Month: March 2016

March 9, 2016 11:20 AM | Permalink |

Read this report in PDF.

For all of the candidates running for president one thing should be clear: years of tax cuts have put our country on a precarious fiscal trajectory. According to the Congressional Budget Office (CBO), the federal government faces an $8.6 trillion cumulative budget deficit over the next 10 years. The nation must raise more revenue to fund its priorities and prevent unsustainable deficits. Yet each of the remaining major Republican presidential candidates who have laid out tax plans propose to enact trillions in tax cuts over the next decade.

While the candidates have touted their planned tax cuts, they have provided little or no detail on how they would make up the lost revenue. Given the sheer size of our projected deficits, this means that the tax cut proposals would, if enacted, inevitably force draconian spending cuts and/or substantial tax increases. In other words, a tax cut paid for with borrowed money now inevitably will lead to big tax increases and/or huge program cuts later.

For this reason, a complete analysis of each candidate’s tax plan should include the impact of necessary future spending cuts and tax increases that the plans would require. This CTJ report not only provides a distributional analysis of how the candidates’ plans would affect taxpayers on average based on income quintile, it also provides a blanket distributional analysis of the economic impact on each quintile of tax increases and spending cuts. This analysis concludes that when the tax cuts and their likely offsets are accounted for, only the wealthiest Americans would receive a net benefit, while the vast majority of Americans would be much worse off.

Assessing the Impact of Spending Cuts and Tax Increases

Although no one can predict how the cost of the tax cuts proposed by each candidate would be paid for in the future, this analysis takes a middle ground approach by assuming that they would be paid for half by spending cuts and half by an across-the-board income tax increase. This is roughly what happened after the 1981 Reagan tax cuts: as it became clear that the tax cuts were unaffordable, Congress significantly cut domestic spending, including Social Security benefits, and increased taxes multiple times.  

To model the effect of the spending cuts on Americans at different income levels, we allocate the impacts on a per capita basis, with each American seeing the same dollar “cost” from spending cuts. This sensible assumption yields an analysis that shows the impact of spending cuts to be highly regressive, with low-income families bearing the biggest costs relative to their income.  But, as we have stated, no one can forecast how candidates’ tax cuts would be paid for in the future. The distributional effect would skew even more regressive if candidates’ proposed tax cuts were paid for primarily by reducing spending on programs that benefit low-income people. On the tax side, our analysis allocates tax increases according to the overall distribution of personal income. Notably, this mix of spending cuts and income tax increases is a more progressive approach than the “spending cuts only” approach the Republican candidates have advocated. One other caveat: in the unlikely scenario that these tax plans were paid for entirely through spending cuts—and no tax increases— the distributional impact would be devastating for middle- and low-income Americans.

Our analysis shows the impact of immediately implementing both the tax cuts and offsetting spending cuts and tax increases based on current economic conditions. This is, of course, an oversimplification: in reality, offsetting spending cuts and tax increases would likely occur years in the future, meaning that even bigger cuts would be required to offset the additional expense of servicing the interest on our growing national debt.

Analytic constraints aside, we are confident that our analysis offers a far more accurate measure of the true effects of the proposed GOP tax cuts than previous analyses, which show only the effects of the tax cuts (ignoring how they will be paid for). Taking into consideration the impact of spending programs in this way dramatically alters the apparent effect of a tax plan. For example, CTJ recently analyzed the impact of the tax increases that Bernie Sanders has proposed to pay for his universal health insurance plan, factoring in both the higher cash wages that would result from his plan for most workers and the fact that workers would still get the same or better health insurance compared to what they have now. CTJ’s analysis found that all but the very top income groups would come out ahead under Sanders’s proposals. In contrast, other groups’ analyses solely looked at the tax changes and didn’t consider the benefits of universal health insurance, and thus found that all income groups would be worse off under Sanders’ plan.

What follows are our estimates of the distributional breakdowns of Donald Trump’s, Ted Cruz’s and Marco Rubio’s tax proposals, when the impacts of future spending and tax changes are taken into account.

Donald Trump’s Tax Plan

Donald Trump’s tax plan would cut taxes by $12 trillion over the next decade by significantly reducing marginal tax rates and substantially increasing the standard deduction. Trump’s tax cut proposal reduces taxes for all income groups on average but is highly skewed to the rich, with the bottom 20 percent receiving an average tax cut of $250, the middle 20 percent an average tax cut of $2,571 and the top 1 percent an average tax cut of $227,225.

As the table below shows, when the impact of future spending cuts and tax increases is tallied, the picture looks very different. In this more complete analysis, only the top 5 percent of taxpayers would see a net benefit from implementing, and paying for, the Trump tax plan. For the lowest 20 percent, the average implicit cost of the tax cuts would be $2,790, leading to a net loss of $2,541. For the middle 20 percent, the average implicit cost of the tax cuts would be $4,647, leading to a net loss of $2,076. In contrast, the top 1 percent would see an average implicit cost of $65,485, much less than the $227,255 they would receive in tax cuts on average, leading to a net gain of $161,740.  

Ted Cruz’s Tax Plan

Ted Cruz’s tax plan would cut taxes by $13.9 trillion over the next decade by sharply reducing the personal income tax and replacing the corporate income tax, estate tax and payroll tax with a new 19 percent value-added tax. Cruz’s tax cut proposal is already highly skewed to benefit higher income people, with the bottom 20 percent seeing an average tax increase of $3,161 dollars and the middle 20 percent, an average tax increase of $1,943. The top one percent, however, would get an average tax cut of $435,854.

As the table below shows, when the impact of future spending cuts and tax increases is accounted for, only the top 20 percent of taxpayers would receive any net benefit. For the lowest 20 percent, the average implicit cost of the tax cuts would be $3,073 leading to a net loss of $6,234. For the middle 20 percent, the average implicit cost of the tax cuts would be $5,108, leading to a net loss of $7,051. In contrast, the top one percent would see an average implicit cost of $72,147, much less than the $435,854 they would receive in tax cuts on average, leading to a net gain of $363,707.

Note: We have adjusted our estimated cost of Cruz’s tax cuts downward somewhat from our previous estimate, based on new information that his advertised 16% value-added tax (a.k.a. national sales tax) would actually impose a tax rate of 18.56%.

Marco Rubio’s Tax Plan

Marco Rubio’s tax plan would cut taxes by $9 trillion over the next decade by, among other things, lowering marginal tax rates, eliminating the capital gains tax and enacting a new partially refundable child tax credit. Rubio’s tax cut proposal is highly skewed toward the rich, with the bottom 20 percent receiving an average tax cut of only $778 dollars and the middle 20 percent receiving an average tax cut of $1,435. The top one percent, however, would get an average tax cut of $223,763.

As the table below shows, when the impact of future spending cuts and tax increases is factored, only the top 5 percent of taxpayers would see any net benefit. For the lowest 20 percent, the average cost of the tax cuts would be $2,340, leading to a net loss of $1,563. For the middle 20 percent, the average cost of the tax cuts would be $3,897, leading to a net loss of $2,462. In contrast, the top 1 percent would see an average implicit cost of $54,920, much less than the $223,763 they would receive in tax cuts on average, leading to a net gain of $168,843.

Note: We have adjusted our estimated size of Rubio’s tax cuts downward somewhat from our previous estimate, based on new information that his advertised “refundable” standard credit would not be nearly as refundable as he has publicly claimed, and that the new credit would replace not only the standard deduction but also taxpayer personal exemptions (but not dependents’ exemptions).

Conclusion: There’s No Free Lunch

When policymakers or candidates propose changing our tax system, it’s important to understand how the proposed changes would affect people at different income levels. But when these plans would result in unsustainable budget deficits on top of the fiscal shortfalls our nation already faces, it’s equally vital to understand how Americans would be affected by the mix of spending cuts and other tax increases that would be required to pay for these tax proposals. As this report shows, when those inevitable spending cuts and tax increases are taken into account, the vast majority of Americans will end up as big losers.

Want even more CTJ? Check us out on Twitter, Facebook, RSS, and Youtube!

March 9, 2016 11:04 AM | Permalink |

For Immediate Release: Wednesday, March 9, 2016
Contact: Jenice R. Robinson, 202.299.1066 X29, Jenice@ctj.org

New Analysis: Paying for GOP Tax Plans Would Wipe Out Income Gains for Most Americans

(Washington, D.C.) When the tax and spending implications of GOP tax plans are considered, the vast majority of Americans would be worse off, according to a new report from Citizens for Tax Justice that sheds more light on the true impact of GOP tax plans.

The new distributional analysis takes a different approach to examining presidential tax plans by looking at the spending implications of the candidates’ deficit-financed tax proposals. 

“The GOP candidates continue to propagate one of the most pernicious myths of our time — that tax cuts come without a cost,” said CTJ director Bob McIntyre. “In truth, we would eventually have to pay for these national debt-ballooning tax cuts with tax increases, drastic cuts in federal spending or a combination of both.”

The new reports intends to broaden the discourse around tax policy proposals by providing an analysis of how various income groups would be affected by a combination of tax increases and spending cuts. The results of the analysis are sobering but not surprising. Under Donald Trump and Marco Rubio’s plans, the bottom 95 percent of taxpayers sustain a net loss, and under Ted Cruz’s plan, the bottom 80 percent would lose. And this is under the rosiest of scenarios.

CTJ analysts point out that the results would be far more severe for middle- and low-income families if the candidates’ proposed tax cuts were paid for solely by cutting public services such as child care, housing, health care, food assistance, Social Security and other programs that boost income security.

“We cannot continue to have a half-baked conversation about tax policy and tax cuts,” McIntyre said. “The truth is that the nation is not in a financial position to promise across-the-board tax cuts and certainly not top-heavy tax cuts that benefit the wealthy at the expense of everyone else.”

To read the report, go to: http://ctj.org/ctjreports/2016/03/the_net_effect_paying_for_gop_tax_plans_would_wipe_out_income_gains_for_most_americans.php#.VuBUWNDYHOA

Want even more CTJ? Check us out on Twitter, Facebook, RSS, and Youtube!

March 4, 2016 09:00 AM | Permalink |

They May Be Avoiding up to $695 Billion in U.S. Taxes

Read this report in PDF (Includes Company by Company Appendixies)

It’s been well documented that major U.S. multinational corporations are stockpiling profits offshore to avoid U.S. taxes. Congressional hearings over the past few years have raised awareness of tax avoidance strategies of major technology corporations such as Apple and Microsoft, but, as this report shows, a diverse array of companies are using offshore tax havens, including the pharmaceutical giant Amgen, apparel manufacturers Levi Strauss and Nike, the supermarket chain Safeway, the financial firm American Express, banking giants Bank of America and Wells Fargo, and even more obscure companies such as Advanced Micro Devices and Symantec.

All told, American Fortune 500 corporations are avoiding up to $695 billion in U.S. federal income taxes by holding $2.4 trillion of “permanently reinvested” profits offshore. In their latest annual financial reports, 27 of these corporations reveal that they have paid an income tax rate of 10 percent or less in countries where these profits are officially held, indicating that most of these monies are likely in offshore tax havens.

How We Know When Multinationals’ Offshore Cash Is in Tax Havens

Offshore profits that an American corporation “repatriates” (officially brings back to the United States) are subject to the U.S. tax rate of 35 percent minus a tax credit equal to whatever taxes the company paid to foreign governments. Thus, when an American corporation reports it would pay a U.S. tax rate of 25 percent or more on its offshore profits, that indicates it has paid foreign governments a tax rate of 10 percent or less.

Twenty-seven American corporations have acknowledged paying less than a 10 percent foreign tax rate on the $561 billion they collectively hold offshore. The table on the following page shows the disclosures made by these 27 corporations in their most recent annual financial reports.

It is almost always the case that profits reported by American corporations to the IRS as earned in tax havens were actually earned in the United States or another country with a tax system similar to ours.  Most economically developed countries (places where there are real business opportunities for American corporations) have a corporate income tax rate of at least 20 percent, and typically tax rates are higher.

Countries that have no corporate income tax or a very low corporate tax —such as Bermuda, the Cayman Islands, and the Bahamas — provide very little in the way of real business opportunities for American corporations like Qualcomm, Safeway, and Microsoft. But large corporations use accounting gimmicks (most of which are allowed under current law) to make profits appear to be earned in tax haven countries. In fact, a 2014 CTJ examination of corporate financial filings found U.S. corporations collectively report earning profits in Bermuda and the Cayman Islands that are 16 times the gross domestic products of each of those countries, which is clearly impossible. 

Hundreds of Other Fortune 500 Corporations Don’t Disclose Tax Rates They’d Pay if They Repatriated Their Profits

At the end of 2015, 303 Fortune 500 companies collectively held $2.4 trillion offshore. (A full list of these 303 corporations is published as an appendix to this paper.)

The 27 companies that report the U.S. tax rate they would pay if they repatriated their profits are not alone in shifting their profits to low-tax havens but they are alone in disclosing the practice.  The vast majority of profit-shifting companies — 248 out of 303 —decline to disclose the U.S. tax rate they would pay if these offshore profits were repatriated. (55 corporations, including the 27 companies shown on this page, disclose this information. A full list of the 55 companies is published as an appendix to this paper.) The non-disclosing companies collectively held $1.74 trillion in unrepatriated offshore profits at the end of 2015.

Accounting standards require publicly held companies to disclose the U.S. tax they would pay upon repatriation of their offshore profits, but these standards also provide a gaping loophole allowing companies to avoid disclosing this information by asserting that calculating this tax liability is “not practicable.”  Almost all of the 248 non-disclosing companies use this loophole to avoid disclosing their likely tax rates upon repatriation even though these companies almost certainly have the capacity to estimate these liabilities.

Hundreds of Billions in Tax Revenue at Stake

It’s impossible to know precisely how much income tax the 248 non-disclosing companies would owe if they repatriated their profits. But if these companies paid the same 28.6 percent average tax rate as the 55 disclosing companies, the resulting, collective one-time tax would total $499 billion. Added to the $196 billion tax bill estimated by the 55 companies who did disclose, this means that taxing all “permanently reinvested” foreign income of the 303 companies at the current federal tax rate could result in $695 billion in added corporate tax revenue.

20 of the Biggest “Non-Disclosing” Companies Hold $1 Trillion Offshore

While hundreds of companies refuse to reveal the tax they likely owe on their offshore cash, just a handful of these companies account for the lion’s share of the permanently reinvested foreign profits in the Fortune 500. The nearby table shows the 20 non-disclosing companies with the biggest offshore stash at the end of the most recent fiscal year. These 20 companies held $1 trillion in unrepatriated offshore income — more than half of the total income held by the 248 “non-disclosing” companies. Most of these companies also disclose, elsewhere in their financial reports, owning subsidiaries in known tax havens. For example:

■ General Electric disclosed holding $104 billion offshore at the end of 2015. GE has subsidiaries in the Bahamas, Bermuda, Ireland and Singapore, but won’t disclose how much of its offshore cash is in these low-tax destinations.

■ Pfizer has subsidiaries in the Cayman Islands, Ireland, the Isle of Jersey, Luxembourg and Singapore, but it does not disclose how much of its offshore profits are stashed in these tax havens.

■ The Coca-Cola Corporation has three Cayman Islands subsidiaries, but the company’s limited financial disclosure doesn’t specify how much of its $31.9 billion in offshore profits are being “earned” there.

■ Merck has 11 subsidiaries in Bermuda alone. It’s unclear how much of its $59 billion in offshore profits are being stored (for tax purposes) in this tiny island.

Congress Should Act

While corporations’ offshore holdings have grown gradually over the past decade, there are two reasons it is vital that Congress act promptly to deal with this problem. First, a large number of the biggest corporations appear to be increasing their offshore cash significantly. Seventy-nine of the companies surveyed in this report increased their declared offshore cash by at least $500 million each in the last year alone. Twelve particularly aggressive companies each increased their permanently reinvested foreign earnings by more than $5 billion in the past year. These include Apple, Microsoft, Pfizer, Gilead Sciences, Danaher, Google, Chevron, Medtronic, IBM, Oracle, Cisco Systems and Sealed Air.

A second reason for concern is that companies are aggressively seeking to permanently shelter their offshore cash from U.S. taxation by engaging in corporate inversions, through which companies acquire smaller foreign companies and reincorporate in foreign countries, thus avoiding most or all U.S. tax on their profits.

What Should Be Done?

Many large multinationals that fail to disclose whether their offshore profits are officially in tax havens are the same companies that have lobbied heavily for tax breaks on their offshore cash. These companies propose the government either enact a temporary “tax holiday” for repatriation, which would allow companies to officially bring offshore profits back to the U.S. and pay a very low tax rate on the repatriated income, or give them a permanent exemption for offshore income in the form of a “territorial” tax system. Either of these proposals would increase the incentive for multinationals to shift their U.S. profits, on paper, into tax havens.

A far more sensible solution would be to simply end “deferral,” that is, repealing the rule that indefinitely exempts offshore profits from U.S. income tax until these profits are repatriated. Ending deferral would mean that all profits of U.S. corporations, whether they are generated in the U.S. or abroad, would be taxed by the United States in the year they are earned. Of course, American corporations would continue to receive a “foreign tax credit” against any taxes they pay to foreign governments, to ensure profits are not double-taxed. 

Conclusion

The limited disclosures made by a handful of Fortune 500 corporations show that corporations are brazenly using tax havens to avoid taxes on significant profits. But the scope of this tax avoidance is likely much larger, since the vast majority of Fortune 500 companies with offshore cash refuse to disclose how much tax they would pay on repatriating their offshore profits.

Lawmakers should resist calls for tax changes, such as repatriation holidays or a territorial tax system that would reward U.S. companies for shifting their profits to tax havens.  If the Securities and Exchange Commission required more complete disclosure about multinationals’ offshore profits, it would become obvious that Congress should end deferral, thereby eliminating the incentive for multinationals to shift their profits offshore once and for all. 

For the full list of unrepatriated profits and taxes owed, click to read the pdf.

Want even more CTJ? Check us out on Twitter, Facebook, RSS, and Youtube!