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
Apparently there's a tax policy scandal afoot in the UK. The issue: the British treasury deleted arguments in favor of a single-rate tax from a memo exploring British tax reform options. From the Stockhom Network's e-newsletter:
The Daily Telegraph, a British broadsheet, carried a front-page story on Monday revealing that key sections of a recent Treasury research document that detailed the advantages of a flat tax had been blacked out.
The newspaper subsequently obtained an unadulterated version of the report, which argued that the introduction of a flat tax could create a “mini-economic boom” and would increase “economic efficiency by reducing policy-induced distortions and allowing the market to function more naturally, improving the overall allocation of resources and encouraging labour supply”.
As George Trefgarne went on to argue in his Telegraph column, ‘Under the Freedom of Information Act, such excisions have to be approved by ministers or senior officials, so the inevitable conclusions are: first, that Treasury mandarins are privately taken by the flat tax idea; and second, the Chancellor fears that this could hand a powerful weapon to the Tories.’
True or false: Shifting to a consumption-based tax system could boost U.S. GDP by some 9 percent in the long run?
True, according to UC Berkeley's Prof. Alan Auerbach. That's just one of several consumption tax lessons in Auerbach's excellent piece in this morning's Wall Street Journal (subscription req.):
Q.1: A shift to a consumption tax could increase GDP in the long run by as much as 9%.
A: True. In a pair of studies published in 1996 and 2001 (the second with several co-authors) I estimated the effects on the economy of an immediate switch to a low-rate, broad-based consumption tax that would raise the same amount of revenue as the current tax system. We found that lower marginal tax rates would increase employment and therefore expand production somewhat in the short run. Over a longer period of time, production would increase even more as the result of stronger capital accumulation induced by the more favorable tax treatment of savings...
Q.6: Adopting a consumption tax would hit the underground economy.
A: False. Drug dealers and others engaged in illegal economic activity currently evade income taxes but would have to pay taxes on their purchases under a consumption tax. The same is true for those engaged in legal economic activity who currently fail to report or pay taxes on their income. But the tax evaders also have customers, who currently pay income taxes before using their after-tax income to make purchases. Under a consumption tax, purchasers of illegal drugs would no longer have to pay income tax but would evade the consumption tax. The increased taxes on producers in the underground economy would be offset more or less by the reduced taxes on consumers in the underground economy.
Finally -- a school district that returns money to its taxpayers rather than having to spend it on “just something.” This does make you wonder though…if some school districts are lowering tax rates during the housing boom because revenues can keep up as a result of higher property values, what happens if the doomsayers are right and the housing bubble does burst? Unfortunately, it may mean property tax hikes all across the country, which could cause an even further downward spiral in a tumbling real estate market. From The Ithaca Journal:
Real estate assessments in the Ithaca City School District have risen by more than 10 percent in the past year, making the school district's new property tax rate the lowest it has seen in seven years. The ICSD Board of Education approved on Tuesday a 2005-06 tax rate of $17.95 per $1,000 of assessed value. That's a 5.4 decrease from last year's rate and lower, too, than the $18.27 per $1,000 property owners paid in 1998. While the tax rate falls, though, the tax levy — the total amount of support the district receives from taxpayers — is rising as planned. The district's $82.76 million budget for 2005-06, which voters approved in May, boosts the levy by 4.32 percent to $57.64 million. “Obviously, everyone would rather have the rate go down than up,” board President Roy Dexheimer said Tuesday. But “we're still raising the amount of money we said we were going to raise.”
It appears Members of Congress are ramping up for hearings this fall on several state tax issues, including telecom taxes, streamlining sales tax collections, and the Cuno v. DaimlerChrysler decision. From Tax Analysts:
Sen. Chuck Grassley, R-Iowa, who chairs the Finance Committee, said he was likely to hear a federal streamlining bill, but that he'd hear all the other state tax issues at the same time.
Such a hearing, [COST Legislative Director] Crosby said, would cover virtually everything generating noise in multistate tax circles: Charlotte Cuno et al. v. DaimlerChrysler Inc. et al, in which a court found an Ohio investment tax credit unconstitutional; state-led efforts for federal legislation to streamline sales and use tax collection; a federal bill that strives to establish a bright-line physical presence standard for state corporate taxes; and telecommunications taxes...
In anticipation of a rewriting of the Telecommunications Act of 1996, such issues as simplifying telecom tax administration and weeding out "discriminatory" taxes -- in other words, higher taxes for telecom than those levied on other businesses -- have surfaced.
For updates on these and other state tax issues, be sure to keep an eye on the State Tax section of our website.
As states continue to seek sources of revenue whose impacts are largely felt by small segments of society rather than broad taxes that tend to be politically unpopular, Oklahoma Governor Brad Henry and the state legislature passed a measure effective January 2005 that raised the tax per pack of cigarettes to $1.03, including a partial elimination of certain exemptions granted to tribal smoke shops that had compacted with the state.
However, what many in the state government failed to realize is a fundamental rule in economics: taxes alter the behavior of individuals and businesses. From Tax Analysts:
The additional revenues from the new taxation scheme (including the tribal compacts) were earmarked to fund several important healthcare initiatives. The shortfall in revenues is at the center of a growing controversy about the new tobacco taxes involving Henry, State Treasurer Scott Meacham, Republican legislative leaders, and Oklahoma Indian tribes.
Meacham claims that the tribes have underpaid their tobacco tax liability by nearly $13 million. At the core of the tribal tax dispute is the tax break in SQ 713 for tribal smoke shops that operate within 20 miles of the state's boundaries. Meacham claims that most of the tribal smoke shops (including those much farther away from the state line) are taking advantage of the tax break. Some tribes have still not compacted with the state and enjoy even more significant price advantages due to the higher taxes.
As we've written before, the home mortgage interest deduction is almost uniformly condemned by economists as bad tax policy, since it distorts investment decisions and shrinks the tax base requiring higher tax rates.
Unfortunately, it survives thanks to entrenched and politically powerful interest groups—builders, home owners, realtors—who benefit from it at the expense of other taxpayers.
The status of housing as the least taxed investment in the United States, which has helped fuel an eight-year boom in real estate values, may be in jeopardy as a presidential commission considers changes to the federal tax code...
Changes to housing-related tax incentives will also be considered, Jeffrey Kupfer, the panel's staff director, said. Economists say such policies would have the effect of eroding the relative advantage housing has enjoyed over other investments since 1997, when Congress effectively made most sales of primary residences tax-free...
The toughest issue to tackle may be the mortgage interest deduction, which has long been viewed as politically sacred, former Treasury Secretary James Baker III told the panel in March.
Former Treasury Department economist Eugene Steuerle says he does not believe that housing incentives, which are worth about $150 billion annually, are off-limits. "Politically, I think the case against making changes is exaggerated," said Steuerle, now a senior fellow at the Urban Institute, a nonpartisan research group.
Linda Goold, tax counsel for the National Association of Realtors, said it's possible that the tax panel may recommend replacing the interest deduction with a tax credit that would be more beneficial to lower-income Americans. They usually don't have enough deductions to justify itemizing, a prerequisite for taking advantage of the mortgage interest deduction.
The most likely reform—if any at all—would be to transform the deduction into a credit to eliminate its regressivity.
Unfortunately, that would make a bad tax policy worse by likely carving even more out of the federal tax base, requiring higher overall tax rates, and further entrenching its political support, all of which make fundamental tax reform even more difficult than it already is.
As the President’s Tax Reform Panel prepares to deliver its recommendations, it is useful to examine why extensive tax reform is necessary, and consequently unlikely.
Tax reform is necessary because politicians have complicated the tax code for years by carving out special provisions aimed at buying votes with taxpayer money. Mindless tax cuts masquerading as tax credits are a glaring example of this type of irresponsible tax policy.
The expansion of the child credit in 1997 is one example of a mindless tax cut. The goal of the credit was to reduce taxes for a particular segment of the population: those with children. The result is that while the tax burden has fallen for those targeted by the credit, the overall tax code is less neutral and more complex.
Years of irresponsible tweaking of the tax code to curry political favor has led to a tax base riddled with huge gaps and holes. Tax reform is now necessary to fix these problems.
However, large-scale tax reform is unlikely for the same reason it is necessary. Special interest lobbies that exist solely to maintain the deductions, exemptions, and credits granted by politicians to their constituents will make any sweeping reform virtually impossible.
The lesson for policy makers is simple: design and use the tax code to raise revenue to fund government, not for social engineering or to gain political favor.
The 2004 Virginia tax increase would have been small potatoes for Virginia taxpayers if Virginia had enacted a Taxpayer Bill of Rights (TABOR) in the early 1990s. TABOR limits the growth of government revenues to population plus inflation, and requires revenues in excess to be returned to taxpayers. The people, through a referendum process, can allow the government to keep and spend excess revenues if they so desire.
According to Michael New and Stephen Slivinski, writing for the Virginia Institute for Public Policy in The Case for a Taxpayer’s Bill of Rights in Virginia (PDF), Virginia taxpayers would have received a tax rebate every year from 1995 to 2002, for a total of $11.7 billion. State spending still would have increased by approximately $2 billion in ten years, but the taxpayers would have reaped most of the tax windfall from economic growth.
As Virginia taxpayers notice that their state government has a $1.1 billion surplus on the heels of a $1 billion tax increase, perhaps TABOR will start to make more sense.
One of the toughest issues facing federal tax reformers is how to deal with the deduction for home mortgage interest. Economists almost uniformly deride it, but homeowners, builders, and their representatives in Congress uniformly embrace it.
What's wrong with it? For one, interest payment deductions carved some $323 billion out of the federal tax base in 2000. Not only does it distort investment decisions toward housing at the expense of computers, education and other investments that may boost productivity more than homes, but it forces taxpayers to bear higher tax rates as a result.
Some sound thoughts on the deduction from the July/August issue of The American Enterprise:
The home mortgage deduction is an equally knotty problem, even for people who like to reduce taxes. Economists tear their hair at the exemption, arguing that it encourages over-investment in housing at the expense of capital investment. “Workers with a computer in front of them are $15,000 more productive than workers without them,” says Stephen Moore, president of the Free Enterprise Fund and a proponent of the flat tax. “You just don’t get those kinds of productivity improvements from investing in housing.”
Many argue that homes will remain affordable under a consumption tax because people will have more income to spend. “Canada doesn’t allow mortgage deductions and it has similar levels of home ownership,” says Edwards of Cato. But it is unlikely that either the Tax Panel or the President will venture into this dangerous territory.
California currently sports the highest individual income tax rate in the nation, 10.3%. Now comes word that a measure to increase taxes to fund universal preschool is close to gaining enough signatures to qualify for the 2006 ballot. From State Tax Notes:
A measure promoted by actor Rob Reiner and Preschool California to provide for universal preschool in California has been cleared for circulation and is expected to gather sufficient signatures to qualify for the June 2006 ballot. If approved by voters, the initiative would raise $2 billion to $2.4 billion per year through a 1.7 percentage point tax increase on individuals earning above $400,000 ($800,000 for joint filers).
Tax increases which are earmarked for specific programs are bad tax policy because taxes should be designed to raise revenue to fund the government as a whole. Also, earmarked taxes often add complexity to the tax code.
A tax increase will be devastating to California’s already fragile business climate, which the Tax Foundation ranks 38th. The additional tax increase on top of the 1% surcharge on individual incomes over $1 million—which took effect January 1, 2005 and gave California the highest marginal rate in the country--will be especially harmful to the business climate.
The large proposed tax increase will only serve to push high income earners and businesses from the state, which California can hardly afford. California voters need to think about this before heading to the ballot in 2006.
Wisconsin legislators are contemplating a “gas-tax holiday” for the rest of the year. From the Milwaukee Journal Sentinel:
Three Republican legislators from southeastern Wisconsin Wednesday called for a temporary 15 cent-per-gallon cut in the state's gasoline tax - what they termed a "gas tax holiday" - to provide motorists some relief from skyrocketing gas prices.
Sales tax holidays are an increasingly popular way for politicians to win favor with constituents; however they are poor tax policy. See our sales tax holidays blog.
High gas prices certainly cost people more money, but lawmakers should stick to fixing the actual issues causing high gas prices, rather than further complicating the tax code to appease angry voters.
West Virginia Governor Joe Manchin has announced a plan to gradually abolish the state’s 6% sales tax on food. When the legislature reconvenes for a special session on Sept. 7, he will ask legislators to consider two proposals: a one percent rate reduction with the goal of complete repeal during his administration, and a monthly food sales tax holiday. Read the full story here.
Republican legislators, who have long wanted to abolish the tax, welcomed this news, but many Democrats do not share their enthusiasm.
The sales tax on food was abolished in the 1980s by Gov. John D. Rockefeller IV, only to be reinstated at a higher rate during a 1989 budget crisis. Now that the state is enjoying a budget surplus, Gov. Manchin believes it can afford the estimated $25 million price tag of either of his plans.
Opponents argue that the fiscal future is uncertain and it is foolish to change tax policy on the basis of just one prosperous year. The budget surplus is due in part to an increase in the price of and demand for coal, which could change in the near future.
Proponents of repeal argue that the state would make up for lost revenue by keeping shoppers in the state. An estimated 400,000 West Virginians buy groceries in neighboring states that do not tax food. If those shoppers stayed in the state, they would not only generate more revenue for West Virginia grocers, they would also purchase some taxed non-food items on their shopping trips, which means more tax revenue for the state.
The governor’s plan for gradual repeal would be a much better choice than his tax holiday proposal. Tax holidays are poor tax policy, and a monthly sales tax holiday would create an administrative nightmare for retailers. If enacted, a food sales tax holiday might eventually meet the same fate as the state’s back-to-school sales tax holiday, which was cancelled earlier this year.
Read more about sales taxes here.
A few weeks ago, we blogged about the Supreme Court decision in Quill v. North Dakota. In that case, the Supreme Court ruled that the Commerce Clause forbids states from forcing remote sellers to collect use tax on sales if they do not have a physical presence in the state. This means that states cannot make remote sellers their tax collectors if they don’t have offices, employees, or some other tangible, physical connection to the state in which they sell products.
Today’s edition of State Tax Notes reports that a task force of the National Conference of State Legislatures (NCSL) recently approved a resolution asking Congress to approve legislation authorizing the states in the Streamlined Sales and Use Tax Agreement (SSUTA) to force remote sellers to collect use tax, effectively overturning the Quill protection for remote sellers. But what about those states that have chosen not to participate in SSUTA? Will sellers located in non-participating states still be protected by Quill?
According to a resolution recently passed by the Tax and Fiscal Task Force of the American Legislative Exchange Council (ALEC), Congress should not force sellers in non-SSUTA states to collect use tax in other states that do participate. State Representative Norman Major (R-NH) tried—unsuccessfully—to amend the NCSL resolution to similarly apply SSUTA solely to states with a sales tax. State Senator Steve Rauschenberger (R-IL), co-chair of NCSL’s task force that passed their resolution, says that “it’s really dangerous to have another legislative group out there with another perspective.”
But federalism is all about respecting the different legislative choices made by different states. Federalism is all about “different perspectives.” If states choose not to participate in the SSUTA, then their retailers shouldn’t be forced to collect in SSUTA states. Congress should allow the states in SSUTA to compete with the states that are not participating. Let the market decide which system is best. That is the essence of federalism, and it’s a principle that ALEC is right to ask Congress to respect.
Yesterday marked the 70th anniversary of President Franklin Roosevelt’s signing the Social Security Act in 1935. See more about the history of Social Security here.
Social Security was designed as a system to keep the country’s senior citizens from falling into poverty. As originally constituted, Social Security was intended to be a social safety net to catch those falling on hard times and to provide a steady base of income for the retired.
One benefit of the recent debate is a growing awareness that Social Security cannot provide all the income necessary for recipients to live more and more comfortably.
On its 70th birthday, it may be a good time to look back at the program’s roots to rediscover its original intention.
Check out the Tax Foundation’s research on Social Security to learn more.
From Yahoo news:
The federal budget-deficit picture turned brighter Monday as congressional scorekeepers released new estimates showing the level of red ink for the current fiscal year would drop to $331 billion.
The falling deficits illustrate how rising incomes increase tax revenues rapidly because of the progressive tax code. If employment and income continue growing, the deficit is likely to continue to decrease.
The deficits are still large however, which suggests that the problem isn’t caused by deficient tax revenue, but by excessive spending. Check out past blogs on income and tax collections here, here, and here.