Author: tarek

Given the recent and unprecedented government shutdown, you’d like to think that lawmakers in Minnesota would want to make it easier, not harder, for the state to balance its budget. But some lawmakers haven’t learned their lesson and are, in fact, proposing to use the state constitution to ban any tax increase that does not receive a supermajority of votes in both chambers. 

Folks at the Minnesota Budget Project (MBP) argue, “The amendment would guarantee gridlock by creating extra hurdles for passing a responsible budget, leading to more budget gimmicks as policymakers seek to fund critical state services.” MBP also points out that surveys show that a majority of Minnesota residents want lawmakers to use both spending cuts and revenue increases to deal with deficits.

In these difficult economic times, lawmakers need more, rather than fewer, tools and options to address budget shortfalls and rising needs. In a state that just survived a horrific budget battle, it should be clear that the more options on the table, the better — for all Minnesotans.

By now everyone has heard about presidential candidate Mitt Romney’s statement that “corporations are people.” “Everything corporations earn ultimately goes to people,” Romney explained to hecklers in Iowa.

Of course, it’s true that corporate earnings eventually go to people and that taxes on corporate earnings are borne by people. Those people are primarily the shareholders, who receive smaller stock dividends and or capital gains because companies pay corporate income taxes. Corporate executive pay is also affected by corporate taxes because so much of it is in the form of stock options and similar vehicles.

The serious problem is that the shareholders who own these corporations are not paying enough, thanks to the loopholes that allow corporations like GE, Boeing, Verizon and others to avoid taxation entirely.

However, some corporate lobbyists and economists who sympathize with them now argue that the people who ultimately pay corporate income taxes are actually the workers. Up to 80 percent of corporate income taxes, they claim, actually fall on labor, rather than the owners of capital. This happens, they argue, because corporations will respond to U.S. taxes by lowering wages or moving operations and jobs to countries with lower taxes, which will also hurt American workers.

They’re wrong. As we have advocated reforms to raise revenue by closing corporate tax loopholes, some have cited these misguided economic models and asked us whether or not higher corporate taxes would ultimately harm the working people we want to help. The answer is absolutely not. 

Tax expert Lee Sheppard makes the obvious point that we’ve often made (subscription required): “if labor bore 80 percent of the burden of the corporate income tax, corporations wouldn’t care about it at all. They don’t fight high value added taxes in Europe, because the burden is clearly borne by consumers.”

Indeed, corporations lobby Congress furiously for reduced corporate income taxes, and they would not bother if they did not believe their shareholders were the ones affected by them.

Higher Taxes Won’t Drive U.S. Corporations Offshore

American corporations certainly have been moving operations and jobs overseas in the past decades. But low labor costs in many foreign countries appears to the main force driving this trend, not lower foreign income taxes.

A recent article explains that GE has shifted operations offshore, but it actually pays higher taxes in those foreign countries than it does in the U.S. (Of course, one feature of our tax system, “deferral,” probably does encourage companies to move jobs offshore and we have urged Congress to repeal it.)

The Debate among Economists

ITEP and other organizations that provide distributional analyses of tax policies, including the non-partisan Congressional Budget Office, assume that corporate income taxes are ultimately borne by the owners of capital (corporate shareholders and owners of other businesses indirectly affected).  Since capital is disproportionately owned by the wealthy, corporate income taxes are therefore very progressive taxes.

But in recent years some economists have claimed that corporate taxes simply push investment out of the country, meaning workers in the U.S. lose their jobs or settle for lower-paying jobs (meaning labor ultimately bears the burden of the tax). 

But other economists and analysts disagree. For example, a working paper from the Congressional Budget Office suggests that investment cannot move across international borders with perfect ease and that goods produced in one country are not always perfectly substitutable for those produced in another country.

The working paper further suggests a model that takes into account the corporate taxes of other countries, meaning corporations cannot escape taxation so easily because most places where they could reasonably operate will have some level of corporate taxation.

When the economic models take all this into account, they lead to the conclusion that most of the corporate income tax is borne by capital.

The People Who Own Corporations Are Not Paying Enough in Taxes

Once we establish that the owners of capital are ultimately paying the corporate income tax, the next question is whether or not they should be paying more than they do now. Mitt Romney seems to believe they pay more than enough already.

As middle-class Americans are told they must sacrifice some of their public services in order to help balance the federal budget, the obvious question is whether or not the owners of capital, who ultimately pay corporate income taxes, can afford to sacrifice as well. The answer is: absolutely.

Many corporations use loopholes to avoid paying the corporate income tax, as our recent report on 12 corporate tax dodgers demonstrates.

Corporate profits can accumulate tax-free before they are paid out as dividends, and two-thirds of those dividends will go to tax-exempt entities like pension funds or university endowments where they can continue to accumulate tax-free before they reach any individuals. The one-third of corporate stock dividends that do go directly to individuals are currently taxed at a low, top rate of 15 percent. (We have explained before that these are reasons why corporate profits are not double-taxed, as some believe they are.)

So the short answer to Mitt Romney is, yes, corporate taxes are ultimately paid by people, the shareholders, and Congress needs to close the loopholes that currently allow them to avoid these taxes.

Photos via Gage Skidmore and IMF Creative Commons Attribution License 2.0

Texas Governor and presidential candidate Rick Perry has endorsed both the concept of a flat income tax and the so-called “Fair Tax,” which is a national sales tax. A three-page report from CTJ explains that both of these proposals would result in substantial tax increases for the poor and middle-class and significant tax cuts for the rich.

Read the report.

Photos via Gage Skidmore Creative Commons Attribution License 2.0

We couldn’t help but laugh when we saw the title of last week’s Wall Street Journal editorial.  For those of you that have followed the “millionaire migration” debate, it should be a very familiar one.

First, a little background: Over the last couple years, the Wall Street Journal has run three editorials claiming that state income tax hikes in Maryland and Oregon were major factors in the shrinking of those states’ millionaire populations.  According to the Journal, while the recession did reduce the number of rich folks in those states, the tax hikes enacted by the “redistributionists” and “class warriors” (to use their words) just had to have something to do with it as well.  No self-respecting rich person would sit around and pay more in taxes when they could quit their job, pull their kids out of school, and move to a state with lower taxes on the rich – like South Dakota.

Our sister organization, ITEP, went to great lengths to point out the problems with the Journal’s migration theory, responding to those editorials in three separate reports, one letter to the editor, and a Huffington Post piece.  All of those publications analyzed official state data and reached the same conclusion: there’s no evidence to suggest that the shrinking of Maryland and Oregon’s millionaire populations was anything other than a predictable result of the recent recession.

That’s what makes last week’s Journal editorial so amusing.  It’s been a little over two years since the Journal first popularized the Maryland millionaire migration myth with a 2009 piece titled “Millionaires Go Missing.”  Apparently, members of the Journal’s editorial board have short memories, because they’ve recycled that same title, but used it to argue the opposite point (and the one ITEP insisted was the case all along): new federal tax data shows that the recession caused a huge decline in the number of millionaires all across the country.  “Told you so” just doesn’t seem sufficient.

Looking back, it’s really unfortunate how much influence the Journal’s made-up story about “Maryland’s fleeced taxpayers fighting back” (as the sub-title of their 2009 article read) actually had.  It resulted in countless misinformed debates about a “millionaire migration” phenomenon that never even existed, and played no small role in the eventual defeat of efforts to extend a very good tax policy in Maryland.

But even against that backdrop, perhaps we should all feel just a bit relieved right now.  At least the Journal opted not to use the new federal data to concoct a fiction about wealthy Americans migrating to low-tax Mexico.  Well, at least not yet.

Unless Congress acts, federal gas and diesel taxes will fall by about 80 percent on September 30.  If this is allowed to happen, spending on our nation’s already inadequate roads and transit systems will likely plummet, and Congress will face massive pressure to make up the difference through deficit spending or rerouting spending from other vital priorities.

Clearly, these outcomes are not ideal.  That’s why extending the gas tax – albeit at low rates – has always been a routine and bipartisan undertaking.  Today, however, the visceral opposition to taxes by many in Congress has led some observers to believe that the debate will be more hostile than usual, and that there is a real possibility – though small – that the gas tax will actually be allowed to expire.  Simply put, there is less and less that is “routine” in our nation’s capital anymore.

In a surprising and fortunate twist to this story, Grover Norquist stated flatly recently that a gas tax extension would not violate the no-tax pledge that 277 members of Congress have signed.  This should have already been obvious to anybody who’s taken the time to read Norquist’s 57-word pledge (it clearly applies only to income taxes), but his admission was nonetheless helpful in making that fact known.

Perhaps more surprising, though, was a confession by one of Norquist’s employees that allowing the gas tax to fall so quickly would be too disruptive.  You know the situation is serious when even Norquist’s group is cautioning against tax cuts.

Less encouraging was Norquist’s recent promise to push for a system in which states could opt-out of the federal Highway Trust Fund, and instead finance their roadways entirely with tax revenues generated inside their borders.  If allowed to happen, this would mark a major retreat from the federal government’s long-running role in helping to maintain our nation’s Interstate highways.

It should go without saying that the Interstate highway system is of immense importance to interstate commerce, and that there is an obvious federal role to be played in ensuring the smooth functioning of that system.  For example, the federal government has always seen to it that large, sparsely populated states are able maintain their expansive highway networks for the good of the national economy.

With this in mind, it should come as little surprise that the organization representing state transportation departments (AASHTO) believes that the federal government’s involvement must continue.  As AASHTO representative Jack Basso recently remarked to Stateline, “The real question is can you maintain a national system, given the diversity and the breadth of geography in the country and the population situation, without some kind of national program? I think the answer is ‘No.’”

Unfortunately, while there appears to be a growing consensus that the gas tax should be extended, there’s still a possibility that it will be “taken hostage” — just like the debt ceiling and most of the Bush tax cuts were within the last year.  If that happens, it’s very likely that the outcome of the current transportation debate will be much more skewed toward Norquist’s priorities than would otherwise be the case.

Photo via Gage Skidmore Creative Commons Attribution License 2.0

If you’ve ever bought something online, then most likely you’ve cheated on your taxes.  Not many realize it, but people making online purchases are required to pay sales taxes on those purchases directly to their state government.  Unfortunately, hardly anyone reports these taxes (either because of ignorance or a desire to save a buck), and the law is essentially unenforceable.

In an effort to remedy this situation, Senator Dick Durbin (D- IL) has once again introduced the Main Street Fairness Act.  The bill would require online retailers above a certain size to remit taxes on sales made in states that have taken steps to simplify their tax systems.  Essentially, this bill would relieve the buyer of their responsibility to calculate and pay the sales tax themselves.  It’s a bill that has been introduced before, but with online shopping (and state efforts to tax it) growing at an increasing rate, it’s now more relevant than ever.

Opponents of the bill have incorrectly labeled it as a tax hike.  The bill doesn’t actually create a new tax, nor does it raise an existing one.  Rather, it merely creates a mechanism to collect taxes that have always been owed.

Failing to collect these taxes creates two major problems:
1) States are losing out on badly needed revenue.
2) Traditional brick and mortar stores are at a competitive disadvantage when their customers have to pay a tax that online shoppers are able to evade.

As an extreme example of this second problem, in many instances customers will go so far as to examine and “try out” merchandise at stores, only to return home and purchase the same product online in order to evade their sales tax responsibility.

It’s no surprise then that numerous organizations representing retail owners, such as the Retail Industry Leaders Association (RILA), support the bill.  As one of their spokespeople said, “It is time to close this decades-old loophole and level the playing field for all retailers.”  And specific “brick and mortar” companies, ranging from Wal-Mart to independent book stores, have come out in support of the legislation as well.

Notably, the bill contains two important provisions meant to address concerns among online retailers about the difficulty of complying with state sales tax laws.  First, the bill would only allow states to require online sellers to collect sales taxes if they have first simplified their tax systems. Second, the bill would also exempt “small sellers” from the requirement, since small businesses are the least likely to have the resources necessary to comply with state sales tax laws.

Amazon has long opposed the small seller exemption, a position reiterated most recently in itsJuly 29 letter to Senator Durbin.  (Michael Mazerov of the Center on Budget and Policy Priorities suggests three reasons why Amazon opposes this exemption in the Appendix of his November 2010 report.)  And while Amazon thanked Durbin for introducing the newest version of this bill, it has stopped short of an outright endorsement.  It remains to be seen how seriously Amazon plans to push for eliminating the small seller exemption, and whether such a push could endanger the entire bill.

On the plus side, the increasing level of interest states are showing in solving this problem themselves has intensified the push for a comprehensive federal solution.  Battles over online sales taxes have been waged in over twenty states in just the last three years, and there are no signs that interest in the issue will wane any time soon.  But as ITEP explains in its recently updated policy brief, only a federal solution can solve this problem entirely.  As Durbin put it, “If you do it on a national basis, there’s hardly a complaint one state is being disadvantaged over another.”

The Main Street Fairness Act has had bipartisan support in the past, though this time around only Democrats have signed on so far.  In theory, conservatives should be very interested in the bill as it removes a longstanding economic distortion.  It’s a common sense solution to a longstanding problem and is a win-win in that it can generate revenue for cash-strapped states while also improving the competitiveness of Main Street businesses.

Photos via American Progress Action Fund & Soumit Creative Commons Attribution License 2.0

Texas Governor and presidential candidate Rick Perry said that he is “dismayed at the injustice that nearly half of all Americans don’t even pay any income tax.”

He should know that Americans pay other types of federal taxes besides just federal income taxes, and that they also pay state and local taxes. A two-page statement from CTJ explains that this is particularly true in Texas, which, despite its reputation, is actually a high-tax state for the poor.

The statement cites a recent ITEP finding that Texas imposes higher taxes on its poorest 20 percent of non-elderly residents than 45 other states. In other words, Texas has the fifth highest taxes for low-income families.  Texas also has the 17th highest taxes on the next 20 percent of non-elderly residents. These are the same families that Governor Perry believes should contribute more in taxes.

Photos via Gage Skidmore Creative Commons Attribution License 2.0

The Institute on Taxation and Economic Policy (ITEP) offers a series of Policy Briefs designed to provide a quick introduction to basic tax policy ideas that are important to understanding current debates at the state and federal level. Over the next two weeks, ITEP will release eight new and updated Briefs that explore various elements of the state Personal Income Tax and offer options for improving its adequacy, stability, and fairness. The new briefs this week are:

· Income Tax Simplification: How to Achieve It

· Indexing Income Taxes for Inflation: Why It Matters

· Why States That Offer the Deduction for Federal Income Taxes Paid Get it Wrong

Warren Buffett, the billionaire investor and CEO of Berkshire Hathaway, called for higher taxes for millionaires in a widely-noted op-ed this week. As expected, the Wall Street Journal reacted with a variety of misleading counter-arguments. We conclude that:

1. Buffett is correct that the tax breaks that benefit the wealthy investor class, like the capital gains and dividends preferences, are unfair.

2. The Wall Street Journal’s arguments that these types of investment income are double-taxed are incorrect.

3. Contrary to what the Journal claims, President Obama’s tax plan is in keeping with Buffett’s call for higher taxes on millionaires.

Billionaire Investor Is Right to Call for Higher Taxes for the Rich and End of Breaks for Investment Income

Buffett points out that middle-class Americans are being asked to “sacrifice” as Congress and the new twelve-member “super committee” search for ways to reduce the budget deficit, but millionaires have not been asked to sacrifice anything. He argues that the super committee should ask millionaires to pay at higher rates than they pay today and should also end or reduce special tax preferences for investment income, which makes up most of the income of millionaires.

Citizens for Tax Justice has long made the case that these tax preferences — the special low income tax rates for capital gains and stock dividends, should be repealed entirely.

CTJ offers the example of an heiress who owns so much stock and other assets that she does not have to work. She receives stock dividends, and when she sells assets (through her broker, of course) for more than their original purchase price, she enjoys the profit, which is called a capital gain. On these two types of income, she only pays a tax rate of 15 percent.

Now consider a receptionist who works at the brokerage firm that handles some of the heiress’s dealings. Let’s say this receptionist earns $50,000 a year. Unlike the heiress, his income comes in the form of wages, because, alas, he has to work for a living. His wages are taxed at progressive rates, and a portion of his income is actually taxed at 25 percent. (In other words, he faces a marginal rate of 25 percent, meaning each additional dollar he earns is taxed at that amount).

On top of that, he also pays the federal payroll tax of around 15 percent. (Technically he pays only half of the payroll tax and his employer pays the other half, but economists generally agree that it’s all ultimately borne by the employee.) So he pays taxes on his income at a higher rate than the heiress who lives off her wealth.

What make this situation even worse are the various loopholes that allow wealthy individuals to receive these tax breaks for income that is not really even capital gains or dividends. As Buffett explains, fund managers use the “carried interest” loophole to have their compensation treated as capital gains and taxed at the low 15 percent rate, while the “60/40 rule” benefits traders who “own stock index futures for 10 minutes and have 60 percent of their gain taxed at 15 percent, as if they’d been long-term investors.”

CTJ has found that if Congress simply repealed the preference for capital gains entirely, three fourths of the tax increase would be borne by the richest one percent of taxpayers. (See page 19 of this report for estimates.) The tax preference for dividends expires at the end of 2012 if Congress does not extend it.

The Myth of Double-Taxed Investment Income

The Wall Street Journal starts with the following complaint about Buffett’s argument that his capital gains and dividend income is insufficiently taxed:

“What he doesn’t say is that much of his income was already taxed once as corporate income, which is assessed at a 35% rate (less deductions). The 15% levy on capital gains and dividends to individuals is thus a double tax that takes the overall tax rate on that corporate income closer to 45%.”

Anti-tax ideologues often claim that corporate profits are taxed twice, once under the corporate income tax and then again under the personal income tax when the shareholders receive them in the form of capital gains and dividends. There are several fatal flaws in this argument:

First, many corporate profits are not taxed, as GE, Verizon, Boeing, and many other corporations have demonstrated.

Second, two thirds of those dividends are actually paid to tax-exempt entities like pension funds or university endowments.

Third, a capital gain from selling a corporate stock is not necessarily a form of corporate profit. If stock value rises based on some expectation of a future increase in profits (which a drug company might enjoy after the FDA approves a new product, for example) that does not have anything to do with profits that the company has already received or paid taxes on.

In any case, the capital gains earned outside of tax-exempt plans are not taxed until shareholders sell their corporate stock at a profit, meaning those gains can be deferred indefinitely. Even when shareholders do report capital gains they often offset them with capital losses.

If one applies the logic of the “double-tax” argument more broadly, one would have to conclude that the wage and salary income of ordinary Americans is subject to several forms of taxes that wealthy investors don’t worry much about. For most Americans, income consists entirely of wages and all of it is subject to Social Security taxes and much or most of it is subject to the federal income tax. Then when people spend their income, a great deal of their purchases are subject to sales taxes.

Somehow the Wall Street Journal and its devotees only express concern over taxing income multiple times when wealthy investors are involved.

Ending Tax Cuts for Income Over $250,000 Actually Targets Millionaires

The Wall Street Journal also complains that, “Like Mr. Obama, Mr. Buffett speaks about raising taxes only on the rich. But somehow he ignores that the President’s tax increase starts at $200,000 for individuals and $250,000 for couples.”

But President Obama’s plan does target millionaires. A recent report from Citizens for Tax Justice explains that if enacted in 2011, 84 percent of the revenue savings from Obama’s income tax plan would come from people who make more than $1 million annually.

What is often not understood is that Obama’s plan would leave in place the Bush income tax reductions for the first $250,000 of adjusted gross income (AGI) for all married couples (and the first $200,000 for all unmarried taxpayers).

A married couple with adjusted gross income of $250,001 would pay higher taxes on at most one dollar, and face a tax hike of only 3 cents at most. But even that tiny tax hike would be extremely rare, since almost all couples at that income level itemize deductions. Typically, couples would have to make more than $295,000 before they lost any of their Bush income tax cuts.

Married taxpayers with incomes between $250,000 and $300,000 would lose just one percent of their Bush income tax cuts, on average, under President Obama’s plan.

The Wall Street Journal calls taxpayers with AGI in excess of $250,000/$200,000 “middle-class.” CTJ estimates that in 2013, when the Bush tax cuts are scheduled to expire, only 2.6 percent of taxpayers will have adjusted gross income in excess of the $250,000/$200,000 threshold.

This shows that President Obama is asking too few, rather than too many, Americans to pay higher taxes than they do today. 

Photos via The White House Creative Commons Attribution License 2.0

Earlier this year, governors in West Virginia and Arkansas signed legislation to lower their states’ sales tax on food, a policy both had championed.  West Virginia lowered the state’s sales tax on food from 3 to 2 percent and Arkansas’ was reduced from 2 to 1.5 percent.

Unlike most states, West Virginia and Arkansas were doing just fine budget-wise, so the tax cut was “affordable” and did not come at the expense of critical and core public services, which are often sacrificed for tax cuts.  Pursuing cuts to food sales taxes also set Mike Beebe (AK) and Earl Ray Tomblin (W.VA) apart from other governors who pushed for regressive tax cuts that primarily benefited upper-income households and businesses.

West Virginia’s Tomblin recently upped the ante, too, asking lawmakers during a special August 2011 session to end the state’s sales tax on food altogether, given the state’s finances were continuing to perform well.  The House and Senate heeded the governor’s request and agreed to phase out the remaining two percent sales tax on food by July 1, 2013. 

The phase-out is contingent on the health of the state’s Rainy Day Fund, which must be equal to or greater than 12.5 percent of the General Revenue Fund at the end of 2012. If that goal is met, the sales tax on food will be reduced to one percent on July 1, 2012 and totally eradicated on July 1, 2013.

While West Virginia’s decision to eliminate the sales tax on food is certainly more beneficial to more families than other states’ efforts to eliminate corporate and personal income taxes, there are smarter, more targeted strategies available to lawmakers seeking to improve the fairness of the sales tax and support working families.

As an updated ITEP brief explains, targeted tax credits are a preferred alternative to exempting products, such as food, from the sales tax base. 

Sales tax exemptions have two main disadvantages as policy. First, they make the sales tax base (that is, the total dollar amount collected from taxable items) much narrower, and reduce the yield of the tax.  Second, they make the exemptions available to all taxpayers, regardless of need or income.  For example, the poorest 40 percent of taxpayers typically receive only about 25 percent of the benefit from exempting groceries while the rest goes to wealthier taxpayers who can more easily afford to pay the grocery tax.

Targeted credits, on the other hand: are designed to apply to specific income groups deemed to be most in need of tax relief; are available only to in-state residents; can be less expensive than exemptions, and; do not affect the stability of the sales tax as a revenue source.

Rather than wholly eliminate the sales tax on food, West Virginia lawmakers could have followed the model of 24 states which have wisely enacted a state Earned Income Tax Credit to ensure the tax cut will primarily benefit low- and moderate-income families, those who need help the most and spend a larger proportion of their incomes on food.  Alternatively, a refundable food tax credit, implemented in Kansas, Oklahoma and Idaho, which helps offset sales taxes paid on food, would be a more preferable policy as it is also 1) targeted to taxpayers who need it most and 2) less disruptive to the state’s revenue – two characteristics of the smartest tax policies.

Photo via Judy Baxter Creative Commons Attribution License 2.0