Category: Archive

April 12, 2016 04:00 PM | Permalink |

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All Americans pay taxes. Most of us pay federal and state income taxes. Everyone who works pays federal payroll taxes. Everyone who buys gasoline pays federal and state gas taxes. Everyone who owns or rents a home directly or indirectly pays property taxes. Anyone who shops pays sales taxes in most states.

The federal income by itself is progressive. But when all of the taxes we pay are taken into account, most of that progressivity disappears. Those who advocate for tax cuts for the highest earners and erroneously claim that the wealthy are overtaxed focus solely on the federal personal income tax, while ignoring all of the other taxes that Americans pay. As the table to the right illustrates, the total share of taxes (federal, state, and local) that will be paid by Americans across the economic spectrum in 2016 is roughly equal to their total share of income. 

Many of the taxes we pay are regressive, meaning they take a larger share of income from poor and middle-income families than they do from the rich. To offset the regressive impact of payroll taxes, sales taxes and even some state and local income taxes, we need federal income tax policies that are more progressive than they are now.

Some features of the federal income tax mitigate the regressivity of other taxes, at least to a degree. For example, the federal personal income tax provides refundable tax credits such as the Earned Income Tax Credit (EITC) and the Child Tax Credit, which can reduce or eliminate federal personal income tax liability for low-income working families and can even result in negative personal income taxes, meaning families receive a check from the IRS.

These tax credits are only available to taxpayers who work and therefore pay federal payroll taxes. These progressive provisions do make the income tax more progressive, but overall they do little more than offset the regressivity of other taxes that poor and middle-income families pay.

Estimates from the Institute on Taxation and Economic Policy tax model, which are illustrated in these charts and tables, include the following key findings:

■ The richest one percent of Americans have 21.6 percent of total income and pay 23.6 percent of total taxes.

■ The poorest one-fifth of Americans have 3.3 percent of total income and pay 2.1 percent of total taxes.

■ Each income group’s share of taxes is quite similar to each group’s share of total income.

■ Contrary to popular belief, when all taxes are considered, the rich do not pay a dispropor­tionately high share of taxes. Although each income quintile pays combined federal, state and local taxes that are roughly equivalent to their share of the nation’s income, this by no means indicates our tax system is fine as is.  In a truly progressive tax system, millionaires and billionaires wouldn’t be paying roughly the same tax rates as working families earning $100,000 per year. 

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April 11, 2016 12:31 PM | Permalink |

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This CTJ report illustrates how profitable Fortune 500 companies in a range of sectors of the U.S. economy have been remarkably successful in manipulating the tax system to avoid paying even a dime of tax on billions of dollars in U.S. profits. These 15 corporations’ tax situations shed light on the widespread nature of corporate tax avoidance.  As a group, the 15 companies paid no federal income tax on $21 billion in profits in 2015. Even more astonishingly, as a group they paid no federal income tax on $93 billion in profits over the past five years. Seven of these companies received federal tax rebates in 2015, and almost all paid exceedingly low rates over five years.

Companies Represent Diverse Economic Sectors

The companies profiled here represent a range of segments of the U.S. economy:

• The telephone and Internet service provider Centurylink enjoyed $1.2 billion in U.S. profits last year, and paid a federal tax rate of just 2.3 percent.
• Online video streaming service Netflix received a tax rebate of $14 million in 2015.
• Over the past five years, the manufacturer International Paper has paid no federal income taxes on $4.2 billion in U.S. profits.
• Ryder System, which provides truck rentals and related services, paid a 0.2 percent federal income tax rate in 2015 and over the past five years a negative 0.6 percent rate.
• California-based utility PG&E had sharply negative tax rates both in 2015 and over the five-year period.

All 15 companies’ effective federal income tax rates for 2015 and the 2011-15 period are shown in the table below.

Companies’ Low Taxes Stem from a Variety of Legal Tax Breaks

While recent policy discourse has focused on multinational corporations that use offshore tax havens to minimize their tax liability, the companies profiled here appear to be using a diverse array of other tax breaks to zero out their federal income taxes:[1]

Jetblue, PG&E and Ryder used accelerated depreciation, a tax break that allows companies to write off the cost of their capital investments much faster than these investments wear out, to dramatically reduce their tax rates. CTJ has estimated that closing the accelerated depreciation loophole could raise more than $428 billion over the next decade.[2] Both Congress and President Barack Obama, however, have supported expanding the scope of this tax break in recent years. 

Netflix relied heavily on a single tax break — writing off the value of executive stock options for tax purposes — to zero out its tax liability in 2015, and enjoyed $250 million in stock option tax breaks over the past three years. Former U.S. Senator Carl Levin (D-MI) has estimated that this tax break will costs $23 billion over the next decade. [3] Netflix also reduced its tax rate using the research and experimentation credit.

International Paper has enjoyed more than $100 million in tax benefits for manufacturing over the past five years.

Qualcomm enjoyed more than $440 million in research and experimentation tax breaks over the past five years. The research tax credit has been criticized for rewarding companies for “research” they would have done anyway, as well as rewarding research in areas such as fast-food packaging. [4]

Corporate Tax Reform Should Repeal Tax Loopholes and Restore Overall Corporate Tax Revenues to a More Reasonable Level

In recent years, the public’s attention has been drawn to the elaborate tax avoidance mechanisms used by huge corporations such as General Electric, Apple, Microsoft and others. But as this report indicates, the scope of corporate tax avoidance goes well beyond these few companies and spans a wide variety of economic sectors. Moreover, the tax breaks that have allowed these companies to be so successful in their tax avoidance are, by and large, perfectly legal, and often have been on the books for decades.

As Congress focuses on strategies for revamping the U.S. corporate income tax, a sensible starting point should be to critically assess the costs of each of these tax breaks and to take steps to ensure that profitable corporations pay their fair share of U.S. taxes. 

The next step is just as important. The revenues raised from eliminating corporate tax subsidies should not be given back to corporations in the form of tax-rate reductions, as corporate lobbyists and their allies inside the Washington Beltway argue. Instead, as the vast majority of Americans understand, these desperately needed revenues should be used to address our nation’s fiscal problems and to make critically needed public investments in our nation’s future.

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[1] Accelerated depreciation and the stock options loophole, and how Congress could raise revenue by repealing them, are described in  Citizens for Tax Justice, “Policy Options to Raise Revenue,” March 8, 2012. http://ctj.org/ctjreports/2012/03/policy_options_to_raise_revenue.php The “active financing exception” is described in Citizens for Tax Justice, “Don’t Renew the Offshore Tax Loopholes,” August 2, 2012. http://ctj.org/ctjreports/2012/08/dont_renew_the_offshore_tax_loopholes.php 

[2] Citizens for Tax Justice, “Addressing the Need for More Federal Revenue,” July 8, 2014. https://ctj.sfo2.digitaloceanspaces.com/pdf/policyoptions2014.pdf

[3] Ibid.

[4] Citizens for Tax Justice, “Reform the Research Tax Credit — Or Let It Die,” December 4, 2013. http://ctj.org/ctjreports/2013/12/reform_the_research_tax_credit_–_or_let_it_die.php

 

 

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April 7, 2016 05:42 PM | Permalink |

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Recent revelations that a Panamanian law firm helped set up more than 200,000 offshore shell corporations has heightened awareness of the vast amount of income and wealth flowing into tax and secrecy havens worldwide. The countries through which this firm helped funnel the global elites’ assets also act as tax havens for multinational corporations. Recently released data from the Internal Revenue Service show that U.S. corporations claim that 59 percent of their foreign subsidiaries’ pretax worldwide income is being earned in ten tiny tax havens.

The table below shows how much profit American corporations collectively tell the IRS that their subsidiaries have earned in each foreign country. Amazingly, American corporations reported to the IRS that the profits their subsidiaries earned in 2012 (the latest year for which data are available) in Bermuda, the Cayman Islands, the Bahamas and Luxembourg were greater than the entire gross domestic product (GDP) of those nations in that year. For example, in Bermuda, U.S. corporations claimed they earned more than $18 for each $1 of actual GDP.

It is obviously impossible for American corporations to earn profits in a given country that exceed that country’s total output of goods and services. Clearly, American corporations are using various tax gimmicks to shift profits earned in the U.S. and other countries where they do the bulk of their business into their subsidiaries in these tiny countries that impose little or no tax on corporate profits.

Besides the aforementioned, the data indicate that other countries also serve as tax havens for American multinational corporations. For example, American corporations report to the IRS that the profits their subsidiaries earned in Switzerland were equal to 7 percent of Switzerland’s GDP. This is a much higher share of GDP than the profits reported in more significant European countries: about half a percent of GDP in Germany and France, and 2.9 percent in the United Kingdom. This suggests that American corporations are exaggerating how much of their profits are earned in Switzerland, which is not surprising given that some corporations are able to obtain very low tax rates in that country.

The 10 countries with the highest reported American offshore corporate profits as a percentage of their GDP in 2012 had only 4 percent of the total GDP for all the foreign countries included in the IRS figures. But American corporations reported to the IRS that 59 percent of their offshore subsidiary profits were earned in these tax-haven countries. This is impossible. The only plausible conclusion is that American corporations are engaging in various accounting gimmicks to make large amounts of their profits appear, for tax purposes, to be earned in these 10 tax-haven countries. 

These 10 countries have either zero tax rates or provide loopholes that allow corporate profits to go largely untaxed in many circumstances. The two columns on the right side of the table on page one show the amount of corporate income taxes paid on the subsidiary profits to the country where they were supposedly earned or any other foreign country. This is shown first as a dollar figure and then as a percentage of the profits supposedly earned in that country.

There are apparently foreign income taxes paid on some profits even in countries known to have a zero corporate tax rate like Bermuda or the Cayman Islands. This may often occur because the profits are shifted from a subsidiary in another foreign country that imposes some tax on profits when they are shifted to a tax haven country. Overall, however, these subsidiary corporations are able to largely avoid paying any tax. The effective rate of foreign taxes paid on subsidiary profits in the ten countries was only 8 percent.

The U.S. allows its corporations to defer paying U.S. corporate income taxes on profits of their offshore subsidiaries until those profits are officially “repatriated” (officially brought to the U.S.). This creates an incentive for American corporations to engage in accounting gimmicks to make their U.S. profits appear to be earned in countries where they will not be taxed. These data demonstrate that this is happening on a large scale. In fact, American corporations reported that more than half a trillion dollars of their profits were earned, for tax purposes, in the 10 tax haven countries shown in the table.

Amazingly, some lawmakers have, in recent years, called for even greater tax breaks for the offshore profits of American corporations. Some proposals would largely exempt previously accumulated offshore profits from U.S. taxes on an (allegedly) one-time basis (often called a “repatriation holiday”). Others would provide a permanent exemption (often called a “territorial tax system”). Perhaps these lawmakers do not realize that over half of the profits that American corporations claim their subsidiaries earn offshore — over half of the profits that could benefit from such new tax breaks — are reported by the companies to have been earned in 10 obvious tax havens.

Corporate profits that are genuinely earned through real business activities abroad are typically subject to taxes in the countries where they are earned, and if they are repatriated, the U.S. tax that is due is reduced by whatever amount of tax was paid to foreign governments. For this reason, the only offshore profits that are potentially subject to nearly the full 35 percent U.S. tax rate upon repatriation are those artificially shifted to tax havens. Companies engaging in these tax-avoidance games would therefore be the main beneficiaries of a repatriation holiday or territorial system.

Congress could end this corporate tax avoidance in a straightforward way by ending the rule allowing American corporations to defer paying U.S. taxes on their offshore subsidiary profits. They would still be allowed to reduce their U.S. income tax bill by whatever amount of tax was paid to foreign governments, in order to avoid double-taxation. But there would no longer be any reason to artificially shift profits into tax havens because all profits of American corporations, whether earned in the U.S. or in any other country, would be taxed at least at the U.S. corporate tax rate in the year they are earned.   

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April 7, 2016 12:21 PM | Permalink |

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Corporate income taxes in the United States as a share of the economy are significantly less than the average among developed nations, according to an analysis of the most recent data from the Organization for Economic Cooperation and Development (OECD). Data from the Treasury Department show that U.S. corporate taxes as a percentage of GDP are 2.3 percent, which is 15 percent less than the 2.7 percent weighted average among the other 32 OECD countries for which data are available. [1]U.S. corporate income taxes have declined sharply as a percentage of GDP since 1945. [2]  Part of the reason corporations are paying less in taxes today than they did 70 years ago is due to copious changes in the tax code. Yet there is a growing and vocal movement among well-financed lobbying groups to push federal lawmakers to lower the corporate tax rate. These business-backed groups claim that the U.S. corporate tax rate is too high, citing the 35 percent federal statutory tax rate. But that narrow argument ignores critical facts such as the many large tax breaks, loopholes and other corporate tax exceptions that big businesses have successfully lobbied to embed in the tax code. A 2014 study by Citizens for Tax Justice examined five years of data and found that Fortune 500 companies paid an average federal effective corporate income tax rate of only 19.4 percent, which is just over half of the nominal U.S. statutory rate of 35 percent. That same study found that many profitable, large U.S. corporations such as Boeing, General Electric and Verizon paid no federal corporate income taxes at all.  [3]Rather than cutting the rate as many lawmakers are proposing, a better approach to corporate tax reform would be to eliminate the tax breaks and loopholes that allow many companies to get away with not paying their fair share. This approach would not only make the tax system more fair, but it would also help ensure that we have enough resources for critical investments in infrastructure, transportation, education, health, public and food safety, all of which benefit the public and corporations alike. [1] OECD continues to use Bureau of Economic Analysis (BEA) estimates of corporate tax payments, while we use actual collections as reported by the U.S. Treasury in its “Monthly Treasury Statements” of federal tax collections and by the U.S. Census Bureau for state & local corporate income taxes (“U.S. Census Bureau, Quarterly Summary of State and Local Government Tax Revenue, Table 1. National totals of state and local government tax revenue, by type of tax”). Previously, OECD’s approach hugely overstated US corporate taxes for several reasons. OECD has corrected most of its errors, but not all. The biggest remaining difference between OECD’s figures and actual U.S. corporate tax collections is that OECD appears to include “Taxes paid by domestic corporations to foreign governments on income earned abroad” as corporate taxes paid to US governments.[2] Office of Management and Budget, “The Budget for Fiscal Year 2017, Historical Tables,” Table 2.3, https://www.whitehouse.gov/sites/default/files/omb/budget/fy2017/assets/hist.pdf [3] Citizens for Tax Justice, “The Sorry State of Corporate Taxes,” February 2014. http://www.ctj.org/corporatetaxdodgers/

Corporate income taxes in the United States as a share of the economy are significantly less than the average among developed nations, according to an analysis of the most recent data from the Organization for Economic Cooperation and Development (OECD). Data from the Treasury Department show that U.S. corporate taxes as a percentage of GDP are 2.3 percent, which is 15 percent less than the 2.7 percent weighted average among the other 32 OECD countries for which data are available. [1]

U.S. corporate income taxes have declined sharply as a percentage of GDP since 1945. [2]  Part of the reason corporations are paying less in taxes today than they did 70 years ago is due to copious changes in the tax code. Yet there is a growing and vocal movement among well-financed lobbying groups to push federal lawmakers to lower the corporate tax rate. These business-backed groups claim that the U.S. corporate tax rate is too high, citing the 35 percent federal statutory tax rate. But that narrow argument ignores critical facts such as the many large tax breaks, loopholes and other corporate tax exceptions that big businesses have successfully lobbied to embed in the tax code. A 2014 study by Citizens for Tax Justice examined five years of data and found that Fortune 500 companies paid an average federal effective corporate income tax rate of only 19.4 percent, which is just over half of the nominal U.S. statutory rate of 35 percent. That same study found that many profitable, large U.S. corporations such as Boeing, General Electric and Verizon paid no federal corporate income taxes at all. [3]

Rather than cutting the rate as many lawmakers are proposing, a better approach to corporate tax reform would be to eliminate the tax breaks and loopholes that allow many companies to get away with not paying their fair share. This approach would not only make the tax system more fair, but it would also help ensure that we have enough resources for critical investments in infrastructure, transportation, education, health, public and food safety, all of which benefit the public and corporations alike. 

 

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[1] OECD continues to use Bureau of Economic Analysis (BEA) estimates of corporate tax payments, while we use actual collections as reported by the U.S. Treasury in its “Monthly Treasury Statements” of federal tax collections and by the U.S. Census Bureau for state & local corporate income taxes (“U.S. Census Bureau, Quarterly Summary of State and Local Government Tax Revenue, Table 1. National totals of state and local government tax revenue, by type of tax”). Previously, OECD’s approach hugely overstated US corporate taxes for several reasons. OECD has corrected most of its errors, but not all. The biggest remaining difference between OECD’s figures and actual U.S. corporate tax collections is that OECD appears to include “Taxes paid by domestic corporations to foreign governments on income earned abroad” as corporate taxes paid to US governments.

[2] Office of Management and Budget, “The Budget for Fiscal Year 2017, Historical Tables,” Table 2.3, https://www.whitehouse.gov/sites/default/files/omb/budget/fy2017/assets/hist.pdf 

[3] Citizens for Tax Justice, “The Sorry State of Corporate Taxes,” February 2014. http://www.ctj.org/corporatetaxdodgers/

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April 7, 2016 11:41 AM | Permalink |

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The most recent data from the Organization for Economic Cooperation and Development (OECD) show that the United States is one of the least taxed developed nations. 

A tally of all taxes collected at the federal, state and local levels reveals based on 2014 U.S. Treasury data reveal that the United States had the fourth lowest level of total taxes — 25.7 percent of gross domestic product (GDP) — among the 34 OECD countries. Only Mexico, Chile and Korea collected less in taxes as a percent of GDP. The level of taxation in the United States is well below the 34.7 percent OECD weighted average. [1]

These facts offer important context at a time when many presidential candidates and members Congress insist that U.S. taxes are too high and the path to economic prosperity is tax cuts. 

This assertion has no basis in sound research and more federal tax cuts could, in fact, set the nation on an irresponsible fiscal path. Already, years of relatively low taxes have increased the national debt and forced draconian spending cuts. The nation’s current relatively low level of taxes leaves us unable to raise enough revenue to adequately fund education, infrastructure and healthcare and other priorities that are crucial to long-term economic growth and competitiveness. It is not a badge of honor that the United States is one of the least taxed developed countries. The OECD data demonstrate that even if lawmakers implemented necessary corporate and individual tax reforms that allowed the nation to collect more revenue in a progressive, fair way, the United States would still remain one of the lowest taxed nations in the developed world. 

View video based on the report’s findings: 

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[1] OECD continues to use Bureau of Economic Analysis (BEA) estimates of corporate tax payments, while we use actual collections as reported by the U.S. Treasury in its “Monthly Treasury Statements” of federal tax collections and by the U.S. Census Bureau for state & local corporate income taxes (“U.S. Census Bureau, Quarterly Summary of State and Local Government Tax Revenue, Table 1. National totals of state and local government tax revenue, by type of tax”). Previously, OECD’s approach hugely overstated US corporate taxes for several reasons. OECD has corrected most of its errors, but not all. The biggest remaining difference between OECD’s figures and actual U.S. corporate tax collections is that OECD appears to include “Taxes paid by domestic corporations to foreign governments on income earned abroad” as corporate taxes paid to US governments.

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April 6, 2016 11:45 AM | Permalink |

For Immediate Release: Wednesday, April 6, 2016
Contact: Jenice R. Robinson, 202.299.1066 x 29, Jenice@ctj.org

Pfizer Inversion Failure Is an Example of What Happens
When Elected Officials Stand up to Special Interests

Following is a statement by Robert McIntyre, director of Citizens for Tax Justice, regarding Pfizer Corp.’s announcement that it will no longer seek to merge with Ireland-based Allergan, a move that for months has been widely derided as a scheme to avoid billions in U.S. taxes.

“Less than 30 hours after the Obama Administration announced regulations that put a damper on corporations’ incentives for “inverting” or claiming foreign citizenship, Pfizer’s board voted to abandon its planned merger with Ireland-based Allergan.

 “The Obama Administration’s actions stopped Pfizer’s tax-dodging scheme in its tracks, at least for now, and demonstrate that our elected officials can and should put the needs of ordinary taxpayers above the will of corporate special interests and their wealthy allies.

 “Pfizer officials claimed that their planned merger with Allergan and ostensible move to Ireland, a known tax haven, was purely a business decision that would benefit consumers as well as shareholders. But the truth is that only Pfizer executives and shareholders stood to financially and handsomely benefit from the inversion if the company could avoid paying taxes on the $200 billion in profits it has stashed offshore.

 “The administration’s actions, while good and necessary, are a partial solution. Only Congress has the power to pass laws that will permanently close the egregious loopholes in our tax code that make it financially beneficial for bad corporate citizens to renounce their citizenship. Americans should send people to Congress who are willing to do so.”  

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April 5, 2016 11:42 AM | Permalink |

For Immediate Release: Tuesday, April 5, 2016
Contact: Jenice R. Robinson, 202.299.1066 X29, Jenice@ctj.org

New Treasury Regulations Are Critical, But Not Sufficient to Stop Inversions

Following is a statement by Robert S. McIntyre, director of Citizens for Tax Justice, regarding the Treasury Department’s proposed new regulations to curb tax avoidance by U.S. corporations that pretend to become foreign companies for tax purposes.

“There is growing public outrage over lax tax laws that allow American corporations to avoid paying U.S. taxes by claiming foreign citizenship. These new regulations partly address that by reducing the tax payoff from a convoluted transaction known as “earnings stripping.” While the regulations may not stop the pending Pfizer inversion, they may put a damper on the company’s assumed plans to avoid taxes on $40 billion in untaxed profits that it has shifted into tax havens.

“But the Treasury Department can and should take further action. For example, it should use its authority to further limit the ability of expatriating companies to use “hopscotch loans” to get around the current, weak curbs on inversions.

“Even if Treasury further cracks down on U.S. companies that claim foreign residency for tax purposes, congressional action remains necessary to put a full stop to corporation inversions. Congressional leaders should stop coddling corporate deserters and enact anti-inversion reforms such as the Stop Corporate Inversions Act.”

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March 23, 2016 01:30 PM | Permalink |

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Dear Secretary Lew:

We urge the Department of Treasury to take all action within its authority to curb the ability of corporations to avoid taxes by engaging in corporate inversions. Specifically, we believe that Treasury could take further steps to curb inversions through the use of its regulatory authority under Section 956 and Section 7701.

Treasury should expand its prior Notice 2014-52 limiting the ability of expatriating firms to use so-called “hopscotch loans” and to decontrol their controlled foreign corporations to avoid paying taxes that they owe on untaxed offshore earnings. This can be accomplished by not limiting the prior notice only to firms covered by Section 7874 and instead using your authority under Section 956 and Section 7701 to apply the limitations to all foreign ownership cases. Even lowering the threshold for applying Notice 2014-52 to 50 percent ownership by the original shareholders of the former U.S. firm (rather than 60 percent as under Section 7874) could have the effect of curbing a significant amount of inversion-driven tax avoidance.

While legislation to curb inversion would be ideal, the political reality is that Congress is unlikely to act before next year. Unfortunately, the planned inversions by Pfizer, IHS and Johnson Controls show that immediate action is needed to prevent a significant erosion in the corporate tax base. In fact, we estimate that Pfizer alone could use an inversion to avoid $40 billion in taxes on the $194 billion that the company has in untaxed offshore earnings.

To be clear, these actions are not just about one company. Pfizer could just be the tip of the iceberg as other companies (like IHS and Johnson Controls have already) seek to imitate its tax strategy. A recent study by Citizens for Tax Justice found that U.S. companies likely owe as much as $695 billion on the $2.4 trillion in earnings they hold offshore. Given the substantial sum owed in taxes by these companies, allowing them to avoid taxes entirely through hopscotch loans or decontrolling could have a negative implications on the tax base moving forward.

Thank you for your careful consideration of this matter.

Sincerely,

Robert S. McIntyre
Director of Citizens for Tax Justice

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March 17, 2016 10:45 AM | Permalink |

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Tax Plan Targets Biggest Tax Cuts for the Best-off Americans

An updated Citizens for Tax Justice analysis of presidential candidate Donald Trump’s tax plan reveals that it would add $12.0 trillion to the national debt over a decade. More than one-third of these tax cuts, $4.4 trillion, would go to the top one percent of taxpayers. Trump’s tax cuts would have to be paired with $12 trillion in spending cuts to avoid massive budget deficits, meaning this plan could require eliminating 94 percent of all discretionary spending to make up for its cost. This analysis also finds that if Congress chooses to pay for the Trump plan’s tax cuts with a mix of spending cuts and tax increases, the net impact of the Trump tax plan would provide an even greater boon to the wealthy and be even more detrimental to low- and middle-income taxpayers.

A Majority of Trump’s Tax Cut Would Go to the Top Five Percent of Taxpayers

Under Trump’s plan, the top one percent of taxpayers would see an average annual tax cut of $227,225. In contrast, the lowest 20 percent of taxpayers would see an average annual tax cut of just $250 and the middle 20 percent of taxpayers would see $2,571.

More than half of Trump’s proposed tax cuts would go to the top five percent of taxpayers, with 37 percent going just to the top one percent. Despite making the first goal of his tax plan “Tax relief for middle class Americans”, it is worth noting that only 13 percent of the overall tax cut would go to the bottom 60 percent of Americans. This regressive pattern reflects the fact that Trump would sharply reduce top personal and corporate income tax rates, while at the same time eliminating the estate tax and alternative minimum tax.

Evaluating the Impact of Paying for the Trump Tax Cuts

The tax changes proposed by Trump would, if hypothetically fully implemented in this year, reduce federal tax collections by $12 trillion over the next decade. This includes $9.6 in personal income tax cuts, $2 trillion in corporate income tax cuts, and the $300 billion cost of repealing estate and gift taxes. Our analysis shows the impact in 2016 because that is the first year for which Trump would, as President, likely be able to affect income tax laws.

While candidate Trump has not specified how he proposes to pay for his tax plan, he would have to cut discretionary spending, which the Congressional Budget Office (CBO) estimates will be $12.7 trillion over the next ten years, by 94 percent to offset the $12.0 trillion 10-year cost of his tax cuts. In other words, defense, environmental protection, food safety and the whole host of other discretionary spending programs would have to be almost entirely eliminated to pay for the tax plan.

This means that Trump’s plan would exponentially balloon the national debt or would have to be paid for with a mix of spending cuts and tax increases. This is roughly what happened after the tax cuts pushed through by the Reagan administration in 1981: as it became clear that the tax cuts were unaffordable, Congress significantly cut domestic spending, including Social Security, and increased taxes multiple times.

The table at right shows the net impact of Trump’s tax plan for Americans at different income levels, from implementing the tax plan and then fully offsetting its cost by enacting a mix of “pay fors” composed half of spending cuts and half of across-the-board income tax increases.[1] The spending cuts are allocated across income groups on a per-capita basis, with the same dollar impact on every American adult and child from these cuts.

CTJ’s analysis finds that these “pay-fors” would be a substantial cost for taxpayers at all income levels, and that low- and middle-income families would be especially hard hit. In particular:

• The poorest 20 percent of Americans, initially seeing a tax cut averaging $250 from the Trump tax plan, would pay an additional $2,790 in the form of additional tax hikes and spending cuts as a result of the “pay-fors.” For this income group, the “pay-fors” are more than ten times the size of the tax cut they would initially receive.
• Middle-income families, initially seeing a tax cut averaging $2,571 from the Trump tax plan, would pay an additional $4,647 in tax hikes and spending cuts as a result of the “pay fors.” For this income group, the “pay-fors” are just under twice the size of the tax cut they would initially receive.
• The best off 1 percent of Americans, initially seeing a tax cut averaging $227,225, would lose an average of $65,485 of those tax cuts from the “pay-fors,” leaving them with a still-enormous net tax cut averaging $161,740.

To be clear, the “pay-fors” outlined here are hypothetical. Trump has not said he would seek increases in other taxes to pay for the tax changes he has proposed. If, in keeping with this statement, the Trump tax cuts were paid for entirely with spending cuts, the net impact on low- and middle-income families of the Trump plan would likely be an even bigger cost than is shown here.

Appendix: Proposed Tax Changes in the Trump Plan

The plan’s tax cuts include:

• Reduce the top personal income tax rate from 39.6 percent to 25 percent, and reduce the number of tax brackets from 7 to 3.
• Reduce the federal corporate income tax rate from 35 to 15 percent.
• Reduce the top tax rate on “pass-through” business income from 39.6 to 15 percent.
• Eliminate the 3.8 percent high-income surtax on unearned income that was enacted as part of President Barack Obama’s health care reforms.
• Eliminate the Alternative Minimum Tax, which was designed to ensure that the wealthiest Americans pay at least a minimal amount of tax.
• Increase the standard deduction to $25,000 for single filers and $50,000 for married couples.
• Eliminate the estate tax.

The plan also includes a few revenue-raising provisions:

• Reduce some itemized deductions and exemptions for high-income taxpayers by a larger percentage than under current law. Deductions for mortgage interest and charitable contributions would not be reduced.
• End the deferral of income taxes on corporate income booked in other countries, and cap the deductibility of business interest expenses.
• Ostensibly repeal the “carried interest” loophole for investment fund managers, but this change would be gutted by Trump’s lower income tax rates.
• Trump also says his plan “reduces or eliminates other loopholes for the very rich and special interests … [and] some corporate loopholes that cater to special interests,” but gives no further details on these potential revenue raisers.

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[1] Citizens for Tax Justice, “The Net Effect: Paying for GOP Tax Plans Would Wipe Out Income Gains for Most Americans,” March 9, 2016. https://ctj.sfo2.digitaloceanspaces.com/pdf/neteffectreport0316.pdf

*The revenue and distributional estimate have been updated to include the impact of reducing the top tax rate on pass-through income to 15 percent. The impact of this provision increased the total revenue impact from $10.8 to $12 trillion and increased the tax break for those in the top quintiles substantially.

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March 16, 2016 11:07 AM | Permalink |

Read this report in PDF.

A new Citizens for Tax Justice analysis of presidential candidate Senator Ted Cruz’s tax plan reveals that it would add $13.9 trillion to the national debt over a decade. Despite proposing the largest tax cut of any candidate, Cruz’s tax plan would actually increase taxes on 60 percent of Americans. Cruz’s tax cuts would have to be paired with $13.9 trillion in spending cuts to avoid massive budget deficits, meaning that even eliminating all discretionary spending would not be enough to make up for its cost. This analysis also finds that if Congress chooses to pay for the Cruz plan’s tax cuts with a mix of spending cuts and tax increases, the net impact of the Cruz tax plan would provide an even greater boon to the wealthy and be more detrimental to low- and middle-income taxpayers.

Poorest Sixty Percent of Americans Would See Tax Increase Under Cruz Plan

Under Cruz’s plan, the bottom 20 percent of taxpayers would see an average annual tax increase of $3,161, the second 20 percent would see an average annual tax increase of $3,747 and the middle 20 percent would get an average annual tax increase of $1,943. This means that the poorest sixty percent of Americans would, as a group, see substantial tax increases under the tax changes proposed by Cruz.

In contrast, the best-off Americans would receive large tax cuts. The top one percent of Americans, a group with incomes averaging nearly $1.8 million in 2016, would enjoy an average annual tax cut of $435,854 under Cruz’s plan.

Nearly two-thirds of Cruz’s proposed tax cuts would go to the top one percent of taxpayers. This regressive pattern reflects the fact that Cruz would eliminate two taxes that fall almost entirely on the best off Americans — the federal estate tax and the corporate income tax — while sharply reducing the progressive personal income tax. Cruz would also offset some of the revenue loss with a highly regressive 18.56 percent value-added tax (a.k.a., a national sales tax). Because middle- and low-income families typically spend most or all of their income each year, while the best-off Americans spend only a fraction of their incomes, any tax on consumption will fall most heavily on those at or below the middle of the income distribution.

Evaluating the Impact of Paying for the Cruz Tax Cuts

The tax changes proposed by Cruz would, if hypothetically fully implemented in tax year 2016, reduce federal tax collections by $13.9 trillion over the next decade. This includes $30.9 trillion in income, payroll, corporate and estate tax cuts, partially offset by a new value-added tax that would likely raise $17.1 trillion over the next decade. Our analysis shows the impact in 2016 because that is the first year for which Cruz would, as President, likely be able to affect income tax laws.

While candidate Cruz has not specified how he proposes to pay for his tax plan, it is unlikely that spending cuts alone would be sufficient to offset the $13.9 trillion ten-year budget hole the plan would create. The Congressional Budget Office (CBO) estimates that all discretionary spending over the next ten years will total $12.7 trillion. In other words, defense, environmental protection, food safety and the whole host of other discretionary spending programs would have to be entirely eliminated to even come close to paying for the tax plan.

This means that Cruz’s plan would exponentially balloon the national debt or would have to be paid for with a mix of spending cuts and tax increases. This is roughly what happened after the tax cuts pushed through by the Reagan administration in 1981: as it became clear that the tax cuts were unaffordable, Congress significantly cut domestic spending, including Social Security, and increased taxes multiple times.

The table at right shows the net impact of Cruz’s tax plan, for Americans at different income levels, from implementing the plan and then fully offsetting its cost by enacting a mix of “pay fors” composed half of spending cuts and half of across-the-board income tax increases.[1] The spending cuts are allocated across income groups on a per-capita basis, with the same dollar impact on every American adult and child from these cuts.

CTJ’s analysis finds that these pay-fors would be a substantial cost for taxpayers at all income levels, and that low- and middle-income families would be especially hard hit. In particular:

• The poorest twenty percent of Americans, already facing a tax hike averaging $3,161 from the Cruz tax plan, would pay an additional $3,073 in the form of additional tax hikes and spending cuts as a result of the “pay fors,” roughly doubling the negative impact of Cruz’s plan on this income group.
• Middle-income families, initially facing a tax hike averaging $1,943 under the Cruz plan, would pay an additional $5,108 in tax hikes and spending cuts as a result of the “pay fors.” For this income group, the “pay fors” more than triple the negative effect the Cruz plan would have on their incomes.
• The best off 1 percent of Americans, initially seeing a tax cut averaging $435,854, would lose an average of $72,147 of those tax cuts from the “pay fors,” leaving them with a still-enormous net tax cut averaging $363,707.

To be clear, the “pay fors” outlined here are hypothetical. Cruz has said he would not seek increases in other taxes to pay for the tax changes he has proposed. If, in keeping with this statement, the Cruz tax cuts were paid for entirely with spending cuts, the net impact on low- and middle-income families of the Cruz plan would likely be an even bigger cost than is shown here.

Appendix: Proposed Policy Changes in the Cruz Plan

• Consolidate income tax brackets into a single 10 percent bracket, with a standard deduction of $10,000 and personal exemption of $4,000.
• Eliminate all deductions and credits, with the exception of charitable deductions, the mortgage interest deduction, the child tax credit and the earned income tax credit.
• Eliminate the estate tax, corporate income tax, payroll tax, net investment tax, Medicare surtax, and alternative minimum tax.
• Create new accounts that allows for $25,000 in tax deductible savings a year.
• Create an 18.56 percent value-added tax.

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[1] Citizens for Tax Justice, “The Net Effect: Paying for GOP Tax Plans Would Wipe Out Income Gains for Most Americans,” March 9, 2016. https://ctj.sfo2.digitaloceanspaces.com/pdf/neteffectreport0316.pdf

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