Author: tarek

A report from the conservative Heritage Foundation uses data from the Treasury Department to make the claim that President Obama’s approach to the Bush tax cuts will “hurt job creation.” Once again, the Heritage Foundation is wrong.

The Heritage report focuses on “flow-through” businesses, those businesses that are not organized as corporations that pay the corporate income tax, but rather are organized as entities whose profits are passed on to the owners and taxed as part of their income, under the personal income tax. These businesses are therefore impacted by the debate over the personal income tax cuts first enacted under President Bush.

The report makes much of the fact that most flow-through business income is concentrated among those taxpayers whose income exceeds $200,000, meaning they are close to, or above, the income threshold at which the Bush income tax cuts would expire under Obama’s approach. (President Obama proposes to extend the Bush income tax cuts for the first $250,000 that a married couple makes and the first $200,000 that a single taxpayer makes.)

The Heritage Foundation report is wrong in its conclusion about job creation for several reasons.

First, as CTJ has already demonstrated, single taxpayers can earn considerably more than $200,000 without losing any tax cuts under Obama’s proposal, and married taxpayers can earn considerably more than $250,000 without losing any tax cuts under Obama’s proposal.

Second, there is no reason whatsoever for a business person to create jobs just because his or her taxes are low. A business owner does not pay taxes on the part of business revenue that goes towards paying compensation to employees. Business owners are only taxed on what they take home after they’ve paid their employees and their other expenses. That means that a married couple with a business would need to take home over $250,000 in profits (meaning they take home more than that after paying their business expenses) before they would lose part of their Bush income tax cuts under Obama’s proposal. (And even then they would only pay the higher, pre-Bush tax rates on the portion of their net income exceeding $250,000).

If a business owner can profit by selling the goods or services produced by an additional employee, it makes sense to make that hire regardless of what the tax rate will be on that profit. If the choice is between profiting and paying taxes on the profit or passing up the opportunity to profit entirely, no reasonable person would choose the latter option.

Conversely, if hiring an additional employee will not result in a profit, then there is no reason to make the hire, no matter how low taxes are or how much cash the owner has available.

Anti-tax lawmakers and commentators sometimes claim that business owners will save their after-tax income to make investments that will expand their company and lead to more hiring, and that higher taxes make this impossible. This is generally wrong because large businesses typically borrow to make such investments, and any business that is truly a “small business” can use a provision (known as “section 179 expensing”) that allows them to deduct the entire cost of making those capital investments. President Obama is asking Congress to raise the limits on this tax break so that more small businesses can benefit from it.

Finally, the fact that a great deal of flow-through business income is concentrated among a few high-income owners of big companies does not logically lead to the conclusion that we must provide more tax breaks to the high-income owners of big companies.

The Heritage Foundation cites Table 15 of a Treasury study that looked at different ways of identifying flow-through businesses. The Treasury study found that in 2007 (the most recent year for which data are available) 34.8 million tax returns claimed flow-through income, but only 4.3 million of those represent business owners who employed workers. It also showed that only 1.2 million both employed workers and earned more than $200,000, meaning their income is at or close to the threshold at which they would lose some of the Bush tax cuts under Obama’s proposal. These 1.2 million business owners earned 91 percent of all the income earned by the flow-through businesses with employees.

According to the Heritage Foundation, this data means that the “businesses that earn almost all of the income are the most successful flow-through employer-businesses. That also means they are the businesses that create the most jobs.” This last assertion by Heritage seems particularly dubious, given that these “most successful” flow-through businesses include hedge funds and private equity funds like Bain Capital, law firms, lobbying firms and other extremely profitable companies with relatively few employees — not the companies most Americans think of when they hear the words “small business” or “job creators.”

The Heritage report concludes that Obama’s proposal would result in higher taxes on “almost all income earned by job creators.”

The fact that most flow-through business income is tied up in the hands of a minority of rich Americans does not logically lead to the conclusion that we should therefore keep taxes low for the richest Americans. The data from the Treasury study also shows that 50 percent of the income going to flow-through businesses with employees actually goes to taxpayers with income exceeding $1 million. Given everything explained above (that business people do not create jobs just because their taxes are low) this does not logically lead to the conclusion that we should keep taxes low for people making more than $1 million annually.

The Michigan government is facing an unprecedented lawsuit charging that some of its public schools are inadequate to the point that they violate state law.  You might think this would make lawmakers revisit the wisdom of their tax-cutting compulsion, but you would be wrong.

Last year, anti-tax lawmakers’ crowning achievement in the Great Lakes State was to slash business income taxes by some $1.6 billion, or 83 percent.  Some of that cut was funded with cuts in state services, though most of it was paid for with personal income tax hikes (PDF) on the state’s elderly and poor.  Some lawmakers viewed those personal income tax hikes as a political liability, however, so Gov. Snyder went ahead and signed a token tax cut, worth an average of ten dollars per taxpayer per year, conveniently designed to take effect about one month before voters head to the polls in November.

But more troubling than this political gamesmanship is a pair of larger tax cuts that lawmakers may try to enact this fall after returning from recess.

In May, the state Senate passed a bill, after many months of negotiations, that repeals the tax businesses pay on industrial and commercial personal property (equipment, furniture, and other items used for business purposes).  The Detroit Free Press said that “there’s general agreement across party lines and all levels of government” that the tax is bad for business and should be repealed, and noted that the House may follow the Senate in doing so this fall.

There is also consensus, however, that since the overwhelming majority of revenue generated by the business personal property tax flows to local governments, localities can’t absorb a cut that severe.  But while the state seems likely to make up part of the difference, there are also serious doubts regarding how much of the lost revenue the state can actually afford to replace, and whether that replacement revenue will dry up the next time the state’s budget is battered by a national recession.

But property tax cuts for businesses aren’t the only pricey tax cut on the legislature’s list. Last month, the House overwhelmingly voted to slash the state’s personal income tax rate, at a cost of $800 million per year by 2018.  The bill’s sponsor promises that revenue growth resulting from the cut will be so strong that it will “not lead to program cuts or shifted funds.” Forgive us if we’re skeptical of that claim.

Finally, to top things off, reversing these tax cuts if they prove destructive and unaffordable could soon become a lot harder.  That’s because the Koch-backed Americans for Prosperity-Michigan has just submitted the signatures needed to put a measure on the ballot amending the state’s constitution to require a supermajority vote of the legislature to raise taxes. Just so we’re clear, supermajority requirements are one of the worst tax ideas of all time.  The Michigan League for Human Services explains the problems with the supermajority proposal in this report (PDF), including how it could entrench special interest tax breaks, damage the state’s credit rating, and pressure local governments to the point of breaking when state funds run short.

Call both your Senators and your Representative today and tell them:

Support President Obama’s proposal to allow most of the Bush tax cuts for the richest 2 percent — couples making more than $250,000 and singles making more than $200,000 — to expire.

Oppose any extension of more tax cuts for the rich — even a temporary one.

Call the U.S. Capitol at 888-744-9958 (TOLL FREE)

The Senate will likely vote this week and the House may vote soon after. They need to hear from you NOW. 

The toll-free number is provided by Americans for Tax Fairness (ATF), a coalition of organizations including Citizens for Tax Justice and other advocacy organizations, think tanks, labor unions, small business associations and watchdog groups.
 
To learn more about how President Obama’s proposal compares to the Congressional Republicans’ proposal to extend all the tax cuts (even for the rich), check out these publications from Citizens for Tax Justice:

Bush Tax Cut Proposal Calculator: Find Out How Much You Would Pay

The Bush Tax Cuts: President Obama’s Approach vs. Congressional Republicans’ Approach (includes state-specific versions)

Fact Sheet: How Many People Are Rich Enough to Lose Part of the Bush Tax Cuts Under Obama’s Proposal? (state-by-state figures)

Fact Sheet: Married Couples with Incomes Between $250,000 and $300,000 Would Lose Only 2% of Their Bush Income Tax Cuts under Obama Plan versus GOP Plan

• Figures from the Institute on Taxation and Economic Policy (ITEP) are cited in this editorial explaining why making Kansas’ tax structure more like Texas’ is public policy at its worst.
• Dan Carpenter’s column in the Indianapolis Star explains who’s hurt by an Indiana law set to issue $300 million in automatic tax breaks as a result of the state’s allegedly rosy budget situation.  Taxpayers might be happy at first to see an extra $100 or $200 in their bank accounts, but at what cost?
• PolitiFact Oregon confirms what advocates long argued: special tax breaks are on autopilot and growing fast, while education and other services suffer as a result.
• North Carolina GOP gubernatorial candidate (and likely next Tarheel State governor) Pat McCrory is making big promises to cut taxes if elected.  What’s in his plan?  Cutting personal income taxes, lowering the state’s corporate income tax rate, and eliminating the state’s estate tax.  Sound familiar?
• Looking who’s playing politics now in New Jersey.  Just days after Governor Chris Christie chided Democrats for holding up his tax cut proposal for political reasons, the state’s Republican Party aired its second radio ad attacking Democrats.  From the ad: “Sadly, it’s the same old story from the Legislature.  Billions for special interest spending.  Not a dollar for tax cuts for New Jersey families.”
• A new budget and tax policy primer from the Open Sky Policy Institute offers a great overview of how Nebraska collects and spends public funds.  One of many important facts: Nebraska actually spends more on special tax breaks than it does on all General Fund appropriations combined.

Many residents of Washington, D.C. have found a good restaurant or shopping deal through an online facilitator like LivingSocial. These websites work by putting consumers in touch with local retailers looking to entice new customers with appealing discounts. But recent action from the D.C. Council could reverse the script, leaving the city’s citizens on the hook for a misguided and revenue-draining attempt at capturing high-tech businesses. After passing a sweet tax deal for one company, the Council is now considering slashing income taxes for just about anyone affiliated with a high-tech company at the expense of the working taxpayers of D.C.

The first tech-tax action taken by the D.C. Council was ensuring that LivingSocial, a high-tech company founded in D.C., remained within the city limits. While the leadership of LivingSocial have long trumpeted their D.C. roots—the chief executive, Tim O’Shaunghnessy, is the son-in-law of Washington Post Co. Chairman Donald E. Graham—they have also made no secret about the organization’s consideration (or threat) of leaving the city for a less “expensive” location. “We’ll make a commitment to the District if the District will make a commitment to us,” O’Shaunghnessy told the Washington Post.

This past week the city government solidified that commitment with LivingSocial in a deal that is far sweeter than anything LivingSocial offers its members. On July 10, the D.C. Council unanimously approved an agreement that keeps the fledgling company’s headquarters (and at least half of its new hires place of residence) within the District’s lines in exchange for a $32.5 million tax break. The deal provides LivingSocial with corporate and property tax abatements over a five-year period beginning in 2015.

What’s more troubling for the city and its residents, however, is a separate proposal to give away tax dollars to investors in online companies. The Technology Sector Enhancement Act of 2012 would allow so-called “angel investors” (qualified employees or stockholders in a qualifying tech company) to only pay a 3 percent tax rate when selling their stake in the company for a profit. Both new and preexisting investments would be covered by the new rate. Additionally, the bill exempts qualified companies from business franchise taxes for five years after the date the company first has taxable income.

Under D.C.’s current tax system, capital gains are taxed like any other income, with the maximum marginal tax rate at 8.95 percent. In fact, the special tax rate (3 percent) for tech investors would be even lower than the lowest income tax rate (4 percent) paid by working D.C. residents. As the D.C. Fiscal Policy Institute has explained, the city would be creating a “Warren Buffett problem” by taxing high-income tech investors at far lower rates than all working D.C. residents. 

Moreover, as the Institute on Taxation and Economic Policy (ITEP) has previously noted (PDF), capital gains are among “the most unequally distributed sources of personal income.” By giving special treatment to such income, governments shift the responsibility for funding government services more heavily onto lower- and middle-income taxpayers.

In addition, the tax giveaway to high-income taxpayers could also be a huge drain on the city’s already stretched-thin budget. A financial impact statement from the city’s Chief Financial Officer notes that such tax cuts will reduce both corporate franchise and capital gains tax collections and that the negative impact “could be substantial.” Unfortunately, the cost of this legislation has not been projected in any detail. The financial impact study merely states that the revenue losses “cannot be reliably estimated at this time.” But the report does explicitly note that if a company were to have a successful IPO “the revenue losses could be significant.”

Such substantial revenue reductions have dire consequences for public investments. And as is often explained (though frequently forgotten), it is those public investments—an educated workforce, first-rate transportation infrastructure and quality health care—that are far more likely than tax incentives to attract high-value-added industries to cities and states.

The D.C. Council was set to vote on the tech tax cut the same day as the LivingSocial deal, but lobbying from anti-poverty groups in opposition to the legislation resulted in the vote being tabled until September. Let’s hope that in the meantime the Council puts some more thought into whether tax breaks for some of the District’s most fortunate residents should really be a top budgetary priority.

As the nation’s governors gather in Williamsburg, Virginia this week, their focus is on their Chairman’s initiative, Growing State Economies.  Too often, however, a governor’s knee-jerk response to a lagging economy is to start cutting taxes, even though state tax cuts offer very little economic bang-for-the-buck.  But while tax cuts aren’t the economic panacea that is often claimed, there are ways in which governors can reform their states’ tax codes to pave the way for improved economic success.

A new report from the Institute on Taxation and Economic Policy (ITEP) identifies governors who get it right and governors who get it wrong, and outlines four commonsense options designed to create infrastructure jobs, boost consumer demand, improve business efficiency, and offer local retailers a more level playing field.

 Read the report.

The National Governors Association is meeting this week and our clickable yearbook of 22 governors is assigning honors to some and detention to others for the tax policies they pushed in 2011 and 2012.

(Single Infographic Version)

	Jan Brewer (R-AZ)	Jerry Brown (D-CA)	Sam Brownback (R-KS)
	Most Likely to Side with Wealthy Investors	Best at Playing a Bad Political Hand	Most Likely to Bankrupt His State
	Lincoln Chafee (I-RI)	Chris Christie (R-NJ)	Andrew Cuomo (D-NY)
	A+ For Effort at Sales Tax Reform	Fiscal Drama Queen	Best Reversal on Millionaires Tax
	Mark Dayton (D-MN)	Mary Fallin (R-OK)	John Kasich (R-OH)
	Most Willing to Stand Up to Legislature	Biggest Loser at Cutting Income Taxes	Fracking Tax Squanderer
	Paul LePage (R-ME)	John Lynch (D-NH)	Dan Malloy (D-CT)
	Reverse Robin Hood Award	Smartest Veto of the Year	Most Likely to Make Rich to Pay Fair Share
	Martin O’Malley (D-MD)	Butch Otter (R-ID)	Deval Patrick (D-MA)
	Defender of Public Services	Champion of the “1%”	Mr. Popular Gimmickry
	Beverly Perdue (D-NC)	Rick Perry (R-TX)	Pat Quinn (D-IL)
	Most Likely to Gamble with State’s Future	Grover Copy Cat Award	Least Likely to Prioritize Seniors
	Brian Sandoval (R-NV)	Rick Scott (R-FL)	Rick Snyder (R-MI)
	Most Likely to Defy Grover’s Tax Pledge	Corporate Tax Giveaway King	Biggest Tax Hiker on the Poor and Elderly
	Scott Walker (R-WI)
	Biggest Bully

 Recent evidence has lead Citizens for Tax Justice to wonder: do the “experts” over at Grover Norquist’s Americans for Tax Reform intentionally lie, or are they just sloppy?

Here’s what we’re looking at:

In their recent policy brief, Americans for Tax Reform links to one of our reports and writes:

“…[E]ven the left-wing Center for Tax Justice admits that “in some parts of the country, $250,000 is really not very much to raise a family on and it’s unclear whether families in such a position can afford to pay higher taxes.”

The problem is that the quote they attribute as the position of Center for Tax Justice (who’s that?) is actually us here at Citizens for Tax Justice (thank you very much) reporting something from the New York Times, and it’s something that we clearly oppose. Here’s the full quote from CTJ’s report:

“Recent articles in the New York Times and the Fiscal Times quote observers and analyses questioning President Obama’s proposal to allow the Bush income tax cuts to expire for adjusted gross income (AGI) in excess of $250,000. One theme of these articles is that in some parts of the country, $250,000 is really not very much to raise a family on and it’s unclear whether families in such a position can afford to pay higher taxes. The idea that Obama’s income tax plan will result in unaffordable tax increases for people who make $250,000 a year is wrong on several levels”

On the one hand, supporting the theory that this misquote results from pure sloppiness is their error of accidently calling us Center for Tax Justice – something busy journalists do all the time.

On the other hand, supporting the theory that Grover’s Americans for Tax Reform is intentionally misrepresenting the position of Citizens for Tax Justice is that our report was a laundry list of reasons why families who make $250,000 can afford to pay higher taxes, making it almost impossible for any semi-literate person to have missed that point. (Plus it’s no secret CTJ supports tax increases for this group.)

Which theory sounds right to you?

Photo of Grover Norquist via Gage Skidmore Creative Commons Attribution License 2.0

The Orlando Sentinel’s editorial board explains the “slow-motion disaster” that is Florida’s tax system, cataloging the lack of sales taxes on services (PDF) and online shopping taxes (PDF), and gasoline tax shortfalls (PDF), among others.

Special tax breaks for businesses frequently reward behavior that would have occurred anyway.  The most recent examples come from Florida, where Publix, CSX, TECO Energy, NextEra Energy, and Mosaic Co. are seeking millions in tax breaks for capital spending they were already planning to undertake.

Online shopping in the DC-Metro area is about to become more expensive, according to this Washington Post article.  Here’s why that’s a good thing for tax fairness, the Marketplace Fairness Act and state coffers.

Advocates for increasing the Arkansas severance tax rate on natural gas from 5 to 7 percent and eliminating exemptions turned in nearly 70,000 signatures on Friday. If the Secretary of State verifies enough signatures, the long overdue rate increase worth $250 million in annual revenues will be put on the November ballot. 

Check out New Jersey Governor’s Chris Christie talk at the Brookings Institution today on “Restoring Fiscal Integrity and Accountability”.  Christie used the first several minutes to give his view on the current tax cut standoff in the Garden State, claiming Democrats were playing politics by holding up his tax cut proposal (when in fact what they’re doing is the right thing).

Every year the Organization for Economic Co-Operation and Development (OECD) produces reports about each of its 34 member countries’ economic prospects. The one they just published about the United States points out the “disproportionate income growth for top earners over the past two decades,” that our tax system is a global underperformer when it comes to ameliorating poverty, and recommends that progressive tax reforms should play in a key role in tackling our increasing income inequality.
 
According the OECD, income inequality has grown continuously over the last four decades. In fact, of the 34 countries in the OECD, the U.S. has the fourth highest level of income inequality as measured by each country’s Gini coefficient. Reinforcing this trend, our current tax-and-transfer system is 30 percent less effective in reducing income inequality than it was in 1980.

One approach that the OECD proposes to counteract U.S. income inequality through the federal tax code is to limit the tax savings from each dollar of certain deductions and exclusions in the federal income tax code. This approach was recently proposed as part of President Barack Obama’s American Jobs Act. Such proposals would increase the progressivity of the tax code and reduce the economic distortions created by tax breaks.

Bad Ideas

While many of the report’s recommendations are progressive and smart, it also some recommendations that would please the most conservative policymakers (leaving us scratching our heads as to how AP could label it “left-leaning”). For example, it calls for a significant reduction in corporate tax rates and the continuation of the special low tax rates for capital income. Of course, what the U.S. needs to do is enact revenue-positive corporate tax reform and treat capital income as ordinary income because these moves would afford us the revenue to implement the OECD’s other more reasonable recommendations, such as increasing government spending on education and job training, to reduce income inequality.