Author: tarek

There is a strong consensus among scholars, think tanks and advocates around the country that there are concrete benefits to providing earned income tax credits (EITCs) – refundable credits (PDF) designed to offset income tax liability for low-income families and individuals. Not only has the EITC been shown to help alleviate poverty, but it has also succeeded in encouraging greater participation in the workforce, improving infant health, and boosting school achievement, among other things.

While most discussions are about the federal and state EITCs, there are two local EITCs that are often overlooked, including Montgomery County, Maryland’s Working Families Income Supplement (WFIS). Originally introduced in 2000 as a tool to help the county’s poorest residents cope with an extremely high cost of living, the WFIS is one of only two local EITCs in the country (the other is in New York City).

When originally implemented in 2000, the WFIS was set at 100 percent of the state EITC – that is, if a worker received $600 from the Maryland EITC, he or she would also receive $600 from the county. This supplement provided low-income Montgomery County families with the most generous combined EITC in the country. It also gave these households the ability to pay for basic day-to-day necessities like child care, school books, utility bills, and groceries – and most of all it helped reduce poverty and promote upward mobility. (Other reference materials on the WFIS can be found here.)

Through the mid-2000s, the number of people living in poverty declined even as unprecedented numbers of people moved into the county. When the Great Recession began to take hold in late 2007, however, these advances were reversed. As jobs were lost and incomes fell, Montgomery County experienced a spike in poverty even as the Washington, DC region as a whole weathered the recession better than most.

In a case of terrible timing, as county tax revenues began to fall, the Montgomery County Council decided to save a little money by scaling back the WFIS to 72.5 percent of the state EITC in FY 2011, 68.9 percent in FY 2012, and 72.5 percent in FY 2013. This decision only made things worse for low-income families: now, not only were they facing wide-spread layoffs prompted by a weak economy, but they were seeing a significant cut in a critical source of income.

Now, however, members of the Council have proposed a plan that would restore the 100 percent credit that was in place for nearly a decade.

Introduced in March and having undergone public hearings in July, Expedited Bill 8-13 (PDF) would gradually return the WFIS to 100 percent of the Maryland credit by Fiscal Year 2016. This expansion is estimated to help over 30,000 low-income households meet their basic day-to-day needs at a cost to the County of $3 million.  (For context, Montgomery County tax revenues are projected to grow by $30 million a year for the foreseeable future – even when factoring in the possible impact of the federal sequester).

With a committee hearing scheduled for early October, the Council members promoting the bill have just under two months to garner support and move its restoration forward. For over a decade, the Council has demonstrated its dedication to the needs of its low-income residents as it championed one of the most forward-looking income tax credits in the nation.  By restoring the Working Family Income Supplement to 100 percent of the state credit, the Council would be offering critical help to its most vulnerable residents, providing a ladder for upward mobility, and adding a boost to the local economy.

For more information on the structure and benefits of Earned Income Tax Credits:

Rewarding Work Through Earned Income Tax Credits

Institute on Taxation and Economic Policy, September 2011

“Low-wage workers often face a dual challenge as they struggle to make ends meet. In many instances, the wages they earn are insufficient to encourage additional hours of work or long-term attachment to the labor force. At the same time, most state and local tax systems impose greater responsibilities on poor families than on wealthy ones, making it even harder for low-wage workers to move above the poverty line and achieve meaningful economic security. The Earned Income Tax Credit (EITC) is designed to help low-wage workers meet both those challenges. This policy brief explains how the credit works at the federal level and what policymakers can do to build upon it at the state level.”

Earned Income Tax Credit Promotes Work, Encourages Children’s Success at School

Center on Budget and Policy Priorities, April 9, 2013

“The Earned Income Tax Credit (EITC), which went to 27.5 million low- and moderate-income working families in 2010, provides work, income, educational, and health benefits to its recipients and their children, a substantial body of research shows. In addition, recent ground-breaking research suggests, the EITC’s benefits extend well beyond the limited time during which families typically claim the credit.”

Ten Years of the EITC Movement: Making Work Pay Then and Now

Brookings Institution, April 18, 2011

“The Earned Income Tax Credit (EITC) … has grown to be called the nation’s largest federal anti-poverty program. The EITC has had significantly beneficial effects for its recipients and their communities. These include encouragement of work, reduction of poverty, and boosting of local economic activity.”

Supply-side economist Arthur Laffer has been very busy the last few years trying to convince state lawmakers that cutting taxes and making them more regressive will lead to an economic boom.  At the same time, our partner organization, the Institute on Taxation and Economic Policy (ITEP), has done a lot of work pointing out the serious flaws in Laffer’s so-called research, and explaining why taxes and the public investments they pay for are key to healthy state economies.

Over at PBS, meantime, the fedora-donning business correspondent for the News Hour, Paul Solman, had gotten wind of ITEP’s critiques.  After reading ITEP’s “States with “High Rate” Income Taxes are Still Outperforming No-Tax States” and deeming it “a convincing piece of work,” Solman decided to sit down with Laffer and ask some questions.  Laffer’s response was predictable and anecdote-heavy.  Aside from recycling the same meaningless statistics ITEP has debunked before, he also included a data point that’s hard to rebut unless you live inside his brain, that he and his family moved to Tennessee “exclusively because of taxes.”  (Of course, a guy who’s made a living bashing taxes is not a particularly representative citizen.)

Happily, PBS’s Solman decided to do a little fact-checking and went looking for an expert, “impartial point of view” (his words, not ours) to help glean whether Laffer’s promise of sure-fire economic growth is all that – or all wet.  For his follow up piece, he turned to Joel Slemrod, noted public finance expert and chair of the Economics Department at the University of Michigan.

In one of many subtle but clear swipes at Laffer’s methods, Slemrod explained that while “economists have developed increasingly sophisticated statistical techniques to try to tease out the causal link between policies and performance … Laffer’s analysis is not sophisticated.”

Slemrod’s criticisms of Laffer closely parallel those made by ITEP in 2012 and early 2013.  For one thing, Laffer fails to control for non-tax factors that impact growth. For another, the economic measures he chooses (cherry picks, really) don’t capture “what’s happened to the … well-being of a typical resident.”  And, Laffer ignores how tax cuts require cuts in public investments that are hugely important to state economies.

On this last point, Slemrod notes that: “Laffer makes clear that … he believes more money does not provide better public services. This is a controversial statement that he backs with a few anecdotes, but it is not one that is widely held.”

In other words, Laffer and his supply-side compatriots have campaigned to frame most every government program as “wasteful” to make the idea (and their ideological obsession) of defunding government seem somehow justified.

Given all of this and his vast expertise, Slemrod concludes that ITEP’s study “make[s] arguably better methodological choices” than Laffer’s.  (We’ll take that as a compliment!) As Slemrod has pointed out in previous interviews, serious research has shown taxes to have little, if any, effect on economic growth; in fact, that “[r]aising taxes and using the money for education and certain infrastructure could certainly be beneficial to an economy.”  Laffer’s tax-phobic worldview notwithstanding, public services do matter to economic growth, and that means we will always need an adequate, fair, and sustainable tax system to pay for them.

If you’re looking for some summer reading, the Institute on Taxation and Economic Policy (ITEP) is in the process of updating its collection of policy briefs.  In the last couple weeks, ITEP has released updated briefs on sales tax holidays, state gasoline taxes, and efforts to collect sales taxes owed on purchases made over the Internet.

Bad tax ideas have already entered Arkansas’ 2014 race for governor.  After claiming that the personal income tax cuts signed this year by Governor Beebe aren’t “significant enough … to make us competitive with our surrounding states,” Republican candidate Asa Hutchinson announced that he would like to phase-down the personal income tax even further.  But ITEP has shown that the personal income tax is vital to both tax fairness and sustainability, and that the states with the highest top personal income tax rates are experiencing economic conditions at least as good, if not better, than those states without income taxes.

The Commonwealth Institute in Virginia writes that the state’s gubernatorial candidates shouldn’t assume it will be easy to pay for their tax cut promises by simply eliminating “wasteful” tax breaks.  According to the Institute, “When you exclude tax breaks that would disproportionately hit low-income and middle class families or those that are clearly not politically feasible, [eliminating] the rest would raise only about $850 million.”  Compare that with the $1.4 billion per year candidate Ken Cuccinelli proposes in personal and corporate income tax rate cuts alone.

Mississippi’s struggling infrastructure budget is in the news now that a new task force is beginning to study how the state can better fund its transportation system.  The Mississippi Department of Transportation (MDOT) says that asphalt costs have tripled in recent years while fuel taxes–which haven’t been raised since the 1980’s–have predictably failed to keep pace.  So far MDOT is responding by forgoing new construction in favor of simply maintaining the current system, but if taxes aren’t raised soon, Mississippi may run the risk of becoming yet another state that opts to siphon money away from education, human services, and other priorities to fill its growing infrastructure funding gap.

18 states across the country are gearing up for their 2013 Sales Tax Holiday season, but these tax-free shopping sprees are also increasingly under fire.  Designed to offer a temporary sales tax exemption for specific consumer items, these holidays typically last two to three days and most take place in time for back-to-school shopping. An updated policy brief (PDF) from the Institute on Taxation and Economic Policy (ITEP), however, lays out why there is so little to celebrate this Sales Tax Holiday season.

For starters, the economic benefit of sales tax holidays is unclear at best. While one commonly cited rationale for such holidays is that they increase local consumer spending, boosting sales for local businesses, available research concludes this “boost” in sales is primarily the result of consumers shifting the timing of their already planned purchases.

But not all consumers. And that’s one of the other problems with sales tax holidays as policy: they are poorly targeted. Advertised as a way to give hard-working families a break from paying the regressive sales tax, they actually end up benefiting wealthier taxpayers, who have more liquidity and therefore flexibility to shift the timing of their purchases and take advantage of the tax break.  (And that goes for more affluent consumers in neighboring states, too, who can easily make a road trip of a tax-free shopping weekend next door.)

What else is wrong with them? Sales tax holidays also cost states upwards of $230 million each year. Why, one may ask, do state lawmakers continue to approve these holidays year-after-year if they are ineffective and expensive? Massachusetts Governor Deval Patrick offered a candid answer, saying he’d support his state’s 2011 holiday “not because it is particularly fiscally prudent, but because it is popular.”

And that’s the thing. Sales tax holidays make great politics but they don’t solve real problems in regressive state tax codes.  They fall far short of accomplishing what advocates claim, that is, helping hard-pressed consumers and local retailers. In fact, those retailers would benefit more from the requirement that out-of-state Internet retailers be required to collect the same sales taxes as brick and mortar stores (that is, if the Marketplace Fairness Act became law).

More important, however, is that lawmakers who really want to help struggling consumers have smart alternatives. Popular tax holidays aside, good tax policy would be targeting tax credits for working families.

Republican Congressman Dave Camp of Michigan, chairman of the House Ways and Means Committee, reportedly told members of his committee on Wednesday that he would propose a tax reform based on the framework spelled out in the House budget resolution – also known as the “Ryan plan,” because it was developed by House Budget Committee chairman Paul Ryan.

The Ryan plan calls for Congress to enact some very specific tax cuts and offset their costs by eliminating or limiting tax expenditures that are left unspecified. A report from Citizens for Tax Justice concludes that no matter how the details of the plan are filled in, people who make over $500,000 would pay tens of thousands of dollars less each year and people who make over $1 million would pay hundreds of thousands of dollars less each year, than they do under the current tax system.

The Ryan plan calls on Congress to replace the current progressive rates in the federal personal income tax with just two rates, 10 percent and 25 percent, eliminate the AMT, reduce the corporate income tax rate from 35 percent to 25 percent, and enact other tax cuts. It calls on Congress to offset the costs of these tax cuts by eliminating or reducing tax expenditures which are left unspecified, although it is fairly clear that tax breaks for investment income (most of which goes to the richest one percent of Americans) would not be limited in any way.

CTJ’s report found that even if high-income Americans had to give up all the tax expenditures that could be eliminated under the Ryan plan, they would still benefit because the rate reductions under the plan are so significant. If Congress fills in the details of the plan in a way that makes it “revenue-neutral,” which Camp proposes, that can only mean that low- and middle-income people must pay more to make up the difference.

According to The Hill, on Wednesday Camp “told Ways and Means Committee members that he planned to push a framework similar to the tax revamp that was passed in the House GOP budget this year. That plan collapsed the current seven individual tax brackets into two — a 10 percent and a 25 percent bracket — while scrapping the Alternative Minimum Tax. Corporations’ top rate would drop from 35 percent to 25 percent under the plan, which would neither raise nor reduce revenue to the Treasury.”

Congressman Camp and Democratic Senator Max Baucus of Montana, the chairman of the Senate Finance Committee, have recently toured the country, making appearances in Minneapolis, Philadelphia, and suburban New Jersey to promote an overhaul of the tax code even though they do not say what that overhaul would look like during their appearances. As the Republican and Democratic chairmen of the two tax-writing committees, they argue that Congress can enact a bipartisan tax reform. However, the Ryan budget plan, which Camp says will be the basis of his proposal, failed to receive a single Democratic vote when versions of it were approved by the House in 2011, 2012 and 2013.

The Hill also reported that Camp planned to mark up a bill before Congress acts to raise the debt ceiling, and that tax reform could be linked to legislation to raise the debt ceiling. The administration has already announced that it will not negotiate over the debt ceiling, and that instead Congress must pass a “clean” bill to raise the ceiling to prevent a default on U.S. debt obligations and the economic tailspin that would result. 

A number of important changes to the District of Columbia’s tax laws will go in effect in the months ahead as part of a budget passed by the DC Council earlier this summer.  A detailed budget toolkit assembled by the DC Fiscal Policy Institute’s (DCFPI) notes that the budget raises $72 million in new revenues, but that it does so largely through traffic cameras and improved tax enforcement—not broad-based tax increases.  Some of the more notable tax changes in the budget include:

Expanding the District’s property tax “circuit breaker” credit, known as Schedule H.  Much like an electrical circuit breaker, DC’s Schedule H “circuit breaker” is designed to protect taxpayers from a property tax “overload”—a situation where property taxes grow too high relative to their incomes.  Prior to this summer, DC’s circuit breaker credit hadn’t been updated for 35 yearso.  Under the expanded credit, the income cut-off for eligibility will rise from $20,000 to $50,000 and the credit’s maximum benefit will grow from $750 to $1,000.

Reforming the gasoline tax.  The District joins Maryland, Massachusetts, Vermont, and Virginia in reforming its gas this year in order to improve its long-term revenue growth.  By switching from an unsustainable fixed-rate tax to one equal to 8 percent of gas prices, DC will be better positioned to pay for the gradually rising cost of public infrastructure in the years ahead.  The Institute on Taxation and Economic Policy (ITEP) testified in support of this reform in June.

Cutting the sales tax rate.  On October 1, the District’s general sales tax rate is scheduled to fall from 6 to 5.75 percent.  While the change will be progressive overall, DCFPI’s proposal to expand either the standard deduction or personal exemption would have been better targeted to lower- and moderate-income District residents, as opposed to largely benefiting tourists and nonresident commuters.

Exempting interest income on out-of-state government bonds.  The least defensible tax change contained in the DC budget is the reinstatement of an unusual and regressive tax break for people investing in out-of-state bonds.  North Dakota is the only state offering such a break.  Three out of every four dollars of tax exempt interest flows to households with total incomes over $200,000.

For more information on DC’s budget and the tax changes it contains, be sure to read DCFPI’s budget toolkit.

If lawmakers and the media are confused about the President’s recent proposal to enact a business tax reform tied to a jobs program, it’s because the White House has not explained it very well. The President’s plan has been depicted by some as a major shift away from his long-held position that tax reform affecting corporations (and possibly other types of businesses) should be revenue-neutral.

That’s all wrong. What the President just proposed is not much different from his previous proposals. If the President really had shifted away from his previous position and declared that corporations should contribute more to fund public investments on a permanent basis, we’d be a lot happier about it. But that’s not what the President has said. If anything, his “new” proposal is more of a clarification than a shift in policy.

(See our previous blog post describing the President’s proposal.)

President Obama has consistently said that business tax reform should be “revenue-neutral,” meaning loopholes and special breaks would be eliminated but the revenue savings would all be used to offset a reduction in tax rates paid by corporations, so that, overall, corporations would not pay more than they do today. The fact sheet released by the White House yesterday still describes his approach to reform as “revenue-neutral.”

All that’s changed is that the President acknowledged that some of the revenue raised from eliminating loopholes and special breaks might be temporary, meaning it would only show up in the first few years or so. This temporary revenue increase cannot be used to pay for anything that is permanent (like the reductions in tax rates). Instead, the White House argues, reasonably, that a temporary revenue increase should be used to pay for something that is temporary. The President proposes to use this temporary revenue to fund a temporary jobs program.

Not counting this temporary revenue increase (which might only appear in the first decade or so after a tax overhaul is enacted) the President’s approach would be revenue-neutral. So the President’s approach still falls short of the “revenue-positive” corporate tax reform that CTJ and others organizations have called for.

The President did not elaborate on possible temporary revenue increases, but here’s an example of how it might work. We have argued that businesses, particularly those set up as corporations, often benefit entirely too much from accelerated depreciation and that this does not help our economy. Accelerated depreciation consists of businesses taking deductions for investments in equipment much more quickly than the equipment actually wears out. If Congress repeals or limits accelerated depreciation, that means businesses will have to take these deductions over a longer period of time. They’ll pay more early on, but less in later years because these deductions are spread out over a longer period of time.

This means that some of the revenue raised by repealing or limiting accelerated depreciation simply represents a timing shift. Taxes are paid during this decade that would otherwise be paid in the next decade. On the other hand, some of the revenue increase we see in the first decade would be permanent, occurring again in the next decade and the decade after.

If lawmakers want to offset a permanent reduction in tax rates, only the permanent part of this revenue increase can be used for that. Otherwise the reform will be “revenue-negative,” meaning it loses revenue, in the second decade or third decade after it’s enacted.

There are other types of changes that can lead to timing shifts, resulting in a larger revenue increase in the first decade than in the second or third decade after reform is enacted. For example, if Congress enacts some sort of tax on profits that corporations have accumulated offshore, then part of the resulting revenue gain would be temporary because some of those profits would have been repatriated and taxed at a later date under the current rules. (Keep in mind that here we’re talking about a mandatory tax of some sort on offshore profits, not the sort that would be paid under a “repatriation holiday” for corporations to choose to bring profits back to the U.S. — that sort of proposal loses revenue.)

None of this was explained in the President’s speech on this topic or in the fact sheet released by the White House, but rather was mentioned when Gene Sperling, director of the National Economic Council, explained to reporters that “That money can’t responsibly be used to lower rates because it doesn’t sustain itself.”

So the only new development is that the White House has acknowledged that some of the revenue increase that comes from closing corporate tax loopholes would be temporary and therefore should be used to fund something temporary rather than permanent rate cuts. CTJ’s longstanding view has been that corporations should contribute more on a permanent basis to support the public investments that make this nation prosperous — and that make their profits possible. That’s why we see the President’s proposal as only a slight improvement over his previous one.

Here’s a look at some of the best and worst ideas that Senators submitted as part of the “blank slate” tax reform process proposed by Senators Max Baucus and Orrin Hatch, the chairman and ranking member of the tax-writing committee in the Senate. In theory, the “blank slate” is supposed to be an approach that assumes Congress is drawing the tax code completely from scratch, with no “tax expenditures” (subsidies provided through the tax code) and Senators were asked to explain which tax expenditures they would want to preserve in a newly reformed tax system.

Of course, this list is not comprehensive. Only a minority of Senators both submitted letters to Baucus and Hatch and made their letters public.

While CTJ has criticized Baucus and Hatch’s “blank slate” approach as ignoring the most crucial issue (the dire need for increased revenue), we have also put forward an approach to determine which tax expenditures should be repealed or preserved. Lawmakers should repeal tax expenditures that are regressive and serve no policy goals, preserve tax expenditures like the EITC that are progressive and do accomplish policy goals, and reform those tax expenditures that fall somewhere in between. CTJ has also explained that revenue should be raised by closing tax expenditures for corporations, particularly those that encourage corporations to shift jobs and profits offshore.

Some Senators, like Bernie Sanders and Jay Rockefeller, submitted letters very much in agreement with our approach. Others, like Jeff Flake, Mike Enzi and Mike Crapo, submitted letters that run completely counter to our approach. 

Worst Idea Submitted: Enact the Ryan Plan

Senator Jeff Flake of Arizona proposes that tax reform follow the approach taken by the House budget plan (also known as the Ryan plan), which would replace our progressive personal income tax rates with two rates of just 10 percent and 25 percent, and would lower the corporate income tax rate to 25 percent. CTJ has frequently pointed out that the Ryan plan would reduce taxes on the very rich no matter how the details are filled in, which means low- or middle-income people would have to pay more if the frequently cited goal of revenue-neutrality is to be achieved.

Senator Flake also repeats several myths about how certain types of income, like corporate stock dividends, are allegedly double-taxed. (CTJ has explained why dividends are rarely, if ever, double-taxed.)

Worst Proposal to EXPAND a Tax Expenditure for Corporations: Enact a “Territorial” Tax System

Senator Mike Enzi of Wyoming calls for enactment of his legislation, S. 2091 from the 112th Congress, to create a territorial tax system. In this context, a “territorial” tax system, which is also endorsed by Senator Mike Crapo of Idaho, is a euphemistic way of describing an exemption of offshore corporate profits from U.S. taxes.

Right now, U.S. corporations already get a big break from the rule that allows them to “defer” paying U.S. taxes on the profits of their offshore subsidiaries until those profits are brought to the U.S. “Deferral” is one of the biggest tax expenditures for corporations and, as we have explained, it encourages American corporations to shift operations offshore or engage in accounting gimmicks to make their U.S. profits appear to be generated in a country like Bermuda or the Cayman Islands that won’t tax them. Expanding deferral into an exemption for offshore profits would only increase these terrible incentives.

Worst Proposal to EXPAND a Tax Expenditure for Individuals: Cut Rates for Capital Gains

The letter from Senator Mike Crapo of Idaho lauds the approach to tax reform taken by the Simpson-Bowles plan — which would remove most tax expenditures and adopt a set of low rates — but then proposes to increase the most regressive tax expenditure of all, the preferential income tax rate for capital gains and stock dividends. A recent CTJ report explains that 68 percent of the benefits of this tax expenditure are estimated to go the richest one percent of Americans this year.

Senator Crapo also believes that further reducing the tax rates on capital gains and dividends will “stimulate investment, capital formation, and additional revenue.” Senator Crapo is referring to the argument made by Arthur Laffer that cutting tax rates on capital gains causes revenue to actually increase. The CTJ report explains that this idea has been disproven time and again by the revenue statistics.

Best Ideas for Ending Tax Expenditures: Eliminate Deferral and Preferential Rates for Capital Gains and Dividends

The letter from Senator Bernie Sanders of Vermont includes several proposals, and among the most significant are repeal of deferral and repeal of the preferential personal income tax rate for capital gains and stock dividends for the rich. Senator Sanders cites the two terrible incentives that deferral creates and that have already been mentioned (incentives to shift jobs offshore and make U.S. profits appear to be generated in offshore tax havens) and also explains that the capital gains and dividends break is the reason why wealthy investors like Warren Buffett can pay lower effective tax rates than many middle-income people.

Best Articulation of Key Principles for Tax Reform: Increase Progressivity and Raise Revenue

Senator Jay Rockefeller of West Virginia writes that his “highest priority for tax reform is to reduce income inequality.” While he praises Senators Baucus and Hatch for committing to maintain the tax code’s current progressivity, “we must go further, by requiring the wealthiest individuals and businesses to contribute more.” He writes that, “While incomes for the top one percent soared over the past two decades, effective tax rates for these same individuals declined dramatically,” and that “too many giant corporations pay no tax…”

Senator Rockefeller also writes that some tax expenditures like the EITC provide a “solid foundation for increasing opportunity and upward mobility for people who are low-income…” The recent CTJ report on individual tax expenditures explains how the EITC is the most progressive tax expenditure and is extremely effective at accomplishing policy goals like encouraging work. 

Finally, Senator Rockefeller is refreshingly candid about the uselessness of any debate over tax reform that does not lead to increased revenue. “I can assure you that I will not support tax reform that does not raise real, sustainable revenue,” he writes. “Frankly, I would rather the tax reform process be delayed for another Congress than pass a bad bill this year that raises inadequate revenue.”

Obama’s Plan Wisely Makes Job Creation the Priority, But Unwisely Lets Corporations Off the Hook

President Obama has once again proposed to reform business taxes without raising any revenue in the long-term. He has shifted his position slightly, however, by proposing to raise some revenue in the very short-term from businesses in order to fund infrastructure and other investments that would create jobs.

While the President’s focus on job creation is laudable, the fact that he still refuses to call for permanently increasing the amount of revenue generated from the corporate tax is a big disappointment. Over the last three years, CTJ has written reports and op-eds explaining why reform of the corporate income tax (as well as reform of the personal income tax) should raise revenue. CTJ also published reports explaining that profitable corporations pay an effective tax rate that is far lower than the statutory tax rate of 35 percent (which corporate lobbyists want to lower), and many pay no taxes at all.

A letter to members of Congress that was circulated by CTJ in 2011 and signed by organizations in every state explains that, “Some lawmakers have proposed to eliminate corporate tax subsidies and use all of the resulting revenue savings to pay for a reduction in the corporate income tax rate. In contrast, we strongly believe most, if not all, of the revenue saved from eliminating corporate tax subsidies should go towards deficit reduction and towards creating the healthy, educated workforce and sound infrastructure that will make our nation more competitive.”

A similar letter was signed by even more organizations at the end of 2012 before being sent to members of Congress. 

President Obama’s Same Old Framework, with One Addition

While speaking today at an Amazon facility in Chattanooga Tennessee, President Obama proposed that Congress enact a business tax reform that closes loopholes, “ends incentives to ship jobs overseas, and lowers rates for businesses that create jobs right here in America,” and also simplifies tax filing for businesses. He also proposed to “use some of the money we save by transitioning to a better tax system to create more good construction jobs” and other types of jobs.

A fact sheet released by the White House explains that the tax reform would be “revenue-neutral” in the long-run, because revenue saved from closing loopholes would go towards offsetting the cost of lowering the corporate tax rate from 35 percent to 28 percent (and setting the rate even lower, at 25 percent, for domestic manufacturing).

This is entirely in keeping with the “framework” for business tax reform that the President proposed in February of 2012. CTJ criticized the framework for not calling for increased revenue and for failing to explain which loopholes would be closed to offset the costs of the rate reductions.

The one thing that is new, based on the President’s speech in Chattanooga, is his proposal to use a temporary increase in revenue generated from “transitioning to a better tax system” for public investments that create jobs. This new wrinkle is the President’s recognition that some of the tax reforms under consideration will raise money in the short run, but will raise far less after they are fully phased in. The President says this short-term revenue should not be counted in calculating whether tax reform is “revenue-neutral,” but should instead be devoted to his “jobs program.”

Such short-term extra revenues could come from changes that alter the timing of tax payments, like limiting accelerated depreciation so that business must wait longer before they can write off the cost of equipment, or from a transition rule for taxing current offshore corporate profit hoards (at an unspecified tax rate). In speaking about this type of timing shift, Gene Sperling, director of the National Economic Council, told reporters that “That money can’t responsibly be used to lower rates because it doesn’t sustain itself.”

Overall, however, the President continues to ignore what should be an essential result of real tax reform: to make corporations pay their fair share of taxes in order to provide the additional revenues we need to provide the public services and investments that our country needs.

Did you know that “Nike Waffle” isn’t just a shoe? It’s also a tax shelter.

Nike, like companies such as Apple, Dell and Microsoft, has a huge stash of offshore profits that it hasn’t paid U.S. taxes on. We also know that Nike, like these other corporations, has paid little or nothing in foreign taxes on these profits either. And we also know that all these companies have many offshore subsidiaries in tax-haven countries.

Nike’s latest annual report, released earlier this week, shows just how blatant multinational corporations have become in using offshore tax havens to avoid their U.S. tax responsibilities.

Nike reports that its cache of “permanently reinvested offshore profits” ballooned from $5.5 billion to $6.7 billion in the past year — meaning that the company moved $1.2 billion of its profits offshore. Nike also discloses that if it were to pay U.S. taxes on its offshore stash, its federal tax bill would be $2.2 billion, a tax rate of just under 33 percent. Since the federal income tax is 35 percent minus any taxes corporations have paid to foreign jurisdictions, it’s easy to deduce that Nike has paid virtually no tax on its offshore profit hoard.

Nike’s long list of offshore subsidiaries includes twelve shell companies in Bermuda alone, ten of which are named after one of Nike’s own shoes! To wit: Air Max Limited, Nike Cortez, Nike Flight, Nike Force, Nike Huarache, Nike Jump Ltd., Nike Lavadome, Nike Pegasus, Nike Tailwind and Nike Waffle!

Why does Nike want to pretend that its product names live in Bermuda? To avoid paying taxes, of course. When multinationals move their brand names and other “intellectual property” to tax-haven subsidiaries, they can have their subsidiaries “charge” the U.S. parent companies big royalties for using the names. These transactions reduce U.S. taxable income and rob state and federal governments of tens of billions of dollars each year.

You might think that American multinational corporations might be just a little embarrassed by such nefarious behavior. But no, they mostly aren’t. Nike, in particular, is thumbing its corporate nose at the IRS and ordinary taxpayers by making its tax avoidance maneuvering so obvious and having a little fun at our expense.

Frontpage Photo of Nike Shoes via Daniel Y. Go Creative Commons Attribution License 2.0