rate on their U.S. profits. A quarter of these giant corporations now pay less than 10 percent in U.S. taxes on their U.S. profits, including many that pay nothing at all.

Closing the loopholes that allow such rampant domestic corporate tax avoidance, including curbing loopholes that allow companies to artificially shift their U.S. profits into foreign tax havens, should be a key part of a balanced deficit reduction strategy. By doing so, we can not only help get deficits under control, we can also afford to make the investments in education and infrastructure that will really make investing and creating jobs in the United States more likely.

So Sen. Schumer, congratulations on pointing out the need for more revenue from wealthy individuals. Now, if you can just appreciate the equally important need to get more revenues from America’s tax-avoiding corporations, well, you’ll be a real tax reform hero for our time.