Author: tarek

If your family makes around $60,000 a year and you work for a living, there’s a good chance you pay a larger percentage of your income in federal taxes than Mitt Romney and the other partners at Bain Capital.

We have explained before that a good portion of millionaires who live off investments pay a lower effective tax rate than people who work for their $60,000 a year.  Worse, the “carried interest” loophole allows people like Romney to enjoy the special low tax rate for investment income even though their income is really from work. CTJ’s Bob McIntyre was the first to predict that Mitt Romney’s effective federal rate was under 15 percent as a result.

Now comes Newark’s Democratic mayor, Cory Booker, defending Bain Capital and other “private equity” firms (really, buyout firms), calling attacks on Romney’s old firm “nauseating.”

Let’s put aside for a moment that fact that private equity firms buy up companies and fire people, and the fact that Mitt Romney doesn’t seem to see the difference between his former job of maximizing profits for investors and the job he seeks, which should be to maximize opportunities for all Americans.

Even if you accept all of that, do you believe that what Mitt Romney did at Bain Capital is so good for America that we should subsidize him through the tax code? Do you believe that discussing the role played by these buyout funds in our economy and in our public policies is off-limits?

Members of Congress, including Democrats and Republicans, have made claims in support of the carried interest loophole that defy common sense. They argue that millionaire fund managers like Mitt Romney should continue to enjoy this tax loophole because, for example, it encourages development in poor communities, helps minorities rise in the financial world, and helps cancer patients receive life-saving treatments.

These arguments are nonsensical for reasons we’ve explained before. The carried interest loophole does not encourage investment in poor communities or new technology or anything at all because it doesn’t affect the people who actually put up money to invest. The loophole subsidizes the people who manage the money, the fund managers who enjoy the special low tax rate on the compensation they receive so long as they maximize profits.

The arguments made in defense of the buyout firms’ privileges are so absurd that they beg the question of what really motivates their proponents in both parties. We cannot say why Mayor Booker does not express any outrage that the Bain partners can pay a lower effective tax rate than many working people in his city. But we are not blind to the many, many articles about campaign contributions from these fund managers and how they have attempted to use this money to protect their privileges. Now that’s nauseating.

• The Minnesota Vikings will get their new stadium and taxpayers are on the losing team.  In more sports news, the New Orleans Hornets can thank the Louisiana legislature, who recently voted to give the team a tax break that amounts to $37 million over the next ten years. But the Milwaukee Bucks might not be as lucky.  
• Kansas House Speaker Mike O’Neal said  that once the Governor signs the tax bill sitting on his desk, “Everybody’s just going to be amazed, and your constituents will be very proud of you.”  But in fact it’s more bad news for Kansans.
• Here’s a great opinion piece from the Canton (Ohio) City Council President showing the impact that state budget cuts have had on his community. Budget cuts don’t happen in a vacuum.
• It’s that time again. Louisiana’s hurricane preparedness sales tax holiday is a boondoggle (as is Virginia’s); they are the definition of “poorly targeted” and do little for consumers and local business.

Photo of Vikings Stadium via AFA Gen Creative Commons Attribution License 2.0

The accounting firm Ernst and Young (E&Y) just released a report, commissioned by the Motion Picture Association of America (MPAA), the purpose of which is to show that there are economic benefits for states that offer tax credits to film productions.  And since there are some economic benefits from almost every kind of business activity – including activity not getting tax subsidies – it shouldn’t be too hard to do.

The report, with its very un-Hollywood title, “Evaluating the effectiveness of state film tax credit programs: Issues that need to be considered,” however, is so riddled with wiggle words like can, could, may and might, you have to wonder if there is any evidence to support the claim that states reap economic development benefits when they give away tax credits to the film industry.  It’s as if the MPAA hired E&Y but then didn’t let them see any industry numbers.

For example, the section called, Case study of a credit program’s impact, is not a case study at all; rather, it’s a discussion of how a hypothetical $10 million production would result in nearly $19 million in economic activity, $ 4.4 million in wages and over half a million in new tax revenues – but it shows no calculations for how they reached these figures. For that level of detail, we are referred to an appendix, which has about the same information, adding only a little more detail about how a $10 million movie budget breaks down and some payroll averages. 

The only hard numbers from a real life example come from three instances in which a permanent film production facility was established. But the authors include an important caveat: “A state must reach a critical mass of productions to attract a studio investment, and not every state will be able to do so. Those that are able to attract a significant amount of production activity may [our emphasis] realize this benefit.”

Tax breaks for movies are like tax breaks for any kind of industry. Regardless of whether anyone can document the demonstrable economic benefits to the state, there is always a measurable cost of the tax deal itself, and the revenues not spent on public infrastructure.

The fiscal conservatives at the Tax Foundation read this same MPAA report and conclude, “The fact that E&Y’s report is unwilling to call these programs successful, but rather limit itself to listing possible benefits, is telling. Their tepid conclusion should alert officials that even a paid-for study by a reputable firm can’t prove something that’s not true.”  The Tax Foundation also reports more states are abandoning tax credits for film production, realizing they don’t offer much economic bang for the fiscal buck.  Absent evidence that they do work – or at least some transparency about how well they work – elimination of these so-called incentives can’t come soon enough.

Republican Speaker of the House John Boehner announced Tuesday that he will refuse to approve any increase in the federal debt ceiling without matching spending cuts — essentially threatening to cause the U.S. to default on its debt obligations. During the same speech, he also announced that he would advance a bill to extend all the Bush tax cuts — which would increase the national debt by hundreds of billions of dollars each year.

The announcement came two months after the Congressional Budget Office (CBO) determined that the federal budget deficit would fall to around $250 billion a year or lower for most of this coming decade if Congress enacts no new laws that increase it. CBO also found that the most significant step that Congress could take to increase the deficit would be extending the Bush tax cuts, which would add about $450 billion to $600 billion to the deficit each year.

This is exactly what Boehner called for on Tuesday, saying Congress should extend the Bush tax cuts for all taxpayers. Under Boehner’s proposal, this would be followed next year by an overhaul of the tax code that eliminates some tax loopholes and tax subsidies, but he made it clear that the tax code should raise no more revenue than it would if the Bush tax cuts were simply made permanent. This would lead to the deficit increase illustrated by the light blue bars in the graph above from CBO’s report.

Bush Tax Cuts Among the Least Effective Ways to Stimulate the Economy

In a sane world, lawmakers would focus on increasing employment until the economy has improved enough for the U.S. to tackle deficit reduction, and many economists agree that almost any measure would do more to stimulate job creation than making the Bush tax cuts permanent.

For example, the noted economist (and former adviser to John McCain) Mark Zandi has concluded that for every dollar of revenue the federal government would lose from making permanent the Bush income tax cuts, U.S. economic output would increase by only 35 cents. On the other hand, he finds that for every dollar the federal government spends on increased food stamps, work share programs, or unemployment benefits, U.S. economic output would increase by $1.71, $1.64, and $1.55 respectively.

Debt Ceiling Needs to Be Raised Because Tax Cuts Increased the Debt

The statutory debt ceiling, first enacted in 1917, was an attempt by Congress to make borrowing easier because lawmakers decided their previous process of approving each bond issued was unwieldy. Little did they know that future Congresses would not increase the ceiling when necessary. Remember, the national debt rises only because Congress already enacted spending increases or tax cuts that could not be paid for, so it’s pretty illogical for the same Congress to then refuse to borrow the money necessary to meet those obligations or even pay holders of existing U.S. debt. This would cause the much-feared default that would send markets into chaos.  

The debt ceiling is like a limit on your credit card – if you could set that limit yourself. What makes the Republican position so bizarre is that it would be as if you spent a thousand dollars on such a credit card and then decided to set your own credit limit at less than $1,000!

Boehner and his allies on the Hill have consistently refused to acknowledge this. For example, they demanded in 2010 that the Bush tax cuts be extended for two years for even the wealthiest taxpayers, increasing the national debt by over half a trillion dollars, along with other tax cuts. (Two thirds of the tax cuts in that “compromise” went to the richest fifth of Americans and a fourth went to the richest one percent.)  

Then, in 2011, House Republicans decried the size of the national debt and threatened to reject a needed increase in the debt ceiling unless federal spending was cut by an equal amount.

2011 Debt Ceiling Deal Worse than Useless

After months of negotiations, President Obama largely capitulated by agreeing to a deal that would cut spending by around $2 trillion but raise no revenue. That 2011 deal allowed the needed increase in the debt ceiling and put in place automatic across-the-board spending cuts on defense and non-defense spending that, it was believed, would encourage Congress to find a more well-thought-out alternative to reduce the deficit.

Boehner’s House Republicans have already tried to undo that deal. The budget plan developed by Republican budget chairman Paul Ryan and passed by the House would cut safety-net programs for the poor while further cutting taxes for the very rich.

Now Speaker Boehner calls for a repeat of the battles over extending the Bush tax cuts and increasing the debt ceiling.

Obama Would Extend “Only” 78 Percent of Bush Tax Cuts

The strange thing is that President Obama’s approach to the Bush tax cuts is not that far off from the GOP approach. While Boehner and other Congressional Republicans demand that all the Bush tax cuts be extended, the President and his allies in Congress propose to extend the Bush tax cuts for the first $250,000 a married couple makes, and the first $200,000 an unmarried taxpayer makes. This comes to about 78 percent of the cost of extending the tax cuts entirely. If anything, President Obama’s proposal would extend far too many of the Bush tax cuts.

The fast moving developments over tax and budget policy in Kansas are mostly political, but the Institute on Taxation and Economic Policy (ITEP) has generated three separate analyses of recent proposals that helped inform the policy debates.  

ITEP found the most recent compromise plan from a House-Senate joint committee would cost roughly $680 million and give the wealthiest one percent of Kansans a $20,000 tax break they don’t need. Earlier in the week, ITEP offered guidance on how to craft a new plan after the Kansas House pre-empted a Senate vote on a slightly less costly tax cut proposal. ITEP’s conclusion that this less costly proposal would raise taxes on low income Kansans and cost $600 million forced a public debate on the costs and benefits of all the bills drafted to comply with Governor Brownback’s goal of cutting – and ultimately eliminating – the state’s income tax.

All of our Kansas news is here.

Facebook® co-founder Eduardo Saverin is facing mounting public scorn for renouncing his US citizenship, presumably to save some tax money (which he says is not the case). There are even two US Senators after him! He left in September but the pile-on is happening this week because of Facebook’s Initial Public Offering (IPO) of its stock: Saverin’s share will be worth somewhere in the neighborhood of $4 billion.

Saving Capital Gains Taxes
If Eduardo Saverin were a US citizen and sold his stock, most of that income would be subject to special low rate capital gains taxes of 15 percent (or 20 percent in future years if the new rate goes into effect January 1 as scheduled). By renouncing his citizenship, Saverin avoids paying those current and future capital gains taxes (and he would never have to pay the full income tax rate that Facebook employees exercising their stock options will be paying), but he does have to pay an “exit tax” (see below). Saverin now lives in Singapore, which doesn’t have a capital gains tax. 

Lowering the “Exit Tax”
When wealthy Americans give up their citizenship, they must pay an “exit tax” which treats all of their assets as if they’d been sold for fair market value (the actual tax payment can be deferred until the assets are sold). The fair market value of publicly-traded stock is what it traded for that day; privately-held stock must be appraised.

A spokesman for Saverin said that he renounced his citizenship last September, well ahead of this week’s Facebook IPO. Therefore, the stock’s valuation for “exit tax” purposes was likely substantially below its expected $38 IPO value, allowing Saverin to reduce his exit tax cost.

Not Tax, But Financial Decision
According to a spokesman, Saverin is expatriating for financial, not tax reasons. He doesn’t mind paying tax, he says, he just dislikes the complicated rules. He claims that the US rules, like the recently enacted Foreign Account Tax Compliance Act (FATCA), are preventing him from making some foreign investments he’d like to make.

Why It Feels Like Treason
Saverin emigrated to the US with his family at age 13 when his name turned up on a list of potential kidnap victims in his native Brazil where criminal gangs target the children of wealthy citizens and hold them for ransom. In the US, not only was Saverin safe from such violence, but he benefited enormously from government investment in education, the court system, and the Internet. Would he be a billionaire today if his family had relocated somewhere else?

Farhad Manjoo, a fellow immigrant, wrote a brilliant post (one of many, including this one) on the IT blog PandoDaily about what Eduardo Saverin owes America (nearly everything) including, quite possibly, his life. Taxes are the least of it.

• On the controversial film tax credit front, movie goers should be thanking New Mexico taxpayers who gave away $22 million in tax credits to the Avengers movie – which has earned over $1 billion so far. The state doled out a total of $96 million in film tax credits last year.
• Stop the presses! There is public support for introducing corporate and personal income taxes in South Dakota. Read about it here.
• The list of tax cuts being promised by Indiana Gubernatorial candidate John Gregg continues to grow.  In addition to his earlier plan ,Gregg now promises to eliminate the corporate income tax for any company headquartered in Indiana, and to offer a variety of new “job-creation” tax credits to certain businesses, and to pay for it by asking online retailers to collect a sales tax from Hoosiers (despite the current governor’s agreement with Amazon.com to postpone such a tax until 2014).
• Yet another income tax cut proposal has been unveiled in Oklahoma, this time by Senate leadership.  In it, low-income families would fare poorly because it repeals the Earned Income Tax Credit and scales back the grocery sales tax credit.

In February, we noted that Facebook® will get huge federal and state income tax refunds and pay no tax for years to come because of an absurd tax break related to the stock options it granted to employees.

When employees exercise their stock options, they pay income tax on the difference between what they paid for the stock (its exercise price) and its fair market value (what it’s trading for). The employer, meanwhile, gets a tax deduction equal to the amount of that difference their employees report – even though the employer isn’t actually out any cash.

This week we have a vivid example of why this deduction makes no sense, and why Senator Carl Levin wants to see this loophole closed, too.

In February, Facebook estimated its tax deduction for the stock options it gave its employees to be $7.5 billion, based on the price of its soon-to-be publicly offered shares. But with its IPO price going up and up, the company has revised its estimated tax deduction. In documents filed with the SEC on May 15, Facebook now estimates the employee stock options that will be exercised in connection with the IPO will result in tax deductions for the company of $16 billion – more than twice their initial estimate!  This massive deduction will cost the federal and state governments about $6.4 billion in lost tax revenue.

The stock option loophole overall will cost the US treasury and taxpayers $25 billion over the next ten years. Surely there’s a better use of that money than making Mark Zuckerberg richer.

Photo of Facebook Logo via Dull Hunk Creative Commons Attribution License 2.0

May 16, 2 PM UPDATE: The House has passed SB1302 and it now heads to Gov. O’Malley’s desk, where he is expected to sign it.

Maryland lawmakers are on the verge of bucking a national trend.  While most of the biggest state tax debates in 2012 have focused on proposals that would cut taxes and tilt state tax systems even more heavily in favor of the wealthy, Maryland appears poised to do exactly the opposite.  On Tuesday, the state Senate voted to raise tax rates and limit tax exemptions for single Marylanders earning over $100,000 and for married couples earning over $150,000 per year.  The House is expected to follow suit by passing the same bill (SB1302) as early as Wednesday.

If enacted into law, these changes will allow the state to avoid a variety of cuts to vital public services, as detailed by the Maryland Budget and Tax Policy Institute.  But in addition to improving the adequacy of Maryland’s tax system, a new analysis from our sister-organization, the Institute on Taxation and Economic Policy (ITEP), shows that the income tax changes contained in SB1302 would also lessen the unfairness of a regressive tax system that allows Maryland’s wealthiest residents to pay less of their income in tax than any other group.  Among ITEP’s findings:

• Because the income tax changes are limited to taxpayers earning over $100,000 or $150,000 per year, only 11 percent of Maryland taxpayers would face an income tax increase in 2012 as a result of SB1302.  (It’s worth noting, however, that increases in tobacco taxes, fees, and other provisions would affect additional taxpayers—though these increases make up just 3 percent of the bill’s total revenue.)
• 54 percent of the income tax revenue raised by SB1302 would come from the wealthiest 1 percent of state taxpayers—a group with an average income of nearly $1.6 million per year.  87 percent of the revenue would come from the top 5 percent of taxpayers.
• The changes in families’ income tax bills—even at the top of the income distribution—would be very modest.  After considering the “federal offset” effect, the tax increase faced by the top 1 percent of taxpayers would equal just 0.16 percent of their total household income, and taxpayers outside of the top 1 percent would face an even smaller increase.  Given the small size of these tax changes, Maryland’s tax system would undoubtedly remain regressive overall.
• The progressive nature of SB1302 means that it’s well suited to take advantage of the “federal offset” effect mentioned above, whereby wealthier taxpayers write-off their state tax payments and receive a federal tax cut in return.  17 percent of the revenue raised by SB1032—or $28 million in tax year 2012—would come not from Marylanders, but from the federal government in the form of new federal tax cuts for Maryland taxpayers.

See ITEP’s full analysis here.

• Michigan Governor Rick Snyder is voicing support for federal legislation that would allow states to collect sales taxes owed on purchases made over the Internet, but he has little interest in pursuing a state-level law that would allow Michigan to begin chipping away at the problem.

• The Gazette has an article about the failure of Maryland legislators to raise the gas tax during their recently concluded regular session.  It cites research from the Institute on Taxation and Economic Policy (ITEP) showing that the state’s gas tax rate would need to rise by 15.8 cents just to offset the last two decades of construction cost inflation.  In the article, Governor O’Malley explains the obvious: high gas prices caused lawmakers to delay this overdue reform, again.

• Legislators in New Hampshire were well on the way to eliminating a tax on internet access, until a flap between the House and Senate over other provisions in the legislation derailed it. Still, leadership in both chambers remain committed to eliminating the tax that appears on consumers’ broadband and wireless bills.  But the New Hampshire Fiscal Policy Institute (NHFPI) warns against eliminating the tax in a recent report which explains that $12 million in annual revenues are a stake, and that better, more targeted options for reducing taxes on New Hampshire families are available.

• This week, New Hampshire gubernatorial candidate Bill Kennedy came out with his own proposal to reduce property and businesses taxes and make up for the loss of those revenues by introducing a personal income tax in the state, which is one of nine states that doesn’t levy one. At the same time, the Granite State’s Senate is about to take up a radical and constraining proposal to amend their constitution to make sure no personal income tax can ever be levied. Stay tuned.