Author: tarek

On Tuesday, House Republicans released a proposal, H.R. 6169, that would relax some of Congress’s normal procedural rules in order to enact an overhaul of the tax code — so long as the tax overhaul meets the objectives laid out in the House budget plan authored by House Budget Committee Chairman Paul Ryan.

H.R. 6169 was introduced on Tuesday by House Ways and Means Committee Chairman Dave Camp and House Rules Committee Chairman David Dreier and lays out several components that the tax overhaul legislation must have in order to be passed through the easier legislative procedure. All of these components are identical to those laid out in the Ryan Plan

The required components of the tax overhaul, which are also those laid out in the Ryan Plan, include:

• replacing the personal income tax rates with just two rates, 10 percent and 25 percent (or less)
• repeal of the Alternative Minimum Tax (AMT)
• reducing the statutory corporate income tax rate to 25 percent (or less)
• adoption of a “territorial” tax system (exempting offshore profits of corporations from U.S. taxes)
• collecting revenue equal to between 18 and 19 percent of GDP

The “findings” section of the bill states that revenue will “rise to 21.2 percent of GDP under current law,” meaning its proposed revenue target of between 18 and 19 percent of GDP is an explicit cut in revenue.

A Huge Tax Break for Millionaires No Matter How It’s Structured

CTJ issued a report in March concluding that Ryan’s proposed changes to the personal income tax would provide taxpayers with income exceeding $1 million in 2014 an income tax cut of at least $187,000 on average

Like Ryan’s plan, the bill introduced by Camp and Dreier does not say which tax loopholes and tax subsidies should be closed to ensure that the tax system still collects revenue equaling between 18 and 19 percent of GDP even after the plan’s steep rate reductions and the repeal of the AMT are in effect.

We estimated that even if those with incomes exceeding $1 million were forced to give up all the tax expenditures Ryan could possibly want to take away from them — all their itemized deductions, tax credits, the exclusion for employer-provided health insurance and the deduction for health insurance for the self-employed — even then the net result for these taxpayers would be an average income tax cut of $187,000 in 2014. That’s because the income tax rate reductions Ryan proposed are so deep that they would far outweigh the loss of all these tax loopholes and tax subsidies.

Increasing Incentives for Corporate Tax Dodging

The CTJ report on the Ryan plan also explains that reducing the statutory corporate income tax to 25 percent would likely lose revenue when we should be raising revenue from corporate tax reform. (CTJ’s major study last year of most of the profitable Fortune 500 corporations found that their effective tax rate, the percentage of profits they actually pay in taxes, was just 18.5 percent, far less than the statutory rate of 35 percent that Ryan and Camp complain about.)

CTJ’s report on the Ryan Plan also explains that a territorial tax system — exempting offshore profits of corporations from U.S. taxes — can only increase the incentives that U.S. corporations already have to disguise their U.S. profits as “foreign” profits through shady transactions that shift their earnings (on paper) into offshore tax havens.

Photo of Rep. Dave Camp via Michael Jolley Creative Commons Attribution License 2.0

Today, a majority of U.S. Senators voted for a proposal that would extend for one year the Bush-era income tax cuts, except for those tax cuts going solely to the richest 2 percent of taxpayers, and would also extend some 2009 provisions that expanded parts of these tax cuts benefiting low-income working families. A minority of Senators voted for a proposal that would extend all the Bush-era income tax cuts, including those solely benefiting the richest 2 percent, but that would allow the 2009 provisions for low-income working families to expire.

The following is a statement from Robert McIntyre, director of Citizens for Tax Justice:

“Both of the tax bills taken up today by the U.S. Senate would extend far too many tax breaks, including tax breaks for those with the highest incomes, and would make future deficit reduction even more difficult. But the bill modeled largely on the President’s tax proposal is certainly the fairer and more responsible of the two.

“Our estimates show that under the Senate Democrats’ bill, which is modeled on President Obama’s proposal to extend most of the expiring tax cuts, people with incomes up to half a million dollars would, on average, continue to enjoy most of the Bush-era income tax cuts they enjoy today. It is ridiculous that a large number of U.S. Senators believe that this bill would not provide sufficient tax breaks to high-income taxpayers, and therefore voted for the Republican bill to extend all the Bush-era income tax cuts.

“The Republican bill that would extend all the Bush-era income tax cuts also would allow the expiration of the 2009 provisions that expanded the Earned Income Tax Credit and the Child Tax Credit that benefit low- and moderate-income working families. The expiration of these 2009 provisions would mean that 13 million families with 26 million children would lose tax breaks, according to our estimates. Virtually all of these families have incomes under $50,000, and in most cases they earn far less.

“A proposal that provides larger tax breaks for the richest 2 percent of taxpayers while allowing the expiration of tax breaks for 26 million children living in low- and moderate income families is the epitome of upside-down priorities. It is unfortunate that the majority party in the House has already lined up behind this coddle-the-rich-at-the-expense-of-tens-of-millions-of-American-children approach.”

UPDATED July 26, 2012:
On Wednesday the Senate approved the Democrats’ tax bill, modeled on President Obama’s plan to extend most of the expiring tax cuts, and rejected the Republican alternative. (See CTJ’s statement on the votes.)

The Republican proposal (S.3413) would extend all the Bush-era tax cuts but would allow more recent expansions of tax breaks for low-income families to expire. The Senate Democrats’ bill (S.3412) would implement most of President Obama’s proposal to extend the Bush tax cuts, except for certain provisions benefiting the rich, and to extend the more recent expansions of tax breaks for low-income families.

The Senate Democrats’ proposal would extend most of the Bush income tax cuts, but would allow the expiration of most of those income tax cuts going solely to the richest two percent of taxpayers — married couples making over $250,000 and singles making over $200,000. The Senate Democrats’ proposal would also extend some 2009 provisions that expanded certain parts of the Bush income tax cuts (related to the EITC and Child Tax Credit) that benefit low-income working families, while the Senate Republican proposal would allow these to expire.

A report published by CTJ last month compares how taxpayers in different income groups would be affected by the Congressional Republican approach to the tax cuts and by President Obama’s approach, which the Senate Democrats are generally following. (You can find state-specific versions of this report here.)

Senate Democrats’ Proposal Differs from Obama’s in only One Way that Matters

The Senate Democrats’ bill (S.3412) differs from President Obama’s proposal (which we examined in the reports discussed above) in a few ways, but most of these differences will not matter by the time Congress is finished determining how much we should pay in taxes for 2013.

For example, there are two important pieces of President Obama’s approach that Senate Democrats have left out of their proposal (extending relief from the Alternative Minimum Tax through 2013 and extending some, but not all, of the Bush estate tax cut into 2013), but it’s generally assumed that Congressional Democrats will try to enact these proposals later this year or, if necessary, early next year.

There is one real difference between the President’s approach and the Senate Democrats’ proposal in that the latter would extend part of the income tax cuts for stock dividends for those with incomes above $250,000/$200,000. This CTJ fact sheet explains the difference and demonstrates that it benefits the very rich (those making over $1 million) in a significant way.

Dispelling Myths and Calculating Your Taxes under Different Proposals

CTJ has also provided reports to address some of the most common misconceptions about these tax cuts.

For example, it is often asserted that taxpayers with any amount of income in excess of $250,000 or $200,000 will lose all of their tax cuts under the Democrats’ approach. This CTJ report demonstrates that married couples with incomes between $250,000 and $300,000 would lose just two percent of their income tax cuts under President Obama’s proposal and would lose just 1 percent of their income tax cuts under the Senate Democrats’ proposal.

To take another example, Republicans like to say that their proposal would result in lower taxes and that Democratic proposals would result in higher taxes. This CTJ report finds that 13 million working families would actually get more tax breaks under the Democrats’ proposal because it would extend the 2009 expansions of the EITC and Child Tax Credit, which the Senate Republican proposal would allow to expire.

Finally, for those who want to know how they would personally be affected by the competing approaches to the income tax cuts, CTJ has created an online calculator that will tell you what you’d likely pay in 2013 in federal income taxes under the President’s proposal and under the Congressional Republican proposal.

Tax Provisions Not Included in CTJ Figures

All of this work from CTJ has focused on proposals that extend all or part of the Bush tax cuts, and proposals that expand parts of the Bush tax cuts (like the 2009 provisions related to the EITC and Child Tax Credit). We have not included, in any of our figures, additional provisions in the Democratic and Republican proposals to provide tax breaks for small businesses, or the Senate Democrats’ proposal to extend the American Opportunity Tax Credit, which was first enacted in 2009 and helps families pay for post secondary education.

Photo of Senate Majority Leader Harry Reid via Talk Radio News Services Creative Commons Attribution License 2.0

A new report about the long-term fiscal problems facing the states is making news, and for good reason. While much of the report focuses on spending-side issues that we’ll leave for others to address, one of the main findings of the State Budget Crisis Task Force is that state tax bases are narrow, shrinking, and increasingly inadequate.  That finding is largely spot-on, even if it’s not terribly surprising.  According to the report, the causes of this growing inadequacy are, in no particular order:

• Sales tax bases are shrinking as consumers spend more on personal services that, unlike tangible products, are not subject to sales taxes.

• States are often unable to enforce their sales taxes on online shopping—which is on track to account for ten percent of all purchases in the next few years.

• State corporate income taxes are declining due to a multitude of tax breaks given to business, and sophisticated tax avoidance strategies used by corporations.

• State gas taxes are being squeezed by rising construction costs and growing vehicle fuel-efficiency, due largely to a structure that has left rates stagnant for decades.

The Institute on Taxation and Economic Policy (ITEP) has an array of policy briefs and reports that elaborate on and confirm these findings, and that offer suggestions for reforming their tax systems.

One area where the Task Force seems to have strayed from its mission, however, was in devoting excessive attention to concerns over tax volatility.  The Task Force’s suggestion for dealing with volatile revenues is a good one (use rainy day funds (PDF) more responsibly).  But it misses the mark by failing to point out that more volatile taxes are often the best (PDF) at addressing the Task Force’s main concern—inadequate long-term revenue growth.

Volatility is an inevitable part of state tax systems that can be managed.  But anemic long-term revenue growth is a much more serious problem that can only be addressed with fundamental tax reforms designed to allow state tax systems to operate effectively in the 21st century economy.

• Louisiana is preparing to take a much closer look at the $4 billion it spends on special tax breaks each year, as the brand new Revenue Study Commission holds its first meeting this week.  The chairman of the state’s House tax-writing committee admits that “we don’t know” whether Louisiana’s tax breaks are working, even though “some of these things have been on the books for more than 80 years.”  Gov. Jindal may be the biggest obstacle to progress on this issue, as he’s said that eliminating an ineffective tax break is technically a “tax hike” that he would veto.
• An op-ed in the Orlando Sentinel highlights the problems with Florida’s tax system, and how to fix them: “Our tax structure is inadequate to our needs, poorly matched with today’s economy and unfair to average Floridians and small business owners.”  Writing for the Florida Center for Fiscal and Economic Policy, the author urges closing corporate tax loopholes and other special interest tax breaks to begin addressing these problems.
• As we’ve pointed out before, most of Indiana gubernatorial candidate John Gregg’s tax ideas so far have been short-sighted and unaffordable.  But Gregg’s newest idea to create a child care tax credit is a good one, as has been recommended (PDF) by the Institute on Taxation and Economic Policy (ITEP).
• The Anniston Star Editorial Board has a numbers-heavy piece explaining the problems with the state’s tax system.  In a nutshell: “Alabama may be a low-tax state for people and businesses at the upper end of the income scale, but at the lower end, Alabama’s tax system adds to people’s misery.”  ITEP has found that Alabama has one of the ten most regressive state and local tax systems in the country.

In a little over a week, Georgia voters will decide whether to raise local sales taxes to better fund transportation.  The state’s business community supports the effort, but Jay Bookman at the Atlanta Journal-Constitution reminds readers businesses are one reason the state’s transportation spending is 49th in the nation. “In an effort to keep their own tax burdens as low as possible, Georgia business leaders have a long history of preaching that taxes are always destructive, government is always incompetent and untrustworthy and there is no problem that can’t be solved by cutting taxes even lower.”

Ohio Gov. John Kasich isn’t backing down from his plan to cut the state’s income tax, and pay for it with higher taxes on natural gas and oil.  All signs are that he’ll continue to push for that plan after the November election, but House Democratic Leader Armond Budish wants to go a different route, saying that: “Gov. Kasich’s proposal to modestly increase the severance tax on oil and gas companies is a step in the right direction … But we should be protecting local property taxpayers and prioritizing our communities, not passing more tax cuts that disproportionately benefit wealthy Ohioans.”

The Wall Street Journal writes about the trend toward more Republican governors embracing the enforcement of sales taxes on online purchases.  The trend has been so pronounced that Sen. Lamar Alexander (R-TN) says the federal government will enact legislation granting states sales tax enforcement powers “if not this year, then definitely by next year.”

Arizona voters may have a chance to vote on extending the temporary sales tax increase they approved in May 2010.  The Arizona Secretary of State initially blocked the measure from appearing on the ballot for technical reasons, but a Superior Court judge rejected that move, saying that 290,000 voter signatures should not be thrown out because of what amounts to “a photocopy error.”  It remains to be seen whether that decision will be appealed to the state Supreme Court.

At a hearing before the House Ways and Mean Committee today, witnesses from Corning, Inc. and 3M called for a “territorial” tax system, which would exempt offshore corporate profits from U.S. taxes, and which is part of Mitt Romney’s tax plan. Both companies said that their ability to compete internationally is harmed by the current system, in which U.S. corporations pay U.S. taxes on foreign profits when they bring them back to the U.S. (U.S. taxes minus a credit for whatever they already paid in foreign taxes).

As we explain in another post, our 2011 corporate tax study found that both of these companies actually pay higher effective tax rates in the other countries where they do business than they pay in the U.S., raising the question of how our tax system could be making them less able to compete.

Our 2011 study examined most of the Fortune 500 corporations that had been profitable for three years straight and found that two thirds of those corporations with significant foreign profits paid higher taxes to the foreign governments than they paid to the U.S. on their domestic profits.

Despite the U.S. having a relatively high statutory corporate tax rate, the effective U.S. corporate tax rate (the percentage of profits that U.S. corporations actually pay in income taxes) is clearly lower than that of most other countries (not counting tax havens, where companies don’t do any real business).

A refreshing dose of honesty was provided by the witness from Ford Motor Company, who said Ford’s offshore operations are, in fact, in “high-tax” countries and that Ford has no position on whether or not we should adopt a territorial system.

As we explain in a fact sheet and in a more detailed report, adopting a territorial system would mainly increase the incentives to shift operations (and jobs) to a handful of countries that really do have low corporate tax rates, or to simply disguise their U.S. profits as “foreign” profits generated in countries with low (or no) corporate taxes.

As we also explain in our report, the expansion of U.S. corporations’ operations in foreign countries may not be in the interest of U.S. workers.

In some situations those offshore operations may be substitutes for U.S. operations, meaning U.S. jobs are shipped offshore. In other situations those offshore operations may compliment U.S. operations, meaning U.S. jobs are created, particularly in corporate headquarters and research facilities, to support the offshore operations. Data from recent years shows that the former effect is more pronounced than the latter.

But either way, America does not need a tax system that favors offshore operations over U.S. operations — which is exactly what a territorial system would do. 

We’re not alone in this view. Last year, several small business associations, labor unions, and good government groups joined a letter opposing a territorial system. And today, the New York Times editorialized that the “corporate tax system needs reform, to raise more revenue, more fairly. The territorial tax system does not meet those criteria.”

A new study by Ernst and Young is grabbing headlines by purporting to show that President Obama’s plan to end most of the Bush tax cuts for the richest 2% of Americans would cause job losses over the long term. This study is highly suspect however because it makes methodological assumptions that are out of line with other independent studies, which actually show that  the expiration of the Bush tax cuts would lead to increased economic growth over the long term.

As the White House explains, the study assumes an entirely unrealistic drop in the labor supply by medium and high income earners due to higher tax rates. Their expected labor supply response is nearly 10 times higher than the non-partisan Congressional Budget Office (CBO) assumes when it makes similar estimates on labor supply effects. 

In addition, the Ernst and Young study makes the bizarre assumption that all of the additional tax revenue will be used for additional spending, rather than for deficit reduction. While it does not explain any reason for this assumption, the effect of it is to eliminate the possibility that the additional revenue will increase private investment by reducing the deficit’s “crowding out” effect.

When the non-partisan CBO performed a study in January 2012 on the economic effects of allowing the Bush tax cuts to expire using its much more robust assumptions, it found that the extension of all of the Bush tax cuts and other expiring measures would reduce Gross Domestic Product (GDP) by as much as 2.1 percent in 2022 and would reduce Gross National Product (GNP) by as much as 3.7 percent in 2022.

Building on this, Citizens for Tax Justice’s Bob McIntyre notes that even President George W. Bush’s own Treasury Department, which was “managed by Bush appointees who profess a deep affection for Bush’s tax-cutting policies,” found that over the long term extending the Bush tax cuts would have “essentially no beneficial effect on the U.S. economy at all.”

Ernst and Young’s reliance on a radical methodology, putting it out-of-line with even the Bush Administration’s Treasury Department, is not be much of a surprise considering that the study was paid for by conservative anti-tax groups like the US Chamber of Commerce and the National Federation of Independent Business. Both these groups have proven in the past that they are willing to distort the facts in order to protect the wallets of the country’s wealthiest corporations and CEOs.

Photo of US Chamber Logo via Truth Out Creative Commons Attribution License 2.0

Earlier today, the U.S. House of Representatives’ Ways and Means Committee held a hearing on “tax reform and the U.S. manufacturing sector.”  With no apparent irony, the Committee invited Susan Ford, a senior official from champion corporate tax-avoider Corning, Inc., to testify on how Congress ought to make the U.S. tax code more friendly for manufacturing.

Ford raised eyebrows with her claim that in 2011, Corning paid a U.S. tax rate of 36 percent and a foreign tax rate of 17 percent.

It’s unclear how Ms. Ford comes up with a 36 percent rate, but clearly one thing she’s doing is counting Corning’s “deferred” U.S. taxes (taxes not yet paid) as well as “current” taxes (U.S. taxes actually paid in 2011). Of course, those “deferred” taxes may eventually be paid. If and when they are paid, they will be included in Corning’s “current” taxes in the year(s) they are paid.

But current taxes are what Corning actually pays each year, and Corning has amassed an impressive record of paying nothing, or less than nothing, in current U.S. taxes. CTJ and ITEP’s November 2011 corporate tax avoidance report found that between 2008 and 2010, Corning didn’t pay a dime in federal corporate income taxes, actually receiving a $4 million refund to add to its $1.9 billion in U.S. profits during this period. And a more recent CTJ report found that in 2011, Corning earned almost $1 billion in U.S. pretax income, and once again didn’t pay a dime in federal income tax. These data paint a dramatically different picture from the “36 percent” claim made by Corning before Congress today.

Ford’s testimony also includes a common but false claim about how U.S. taxes compare to foreign taxes:

“American manufacturers are at a distinct disadvantage to competitors headquartered in other countries. Specifically, foreign manufacturers uniformly face a lower corporate tax rate than U.S. manufacturers…”

In fact, over the 2008-2010 period, Corning paid a higher effective corporate income tax rate to foreign governments than it paid to the US government. (Which wasn’t hard to do, since it paid nothing to the U.S. government.) CTJ’s November 2011 report shows that over the 2008-2010 period, Corning paid  -0.2 percent (negative 0.2 percent) of its US profits in US corporate income taxes, but paid 8.6 percent (positive 8.6 percent) of its foreign profits in foreign corporate income taxes.

During the Congressional hearing, 3M executive Henry W. Gjersdal made a similar, and equally misleading, claim, in his testimony before the Committee, arguing that “[i]n an increasingly global marketplace, 3M’s high effective tax rate is a competitive disadvantage.”

But if 3M has a high worldwide effective tax rate, it’s not because the U.S. corporate income tax is high. In fact, like Corning, 3M paid a higher effective corporate income tax rate to foreign governments than it paid to the U.S. government between 2008 and 2010. Specifically, it paid an effective 23.8 percent rate on its US profits in US corporate income taxes and 27.1 percent on its foreign profits in foreign corporate income taxes, according to CTJ’s report.

Let’s remember that Corning also spent $2.8 million on lobbying during the 2008-10 period they spent enjoying a tax-free ride from the federal government. There are companies across the country paying their fair share in taxes and still making enough to grow their business and please their shareholders. Those are the kinds of companies Congress should be hearing from.

A new poll from the Pew Research Center reports that Americans believe eliminating the Bush tax cuts for the rich would be both beneficial to the economy and make the tax system more fair. By a two-to-one margin, the public says raising taxes on income over $250,000 would help the economy (44%) rather than hurt it (22%), with (a particularly wise) 24% saying it would make no difference. By a similar 44%-to-21% margin, Americans say this tax increase on the rich would make the tax system more fair rather than less fair (25% say no difference would result).

This new finding from a polling organization with an impeccable record contradicts a recent McClatchy-Marist poll which concludes a majority of Americans favor extending all the Bush tax cuts. As an expert pollster with Americans for Tax Fairness (ATF) pointed out, the McClatchy question’s jumbled wording likely left respondents confused as to which groups would be affected by a tax increase. In contrast, the Pew Research Center poll simply asked (PDF): “Do you think raising taxes on income over $250,000 would” help or hurt the economy and make the tax system more or less fair? The Pew Research finding is also in line with other recent surveys, as ATF reminds us, from National Journal and NBC/Wall Street Journal that show most Americans oppose extending the Bush tax cuts for the rich.

As Citizens for Tax Justice has explained, raising taxes on income above $250,000 would result in just 1.9% of all Americans losing some portion of the Bush income tax cuts, and for most, the “loss” would be negligible. For example, an average married couple earning between $250,000 and $300,000 would lose only 2% of their total Bush income tax cuts, or $199, in 2013. This is because all taxpayers—even those in the top income bracket—benefit from the lower tax rates on income below the $250,000 threshold that are set to remain in place under such a plan.

The American public continues to support progressive and fair taxation; we just need our elected leaders to deliver it.

Chart from Pew Research poll overview.