Category: Archive

March 13, 2013 02:40 PM | Permalink |

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House Budget Chairman Paul Ryan’s budget plan for fiscal year 2014 and beyond includes a specific package of tax cuts (including reducing income tax rates to 25 percent and 10 percent) and no details on how Congress would offset their costs, all the while proposing to maintain the level of revenue that will be collected by the federal government under current law.

The revenue loss would presumably be offset by reducing or eliminating tax expenditures (tax breaks targeted to certain activities or groups), as in his previous budget plans. For taxpayers with income exceeding $1 million, the benefit of Ryan’s tax rate reductions and other proposed tax cuts would far exceed the loss of any tax expenditures. In fact, under Ryan’s plan taxpayers with income exceeding $1 million in 2014 would receive an average net tax decrease of over $200,000 that year even if they had to give up all of their tax expenditures. These taxpayers would see an even larger net tax decrease if Congress failed to limit or eliminate enough tax expenditures to offset the costs of the proposed tax cuts.

Given that Ryan’s plan specifies how taxes would be cut, but not how tax expenditures would be reduced to offset the costs, it is nearly impossible to estimate the impacts on taxpayers in most income groups. However, for very high-income taxpayers, it is possible to estimate a range of impacts, with one extreme being a scenario in which these taxpayers must give up all tax expenditures, and the other extreme being a scenario in which they give up no tax expenditures.[1]

The table above illustrates these two possible scenarios by including estimates of the minimum and maximum average net tax cuts that high-income taxpayers could receive in 2014 under Chairman Ryan’s plan. Because these very high-income taxpayers would pay less than they do today in either scenario, the average net impact of Ryan’s plan on some taxpayers at lower income levels would necessarily be a tax increase in order to fulfill Ryan’s goal of collecting the same amount of revenue as expected under current law.

The estimates of the minimum average net tax cuts assume that wealthy taxpayers would have to give up all of the tax expenditures that benefit them directly — except the huge breaks for investing and saving, which Ryan has pledged in the past to leave in place.[2] These tax breaks for investing and saving, particularly the lower tax rates for capital gains and stock dividends, provide the greatest benefits to the richest taxpayers. The estimates of the minimum average tax cuts also assume that the reduction in the corporate income tax rate would be offset by the elimination or reduction in tax expenditures that benefit businesses.

The estimates of the maximum average net tax cuts, on the other hand, assume that no tax expenditures are eliminated or reduced. The maximum average net tax breaks are what high-income taxpayers would receive if Congress enacts the specific tax cuts proposed in Ryan’s plan with no provisions to offset the revenue loss by limiting tax expenditures.

Chairman Ryan’s budget plan lays out (on page 24) the following “solutions” for our tax system:

• Simplify the tax code to make it fairer to American families and businesses.
• Reduce the amount of time and resources necessary to comply with tax laws.
• Substantially lower tax rates for individuals, with a goal of achieving a top individual rate of 25 percent.
• Consolidate the current seven individual-income-tax brackets into two brackets with a first bracket of 10 percent.
• Repeal the Alternative Minimum Tax.
• Reduce the corporate tax rate to 25 percent.
• Transition the tax code to a more competitive system of international taxation [widely understood to mean a territorial tax system].

Elsewhere the plan makes it clear (on page 54, for example) that the Affordable Health Care for America Act (President Obama’s major health care reform) would be repealed. This means the plan would repeal tax increases that were part of the health reform law, including a significant provision reforming the Medicare Hospital Insurance (HI) tax so that it has a higher rate for high-income earners and no longer exempts the investment income of wealthy taxpayers.

Despite all of these proposed tax cuts, Chairman Ryan’s plan also proposes to somehow maintain the level of revenue that will be collected by the federal government under current law.[3]

Ryan’s Budget Plan Is Not Meaningfully Different from His Previous Budget Plans

It has been noted that Chairman Ryan’s plan for fiscal year 2014 accepts the level of revenue that the federal government is projected to collect under current law, which includes the recent New Year’s Day deal addressing the “fiscal cliff” by letting some tax rates go up for the very rich and also includes the revenue raised in the Affordable Health Care for America Act. But this is far less impressive than it might sound, for two reasons.

First, Ryan’s plan includes the same revenue-reducing measures — the same tax rate reductions, the same repeal of the AMT, and the same repeal of health care reform — as his previous budget plans. Chairman Ryan simply leaves it to others to decide what tax expenditures to reduce or eliminate to make the entire package revenue-neutral compared to current law.[4]

Second, even the current law level of revenue is widely recognized to be inadequate to meet our nation’s needs. Ryan’s plan notes that under current law, federal revenue will equal 19.1 percent of GDP (19.1 percent of the overall economy) in 2023, and observers have noted that this is more than his previous budgets allowed.[5] But this level of revenue would not have balanced the budget even during the Reagan administration, when federal spending ranged from 21.3 percent to 23.5 percent of GDP. [6] That was at a time when America was not fighting any wars, the baby-boomers were not retiring, and health care costs had not yet skyrocketed the way they have today.

Chairman Ryan’s refusal to raise any more revenue is why his plan must rely on enormous cuts in public investments in order to balance the budget. As others have noted, Ryan’s plan cuts the number of people with health insurance by 40 to 50 million people, cuts $800 billion from the mandatory programs that mostly serve the poor (like Pell Grants, food assistance, the EITC, and Temporary Assistance for Needy Families) and cuts $700 billion from non-defense discretionary spending (like education, transportation, Head Start and housing assistance).[7] Ryan’s budget plan does all this while providing an annual tax cut of at least $200,000 to those with incomes exceeding $1 million.

	Tax Provisions of the Ryan Budget for Fiscal Year 2014
			Specified in Plan		Filling in the Blanks
	Income Tax Rates on Ordinary Income		Two rates, 10% and 25%.		The goal of the Ryan plan is to reduce rates, not raise them, so we assume that income tax rates currently higher than 25% will be replaced with the 25% rate while rates below 25% will all become 10%.
	Capital Gains and Dividends		Nothing, except to cite the alleged “double taxation of capital and investment” as one of three factors that “combine to suppress innovation, job creation, and economic growth.” Chairman Ryan’s previous budget plan specifically objected to “raising taxes on investing,”		Currently, the tax brackets in which ordinary income is taxed at 25% and 10% have a 15% and 0% rate, respectively, for capital gains/dividend income. We therefore assume the 25% and 10%  brackets in the Ryan plan would have 15% and 0% rates for capital gains and dividends. We do not assume a 20% rate for capital gains and dividends for those with taxable income above $450,000/$400,000 as in current law because this would require a third tax bracket, contradicting Ryan’s goal of having just two brackets.
	Tax Expenditures for Individuals		Nothing, except to say that the goal should be to “simplify the tax code” and “reduce the amount of time and resources necessary to comply with tax laws.” Ryan’s previous budget explicitly called for reducing or eliminating tax expenditures to offset the costs of the proposed tax cuts.		To calculate our minimum average net tax cuts, we assume that the very rich must give up all itemized deductions, all credits, the exclusion for employer-provided health care, and the deduction for health care for the self-employed. To calculate our maximum average net tax cuts, we assume none of these tax expenditures are reduced at all.
	Hospital Insurance (HI) tax increase in health reform		The plan makes clear that the health reform law would be repealed.		We assume the HI tax reform that was enacted as part of the health reform law would be repealed.
	Corporate Tax Statutory Rate		Cut to 25%		We assume corporate tax cuts ultimately are borne by the owners of capital (corporate stocks and other business assets) about half of which are concentrated in the hands of the richest one percent.
	Corporate Tax Treatment of Offshore Profits		“Transition the tax code to a more competitive system of international taxation”		This is widely understood to refer to a “territorial” system, meaning a tax system that exempts offshore profits from taxes.
	Tax Expenditures for Business		The plan decries the complexity that is generally caused by tax expenditures. It says that “American corporations engage in elaborate tax planning because the current tax code puts them at a competitive disadvantage compared to their foreign competitors,” and that “companies engage in complex transactions purely to reduce their tax burden even when these schemes divert resources from more productive investments.”		To calculate the minimum average net tax cuts, we assume that enough would be eliminated to offset corporate rate cuts and the transition to a territorial system. To calculate the maximum average net tax cut, we assume no tax expenditures are reduced or eliminated.

 

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[1] Some of the details that need to be filled in for Ryan’s plan would have little effect on the tax bills of very high-income taxpayers. For example, Ryan’s plan does not specify the level of taxable income at which the 10 percent rate would end and the 25 percent rate would begin, and it says nothing about standard deductions and personal exemptions. We assume that all income tax rates currently above 25 percent are replaced with the 25 percent rate, and all rates below the current 25 percent rate are replaced with the 10 percent rate. We also assume no change to standard deductions and personal exemptions. These assumptions make little difference for very high-income taxpayers, because the vast majority of their income would be taxed at the 25 percent rate in any event under Ryan’s plan. But these details could dramatically impact the tax liability of low- and middle-income taxpayers.

[2] The budget plan for fiscal year 2014 does not specify how special income tax rates for investment income and special breaks for savings and investment will be treated, but does cite the alleged “double taxation of capital and investment” as one of three factors that “combine to suppress innovation, job creation, and economic growth.” Ryan’s previous budget plan specifically objected to “raising taxes on investing,” making it extremely difficult to believe Ryan would propose to do so the very next year.

[3] The table on page 78 shows no revenue change, compared to “current policy.” Then the table on page 81 provides the “cross-walk” from CBO’s baseline to what Ryan calls “current policy.” For revenue, the difference is zero dollars.

[4] Chairman Ryan seems eager to specify the tax cuts in his plan, but when it comes to paying for those tax cuts, he becomes deferential to the House Ways and Means Committee (the tax-writing committee). Ryan’s plan claims that it “accommodates the forthcoming work by House Ways and Means Committee Chairman Dave Camp of Michigan. It provides for floor consideration of legislation providing for comprehensive reform of the tax code.” The portion of Ryan’s plan describing tax reform cites, and is nearly identical to, a letter from Camp describing the tax reform Ways and Means Republicans will pursue. Everything described in the letter is consistent with the tax provisions Ryan has proposed in his previous budget plans. Letter from House Ways and Means Committee Republicans to House Budget Committee Chairman Paul Ryan, http://budget.house.gov/uploadedfiles/fy14budgetletterwm.pdf

[5] Suzy Khimm, “Paul Ryan Wants More Revenue,” Washington Post Wonkblog, March 12, 2013. http://www.washingtonpost.com/blogs/wonkblog/wp/2013/03/12/paul-ryan-wants-more-revenue/

[6] Office of Management and Budget, Historical Tables, Table 1.2. http://www.whitehouse.gov/omb/budget/Historicals/

[7] Statement by Robert Greenstein, President, On Chairman Ryan’s Budget Plan, Center on Budget and Policy Priorities, March 12, 2013. http://www.cbpp.org/cms/index.cfm?fa=view&id=3920

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March 11, 2013 04:12 PM | Permalink |

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92 Fortune 500 Corporations Boosted Their Offshore Stash by Over $500 Million Each

In recent years, multinational U.S.-based corporations have systematically accumulated staggering amounts of profits offshore. Much if not most of these profits were actually earned in the United States but have been artificially shifted to foreign tax havens to avoid U.S. corporate income taxes.

Ten particularly aggressive companies report that their offshore profit holdings have grown by more than $5 billion each in just the past year. Apple Inc. reports adding $28 billion in offshore cash in the past year, while Microsoft’s offshore stash increased by $16 billion.1 Other Fortune 500 companies adding at least $5 billion offshore in the past year include Pfizer, Merck, Google,2 Abbott Laboratories, Johnson & Johnson, Citigroup, IBM, and General Electric. These ten companies increased their offshore profit holdings by a total of $107 billion in just the past year.

In the same year, 92 Fortune 500 corporations each boosted their reported offshore profit holdings by at least $500 million. In total, these 92 corporations added an additional $229 billion to their offshore profit hoards in 2012 alone. (See table on p. 4 and 5 of PDF)

Under current law, so-called “foreign” corporate profits are not subject to U.S. tax unless and until the profits are repatriated into the United States. According to the congressional Joint Committee on Taxation, this indefinite deferral of tax on profits ostensibly earned or shifted overseas will cost the federal government about $600 billion over the upcoming decade.3

But lobbyists for the multinationals are urging Congress to go even further, by permanently exempting from U.S. corporate income taxes all profits that U.S. corporations manage to have treated as “foreign.” Such a change would make it even more profitable for multinational corporations to shift jobs and profits out of the United States, and could cost the U.S. government hundreds of billions of dollars in additional lost revenues.

Over the Past Four Years, 48 Corporations Added $518 Billion to their Offshore Profit Hoards

Showing that 2012 is not an exception, over the past four years, 48 corporations each added at least $3 billion to their offshore profit hoards. The total that these 48 companies added over four years was $518 billion.

Some companies, of course, had even higher additions to their offshore profit hoards over the past four years. Apple Inc. topped the four-year list, adding $65 billion to its offshore holdings of cash and marketable securities. Fourteen other corporations also added at least $10 billion to their offshore profit holdings over the last four years. These were: Microsoft, Pfizer, General Electric, Merck, Google, Abbott Laboratories, IBM, Cisco Systems, Hewlett-Packard,4 Johnson & Johnson, Citigroup, Procter & Gamble, Oracle and PepsiCo. (See table on p. 6. of PDF)

Offshoring is Much More Widespread

The offshoring phenomenon goes well beyond the group of companies just highlighted. A December 2012 CTJ report shows that almost 300 Fortune 500 corporations have disclosed holding at least some profits overseas, and that these companies collectively held over $1.6 trillion offshore at the end of 2011.5

Of this group, 47 corporations indirectly disclosed how much U.S. tax they would owe if their $384 billion in offshore profit holdings were subject to U.S. corporate income tax. Just for these companies, the taxes due would total $105 billion. These figures strongly indicate that most of those profits have been shifted out of the U.S. into foreign tax havens where the companies do no actual business.6

Michigan Senator Carl Levin recently observed that such practices may be legal, but they shouldn’t be; ending the practice of deferral would render artificial profit shifting illegal and would restore significant revenues to the U.S. Treasury.
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1 A recent Senate Permanent Subcommittee on Investigations hearing revealed that Microsoft shifted 47 percent of the profits earned on products developed and sold in the U.S. to subsidiaries in foreign tax havens. http://www.hsgac.senate.gov/subcommittees/investigations/media/subcommittee-hearing-to-examine_billions-ofdollars-in-us-tax-avoidance-by-multinational-corporations-

2 Google, Starbucks, and Amazon were recently called before a U.K. Parliament committee to answer charges that they were dodging U.K. taxes by artificially shifting profits to tax haven countries. See Rajeev Syal and Patrick Wintour, “MPs attack Amazon, Google and Starbucks over tax avoidance,” The Guardian, December 2, 2012 available at http://www.guardian.co.uk/business/2012/dec/03/amazon-google-starbucks-tax-avoidance.

3 See Joint Committee on Taxation, Estimates of Federal Tax Expenditures for Fiscal Years 2012-2017, Feb. 1, 2013 (JCS-1-13), page 30. The JCT report estimates that “deferral of active income of controlled foreign corporations” will cost $265.7 billion over the 2013-17 period. Extrapolating out the following five years brings the 10-year cost to more than $600 billion. https://www.jct.gov/publications.html?func=startdown&id=4503

4 Hewlett-Packard was also the target of a recent Senate Permanent Subcommittee on Investigations probe. See http://www.hsgac.senate.gov/subcommittees/investigations/media/subcommittee-hearing-to-examine_billions-ofdollars-in-us-tax-avoidance-by-multinational-corporations-.

5 Citizens for Tax Justice, “Fortune 500 Corporations Holding $1.6 Trillion in Profits Offshore,” December 13, 2012, page 10. https://ctj.sfo2.digitaloceanspaces.com/pdf/unrepatriatedprofits.pdf

6 Eli Lilly, for example, reported that it would owe the full 35 percent U.S. corporate tax if it “repatriated” all of the $20.6 billion it had parked overseas at the end of 2011. But since the U.S. gives a credit for any income taxes paid to foreign governments that means that Eli Lilly has paid no income tax to any government on its offshore income. Which, in turn, means that the profits must have been artificially shifted from where they were actually earned into tax-free havens. Overall, the 47 corporations that disclosed what they would owe if they repatriated their offshore profits said that they would pay a U.S. tax of 27 percent. That implies that more than three-quarters of the profits (27%/35%) have never been taxed by any government. See Citizens for Tax Justice, “Which Fortune 500 Companies Are Sheltering Income in Overseas Tax Havens,” Oct. 17, 2012. http://ctj.org/ctjreports/2012/10/which_fortune_500_companies_are_sheltering_income_in_overseas_tax_havens.php

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February 14, 2013 09:52 AM | Permalink |

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Earlier this month, the Facebook Inc. released its first “10-K” annual financial report since going public last year. Hidden in the report’s footnotes is an amazing admission: despite $1.1 billion in U.S. profits in 2012, Facebook did not pay even a dime in federal and state income taxes.

Instead, Facebook says it will receive net tax refunds totaling $429 million.

Facebook’s income tax refunds stem from the company’s use of a single tax break, the tax deductibility of executive stock options. That tax break reduced Facebook’s federal and state income taxes by $1,033 million in 2012, including refunds of earlier years’ taxes of $451 million.[1]

But that’s not all of the stock-option tax breaks that Facebook generated from its initial public offering of stock (IPO). Facebook is also carrying forward another $2.17 billion in additional tax-option tax breaks for use in future years.[2]

So in total Facebook’s current and future tax reductions from the stock options exercised in connection with its IPO will total $3.2 billion. That’s almost exactly what CTJ predicted last year, when Facebook first announced its IPO.[3]

Of course, Facebook is not the only corporation that benefits from stock option tax breaks.

Many big corpora­tions give their executives (and sometimes other employees) options to buy the company’s stock at a favorable price in the future. When those options are exercised, corporations can take a tax deduction for the difference between what the employees pay for the stock and what it’s worth (while employees report this difference as taxable wages). Before 2006, companies could not only deduct the “cost” of the stock options on their tax returns, reducing their taxable profits as reported to the IRS, but they also didn’t have to reduce the profits they reported to their shareholders in the same way, creating a big gap between “book” and “tax” income.

Some observers, including CTJ, have argued that the most sensible way to resolve this incongruity would be to deny companies any tax or “book” deduction for an alleged “cost” that doesn’t require a dime of cash outlay.[4] But instead, rules in place since 2006 now require companies to lower their “book” profits to take some account of options. But the book write-offs are still usually considerably less than what the companies take as tax deductions. That’s because the oddly-designed rules require the value of the stock options for book purposes to be calculated — or guessed at — when the options are issued, while the tax deductions reflect the actual value when the options are exercised. Because companies typically low-ball the estimated values, they usually end up with bigger tax deductions than they deduct from the profits they report to shareholders.      

A November 2011 CTJ report assessing the taxes paid by the Fortune 500 corporations that were consistently profitable from 2008 through 2010 identified this stock option tax break as a major factor explaining the low effective tax rates paid by many of the biggest Fortune 500 companies.[5]

Some members of Congress have recently taken aim at this remaining tax break. In July of 2011, Senator Carl Levin (D-MI) introduced the “Ending Excess Executive Corporate Deductions for Stock Options Act,” to require companies to treat stock options the same for both book and tax purposes. Levin has signaled his intention to introduce similar legislation in early 2013. According to calculations made by Levin’s staff using IRS data, in the past five years U.S. companies have consistently deducted far more stock options for tax purposes than they recorded as a book expense. This “excess” deduction, according to Levin’s calculations, has ranged between $12 billion and $61 billion a year.

 

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[1] “The tax benefits realized from share-based award activity of $1.03 billion related to both the reduction of current year income tax liabilities and the expected refund of $451 million from income tax loss carrrybacks to 2010 and 2011.” Facebook Inc. 10-K for 2012, p. 84.

[2] Facebook’s disclosure of this huge carryforward of stock option tax breaks is cryptic, but clear to those of us who are familiar with corporate annual reports: “As of December 31, 2012, the U.S. federal and state net operating loss carryforwards were approximately $5.83 billion and $7.62 billion, which will expire in 2027 and 2021, respectively, if not utilized. If realized, $2.17 billion of net operating loss carryforwards will be recognized as a benefit through additional paid in capital.” (emphasis added.) Facebook Inc. 10-K for 2012, p. 85.

[3]“Putting a Face(book) on the Corporate Stock Option Tax Loophole,” by Robert S. McIntyre, Citizens for Tax Justice, Feb. 2012, www.ctj.org/pdf/FacebookReport.pdf.

[4] For a fuller explanation of CTJ’s position, see “Putting a Face(book) on the Corporate Stock Option Tax Loophole,” by Robert S. McIntyre, Citizens for Tax Justice, Feb. 2012, www.ctj.org/pdf/FacebookReport.pdf.

[5] Citizens for Tax Justice, “Corporate Taxpayers & Corporate Tax Dodgers, 2008-2010,” November 3, 2011, page 10. http://ctj.org/corporatetaxdodgers/.

 

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February 6, 2013 03:51 PM | Permalink |

Citizens for Tax Justice has an online calculator that will tell you what you’d pay in federal taxes in 2013 under three different scenarios:

1) Congress did nothing during the New Year and allowed the “fiscal cliff” to take effect.

2) Congress extended all tax cuts in effect in 2012 and delayed all tax increases that were scheduled to go into effect.

3) Congress enacted the American Taxpayer Relief Act, which extended most, but not all tax cuts. This is the law that was actually enacted.

Basic Calculator
If you are an employee, your income comes entirely from wages or salary, and you take the standard deduction, click here to calculate your likely taxes in 2013 under the three different scenarios.

Detailed Calculator
If you have other types of income or if your situation is more complicated, click here to calculate your likely taxes in 2013 under the three different scenarios.

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February 4, 2013 06:17 PM | Permalink |

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In recent weeks, Dave Camp of Michigan, the Republican chairman of the House Ways and Means Committee, released tax proposals related to the complex world of derivatives that would have real benefits — if Camp was not proposing to use all the resulting revenue savings to offset cuts in tax rates.[1] Congress instead should consider enacting these proposals and using the revenue to protect and preserve programs like Medicare that are increasingly targeted for self-destructive cuts.

Current tax law treats “derivatives” — futures contracts, options, swaps, and so forth — in a variety of ways, none of them correct. This allows taxpayers to use derivatives to avoid or defer taxes on investment income.

Derivatives — the Basics

A derivative can be thought of as a contract between two parties to make some sort of transaction and that has a value derived from the underlying asset involved in that transaction. For example, two people can enter into a contract that gives party A the right to buy stock from party B at a certain price in the future. If the price of the stock rises above that price, party A wins (he gets to buy the stock at less then its value) and party B loses (he has to sell the stock at less than its value). Conversely, if the stock value turns out to be less than the contract price, party B wins (and party A loses).

Derivatives can be useful financial tools for businesses, particularly for hedging risks. For example, a farm business may want to reduce risk by setting a future price for its crops at a certain level. So the farm agrees to sell the crops at a future date at that certain price. The buying party is betting that the value of the crops will be higher in the future. This “hedging” may or may not turn out to maximize the farm’s profits, but the business can eliminate its downside risk.

In recent years, derivatives have become far more complex, particularly as they have become traded by individual and corporate investors who have no connection to or interest in the underlying assets. For example, imagine that neither party in the contract described above actually owns or plans to buy the crops that the contract refers to. The contract really is just a bet by the two parties on which way the crops’ value will move.

How Derivatives Are Used for Tax Avoidance

Derivatives can also create huge opportunities for tax avoidance. To take just one example, some high-profile people of enormous wealth, including Ronald S. Lauder, heir to the Estée Lauder fortune, have used a derivative called a “variable prepaid forward contract” to sell stock without paying taxes on the capital gains for a long time. Lauder entered into a contract to lend $72 million worth of stock to an investment bank and promised to sell the stock to the bank at a future date at a discounted price, in return for an immediate payment of cash.[2] The contract also hedged against any loss in the value of the stock. The contract put Lauder in a position that is economically the same as having sold the stock — he received cash for the stock and did not bear the risk of the stock losing value — and yet he does not have to pay tax on the capital gains until several years later, when the sale of the stock technically occurs under the contact.

Billy Joe “Red” McCombs, co-founder of Clear Channel and former owner several sports teams, used the same type of derivative, the “variable prepaid forward contract,” to dodge capital gains taxes. He entered into a contract to lend an investment bank his Clear Channel stock for $292 million and officially sell the stock to the bank several years later. The IRS did decide that the contract was actually a sale, and that he owed $44.7 million in back taxes — but then settled for only half that amount.[3] Dole Food Co. Chairman David H. Murdock and former AIG chairman and CEO Maurice “Hank” Greenberg have both entered the same type of contracts for hundreds of millions of dollars.[4]

Key Reform Proposal: Mark-to-Market Taxation

The most significant of Chairman Camp’s proposals would subject most derivatives to what is called “mark-to-market” taxation. At the end of each year, gains and losses from derivatives would be included in income, even if the derivatives were not sold. All profits (and losses) would be treated as “ordinary,” meaning that they would be treated as regular income and would be ineligible for the special low tax rates on capital gains. The new rule would exempt those derivatives that are used for actual business hedging.

Assuming the mark-to-market system is implemented properly without loopholes or special exemptions for those with lobbying clout, the result would be that the types of tax dodges described above would no longer provide any benefit. The taxpayers would not bother to enter into those contracts because they would be taxed at the end of the year on the value of the contracts (meaning they are unable to defer taxes on capital gains) and the gains would be taxed at ordinary income tax rates.

There is no revenue estimate for this proposal at this time, but experts believe it could raise substantial revenues from curbing tax avoidance. Unfortunately, Chairman Camp proposes to use the revenue savings from this and other loophole-closing provisions to offset reductions in tax rates, but there is no reason why Congress could not enact this reform as a way to raise revenue.

 

 

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[1] See the House Ways and Means Committee’s Tax Reform web page. http://waysandmeans.house.gov/taxreform/default.aspx

[2] David Kocieniewski, “A Family’s Billions, Artfully Sheltered,” New York Times, November 26, 2011. http://www.nytimes.com/2011/11/27/business/estee-lauder-heirs-tax-strategies-typify-advantages-for-wealthy.html?_r=0&pagewanted=all

[3] Jesse Drucker, “Buffett-Ducking Billionaires Avoid Reporting Cash Gains to IRS,” Bloomberg, November 21, 2011. http://www.bloomberg.com/news/2011-11-21/billionaires-duck-buffett-17-tax-target-avoiding-reporting-cash-to-irs.html

[4] Id.

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February 4, 2013 01:37 PM | Permalink |

End Tax Sheltering of Investment Income and Corporate Profits and Limit Tax Breaks for the Wealthy: There are at least three major categories of tax reforms Congress could pursue to raise revenue. They include ending tax breaks and loopholes that allow wealthy individuals to shield their investment income from taxation, and ending breaks and loopholes that allow large, profitable corporations to shift their profits offshore to avoid U.S. taxes, and limiting the ability of wealthy individuals to use itemized deductions and exclusions to lower their taxes.

Read the working paper

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January 25, 2013 01:28 PM | Permalink |

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A new report from the non-partisan Congressional Research Service (CRS) finds that U.S. corporations report a huge share of their profits as officially earned in small, low-tax countries where they have very little investment and workforce while reporting a much smaller percentage of their profits in larger, industrial countries where they actually have massive investments and workforces.[1] The report confirms that U.S. corporations are artificially inflating the proportion of their global profits that are generated in small, low-tax countries — in other words, shifting their profits to tax havens.

CRS looked at the location of foreign profits, as reported by U.S.-based multinationals in surveys conducted by the Commerce Department’s Bureau of Economic Analysis. CRS’s report focused on five small countries generally considered to be tax havens (the Netherlands, Luxembourg, Ireland, Bermuda and Switzerland) and compared them to five of the top “traditional” foreign countries where American companies actually do business (Canada, Germany, the United Kingdom, Australia and Mexico). The results are striking.

Comparing reported profits to workforce and investments, CRS finds:

■ In 2008, American multinational companies reported earning 43 percent of their $940 billion in overseas profits in the five little tax-haven countries, even though only four percent of their foreign workforce and seven percent of their foreign investments were in these countries.

■ In contrast, the five “traditional economies,” where American companies had 40 percent of their foreign workers and 34 percent of their foreign investments, accounted for only 14 percent of American multinationals’ reported overseas’ profits.

When comparing reported profits to countries’ total economic output (gross domestic product), what CRS finds is even more alarming:

■ U.S. multinational profits in the five traditional economies averaged one to two percent of those countries’ total economic output. But the multinationals’ reported profits in the five tax-haven countries averaged 33 percent of those tax havens countries’ economies.

■ More specifically, U.S. multinational foreign profits reported in Bermuda equaled a ridiculous 1000 percent of that tiny island’s total economic output. That was up by a factor of five since 1999.

■ In even tinier Luxembourg, American business profits jumped from 19 percent of that country’s economy in 1999 to 208 percent the economy by 2008.

These preposterous disparities between “the profits reported by American firms in the two groups of countries . . .  compared with measures of real economic activity in those locations,” CRS concludes, are further “evidence that American companies are shifting profits in an attempt to reduce their tax liabilities and that U.S. tax revenues suffer as a result.”

If asked whether American multinational corporations engage in tax avoidance by shifting their profits into tax havens, any knowledgeable person would honestly answer, “Of course.” But corporate lobbyists and CEOs deny this, or say, in the standard corporate gobbledegook: “Our company pays all applicable taxes in every jurisdiction where we operate.”[2]

What’s most alarming is that the tax avoidance by these corporations is mostly legal. Our tax rules allow U.S. corporations to “defer” (delay) paying U.S. taxes on their offshore profits until those profits are brought to the U.S. (until those profits are “repatriated”). Often those profits are never repatriated. The benefit of deferral creates an incentive for corporations to take profits that are really generated from business activity in the U.S. and claim that they are “foreign” profits generated in countries with no corporate tax or a very low corporate tax (offshore tax havens).

The tax rules make it easy for U.S. corporations to claim that more of their profits are generated abroad than is really the case. For example, multinational corporations are allowed to move intangible assets like patents between subsidiaries in different countries and turn U.S. profits into royalties paid by U.S. corporations to their subsidiaries in tax havens. The U.S. corporations are, officially, left with no profits to report to the IRS, and are able to defer U.S. taxes on the profits that are officially earned by the subsidiaries in tax havens.

A number of legislative reforms could reduce this type of corporate tax avoidance, and many have been proposed by the President. But, as we have explained elsewhere, ending this type of tax avoidance by corporations ultimately will require ending deferral.[3]

 

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[1] Mark P. Keightley, “An Analysis of Where American Companies Report Profits: Indications of Profit Shifting,” Congressional Research Service, January 18, 2013.

 

[2] Jesse Drucker, “Yahoo, Dell Swell Netherlands’ $13 Trillion Tax Haven,” Bloomberg, January 23, 2013. http://www.bloomberg.com/news/2013-01-23/yahoo-dell-swell-netherlands-13-trillion-tax-haven.html

 

[3] Citizens for Tax Justice, “Congress Should End ‘Deferral’ Rather than Adopt a ‘Territorial’ Tax System,” March 23, 2011. https://ctj.sfo2.digitaloceanspaces.com/pdf/internationalcorptax2011.pdf

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January 17, 2013 11:34 AM | Permalink |

More Detailed Tables in Appendix in Full Report

Read the full report in PDF

The expiration of parts of the Bush-era income tax cuts under the fiscal cliff deal affects just under one percent of taxpayers this year, while the expiration of the payroll tax cut affects over three-fourths of taxpayers this year.

The fiscal cliff deal (the American Taxpayer Relief Act of 2012), which was approved by the House and Senate on New Year’s Day and signed into law by President Obama, extended most of the Bush-era income tax cuts but allowed all of the payroll tax cut in effect over the previous two years to expire.

The table to the right shows the percentage of taxpayers nationally and in each state who will pay higher income taxes or payroll taxes as a result in 2013.

Under the fiscal cliff deal, even the wealthiest Americans will continue to receive some of the tax cuts first enacted under President George W. Bush in 2001 and 2003. Under the new law, the Bush-era income tax rate reductions no longer apply to taxable income over $450,000 for married couples and over $400,000 for singles. But even multi-millionaires will still enjoy the rate reductions that apply for all taxable income below these levels. Also, many people have gross income exceeding $450,000 or $400,000 but will lose no part of their income tax cuts because their exemptions and deductions reduce their taxable income to a much lower amount.

The Bush-era income tax cuts also included the repeal of the personal exemption phase-out and the limit on itemized deductions (often called PEP and Pease). The fiscal cliff deal allows PEP and Pease to come back into effect (and therefore limits personal exemptions and itemized deductions), but only for married couples with adjusted gross income (AGI) exceeding $300,000 and singles with AGI exceeding $250,000.

The payroll tax cut in effect in 2011 and 2012 had reduced the Social Security payroll tax that employed people pay directly from 6.2 percent of earnings to 4.2 percent of earnings. (The Social Security payroll tax applies to earnings up to a maximum, which is $113,700 in 2013, and not to any earnings above that level.) The payroll tax cut benefited everyone with income in the form of wages or salary.

The appendix in the full report includes more detailed tables showing the percentage of taxpayers in each income group in each state who lose part of the income tax cuts or the payroll tax cut under the deal. Read the full report in PDF.  

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January 10, 2013 01:56 PM | Permalink |

The fiscal cliff deal (the American Taxpayer Relief Act of 2012) makes permanent nearly all of the Bush tax cuts and extends many of the tax provisions from the 2009 economic recovery act. In fact, the only major provision of the tax breaks in effect in 2012 that was allowed to expire entirely was the 2 percent payroll tax holiday. This table explains the income and estate tax provisions in the major proposals and final deal that became law.

Read the fact sheet

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January 3, 2013 05:05 PM | Permalink |

While the White House and members of Congress have described the fiscal cliff deal as raising $620 billion in revenue, the Joint Committee on Taxation (JCT), the official revenue estimator for Congress, has projected that it will actually reduce revenue by $3.9 trillion over a decade.  The widely-used $620 billion figure is calculated by comparing the bill’s provisions making permanent most of the Bush-era tax cuts to a proposal for making permanent all the Bush-era tax cuts.  As explained below, the revenue “savings” is likely to be offset by the business tax cuts that are also included in the bill and which are now likely to be extended over and over throughout the decade and beyond.

Read the report

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