President Obama recently gave a lengthy speech on inequality, poverty, and what to do about it. He claimed inequality is increasing, which is debatable, and then offered a few populist ways to reduce it, such as raising...
The Tax Policy Blog
While Governor Ed Rendell of Pennsylvania opposes raising the state’s excise tax on gasoline to improve roadways, he has suggested the possibility of increasing taxes on oil companies to generate funds for road needs. From State Tax Today:
“Pennsylvania Gov. Ed Rendell (D) says he opposes an increase in the state gasoline tax to help raise the $866 million to $2 billion his own blue-ribbon commission estimates is needed to maintain roads and bridges and bail out mass transit agencies in Philadelphia and Pittsburgh.
Rendell, in the middle of a campaign for reelection, would not say how he would come up with the cash called for by the Pennsylvania Transportation and Funding Reform Commission. He said the state has always found a way to "stretch highway dollars" and would continue to do so, though he acknowledged that it is unrealistic to believe the transportation needs can be met without additional funding sources.
The only possibility Rendell suggested was an increase in the state franchise tax for oil companies.
The commission's interim report, released August 23, found that the state needs $866 million a year in new funding just to maintain the status quo in roads and transit, and up to $2.2 billion a year in new funding to improve the state's transportation system.”
Today, the American Petroleum Institute estimates motorists in Pennsylvania pay an average gasoline tax of 50.7 cents for every gallon of gasoline and 63.6 cents per gallon of diesel fuel – both tax rates rank in the top 10 nationally. Included in these rates is the state’s franchise tax on oil companies which increased to 19.2 cents per gallon of gasoline and 26.1 cents per gallon on diesel as of January 2006.
Governor Rendell is wise to consider stretching current highway dollars before raising Pennsylvania’s gasoline taxes. However, an issue that is neglected in the debate is the amount of Pennsylvania’s federal gasoline tax dollars that are “earmarked” for projects that are many times low-priority, often politically motivated and sometimes marginally related to roads.
For instance, according to Taxpayers for Common Sense, the 2005 highway bill spent $706,691,502 of Pennsylvania’s federal transportation funds on 423 earmarked projects. (see full list here). That amounts to $2,812 of federally earmarked gasoline tax dollars per lane mile of highways in Pennsylvania.
Included in the laundry list of earmarked transportation “pork” is $1.6 million for construction of the Montour Trail, Great Allegheny Passage, $600,000 to complete gaps in the Pittsburgh Riverfront Trail Network and over $4 million for projects at the Philadelphia Zoo – including pedestrian walkways and landscape improvements to surface parking lots.
It’s no wonder many of Pennsylvania’s roads are in dire need of repair when gasoline tax dollars –that are designed to build and maintain roadways – are being used to fund zoos and bike paths.
As we've written before, the phasing-out of the federal estate tax has left a complex minefield of state-level estate taxes in its wake. But those state-level estate taxes may be headed for the grave in the near future as well, thanks to the power of state tax competition for wealthy residents. At least that's the conclusion of one new study from Prof. Jeffrey Cooper of the Quinnipiac University School of Law. From the introduction:
In this analysis, I explore the history of interstate competition to attract and retain wealthy residents in an effort to help inform the debate as to how such competition will impact modern state death taxes. Although it is impossible to anticipate with certainty what state politicians will do in the future, I seek to offer guidance by placing the current climate in historical perspective and studying what past political leaders said and did when confronted with similar considerations...
The conclusion reached from this analysis is a grim one for the future of state death taxes. The states with decoupled estate taxes now confront the same competitive pressures that plagued states seeking to impose death taxes prior to 1924. In the earlier era, Congress provided a bold solution in the form of the state death tax credit, preventing interstate competition from destroying the state death taxes. Now, that credit is gone. As such, it may be only a matter of time before modern state leaders resume where long forgotten predecessors left off, completing the migration away from death taxation and towards other forms of tax revenue.
It might be equal parts Tip O’Neil and James Carville. But whether you think “All Politics is Local” or “It’s the Economy, Stupid”, taxes and tax reform are making big splashes in some of the most contentious gubernatorial races in the country.
The Wall Street Journal today writes of the Bay State:
You'll never guess the hottest issue in this fall's Democratic primary for governor of Massachusetts: income tax cuts. Two of the three Democratic candidates in this bluest of blue states have endorsed cutting the state flat-rate income tax to 5%. … An August 27 Boston Globe poll found that 57% of Democratic primary voters support the tax relief plan. This is the same electorate that has given the nation Ted Kennedy, Michael Dukakis and John Kerry.
In Michigan, the contentious fight over the Single Business Tax (SBT) has forced the Democratic incumbent, Jennifer Granholm, into pushing tax reform. After being spurned by the people of Michigan, who effectively overrode her veto of legislation that eliminates the SBT by 2007, Granholm has unveiled a “restructuring package” to replace SBT revenue. For his part, Republican challenger Dick DeVos supports replacing it with what he calls a “business-based tax”. The details of his proposal are still in limbo which means the issue isn’t going away any time soon. Democratic nominee Mike Beebe is looking to convince the people of Arkansas that he is a born-again tax cutter as his race heats up against Republican Asa Hutchinson. Beebe’s support for eliminating sales taxes on groceries is being questioned by the former Congressman who says Beebe has had opportunities to eliminate the tax but hasn’t taken them. Beebe also tells Arkansans he’s going to cut property taxes by $22 million. National polls put economic issues at the top of voters’ lists of priorities over Iraq and national security. On the ground, the core of those economic issues seems to be candidates positions on a wide variety of taxes; namely, how to cut them. Thankfully, it is not just the winning position but the right one, as well.
In the five years since 9-11, Americans are asking themselves Are We Safer? Congressional leaders are trying to answer this question this week by topping the agenda with national security issues such as port security and the NSA’s Terrorist Surveillance Program. However, other grave threats to national security have gone unanswered for far too long: the out-of-control cost of entitlement programs and our declining ability to compete in the global market. Entitlements will dwarf all other spending
• According to the Congressional Budget Office, entitlement spending as a percentage of GDP will double over the next 45 years. The cost of Medicare and Medicaid will triple. • By 2050, the federal government will only take in enough revenue to pay for Medicare, Medicaid, Social Security, and interest on the national debt. • That means no money for national defense, homeland security, counterterrorism at home and abroad, or border security and immigration enforcement. Every cent will go to pay for ever increasing health costs and retirement for the baby boom generation.
Declining competitiveness undermines American economy
• The United States continues to lose ground among all other developed countries due to our high tax rates and our failure to reform the Byzantine tax code. • As other countries race to encourage investment and entrepreneurship, the United States purges American jobs by refusing to reform a punitive business climate. • Declining revenue and a corroding economy will mean less focus on growing national security threats and our strategic interests abroad.
As we prepare to commemorate the 5th anniversary of 9-11, we should remember that a robust American economy is a large part of the reason we are able to trumpet the values of freedom and prosperity throughout the world. As we become less competitive and entitlements eat up our revenue, our ability to protect Americans around the world is crippled and we become less and less safe.
There are many reasons to oppose federal and state estate taxes. One that is sometimes overlooked is the damage an estate or inheritance tax does to a state’s competitiveness. Now that 25 states no longer levy estate taxes, states that continue to impose estate or inheritance taxes may have a hard time attracting or keeping retirees and business owners who wish to pass the business on to their children.
A recent Wall Street Journal article (subscription required) addresses this issue, whish was on the mind of Virginia Governor Tim Kaine and the state legislature when they agreed last week to abolish the state estate tax, effective in July 2007:
The tax only brings in about $140 million a year to Richmond from several hundred estates, but the levy has made it harder for Virginia to compete for small businesses and retirees with Florida and the 24 other states that no longer have a death tax. So when Governor Kaine proposed killing the tax earlier this year, the legislature overwhelmingly approved.
Only a few years ago nearly every state taxed estates at death, in part because a federal tax credit allowed states to keep part of the revenue that would otherwise go to Uncle Sam. Last year the federal tax credit was abolished and in two dozen states the death tax died along with it. But not at first in Virginia, which had decided way back in 1978 that it would go on collecting its death tax even without the benefit of a federal tax credit. Not any more.
Estate taxes have a disincentive effect on entrepreneurship, force the sale of family businesses and farms, and impose high tax compliance costs—all for a relatively small amount of revenue. Virginia’s desire for a competitive tax system has also led it to a more principled tax system.
We recently released a report which showed that the U.S. has the second-highest statutory corporate tax rate (39.3 percent combined federal and state) in the OECD. The U.S. achieved this status by keeping its rate unchanged will other OECD nations aggressively cut their rates. Japan (39.5 percent) and Germany (38.9) have the first and third highest statutory rates, respectively.
It won't be long, however, until our inaction gives us the highest rate in the world. Recent news stories indicate that Japan and Germany could both reduce their corporate tax rates in the near future. An article in today's Daily Tax Report indicates that the Japanese Finance Ministry may recommend a corporate tax rate as part of its FY 2007 tax reform proposal. A recent Bloomberg story reported that new German Chancellor Angela Merkel continues to push for a 29 percent rate in 2008, though her coalition partners may demand corporate tax base broadening (which would be a good development in any case) to make up lost revenues.
With the second highest corporate tax rate in the OECD and a worldwide system of corporate taxation that is at odds with the territorial system used by many countries in the OECD, the U.S. corporate tax system will soon be one of the worst--structurally speaking--in the global market. Martin Sullivan recently discussed some of these corporate tax issues in a Tax Foundation podcast, which you can access by clicking here.
When people shop at 7-Eleven or any other convenience store, they probably don’t think too much about taxes. They grab a few items, pay, and hurry out. But a recent MSN Money article shows that if consumers paid a little more attention to the tax portion of their receipts, they might be in for a surprise.
The article calculates the “7-Eleven tax”—that is, the state-level sales and excise taxes (not counting local sales taxes) on 10 gallons of gas, two packs of cigarettes and $10 worth of goods— for all 50 states:
If you want to drive yourself slightly nuts, try to figure out why there's so much variation among the states when it comes to taxing consumption.
Cigarette taxes are fairly easy: They tend to be lowest in tobacco-producing Southern states. But gas taxes aren't necessarily lower in oil-rich states, and sales taxes are all over the map. In two cases (Washington and New Jersey), states with the highest sales-tax rates in the country are right next door to states with no sales tax at all (Oregon and Delaware, respectively).
The crazy quilt that's resulted means that you can pay very different tax amounts for the same products, depending on where you live.
Think it all evens out? Consider this: A trip to the local 7-Eleven for a couple of packs of cigarettes, 10 gallons of gas and $10 worth of munchies will cost you $1.89 in state taxes in Georgia. The same taxes would total $8.62 in Rhode Island.
The article underscores the importance of state tax competition. High sales and excise tax rates can lead to interstate smuggling and large numbers of residents in border areas heading to other states to do their shopping. Some may even choose to move to lower-tax states. If rushed consumers slowed down and started analyzing their receipts on the way out of the store, perhaps lawmakers would be more attuned to their states’ sales and excise tax competitiveness.
New income data released by the Census Bureau on Tuesday has been the topic of considerable news coverage for the past few days. Much of the discussion has centered on the fact that real (adjusted for inflation) median household income has fallen since 1999. Many suggest that this is a sign the economy is not lifting all boats.
While it may be true that not everyone has gained since 1999, we must note that there are a myriad of factors that determine median household income, and the picture created by this data is not as simple as it seems.
One factor that can complicate the picture is marital status. When a couple gets married, they are now counted as one household making the total income of two individuals rather than two poorer households making lower incomes. (This same problem exists when using all tax returns data because when a married couple files a joint tax return, the couple is counted as one taxpayer, not two.) If every dual-income married couple got divorced, even if their individual incomes stayed the same, the country’s median household income would plummet because the newly-single earners’ incomes would be lower than their previous jointly reported incomes.
We can see evidence of this factor in the comparisons between 1999 and 2005. The table below details how median household incomes in various types of households changed during that period. One- and two-earner households saw increases in median nominal incomes of 17.5 percent and 19.5 percent, respectively, compared to an increase of only 13.5 percent for all households combined.
When we look at inflation-adjusted incomes, we see that households with more earners once again fared better than households with fewer earners. The CPI-U (a measure of consumer price inflation) increased by 17.2 percent from 1999 to 2005, leading many to point out that real median household income for all households has fallen by 3.7 percent (13.5 – 17.2 = -3.7). However, as we can see in the last column in the table, real median household income for one-earner households has actually risen by 0.3 percent, and real median household income for two-or-more earner households has risen by 2.2 percent.
|Category||Percentage of Households Falling into Category in 1999||Percentage of Households Falling into Category in 2005||Median Household Income in 1999 within Category||Median Household Income in 2005 within Category||Percentage Change in Median Nominal Household Income||Percentage Change in Real Nominal Household Income|
|All Households||100 %||100 %||$40,816||$46,326||13.5 %||- 3.7 %|
|Households with No Earners||19.6 %||21.2 %||$15,405||$16,893||9.7 %||- 7.5 %|
|Households with One Earner||35.0 %||36.8 %||$31,948||$37,541||17.5 %||0.3 %|
|Households with 2-or-more Earners||45.4 %||42.0 %||$63,021||$75,293||19.5 %||2.3 %|
|Sources: Census Bureau and Bureau of Labor Statistics|
How could it be that the two largest groups, households with one earner and households with two or more earners, both saw their incomes grow faster than the overall household median? It is largely because the percentage of households in the one-earner and no-earner groups, where income is traditionally lower, has risen from 54.6 percent to 58 percent. This increasing ratio of zero- and one-earner households to two-or-more earner households pushes down the overall median.
To make this phenomenon clear, let’s look at a hypothetical example. Suppose we have 5 people in an economy: Homer, Ned, Edna, Marge, and Maude, all of whom work and are unmarried. Homer earns $20,000; Ned earns $30,000; Edna earns $40,000; Marge earns $50,000, and Maude earns $60,000. The median household income would be $40,000 (Edna is the middle value).
But now suppose Homer and Marge get married and Ned and Maude get married. We now have only three households: (1) Edna by herself at $40,000, (2) Homer and Marge making $70,000 in household income, and (3) Ned and Maude making $90,000. Now the median household income is $70,000. No individual person’s income has changed, but we have a higher median income. We would never say that the economy is improving in this situation although median household income is rising.
If Homer and Marge divorce, we will have four households earning incomes of $40,000, $20,000, $50,000, and $90,000. The median has now fallen from $70,000 to $45,000. Again, we would never say that the economy is faltering in this situation although median household income has fallen.
When we analyze household-level data that combines different types of households, we must take into account changing household structures. Shifts in the number of household earners can significantly impact median household statistics, and failure to take this into account can create a distorted picture of income distribution.
Links: 1999 Census Income Data (courtesy of 2000 March CPS March Supplement); 2005 Census Income Data (courtesy of 2006 CPS March Supplement); Bureau of Labor Statistics CPI Data (click on "All Urban Consumers, Current Series")
Last week, the D.C. Circuit Court of Appeals issued a potential bombshell tax opinion in the case of Murphy v. I.R.S. The potential ramifications for the federal income tax system are enormous because the court ruled that the Sixteenth Amendment of the Constitution precluded the income taxation of non-economic (i.e. emotional distress) compensatory damages.
The case involved a woman employed by the New York Air National Guard. When she blew the whistle on environmental problems on an airbase, she claimed that her employer retaliated by “blacklisting” her and providing bad references to potential employers. She filed a complaint with the Department of Labor, who referred the case to an administrative law judge, who ultimately ended up rewarded her $70,000 in compensatory damages for emotional distress.
She initially paid tax on the $70,000 but later filed for a refund. She had two main claims in her refund lawsuit: first, that the Internal Revenue Code (IRC) excluded the $70,000 from gross income; second, that the Sixteenth Amendment precluded the taxation of the $70,000 as income.
Chief Judge Douglas Ginsburg, writing for a unanimous court, rejected her first claim but accepted her second. Basically, Judge Ginsburg wrote that the IRC—specifically, §104(a)(2)—did not exclude damages for emotional distress from gross income. However, he went on to hold that the Sixteenth Amendment basically required that such damages be excluded from income, and held §104(a)(2) unconstitutional to the extent that it did not.
This case involves the thorny issue of the definition of income. We have wrestled with this definition in the past (click here for one such report). Fortunately, we don’t have to wade into that thicket in order to notice a couple of problems with this decision.
First, in finding constitutional infirmity in taxing emotional distress damages as income, the court blamed the wrong section of the tax code. §104(a)(2), the section the court held unconstitutional, is an exclusion section. The IRC is structured such that gross income is broadly defined (“from whatever source derived”) in §61, with the definition only limited by specific exclusions in other sections of the IRC.
To the extent that the IRC includes emotional distress damages in gross income, §61—not an exclusion section like §104(a)(2)—is the culprit. Thus, the court should have held §61 unconstitutional, not §104(a)(2). Professor Maule discusses this issue in a worthwhile blog post located here.
Second, the Sixteenth Amendment inquiry is not the end of the constitutional analysis in this case, because that amendment is not the sole source of congressional tax authority in the Constitution. The basic taxation power of Congress is found in Article I, §8, which says that “The Congress shall have Power To lay and collect Taxes, Duties, Imposts and Excises, to pay the Debts and provide for the common Defence and general Welfare of the United States…” This power is limited in Article I, §9, which says that “No Capitation, or other direct, Tax shall be laid, unless in Proportion to the Census of Enumeration herein before directed to be taken.”
Thus, it is likely that Congress could levy an income tax even in the absence of the Sixteenth Amendment, just as it levies taxes on gasoline, tobacco, etc. Some commentators believe it was ratified in order to reverse the Supreme Court’s Pollock opinion, which held that an income tax was a direct tax and thus had to be apportioned based on census data. If this view of the Sixteenth Amendment is correct, then the Murphy opinion failed to wrestle with the issue of whether Article I, §8 can be cited as independent constitutional authority for the power to tax emotional distress damages as income.
In the future, we will consider the economic issues presented by the court’s ruling that emotional distress damages are not income.
Probably the most important tax policy story in recent decades has falling statutory tax rates on capital income. As companies and financial capital have gotten more mobile in recent years, tax competition for jobs and investment between countries has forced down statutory tax rates on capital income around the world, particularly throughout Europe.
But how far can this trend continue? Should lawmakers abandon taxes on capital income altogether, and focus on taxing consumption instead? Those are the questions addressed in a provocative new paper from CESifo, a Munich-based research group, titled "Should Capital Income Taxes Survive? And Should They?" From the introduction:
Can capital income taxes survive? And should they? In recent decades these questions have been debated with increasing intensity among tax economists and policy makers, as growing capital mobility and the ensuing tax competition has driven down statutory tax rates on capital income throughout the world.
Those who believe that returns to savings should not be taxed have typically welcomed capital tax competition, hoping that it will push governments towards greater reliance on consumption-based taxation.
However, many other observers fear that an erosion of capital income taxation will undermine the integrity and political legiiimacy of the tax system and lead to greater inequality and to an underprovision of public goods–the well-known spectacle of a ‘race to the bottom’. (full paper here).
The paper is fairly technical, but here's one popular highlight: the downward trend in corporate income tax rates in OECD countries:
For more on corporate taxes in the U.S., check out our "Corporate Taxes" section.
A new study released by the Department of Education shows that those who benefit most from tuition tax credits, specifically the Hope Learning Credit and the Lifetime Learning Credit, tend to be higher income taxpayers relative to lower income taxpayers. From Bloomberg News via the Boston Globe:
College tuition tax credits are benefiting wealthier U S taxpayers more than the poorest, a federal study concluded , based on tax records, in the first analysis of the nine-year-old program.
The federal credits are saving an average of $700 in taxes for families earning $92,000 or more, and $600 for families earning less than $32,000, the Education Department's National Center for Education Statistics said in a report.
The findings confirm warnings about the program when it was enacted in 1997, said Kenneth Redd, director of research and policy analysis at the Council of Graduate Schools, which represents about 470 colleges in the United States and Canada.
``The critics of these kinds of credits have said, `Is it right to use scarce resources on people who may not have the most need for it?' " Redd said. ``But at the same time, higher income families have financial need, because the cost of college is very high."
The report, based on 2003-04 figures, found that low-income families do better overall with federal college assistance. Counting tax breaks and a variety of federal grants, families earning less than $32,000 get an average benefit of $3,300, while those earning more than $92,000 get $800. (Full Story)
There are a few major reasons why we see that most of the benefits of tuition credits flow to upper-income taxpayers. First, these credits are non-refundable. Therefore, as the article points out, those who have low incomes to begin with have lower tax liabilities. Therefore, if these individuals would be paying little, if any income tax without the credit, and since these credits are non-refundable, these tuition credits can only push their already low tax liabilites down to the lower bound of zero. (See a recent Tax Foundation piece showing how over 43 million tax returns had zero or negative tax liability.)
Another reason that these benefits would tend to flow to the upper-income tax returns is that they are likely to have a larger tuition bill than the lower-income tax returns. There are two reasons for this: (1) higher income families are more likely to send their children to more expensive schools, and (2) colleges heavily practice price discrimination with their student body. Price discrimination is where a firm can charge different prices for the same good to two different individuals. Colleges do this through financial aid based upon financial need by obtaining loads of information regarding the financial status of the student. (Remember how many forms you had to fill out?) Thereby, the colleges charge a lower final tuition price to those students with less financial backing, resulting in lower tuition bills for these students, and less of a tuition credit.
Finally, a problem with looking at tax returns as the unit of analysis is that you are comparing single returns with joint returns, and as the article points out, the single returns have a phaseout range that begins at $43,000, while the joint returns have a phaseout range that begins at $87,000. If you are going to say that a $45,000 single return has lower income than an $80,000 joint return, then this phaseout difference is another obvious reason why the "wealthy returns" would benefit more than the "poor returns."
Although soaring home prices have slowed recently, the rapid run-up in real estate values in the last decade has led to booming property tax bills around the nation. Not surprisingly, support for property tax reform is building among irritated homeowners.
Today's USA Today ran two pieces exploring the growing dissatisfaction with rising state and local property tax bills. Our annual tax policy survey is quoted in the first piece, titled "States attack property taxes":
At least 10 states have cut property taxes this year or are preparing to do so, part of a tax mini-rebellion that has been brewing alongside higher home prices.
States are raising other taxes, especially the sales tax, and spending budget surpluses to replace lost property tax revenue. That makes the trend more of a tax shift than a net tax cut. Political leaders are pledging that local government and schools, which depend on property taxes, will be protected.
"We will replace the money so that education doesn't get shorted," says Idaho Gov. James Risch, a Republican who has called a special legislative session today to cut property taxes.
Polls show the property tax is the most unpopular tax. A 2006 survey by the Tax Foundation, a non-partisan tax research group, found 39% considered it "the worst" state or local tax, about twice as many as thought that of the state income or sales tax...
Property taxes have risen 27% since 2000, after adjusting for inflation and population growth. That's less than the 41% inflation-adjusted increase in home values, but it's twice as fast as the growth in sales or income taxes.
Property taxes now consume a greater share of personal income — 3.4% — than any time since 1992, according to a USA TODAY analysis.
And from the second, titled "Soaring property taxes elicit backlash among homeowners," which also quotes the Tax Foundation on the likely reasons behind the perceived unfairness of property taxes among many taxpayers:
Fallout from property tax cuts is wide and complicated. The changes are shifting public school financing from locally controlled property taxes to state-controlled sales and income taxes.
The changes also are carving out new winners and losers. Tax exemptions are being expanded for the elderly, the disabled, veterans and people who have owned their homes for long periods. New Jersey is considering taxing business property at a higher rate than residential property, a practice some other states use.
The property tax is under fire in states that have high property taxes, such as New Jersey, and states that don't, such as Idaho. The rebellion is mostly in states that have had soaring home values, but it's also found in some states that haven't, such as Indiana.
"People hate the property tax because it's visible," says economist Andrew Chamberlain of the Tax Foundation, a research group in Washington, D.C. "One of the great ironies of tax policies is that people hate the tax that's easiest to see, not necessarily the one that costs them most." State and local governments collect more in sales taxes than in property taxes.
For more on the good, the bad and the ugly of state and local property taxes, check out our "Property Taxes" section. Also, be on the lookout for our forthcoming report on growing property taxes around the nation, due out in the coming weeks.
A new report released Thursday by the Congressional Budget Office (CBO) estimated that for the corporate income tax in an open economy like the United States, workers could bear as high as 70 percent of the tax burden, while owners of capital would bear around 30 percent. Here is part of the abstract from the report:
Burdens are measured in a numerical example by substituting factor shares and output shares that are reasonable for the U.S. economy. Given those values, domestic labor bears slightly more than 70 percent of the burden of the corporate income tax. The domestic owners of capital bear slightly more than 30 percent of the burden. Domestic landowners receive a small benefit. At the same time, the foreign owners of capital bear slightly more than 70 percent of the burden, but their burden is exactly offset by the benefits received by foreign workers and landowners. To the extent that capital is less mobile internationally, domestic labor’s burden would be lower and domestic capital’s burden would be higher. Burdens can also be affected by the domestic country’s ability to influence the world prices of some traded corporate outputs. But the signs and magnitudes of those effects on burden depend upon the relative capital intensities of production in the corporate sectors that produce internationally tradable goods.
Currently, many estimates of the consequences of changes in corporate income tax policy make a drastically different assumption regarding the economic incidence (who really bears the burden) of corporate income taxes. For example, in its distributional work, CBO, the Urban-Brookings Tax Policy Center, and formerly Treasury assume(d) that the entire burden falls on capital owners. See TPC documentation. That is, these types of estimates typically assume that a larger fraction of the burden falls on the owners of capital, and a much lower burden falls on workers than what is estimated in this piece. Some other works (like some that have been done in the past at the Tax Foundation) also assume in some cases that consumers bear some burden of the tax.
So what could these new numbers mean? First, these numbers could imply different revenue estimates for given changes in tax policy than were conducted previously when they assumed different relative sensitivities to the corporate income tax for capital owners, consumers, and laborers.
Second, these estimates imply that distributional estimates of the true economic burden of the corporate income tax would tend to overstate the tax burden on capital owners, which are more likely to be upper income earners. It would also then understate the tax burden of laborers, whose incomes are less likely to be skewed towards the wealthy than capital income. This would also imply that those tax models that do distributional analysis of proposed tax changes would be overstating the benefit to the wealthy that would come from lowering the corporate income tax, and understating the benefit to middle class income earners.
Finally, the fact that the tax burden could fall so highly on labor makes one question the purpose of a progressive rate structure on corporate income taxes. It is almost indefensible when you consider that labor is bearing a very large fraction of the economic incidence of the tax. Why should Business A that has a profit of $50 million pay a higher tax rate than Business B with a profit of $1 million when the laborers of Business A and Business B are bearing so much of the burden? The laborers in Business A don't even necessarily earn higher incomes than the laborers in Business B and in fact could be paid less than the workers for Business B, yet are subject to higher taxation through this progressivity of the corporate income tax.
For more on this topic, Greg Mankiw had some comments on this report on his blog.
There are many reasons to oppose state-run lotteries, and a recent news story reminds us that perhaps state governments should not be using gambling revenue to fill state coffers.
A Long Island mom blew up to $6,000 a day on lottery tickets - an out-of-control addiction she fueled by embezzling $2.3 million from her bosses, authorities said yesterday.
By day, Annie Donnelly, 38, a bookkeeper and mother of three from Farmingville, wrote checks to herself and for cash at her medical office job.
By night, she would buy huge strips of $10 and $20 scratch-off tickets and thousands of dollars in lottery tickets on her way home - usually stopping at the same shop.
Donnelly, who has been behind bars since her arrest in June, pleaded guilty yesterday to grand larceny charges. She faces four to 12 years in prison when she is sentenced on Sept. 20.
The tax policy aspect of this story may not be immediately evident, but we must remember that the lottery is actually a source of implicit tax revenue. About a third of the woman’s lottery purchases, or over $700,000, was kept by New York State to support government programs.
How many other taxes involve embezzlement and gambling addictions? Of course states tax privately run casinos, but lotteries are run by the state and only the state.
Sensationalistic news stories like this may distract people from the tax policy problems inherent in state-run lotteries; tax policy may seem uninteresting to some compared to stories of embezzlement, imprisonment and addiction. But stories like this one should be a reminder not only of the fundamental differences between lotteries and other types of tax revenue, but also of the tax policy problems caused by states running lotteries as a source of tax revenue—problems that include regressivity, lack of economic neutrality and lack of transparency. All taxpayers—not just a few who develop gambling problems—are worse off due to the tax policy problems of lotteries.
Maryland has joined the crowd of states that declare one or more “sales tax holidays.” The result is much hype and little tax relief, as Tax Foundation economist Jonathan Williams explains in today’s Baltimore Sun.
Scheduled for four days in August to coincide with back-to-school shopping, the sales tax holiday in Maryland is essentially a 5% sale on selected items costing less than $100.
You wouldn’t think such a small discount on fairly low-cost items would attract a crowd, but state governments spend such a huge amount advertising their temporary generosity that some retailers piggy-back on the sales with their own discounts. Some don't.
When politicians decide what’s on sale, don’t expect it to be easy. In Maryland’s slide show on the program, things get complicated fast.
Under “What's Exempt," we’re told, “Qualifying clothing or footwear are articles designed to be worn on or about the human body."
The silly clause at the end defining “clothing and footwear” seems to be just a legalistic effort to make us understand that everything in those two categories is exempt. But if you think scarves and belts and ties and headbands are “worn on or about the human body,” you’d be wrong. Those are accessories, and there's no tax holiday for them.
From the retailer's point of view, it might be easier just to forgive the tax on everything they sell instead of trying to keep track of such rules. No, no, no. Under "Prohibited by Law," the State of Maryland warns, "Retailers cannot state or imply they will pay or refund Maryland sales tax on non-exempt items."
If an item is buy-one-get-one free, and it costs $120, that means they're really $60 each, and therefore tax exempt during the holiday, right? Wrong, if the retailer wants those items to sell tax-free, he has to change the sign to read "Half off" and sell them one at a time under $100.
Shipping doesn't count as part of the price, but handling does. When they're combined, handling wins -- s/h is part of the price. On the sale of multiple items, the retailer must apportion the s/h to each item to determine eligibility for the tax exemption.
The complexity just goes on and on. In the end, taxpaying customers save little, and they're certainly not getting a bargain on the price of government.