Author: tarek

A new survey of 250 economists in the business community by the National Association for Business Economics released on Monday revealed their strong support for increasing fiscal stimulus in the short term and taking a balanced approach to deficit reduction (including revenue increases as well as spending cuts) over the long term. This agreement among business economists stands in direct contrast to many conservative lawmakers in Washington, who increasingly favor spending cuts in the short term and actually decreasing taxes over the long term.

Of the economists surveyed, 67 percent favored maintaining or even increasing the current level of fiscal stimulus in 2013. Moving in the opposite direction, Congress actually enacted $984 billion in spending cuts (known as sequestration) last year, which go into effect starting in 2013; a full three quarters of the economists polled outright oppose allowing those sequestration cuts to take effect.

Although a majority of the business economists did favor extending tax cuts in 2013 to help stimulate the economy (although there was no majority for making all the tax cuts permanent), the reason more of them favor preserving government spending is likely explained by the fact that government spending typically has a much greater positive impact on economic growth than tax cuts.

Turning to the long haul, a full 90 percent of those surveyed believe that Congress should take a balanced approach to deficit reduction, meaning a combination of tax increases and spending cuts. And while there is near universal consensus among these economists for tax increases, neither the Democratic nor Republican party platforms support increasing tax revenue as part of a balanced approach to deficit reduction. Both parties instead call for reducing revenue by trillions of dollars (compared to what our tax system would collect if the tax cuts were all allowed to simply expire).

While the business community is often portrayed as being hindered by budget deficits and higher taxes, this survey reveals that they actually favor higher budget deficits in the short term and higher taxes over the long term. It’s time Congress begins listening to the actual business community rather than the anti-tax activists who pretend to speak for them.

First there was the Congressional hearing last Thursday, then the release of Republican Presidential candidate Mitt Romney’s 2011 tax return on Friday. While one of them was big news and the other not so much, both events highlight the biggest subsidy high-income taxpayers get from the tax system – the preferential rate on capital gains and dividends. While we tax “ordinary” income such as salary and wages at rates up to 35 percent, capital gains and dividends are never taxed higher than 15 percent.

The upshot is that a taxpayer with investment income will pay less than half of the federal income tax that someone with the same amount of regular wage or salary income will pay. This is true at any income level – whether comparing two taxpayers that make $60,000 or two taxpayers that make $60 million. This fundamental unfairness in the tax code is the primary reason why Warren Buffett pays a lower tax rate than his secretary, why Mitt Romney pays a lower tax rate than many middle-income Americans and is the reason behind that feeling most Americans have that the tax code is rigged in favor of the wealthy.

A CTJ review of Romney’s 2011 federal income tax return found that he saved $1.2 million in federal income taxes in 2011 because of the preferential capital gains tax rate. Without that special break, he would have paid total federal income taxes of $3.1 million and his tax rate would have been almost 23 percent.

This benefit of this particular tax subsidy goes overwhelmingly to the richest Americans. A CTJ report released Thursday shows that 83 percent of capital gains and 60 percent of dividends are earned by the richest five percent of taxpayers. As Colorado venture capitalist Bill Stanfill testified in the Senate hearing, this tax break is “simply a windfall for wealthy investors.” He urged lawmakers to eliminate the special treatment.

Also at that rare, joint House Ways and Means and Senate Finance Committee hearing was a panel of experts from across the political continuum who all agreed that addressing the huge discrepancy between the ordinary income and capital gains tax rates will be key to any comprehensive tax reform. Len Burman, a professor at Syracuse and former director of the Tax Policy Center, noted, as did CTJ’s report, that the huge differential in tax rates creates enormous complexity in the tax code – which is exacerbated by more people pushing the limits of the code to structure their income as a capital gain, to which lawmakers respond with even more rules, and so on. (Two of the witnesses guessed that this ridiculousness accounts for about half the pages in the tax code!)  David Brockaway, chief of staff of the Joint Committee on Taxation during the tax reform battles of 1986, said the revenue gained from raising the capital gains rate then was essential to pay for the other changes, calling it “a gateway issue.” Even Lawrence Lindsey, former director of the National Economic Council and an architect of the Bush tax cuts, said the ordinary and capital gain tax rates shouldn’t be so far apart.

Mitt Romney’s plan to keep the low capital gains tax rate is the primary reason why his tax proposal will be a huge break for millionaires. Even if all of their other deductions and exclusions are eliminated, taxpayers making over $1 million would get an average federal income tax cut of at least $250,000 and as much as $400,000 under Romney’s plan (to the extent we can know, anyway). For his part, President Obama has proposed to keep the current low capital gains rates for taxpayers with less than $250,000 in income, but to let the rates for taxpayers with higher income revert to the pre-Bush levels of 20 percent – a rate still substantially below the ordinary income rate.

It is clear that the special low rate on capital gains must be completely eliminated to simplify the tax code, end economically-damaging tax shelters, and enable comprehensive tax reform. It would also make the tax system dramatically more fair by taxing income from wealth the same as income from work.

Mitt Romney’s 2011 Returns Reveal a Tax Code Stacked in Favor of the Very Rich Because of Loopholes and Special Rates Not Available to Ordinary Taxpayers

Washington, DC – Since Citizens for Tax Justice (CTJ) first calculated that GOP Presidential candidate Mitt Romney likely paid a 2010 federal income tax rate of 14 percent in October of 2011, CTJ’s analysts have been helping to explain the features of our tax code that allow high wealth individuals like Romney to pay such a low federal income tax rate. The explanation is that loopholes in the tax code benefit the most affluent. 

After reviewing Mitt Romney’s 2011 return (an estimate of which he released in January), and the 20-year summary of the candidate’s taxes issued by his lawyer, CTJ’s Senior Counsel for Federal Tax Policy, Rebecca Wilkins, issued the following statement:

“It’s an indictment of the federal tax code that a man of Mitt Romney’s wealth could pay a federal tax rate as low as 10 percent. While he chose to forgo deductions for charitable contributions in order to keep his “commitment to the public that his tax rate would be above 13 percent,” bringing his rate up to 14 percent for 2011, it is still outrageous that the code allows such a low rate.

“He also takes advantage of a special low rate on investment income. The preferential rate on capital gains and dividends saved Mitt Romney a whopping $1.2 million in taxes in 2011, cutting his tax bill almost in half.  He would have paid $3.1 million in taxes without that special treatment. And much of his low-rate income is really compensation from Bain Capital that should have been taxed like regular wages or salary, but is disguised as capital gains using the “carried interest” loophole.

“Romney also paid $675,000 under the Alternative Minimum Tax (AMT). If his own tax plan, which eliminates the AMT, had been in place in 2011, he would have saved himself an additional $675,000, or one third of his entire federal tax bill, and reduced his effective rate to 9 percent.

“Also notice that Mitt Romney’s tax return for 2011 is almost twice as long as it was in 2010. It is 379 pages long, and 250 pages are foreign entity disclosure forms. Put simply, that’s 250 pages about his offshore investments.

“Further, the summary provided by his lawyer is playing games by averaging Romney’s 20-year tax rate. Including the years 1992-97 skewed his rate upwards because during those years, the capital gains rate was 28 percent instead of the 15 percent it is now. If they’d averaged only the last 15 years, his rate would have been much lower.

“And one final point is that Romney continued to work and make lots of money even when his capital gains tax rate was almost double the current rate, the rate he wants to retain.  Yet he says that the low capital gains rate is essential to incentivizing rich people to do what they do.  How does he explain that?”

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Citizens for Tax Justice (CTJ), founded in 1979, is a 501 (c)(4) public interest research and advocacy organization focusing on federal, state and local tax policies and their impact upon our nation (www.ctj.org).

When the Supreme Court ruled in June that the new penalty for not obtaining health care was actually a tax (and therefore permissible under Congress’s taxing power) we pointed out that hardly anyone would pay it because low-income families would be eligible for Medicaid, and because subsidies would be available to help make coverage affordable for middle-income families (making up to $90,000 for a family of four).

We also pointed to a study from the Urban Institute and Robert Wood Johnson Foundation concluding that “About 7.3 million people—two percent of the total population (three percent of the population under age 65)—are not offered any financial assistance under the ACA and will be subject to penalties if they do not obtain coverage.”

This week, the Congressional Budget Office (CBO) released estimates that a smaller number than that — 6 million people — would be subject to the penalty for not obtaining health insurance. Naturally, some anti-tax politicians like Governor Bobby Jindal of Louisiana have pounced on this as evidence of a crushing tax increase during the Obama administration.

CBO explains that their previous estimate, that only 4 million people would pay the penalty, had to be revised for several reasons, like continuing gloomy unemployment figures and technical changes. But CBO also says that:

A small share—about 15 percent—of the increase in the number of uninsured people expected to pay the penalty results from the recent Supreme Court decision [which also allows states to opt of the Medicaid expansion that was part of health care reform]. As a result of that decision, CBO and JCT now anticipate that some states will not expand their Medicaid programs at all or will not expand coverage to the full extent authorized by the ACA. Such state decisions are projected to increase the number of uninsured, a small percentage of whom will be subject to the penalty tax.

And who are these governors that will opt to not have their states participate in the Medicaid expansion and thus increase the number of people subject to the penalty for not having health insurance? Well, one of them is Governor Jindal of Louisiana.

Photos of Bobby Jindal via Gage Skidmore Creative Commons Attribution License 2.0

The Washington Post explains why so-called “budget surpluses” in Maryland and Virginia are nothing to get excited about: “In both cases, the surpluses are modest, amounting to no more than a percentage point or two of state spending. And in both cases, the states’ present and pending obligations have sponged up most of the so-called extra cash. In a budgetary environment that remains severely austere, no one should equate a surplus with a windfall.”

Missouri is not alone in planning to give corporate income tax credits a much closer look in 2013. The head of a special committee tasked with reviewing Oklahoma’s tax credits said that he will push for a two-year moratorium on over two dozen corporate tax credits.  He will also propose eliminating the “transferability” of tax credits, which allows companies that don’t owe any income tax to benefit from tax credits nonetheless, by selling them to other individuals or businesses.

Iowa State Senator and chairman of the senate’s Ways and Means Committee recently wrote in the DesMoines-Register that Governor Terry Branstad should “strengthen the best anti-poverty program this nation has ever had: the earned income tax credit. This state tax cut will put more money in the pockets of working Iowa families with incomes less than $45,000. That’s money that will be spent in communities across the state.”  

Progressive tax advocates will be happy to hear that Minnesota Governor Mark Dayton has recommitted himself to advocating for legislation in the next legislative session that raises taxes on the wealthiest Minnesotans.

Today the Census Bureau released new data showing that in 17 states, the number of Americans living in poverty increased in 2011.  Lawmakers and advocates interested in helping to lift families out of poverty can and should look to their states’ tax structures, which are often part of the problem but can also be part of the solution and play a role in helping to eliminate poverty.

When all the taxes imposed by state and local governments are taken into account, almost every state imposes a higher effective tax rate on low-income families than on upper- income taxpayers.  A new Institute on Taxation and Economic Policy report, “State Tax Codes as Poverty Fighting Tools,” recommends four key anti-poverty tax policies: the Earned Income Tax Credit, property tax circuit breakers, targeted low-income tax credits, and child-related tax credits.  The report identifies the states where each of these policies is in place, and finds that seven states (Alabama, Alaska, Florida, Mississippi, Nevada, Tennessee and Texas) don’t offer any of these four recommended anti-poverty tax policies.

The report also includes a survey of state-by-state anti-poverty tax policy decisions made this year and offers specific recommendations tailored to policymakers in each state as they work to combat poverty. Read ”State Tax Codes as Poverty Fighting Tools” here.

 A new study by the non-partisan Congressional Research Service (CRS) using data from the past 65 years found that there is no correlation (PDF) between top tax rates and economic growth. But it doesn’t stop there. The study also found that there is a correlation between the reduction in top tax rates and the increasing concentration of wealth toward the top of the income distribution. The report, Taxes and the Economy: An Economic Analysis of the Top Tax Rates Since 1945, is also clear that this is not only about tax rates on regular income, and points out (PDF) that “changes in capital gains and dividends were the largest contributor to the increase in income inequality since the mid-1990’s.”

This has to be just about the last nail in the tax-cutting, supply-side coffin. CRS is a bunch of smart people at the Library of Congress whose mission is “providing comprehensive and reliable legislative research and analysis that are timely, objective, authoritative, and confidential, thereby contributing to an informed national legislature.”  And while the study has earned volumes of media coverage, it’s worth noting that even the Wall Street Journal report didn’t quibble with the study’s finding that “tax cuts for the rich don’t seem to be associated with economic growth…. [but] can be linked to a different outcome: income inequality.”

The CRS findings fall in line with the increasing consensus showing that supply-side tax cuts touted by people like Arthur Laffer have been an enormous failure over the past several decades. As Citizens for Tax Justice’s Bob McIntyre has pointed out, even George W. Bush’s own Treasury Department conceded in 2006 that the Bush tax cuts (which were mostly targeted to the wealthiest Americans) would not have a significant effect on economic growth over the long term. And every few weeks in his New York Times blog post, Ronald Reagan’s former advisor, Bruce Bartlett, explains that tax cuts really can not and do not make an economy healthy.

For numbers crunchers, here are some details about the study. To explore the connection between top tax rates and economic growth, the CRS performed two regression analyses comparing the top income and capital gains tax rates to the private savings rate, productivity growth rate, and real per capita GDP from 1945 to 2010. The results of the analysis reveal that there is simply no statistically significant relationship between tax rates and savings, productivity, or real per capita GDP.

To examine the effect of top tax rates on income inequality, the CRS used a regression analysis comparing the top income and capital gains tax rates to the share of income earned by the top 0.1% and 0.01%. The analysis found that there is a statistically significant negative correlation between the share of income received by the top 0.1% and 0.01% of income earners and the level of the marginal tax rates. In other words, lowering top marginal tax rates has the effect of further increasing the disproportionate amount of income earned by the wealthiest of the wealthy.

Citizens for Tax Justice and other economic think tanks have been demonstrating the flaws in supply-side tax cuts for decades, and the public is increasingly catching on about taxes in particular and economic inequality more generally. With these two issues high on the election year agenda, maybe 2012 will be the year supply-siders, voodoo economists, wishful thinkers and other magical thinkers lose their credibility, once and for all.

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UPDATE, November 1, 2012: According to a New York Times story, “[t]he Congressional Research Service has withdrawn an economic report that found no correlation between top tax rates and economic growth, a central tenet of conservative economy theory, after Senate Republicans raised concerns about the paper’s findings and wording.” The study referred to is the one CTJ blogged here when it was first published in September 2012.

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UPDATE, December 13, 2013: The report has now been reissued with little changes and the same basic conclusions are contained in the original report.

For Immediate Release: September 20, 2012

Rare Joint House-Senate Hearing on Tax Reform Will Fail without Commitment to Repeal Capital Gains Tax Break

 New Report Shows All Current Proposals Give Richest Taxpayers a Break More than a Thousand Times Larger Than They Give Middle Income Taxpayers

Washington, DC – In advance of a rare joint House-Senate hearing on tax reform and capital gains, a new report finds that the special low tax rates for capital gains and stock dividends will continue to provide huge benefits mainly to the richest one percent of Americans, no matter how Congress resolves the standoff over the expiring Bush-era tax cuts.

The report, from Citizens for Tax Justice, finds that the richest one percent of Americans would enjoy an average break of $41,010 on capital gains and dividends next year under the bill passed last August by the Republican-controlled House to extend all the Bush tax cuts. They would enjoy a slightly lower average tax break of $40,990 under the bill passed by Senate Democrats last July to extend most, but not all, of the Bush tax cuts. Americans in the middle fifth of the income distribution would enjoy an average capital gains and dividend tax break of just $30 next year under either approach. The report is available at this link.

Capital gains, which are the profits obtained from selling assets for more than their purchase price, were already taxed at lower rates than other income when President George W. Bush took office. The Bush tax cuts lowered the capital gains rate further and expanded the break to apply to stock dividends.

“The bad news is that none of the approaches to extending the Bush tax cuts would change the fact that these lower tax rates for investment income are a huge break benefiting the very wealthiest Americans,” said Steve Wamhoff, Legislative Director at Citizens for Tax Justice (CTJ). “The good news is that both parties are talking about extending those tax cuts for only one year and then devising a comprehensive tax reform that makes dramatic changes. The question now is how Congress will define ‘reform.’”

The CTJ report, Ending the Capital Gains Tax Preference Would Improve Fairness, Raise Revenue and Simplify the Tax Code, released today makes five points.

1) The capital gains tax preference mainly benefits the richest one percent of Americans.
2) It reduces revenue, despite claims to the contrary.
3) It gives rise to tax shelters and makes the tax code overly complicated.
4) These problems will be mitigated, but certainly not eliminated, by the reform of the Hospital Insurance tax coming into effect in 2013.
5) The way to fully resolve the problems described here is to eliminate the special, low personal income tax rates for capital gains so that they are taxed just like any other income.

The hearing, which is scheduled for today at 10 a.m. EST, will be held jointly by the House Ways and Means Committee, which is controlled by Republicans, and the Senate Finance Committee, which is controlled by Democrats. The hearing is part of a series of unusual joint hearings to address topics related to tax reform.

Many members of the two committees have shown a willingness to retain, and even expand, some tax preference for investment income. The CTJ report recommends eliminating it altogether and points out that repealing this break completely is not a radical proposal – the Tax Reform Act of 1986 eliminated the capital gains tax break so that all income was taxed at the same rates. Preferential rates for capital gains were subsequently reintroduced into the tax code and the break was gradually increased by subsequent Presidents and Congresses. It was expanded dramatically under President George W. Bush.

“Any overhaul of the tax code that continues to tax the income of wealthy investors like Warren Buffett at lower rates than other income is not worthy of the term ‘reform,’” said Wamhoff.

Citizens for Tax Justice (CTJ), founded in 1979, is a 501 (c)(4) public interest research and advocacy organization focusing on federal, state and local tax policies and their impact upon our nation (www.ctj.org).

Republican Presidential Candidate Mitt Romney was caught on tape explaining to a group of prospective donors that 47 percent of Americans “pay no income tax” and generally fail to contribute their fair share. In identifying these presumed slackers who would never vote for him, Romney betrayed his own myopia about how the tax system works.

Here’s what Romney doesn’t talk about when he talks about taxes.

1. All Americans Pay Taxes

If you look at the tax system as a whole, the share of taxes paid by Americans in each income group is similar to their share of total income.

While Romney is about right that 47 percent of Americans do not specifically pay the federal income tax (according to Tax Policy Center Data), this statement is extremely misleading because it disappears the more than half of this same group that pays payroll taxes. And, every American pays state and local taxes – income, sales, property, etc.

In fact, the bottom 20 percent of taxpayers pays substantially more in state and local taxes as a percentage of their income than any other income group.

Are there people out there who don’t pay any taxes? When we went looking, we couldn’t find any, so we had to make one up.

2. Our Federal Tax System Rewards Work and Combats Poverty, and that’s Good

While every American pays some taxes, it is the case that about 18 percent of Americans pay neither payroll nor federal income taxes. Who are these alleged freeloaders? About 60 percent of them are elderly, meaning that they’re unable to work and are largely living on limited retirement income.

The rest of the households that don’t pay payroll or federal income taxes are low income households bringing in less than $20,000 each year, and who are benefitting from highly effective tax credits like the earned income tax credit (EITC) and child tax credit (CTC).  These credits incentivize work while providing much needed support to low and middle income family budgets, and in 2010 they were responsible for lifting 9.2 million people, including 4.9 million children, above the poverty line.

The effectiveness of these credits is so widely recognized across the political spectrum that every single president since Gerald Ford, from Reagan to Obama, has enacted expansions of the EITC or CTC.  Ronald Reagan once called the EITC the “the best anti-poverty, the best pro-family, the best job creation measure to come out of Congress,” and George W. Bush expanded it as part of his 2001 tax cuts.

3. Also Paying No Federal Income Tax Are High Wealth Individuals and Highly Profitable Corporations

Low income families who pay nothing in federal income taxes are using provisions that were written into the tax code by Congress, just like wealthy corporations and individuals (including Romney himself) do to bring down their tax bills.

On the corporate side, Citizens for Tax Justice found that from 2008-2011, 30 Fortune 500 companies, including the likes of General Electric and Verizon, made $205 billion in profits, yet their overall tax bill was actually negative. The corporate tax system has become so full of loopholes and tax breaks (yes, written by Congress) that what even the most profitable companies actually pay on average is roughly half the statutory corporate tax rate.

As far as the wealthiest Americans, a recent IRS study found that in 2009 a shocking 35,000 Americans making over $200,000 paid not a dime in federal income tax. Similarly, many of the country’s wealthiest Americans, like billionaire investor Warren Buffet, pay lower tax rates than middle class Americans, largely due to the tax break on capital gains income and a plethora of other tax loopholes.

Slow but steady progress toward enforcing state sales taxes on online purchases continues.  Amazon.com has agreed to begin collecting sales taxes in Pennsylvania, and the state’s Revenue Department plans to start auditing and penalizing other online retailers with a physical presence in the state that fail to collect the tax.

Promises from Iowa lawmakers to flatten and lower income tax rates and roll back business property taxes are worrisome. But when House Republicans and the governor recently sketched out their ideas for pursuing this agenda, they actually (and deliberately) “offered no specifics on any of their tax relief and reform commitments.”  The state requires a balanced budget, so these tax cuts will need to be paid for and the choices available are limited: cut services or increase other taxes

While state lawmakers love to offer tax breaks in the name of job creation, Missouri might be learning to resist the urge. Governor Jay Nixon has asked his Tax Credit Review Commission, which he created in 2010 to provide an independent review of the state’s many tax credits, to update its 2010 report, which was harshly critical of many Missouri tax credits. While the original report’s advice was never followed because the state legislature was unable to agree on paring back these tax breaks, House lawmakers are now signaling their interest in critically reviewing the tax breaks the state currently provides in the name of job creation – welcome news since there is remarkably little evidence (PDF) that state tax breaks are an effective job-creation strategy.

Last weekend, Louisiana shoppers took advantage of the Second Amendment sales tax holiday, which allows the purchase of guns and ammunition tax free.  Read why sales tax holidays are silly (PDF) and a political racket.