For more on corporate taxes, see Kyle's recent study "U.S. Multinationals Paid More Than $100 Billion in Foreign Income Taxes."
The Tax Policy Blog
Citing unfair price competition, the cable industry is asking the Massachusetts legislature to impose a 5 percent tax on satellite television. From Fox 12 News in Providence:
Massachusetts residents who receive satellite television service would face a new five percent tax under the terms of a proposed bill on Beacon Hill.
It's legislation the cable TV industry is pushing because satellite providers such as DirecTV are competing with them for subscribers.
But wording in the bill -- written by the cable industry -- would then nullify the charge for cable subscribers because they already pay up to five percent in so-called franchise fees.
Cities and towns have traditionally charged cable companies the fees to compensate a community for stringing wires and digging up roads to provide their service.
Satellite companies have been spared the fees because their service does not rely on public infrastructure.
Making cable companies (and their subscribers) pay for infrastructure projects they exclusively benefit from is consistent with the benefit principle of taxation. Why should those who will never receive cable pay for the digging of cable lines?
Just because satellite companies can produce a similar product to cable companies without having to pay the costs of laying cable does not imply that lawmakers should use tax policy to "even out" the two prices. If one company can produce at a lower price than its competitors, don't we usually consider that to be a good thing in the marketplace?
The never ending parade of sales tax exemptions moved in to New Jersey and has found a way to complicate Halloween of all things. From Newsday.com:
Just in time for Halloween, sales tax is being removed from Twix bars, Tootsie Rolls and those itchy store-bought Halloween costumes.
New rules bringing New Jersey's sales taxes in line with other states go into effect Saturday, said Tom Vincz, spokesman for the New Jersey Department of the Treasury.
The changes are designed to smooth operations for businesses with multistate trade so that say, a single-serving bottle of iced tea or dandruff shampoo is taxed similarly in several states. New Jersey will join about 20 other states that have signed onto the Streamlined Sales and Use Tax Agreement.
Among the changes, the Department of Taxation's officials say, is one in which sweets made with flour _ such as licorice, KitKats and Nestle's Crunch, will be exempt from tax, while those prepared without flour _ Hershey's chocolate bars, for example _ remains subject to New Jersey's 6 percent sales tax.
We at the Tax Foundation are all for making the sales tax code uniform across states as this cuts down on uncertainty and complexity, but what is the rationale behind taxing one candy and not another?
Robert Frank of the New York Times told us yesterday that children learn best through story telling. Maybe the best way to teach children about poor tax policy is to tell them about the scary tax man who wishes to complicate their Halloween fun by taxing their snickers bars but not their twix bars.
Excess regulatory costs are like sand in the gears of commerce, diverting companies' attention toward legal and administrative tangles and away from productive work.
The Small Business Administration's Office of Advocacy has released a new study (PDF) on the costs of federal regulations on small businesses, including the costs of complying with the federal income tax. In fact, the paper's section on tax compliance relies on the Tax Foundation's own 2002 study of compliance costs by economist J. Scott Moody:
The estimate of the cost of federal tax compliance relies on a 2002 report by the Tax Foundation that provides extensive details about the time required to file federal income tax returns...
The basic approach to the computation of tax compliance costs is straightforward and easy to describe. The first step uses data from the Internal Revenue Service on the amount of time required to complete each type of tax form, and the number of filings for each type of form...
The number of compliance hours is broken down in Table 6 for businesses, nonprofits, and individual filers. The total number of hours required for compliance is nearly 5.8 billion per year, and American businesses account for roughly half of the total hours.
For 50 years of the Cold War, it was the West that much of Eastern Europe looked up to and envied. Now the economic policies of Eastern Europe are being debated for their possible implementation in Western Europe, specifically the flat tax.
These new free market approaches coming from Eastern Europe, however, are being met with some resistance. As Business Week explains:
Russians do it, Romanians do it, even Lithuanians and Latvians do it. So far, though, few in western Europe have fallen in love with the flat tax.
Supporters say the flat tax, a system under which all taxpayers pay the same rate, cuts away complicated bureaucracy and encourages people to work harder, earn more, and keep more of their income.
But some see the flat tax as "voodoo economics," stealing from poor wage earners and cutting public spending while widening the wealth gap.
While the domino theory of fighting communism was met with mixed results, a similar domino theory of lower taxes and less regulation is unfolding across Europe. When one country in Eastern Europe that is looking to rapidly grow its economy lowers its taxes for businesses, it encourages business flow, making it a more attractive place for business compared to its neighbor. This forces the neighbor to lower its taxes on businesses in order to stay competitive, which in turn forces its neighbor to do the same, and hence a domino effect.
This domino effect has now reached the former Iron Curtain, or the divide between the former Soviet bloc countries of Eastern Europe and Western Europe. The issue of the flat tax reached that curtain in the recent German elections, where those that were still wary of this flat tax revolution survived the possibility of a complete overhaul, as the article explains. How long this wariness in Germany can persists as Eastern European countries continue to become more competitive is unclear.
Could this impact be felt outside of Europe? In short, yes. As the world becomes a more global economy and geography becomes less a barrier to trade, this domino effect will not be exclusive to countries that are merely geographically close. Or as Thomas Friedman would say, The World is Flat, implying that the global economy is becoming increasingly competitive and differences in economic policies across nations are much more important than they were even ten years ago.
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.
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.
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.
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.