In yesterday's House hearing, the Treasury Inspector-General was asked if he could list which organizations had been targeted by the IRS for delayed approval or harassing questions. He replied that he could not make that...
The Tax Policy Blog
In yesterday's House hearing, the Treasury Inspector-General was asked if he could list which organizations had been targeted by the IRS for delayed approval or harassing questions. He replied that he could not make that information public, due to privacy laws. Rep. Darrell Issa (R-CA) noted that if the groups came forward voluntarily, however, their stories could be told.
As a result, the House Ways & Means Committee has posted a webpage where targeted groups can reach out to the committee to have their experiences heard, possibly in future hearings. Groups can choose to have their information disclosed only to committee staff or also to the general public.
Recently, Governor Cuomo and the Oneida Indian tribe announced a settlement that would end an ongoing dispute over cigarette taxes between New York and the tribe. Under the terms of the settlement, the Oneida will be required to tax all cigarette sales to non-Indians at a rate equal to or greater than New York state and local rates. Also, the Oneida will be required to adhere to minimum pricing standards and are required to use the tax revenue from cigarette sales on the same types of programs that the state and counties devote their tax revenues.
In return, the revenue resulting from the sales tax would stay with the Oneida rather than going to New York. The agreement also settles ongoing land disputes between the Oneida and New York and gives the Oneida exclusive casino rights in several New York counties. The agreement is pending approval from various state and tribal departments.
Under federal law, the Oneida have been able to sell cigarettes, both name-brand and Oneida manufactured, to Indians on their reservation free of state excise taxes. However, because the cigarettes were far cheaper than those sold on non-Indian owned land (nearly half the price or less), non-Indians also came to the reservation to buy them tax-free. In 2010 New York voted to collect the state cigarette tax on name-brand cigarettes sold to non-Indians on Indian land. The following year, in Oneida Nation of New York v. Cuomo, 645 F.3d 154 (2d Cir. 2011), a federal appeals court lifted a stay put in place by a district court, allowing New York to enforce the state sales tax.
In 2008, the Oneida had moved its own cigarette factory onto the reservation and sold Oneida manufactured cigarettes tax-free to both Indians and non-Indians at a substantially lower cost to the consumer. The Oneida believed that the 2nd Circuit ruling did not apply to non-name brand cigarettes manufactured and sold on the reservation, even if sold to non-Indians. As a result, the Oneida said they would not purchase name-brand cigarettes from wholesalers to sell on their reservation, and instead would focus on selling Oneida manufactured cigarettes to avoid the state excise taxes. However, Governor Cuomo has long asserted that New York does in fact have the right to tax Indian-made cigarettes sold to non-Indians.
Indeed, the recently announced settlement would apply the cigarette tax to both name-brand cigarettes and cigarettes manufactured on the reservation and sold to non-Indians.
Ahead of the Senate hearing on “Offshore Profit Shifting and the U.S. Tax Code,” I released a report reminding us that contrary to the perception created by these types of political spectacles, corporations pay a substantial amount of taxes to foreign governments. Even though individual companies may be doing their best to limit their overall tax burden, companies are still paying more than $100 billion to foreign governments.
There is another thing that is worth remembering as well.
It is true that corporations attempt to limit their tax burden through tax planning and the use of credits and deductions in the tax code. These “loopholes” reduce the amount of tax revenue that the government receives.
However, any discussion of these loopholes requires perspective.
Previous research by Tax Foundation has shown that, yes, corporations benefited from corporate tax expenditures that reduced their tax liability by a total of $102 billion dollars (2011 numbers). However, this pales in comparison to the tax benefits received by individuals.
The mortgage interest deduction alone is a bigger benefit than all of the corporate tax expenditure combined; a benefit of $104 billion. The exclusion for health insurance nearly doubles all corporate tax expenditures at $177 billion. Altogether, these 5 major individual benefits in the above chart are 5 times more valuable than all corporate benefits combined.
Then would it make sense to go after working families for excessively taking advantage of the EITC, Home Mortgage Interest Deduction and Child Tax Credit through tax planning to reduce their income tax burden to zero? Of course not: politicians created the current individual system with a number of credits and deductions. You cannot fault people for using them in order to lower their tax burden as much as possible.
In the same vein, it serves no useful purpose for politicians to go after individual corporations for reducing their tax burden in the same way. Politicians created the current corporate tax system and the current system is broken. If you are going to set out a menu of options for corporations to reduce their tax burden, don’t be surprised or upset that corporations take advantage of them. It is only rational.
This is not to say that individuals’ and corporations’ interactions with the tax code are the same. The point here is that incentives matter. If there are perfectly legal ways to reduce one’s tax burden, there should be no surprise that people do so.
Rand Paul put it nicely: Congress should look in the mirror. It is not Apple’s, or any individual corporation’s fault that the current tax system is a mess. It is instead Congress’ responsibility to fix the overly burdensome and complex corporate tax system.
In a hearing where Senator Carl Levin (D-MI) deemed Apple’s tax planning “the Holy Grail of tax avoidance,” Apple CEO Tim Cook’s appearance before the Senate Permanent Subcommittee on Investigations resulted in a show trial of sorts. But instead of revelations about Apple’s tax structure, much of the attention focused on the need to reform the outdated and broken U.S. corporate tax code.
"Apple welcomes an objective examination of the U.S. corporate tax system, which has not kept pace with the advent of the digital age and the rapidly changing global economy," Cook said in his opening remarks.
Though no one has questioned the legality of Apple’s business operations, Senator Levin said the hearing would be used to “highlight” Apple’s gimmicks and tax avoidance strategies. Instead, it served to highlight the impossible intricacies of the current tax code.
Senator John McCain (R-AZ) presented the notion that Apple knowingly violated the spirit, if not the letter of the law through its tax planning strategy, through which it greatly limited its international tax liability. But Cook flatly denied any wrong doing.
"We not only comply with the laws, but we comply with the spirit of the laws," Cook said.
The corporate tax code is such that only CPA’s and employees of corporate tax departments can understand it, and is better suited to lawyer and accountants than economists.
Tim Cook took the opportunity show support for simplification of the corporate tax code and present Apple’s principles for tax reform:
1. Revenue neutrality
2. Eliminate all corporate tax expenditures
3. Lower corporate income tax rates
4. Implement a reasonable tax on foreign earnings that allows free movement of capital back to the U.S.
The first two principles, though important in theory, are set with a false premise. Revenue neutrality is good, but it should be calculated on a dynamic basis, with considerations for economic growth; corporate tax expenditures include both loopholes and cost recovery – only the loopholes should go, not the deductions for capital reinvestment and other business expenses. It’s Apple’s final two principles to reform that are most crucial.
As Senator Rand Paul (R-KY) said in the hearing: “Money goes where it’s welcome. Currently, our tax code makes money not welcome in this country.”
Our current code restricts the free flow of capital back to the United States in two ways: a high corporate rate and worldwide system of taxation.
Our average combined rate of 39.1 percent is the highest in the industrialized world. In an increasingly globalized world, this matters more today than it did the last time we reformed the code in 1986. Today the U.S. has to compete with countries around the globe who are constantly improving their tax codes. When the U.S. fails to do so itself, American consumers, workers, and shareholders lose out. A high corporate tax rate is destructive to economic growth, and leads to fewer jobs and less corporate tax revenues.
The world’s highest tax rate coupled with our worldwide system of taxation serves to further damage the economy. The worldwide system locks $1.7 trillion outside of the U.S. that American companies want to bring home to reinvest. This discourages the free flow of capital. In the hearing yesterday Senator Levin helped make this point without realizing it when he asked Cook if he had plans to bring back any of the more than $100 billion Apple has in holdings abroad.
"I have no current plan to bring them back, at the current tax rate,” Cook responded.
Tax codes shouldn’t control business decisions, but Cook's response shows that the current code does.
Instead, taxes should raise the necessary revenue with the least economic harm. But our current corporate tax code damages economic growth and threatens long term prosperity in the United States, and raises meager revenues in the process.
Comprehensive tax reform should simplify the code, lower the rate, and move us to a territorial system. This would unlock capital, allow businesses make decisions based on business factors, and promote economic growth, leading to more jobs, higher wages and stronger economy.
For more on corporate taxes, see Kyle's recent study "U.S. Multinationals Paid More Than $100 Billion in Foreign Income Taxes."
For more on corporate taxes, see the recent study by economist Kyle Pomerleau "U.S. Multinationals Paid More Than $100 Billion in Foreign Income Taxes."
One of the most used resources on our website is historical tax rate information. For federal taxes, we go all the way back to the beginning: the federal income tax (1861-1872, 1913-present), the corporate income tax (1909-present), the gasoline tax (1932-present), and so forth. At the state level we have historical income taxes, sales taxes, corporate taxes, and excise taxes for each state, but they mostly only go back to 2000. We have some records of pre-2000 information but it needs to be verified and filled out. Additionally, the way we present the data needs to be improved.
I'm pleased to announce the first phase of a project to do just that: provide state tax rate data all the way back to the beginning. We are frequently asked for this information by researchers and taxpayers, and we believe making it available will be of great value to studying the effect of tax rate changes over time. This will likely be a long effort (and we currently have funding support only for the first of multiple phases) but I'm excited to be starting any aspect of it!
As a first step, last week I reached out to all state revenue departments, asking for any records they have on historical tax rate information. Not everyone will have this at their fingertips, certainly, but those that do will make this project easier! I'm pleased to thank the Nebraska and New Hampshire revenue departments for being the first to respond in full with all of the needed information! They took less than half a week, making them superstars. Other states I'm sure will be reporting soon, and I'll highlight them on the blog.
Georgia has also responded, to notify us that we must file an open records request to obtain historical tax rate information, paying them an hourly search rate plus 10 cents per page. We've declined, for now.
I hope you'll consider supporting this important project!
This week's map looks at state excise tax rates on wine.
Click on the map to enlarge it.
View previous maps here.
President Obama just announced at a press conference that he has directed Treasury Secretary Jack Lew to demand the resignation of the Acting IRS Commissioner, Steven Miller. CNN then obtained Miller's resignation letter, which indicates that the resignation will not take effect until early June:
May 15, 2013
The internal message to IRS Employees from Acting IRS Commissioner Steven T. Miller
It is with regret that I will be departing from the IRS as my acting assignment ends in early June. This has been an incredibly difficult time for the IRS given the events of the past few days, and there is a strong and immediate need to restore public trust in the nation's tax agency. I believe the Service will benefit from having a new Acting Commissioner in place during this challenging period. As I wrap up my time at the IRS, I will be focused on an orderly transition.
While I recognize that much work needs to be done to restore faith in the IRS, I don't want anyone to lose sight of the fact that the IRS is comprised of incredibly dedicated and hard-working public servants. During my 25-year IRS career, I am profoundly proud to have worked alongside you and to be part of an institution that has worked hard to support the nation. I have strong confidence in the IRS leadership team to continue the important work of our agency.
I want to thank everyone for all of their support and friendship during my career in government service. And I especially want to thank each and every one of you for your continued commitment to the nation's taxpayers.
I'm surprised: when the President tells you to leave, it doesn't usually mean in three or four weeks. More about the IRS scandal here.
Here’s what we do know. The overall plan includes $2 billion in additional tax revenues over the next biennium—specifically a hike on taxes paid by higher-income taxpayers and smokers. Governor Mark Dayton’s (D) original budget, introduced earlier this year, contained both of these provisions. The tax increases are a way to fill a projected budget deficit of $627 million and fund additional spending.
The budget adds another income tax bracket on single filers earning $150,000 or more annually. The state’s top rate will now be 9.85 percent, making it the fourth highest top rate in the country. Politicians are spinning this as only affecting the “top 2 percent,” but that misses the point.
Pushing more of the tax burden onto a smaller, wealthier group is poor policy, not because I care about rich people more (an absurd and inaccurate, but unfortunately common, assertion), but because those incomes are volatile. Income tax revenues that derive a large share of receipts from the wealthiest are unstable, and there’s a lot of research to back that up (a few examples can be found here and here). This point is exacerbated by the fact that lawmakers might also throw in an additional temporary income tax surcharge on those earning $500,000 or more.
Tobacco taxes will also rise, but the exact magnitude of the tax increase is yet to be determined. This is another bad policy move. I find it concerning that lawmakers want to push more of the tax burden onto a group of shrinking, politically unpopular people. Research shows that cigarette taxes do in fact decrease consumption. As the pool of tobacco-users shrinks over time, that revenue source will dry up, leaving the state right back where it started. Cigarette tax hikes are also counter to many progressive goals—that is, they tend to hit the poor hardest.
The FBI has opened an investigation into the targeting of conservative groups by the IRS. The inspector general delivered the entire report to Congress on Tuesday and the IRS released a statement in response.
An article in the Atlantic examines how a Pigovian tax on hipsters might play out, referencing a poll that shows 27 percent of Americans would support such a tax. The conclusion to such a plan (no matter how you feel about hipsters): hipsters will adapt their behavior, as people do in response all taxes.
A New York Federal reserve study shows that about 80 percent of people cut spending in response to the decrease in personal income from the expiration of the payroll tax holiday. Only 2 percent increased their debt due to the decreased take home pay, according to the study.
Advocates in Connecticut want the state legislature to raise its cigarette tax by 95 cents a pack. This would increase the tax to $4.35 a pack. We have plenty of research on cigarette taxes and why they might not get the revenue they would like.
On the topic of small business tax reform, Bloomberg BusinessWeek points out that there isn’t really a clear definition of what constitutes a small business. In the current code, small business classification has nothing to do with the numbers of employees or amount of revenue, but with how the company is organized. Most companies in the U.S. are organized as a pass-through (partnership, sole proprietorship, s-corp) instead of a traditional corporation (c-corp). This is one reason why many call for parity between the individual and corporate rate through the reform process.
This week's map shows the percentage of federal tax returns in each state claiming Schedule A itemized deductions, the biggest of which are for charitable contributions, state and local taxes, and mortgage interest. Because every taxpayer is able to claim a minimum standard deduction (currently $5,950 for single filers and $12,200 for joint filers) these deductions only provide a benefit if they add up to be more; they therefore benefit mainly higher-income taxpayers, and wealthier states have a higher percentage of itemizers.
Click on the map to enlarge it.
View previous maps here.
Passing both sides of the General Assembly by a wide margin, new tax legislation would make some major changes to the state code over the next decade and cost $700 million annually when fully phased-in. The plan would:
- lower the individual income tax top rate from 6 percent to 5.5 percent over ten years and reduce the number of brackets from ten to nine (the rate would go down an additional one-half percentage point if Congress enacts the Marketplace Fairness Act),
- reduce the corporate income tax rate from 6.25 percent to 3.25 over the next decade,
- enact a 50 percent business pass-through income deduction between 2014 to 2018, and
- increase the personal income tax deduction for low-income individuals in 2014.
Unfortunately, this doesn’t get at the real problem with the Missouri individual income tax: it’s incredibly complicated. There are no less than ten brackets and the top rate kicks in at only $9,000. We’ve suggested earlier that the state could easily change the system for the better by simply flattening the brackets:
Missouri’s rather absurd income tax brackets…are a relic of 1931, when $9,000 was a lot of money (equivalent to $136,000 today). Missouri might be better off junking everything but that top rate, since most taxpayers are probably in the top bracket anyway.
Isn’t it time for the state to bring its code in line with the current economy, rather than one that’s more than 80 years old?
Further, isn’t a ten year phase-in period a little bit long? Governor Jay Nixon (D) has expressed concern over the state’s ability to fund public services with less revenue. Though I fully support responsible tax changes that don’t cut a state’s revenue stream short, reducing the individual rates one-twentieth of a percentage point (three-tenths for the corporate income tax) each year for a decade is moving at a glacial pace. The bill even dictates that rate cuts are contingent upon revenue increase requirements, meaning that funding shortfalls aren’t possible.
I don’t think the Governor has any reason to worry. In fact, he should push for a less underwhelming individual income tax reform.
Last week, the IRS shocked me by dropping its claim that it could read taxpayers' e-mails without getting a warrant. They had lost a court case but had seemed determined to fight it out, so while I was happy about the victory, it was a surprising and sudden change of heart.
As we now know, they were clearing the decks for a late Friday revelation: Tea Party and conservative organizations were subject to intentional delays and unnecessary information demands as they sought 501(c)(4) tax-exempt status. They apologized and promised that changes had been made.
The full report from the Inspector General came out yesterday, and the findings are scathing. From April 2010 to December 2011, the IRS shunted all targeted applications to one employee, creating an enormous backlog. A memo was distributed ("BOLO"=Be On the Lookout) to flag applications with "Tea Party," "Patriots," "9/12," issues on government spending or debt or taxes, educating the American public to "make America a better place to live," and constitutional education efforts. In early 2012, additional specialists had been added but they began demanding absurd amounts of information to process applications, setting a 2 or 3 week deadline. Slate's Dave Weigel obtained one information demand letter from the IRS to the Hawaii Tea Party dated January 26, 2012:
1) You are a membership organization. Provide details regarding all dues and benefits.
2) Provide actual financial information for 2009, 2010 and 2011. Include details regarding each item listed.
3) Provide copies of your monthly newsetters since October of 2010.
4) You will sell merchandise. Provide a list of all merchandise you will sell, your cost and the sale price.
5) Provide details regarding your relationship with the Leadership Institute. Provide copies of their training material.
6) Provide details regarding your relationship with Dylan Nonaka. Provide copies of the training material used by Dylan Nonaka.
7) Provide details regarding all other training you have received. Provide copies of the training material.
8) Have you added or replaced any board members, officers, or key employees since October of 2010? If yes, submit the following information: (a) Provide a resume for each. (b) Indicate the number of hours per month each individual has provided or is providing services to you. (c) Provide a description of all the services each individual provides or has provided to you. (d) Indicate the total compensation provided to each individual. (e) Indicate if any of your current or former officers, directors, and key employees are related to each other (include family and business relationships) and describe the nature of the relationship.
11) Provide minutes of all board meetings since October of 2010.
25) Have any candidates for public office spoken at a function of the organization other than a candidate forum? If yes, provide the following: a) The names of the candidates; (b) The functions at which they spoke; (c) Any materials distributed or published with regard to their appearance at the event; (d) Any video or audio recordings of the event; (e) A transcript of any speeches given by the candidate(s).
And so on. (It looks like that particular one did not demand donor information, but the Inspector General found that others routinely demanded lists of donors, contributions, and use of the money. The IRS demanded one group provide lists of books read by members of the organization; they snarkily sent a copy of the Constitution.) By February 2012, after some organizations began complaining to the media about IRS harassment, the IRS stopped demanding more information and instead granted 60 day extensions to satisfy existing information requests. From May 2012 to December 2012, the IRS began approving applications, telling a number of the organizations that they no longer needed to respond to the information requests. All told, the average organization was approved in 238 days, but the average targeted group took 574 days to get approval.
While there are tax-exempt organizations out there that perhaps don't deserve that status, many of the IRS's questions were unnecessary toward such an inquiry, and in any event, the one-sided scrutiny was evidently designed to be harassing and delaying rather than true investigatory work. It also wasn't one or two renegade employees, and indeed, the current Acting IRS Commissioner is the head of the Exempt Organizations division. The IRS has apologized, but as Jon Stewart noted, the IRS rarely accepts an apology from a taxpayer accused of wrongdoing. They should be held to the same standard.
Inspector General report:
IRS Letter to Tea Party Hawaii:
Last week, I took part in a debate on the future of North Carolina tax reform with Jared Bernstein (if you missed it, you can watch it here). In my most recent Fiscal Fact, released today, I follow up on my conclusions from the discussion. Today, I wanted to introduce the first point of disagreement between Mr. Bernstein and I: that income taxation will not impede economic growth.
Economically speaking, income taxes are the worst types of taxes because they alter individuals' decisions to work and to invest. This is especially true for those with high graduated rates. An age-old adage notes that “when you tax something, you get less of it.” The last thing we want to do is discourage those things that add productive value to the economy.
A common counterargument to this idea is that encouraging consumption alone can push the economy forward. Consumption, though an integral part of our complex economy, is the byproduct of growth, not the driver. A recent Forbes article articulates this point much more eloquently than I: Consumer demand does not necessarily translate into increased employment. That’s because “consumers” don’t employ people. Businesses do. Since new hires are a risky and costly investment with unknown future returns, employers must rely on their expectations about the future and weigh those decision very carefully...Where do these “consumers” get their money to spend? Before we can consume, we need to produce and earn a paycheck. And paychecks have to flow to productive—that is, value-creating—behavior...Our various demands as consumers are enabled by our supply as workers/producers for others...Consumption is the goal, but it is production that is the means...Increasing consumption is a result of…growth, never the cause of it.
Higher tax liability makes it less profitable than it would be otherwise for individuals to work or businesses to expand their production. As a result, people will engage in less of these activities than they would have otherwise and the economy produces less overall.
Income taxes result in larger “deadweight loss,” a fancy term economists use to demonstrate the fact that tax revenues removed from the economy aren’t the only cost of taxation. In other words, “deadweight loss” is the loss in benefit from the reduced number of productive activities as a result of the tax. An accountant that is hired to help a business navigate and comply with the complicated tax code is one less productive laborer. Those resources could be used more effectively elsewhere.
To minimize this loss, taxes on income need to be as small and as simply structured as possible, and they need to minimize a person’s disincentive to produce. The solution here is flatter, lower income tax rates applied to a broad, neutral base.
Critics of tax reform are misunderstanding my argument entirely. I’m not selling any “snake oil” asserting that any and all tax cuts will lead to instant growth. What I am arguing, however, is that the ultimate goal of tax reform should be creating an atmosphere where business can thrive and economic growth is possible, while still generating revenue for the government to pursue its priorities. Growth won’t be instant, but a continued, consistent commitment to a system that won’t discourage the very things that will move North Carolina’s economy forward will most definitely benefit the state in the long-run.
Be sure to take a look at the full report here!