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...
The Tax Policy Blog
According to yesterday’s Atlanta Business Chronicle, this month’s temporary repeal of Georgia’s state gasoline tax is soon set to expire.
“Beginning Oct. 1, distributors will collect about 15 cents more for each gallon of gas they deliver into a retailer's pumping tanks. Gov. Sonny Perdue temporarily suspended the collection of the state's motor fuel taxes on Sept. 2 "to relieve some of the financial burden placed on Georgians by the disruptions of our fuel supply resulting from the effects of Hurricane Katrina." His action was ratified by the Georgia General Assembly on Sept. 10. [Full Story]
Recent Tax Foundation research noted that, “today, the combined burden of federal, state and local gas taxes costs American drivers an average of 45.9 cents on every gallon purchased. According to data on gasoline use from the U.S. Department of Transportation, that amounts to an annual gas tax burden of roughly $271 for every man, woman and child in the United States.” While the short term change in price is determined by the forces of supply and demand, Americans need to remember the significant burden that gas taxes place on the long term cost of gasoline.
You can read the Tax Foundation’s new Fiscal Fact on gas taxes here.
A hilarious case of tax preferences gone awry in the Netherlands. From BBC News:
A Dutch actress training to be a witch is eligible for a tax deduction for her course fees, the tax authorities in the Netherlands have decided. They allowed the 39-year-old woman to claim 2,210 euros (£1,505) for the course that lasts a year and a day.
A tax official told Reuters news agency the woman used the course "to extend her professional knowledge." Students learn to cast spells, prepare herbs and potions and use crystal balls as well as other aspects of witchcraft.
The course organiser, Margarita Roland, said she taught apprentices all they needed to know, using magic as a force for good.
"A witch is a wise woman or man who knows about the magic of life in general and the magic of the earth in particular," Ms Roland was quoted as saying.
Read the full story here. No word yet on the Netherlands' official tax treatment of frog legs and unicorn horns as business inputs.
We're now accepting registrations for the Tax Foundation's 68th annual National Conference, held November 17 in the Cannon House Office Building here in Washington, D.C.
Treasury Secretary John Snow is the keynote speaker. The conference topic: "The U.S. Corporate Income Tax: Economic and Competitive Issues."
Other speakers include:
Robert Carroll, Treasury Department
Christopher Heady, OECD
Kenneth Judd, Stanford University
Dale Jorgenson, Harvard University (Invited)
Download our registration form here, or call (202) 464-5102 for details.
As U.S. lawmakers work toward a permanent repeal of the federal estate tax—the so-called “death tax”—our friends in Russia are moving in the opposite direction, proposing an actual death tax on funeral services. From today’s Moscow News:
The regional legislature in southern Siberia’s Kurgan has approved amendments to the imputed tax law that will introduce taxation for religious rituals such as funerals and baptisms, the Vedomosti business daily reported on Tuesday. The move has already caused protests from the Orthodox Church and the Finance Ministry. [Full Story]
This bizarre story should remind Americans that our own version of the death tax will return unless action is taken. While the most recent tax cuts eliminated the federal estate tax, thanks to the sunset provision it’s scheduled to return in 2011.
For more on estate and gift taxes, see here.
In the next few weeks, many tax commentators will argue that the physical presence rule (generally embodied in H.R. 1956, which will be heard today in the House Subcommittee on Commercial and Administrative Law) would violate the principles of federalism, would short-circuit a state-led solution to corporate tax complexity, would violate state sovereignty, and would increase tax sheltering. The following thoughts are important to remember when evaluating these claims:
1. One of the driving issues behind the calling of the Constitutional Convention in 1787 (and the Annapolis Convention in 1786) was the lack of a power in Congress to regulate commerce among the states. The impotence of Congress in this area was severely impacting commercial relations with foreign nations and between the states themselves.
2. James Madison’s Notes of Debates in the Federal Convention of 1787 reveals that many founders—including two of the most famous—had a great deal of frustration over the usurpation of rights and liberties by the States. James Madison was so frustrated with the States at the time of the founding that he even wanted to give the federal government an absolute veto power over all state legislation. Alexander Hamilton wanted to abolish the States altogether. The small states at the time obviously would have none of that, but the Constitution ultimately did give Congress an absolute veto over state regulation of interstate commerce.
3. Giving the power to regulate commerce to Congress is a judgment that an integrated national market is more important than the taxing authority of the States. Thus, statements such as "Congress should exercise its authority only to further cooperative efforts among the states to simplify ...their tax systems" miss the mark entirely. Congress is free to set aside those state tax laws that, in its judgment, negatively impact interstate commerce and thereby hinder national economic growth.
4. H.R. 1956 would not exacerbate corporate tax sheltering. The states have a number of ways to fight corporate tax shelters. Lee Sheppard says that combined reporting is the best tool, arguing that “…[e]very single tax shelter trend identified by the MTC in its tax shelter report is directly traceable to the failure to require combined filing.” A federal physical presence requirement will not keep the states from fighting tax shelters.
Just yesterday, we released a report showing how the physical presence standard for business activity taxes is consistent with the benefit principle of taxation as well as international tax practice. Click here to read the report.
To continue the theme of mixed messages coming from Washington, we see this story from today’s Cincinnati News-Enquirer:
Rep. Steve Chabot says motorists who are being pummeled by sharp increases in fuel prices should get $500 to $1,000 in tax credits to help defray the cost.
Chabot, R-Westwood, planned to introduce a bill today that would create the tax credit for those who use gasoline or diesel.
Prices for both have skyrocketed in recent months.
The overall price tag of Chabot's bill was unclear, but it was expected to be in the billions of dollars.
Compare that with President Bush’s comments from yesterday urging Americans to consume less (from Yahoo News):
"We can all pitch in … by being better conservers of energy. I mean, people just need to recognize that the storms have caused disruption and that if they're able to maybe not drive … on a trip that's not essential, that would be helpful."
There is no better way to get people not to conserve gasoline than to be giving them a special temporary tax break for buying gasoline. What many politicians have ignored in the current debate over fuel prices is the role of prices as an information mechanism. High fuel prices signal to consumers to conserve on gasoline, and signal to producers to boost fuel supplies.
Unfortunately, many policymakers are sending the entirely wrong policy signals in their effort to aid gas consumers at the pump.
Today, bay watchers in San Francisco may find more than the tide rolling away. According to several stories in the San Francisco Chronicle this weekend, 30,000 quarterly tax payments were lost in San Francisco Bay.
“Thousands of tax payments and other correspondence sent to the Internal Revenue Service were dumped into San Francisco Bay following an automobile accident. An additional 15,000 tax payments were recovered after the accident, which occurred on the San Mateo Bridge as the courier traveled from the San Francisco post office to a check-processing facility in Hayward, the IRS said. [Full Story]
The lost payments are estimated to represent only 2 percent of September’s volume at the IRS facility in Hayward, California. This story highlights the massive amount of paperwork that the current tax system requires of everyday Americans. Americans are now coming to realize that the current tax system is far too complicated. According to a recent poll commissioned by the Tax Foundation and conducted by Harris Interactive®, “an overwhelming 81 percent of adults believe the federal income tax is somewhat or very complex, and 70 percent said they either “hated” or “disliked” doing their income taxes.” A recent study by Tax Analysts points out that Americans currently spend an average of 21 hours in order to comply with the complexities of the status quo each year. Let’s hope the President’s Advisory Panel on Federal Tax Reform presents a straightforward plan to eliminate the reprehensible complexity of the tax code.
Great piece from today on Bloomberg News by Kevin Hassett of the American Enterprise Institute:
It's time for a pop quiz. Suppose a region of the country is hit by two massive hurricanes causing unprecedented destruction. Will it speed the recovery if the U.S. government imposes a massive new tax on that region's most important industry?
Incredibly, the U.S. may be getting ready to try.
Because of storm-caused supply disruptions in the Gulf of Mexico, oil and gas prices have skyrocketed. This reminds us how much U.S. production occurs between Texas and Florida. According to the Department of the Interior, 29 percent of the country's domestic oil comes from the Gulf of Mexico.
Democratic Senator Byron Dorgan of North Dakota introduced a bill this month to impose a windfall-profits tax on oil companies. The bill would impose a 50 percent tax on the additional revenue received by integrated oil companies when prices top $40 a barrel.
The base price would be adjusted annually for inflation, and the tax would expire three years after its enactment. Revenue from the tax would be returned to individuals as rebates. The tax wouldn't apply to oil discovered after the law takes effect.
If this passes, consider what message Washington would be sending:
July 2005: Pass an energy bill that gives huge tax breaks and subsidies to oil companies (supposedly aimed at increasing production)
Late 2005: Pass a tax on oil companies for profits earned, which would deter future production.
But this wouldn’t be the first time Washington has sent an unclear message to its citizens and businesses.
Despite the political popularity of the tax deduction for home mortgage interest, economists are basically united in their opposition to it.
What's the economic case against it? Simple: by giving a tax subsidy to housing, it distorts investment decisions toward houses and away from assets like factories and equipment that are more productive at the margin. And that makes workers less productive, ultimately lowering wages and making society poorer.
A recent GAO primer on tax reform makes a clear and persuasive case against the mortgage interest deduction:
Tax Treatment of Owner-Occupied Housing Distorts Investment Choices and Lowers Wages
Compared to other types of investment, owner-occupied housing enjoys tax advantages primarily because the value that homeowners receive from housing services, which is a part of the return on their investment in housing, is excluded from taxation. Economists view these services, called imputed rent, as income in kind, which is valued at what the homeowner would receive as income if the house was rented.
Under a pure income tax, imputed rent net of such costs as mortgage interest would be taxed. This tax treatment would help insure that investment in housing is taxed as other investments are taxed. As the table below shows, the tax advantages under the current system lead to lower marginal effective tax rates (METR) for housing relative to other investments.Marginal Effective Tax Rates on Capital, by Source, 2003
Owner-occupied housing: 2% Noncorporate investment: 18% Corporate investment: 32% Source: Jane Gravelle, “The Corporate Tax: Where Has It Been and Where Is It Going?” National Tax Journal, vol. 57, no. 4 (2004): 903-23
Economists generally agree that the favorable treatment of owner-occupied housing, by lowering METR, distorts investment in the economy, resulting in too much investment in housing and too little business investment. The consequence of this is that businesses invest less in productivity-enhancing technology. This in turn results in employees receiving lower wages because increases in employee wages are generally tied to increases in productivity.
The resulting distortions from the tax-preferred treatment of owner-occupied housing lead to efficiency costs that have been estimated to be large. Gravelle’s summary of estimates reports that the efficiency costs of the tax-preferred treatment of owner-occupied housing could be as much as 0.1 to 1 percent of GDP.
That's from a text box on page 39. Let's hope Members of Congress—who may be taking on federal tax reform next year—are actually reading these excellent GAO reports. Read the full report here (PDF).
In yet another sign that the economy is roaring ahead despite deficits, hurricanes, high gas prices and overall pessimism, state tax revenues increased 8.1 percent in real inflation-adjusted terms in the second quarter, compared to 5.6 percent during the same time frame last year, according to the Rockefeller Institute.
During the second quarter: -Personal income tax revenue grew 18.4 percent -Corporate income tax revenue 22.8 percent -Sales tax revenue grew 7.9 percent
See the full Rockefeller Institute report here.
The IRS has released new figures regarding the burden that tax compliance places on the average tax filer. As today's news section of Tax Analysts points out:
U.S. taxpayers pay nearly $25 billion a year and on average need almost a whole day to do their taxes, according to estimates based on the IRS’s new model for measuring the tax system’s burden.
The IRS estimates, based on Forms 1040, 1040A, and 1040EZ data from the 2003 tax year, show that taxpayers pay an out-of-pocket average of $179 for every return filed. However, the estimates reveal large discrepancies in the time and cost, depending on the major form filed in a taxpayer’s return. For example, taxpayers filing Form 1040 need an average of 31 hours to prepare their return, whereas taxpayers filing Form 1040EZ need only seven hours. Likewise, it costs an average of $242 to prepare a 1040, while a 1040EZ is only $29.
America needs a reformed tax code that is simpler, more transparent, and does not heavily distort economic activity. When 81 percent of Americans feel that the tax code is too complex (see Tax Foundation/Harris Poll), lawmakers should realize that something needs to be done. We hope the President's Tax Reform Panel will heed these calls from the American people for an overhaul of the current system.
As in most places, food is tax-exempt in Washington State. So why is Seattle's most ubiquitous coffee house charging sales tax on tax-free muffins?
Apparently, because they're confused about state law. And in a hilarious twist, state tax collectors have turned a blind eye to the practice since it boosts tax collections. From the Seattle Post-Intelligencer:
Kathy Batey of Seattle wants to know why she is charged sales tax at Starbucks on muffins that were not prepared by the coffee shop, but can buy muffins from stores, other coffeehouses and bakeries tax-free...
The short answer is that Starbucks, Seattle's Best and Tully's are charging customers sales tax that consumers don't have to pay... In Washington, consumers are not required to pay sales tax on food items, unless the food is prepared by the establishment selling it, or unless the food is served. Bakery goods always have been exempt from sales tax...
When the Seattle Post-Intelligencer tested the system at large chain coffeehouses across the city, we were charged the 9.3 percent Seattle sales tax each time, even when the purchase was only for tax-exempt food, such as a bottle of juice and a cookie...
Officials from Starbucks Coffee Co. said that ... they are supposed to tax all of their sales... Gowrylow [spokesman for the state Department of Revenue] said that assessment is incorrect.
The state, however, is not against businesses turning over more tax than is necessary. If a business does not want to separate its taxable and non-taxable items, like grocery stores do, it doesn't have to...
Consumers don't have much recourse, other than to express their displeasure with the practice and to take their business elsewhere.
No word on whether the company plans to take on additional government functions in addition to levying its own taxes. Read the full piece here.
How do you cut federal income tax rates in half without losing a dime of tax revenue? Find the answer—at least in theory—in our new "Fiscal Fact" posted yesterday.
In it, chief economist Patrick Fleenor calculates that by expanding the base of the federal individual income tax to include all personal income—rather than just the 40 percent it now taxes—we could theoretically lower the U.S.’s average effective income tax rate from 19.5 percent to just 9 percent. From the analysis:
An ideal tax system is one that taxes a wide base at a low rate. Unfortunately, the current federal individual income tax system does neither. Thanks to a myriad of exclusions and preferences, the current system taxes just 40 percent of actual income in the U.S. As a result, income tax rates are more than twice as high as they could otherwise be.
Read the full piece here. Here are the graphics with the punchline:
Federal lawmakers are scrambling to enact measures to provide tax relief for rebuilding in the Gulf region in the aftermath of Katrina. Naturally, Congress is limiting the tax relief to the disaster area. After all, they reason, why should companies get Katrina-related tax credits for hiring additional employees in Seattle or Los Angeles?
Defining the disaster area and how far to extend the tax credits, geographically, was a small source of contention during congressional debate over H.R. 3768, the Katrina Emergency Tax Relief Act of 2005. Representative Bill Thomas, chair of the House Ways and Means Committee, was concerned about the Senate version of the expansion of the Work Opportunity Tax Credit (WOTC) that would have applied more broadly. For example, the Senate version would have applied to a company that hired someone taking refuge in the Astrodome to do work in the Houston area.
“How does that help New Orleans?” Thomas was quoted as asking in the September 16th edition of Daily Tax Report.
Ironically, the Sixth Circuit’s decision in Cuno v. DaimlerChrysler, which ruled that state investment tax credits are unconstitutional if they only apply to in-state activities, would restrict the states of Louisiana, Mississippi and Alabama from using a tax credit like the federal WOTC for rebuilding efforts. Cuno simply would not allow a state to target tax relief to a specific area like New Orleans, even if it were available to any company that invested in new employees in the area.
If Cuno were the law of the land, Louisiana would be restricted from asking the same question that Chairman Thomas asked about the federal WOTC expansion: “How does this help New Orleans?”
The complexity of our federal tax system was highlighted today in a piece on IRS real estate investment rules. From Dow Jones Newswires via the Myrtle Beach Sun News:
NEW YORK - Amateur "flippers" in the real estate market have more to worry about than a bubble burst. An IRS audit might interrupt their trip up the property ladder. Some amateurs are buying and selling properties too quickly, running the risk that the IRS may deem the transactions a person's business, with gains taxed as ordinary income, subject to self-employment taxes. The best way to avoid a problem is to consult a CPA or tax attorney before you begin the real-estate transaction. [Full Story]
Wouldn’t it be nice if investors and entrepreneurs could concentrate their efforts on making sound business decisions, instead of consulting a CPA or a tax attorney about tax code provisions? When the President’s Advisory Panel on Federal Tax Reform presents their recommendations, let’s hope that Congress doesn’t put them on the shelf to collect dust. The American people deserve a tax system that is simpler, more intelligible and easier to comply with.
You can read Tax Foundation research on tax complexity here.