Month: April 2014

How’d Caterpillar Dodge All Those Taxes?

Posted on by tarek
April 8, 2014 01:41 PM
By Citizens for Tax Justice Staff | | Bookmark and Share

Large tech companies are among the most notorious tax dodgers, but they are hardly the only ones to enlist crafty accountants to avoid paying U.S. taxes.

So it’s refreshing to see lawmakers also taking a look at other companies, as Sen. Carl Levin’s Permanent Subcommittee on Investigations did last week when it documented that Caterpillar is exploiting loopholes to dodge taxes just like companies in Silicon Valley.

Caterpillar is one of the most widely recognized manufacturers of heavy construction equipment in the United States. Its major profit center is spare parts sales.ons did last week when it documented that Caterpillar is exploiting loopholes to dodge taxes just like companies in Silicon Valley.

So just how did Caterpillar dodge taxes?

Until 1999, Caterpillar purchased spare parts from suppliers and subsequently resold them to local dealers. But for the past 15 years, Caterpillar has transferred ownership of most of its parts to a Swiss subsidiary, CSARL. Even though the Swiss subsidiary “owned” the parts, Caterpillar continued to store them in its Illinois warehouse and send them directly to buyers, exactly as it always has.

But when Caterpillar shipped the parts to overseas customers, it attributed the profits to CSARL, even though the Swiss subsidiary never took physical possession. The result? According to the subcommittee report, the company declared at least 85 percent of its profits on sales to non-U.S. customers—profits that appeared on U.S. tax returns before 1999—as Swiss income, subject only to a special single-digit tax rate negotiated directly with the Swiss government.

In depositions before the subcommittee, Caterpillar executives and tax attorneys were sometimes remarkably candid in admitting that this maneuver did not change the way the company does business, and the rationale for the move was simply to avoid taxes. During investigations prior to last week’s hearing, this exchange occurred:

Government: Was there any business advantage to Caterpillar, Inc., to have this arrangement put into place other than the avoidance or deferral of income taxation at higher rates?

Caterpillar: No, there was not.

Caterpillar Counsel: Let’s take a break.

The subcommittee report estimates that since 1999, Caterpillar has shifted $8 billion in profits offshore, avoiding $2.4 billion in U.S. income taxes.

Policy solutions?

Fortunately, Congress has the option to enact straightforward policies to end shenanigans practiced by Caterpillar, as well as the army of tech-company tax dodgers. Ending deferral—the ability of multinationals to postpone paying U.S. taxes on their foreign profits until those profits are brought home to the US—would remove the incentive of companies to shift their income into foreign tax havens because it would require companies like Caterpillar to pay tax at the U.S. rate (minus any taxes already paid to foreign governments) on offshore profits. Until Congress finds the backbone to enact this needed reform, it can put a stop to Caterpillar’s hijinks using the “economic substance” doctrine it codified in 2010, which says that for a corporate transaction to be recognized for tax purposes, the transaction must have a legitimate non-tax business purpose—a purpose Caterpillar executives were generally at a loss to identify.

Congress should also take a hard look at the role played in this mess by their accountant, PricewaterhouseCoopers, which actually dreamed up this tax dodge for Caterpillar in its capacity as the company’s tax advisor, and later approved its own tax-dodging ideas in its capacity as Caterpillar’s tax auditor.

It’s not acceptable for burglars to moonlight as parole officers, nor should accounting firms be free to create clear conflicts of interest by evaluating their own tax schemes.

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Some Unregulated Preparers Use Tax Season for Illicit Profits

Posted on by tarek
April 8, 2014 10:33 AM
By Citizens for Tax Justice Staff | | Bookmark and Share

It’s tax time. Across the nation, millions of families are rolling up their sleeves to file federal and state income tax forms—and millions more are awaiting refunds. But as a New York Times report documents, a cottage industry of untrained, unregulated “tax preparers” is jeopardizing those refunds for many low-income families. Astonishingly, more than half of the 79 million returns filed in 2011 were completed by paid preparers who were entirely unregulated. And all too often, these unregulated tax preparers are using tax season as an illicit profit-making enterprise, illegally claiming tax breaks for their taxpayer clients and keeping a share of the haul.

The Obama administration has, sensibly, attempted to implement regulations that would allow the Internal Revenue Service to regulate tax preparers. But earlier this year, a federal court struck down the regs as beyond the IRS’s regulatory authority.

Some tax preparers are vociferously opposed to having their industry regulated. Hysterically, one itinerant tax preparer complained to the author of the Times report that, “Each year it’s getting tighter and tighter…It’s hard to defraud the government now.” But a recent report from the National Taxpayer’s Advocate—a position created to represent the interests of individual taxpayers in their dealings with tax administrators—concludes that there is currently no “meaningful IRS oversight of preparers” at all, and calls for reforms mirroring those sought by the IRS’s now-discontinued attempts to regulate the industry.

The good news is that Congress can easily enact legislation that achieves the regulatory goals President Obama has proposed. In fact, Obama’s proposed budget for the upcoming fiscal year includes such a measure. Senate Finance Committee Chair Ron Wyden has scheduled a hearing on predatory tax preparers for today, saying that “there should be a floor of basic consumer protection and fairness” for low-income taxpayers depending on tax filing assistance.

Congress has, laudably, enacted a variety of targeted tax breaks designed to reduce the federal income tax’s impact on middle- and low-income families. These families deserve an infrastructure of tax preparers that they can trust to help them claim the tax breaks to which they are entitled. 

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Five Things You Should Know on Tax Day: Findings from Recent CTJ Reports

Posted on by Alex Welch

April 7, 2014 02:31 PM | | Bookmark and Share

Read this report in PDF.

1. The nation’s tax system is barely progressive

■ A CTJ fact sheet demonstrates that the total share of taxes (federal, state, and local) that will be paid by Americans across the economic spectrum in 2014 is roughly equal to their total share of income. 

■ While some taxes, such as the federal income tax, are progressive, other taxes such as state and local sales taxes actually take a larger share of income from low-income families than they take from higher-income families.

■ In 2014, the richest one percent of Americans will pay 23.7 percent of the total taxes in America, but they will also take in 21.6 percent of the total income in America.

2. The statutory corporate tax rate is 35 percent, but few companies pay that.

■ CTJ’s recent study of consistently profitable Fortune 500 corporations found that over the past five years they paid 19.4 percent of their profits in federal income taxes — far lower than the official 35 percent rate that corporate lobbyists complain about.

■ CTJ’s study also found that 26 of these corporations, including well-known companies General Electric, Boeing, Verizon, Priceline and Corning, paid no federal corporate income tax over the five-year period examined.

3. Among developed countries, the United States is one of the least taxed.

■ Taxes accounted for 24 percent of the nation’s GDP in 2011. A CTJ fact sheet explains that among 35 developed nations, only two (Chile and Mexico) collected less tax revenue as a share of their economy that year.

■ The countries collecting more in taxes as a share of their economy than the U.S. include our trade partners and competitors, like France, Germany, the United Kingdom, Canada, South Korea and others.

4. The goals of tax reform should be to raise revenue, make the system more progressive, and end offshore tax dodging.

■ The federal government cannot fund public investments at a level that Americans expect if we do not change our tax laws to collect more revenue.

■ A CTJ report explains why the goals of federal tax reform should be to raise revenue, make the system more progressive and end offshore tax avoidance by corporations.

5. Tax reform that accomplishes the above goals is achievable.

■ Citizens for Tax Justice recently published its own tax reform plan that accomplishes these goals.

■ The plan mostly maintains current tax rates and incorporates lawmakers’ proposals to close loopholes.  

■ The table below illustrates the impacts on Americans at different income levels and how CTJ’s plan would make the tax system more progressive.

■ Another CTJ report explains that the main tax reform proposal before Congress right now unfortunately fails to achieve these goals.


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Who Pays Taxes in America in 2014?

Posted on by Alex Welch

April 7, 2014 12:02 PM | | Bookmark and Share

Read this fact sheet in PDF.

All Americans pay taxes. Everyone who works pays federal payroll taxes. Everyone who buys gasoline pays federal and state gas taxes. Everyone who owns or rents a home directly or indirectly pays property taxes. Anyone who shops pays sales taxes in most states.

The nation’s tax system is barely progressive. Those who argue that the wealthy are overtaxed focus solely on the federal personal income tax, while ignoring the other taxes that Americans pay. But, as the table to the right illustrates, the total share of taxes (federal, state, and local) that will be paid by Americans across the economic spectrum in 2014 is roughly equal to their total share of income. 

Many taxes are regressive, meaning they take a larger share of income from poor and middle-income families than they do from the rich. To offset the regressive impact of payroll taxes, sales taxes and even some state and local income taxes, we need federal income tax policies that are more progressive.

Some features of the federal income tax try to offset the regressivity of other taxes, at least to a degree. For example, the federal personal income tax provides refundable tax credits such as the Earned Income Tax Credit (EITC) and the Child Tax Credit, which can reduce or eliminate federal personal income tax liability for working families and even result in negative personal income tax liability, meaning families receive a check from the IRS.

These tax credits are only available to taxpayers who work, and who therefore pay federal payroll taxes, not to mention the other taxes that disproportionately affect low- and middle-income Americans. In other words, progressive provisions in the tax code are justified because they offset some of the regresssivity of other taxes that poor and middle-income families pay.

The estimates from the Institute on Taxation and Economic Policy tax model, which are illustrated in these charts and tables, include the following key findings:

■ The richest one percent of Americans pay 23.7 percent of total taxes and receive 21.6 percent of total income.

■ The poorest one-fifth of Americans pay 2.1 percent of total taxes and receive 3.3 percent of total income.

■ Each income group will pay a total share of taxes that quite is similar to each group’s total share of income.

■ Contrary to popular belief, when all taxes are considered, the rich do not pay a dispropor­tionately high share of taxes. Of course, in a truly progressive tax system, they would pay much higher effective tax rates than everyone else.


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The U.S. Is One of the Least Taxed of the Developed Countries

Posted on by Alex Welch

April 7, 2014 11:36 AM | | Bookmark and Share

Read this fact sheet in PDF.

The U.S. was the third least taxed country in the Organization for Economic Cooperation and Development (OECD) in 2011, the most recent year for which OECD has complete data. 

Of all the OECD countries, which are essentially the countries the U.S. trades with and competes with, only Chile and Mexico collect less taxes as a percentage of their overall economy (as a percentage of gross domestic product, or GDP).

This sharply contradicts the widely held view among many members of Congress that taxes are already high enough in the U.S. and that any efforts to reduce the federal deficit should therefore take the form of cuts in government spending.

As the graph to the right illustrates, in 2011, the total (federal, state and local) tax revenue collected in the U.S. was equal to 24.0 percent of the U.S.’s GDP.

The total taxes collected by other OECD countries that year was equal to 34.0 percent of combined GDP of those countries. 

As the table below illustrates, the U.S. has steadily moved closer and closer to becoming the least taxed OECD country over the past three decades.

 

In 1979, the U.S. had the 16th highest taxes as a percentage of GDP, out of 24 countries at that time.

In 2011, the U.S. had the 32nd highest taxes as a percentage of GDP, out of 34 OECD countries.

Taxes collected by other OECD countries as a percentage of GDP have been above 31 percent throughout this period of years, and in some years have exceeded 34 percent.

In the U.S., taxes as a percentage of GDP never even exceeded 28 percent during this period, except for three years (1998 through 2000). After that, taxes were reduced by the Bush-era tax cuts and other changes, most of which were made permanent in the legislation approved by Congress in early 2013.[1]


[1] For more information about the effects of the “fiscal cliff” deal, see Citizens for Tax Justice, “New Tax Laws in Effect in 2013 Have Modest Progressive Impact,” April 2, 2013. http://ctj.org/ctjreports/2013/04/new_tax_laws_in_
effect_in_2013_have_modest_progressive
_impact.php

 


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The Camp Tax Plan Is a Regressive $1.7 Trillion Tax Cut

Posted on by Alex Welch

April 7, 2014 10:31 AM | | Bookmark and Share

The Chairman of the House Ways and Means Committee, Dave Camp (R-Mich.), has a tax overhaul plan that would cut the top personal income tax rate down from about 40 percent to 35 percent and slash the corporate tax rate from 35 percent to 25 percent. Camp claims his plan would still break even revenue-wise and would not favor the rich.

CTJ’s new analysis shows that while that may be true in the first decade the plan is in effect, during the second decade it would increase the deficit by $1.7 trillion.

The tax cuts would favor the rich and multinational corporations while lower-income Americans would face a tax increase. Two-thirds of single parents would pay an extra $1,100 a year in taxes.

Read the report.


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Five Key Tax Facts About Healthcare Reform

Posted on by tarek
April 4, 2014 02:08 PM
By Richard Phillips, Senior Policy Analyst at ITEP | | Bookmark and Share

With Obamacare exceeding the Administration’s goal of 7 million sign-ups for private health coverage this week, there’s no longer any doubt about the dramatic impact that the Affordable Care Act (ACA) is having on healthcare coverage throughout the country. Unfortunately, there is a lot of misunderstanding about the various tax provisions included as part of the ACA.

Here are the five key facts to remember about tax policy in the ACA:

1. The Affordable Care Act includes tax subsidies of $940 billion for low- and middle-income families.

While endless coverage has been given to the tax increases (mostly on the rich) used to pay for the ACA, the reality is that the act also includes over $940 billion in tax subsidies over the next decade to help individuals and families pay for health insurance. In fact, a recent report by the Kaiser Family Foundation found that as of February 28, 2014, 3.5 million people have already qualified for a total of about $10 billion in annual premium subsidies, which breaks down to an average subsidy of $2,890 per person. By 2018, the CBO expects the number of people receiving tax subsidies to help pay for healthcare to reach as high as 20 million.

2. Only two percent of Americans will pay the tax penalty for not having insurance.

The tax penalty on individuals who do not purchase health insurance will be paid by hardly anyone. According to the CBO, only an estimated two percent of the US population will owe the rather modest penalty.

More importantly, the provision in the ACA banning discrimination against pre-existing conditions cannot work without the penalty for not purchasing health insurance. Without the tax penalty, the ban would cause a significant increase in the cost of health insurance premiums because it would allow individuals to simply delay obtaining insurance until they need care.

3. About three-fourths of the tax increases included to pay for health reform apply to businesses or married couples making over $250,000 and single people making over $200,000.

Our calculations show that about three-fourths of tax increases apply to businesses or married couples making over $250,000 and single people making over $200,000. For example, the biggest revenue-raiser in the ACA is the expansion of the Hospital Insurance tax so that it applies at a higher rate for very high-earners and no longer exempts wealthy people’s investment income. These reforms were originally proposed (PDF) by Citizens for Tax Justice.

4. Healthcare reform includes billions in tax subsidies to help small businesses.

Every politician loves to talk about helping small businesses, but opponents of the ACA have been surprisingly quiet when it comes to discussing the estimated $14 billion in tax subsidies that the ACA will provide small businesses over the next decade to help pay for health insurance for their employees. The tax credit can actually be worth up to 50 percent of a small business’s contribution toward its employees’ premium costs.

5. The medical device excise tax is worth keeping.

Since the passage of the ACA, the effects of the medical device excise tax have been wildly distorted by industry opponents of the tax. They will enjoy increased business as a result of the ACA’s increase in coverage, but don’t want to shoulder any of the costs. Despite their claims to the contrary, the tax is not large enough to have a significant impact on the industry.

Repealing the tax would cost about $30 billion over 10 years, which would either require raising taxes on other groups or increasing the deficit. It’s also worth nothing that medical device companies like Baxter International already pay extremely low effective income tax rates tax rates and enjoy substantial profits. 

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Another Ryan Budget Gives Millionaires Average Tax Cut of At Least $200,000

Posted on by Alex Welch

April 2, 2014 11:12 AM | | Bookmark and Share

Read this report in PDF.

As in previous years, House Budget Committee Chairman Paul Ryan has released a budget proposal that includes some specific, enormous tax cuts with a vague promise that the amount of revenue collected by the federal government would somehow be unchanged. There is no way the plan could be implemented without providing millionaires with tax cuts averaging at least $200,000.

The language in Ryan’s budget plan makes clear that he expects Congress to limit or eliminate tax expenditures (special breaks or loopholes in the tax code) in order to offset the cost of his proposed tax cuts, which include reducing personal income tax rates to 25 and 10 percent, repealing the Alternative Minimum Tax (AMT) and reducing the corporate income tax rate to 25 percent, among other tax cuts.

For taxpayers with income exceeding $1 million, the benefit of Ryan’s tax rate reductions and other proposed tax cuts would far exceed the loss of any tax expenditures. In fact, under Ryan’s plan taxpayers with income exceeding $1 million in 2015 would receive an average net tax decrease of over $200,000 that year even if they had to give up all of their tax expenditures. These taxpayers would see an even larger net tax decrease if Congress failed to limit or eliminate enough tax expenditures to offset the costs of the proposed tax cuts.

Estimates produced using the Institute on Taxation and Economic Policy (ITEP) microsimulation tax model illustrate two scenarios for how the Ryan budget plan could be implemented. In the first scenario, very high-income people must give up all of their tax expenditures, except for those subsidizing investment and savings which Ryan has consistently made clear he would preserve. Even in this scenario, these very wealthy people would receive enormous net tax cuts, as illustrated in the table above. In the second scenario, these very high-income people are not required to give up any tax expenditures, and as a result their net tax cuts would be even larger.[1]

Because these very high-income taxpayers would pay less than they do today in either scenario, the average net impact of Ryan’s plan on some taxpayers at lower income levels would necessarily be a tax increase in order to fulfill Ryan’s goal of collecting the same amount of revenue as expected under current law.

Chairman Ryan’s budget plan lays out (on page 83) the following “solutions” for our tax system:

• Simplify the tax code to make it fairer to American families and businesses.

• Reduce the amount of time and resources necessary to comply with tax laws.

• Substantially lower tax rates for individuals, with a goal of achieving a top individual rate

   of 25 percent.

• Consolidate the current seven individual-income-tax brackets into two brackets with a

   first bracket of 10 percent.

• Repeal the Alternative Minimum Tax.

• Reduce the corporate tax rate to 25 percent.

• Transition the tax code to a more competitive system of international taxation [apparently similar to the international proposal by House Ways and Means Chairman Dave Camp].

Elsewhere the plan makes it clear that the Affordable Health Care for America Act (President Obama’s major health care reform) would be repealed. This means the plan would repeal tax increases that were part of the health reform law, including a significant provision reforming the Medicare Hospital Insurance (HI) tax so that it has a higher rate for high-income earners and no longer exempts the investment income of wealthy taxpayers.

[1] Some of the details that need to be filled in for Ryan’s plan would have little effect on the tax bills of very high-income taxpayers. For example, Ryan’s plan does not specify the level of taxable income at which the 10 percent rate would end and the 25 percent rate would begin, and it says nothing about standard deductions and personal exemptions. We assume that all income tax rates currently above 25 percent are replaced with the 25 percent rate, and all rates below the current 25 percent rate are replaced with the 10 percent rate. We also assume no change to standard deductions and personal exemptions. These assumptions make little difference for very high-income taxpayers, because the vast majority of their income would be taxed at the 25 percent rate in any event under Ryan’s plan. But these details could dramatically impact the tax liability of low- and middle-income taxpayers.

 


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ITEP Predicts Illinois Tax Reform Debate…and Then Puts Crystal Ball Away

Posted on by tarek
April 1, 2014 04:45 PM
By Kelly Davis, Assistant Director of Communications | | Bookmark and Share

Earlier this year our partners at the Institute on Taxation and Economic Policy predicted Illinois would be a state “taking on real tax reform.” Policymakers in Illinois are making our crystal ball look very reliable as a bevy of tax reform measures are being seriously discussed. The pressure is on Illinois lawmakers to do something to enhance revenue because the state’s temporary 5 percent income tax rate is set to fall to 3.75 percent in 2015. The following is a roundup of some of the proposals being discussed.

Last week, Gov. Pat Quinn delivered his budget address. During the speech he discussed “comprehensive tax reform [that] protects children, working families and seniors while preventing radical cuts to critical services.” The governor’s proposal includes making permanent the temporary income tax hike, doubling the state’s small Earned Income Tax Credit (EITC), providing a new $500 refundable tax credit for homeowners, and new tax cuts for businesses.

The day before Gov. Quinn’s address, Sen. Don Harmon released his own version of tax reform that would increase the progressivity of the state’s income tax by introducing a graduated rate structure. Taxpayers would see their first $12,500 of taxable income taxed at 2.9 percent. Taxable income between $12,500 and $180,000 would be taxed at 4.9 percent, as opposed to the current 5 percent rate. And taxpayers with taxable income over $180,000 would see that income taxed at 6.9 percent. No Illinoisan with income under $200,000 would see a tax hike under this plan.

Since the Illinois constitution mandates a single income tax rate, Senator Harmon’s plan would require a 3/5th majority vote in the House and Senate, as well as a vote of the people. Illinois Voices for Children rightly argues that Senator Harmon’s proposal (or one like it) is necessary to create a more equitable tax structure.

But Harmon and Quinn’s plans are hardly the only ones under discussion. Late last week, House Speaker Michael Madigan put forward his own constitutional amendment that levies a 3 percent surcharge on Illinois millionaires. The proposal was approved by the House Revenue Committee. Speaker Madigan admits his plan wouldn’t solve the state’s budget woes noting that this is especially true if the current income tax rate is allowed to expire, “We’ll still struggle with a budget for the state of Illinois because there will be a great loss of revenue unless we extend the increase in the income tax.” That same House committee voted down a proposal that would eliminate the state’s current flat rate income tax and replace it with graduated rates and brackets. Let’s hope there is more debate on this important issue.

We aren’t going to press our luck again and dust off our crystal ball to predict what the outcome of this debate will be. But tax justice advocates everywhere should be heartened to hear that real reform is being discussed in a state where there is a desperate need for it. The Illinois tax structure is one of the ten worst in the nation in terms of fairness, and income tax reform could go a long way to improving this grim situation.

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How Long Has it Been Since Your State Raised Its Gas Tax?

Posted on by tarek
April 1, 2014 12:36 PM
By Carl Davis, Research Director at ITEP | | Bookmark and Share

State gas tax policies have changed a lot in recent months, which makes two new fact sheets from the Institute on Taxation and Economic Policy (ITEP) especially useful in understanding where states stand on this issue.

The first fact sheet shows that 24 states have gone a decade or more without increasing their gas tax rate, and that 16 states have gone two decades or more.  This lack of action has allowed for a significant drop in the purchasing power of these states’ gas tax dollars as the cost of construction and maintenance has increased.  The worst gas tax procrastinators are Alaska (43.9 years), Virginia (27.3 years), Oklahoma (26.9 years), Iowa (25.3 years), Mississippi (25.3 years), and South Carolina (25.3 years). 

The fact sheet also shows that four states are “celebrating” gas tax anniversaries this week.  As of April 1st, it has been exactly 18 years since Idaho and Missouri raised their gas tax rates, while South Dakota and Wisconsin have gone 15 and 8 years, respectively.  The only state raising its gas tax this April 1st is Vermont, where the rate is rising by less than a tenth of a penny per gallon.

The second fact sheet from ITEP puts a spotlight on those 18 states, plus the District of Columbia, that actually levy a smarter gas tax.  Rather than going years on end without a change in their gas tax rates, these states allow for modest increases in their tax rates each year through the use of a “variable-rate” tax that rises with inflation or gas prices. 

As a result of reforms enacted in four states last year, a majority of the country’s population now lives in a state where the gas tax rate is “indexed” in this way.  This isn’t a radical idea.  More states, and the federal government, should take a serious look at switching to a variable-rate gas tax.

Read the fact sheets:

How Long Has it Been Since Your State Raised Its Gas Tax?

Most Americans Live in States with Variable-Rate Gas Taxes

 

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