Author: tarek

When most people think of major foreign policy issues facing the U.S., they rarely think of taxes and budget deficits. But during the foreign policy-focused final presidential debate on Monday night, the candidates delved into tax and budget issues – domestic ones, that is, but not those related to foreign policy. Below, we break down the most important tax policy moments of the night.

The Debt “Crisis”
Romney came out swinging saying that President Barack Obama had put the U.S. on a path “heading towards Greece” and that by the end of his second term Obama will have pushed the debt to $20 trillion. He added that a former Chairman of the Joint Chiefs of Staff has called the debt “the biggest national security threat we face.” There is a lot to unpack in this line of attack.

To start, even alarmist estimates, like those by the conservative Heritage Foundation, show that on its “current” path the U.S. still has twenty years before it reaches a debt-to-GDP ratio on par with Greece. More importantly, however, such projections assume that Congress and the President will extend the Bush tax cuts and reverse the spending cuts contained within the sequester; and in truth, that combination is the most serious long term debt threat U.S. faces.

It is also true that Obama’s approach to our long term debt comes up short. Citizens for Tax Justice (CTJ) has criticized Obama’s plan that would increase the deficit by $4.2 trillion over the next ten years by extending a full 78 percent of the Bush tax cuts. But it’s quite a thing for Romney to point fingers at Obama regarding the debt since Romney is proposing an approach far and away more reckless, one that includes about $5 trillion in additional tax cuts on top of the $5.4 trillion cost of a full extension of the Bush tax cuts over the next ten years, which he also endorses.

Compounding this, Romney has not proposed enough specific spending cuts to get anywhere close to balancing the budget. In fact, the Congressional Budget Office has found that Romney’s number one recommendation to cut the deficit during the debate, his plan to “get rid” of Obamacare, would actually increase the deficit by $210 billion over ten years. In addition, even under Romney’s running-mate Representative Paul Ryan’s draconian budget plan, the debt would still increase to $19 trillion in 2016 by Ryan’s own estimations.

Making Romney’s budget math even more fantastical (as Obama correctly pointed out) is his proposal to increase military spending by about $2 trillion over the next ten years compared to Obama’s budget proposal, and about $2.5 trillion compared to what the sequester deal would require.  

Balancing Budgets at the State Level
To support his idea that it’s possible to enact massive tax cuts while also balancing the budget at the federal level, Romney pointed to his record as governor in Massachusetts, where he said he was able to balance the budget four years in a row while still cutting taxes “19 times.” In actuality, Romney was only able to balance the budget because he took the responsible position of actually raising more, rather than less revenue as governor.

According to an analysis by the Massachusetts Taxpayers Foundation, budgets enacted under Romney raised around $700 million in additional revenue annually through higher user fees (a popular approach of raising revenue among anti-tax governors) and closing tax loopholes. This increase in revenue outweighed the cost of his 19 tax cuts, which were mostly small and included gimmicky measures like a sales tax holiday. By contrast, Romney is now proposing tax cuts that would dwarf the revenues he would raise through loophole closing.

Candidates Barely Touch on International Tax Dodging

As we predicted, the candidates barely made a passing reference to the problems facing our international tax system, even though, for example, the U.S. loses an astounding $100 to $150 billion in tax revenues each year to offshore tax havens. The only mention of international tax issues came when Obama noted that the current system “rewards companies that are shipping jobs overseas” and when he repeated the point previously made by Vice President Joe Biden that the territorial tax system Romney supports will create 800,000 jobs – but in places like China rather than the U.S.

Biden and Obama are right, and they cite this study showing that the territorial tax system (PDF) Romney proposes would even further encourage corporations to move jobs offshore and disguise their U.S. income as foreign income in order to avoid U.S. taxes. Rather than moving backwards with a territorial tax system, the U.S. should end deferral of taxes on foreign profits by U.S. corporations, which would immediately solve the issue of companies holding $1.5 trillion of income offshore to avoid taxes on the billions they owe in taxes on that income.

The Pennsylvania legislature just sent a bill to Governor Corbett that would allow most companies to keep the income tax payments they withhold from their employees as a kind of reward for having hired them. Normally, of course, those tax dollars would go to pay for the public services all Pennsylvanians, including the workers, rely on.  As Sen. Jim Ferlo argues, “All of sudden we’re waylaying those employees’ wages, almost akin to Jesse James robbing a bank, and we’re going to put it back in the pockets of one company, in one locale, in one county, in one jobsite.”  This type of tax break is not uncommon, and it’s explained in Good Jobs First’s “Paying Taxes to the Boss.”

The Olympian editorializes against Washington State’s Initiative 1185, the newest attempt by anti-tax activist Tim Eyman to empower a small minority of legislators to block the closing of any tax loophole.  The proposal is known as a “supermajority requirement,” since it would require approval by two-thirds of each legislative chamber to enact any revenue-raising tax change.  But as the editorial explains, “A supermajority gives unprecedented and undemocratic powers to the minority in just one area: tax increases. Lawmakers who oppose a tax proposal get twice the voting power of those who support it.”

Iowa tax revenues appear to be on the rise, but instead of using that money to fill in gaps after years of “starv[ing] state government” or, say, restoring anti-poverty tax credits like the state’s Earned Income Tax Credit (EITC),  Governor Terry Branstad is pushing for proposals that will “dramatically” reduce both personal and corporate income tax rates. This is par for the course with Governor Branstad. He has a history of prioritizing the wrong tax cuts while vetoing those for working families, like an expanded state EITC.

Looking for evidence that states shouldn’t heavily depend on cigarette tax (PDF) revenues as a stable source of revenue? Check out this Clarion Ledger article which reports that “per capita consumption of cigarettes — 67.9 packs a person in 2011 — is the lowest it’s ever been in Mississippi.” Thanks to federal and state tax increases, tax revenues have actually increased, but as fewer and fewer Mississippians smoke, those cigarette tax revenues are bound to decline as well.

In a recent survey, conducted by the Docking Institute of Public Affairs at Fort Hays State University, Kansans said they would rather see property tax cuts than income tax cuts. This finding isn’t surprising given the unpopularity (PDF) of regressive property taxes. Earlier this year, however, Kansas lawmakers did the opposite and passed sweeping reductions to the income tax.  The Institute’s Director said it was clear that, “the tax structure [Kansans] want seems to be completely the opposite of the tax policies coming from the Legislature.”

California is not the only state this election season taking taxing decisions directly to the people on November 6.  The stakes will be high for state tax policy on Election Day in nine other states with tax-related issues on the ballot. With a couple of exceptions, these ballot measures would make state taxes less fair or less adequate (or both).

Arizona

• Proposition 204 would make permanent the one percentage point sales tax increase originally approved by voters in 2010.  The increase would provide much-needed revenue for education, particularly in light of the worsened budget outlook created by a flurry of recent tax cuts.  But it’s hard not to be disappointed that the only revenue-raising option on the table is the regressive sales tax (PDF), at a time when the state’s wealthiest investors and businesses are being showered with tax cuts.

• Proposition 117 would stop a home’s taxable assessed value from rising by more than five percent in any given year.  As our partner organization, the Institute on Taxation and Economic Policy (ITEP) explains (PDF), “Assessed value caps are most valuable for taxpayers whose homes are appreciating most rapidly, but will provide no tax relief at all for homeowners whose home values are stagnant or declining. As a result, assessed value caps can shift the distribution of property taxes away from rapidly appreciating properties and towards properties experiencing slow or negative growth in value – many of which are likely owned by low-income families.”

Arkansas

• Issue #1 is a constitutional amendment that would allow for a temporary increase in the state’s sales tax to pay for large-scale transportation needs like highways, bridges, and county roads. If approved, the state’s sales tax rate would increase from 6 to 6.5 percent for approximately ten years, or as long as it takes to repay the $1.3 billion in bonds issued for the relevant transportation projects. Issue #1 would also permanently dedicate one cent of the state’s 21.5 percent gas tax (or about $20 million annually) to the State Aid Street Fund for city street construction and improvements. It’s no wonder the state is looking to increase funding for transportation projects. ITEP reports that Arkansas hasn’t increased its gas tax is ten years, and that the tax has lost 24 percent of its value during that time due to normal increases in construction costs. Governor Beebe is supporting the proposal, and his Lieutenant Governor Mark Darr recently said, “No one hates taxes more than me; however, one of the primary functions of government is to build roads and infrastructure and this act does just that. My two primary reasons for supporting Ballot Issue #1 are the 40,000 non-government jobs that will be created and/or protected and the relief of heavy traffic congestion.”

California

• For a detailed description of two competing revenue raising ballot measures in California, read California Voters to Choose Which Tax Proposals Will Pay for Schools on November 6

• Thus far overshadowed by the competing Prop 30 and 38 revenue raising proposals, Proposition 39 would close a $1 billion corporate tax loophole that Governor Brown and other lawmakers have tried, but failed to end via the legislative process.  Currently, multi-national corporations doing business in California are allowed to choose the method for apportioning their profits to the state that results in the lowest tax bill.  If Prop 39 passes, all corporations would have to follow the single-sales factor apportionment (PDF) method.  Half of the revenue raised from the change would go towards clean energy efforts while the other half would go into the general fund.

Florida

• Amendment 3 would create a Colorado-style TABOR (or “Taxpayer Bill of Rights”) limit on revenue growth, based on an arbitrary formula that does not accurately reflect the growing cost of public services over time.  As the Center on Budget and Policy Priorities (CBPP) explains, Amendment 3 is ““wolf in sheep’s clothing” because it would phase in over several years, which obscures the severe long-term damage it would cause.  Once its revenue losses started, however, they would grow quickly. To illustrate its potential harm, we calculate that if the measure took full effect today rather than several years from now, it would cost the state more than $11 billion in just ten years.” The Orlando Sentinel’s editorial board urged a No vote this week writing that voters “shouldn’t risk starving schools and other core government responsibilities that are essential to competing for jobs and building a better future in Florida.”

• Amendment 4 would put a variety of costly property tax changes into Florida’s constitution, including most notably an assessment cap (PDF) for businesses and non-residents that would give both groups large tax cuts whenever their properties increase rapidly in value.  Moreover, as the Center on Budget and Policy Priorities (CBPP) explains, “Amendment 4’s biggest likely beneficiaries would be large corporations headquartered in other states, with out-of-state owners and shareholders,” including companies like Disney and Hilton hotels.

Michigan

• Proposal 5 would enshrine a “supermajority rule” in Michigan’s constitution, requiring two-thirds approval of each legislative chamber before any tax break or giveaway could be eliminated, or before any tax rate could be raised.  As we explained recently, the many flaws associated with handcuffing Michigan’s elected representatives in this way have led to a large amount of opposition from some surprising corners, including the state’s largest business groups and its anti-tax governor. Republican Governor Rick Snyder wrote an op-ed in the Lansing State Journal opposing the measure saying it was a recipe for gridlock and the triumph of special interests. Proposal 5 is also bankrolled by one man to protect his own business interests.

Missouri

• Proposition B would increase the state’s cigarette tax by 73 cents to 90 cents a pack. The state’s current 17 cent tax is the lowest in the country.  Increasing the state’s tobacco taxes would generate between $283 million to $423 million annually. The Kansas City Star has come out in favor of Proposition B saying, “It’s not often a single vote can make a state smarter, healthier and more prosperous. But Missourians have the chance to achieve all of those things on Nov. 6 by voting yes on Proposition B.”

New Hampshire

• Question 1 would amend New Hampshire’s constitution to permanently ban a personal income tax.  The Granite State is already among the nine states without a broad based personal income tax and proponents want to ensure that will remain the case forever. As Jeff McLynch with the New Hampshire Fiscal Policy Institute explains, a Yes vote would mean that “you’d limit the choices available to future policymakers for dealing with any circumstances, and by extension, you’re limiting choices for future voters.”

Oklahoma

• State Question 758 would tighten an ill-advised property tax cap (PDF) even further, preventing taxable home values from rising more than three percent per year regardless of what’s happening in the housing market.  As the Oklahoma Policy Institute explains, “Oklahomans living in poor communities, rural areas, and small towns would get little to no benefit, since their home values will not increase nearly as much as homes in wealthy, suburban communities.”  And since many localities are likely to turn to property tax rate hikes to pick up the slack caused by this erosion of their tax base, those Oklahomans in poorer areas could actually end up paying more.  

• State Question 766 would provide a costly exemption for certain corporations’ intangible property, like mineral interests, trademarks, and software.  If enacted, the biggest beneficiaries would include utility companies like AT&T, as well as a handful of airlines and railroads.  The Oklahoma Policy Institute explains that the exemption, which would mostly impact local governments, would have to be paid for with some combinations of cuts to school spending and property tax hikes on homeowners and small businesses.  And the impact could be big.  As one OK Policy guest blogger explains: “In 1975, intangible assets comprised around 2 percent of the net asset book value of S&P 500 companies; by 2005, it was over 40 percent, and the trend is likely to continue. If SQ 766 passes, Oklahoma will find itself increasingly limited in its ability to tax properties.”

Oregon

• Measure 84 would gradually repeal Oregon’s estate and inheritance tax (PDF) and allow tax-free property transfers between family members.  If the measure passes, Oregon would lose $120 million from the estate tax, its most progressive source of revenue.   According to many legal interpretations of the measure, the second component – referring to inter-family transfers of property – would likely open a new egregious loophole allowing individuals to avoid capital gains taxes (PDF) on the sale of land and stock by simply selling property to family members.  Oregon’s Legislative Revenue Office released a report last week that showed 5 to 25 percent of capital gains revenue could be lost as a result of the measuring passing. The same report also found no evidence for the claim that estate tax repeal is some kind of millionaire magnet that increases the number of wealthy taxpayers in a state.

• Measure 79, backed by the real estate industry, constitutionally bans real estate transfer taxes and fees.  However, taxes and fees on the transfer of real estate in Oregon are essentially nonexistent, prompting opponents to refer to the measure as a “solution in search of a problem.”

• Measure 85 would eliminate Oregon’s “corporate kicker” refund program which provides a rebate to corporate income taxpayers when total state corporate income tax revenue collections exceed the forecast by two or more percent. Instead of kicking back that revenue to corporations, the excess above collections would go to the state’s General Fund to support K-12 education. Supporters of this measure acknowledge that a Yes vote will not send buckets of money to schools right away since the kicker has rarely been activated.  But, it is a much needed tax reform that will help stabilize education funding and peak interest in getting rid of the Beaver State’s more problematic personal income tax kicker.

South Dakota

• Initiative Measure #15 would raise the state’s sales tax by one cent, from 4 to 5 percent. The additional revenue raised would be split between two funding priorities: Medicaid and K-12 public schools. As a former South Dakota teacher writes, “[w]hile education and Medicaid are important, higher sales tax would raise the cost of living permanently for everyone, hitting struggling households the hardest, to the detriment of both education and health.”  This tax increase is the only revenue-raising measure on the horizon right now; South Dakotans deserve better choices.

Washington

• Initiative 1185 would require a supermajority of the legislature or a vote of the people to raise revenue. A similar ballot initiative, I-1053, was already determined to be unconstitutional. As the Washington Budget and Policy Center notes about this so called “son of 1053” initiative:  “Limiting our state lawmakers with the supermajority requirement is irresponsible, and serves only  to limit future opportunity for all Washington residents.”

As President Obama and Governor Romney discuss foreign policy in their final debate, there’s a major issue that they will, unfortunately, probably ignore: the tangle of international tax rules that allow offshore tax dodging.

The U.S. tax system is already in a mess when it comes to the rules we use to determine how profits of multinational companies are taxed. President Obama has proposed some steps to rein in the worst abuses, but most of these are relatively timid or vague. Meanwhile, Romney proposes that the U.S. follow the example of other countries that have a “territorial” system, which has facilitated high-profile tax avoidance schemes by major multinational corporations. On this issue, the U.S. needs to show leadership that has been lacking so far.

Here are the basics: The U.S. could either have a “worldwide” tax system, in which we tax the offshore profits of our corporations (but provide a credit for foreign taxes paid, to prevent double-taxation) or the U.S. could have a “territorial” tax system, which exempts the offshore profits of our corporations from U.S. taxes. What we have now is a hybrid of the two systems. The U.S. does tax the offshore profits of U.S. corporations and provides a credit for foreign taxes paid, but also allows the corporations to “defer” (delay indefinitely) those U.S. taxes, until the profits are brought to the U.S.

Under the current rules, U.S. corporations have a reason to prefer offshore profits over U.S. profits, because they benefit from the rule allowing them to “defer” U.S. taxes on offshore profits indefinitely. So they may shift operations (and jobs) to a country with lower taxes, or engage in convoluted transactions that make their U.S. profits appear to be earned by subsidiaries in countries with no (or almost no) corporate tax (i.e., offshore tax havens).

The offshore subsidiary may be nothing more than a post office box in the Cayman Islands. CTJ recently explained that Nike, Microsoft, Apple and several other companies essentially admit in their public documents that they engage in these tricks.

If allowing corporations to “defer” U.S. taxes on offshore profits causes them to prefer offshore profits over U.S. profits, then eliminating U.S. taxes on offshore profits would logically increase that preference, and increase these abuses. And that’s exactly what a territorial system, which Romney supports, would do.

CTJ has explained in a fact sheet and a more detailed report that we should move in the opposite direction by simply repealing “deferral” so that we have a true “worldwide” tax system. A CTJ report on options to raise revenue explains that repealing deferral would raise $583 billion over a decade.

President Obama has proposed far more limited steps. His most recent budget blueprint proposes to raise $148 billion over ten years with a package of provisions to crack down on the worst abuses of deferral. (The official revenue estimators for Congress projected that the provisions would raise a little more, $168 billion over a decade.)

These proposals would do some good. For example, one would end the practice of companies taking immediate deductions against their U.S. taxes for interest expenses associated with their offshore operations while they defer (not pay) the U.S. taxes on the resulting offshore profits indefinitely. Another would help ensure that the foreign tax credit, which is supposed to prevent double-taxation of foreign profits, does not exceed the amount necessary to achieve that goal. Still another would reduce abuses involving intangible property like patents and trademarks, which are particularly easy to shift to tax haven-based subsidiaries that are really no more than a post office box.

But none of these reforms proposed as part the President’s budget really addresses the underlying problem with a deferral system or a territorial system: The IRS cannot figure out which portion of a multinational corporation’s profits are truly generated in the U.S. and which portion is truly generated overseas. If a U.S. corporation tells the IRS that a transaction with an offshore subsidiary wiped out its profits, the IRS cannot challenge the company unless it can prove that the transaction was unreasonable. And that’s difficult to do, especially when the transaction involves some product or service that is not comparable to anything else in the market (like a new invention, pharmaceutical, or software program).

President Obama has also proposed, as part of his “framework” for corporate tax reform, a minimum tax on offshore corporate profits. Because he has not yet specified any rate for this minimum tax, it’s impossible to say whether it would be effective. If the rate is set extremely low, then it would change very little. In theory, if the rate was set high enough, it would almost have the same effect as ending deferral — but no one in the administration is talking about anything that dramatic. (Read CTJ’s response to the President’s “framework” for corporate tax reform.)

There are some members of Congress looking very seriously at offshore tax dodging by corporations (like Senator Carl Levin). But serious leadership is unlikely to come from the presidential candidates anytime soon.

Photo of Barack Obama, Mitt Romney, and Cayman Islands Flag via Austen Hufford, Justin Sloan, and J. Stephen Con Creative Commons Attribution License 2.0 

The discussion over tax policy during Tuesday night’s town hall debate between President Barack Obama and former Massachusetts Governor Mitt Romney is a case study in how candidates can make selective use of facts. Below we bring some context to some of the most significant points made about tax policy during the debate.

Canada and the “High” Corporate Tax Rate

One area of unfortunate mutual agreement between Obama and Romney is, as Obama put it during the debate, that our corporate tax rate is “too high.” Backing this notion up, Romney noted that Canada’s corporate tax rate is now “15 percent” while the U.S.’s “35 percent” and thus leaves the U.S. in a less “competitive” position.

The primary problem is that both candidates are focusing on the statutory rate (the written law), which is relatively high in the United States, rather than the effective rate (the percentage of profits that corporations actually pay in taxes), which is far lower than the 35 percent statutory rate due to tax loopholes that plague our corporate tax system. In fact, Citizens for Tax Justice (CTJ) has found that large profitable corporations pay about half the statutory rate on average, while some companies like General Electric and Verizon pay nothing at all in corporate taxes.

Turning back to Romney’s comparison of the U.S. corporate tax rate with Canada’s, a CTJ analysis of Organisation for Economic Co-operation and Development (OECD) data actually found that the U.S. collects half as much in corporate tax revenue as Canada when measured as a percentage of GDP.

Rewriting the Legacy of George W. Bush

Getting to the core of many undecided voters’ concerns about his candidacy, one of the questioners asked Romney how his policies would differ from those of former President George W. Bush. Romney responded that he, unlike Bush, would balance the budget and that Obama had actually doubled the size of the annual Bush deficits.

What’s bizarre about this statement is that Romney is saying he will balance the budget, unlike Bush, while simultaneously doubling down on many of the same policies that drove the Bush deficits to begin with. For example, the Bush tax cuts added $2.5 trillion to the deficits between 2001-2010, yet Romney supports extending the entirety of the Bush tax cuts, which over the next ten year are estimated to cost $5.4 trillion (twice as much as in the first decade). Building on this, Romney is actually proposing roughly $5 trillion in more tax cuts over the next ten years, the costs of which he cannot offset without taxing the middle-class (which he pledges not to do).

Romney was also off base when he said that Obama doubled the federal budget deficit. For one, Obama came into office 3 months after the start of fiscal year 2009, and CBO had already projected a $1.2 trillion dollar deficit for that year. In addition, the Center on Budget and Policy Priorities points out that the economic downturn, the bailouts, the war costs, and Bush-era tax cuts, all of which began under the Bush Administration, account for most of the budget deficit.

Taking an Interest in the Preferential Tax Rate for Capital Gains

During the discussion over which loopholes and deductions Romney would close, Obama rightfully noted that Romney has already taken off the table any option that would close or reduce the biggest tax loophole for the wealthy, the preferential rate for capital gains. As CTJ noted in a recent report, ending the preferential rate would improve tax fairness, raise revenue, and simplify the tax code. Surprisingly, Romney did not offer any defense of the preferential capital gains rate during the debate, which could be explained by the fact that he did not want to bring further attention to the fact that he personally saved $1.2 million in taxes due to the lower rate.

Instead of defending the merits of a lower rate, Romney instead highlighted his plan to eliminate taxes on interest, dividends, and capital gains for taxpayers with AGI below $200,000.  While this sounds like a boon to lower and middle-income taxpayers, the reality is that the only 6 percent of all capital gains income and 17 percent of dividend income is earned by the bottom 80 percent, so it would apply to relatively few taxpayers.

The Iowa Policy Project’s Research Director Peter Fisher is quoted in a Des Moines Register piece where he recommends that Iowa increase it Earned Income Tax Credit (EITC) as one way to help low- and middle-income children. ITEP has long championed EITCs as a vital anti-poverty tax policy.  

With Halloween just around the corner, Renee Fry of Nebraska’s Open Sky Policy Institute shares the scary news that Nebraska ranks 27th among states for its regressive tax structure. Taxes are expected to be a contentious issue this year and “fiscal guru” Fry says the state’s “tax system is taking its toll in how much Nebraskans invest in schools, roads and communities. Outdated tax codes also complicate state leaders’ ability to plan strategically.”

Here’s a familiar problem, this time from Tennessee.  Big property tax breaks for farmers are reducing local tax bases by up to 20 percent. Worse, a state report says that the break is “being used by some people who clearly aren’t farmers.”  Among the so-called “farmers” benefiting from this giveaway are some of the state’s wealthiest residents, like country music stars Billy Ray Cyrus and Wynonna Judd, as well as the founder of Autozone.

With a Maryland version of the DREAM Act on the November ballot, columnist Dan Rodricks at the Baltimore Sun wants readers to be aware of  the taxes that are often paid by undocumented workers, including state income taxes, federal income taxes, Social Security taxes, sales taxes, and fees.

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

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

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

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

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

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

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

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

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

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

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

Romney Says “Of Course” His Tax Plan Adds Up

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

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

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

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

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

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

Romney Says He will Create 12 Million Jobs

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

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

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

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

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

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

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

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

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

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

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

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