Some worry the IRS scandal will divert resources away from the comprehensive tax reform discussion. But both Chairman Camp and Chairman Baucus seem dedicated to reform, unveiling their new website and joint twitter account last week.
France is considering a tax on smartphones to help fund their cultural programs.
Australia hopes to cover for its $17 billion deficit by cracking down on tax evaders. If the experience of Greece is an indicator, the push won’t do much to fill Australia’s treasury. So far they have only be able to collect 19 million euros worth of the estimated 13 billion euros the government says its 1,500 biggest tax debtors owe.
Vice President Biden suggested a new sin tax on violent video games, stating “there’s no legal reason why they couldn’t” tax those companies. Legality of the tax aside, taxes shouldn’t micromanage individuals’ choices.
Time points out that maybe not all of the groups currently tax exempt should be. Currently, oraganization like the NFL and PGA receive tax-exempt status - something that Republican Senator Tom Coburn has taken an interest in eliminating.
Indiana Governor Mike Pence (R) last week signed into law the state’s 2014-15 two-year budget. The approved budget keeps spending increases below inflation and cuts the state’s single-rate income tax, the corporate income tax, and eliminates the inheritance tax:
|
|
Current |
2014 |
2015 |
2016 |
2017 |
|
Individual Income Tax |
3.4% |
3.4% |
3.3% |
3.3% |
3.23% |
|
Corporate Income Tax |
7.5% |
7.0% |
6.5% |
6.5% |
6.5% |
|
Inheritance Tax |
Repealed, retroactive to Jan. 1, 2013 |
Repealed |
Repealed |
Repealed |
Repealed |
The corporate tax reduction preserves one enacted in 2011, but the others are new. Indiana’s well-structured income tax – broad-based and low-rate – gets ever closer to Pennsylvania’s lowest-in-the-country rate of 3.07 percent. (Pence had initially sought a larger reduction but ultimately negotiated these rates with legislative leaders.) The inheritance tax was being phased out by 2022, and the budget accelerates that to, well, now.
This year it was the medical excise tax, next year it will be the “annual fee on health insurance.”
Last week, the Subcommittee on Health and Technology held a hearing to discuss the next tax to go into effect to fund Obamacare: the “annual fee” (tax) on health insurance. In the first year, this tax will total $8 billion, apportioned among health insurance companies based on their net premiums. The total cost of this tax will then grow to more than $14 billion in 2018, after which it will be set to grow indefinitely, indexed to the growth of healthcare premiums.
Prior to the hearing they released a memo discussing the new tax’s possible effects on small business and the economy.
The memo highlights research on the downsides of the tax:
Both the JCT and CBO estimate that a vast majority of the tax will be passed on the consumers. Specifically, the JCT estimated that getting rid of this tax would save families $350 to $400 on their premium in 2016.
Even more, since there is an exemption for those who self-insure—most commonly large employers—the majority of this tax will fall on small businesses. According to a study by the Nation Federation of Independent Business Research Foundation, the increased premiums on businesses “could reduce private sector employment by 146,000 to 262,000 in 2022, with a majority of those losses falling in the small business sector.”
Another study found that the insurance fee will increase premiums by 1.9 percent to 2.3 percent in the first year of this tax and a projected annual growth of premiums of 1.8 percent after that. This translates to an additional $2,794 for individuals and $5,140 for families over the next ten years. Even more, the study said that some small businesses could see dramatic premium increases.
However, testimony from CBPP argues that combined with all the other provisions in Obamacare, the effect of the tax will be negligible to employers. In their testimony, they cite the CBO which claims that that Obamacare’s effect on premium prices will be between a 1 percent increase and a 2 percent decrease.
This assumes, of course, that the highly complex structure of Obamacare created all the right incentives and all those incentives line up correctly and lead to lower health insurance costs, mitigating all negative effects of this tax. With all the implementation issues and political issues Obamacare faces, this seems like a dream rather than a reality.
It is more likely that Obamacare won’t work perfectly: the fee will raise premiums and there will be some negative effect on employment. If this is the case, the effects of this new fee on premiums seem to contradict the purpose of Obamacare, which was meant to reduce the cost of healthcare, not increase it.
Update: The New York Times has issued a correction, admitting that Egan's column "imprecisely described" the Marketplace Fairness Act.
In today's New York Times, columnist Timothy Egan criticizes Sen. Ted Cruz (R-TX) for his opposition to the Marketplace Fairness Act, which would empower states to require out-of-state businesses to collect sales taxes. Much of Egan's column chides Cruz for standing in the way of consumer choice about where they can purchase goods and what states that will benefit:
While buying the latest weapon accessories, he could support Texas values and purchase only from Texas-based retailers, thus ensuring that Texas taxes continue to be spent on their usual things — everything but regulatory oversight of industrial polluters. Wow: choice!
Now, should his wandering shopper’s eye drift toward some product that comes from one of the evil blue states, he would indeed have to contribute in a small way to the welfare of non-Texans.
Egan seems to think the Marketplace Fairness Act adopts an "origin-based sourcing" standard, whereby Texas consumers buying from Texas means Texas gets sales tax revenue, while Texas consumers buying from California means California gets tax revenue. That is not what the bill does. In all cases, a Texas consumer buying online, from anywhere, will result in sales tax collections for Texas. This is "destination-based sourcing." Egan's several paragraphs of consumer choice about what states to benefit, about how sales taxes should benefit where businesses are located rather than more parochial standards, and so forth, are all actually arguments against the bill because it does the opposite. Egan and Cruz are actually making the same arguments; Egan just doesn't seem to realize it because he misunderstands the bill.
This is not the first time that someone musing about fundamental fairness has assumed that the origin-based standard is what the Marketplace Fairness Act adopts. Last summer, one of the proponents' witnesses at a Senate hearing was a small bookstore owner in Texas who talked about how easy it was to collect sales tax on his online sales. Turns out he was charging all of his customers the Texas sales tax rate, rather than charging the sales tax of the customer's location. Again, an origin-based standard rather than what the bill does. It caused quite a stir at that hearing when the truth came out.
Can a tax cut pay for itself? Most economists would probably agree that the answer is generally “rarely, but usually not.” However, this question is often mixed up with a different one – “can reforms that lose revenue on a static basis pay for themselves?” It’s incredibly important to realize that the second question is distinct from the first, and that the answer can easily be “yes.” Tax reform is not a matter of raising or lowering a single tax - it’s a combination of tax cuts and tax hikes, and the swapping of particular sources of revenue for others. Since the economic effects of different taxes differ, reforms that are scored as a static revenue loss (and thus be popularly thought of as a “tax cut”) can easily raise revenue when their economic effects are accounted for. The people who completely dismiss the idea that a tax cut can pay for itself are usually on solid ground when considering a single tax only, but it’s wrong to extend this skepticism to any tax reform that shows a static revenue loss.
It is true that with any tax, there is a point where a high enough rate causes sufficient economic damage that further rate increases reduce revenue rather than raise it. For example, an income tax rate of 100% would raise no revenue because there’d then be no reason for anyone to work or invest, and consequently no income to tax. This idea can be expressed graphically as the controversial “Laffer curve,” but the basic concept isn’t disputed – for any tax, there exists a revenue-maximizing rate beyond which further rate increases are counterproductive. The dispute between left-leaning economists and right-leaning economists is therefore not so much over whether the Laffer curve exists (it does) but what shape it has.
To illustrate this, consider three hypothetical taxes. Revenue estimates for each are presented below, with the (tax-inclusive) rate ranging from 0% to 100%. The orange dotted line is the “static” revenue estimate that assumes no Laffer-type effects – that is, no changes to the economy resulting from the tax. The blue line is the revenue that is actually raised once these effects are accounted for:
Tax A is a good tax – that is, one that causes minimal economic damage. Consequently, the static revenue estimate and the dynamic revenue estimate are more or less the same until rates get prohibitively high. Left-leaning economists probably imagine most taxes to look something like this; those who lean right are not as optimistic. Tax B is an okay tax – it causes relatively little economic damage at low rates but the effects start to add up at higher rates; the revenue maximizing rate is about 45%, and beyond 70%, the tax is so damaging to the economy that more revenue would be raised by simply not levying the tax at all (because revenue from other taxes is also depressed by the damaging tax.) Tax C is a terrible tax – even at low rates, the damage it causes is bad enough to cause total tax revenue to go down.
Most taxes aren’t so bad as Tax C – it’s an exceptional case. That’s why skepticism is warranted when somebody claims that a tax cut will pay for itself. However, consider a more realistic (but still somewhat simplified) scenario. A government levies two taxes – one looks like Tax A and the other looks like Tax B, both at rates of 20%. A tax reform bill comes along that lowers Tax B from 20% to 10%, and raises Tax A from 20% to 30%. Government analysts perform a static revenue analysis and find that cutting Tax B loses $500 billion dollars, and raising tax A brings in $400 billion dollars. That’s a deficit of $100 billion, and the bill’s opponents argue that such a huge “tax cut” is irresponsible. “But wait!” says a renegade economist. Her dynamic analysis shows that while raising tax A does indeed bring in $400 billion dollars, cutting Tax B has some dynamic economic benefits – certainly not nearly enough that the cut “pays for itself,” but enough that it loses only $400 billion instead of $500 billion in revenue. The static $100 billion deficit has disappeared.
At this point, the economist would likely be ridiculed as a crank who believes that tax cuts always pay for themselves. But this is unfair – it’s a distortion of what was actually said. She never argued that cutting Tax B alone pays for itself – that would indeed be an extraordinary claim deserving of considerable scrutiny. Rather, she merely argued that cutting Tax B isn’t quite as expensive as the static analysis would suggest, and that’s enough to make the entire bill revenue-neutral.
It’s one thing to laugh off claims that cutting a single tax pays for itself – it’s quite another to dismiss similar claims about a comprehensive tax reform bill. As long as there is a differential between the dynamic effects of the tax cuts vs. the tax increases, it’s quite plausible that the static score shows a deficit increase and the dynamic score shows a reduction. This isn’t the same thing as saying a tax cut pays for itself, and it shouldn’t be treated as such.
I just ran across an excellent video by the the North Carolina Association of Certified Public Accountants (NCACPA) about tax reform efforts in the Tar Heel State. It's worth checking out:
Follow Scott Drenkard on Twitter @ScottDrenkard.
Last February, the Ways and Means Committee ranking members announced the formation of 11 “working groups” that would focus on different areas of tax reform. Their goal was to “to review current law in its designated area, research relevant issues, and compile related feedback from stakeholders, academics and think tanks, practitioners, the general public, and colleagues in the House of Representatives.”
Earlier this week, the Joint Committee on Taxation released a report outlining the feedback that these working groups received (starting on page 490).
Underscoring the political challenges to tax reform, a range of conflicting suggestions was given to these different working groups.
A good example of the range of policy choices surrounding tax reform are the suggestions given to the Working Group on Debt, Equity and Capital regarding the tax rate of dividends and capital gains.
Groups suggested the following regarding both:
Capital Gains:
· Retaining low rates on capital gains;
· Retaining the present-law tax rate on capital gains
· Taxing capital gains at a maximum 28 percent
Dividends:
· Providing low tax rates on dividend income;
· Retaining the present-law statutory top rate on qualified dividends paid by C corporations;
· Treating dividends as ordinary income subject to the top individual tax rate;
As you can see, some want these taxes lowered, some want them kept the same, while some want them to be increased. I want to focus on the two specific suggestions to raise taxes on capital gains and dividends. What would these changes theoretically look like compared to the OECD average tax rates on dividend and capital gains income?
For capital gains, the current law is already out-of-step with international standards. After the fiscal cliff, combined state and federal capital gains rates increased from 19.1 percent to 28 percent. This is more than 10 percentage points higher than the international average. One suggestion, of course, is to tax capital gains at the rate at the 1986 rate of 28 percent. This would push America’s average combined federal and state capital gains rate to more than 35 percent, more than double the international average.
As for dividend taxation, the United States used to have a rate lower than the international average, but after the fiscal cliff deal the average rate increased to over 28 percent. Again, one of the suggestions above is to treat dividends as ordinary income. This would push the tax rate on dividends to more than twice as high as the OECD average to the top marginal combined state, local and federal income tax rate of 47.9 percent.
Internationally, our capital gains and dividend tax rates are too high already. For the past 3 decades, countries throughout the world have been lowering their individual capital gains and dividends tax rates. Following these suggestions and raising these tax rates would be a bad idea and in total opposition to current international trends. These trends reflecting the realization that lowering your tax burden on saving spurs investment, increases a country’s economic competitiveness and spurs economic growth. Raising these taxes would put America further at risk for losing its competitive edge.
This week's map looks at state excise tax rates on beer.
Click on the map to enlarge it.
View previous maps here.
Sometimes, researchers get so caught up in trying to prove their point that they lose sight of what their research actually tells them. Such is the case of the new study by Heritage Foundation researchers Robert Rector and Jason Richwine Ph.D. The Fiscal Cost of Unlawful Immigrants and Amnesty to U.S. Taxpayers.
The study purports to show the long-term cost of allowing 3.5 million non-legal immigrant households (totaling roughly 11 million people) to become citizens and, thus, eligible for the panoply of government benefits over their remaining lifetimes. What the study really shows is that the social cost of having millions of under-educated, non-immigrant households is many times greater than the cost of “unlawful” immigrants and that the people bearing that cost are those with a college education.
In recent days, there have been many valid critiques of the methodology that Rector and Richwine used to calculate the $6.3 trillion, 51 year cost of an amnesty plan. I agree with many of these criticisms and won’t pile on here. However, I will say that these critics were so quick to condemn Rector and Richwine, that they too missed the elephant in the room.
The value in the Heritage study is that it adds to a solid body of research on what we call “fiscal accounting.” That is, measuring how much people pay in total taxes compared to the amount of total spending benefits they get from government. This is the first step in measuring the total amount of redistribution that occurs from both taxes and spending policies. The Tax Foundation published one of the first of such studies in 1967, and updated this work in 2006 and 2009.
The Heritage study reconfirms what previous studies have found, that the majority of American households receive far more in total benefits from government than they pay in all types of taxes. Indeed, Heritage found that, on average, all American households received $31,584 in government benefits and services (excluding national defense and interest on the national debt) and paid $30,426 in total taxes (federal, state, and local). Thus, the “typical” U.S. household was a net recipient of $1,158 in government benefits and services.
However, unlike most fiscal accounting studies, Rector and Richwine present their results by educational attainment rather than by income bands. In the table below (drawn from page 12 in their report), we can see the fiscal accounting for non-immigrant households at various levels of educational attainment.
There are nearly three times as many non-immigrant households without a high school degree (10 million ) than non-legal households (3.5 million) and they receive an average of $36,053 more in government benefits and services than they pay in taxes. This amounts to $363.5 billion in total net fiscal subsidies to “under-educated” households. Over just the next 20 years, these households (presuming their status doesn’t change) will “cost” the government $7.2 trillion – more than the 51 year cost of Rector and Richwine’s non-legal immigrants.
The fiscal “cost” of high school educated non-immigrant households is even great because there are 31 million of them. These households get an average of $14,642 more each year in government spending than they pay in taxes. The total cost of these households each year is $455.4 billion, or $9.1 trillion if their status doesn’t change (an unlikely assumption, but the same one Heritage authors made).
The Fiscal Accounting of Educational Attainment |
||||
|
Non-Immigrant Households |
Number of Households |
Annual Fiscal Deficit/Payment Per Household |
Annual Net Gain/Loss for All These Households ($Billions) |
20 Year Gain/Loss ($Billions) |
|
Without a High School Degree |
10,083,618 |
$ (36,053) |
$ (363.5) |
$ (7,271) |
|
With a High School Degree |
31,099,306 |
$ (14,642) |
$ (455.4) |
$ (9,107) |
|
With Some College |
30,986,396 |
$ (5,722) |
$ (177.3) |
$ (3,546) |
|
Total |
$ (996.2) |
$ (19,924) |
||
|
|
||||
|
College Degree or More |
31,857,640 |
$ 30,255 |
$ 963.9 |
$ 19,277 |
|
Source: Rector & Richwine page 12 |
||||
When we add in the fiscal subsidy to households with some college, we get a total annual cost of nearly $1 trillion ($996.2 billion) for all of these “under-educated” groups and a 20 year cost of nearly $20 trillion.
Who pays for all of these benefits and services? It appears that college educated households are the only Americans who, on average, pay more in total taxes than they get in total government benefits. Their net payment, $963.9 billion. Over 20 years, this would amount to $19.2 trillion.
Ironically, Rector and Richwine’s data shows that college educated immigrants also contribute more in taxes than they get back in government benefits and services.
So the real lesson from this study that was lost by both the authors and critics alike is that education matters more than immigration status. People with less than a college degree – be they native born or immigrants – will draw more in government benefits and services than they pay in taxes of all kinds. And the fiscal cost of those under-educated households is being borne by college educated workers – native and immigrant – to the tune of $1 trillion per year.
And I thought my student loans were expensive.
Last month we reported that the ACLU had discovered a frightening find: the IRS enforcement handbook asserted that the agency did not need warrants before reading taxpayers' e-mails. The official guidance asserted that taxpayers have no expectation of privacy when e-mails are stored on servers, so the IRS could just demand them from Internet Service Providers (ISPs). This assertion was despite the fact that a federal appeals court had held that the IRS in fact must abide by the Fourth Amendment and get a warrant.
The IRS has now backed down. In a policy statement released yesterday (PDF), the IRS concedes that the Fourth Amendment applies to it and that it will obtain a search warrant before demanding e-mails from Internet Service Providers.
This is a victory for taxpayers - although one that shouldn't have been necessary - but congrats to everyone who helped the IRS see the error of its ways!
Tax Foundation economist Scott Drenkard testified today before the Ways and Means Committee of the Ohio House of Representatives on HB 5, a municipal tax reform bill which offers a step in the right direction toward a simplified income tax code. His written remarks are available here, with an excerpt below.
I’m pleased to have the opportunity to speak today with regard to H.B. 5, a bill to reform elements of Ohio’s municipal tax system. While we take no position on the bill, I hope to give some perspective based on our research.
In 2011, we wrote a paper on city- and county-level income taxes, and found that of the 17 states that rely on local income taxes, Ohio has among the highest rates. In 2010, local income tax collections as a percentage of state personal income were 1.06 percent. The only state with higher effective rates is Maryland.
However, sound tax policy is not just about how much money is collected. It is about collecting revenue for necessary government services in the most efficient way possible. Ohio’s municipal tax system is far from that ideal. H.B. 5 does a great deal to remove some of the complexity built into Ohio’s municipal tax system. I’m hoping it represents a start to a movement by lawmakers to make the code more sensible and user-friendly.
More analysis on Ohio available here.
Today Tax Foundation economist Elizabeth Malm participated in a lively debate with Jared Bernstein, Senior Fellow at the Center on Budget and Policy Priorities, about the future ability of North Carolina to retain talent, recruit industry, and finance needed infrastructure. To watch an archived video of the debate, click "See event details" in the box below.
Hosted by the Institute for Emerging Issues, in partnership with the Civitas Institute and the NC Budget and Tax Center, this debate informed attendees about how North Carolina’s tax reform initiative fits into the broader national discussion on economic growth and sustainability. Kelly McCullen, Senior Correspondent and lead political anchor for UNC-TV, served as moderator for the event.
The U.S. Senate yesterday voted 69-27 to approve the Marketplace Fairness Act, which gives states the power to collect sales taxes from out-of-state businesses (primarily Internet and catalog retailers). Opponents were senators from states without a sales tax and most of the Tea Party caucus Republicans. Most conservative and libertarian activist organizations opposed the bill; supporters included state officials, large retailers, and Amazon.com.
The question now becomes what will happen in the House of Representatives, and what will need to be attached to or modified in the bill for it to be considered. (In the Senate, the bill was discharged out of committee due to opposition by Finance Committee Chair Sen. Max Baucus (D-MT).)
Here are some key Tax Foundation materials on the Marketplace Fairness Act:
As young people who work in a 75 year old organization, we cherish every connection we have to the Tax Foundation’s early years -- especially to the people who worked in our original headquarters in New York City.
So I was saddened to learn that one of those early scholars, Gordon Paul Smith, just passed away in Carmel, California. He was 96 years old.
I enjoyed listening to Gordon talk about his days at the Tax Foundation in the mid-1940s. He landed his first job out of graduate school as a junior analyst at the Tax Foundation and was given the task of working on our annual book Facts and Figures on Government Finance – that was only the 3rd edition. He liked the book so much he was still ordering copies until we published the 36th and final hardbound edition just a few years ago.
Like so many of the young scholars who cut their teeth at the Tax Foundation, Gordon’s experiences would last him a lifetime. To mark our 65th anniversary, Gordon wrote me a note recounting his experience at the Tax Foundation:
"I reflect on the wonderful memories of the close relationships I had and enjoyed with the Foundation beginning over a half century ago. As a young man fresh out of graduate school joining the Tax Foundation as a member of its research staff, it was the Foundation who, without any doubt, truly set the course for my career in business and government ever since. I am grateful. Always have been."
The standards that guided Gordon Smith all those years ago are the same standards that guide us today.
Our thoughts and prayers go out to his wife Ramona and their family.
Economists Elizabeth Malm and Kyle Pomerleau, both co-authors of the Tax Freedom Day 2013 report, were in Trenton, New Jersey yesterday, bringing the good news of the impending arrival of Tax Freedom Day to the Garden State. The event was organized by the New Jersey chapter of Americans for Prosperity, and also featured remarks by AFP-NJ's Steve Lonegan.
There's more on Tax Freedom Day arriving in New Jersey from NJBiz, PolitickerNJ, and the Courier-Post.
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