CTJ Submits Comments on Finance Committee Chairman Baucus’ International Tax Reform Proposal

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Today Citizens for Tax Justice submitted comments to the Senate Finance Committee on the discussion draft that the committee recently published under the direction of its chairman, Max Baucus of Montana. Tax reform seems to be on hold, with Baucus’s expected departure to serve as ambassador to China being just one of many complications. But the discussion draft may nonetheless be a starting place for future debates on how the corporate tax should be overhauled.

And that would pose problems because, as CTJ’s comments explain, Baucus’s discussion draft fails to accomplish what should be three goals for tax reform:

1. Raise revenue from the corporate income tax and the personal income tax.
2. Make the tax code more progressive.
3.Tax American corporations’ domestic and offshore profits at the same time and at the same rate.

As CTJ’s comments explain, the discussion draft would, in a proclaimed revenue-neutral manner, impose U.S. corporate taxes on offshore corporate profits in the year that they are earned. But it would do so at a lower rate than applies to domestic corporate profits.

The goal of revenue-neutrality causes the discussion draft to fail the first goal of raising revenue as well as the second, because any increase in corporate income tax revenue would make our tax system more progressive. The discussion draft also fails to meet the third goal. Although it would tax domestic corporate profits and offshore corporate profits at the same time, it would subject the offshore profits to a lower rate, preserving some of the incentive for corporations to shift investment (and jobs) offshore or to engage in accounting gimmicks to make their U.S. profits appear to be generated in offshore tax havens.

Read CTJ’s comments (8 pages) on the Finance Committee discussion draft.


CTJ’s Comments on Senate Finance Committee Discussion Draft on International Business Tax Reform

January 17, 2014 09:55 AM | | Bookmark and Share

Citizens for Tax Justice, January 17, 2014

Read this document in PDF.

The Senate Finance Committee’s discussion draft on international tax reform fails to accomplish what should be three goals for tax reform.

1. Raise revenue from the corporate income tax and the personal income tax.
2. Make the tax code more progressive.
3.Tax American corporations’ domestic and offshore profits at the same time and at the same rate.

The discussion draft would, in a proclaimed revenue-neutral manner, impose U.S. corporate taxes on offshore corporate profits in the year that they are earned. But it would do so at a lower rate than applies to domestic corporate profits.

The goal of revenue-neutrality causes the discussion draft to fail the first goal of raising revenue as well as the second, because any increase in corporate income tax revenue would make our tax system more progressive, as explained below. The discussion draft also fails to meet the third goal. Although it would tax domestic corporate profits and offshore corporate profits at the same time, it would subject the offshore profits to a lower rate, preserving some of the incentive for corporations to shift investment (and jobs) offshore or to engage in accounting gimmicks to make their U.S. profits appear to be generated in offshore tax havens.

1. Raise revenue from the corporate income tax, as well as from the personal income tax.

Some lawmakers see no reason to raise any revenue from either the corporate income tax or the personal income tax. These lawmakers’ fixation with addressing the budget deficit solely with spending cuts rather than revenue increases has resulted in the “sequestration” of federal spending in effect today, which cuts even those programs that are supported by large majorities of Americans as investments in our economic future, like Head Start and medical research.

Almost all developed countries collect more in taxes as a share of their economies and therefore make greater public investments. As illustrated in the graph above, in 2011, the most recent year for which there is complete data, the U.S. collected less tax revenue as a percentage of its economy than did any other OECD country except for Chile and Mexico.

Other lawmakers believe that tax reform should raise revenue, but only from the personal income tax. This, too, is very misguided. According to the Department of the Treasury and the Congressional Budget Office, federal corporate tax revenue in the U.S. was equal to 1.2 percent of our economy in 2011[1] (1.5 percent if you include state corporate taxes). The average for other OECD countries (which include most of the developed countries) in 2011 was 2.9 percent.

The federal corporate income tax today is so weak that it allows some American companies to avoid it completely even when they are profitable over several years. The figures in the table to the right are from CTJ’s study of the Fortune 500 corporations that were consis­tently profitable for three years straight.[2] Another finding from that study was that, of those profitable Fortune 500 corporations with significant offshore profits, two-thirds paid a higher effective corporate tax rate in the other countries where they do business than they paid in the U.S.

In other words, there is ample evidence that American corporations are undertaxed in the U.S. and can reasonably be expected to contribute more in tax revenue.



2. Make the tax code more progressive.

Because the corporate income tax is itself a progressive tax, raising revenue by closing corporate tax loopholes would make our tax system more progressive.

Contrary to what many lawmakers and pundits claim, our tax system as a whole is just barely progressive today. In fact, if one accounts for all the of the federal, state and local taxes that Americans pay, it turns out that the share of total taxes paid by each income group is roughly equal to the share of total income received by that group, as illustrated in the graph below. For example, the poorest fifth of taxpayers paid only 2.1 percent of total taxes in 2013, which is not so surprising given that this group received only 3.3 percent of total income. Meanwhile, the richest one percent of Americans paid 24 percent of total taxes and received 21.9 percent of total income in 2013.[3]

The Treasury Department and the Joint Committee on Taxation (JCT) have recently confirmed that the corporate income tax is a progressive tax. It is clear that the corporate tax is, in the short-term, borne by the (mostly wealthy) owners of capital — meaning it’s paid by the owners of corporate stocks and other business and investment assets because the tax reduces what corporations can pay out as dividends to their shareholders. The Treasury Department concluded that even in the long-run, 82 percent of the tax is borne by owners of capital.[4] The rest is borne by labor.

Opponents of the corporate tax sometimes argue that a much higher portion is borne by labor — by workers who ultimately suffer lower wages or unemployment because the corporate tax allegedly pushes investment (and jobs) offshore.

The Treasury Department concluded that such investment is not so mobile in this way. This is reinforced by JCT’s recent conclusion that, in the long-run, 75 percent of the corporate income tax is borne by owners of capital.[5]

The table below includes JCT’s estimates of the tax increase that would result for each income group if the corporate income tax was increased by $10 billion, along with CTJ’s calculations of the average tax increase and share of the total tax increase for each income group. It shows that over half of a corporate income tax increase would be paid by people with income exceeding $200,000. Well over three-fourths would be paid by people with incomes exceeding $100,000. Only about 6 percent would be paid by the 55 percent of taxpayers earning less than $50,000, whose average tax increase from a $10 billion corporate tax hike would be only $6 to $8.

3. Tax American corporations’ domestic and offshore profits at the same time and at the same rate.

Taxing the offshore profits of American corporations more lightly than their domestic profits can create two terrible incentives for corporations. First, in some situations it encourages them to shift their operations and jobs to a country with lower taxes. Second, it encourages them to use accounting gimmicks to disguise their U.S. profits as foreign profits generated by a subsidiary company in some other country that has much lower taxes or that doesn’t tax these profits at all.

The countries that have extremely low taxes or no taxes on profits are known as tax havens. And the subsidiary companies in the tax havens that are claimed to make all these profits are often nothing more than post office boxes.

There are two ways we can tax corporate profits that are officially “offshore” more lightly than domestic profits and thus create these terrible incentives. The first way is what our tax rules do now when they allow American corporations to “defer” (delay indefinitely) paying U.S. taxes on their offshore profits until those profits are officially “repatriated” (officially brought to the U.S.). The second way is to tax corporate profits that are officially offshore at a lower rate than domestic corporate profits. A version of this is the offshore minimum tax proposed in the Senate Finance Committee’s discussion draft on international tax reform.

Neither deferral nor a lower tax rate is needed to protect offshore corporate profits from double-taxation. Another feature of our tax rules, the foreign tax credit, prevents double-taxation by allowing American corporations to subtract whatever corporate tax they paid to foreign governments from the U.S. corporate tax owed on their offshore profits. In other words, the deferral rule we have now, and the lower tax rate for foreign profits proposed by the Finance Committee are both unnecessary breaks for profits characterized as “offshore.”

To be sure, the minimum tax for offshore profits proposed by the Finance Committee would certainly cause some of the worst corporate tax dodgers to pay some U.S. taxes on profits that are entirely tax-free under the current rules. These are profits that are earned in the U.S. (or in other countries with a corporate tax) but manipulated through accounting gimmicks to appear to be earned in tax haven countries.

There is ample evidence of specific American corporations holding their profits in offshore tax havens. Some corporations divulge, in their public filings with the Securities and Exchange Commission, how much they would pay in U.S. taxes if they “repatriated” their offshore profits (officially brought their offshore profits to the U.S.) And some of these corporations — like American Express, Apple, Dell, Microsoft, Nike and others — indicate that they would pay nearly the full U.S. corporate income tax rate of 35 percent.[6] This is another way of saying that these corporations would receive very little, if any, credits to offset foreign taxes paid, because they have not paid much, if anything, in taxes to any foreign government.  

This is an indication that the corporations’ offshore profits are held (officially, at least) in countries with no corporate income taxes — tax havens. Most of the countries that have consumer markets and developed economies where American companies can sell products also have corporate taxes. Most countries that do not have corporate income taxes are small countries like Bermuda and the Cayman Islands that provide little in the way of real business opportunities but are useful to multinational corporations as tax havens.

Recent data from the Congressional Research Service (CRS) confirms that this sort of corporate tax dodging involving offshore tax havens is happening on a massive scale. For example, CRS finds that the profits that American corporations claimed (to the IRS) to have earned through subsidiaries in Bermuda in 2008 equaled 1,000 percent of that tiny country’s economy, which is clearly impossible.[7]

The minimum tax for offshore profits proposed in the discussion draft would certainly raise corporate taxes on the profits shifted (on paper) into a tax haven like Bermuda because under the current rules these profits are not taxed at all.

But the incentive for corporations to use complicated tricks to make their U.S. profits appear to be earned in tax havens will exist so long as offshore profits continue to be taxed more lightly than domestic profits, which would continue to be the case under the Finance Committee’s discussion draft.

One version of the proposed minimum tax would require that profits generated in other countries be taxed at a rate that is at least some unspecified percentage of the regular U.S. corporate tax rate. The Committee has not yet decided what general corporate tax rate will be proposed or what percentage of that must be paid in tax on foreign profits. (The discussion draft suggests that it could be 80 percent of the regular corporate tax rate but says this will likely be adjusted as the tax reform plan takes shape.)

If one assumes that the general corporate tax rate is 28 percent and the minimum tax for offshore profits is 80 percent of that, then the proposed rule would require that foreign profits be taxed at a rate of at least 22.4 percent. If they are taxed by the foreign country at a rate of, say, 18 percent, that would mean the corporation would pay U.S. corporate taxes of 4.4 percent. (18+4.4=22.4).

If the minimum tax for offshore profits is lower than 80 percent of the regular corporate income tax rate, then the proposed rule would be even less effective. (On the other hand, if it is 100 percent of the regular corporate tax rate, then the proposed rule would be the approach that we favor.)

The other version of the minimum tax offered in the discussion draft would tax “passive” offshore profits at 100 percent of the regular corporate tax rate but would tax “active” offshore profits at a lower, unspecified percentage of the regular corporate tax rate. (The discussion draft suggests that “active” offshore profits could be 60 percent of the regular corporate tax rate.)

The concept of “active” income and “passive” income already is a major part of our tax code, but the discussion draft would define them differently for this option. The basic idea is that “passive” income (like interest payments, rents and royalties) is income that is extremely easy to move from one subsidiary to another and therefore easily used for tax avoidance if it’s not taxed at the full U.S. rate.

This second option has some conceptual appeal if the only goal is to try to crack down on offshore profit shifting. But the definitions of passive and active would likely lead to schemes to characterize passive income as active, as happens under current law. Moreover, this rule would do little to reduce incentives to move actual investment and jobs offshore.


The first problem with the Finance Committee’s discussion draft on international tax reform is that it does not attempt to raise badly needed revenue from the corporate income tax.  This leads to the second problem, which is that the discussion draft passes by an opportunity to add some badly needed progressivity to America’s tax system.

The third problem with the discussion draft is that it would continue to tax corporate profits that are booked offshore more lightly than those booked in the U.S. Our position remains that a reformed code should tax corporate profits at the same time and at the same rate regardless of whether they are booked offshore or in the U.S.

In other words, our position remains that international corporate tax reform should include full repeal of deferral (along with a per-country rule for foreign tax credits) and a single tax rate for both offshore and domestic profits, as has been proposed by Senator Ron Wyden.[8] This simple approach would both solve the tax-haven problem and reduce tax incentives for moving investment and jobs offshore. And our position remains that the corporate tax rate should not be reduced significantly below the current 35 percent rate, because doing so would make it very difficult to meet the goals of raising revenue and increasing progressivity.


[1] Congressional Budget Office, “Updated Budget Projections: Fiscal Years 2013 to 2023,” May 2013, “Historical Budget Data.” http://cbo.gov/publication/44197

[2] Citizens for Tax Justice, “Corporate Taxpayers & Corporate Tax Dodgers, 2008-2010,” November 3, 2011. www.ctj.org/corporatetaxdodgers

[3] For more see Citizens for Tax Justice, “Who Pays Taxes in America in 2013?,” April 1, 2013. http://ctj.org/ctjreports/2013/04/who_pays_taxes_in_america_in_2013.php; Citizens for Tax Justice, “New Tax Laws in Effect in 2013 Have Modest Progressive Impact,” April 1, 2013. http://ctj.org/ctjreports/2013/04/new_tax_laws_in_effect_in_2013_have_modest_progressive_impact.php

[4] Julie-Anne Cronin, Emily Y. Lin, Laura Power, and Michael Cooper, “Distributing the Corporate Income Tax: Revised U.S. Treasury Methodology,” Treasury Department, 2012. http://www.treasury.gov/resource-center/tax-policy/tax-analysis/Documents/OTA-T2012-05-Distributing-the-Corporate-Income-Tax-Methodology-May-2012.pdf

[5] Joint Committee on Taxation, “Modeling The Distribution Of Taxes On Business Income,” October 16, 2013. https://www.jct.gov/publications.html?func=startdown&id=4528

[6] Citizens for Tax Justice, “Apple Is Not Alone,” June 2, 2013. http://ctj.org/ctjreports/2013/06/apple_is_not_alone.php

[7] Mark P. Keightley, “An Analysis of Where American Companies Report Profits: Indications of Profit Shifting,” Congressional Research Service, January 18, 2013.

[8] Citizens for Tax Justice, “Working Paper on Tax Reform Options,” February 4, 2013. www.ctj.org/ctjreports/2013/02/working_paper_on_tax_reform_options.php

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Oklahoma Shows How Not to Budget

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A fascinating analysis published by the Tulsa World reveals how a growing share of Oklahoma’s budget has been put on auto-pilot, and how other areas of the budget have suffered as a result.  Despite actually seeing an increase in tax revenues this past year, Oklahoma’s elected officials now have $170 million less to appropriate, and state agencies are bracing for potential cutbacks as a result.

The biggest offender here is one we’ve explained before: the growing trend of funneling general tax revenues toward transportation in order to delay having to enact a long-overdue gas tax increase.

A spokesman for Governor Fallin recently paid lip service to the problem, explaining that “the governor … believes … the more money we skim off the top of general revenue, the less flexibility the state has to respond to situational needs and concerns. We certainly don’t want taxpayers to lose influence into how their money is used by their government.”  But when it comes time to talk specifics, Fallin stands firmly behind her decision to direct a growing share of the state’s limited revenues toward roads and bridges.

The Tulsa World details how the portion of formerly “general fund” spending now swallowed up by transportation has grown almost fivefold since 2007, and how more increases are planned in the years ahead.  It’s hard to see how that trend will ever be reversed unless Oklahoma lawmakers finally address the fact that their traditional source of transportation revenue—the gasoline tax—hasn’t been raised in nearly 27 years.

What to Watch for in 2014 State Tax Policy

Note to Readers: This is the first of a five-part series on tax policy prospects in the states in 2014.  This post provides an overview of key trends and top states to watch in the coming year.  Over the coming weeks, the Institute on Taxation and Economic Policy (ITEP) will highlight state tax proposals and take a deeper look at the four key policy trends likely to dominate 2014 legislative sessions and feature prominently on the campaign trail. Part two discusses the trend of tax shift proposals. Part three discusses the trend of tax cut proposals. Part four discusses the trend of gas tax increase proposals. Part five discusses the trend of real tax reform proposals.

2013 was a year like none we have seen before when it comes to the scope and sheer number of tax policy plans proposed and enacted in the states.  And given what we’ve seen so far, 2014 has the potential to be just as busy.

In a number of statehouses across the country last year, lawmakers proposed misguided schemes (often inspired by supply-side ideology) designed to sharply reduce the role of progressive personal and corporate income taxes, and in some cases replace them entirely with higher sales taxes.  There were also a few good faith efforts at addressing long-standing structural flaws in state tax codes through base broadening, providing tax breaks to working families, or increasing taxes paid by the wealthiest households.

The good news is that the most extreme and destructive proposals were halted.  However, several states still enacted costly and regressive tax cuts, and we expect lawmakers in many of those states to continue their quest to eliminate income taxes in the coming years.  

The historic elections of 2012, which left most states under solid one-party control (many of those states with super majorities), are a big reason why so many aggressive tax proposals got off the ground in 2013.  We expect elections to be a driving force shaping tax policy proposals again in 2014 as voters in 36 states will be electing governors this November, and most state lawmakers are up for re-election as well.

We also expect to see a continuation of the four big tax policy trends that dominated 2013:

  • Tax shifts or tax swaps:  These proposals seek to scale back or repeal personal and corporate income taxes, and generally seek to offset some, or all, of the revenue loss with a higher sales tax.

    At the end of last year, Wisconsin Governor Scott Walker made it known that he wants to give serious consideration to eliminating his state’s income tax and to hiking the sales tax to make up the lost revenue.  Even if elimination is out of reach this year, Walker and other Wisconsin lawmakers are still expected to push for income tax cuts.  Look for lawmakers in Georgia and South Carolina to debate similar proposals.  And, count on North Carolina and Ohio lawmakers to attempt to build on tax shift plans partially enacted in 2013.  

  • Tax cuts:  These proposals range from cutting personal income taxes to reducing property taxes to expanding tax breaks for businesses.  Lawmakers in more than a dozen states are considering using the revenue rebounds we’ve seen in the wake of the Great Recession as an excuse to enact permanent tax cuts.  

    lawmakers, for example, wasted no time in filing a new slate of tax-cutting bills at the start of the year with the hope of making good on their failed attempt to reduce personal income taxes for the state’s wealthiest residents last year.  Despite the recommendations from a Nebraska tax committee to continue studying the state’s tax system for the next year, rather than rushing to enact large scale cuts, several gubernatorial candidates as well as outgoing governor Dave Heineman are still seeking significant income and property tax cuts this session.  And, lawmakers in Michigan are debating various ways of piling new personal income tax cuts on top of the large business tax cuts (PDF) enacted these last few years.  We also expect to see major tax cut initiatives this year in Arizona, Florida, Idaho, Indiana, Iowa, New Jersey, North Dakota, and Oklahoma.

    Conservative lawmakers are not alone in pushing a tax-cutting agenda.  New York Governor Andrew Cuomo and Maryland’s gubernatorial candidates are making tax cuts a part of their campaign strategies.  

  • Real Reform:  Most tax shift and tax cut proposals will be sold under the guise of tax reform, but only those plans that truly address state tax codes’ structural flaws, rather than simply eliminating taxes, truly deserve the banner of “reform”.

    Illinois and Kentucky are the states with the best chances of enacting long-overdue reforms this year.  Voters in Illinois will likely be given the chance to convert their state’s flat income tax rate to a more progressive, graduated system.  Kentucky Governor Steve Beshear has renewed his commitment to enacting sweeping tax reform that will address inequities and inadequacies in his state’s tax system while raising additional revenue for education.  Look for lawmakers in the District of Columbia, Hawaii, and Utah to consider enacting or enhancing tax policies that reduce the tax load currently shouldered by low- and middle-income households.

  • Gas Taxes and Transportation Funding:  Roughly half the states have gone a decade or more without raising their gas tax, so there’s little doubt that the lack of growth in state transportation revenues will remain a big issue in the year ahead. While we’re unlikely to see the same level of activity as last year (when half a dozen states, plus the District of Columbia, enacted major changes to their gasoline taxes), there are a number of states where transportation funding issues are being debated. We’ll be keeping close tabs on developments in Iowa, Michigan, Missouri, New Hampshire, Utah, and Washington State, among other places.

Check back over the next month for more detailed posts about these four trends and proposals unfolding in a number of states.  

State News Quick Hits: Return of the “Fair Tax”, Business Tax Cuts and More

Some Indiana legislators aren’t too excited about Governor Mike Pence’s plan to take a major revenue source away from local governments.  Instead of prohibiting localities from taxing businesses’ equipment and machinery, House Speaker Brian Bosma has a more modest plan that would give local governments the option of eliminating those taxes on new investments.  But the Indiana Association of Cities and Towns doesn’t think Bosma’s plan is likely to do much good, explaining that “the more we slice the revenue side the less opportunity we have to create those kind of things which are just as big an economic development tool as reducing taxes.”

After cutting taxes for businesses and wealthy individuals these last couple years, Idaho Governor Butch Otter has changed his tune–at least slightly.  While the Governor wants to continue the state’s tax cutting race to the bottom, he says that boosting funding for education is actually his top priority this year.  Otter’s realization that public services matter to Idaho’s economic success is certainly welcome.  But rather than setting aside $30 million for tax cuts in his current budget, he may want to address the fact that “he’s not proposing any raises for teachers … nor is he proposing funding raises for any of Idaho’s state employees, despite a new state report showing state employee pay has fallen to 19 percent below market rates.”

Jason Bailey, Director of the Kentucky Center for Economic Policy gets it right in this op-ed describing how desperately the state needs tax reform and what the goals of tax reform should be. He notes that first and foremost “tax reform should raise significant new revenue now to begin reinvesting in Kentucky’s needs.” He goes on to make the case that the tax reform should also improve the state’s tax structure in terms of fairness. He cites an Institute on Taxation and Economic Policy (ITEP) analysis which found that  currently ”low- and middle-income people pay nine to 11 percent of their incomes in state and local taxes in Kentucky while the highest-earning one percent of people pay only six percent.” Thankfully it looks like Governor Steve Beshear is on board with at least some of the principles outlined in this piece. During last week’s State of the Commonwealth (PDF) address he called for “more resources” to help restore cuts to vital services. The Governor’s own tax reform plan is scheduled to be unveiled later this month.

This piece in the Marietta Daily Journal discusses the radical “fair tax” proposal in Georgia. Some lawmakers are interested in eliminating the state’s income tax and replacing the revenue with a higher sales tax. When the Institute on Taxation and Economic Policy (ITEP) analyzed this proposal we found that this tax shift, despite not raising a dime of new revenue for the state, would actually increase taxes on most families.

Economists agreed last week that Michigan is set to see a nearly $1 billion revenue surplus over the next three years.  But, deciding on what to do with the boost in revenue will not be quite so easy.  There is some agreement amongst lawmakers that at least a portion of the surplus should be spent on tax cuts, some even calling tax cuts “inevitable.” Proposals vary greatly from lowering the state’s flat income tax rate (a permanent change) to handing out one-time rebate checks to taxpayers (recognizing that most of the surplus is one-time money) to restoring cuts to the state’s Earned Income Tax Credit (targeting tax cuts to low- and moderate-income taxpayers).   

Center for American Progress: There Are No Corporate Profits “Trapped” Offshore

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A new report from the Center for American Progress (CAP) explains that, despite the well-known complaints of America’s largest multinational corporations, our tax system is not trapping corporate profits offshore. In fact, the profits characterized as “offshore” are invested in the U.S. economy already because they are deposited in U.S. bank accounts or invested in U.S. Treasury bonds or even corporate stocks. The real problem is that our tax system traps badly needed revenue out of the country by allowing American corporations to “defer” (delay) paying U.S. taxes on profits characterized as “offshore” — even if they are really earned here in the U.S.

Many lawmakers seem to mistakenly believe that the $2 trillion in “permanently reinvested profits” that American corporations hold abroad are locked out of the American economy. This has led many to support proposals to exempt American corporations’ offshore profits from U.S. taxes, either on a permanent basis (through a so-called “territorial” tax system) or a temporary basis (with a tax amnesty for repatriated offshore profits).

But nothing restricts corporations from investing these profits in the U.S. The CAP report cites a study from the Senate Permanent Subcommittee on Investigations (chaired by Carl Levin of Michigan) that examined the corporations benefiting the most from the repatriation amnesty enacted by Congress in 2004 and finding that almost half of their offshore profits were actually in U.S. bank accounts, Treasury bonds, and U.S. corporate stocks.

American corporations continue to designate these profits as “permanently reinvested earnings” offshore (to use the technical term) because these profits will be subject to U.S. corporate taxes when they are officially “repatriated” (brought to the U.S.).

Corporations are, in theory, restricted by law from using their offshore profits to pay dividends to shareholders or to directly expand their own investments. But even these rules can be circumvented when the corporations borrow money for these purposes. Because these companies have so much accumulated profits (offshore and often in the U.S. also) they are effectively able to borrow money at very low or even negative interest rates. The report explains how Apple and Microsoft both borrowed in this way to finance dividends and share buybacks.

Apple and Microsoft are also examples of another problem, which is that much of these “offshore” profits are actually U.S. profits that the companies characterize, using accounting gimmicks, as earned in countries like Bermuda or the Cayman Islands that do not tax them (offshore tax havens). The existing rule allowing American corporations to “defer” U.S. taxes on their offshore profits already encourages companies to engage in these tricks. Rather than expanding that break into a bigger one (a territorial system or a repatriation amnesty), the CAP report suggests either repealing deferral or cracking down on the worst abuses of deferral, as Senator Carl Levin has proposed.

How to Understand New York Governor Andrew Cuomo’s Proposed Tax Cuts

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Of all the governors across the United States supporting tax cutting proposals, New York Governor Andrew Cuomo has been one of the most aggressive in promoting his own efforts to cut taxes. Taking his tax cut efforts one step further this election year, Cuomo is now proposing to expend the entirety of his state’s hard-won budget surplus on more than $2 billion in annual tax cuts.

While the term “budget surplus” may make it sound like that there is extra money lying around in Albany, the reality is that the surplus is the product of five consecutive years of austerity budgets and a budget plan that would continue this austerity for years to come. In other words, rather than using the surplus to restore funding to state and local services that have taken a hit over the past years, Cuomo is insisting that the money be used for tax cuts (many permanent) instead.

Unfortunately, tax cutting has become a pattern during Cuomo’s time as governor. In June 2011, Cuomo pushed through a property tax cap, which severely limited the ability of cash-strapped local governments to raise enough revenue to fund basic services. In December of the same year, Cuomo further starved the state of much needed revenue by killing efforts to fully extend a millionaire’s surtax, and instead pushing through a scaled back surcharge that raised half as much revenue as the original. Just last year, Cuomo pushed through a program of unproven and expensive corporate tax breaks, which a CTJ investigation found could actually harm many existing New York companies.

Even worse, to defend his past and newest tax cut proposals, Cuomo has embraced the cringe-worthy rhetoric of anti-tax governors like Kansas Governor Sam Brownback in arguing that ending “high taxes” and enacting corporate tax breaks will make the state more “business-friendly” and help improve New York’s economy. The problem, of course, is that taxes are crucial to funding what really drives economic development: a highly educated workforce, good infrastructure and quality healthcare.

Cuomo’s anti-tax approach is in direct contrast to the newly-elected New York City Mayor, Bill de Blasio, who ran and won a landslide victory on a campaign platform of addressing growing income inequality primarily through hiking taxes on the rich to provide universal citywide pre-kindergarten classes. De Blasio’s call for higher taxes has proven not only popular in New York City, but also garnered the support of 63% of New York voters statewide. What de Blasio’s election proves is that a significant majority of New Yorkers, unlike Cuomo, are not only willing to forgo tax cuts, but are actually willing to support higher taxes in order to help fund critical public services.

Cuomo’s Tax Proposal a Mixed Bag in Terms of Tax Fairness

While many of Cuomo’s past tax proposals have offered little or nothing to those in need, Cuomo’s new plan does includes a few potentially good ideas as well as few a very bad ones. On the good side of things, Cuomo proposes to substantially expand the state’s property tax circuit breaker and create a renters credit, which could potentially provide a well-targeted income boost to low-income families. While the proposals sound good, their effectiveness will really depend on their details, which are yet to be released.

Regrettably, Cuomo is also proposing a significant cut in the state’s corporate income and estate taxes, which will almost exclusively go to only a very small portion of the richest New Yorkers. Considering the recent series of tax cuts already passed by Cuomo and the years of budget cuts, piling on these additional tax breaks for the rich is simply unconscionable and would make an already unfair tax system (PDF) even worse.


Should It Bother Us that Boeing Says It Needs a Tax Incentive to Make Its Planes Safe?

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How worried should we be that Boeing argues it should get a tax break for performing safety tests on its new planes? This is the argument the corporation seems to have made at an IRS hearing on January 8 and in comments submitted (sorry, subscription only) to the agency about proposed regulations governing tax breaks for research.

Tax breaks designed to encourage research can only be said to be effective if they result in their recipients conducting research that they would not otherwise conduct. Boeing seems to argue that this includes safety testing of airplanes. But isn’t this something that Boeing must do anyway?

On one hand, if Boeing is not naturally inclined, in the absence of a tax incentive, to make its planes safe, you might want to consider that before you book your next flight. On the other hand, if we trust that the FAA and comparable foreign agencies have stringent safety requirements, then why does Boeing need a tax incentive to do what is required by law?

In its comments on the regulations, Boeing criticizing a proposed “shrinking-back rule” that would provide the research tax break only for companies that develop and test individual components of an aircraft rather than those who put together and test the entire aircraft (which is what Boeing does). Another issue Boeing raises is whether it can receive the break for multiple pilot models (prototype planes, for example) for safety testing.

Boeing argues that “in the aerospace industry, companies such as Boeing that have built tens of thousands of aircraft through the years know from experience that they need multiple pilot models for testing. Indeed, without multiple pilot models, a failure may not be correctly identified as a design problem or a unique problem encountered by the pilot model because of, for example, a defect in materials.”

To which the sensible response seems to be, so what? Are we supposed to believe that Boeing will not do the appropriate safety testing if it does not receive a tax incentive for doing so? Indeed, Boeing goes on at length about the FAA safety standards it must meet through testing.

Firms are allowed to deduct their business expenses each year, except that capital expenses (expenditures to acquire assets that generate income in the future) must usually be deducted over a number of years to reflect their ongoing usefulness. In 1954, Congress enacted section 174 of the tax code, which relaxed the normal capitalization rules by allowing firms to deduct immediately their costs of research. This immediate deduction is the specific tax break addressed by the proposed regulation that is causing Boeing so much angst.

But that’s not all that’s at stake. Businesses must meet the requirements of section 174 (and some additional requirements) to get an even bigger break, the research tax credit, which was first enacted in 1981.  Of those corporations that make public how much they claim in research tax credits, Boeing is near the top of the list. This is illustrated in the table, which was published in our recent report on the many problems with the research tax credit.

You really have to hand it to Boeing. The company has managed to have billions in profits for a decade while paying nothing in federal or state corporate income taxes over that period. Yet, President Obama argues that companies that use tax breaks to shift operations and profits offshore ought to pay more U.S. taxes and that the revenue “should go towards lowering taxes for companies like Boeing that choose to stay and hire here in the United States of America.” Likewise, after Washington State recently gave Boeing the biggest state tax break in history, other states like Missouri still seem to think they can lure the corporation by lavishing it with even more tax breaks. At this rate, Boeing could probably threaten that its planes will explode midair if it doesn’t get more tax breaks, and the Treasury Department and Congress probably would provide them.

Congressional Research Service: Stop Assuming Tax Rate Reductions Will Help the Economy

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Several reports released by the Congressional Research Service (CRS) in the first week of January refute claims that tax rate reductions will boost the economy and even pay for themselves by generating economic growth.

Changes in Personal Income Tax Rates

A report released on January 2 “summarizes the evidence on the relationship between tax rates and economic growth” and finds “little relationship with either top marginal rates or average marginal rates on labor income.” It also finds that work effort and savings are “relatively insensitive to tax rates.”

While many advocates of tax cuts claim that a high top marginal personal income tax rate hinders investment by the wealthy, the report finds that “periods of lower taxes are not associated with higher rates of economic growth or increases in investment.”

The January 2 report also concludes, “Claims that the cost of tax reductions are significantly reduced by feedback effects do not appear to be justified by the evidence.” Many advocates for tax cuts claim that reducing tax rates will cause so much growth of income and profits that the additional taxes collected (the “revenue feedback effects”) will replace much of the revenue lost from the rate reduction.

But the report explains that “the models with responses most consistent with empirical evidence suggest a revenue feedback effect of about 1% for the 2001-2004 Bush tax cuts,” meaning the effects that the tax cuts had on the economy and on behavior of taxpayers offset just 1 percent of their total cost. And much of this effect may have taken the form of taxpayers changing how many deductions they take, and other tax planning changes, rather than actual economic growth.

Even cuts in tax rates for capital gains, which are often argued to have the most significant “revenue feedback effects,” don’t come close to paying for themselves.

“Capital gains taxes have been scored for some time as having a significant feedback effect through changes in realizations, one that had a revenue offset of around 60 percent,” the report explains.  In other words, some analysts have claimed that a tax cut for capital gains increases those gains to such an enormous degree that up to 60 percent of the lost tax revenue is ultimately regained.

But the report explains, “More recent estimates, however, have suggested a feedback effect of about 20 percent.” CRS’s descriptions of these more recent estimates have been used in CTJ’s analyses of capital gains tax changes and are explained in the appendix to this report. (Another CTJ report proposes coupling higher capital gains tax rates with a policy change that would largely eliminate any negative effect on revenue.)

Changes in the Corporate Income Tax

The idea of changing the corporate income tax rate has received so much attention that the topic apparently warranted a separate report, which CRS released on January 6.

“Claims that behavioral responses could cause revenue to rise if rates were cut do not hold up on either a theoretical basis or an empirical basis,” the report explains. It also shoots down the argument that the corporate tax is a regressive tax because it chases investment offshore in a way that ends up hurting American workers.

This report goes into great detail about some of the problems with the studies that advocates of reducing corporate tax rates rely on. Much of the report details how CRS, using the same data and methods found in these studies, found that the results either disappeared or became insignificant after correcting for various errors

For example, the CRS report cites an op-ed published by R. Glen Hubbard, chairman of President George W. Bush’s Council of Economic Advisers. In it, Hubbard cites a study by Kevin A. Hassett and Aparna Mathur that was rife with methodological problems.

As the CRS report explains, Hassett and Mathur conclude that “a 1% increase in the corporate tax causes manufacturing wages to fall by 0.8% to 1%. These results are impossible, however, to reconcile with the magnitudes in the economy… corporate taxes are only about 2.5% of GDP, while labor income is about two thirds. These results imply that a dollar increase in the corporate tax would decrease wages by $22 to $26, an effect that no model could ever come close to predicting.” A later report by Hassett and Mathur “continued to produce implausible estimates” because it “implies a decrease of $13 in wages for each dollar fall in corporate taxes.”

To take another example, the CRS report also examines a cross-country study concluding that corporate taxes reduce investment. But CRS finds that some of the results seem to be affected by countries that are outliers, like Bolivia, for which a transaction tax is mistakenly counted as a corporate income tax. When such mistakes are corrected, the results are found to no longer be statistically significant.

This CRS report is particularly helpful because advocates of cutting the corporate income tax rate often rely on econometric studies that they claim support their case. These studies are often mind-numbingly complicated and it is rare that policymakers or their aides have the time and ability to go through these studies to understand whether or not they actually make sense. Thankfully, the Congressional Research Service has done that job for everyone.

Reasons Why Congress Should Allow the Deduction for Tuition to Remain Expired

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You might be surprised to learn that Congress is likely to extend a tax break that is claimed mostly by high-income individuals paying for graduate education and by families of undergrads who are mistakenly taking this break instead of one that would benefit them more.

The deduction for tuition and related fees is part of the “tax extenders,” which is the nickname often given to a package of provisions that Congress approves every couple of years to extend various arcane tax breaks that mostly go to businesses. This deduction is one relatively small piece of the larger “tax extenders” package, and it’s one that does go to families. But unfortunately, it’s also the most regressive of all the tax breaks for postsecondary education, meaning it’s targeted more to the wealthy than any other education tax break.

Congress last extended the deduction for tuition and related fees in the tax extenders package that was included in the “fiscal cliff” legislation approved on January 1 of 2013. That legislation extended it retroactively to 2012 and prospectively through the end of 2013. The two-year extension cost $1.7 billion.

Here’s a list of reasons why Congress should allow it to remain expired.

The deduction for tuition and related fees mainly supports graduate education.

Americans paying for undergraduate education for themselves or their kids in 2009 or later generally have no reason to use the deduction because starting that year another break for postsecondary education was expanded and became more advantageous. The more advantageous tax break is the American Opportunity Tax Credit (AOTC), which has a maximum value of $2,500. The deduction for tuition and related fees, in contrast, can be taken for a maximum of $4,000, and since it’s a deduction that means the actual tax savings even for someone in the highest income tax bracket (39.6 percent) cannot be more than $1,584.

The AOTC is more generous across the board. Under current law, the AOTC is phased out for married couples with incomes between $160,000 and $180,000, whereas the deduction for tuition and related fees is phased out for couples with incomes between $130,000 and $160,000. For moderate-income families, the AOTC is more beneficial because it is a credit rather than a deduction.   The working families who pay payroll and other taxes but earn too little to owe federal income taxes – meaning they cannot use many tax credits – benefit from the AOTC’s partial refundability (up to $1,000).

Given that a taxpayer cannot take both the AOTC and the deduction, why would anyone ever take the deduction? The AOTC is available only for four years, which means it would normally be used for undergraduate education, while the deduction could be used for graduate education or in situations in which undergraduate education takes longer than four years.  The deduction can also be used for students who enroll for only a class or two, while the AOTC is also only available to students enrolled at least half-time for an academic period during the year.

For graduate students and others in extended education, under current law the Lifetime Learning Credit (LLC) is generally a better deal than the tuition and fees deduction. Because the upper income limit for the LLC is lower — $124,000 if married, $62,000 if single, the tuition and fees deduction primarily benefits taxpayers whose income is above these thresholds.

Taxpayers confused by all the education tax breaks may mistakenly take the deduction rather than a tax break that benefits them more.

One reason a family paying for undergraduate education would claim the deduction instead of the AOTC is confusion. Because the panoply of education tax breaks is so confusing, many taxpayers mistakenly claim a break that is not the best deal for them. A 2012 report from the Government Accountability Office found that over a fourth of taxpayers eligible for postsecondary education tax breaks don’t take advantage of them, and those who do use them often don’t use the most advantageous tax break for their situation.

The deduction for tuition and related fees is the most regressive tax break for postsecondary education.

The distribution of these tax breaks among income groups is important because if their purpose is to encourage people to obtain education, they will be more effective if they are targeted to lower-income households that could not otherwise afford college rather than well-off families that will send their kids to college no matter what.

The graph below was produced by the Center for Law and Social Policy (CLASP) using data from the Tax Policy Center, and compares the distribution of various tax breaks for postsecondary education as well as Pell Grants.

The graph illustrates that not all tax breaks for postsecondary education are the same, and the deduction for tuition and fees is the most regressive of the bunch. Some of these tax breaks are more targeted to those who really need them, although none are nearly as well-targeted to low-income households as Pell Grants. Tax cuts for higher education taken together are not well-targeted, as illustrated in the bar graph below.

One proposal offered by CLASP would expand the refundability of the American Opportunity Tax Credit (AOTC), represented by the blue bar above, increasing the assistance available to low-income families not helped by the other tax breaks. The proposal offsets these costs — and simplifies higher education tax aid – by eliminating the other tax breaks and reducing AOTC benefits for higher income households