Federal Tax Issues News


Investors and Corporations Would Profit from a Federal Private School Voucher Tax Credit


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A new report by the Institute on Taxation and Economic Policy (ITEP) and AASA, the School Superintendents Association, details how tax subsidies that funnel money toward private schools are being used as profitable tax shelters by high-income taxpayers. By exploiting interactions between federal and state tax law, high-income taxpayers in nine states are currently able to turn a profit when making so-called “donations” to private school voucher organizations. The report also explains how legislation pending in Congress called the Educational Opportunities Act (EOA) would expand these profitable tax shelters to investors and corporations nationwide.

The core feature of these tax shelters are credits that offer supersized incentives to donate to organizations that distribute private school vouchers. When taxpayers donate to most charities, such as food pantries or veterans’ groups, they typically receive a charitable tax deduction that somewhat reduces the out-of-pocket cost of their donation. Private school proponents have decided that their cause is worthy of a far more generous subsidy, however, and have successfully pushed for the enactment of state tax credits that wipe out up to 100 percent of the cost of donating to private school voucher organizations. When these lucrative state tax credits are combined with federal charitable tax deductions (and sometimes state deductions as well), some high-income taxpayers are finding that the tax cuts they receive are larger than their actual donations (see Figure 1). Tax accountants and private schools have seized on this tax shelter and turned it into a marketing opportunity, advising potential donors that: “You can make money by donating!”

As things stand today, this tax loophole is only available to taxpayers in nine of the seventeen states with private school voucher tax credits. But the Educational Opportunities Act (EOA) introduced by Sen. Marco Rubio (FL) and Rep. Todd Rokita (IN) would open up entirely new profit-making schemes to investors and corporations nationwide.

The EOA would offer a 100 percent tax credit of up to $4,500 for individuals or $100,000 for corporations donating to fund private school vouchers. Under this system, investors choosing to donate stock (or other property) rather than cash to voucher organizations would find that doing so would be more lucrative than if they had simply sold the stock and kept the money for themselves. This is because rather than receiving (taxable) capital gains income from a buyer of the stock, the investor would be paid in (tax-free) federal tax credits.

Another potential tax shelter would be limited to those taxpayers living in states offering their own voucher tax credits. While the EOA prohibits claiming a federal tax deduction and federal tax credit on the same donation, it is silent as to whether taxpayers can claim a state tax credit and federal tax credit on a single donation. If this occurred, taxpayers would enjoy a guaranteed profit every year they donate to private schools when they stacked 100 percent federal credits on top of state credits valued at 50 to 100 percent of the amount donated.

Wealth managers and tax accountants would be foolish not to advise their clients to take advantage of these handouts. Even families with no particular attachment to private schools would find it to be in their own financial best interest to begin donating to those schools. The result could be an explosion in funding for private schools at the expense of the public coffers and everything they fund—including public education.

Read the report: Public Loss, Private Gain: How Voucher Tax Shelters Undermine Public Education


Key Resources for Digging into the Trump and GOP Tax Reform Agenda


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President Donald Trump’s tax sketch released in late April is the starting point for federal tax reform discussions. For now, the sketch includes too few details to properly analyze its revenue and distributional impacts, but based on limited information, corporations and the wealthy stand to benefit most. Below are resources ITEP has produced on tax reform. If and when the Trump Administration or Congress release more details about a proposed tax reform plan, ITEP staff will continue to provide analyses and commentary, especially about how any tax proposal would affect working people and the federal government’s ability to fund basic services and programs. 

Commentary on President Trump and House GOP’s Tax Plans

Both President Trump and Congress have floated tax plans that would redistribute wealth to corporations and the already rich. Multinational corporations are immensely profitable and currently pay barely more than half the 35 percent statutory corporate tax rate (the average effective rate for profitable corporations is 21.4 percent), yet policymakers are proposing to drop  the corporate tax rate to 20 or even 15 percent with no clear plan for closing the copious loopholes that allow corporations to avoid federal taxes in the first place. Further, this drive to cut taxes for corporations and the rich is contrary to the public will.

 

Full Revenue and Distributional Analyses of Trump Campaign and House GOP Tax Plans

The so-called “Better Way Plan,” released by Speaker Paul Ryan and the President’s campaign tax plan, are currently the only substantive tax proposals on the table, and it’s reasonable to surmise these proposals will help form the basis of tax legislation moving forward. For each of these plans, ITEP dived into their details and used its microsimulation model to estimate their total revenue and distributional impact. The one common thread between the old plans? Profitable corporations and the wealthiest 1 percent of taxpayers are the biggest winners.

 

Resources on Key Features of the Trump and House GOP Tax Change Priorities

The Trump Administration and House GOP have each put out basic goals for tax legislation, including a corporate rate cut, moving to a territorial tax system, a border adjustment tax, a repatriation holiday, and estate tax repeal among other things. These and other pieces of the plan warrant component-by-component evaluation. ITEP research on some of the most prominent pieces of their plans is below.

Corporate Rate Cut

Move to Territorial Tax System

Border Adjustment Tax

Repatriation Tax Break

Tax Breaks for Child and Dependent Care

Estate Tax Repeal

Pass Through Loophole

Carried Interest Tax Break Repeal

Net Investment Income Tax Repeal

Economic Growth Paying for Tax Cuts

 

Progressive Tax Reform Options

If the Trump Administration and Congress plan to make the first fundamental overhaul to the nation’s tax system in a generation, it is critical to take a step back and discuss how tax reform can improve the lot of all Americans and what the majority of taxpayers think lawmakers should focus on. Public opinion polls overwhelmingly show that a majority of the public do not want another round of tax cuts that primarily benefit the wealthy and corporations. True, sustainable tax reform and related proposals should increase revenue and the overall fairness of our tax system.


Critical Anti-Tax Evasion Legislation Under Attack


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The Foreign Account Tax Compliance Act – or FATCA – is a financial disclosure and transparency law designed to crack down on international tax evasion by U.S. taxpayers who hold financial assets offshore. This law, passed in 2010 as part of the Hiring Incentives to Restore Employment (HIRE) Act, provides the Internal Revenue Service (IRS) with the information necessary to ensure that every U.S. taxpayer is tax compliant.

Despite – or perhaps because of – its important role in combating international income tax evasion, FATCA continues to have outspoken critics. The ongoing effort to repeal FATCA took one step forward this past Wednesday, when the House Oversight Committee’s Subcommittee on Government Operations held a hearing to “Review the Unintended Consequences of the Foreign Account Transparency Act.”

The forum could have been an opportunity to spur reasoned debate to address some of the issues raised by FATCA. Instead, Subcommittee Chair Rep. Mark Meadows (R-NC), who recently introduced a bill to repeal FATCA alongside long-time anti-FATCA champion Sen. Rand Paul (R-KY), used the hearing as an opportunity to cherry-pick extreme examples of FATCA’s (admittedly bumpy) implementation and rail against FATCA’s necessary disclosure of financial information to invalidate the entire law.

Despite what Rep. Meadows and Sen. Paul would like us to believe, FATCA is a critical and effective anti-tax evasion law.  It wasn’t created with the desire to rake through U.S. taxpayers’ financial data. FATCA was passed in the context of overwhelming evidence that certain U.S. taxpayers were taking advantage of the intricacies of the global financial system to hide assets offshore. For example, in 2009, 52,000 American-held accounts totaling over $14.8 billion in previously undisclosed assets were discovered at the Swiss bank UBS. And this is just one example at one bank – it is estimated that the United States loses $40 to $70 billion in revenue annually due to individual income tax evasion.

FATCA helps to close the gap between the revenue the U.S. government should collect and what it actually brings in by aggregating account information from both U.S. accountholders and their foreign financial institutions (FFIs). The IRS can then match what each individual reports against the information supplied by their FFI to identify misreported and unreported income. According to the IRS, sources of income that are not subject to either third-party-reporting or withholding are misreported at a 56% higher rate than sources that are subject to additional reporting and withholding. Matching statements of income provided by taxpayers against third-party sources is a common U.S. practice; it’s how the IRS identifies misreported information from wage (through your W-2) and investment income (through the 1099 series) each year.

When the HIRE act was first proposed, the Joint Committee on Taxation estimated that FATCA would raise approximately $8.7 billion over the next decade. While it’s difficult to measure how much FATCA has raised to date, the IRS recently reported that over 100,000 individuals have voluntarily come back into tax compliance through its voluntary disclosure program, resulting in approximately $10 billion in recouped taxes, interest, and penalties. Many have attributed this influx of voluntary compliance to taxpayers’ realization that FATCA increases their likelihood of detection if they misreport their worldwide income.

FATCA is designed to ensure that every American taxpayer is paying the correct amount of tax. Repealing FATCA would be a serious step in the wrong direction. Without a new law to take its place – which no one advocating for repeal has proposed – repeal would return us to the pre-FATCA status quo of having no meaningful way to crack down on international income tax evasion. This isn’t fair to law-abiding citizens who eventually end up picking up the tab when revenue is hidden overseas.

We should instead focus our energy on thoroughly vetting and advancing reform proposals – such as Sen. Sheldon Whitehouse & Rep. Lloyd Doggett’s “Stop Tax Haven Abuse Act” – that serve to improve and strengthen FATCA, rather than simply striking this important disclosure law from our books.

For more information on FATCA and how the law works to crack down on international tax evasion, ITEP has published a FATCA policy brief Foreign Account Tax Compliance Act (FATCA): A Critical Anti-Tax Evasion Tool and a one page FATCA fact sheet.


The April Fool's Joke Is on Consumers: April 1 Marks Record-Breaking Procrastination on Federal Gas Tax Policy


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It's only appropriate that April 1 will mark a new milestone in foolish federal transportation infrastructure policy.

On Saturday, the nation’s federal gasoline tax rate will have been stuck at 18.3 cents per gallon for 8,584 days in a row—or more than 23.5 years. This surpasses the previous record of 8,583 days without an update set on March 31, 1983—the day before lawmakers more than doubled  the federal gas tax from 4 to 9 cents, under legislation signed by President Ronald Reagan. (A full history of federal gas rates is available in Figure 1.) Now that infrastructure funding is back on the agenda in Congress, revisiting this extraordinarily outdated area of the tax code is a logical place to begin the search for revenue.

 

Frequent updates to the gas tax are critical to ensuring that the tax retains its purchasing power over time. Just as a business that refused to raise its prices for 23 years would likely find itself facing financial difficulties as its costs grew, the federal government is finding it increasingly impossible to fund a 21st century infrastructure with a gas tax rate set in the first year of President Bill Clinton’s Administration.

Figure 2, below, shows that the cost of building and maintaining our nation’s roads has risen by 62 percent since 1993. As asphalt, machinery, labor, and other inputs have become more expensive, an infrastructure project that could have been completed for $4 million in 1993, for example, would cost closer to $6.5 million today.

At the same time, most consumers are now paying less gas tax per mile driven than in 1993 because vehicles have become more fuel-efficient. While the average light duty vehicle could travel 19.3 miles per gallon in 1993, that figure crept up to almost 22 miles per gallon in 2015 (the most recent year for which data are available). This 14 percent improvement means that most drivers are now able to travel further on each tank of gas before they must refuel and pay any gas tax to fund the roads on which they have been driving.

Congress isn’t doing the American public any favors by refusing to update the very low, and very outdated federal gas tax. The extra potholes and traffic congestion that come with an underfunded transportation network are a major drain not only on the national economy, but on individual drivers’ pocketbooks and free time. The American Society of Civil Engineers (ASCE) reports that traffic congestion alone is costing consumers the equivalent of $160 billion in wasted time and fuel every year.

If there’s one bright spot in this story, it’s that state lawmakers have increasingly realized that a higher gas tax is a price worth paying to improve infrastructure. Since 2013, 19 states have raised or reformed their gas taxes, and more than a dozen additional states are considering doing the same right now. If Congress took a page out of state lawmakers’ playbooks, the nation’s infrastructure would be better off for it.


A Tax Perspective on International Women's Day


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Thursday, March 8 is International Women's Day. The day draws attention to the progress that has been made and the work that still needs to be done in advancing gender equality. Many campaigns on issues like equal pay or paid family leave acknowledge that economic policies impact women and men differently. But we often overlook the role governments’ budgeting and taxation practices can play in advancing or preventing progress.

Researchers in Western developed countries like the United Kingdom have noted how severe budget cuts in that country placed more of the financial burden on women than men. Because we don't yet live in an equal society, women earn less than men, receive more public services than men, and are more likely to bear the responsibility of raising children on their own. This means that revenue cuts that impact public programs disproportionately harm women.

A diverse group of ambitious countries, like Sweden, Uganda, and South Korea, have adopted gendered budgeting which intentionally considers the differential impact of revenue changes on women and men. These practices recognize that you can't address the issue of women's stunted economic gains if you don’t know how policies are contributing to the problem.

In the U.S., we are a long way from incorporating a gendered lens into our budgeting practices. But we do have several tax credits for working families that do practically (even if unintentionally) target women. As a result, policies that decrease the value or narrow the eligibility of these credits disproportionately impact women. Federal credits include the Child and Dependent Care Tax Credit, which offsets some of the child care costs incurred by women who work outside the home; the Child Tax Credit, which offsets some of the additional costs of raising children and recognizes the importance of investing in the next generation of workers; and the Earned Income Tax Credit (EITC) which boosts the wages of low-income workers.

Some states offer state versions of one or more of the federal credits—only New York and Oklahoma offer versions of all three. But in most states the credits are not refundable. This means a low-income woman can only reduce the tax she would owe and cannot use the refund to pay towards the additional expenses related to her health care or child care, or to boost her pay to compensate for the wage gap.

The effectiveness of these credits is in the hands of lawmakers. One way federal lawmakers can improve the credits is by indexing their value to inflation so they keep place with the increasing costs of child care and other living expenses. Lawmakers in states without these credits that support working families should establish them. This year we've seen proposals to establish EITCs in Georgia, Hawaii, Missouri, Montana, and Utah; and a proposal to make Washington state’s EITC fully refundable.

We've got a long way to go before we collect and distribute revenue in a way that's fair and equitable to all women—we haven’t done anything through the tax code to address the economic disparities of women of color or lesbian, bisexual or transgender women—but we have the tools to begin making some progress.


What to Watch in the States: State-Federal Relationship Shifting


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So far in this series on tax policy topics to watch in 2017, we’ve covered important state debates in areas such as attempts to weaken or eliminate progressive taxes and needed updates to gas taxes and sales taxes. As if those topics weren’t enough to keep state lawmakers up at night, they will be making these decisions amid a great deal of uncertainty about the future of federal tax and funding policies that are crucial to the states. How those federal debates shake out, and how states prepare for and react to them, will have lasting consequences for families and businesses in every state, and for the very nature of federalism in the United States.

The first example of this is the very high likelihood of reduced federal funding for aid to states and for services such as health care, K-12 schools, and higher education that have historically been provided through a mix of local, state, and federal efforts. Many states are preparing two-year budgets right now with no clear idea of what to expect from Congress. For example, Governing has noted that states are underprepared for the ramifications of federal retrenchment in healthcare. Details are hazy but with leading federal budget proposals taking major cuts as a given – including the possible block-granting of Medicaid and other programs, repeal of the Affordable Care Act, and even completely eliminating the Department of Education – congressional representatives are sending the clear message that they intend to pull back drastically on their portion of those shared investments.

State leaders will have to decide whether they value their residents’ education, health, and safety enough to step up to these challenges as the federal government backs down from them. Stepping up will require replacing lost federal dollars with new state revenues, which will be particularly hard in states where legislators have been attempting for years to slash taxes and cut back on their share of these investments.

And that’s just the spending side of the federal budget. Federal tax changes could have serious impacts on the states as well.

Tax plans laid out by President Trump and congressional leadership include a number of provisions that could impact the states. Ending the deductibility of state and local taxes, creating a new deduction for child care expenses, changing the taxation of carried interest, altering expensing of business investments, and other corporate tax changes such as “border adjustment” could all have ripple effects on state revenue systems.

Another key example is the estate tax. In the 2000s, as federal tax cuts greatly weakened the federal estate tax and eliminated a credit for state estate taxes that was the basis for most such taxes, states had to decide whether to “decouple” from these changes and preserve their role in promoting equality of opportunity and resisting the growing influence of inherited wealth. Most states declined to act and today only 14 states and the District of Columbia have estate taxes. But in many of those states, a relationship between the state and federal tax estate tax codes remains, as exemption levels and other parameters often remain coupled to federal statute. Should Congress decide in the coming years to fully eliminate the federal estate tax or weaken it further, as both President Trump and congressional Republicans have indicated a desire to do, these states would again find themselves having to choose whether to passively accept such changes to their own tax codes or take action to establish a truly independent estate tax.

Similar “decoupling” questions could face states in respect to multiple other federal tax policies. One example to watch is federal treatment of capital gains interest and dividend income. Speaker Ryan has expressed a desire to exclude 50 percent of this income from federal Adjusted Gross Income (AGI), while another approach with a similar effect would be to simply reduce the tax rate on this income. However, if such a cut is enacted in the form of an exclusion from AGI, state revenues would suffer because many states use federal AGI as the starting point for their own income calculations. A rate cut would not ripple down to states in the same way. State lawmakers and advocates should watch such debates closely so they can either decouple from provisions where they are vulnerable to federal changes or encourage their federal representatives to reconsider the policies or adopt a different approach that does not harm the states. States with “rolling” conformity to the federal tax code could also consider switching to “fixed date” conformity to reduce their vulnerability to such changes.

Another approach some states are taking to proactively address some of these issues is to pass bills that automatically decouple from federal tax changes that significantly threaten state revenues. A thoughtful bill introduced in Nebraska, for example, preempts the adoption of any federal changes to the calculation of AGI that reduce Nebraska revenues by more than $5 million and requires a report to be produced on such changes so that lawmakers can make an informed and deliberate decision on whether to couple to the policy.

Other federal changes could increase revenues in some states. A few states still have an ill-advised state deduction for federal income taxes, which means that federal income tax cuts would reduce the size of that deduction and thereby increase state revenues. And if federal tax changes broaden the tax base by limiting itemized deductions, for example, states that couple to those income calculations will see revenue gains as well. In these cases, states may be tempted to “pass on” the benefit to their residents in the form of tax cuts, but it will be important for them to think twice about such tax cuts given the likely federal funding cuts summarized above and the need in many states to build up reserves before the next recession hits.


Lawmakers Should Not Use Disproven Trickle-Down Myth to Ramrod Tax Cuts for the Rich


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For more than four decades, supply-side ideologues have promoted the myth that tax cuts for the wealthy are self-financing and the benefits eventually trickle down to everyone else, despite real-life evidence that tax cuts for the rich benefit the rich.

Not even the reality of 40 years of widening income inequality or the current economic expansion in which the benefits primarily flowed to wealthy households have stopped anti-tax proponents from peddling the erroneous idea that top-heavy tax cuts will eventually benefit ordinary working people.

As a new ITEP video shows, this supply-side thinking, also known as trickle-down economics, is a school of thought that claims tax cuts for the rich will trickle down to everyone else and supercharge the nation's economy in the process. Some adherents to this worldview use the Laffer curve or the easily manipulable "dynamic scoring" technique to claim that economic growth will be so explosive that lower tax rates would actually lead to more tax revenue.

We’ve seen this trickle-down experiment conducted in the past, and it hasn’t worked.  Consider President George W. Bush’s 2001 and 2003 tax cuts. Thirty-eight percent went to the top 1 percent of Americans. But the wealth didn’t trickle down. Low job growth, increased poverty, and a growing income gap persisted throughout most of Bush’s tenure. The end of the Bush era also ushered in the worst economic recession since the Great Depression; shattered the myth of a broad, prosperous middle-class, and exposed the fact that a substantial percentage of Americans across the country are one or two paychecks from financial ruin.

Instead of taking this lesson about the majority of Americans’  livelihoods (or lack thereof) and applying it to public policies that promote shared economic prosperity, the nation’s policymakers are back at supply-side square one. Speaker Paul Ryan’s most recent budget plan doubles down on trickle-down, proposing to give a whopping 60 percent of its tax cut to the top 1 percent of earners. On the campaign trail, President Trump touted a tax cut plan that would bestow 44 percent of its benefits to the 1 percent. Either Trump or Ryan’s plan, or even a combination of the two, would transfer more of the nation’s wealth to the rich and force working people to pick up the slack in the form of cuts to vital programs and increased annual deficits. This drive to cut taxes ignores polling that reveals nearly two-thirds of voters think wealthy individuals and corporations pay too little in federal taxes, not too much.

Some state lawmakers have also favored cutting taxes for the rich over investments in broader prosperity. Supply-side-driven tax cuts are particularly dangerous for state budgets because unlike the federal government, most states can’t run deficits. As a result, state-level tax cuts tend to bring about a rapid, unavoidable reduction in vital public services.

Kansas is perhaps the most infamous recent example. Gov. Sam Brownback slashed top tax rates in 2012, but the job growth he promised didn’t materialize, and the state has faced massive budget shortfalls every fiscal year since.

North Carolina eschewed most of those lessons and followed Kansas over the proverbial supply-side cliff. The Tarheel state’s cuts began in 2013 and are set to phase in through 2020—a tactic that delays and masks, but does not eliminate, much of the budgetary consequences. Already cuts of more than $2 billion annually, or 10 percent of the general fund, have resulted in severe reductions to key services such as K-12 and higher education.

The evidence of supply-side economics’ failures is abundant. The promise of broad economic prosperity is too often broken. Instead, ordinary working people have to endure concessions that matter little to the super wealthy who enjoy the tax cuts. At the federal level, lawmakers focus on which vital programs to cut in exchange for maintaining tax cuts for the wealthy. And at the state level, residents endure underfunded schools and crumbling roads. The time for our policy makers to look out for ordinary working people and ensure our local, state, and federal governments have the resources necessary to invest in our communities is long over due.

Watch the video


Tax Justice Digest: Sales Tax Holidays, Alaska and Corporate Loopholes


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In the Tax Justice Digest we recap the latest reports, blog posts, and analyses from Citizens for Tax Justice and the Institute on Taxation and Economic Policy. Here’s a rundown of what we’ve been working on lately. 

Why Sales Tax Holidays Fail to Make the Grade
Back to school shopping season is just around the corner, which means it’s also time for our annual lesson on the follies of “sales tax holidays,” a tax policy idea that fails to make the grade. 
Read the Blog Post.
Read the Policy Brief.

Income Tax Offers Alaska a Brighter Fiscal Future
Alaska was once so awash in oil tax and royalty revenues that state residents received annual average dividend payments of about $2,000. And the state didn’t levy personal income or sales tax. Now, lower oil prices and, thus, revenue has Alaska’s governor and lawmakers scrambling to figure out how to fully fund the state government. In a new brief, ITEP outlines why a personal income tax is the most sustainable, progressive option.
Read the Blog Post.
Read the Report.

Corporations Are Lobbying Hard to Keep Tax Loopholes
Corporate deserters don’t have a leg to stand on in the court of public opinion when it comes to corporate inversions, the practice of claiming their headquarters are in other countries to avoid U.S. taxes. But it hasn’t prevented them from loudly arguing that Treasury regulations intended to curb inversions are “bad for business.” CTJ recently submitted comments to the Treasury that outlines why we shouldn’t cry corporations a river—and why Treasury should take bolder action.
Read the Blog Post.
Read Our Comment Letters.

How Gilead Sciences Is Cheating U.S. Taxpayers
Already, Gilead Sciences has been called out by health advocates for price gouging consumers for a drug that U.S. taxpayers subsidized the development of. So, it’s not surprising that the company has one-upped its own unethical behavior by shifting profits it earned from price gouging into offshore tax havens to avoid U.S. tax.
Read more about this shameful practice.

Tax Cuts Pay for Themselves, Dynamic Scoring and Other Fairytales
The theory that cutting rich people’s taxes will grow the economy is disproven, not to mention exhausting. Yet the rightwing Tax Foundation continues to perpetuate this myth with dubious analyses that will always claim tax cuts are good. The organization’s latest dynamic scoring chicanery? A dubious analysis of Speaker Paul Ryan’s tax proposal that claims the plan’s trillions in tax cuts (mostly for the rich) will be mitigated by massive economic growth. Also, they have a bridge to nowhere to sell. Read more
 

State Rundown
In this week's Rundown we highlight state tax news in Alaska, New Jersey, Pennsylvania, Masschusetts, and more. Read the Rundown and check out our new “What We’re Reading” section here.

Sharable Tax Analysis

 

ICYMI: CTJ Director Bob McIntyre’s Op-Ed at CFO.com: The Case for a Corporate Tax Cut Doesn’t Hold Up

For frequent updates find us on Twitter (CTJ/ITEP), Facebook (CTJ/ITEP), and at the Tax Justice blog.


Recent Tax Reform Proposals: The Good and the Bad


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Over the past few weeks the Tax Policy and Health subcommittees of the House Ways and Means Committee held Member Day hearings, in which Representatives pitched their favorite pet tax reform proposals to their colleagues in hopes of moving some of the measures forward.

A few things stand out: 1) many of our Representatives have great ideas on how to reform our tax code that makes it fairer, more equitable, and raises revenues, but; 2) the good proposals are overshadowed by a litany of horrible bills that would make our tax system less adequate and fair.

Here is a list of some of the best and worst bills covered during the Member Days:

The Good

Earned Income Tax Credit Improvement and Simplification Act (H.R. 902):  The Earned Income Tax Credit (EITC) is one of the most popular and effective anti-poverty tax credits. Awarded to low-income workers age 25 and older, the EITC and the Child Tax Credit (CTC), another tax credit for working families, lifted 9.8 million people out of poverty in 2014. In their current form, these credits fail to adequately meet the financial needs of childless workers and non-custodial parents. In 2012, the flaws in the EITC regarding childless workers resulted in 7 million workers being taxed into or deeper into poverty.

H.R. 902, introduced by Rep. Richard Neal (D-MA), seeks to rectify this oversight. In addition to directly increasing the overall tax credit available to single and married low-income workers with or without qualifying children, H.R. 902 also allows unmarried 21 year-olds with no qualifying children to claim the credit as long as they are not full-time students. Rep. Neal’s bill would provide10.6 million workers with an average tax benefit of $604.

Fairness in Taxation Act (H.R. 389):  Introduced by Rep. Jan Schakowsky (D-IL), the Fairness in Taxation Act aims to curtail the accumulation of wealth that the “super-duper rich” of the country have been enjoying for over a decade. The bill uses two mechanisms to accomplish this goal. The first is introducing five new income tax brackets between taxable incomes of $1 million and $1 billion (the top federal tax bracket currently starts at $373,000).

The second, and more important, policy in H.R. 389 would end the special preferential tax rate for capital gains and dividend income. Both capital gains and dividend income are currently taxed at much lower rates than ordinary income and are predominantly held by the richest among us. Citizens for Tax Justice (CTJ) projects that 94 percent of capital gains and 82 percent of qualified dividend income go to the richest 20 percent of the country, with 67 percent of capital gains and 38 percent of qualified dividend income going to the richest one percent alone. CTJ also estimates that Rep. Schakowsky’s bill would raise $849 billion in revenue over the next decade, helping to raise the revenue our country desperately needs to make more public investments.

Common Sense Housing Investment Act (H.R. 1662)Introduced by Rep. Keith Ellison (D-MN), this bill would boost federal support for low-income housing. H.R. 1662 would cap the amount of a home mortgage eligible for a tax break at $500,000, down from the current cap of $1 million (only 4.5 percent of mortgages from 2011 to 2013 were above $500,000). The bill would also convert the regressive Mortgage Interest Deduction to a flat, 15 percent non-refundable mortgage interest tax credit.

These proposed changes would enable 16 million more homeowners with a mortgage to receive a bigger tax break. It would also make a significant contribution to the gap of 7 million affordable rental homes needed for extremely low-income families. Nearly half of renters spend more than 30 percent of their income on rent. The bill would raise $200 billion in revenue over the next decade, which would be invested into expanding the Low-Income Housing Credit and provide a source of permanent funding for the National Affordable Housing Trust Fund, supplying low-income homebuyers with even more support and financial security. These reforms would go a long way toward reversing the current upside down nature of the deduction, in which the wealthiest families get tens of thousands of dollars in housing support from these tax programs, while low- and middle-income families get next to nothing.

The Bad

Fair Tax Act (H.R. 25):  Introduced as H.R. 25 in every Congress since 2003 (and yet to make it out of Committee), the current iteration was introduced by Rep. Rob Woodall (R-GA). The Fair Tax Act would replace the entirety of the federal tax code (including corporate and income taxes) with a so-called 23 percent national sales tax (though in reality it’s more like 30 percent) on all purchases in the U.S.

An ITEP analysis of the Fair Tax  found that the bottom 80 percent of Americans would pay 51 percent more in sales taxes than they now pay in all federal taxes. In contrast, the best-off one percent of all taxpayers nationwide would get average tax reductions of about $225,000 per year.

Under the “Fair Tax,” revenues would likely fall dismally short of what the bill’s proponents claim; the Brookings Institute, CTJ, and the congressional Joint Committee on Taxation have each estimated that the national sales tax rate would have to be closer to 60 percent for the government to break even. Political leaders throughout history have shown a fondness for promoting simple solutions for complex problems that are very appealing on the surface, but overlook the intricacies of reality. The Fair Tax is no exception to this trend.

Create Jobs Act (H.R. 4518):  Introduced by Rep. Tom Emmer (R-MN), H.R. 4518 seeks to “allow the U.S. to better compete in the global economy.” The bill purports to accomplish this goal by cutting the federal corporate income tax rate from 35 percent to five percent below the average corporate tax rate for Organization for Economic Co-operation and Development (OECD) countries, or 10 percent if that reformed rate is still too high. The bill also requires a congressional joint resolution to approve a tax rate increase.

Rep. Emmer’s bill is based on the false premise that U.S. corporations are paying high corporate taxes, when in reality they are paying relatively low tax rates. While it is true that the U.S. statutory rate is 35 percent, most companies pay far less than that full rate. Thanks to the numerous subsidies and tax breaks afforded to big business, CTJ found 288 consistently profitable Fortune 500 corporations paid a federal income tax rate averaging just 19.4 percent over five years, with a third of the companies paying less than 10 percent and 26 corporations paying no federal income taxes at all. This explains why the United States corporate tax level is below the OECD average, even though our statutory rate is the highest. In other words, U.S. corporations already routinely pay below the OECD average, so all this bill would do is cut rates even lower and lose hundreds of billions in critical revenue.

Bad Exchange Prevention Act (H.R. 4297):  Introduced by Rep. Charles Boustany (R-LA) in response to guidelines issued by the U.S. Treasury Department regarding the OECD’s Base Erosion and Profit Sharing (BEPS) Action Plan, H.R. 4297 seeks to limit the sharing of corporate income and tax information between the U.S. and other countries. Also known as country-by-country reporting (CbCR), BEPS allows the U.S. and countries around the world to track international tax avoidance and evasion. H.R. 4297 would delay CbCR until 2017, and would instruct the Treasury to blacklist any foreign jurisdiction that “abuses” the confidential information in CbCR.

While safeguarding confidential information sounds like a reasonable requirement, it’s not. H.R. 4297 would effectively transform America into the world’s largest secrecy jurisdiction, in which corporations could hide behind their political friends in order to avoid disclosing financial information that provides evidence of tax fraud and evasion. Rather than joining the rest of the world in curbing the offshore tax avoidance, Rep. Boustany is complicit in the professional tax avoiders’ extortion of countries’ tax laws in the race to the bottom.


Why Donald Trump May Be Hiding His Tax Returns


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Donald Trump said Tuesday he will not release his tax returns before the election because “there’s nothing to be learned from them,” potentially making him the first major presidential nominee not to release a full return in 40 years.  

Perhaps what the presumptive Republican presidential nominee really means is that he has nothing to gain politically by releasing his returns, but the public could learn quite a bit.

For instance, we might discover that despite Trump’s actual earnings, his taxable income isn’t much at all because, as some suspect, he may write off most of his lavish life style as “business expenses.”

If widespread speculation is true, this would mean that American taxpayers are footing the bill for a big share of Trump’s private jet, his golf outings, his mansions, and who knows what else. In a February 2016 article for The National Memo, David Cay Johnston outlines nine “bombshells,” that Trump’s tax returns may reveal, including how arcane tax rules may allow him to remain relatively tax free.

If Trump, who is vying to be the next president of the United States, is living large at the expense of the rest of us, doesn’t the public deserve to know?

During the thick of the Republican primary, Trump vowed to release his tax returns, but he has since resisted by claiming that he cannot release them while the IRS is auditing them. This flimsy excuse is simply not true. In a statement, the IRS wrote, “nothing prevents individuals from sharing their tax information.”

Ironically, Trump in 2012 said that Republican presidential candidate Mitt Romney was “hurt really very badly” by not releasing his tax returns and that Romney should have released them by April 1. No word on why what was good for Romney is not good for him.

Trump in so many words has declared that his business acumen and negotiating skills qualify him for the highest office in the land. In that vein, his tax returns may contain critical insights into how he is using the tax code to build his wealth.

During the 2012 campaign, for example, Mitt Romney’s tax returns exposed a myriad of loopholes that allowed him to pay a paltry 14 percent tax rate on millions in earnings. Specifically, Romney’s returns brought attention to the preferential rate on capital gains and also illustrated how some wealthy individuals use offshore shell companies or avoid taxes through special IRAs.

Given that Trump’s tax plan includes trillions in tax cuts for the wealthy, it isn’t surprising that he may be trying to hide from the public’s view the numerous ways that tax system is already rigged in favor of wealthy individuals like him.

But here’s the thing. A president is accountable to the American people. The electorate must demand more than bombastic proclamations and shouldn’t concede the point when a politician declares, “trust me I know how to get it done.” We should also be wary of allowing a presidential contender to go against the grain of what almost every presidential candidate in the last two generations has done--release at least one detailed tax return. 

Donald Trump may have turned conventional wisdom on its head this election cycle, but we shouldn’t allow him to rewrite critical rules that have helped reveal the character and agenda of our presidential contenders. 

 


Trump Implies Failure to Effectively Negotiate His Tax Plan Would Be the Best Outcome


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Throughout the 2016 campaign, presidential candidate Donald Trump has claimed he would raise taxes on himself and other rich individuals, even while promoting a detailed tax plan that would do precisely the opposite.                          

Trump this weekend attempted to clarify this inconsistency. He remains, he says, committed to his regressive tax proposal, but he’ll rely on legislative negotiations with Congress to ensure the middle class doesn’t get the short end of the stick. If he means what he says, that’s a novel political tactic, to say the least.

Trump’s inconsistency on taxes came to a head last week, when he responded to criticisms that his plan would lavish huge tax cuts on wealthy Americans by saying ambiguously that he is “not such a huge fan of that.” Trump added that he is “so much more into the middle class” in his approach to tax reform.

Yet Trump’s comments are incompatible with the tax plan he announced last fall, which would reserve a stunning 37 percent of its tax breaks for the very richest 1 percent of Americans while cutting federal revenues by $12 trillion over a decade.

On the Sunday talk-show circuit, a number of interviewers sought to clarify this discrepancy. Speaking on “Meet the Press,” Trump reiterated that his plan would “lower the taxes on everybody very substantially,” but clarified that his negotiations with congressional leaders would likely turn his plan upside down: “For the wealthy, I think, frankly, it’s going to go up. And you know what, it really should go up.”

Trump made a similar forecast in his appearance on “This Week”: “On my plan, they’re going down. But by the time it’s negotiated, they’ll go up.” In other words, Trump stands behind the details of his plan but expects that a Congress suddenly hungry to tax the rich more would turn it upside down. If this is truly his position, it’s perplexing but it means he believes a wholesale failure to pass his tax proposal would qualify as effective leadership.

Presidential candidates routinely seek to appeal to the voting public by proposing vague tax platforms that promise big tax cuts to middle-income families, but they often omit the vital details that would be required to score these plans. Trump has emphatically not taken this approach. To his credit, Trump months ago released a comprehensive and detailed plan that left little open to interpretation. If Trump now thinks his plan is bad policy, he owes it to the American public to outline, in similar detail, what he thinks tax reform should look like.


Inverted Companies Are Still Claiming Executive Stock Option Tax Breaks In the U.S.


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Hundreds of Fortune 500 corporations routinely lower their federal tax bills by taking advantage of a tax break that allows them to write off executive compensation in the form of stock options.

As we have noted previously, the tax break has allowed giant tech firms such as Facebook, Microsoft and Apple to substantially reduce their effective tax rates by claiming “expenses” they never actually paid.

But newly released annual financial reports show that the problem goes beyond American firms: a number of formerly U.S.-based companies that have inverted  (that is, filed paperwork to claim their headquarters are overseas) continue to claim these U.S. tax breaks for their executives’ pay. In other words, not only have many inverted companies shifted their headquarters to low-tax countries to avoid having the U.S. as their primary residence for tax purposes, they are still using every trick and loophole available to avoid paying taxes on U.S. profits.

Endo Pharmaceuticals is a textbook case. The company formally inverted to Ireland in 2014, but its executives stayed stateside. The company now appears to be enjoying the best of both worlds, pretending its profits are being earned in Ireland while claiming lavish U.S. tax breaks for the stock options given to its executives.

Endo International, as the company now styles itself, discloses in its latest annual financial report that the company has reduced its U.S. taxes by more than $50 million over the last two years using the executive-stock-option tax break.

And Endo’s not alone. A number of other inverted companies still appear to be claiming U.S. tax breaks for their executives’ stock options. Horizon Pharma, the Illinois corporation that has claimed Irish residency since 2014, enjoyed $19 million in stock option tax breaks in 2015.

The same tax breaks are also still being claimed by companies that renounced their U.S. citizenship prior to the most recent wave of inversions. Eaton has enjoyed $50 million in stock-option tax breaks in the three years since its 2012 inversion. In the five years since Valeant Pharmaceuticals decamped to Canada, the company has disclosed $80 million of stock option tax breaks. Herbalife, whose L.A.-based executives have been pretending to run their company from the Cayman Islands since 2002, discloses $86 million in stock option tax breaks over the past five years.

Covidien, the “Irish” company with a strong Boston accent, claimed $76 million in stock option tax breaks over the last two years of its existence before merging with Medtronic in that company’s own inversion. And Medtronic itself, in its first annual report as an Irish entity, discloses $81 million in tax savings from the executive stock option tax break.

The most sensible reform step for Congress would be to pare back this tax giveaway for U.S. corporations as well as inverted companies, so that all companies will pay something resembling their fair share. But it’s hard to see how anyone can think it’s a good idea that companies that have renounced their U.S. citizenship, at least on paper, should be able to claim tax breaks for the lavish stock options given to the very executives who, in some cases, were responsible for the companies’ inversion decisions.


The U.S. Is One of the Least Taxed Developed Countries


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The most recent data from the Organization for Economic Cooperation and Development (OECD) show that the United States is one of the least taxed developed nations. 

A tally of all taxes collected at the federal, state and local levels reveals based on 2014 U.S. Treasury data reveal that the United States had the fourth lowest level of total taxes — 25.7 percent of gross domestic product (GDP) — among the 34 OECD countries. Only Mexico, Chile and Korea collected less in taxes as a percent of GDP. The level of taxation in the United States is well below the 34.7 percent OECD weighted average. 

Read the full CTJ report here

Watch CTJ's Taxes and the U.S. Economy video that sets the record straight on U.S. tax collections:


Obama Wins One Against Corporate Tax Dodging


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Almost 70 years ago, Circuit Judge Learned Hand established an important tax principle. To paraphrase the judge, nobody has to pay more in taxes than the law requires, but would-be tax avoiders cannot make stuff up.
Unfortunately, over the years, making stuff up has become the stock in trade of lawyers for U.S.-based multinational corporations, and they too often get away with it thanks to our lax corporate tax laws and their weak enforcement.
But this week after swift action by the Obama administration, Pfizer Inc. abruptly reversed course on its planned corporate inversion, or made up move to Ireland, which would have allowed the pharmaceutical manufacturer to dodge taxes on $194 billion in offshore profits.
The Treasury Department's new regulations strike the core of one of the main reasons corporations (and likely Pfizer) invert: avoiding taxes on profits stockpiled offshore.
Pfizer's about-face, and the Treasury action that led to it, is a major victory for average American taxpayers, who would have been left holding the bag for the big hole in the federal budget that the inversion craze threatened to produce. It's also a triumph for common sense.
Inversions are a particularly egregious exploitation of our loophole-ridden corporate tax code. Pfizer, for example, had no real plans to move to Ireland. In fact, in a press release announcing the inversion and merger with Allergan, Pfizer wrote that "the combined company is expected to maintain Allergan's Irish legal domicile (but) Pfizer plc will have its global operational headquarters in New York." In other words, New York-based Pfizer planned on continuing business as usual in the United States and retaining all the benefits of operating on U.S. soil without paying much in U.S. taxes.
Like most multinationals, Pfizer and its corporate lobbyists continually complain that U.S. taxes are too high, claims that are parroted by its elected allies on Capitol Hill. The truth is that big, profitable U.S. corporations actually pay an average effective tax rate of only 19 percent, which is on par with or lower than corporate tax rates in most other developed countries. The current inversion craze has helped exposed how multinational corporations relentlessly seek to achieve a U.S. tax rate of close to zero by shifting their profits on paper to tax haven countries like Ireland, the Cayman Islands or Bermuda.
Our elected officials can and should work to prevent these elaborate tax dodging schemes. A decade ago after a wave of corporate inversions, an appalled Congress, on a bipartisan basis, quickly passed a law that attempted to ban them. That law turned out to be inefficient, but our current Congress has refused to fix it, even as inversions have gone viral. This is why the Treasury Department's latest action was necessary.
Clearly, President Barack Obama is committed to doing what he can to end tax-motivated expatriations. But this doesn't guarantee a happy ending to this story. Already Allergan, Pfizer's erstwhile partner in crime, is seeking a new inversion partner, and lawyers for other U.S. corporations are almost certainly searching for ways around the latest Treasury regulations.
There is no excuse for Congress not to act to protect U.S. taxpayers and ensure that multinational companies like Pfizer pay their fair share in taxes. Lawmakers have a number of sensible legislative options to do so, including the Stop Corporate Inversions Act, the Pay What You Owe Before You Go Act and the Corporate Fair Share Tax Act.
Unfortunately, the current majority in Congress apparently doesn't need an excuse to do nothing. It's up to us voters to rectify that.

"Almost 70 years ago, Circuit Judge Learned Hand established an important tax principle. To paraphrase the judge, nobody has to pay more in taxes than the law requires, but would-be tax avoiders cannot make stuff up.

Unfortunately, over the years, making stuff up has become the stock in trade of lawyers for U.S.-based multinational corporations, and they too often get away with it thanks to our lax corporate tax laws and their weak enforcement."

Read the Full Article in US News and World Report

 


Panama Papers and America's Problem


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"Anonymous shell corporations and secret bank accounts are vital resources for those engaged in tax evasion and money laundering. But this web of secrecy has started to crumble in recent years due in part to revelations from whistle-blowers embedded in this complex web of tax havens and fake corporations.

The latest leak to the International Consortium of Investigative Journalists (ICIJ), dubbed the Panama Papers, reveals that a single law firm, Mossack Fonseca, facilitated the creation of more than 200,000 offshore entities."

Read the Full Article at CNN.com


Tax cut promises: Tall tales and half analyses


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This article originally appeared in The Hill. 

These calculated, misleading messages have helped pave the way for a series of irresponsible, unfunded tax cuts that have endangered our nation’s long-term fiscal health. The huge, deficit-financed tax cuts pushed through by President George W. Bush more than a decade ago were one result of this movement. In the current election cycle, the major Republican presidential candidates have presented the American public with tax-cutting plans that would double down on the Bush tax cuts, but they have offered few or no details about how they would pay for these cuts. It’s clear that the latest generation of Republican leaders views fiscal policy through the same rose-colored lenses as their supply-side predecessors. 
Such breathtaking fiscal irresponsibility creates an analytic challenge for those who care about tax fairness. On its face, a plan to cut taxes by $12 trillion over the next decade, as Donald Trump’s proposal would do, would result in a net income gain for virtually all Americans in the same way that dropping hundred dollar bills from a helicopter would benefit all those beneath it. But any analysis of Trump’s plan that focuses solely on the tax cuts is woefully incomplete: in the long run, tax cuts of this magnitude will have to be paid for, and it won’t be pretty. If history is any guide, a mix of unpopular spending cuts and across-the-board tax increases will be required to offset most or all of the tax cuts.
My organization, Citizens for Tax Justice, has a new report that tells both sides of the story. We not only show the effects of the tax cuts that GOP presidential candidates boast about, but we also count what the candidates don’t want to talk about: the effects of the inevitable spending cuts and/or offsetting tax increases that will be necessary to avoid fiscal catastrophe. 
Looking at the GOP tax proposals this way tells a very different story: every income group except the very highest ones would be worse off under the GOP candidates’ tax plans. 
For example, Donald Trump’s tax plan ostensibly offers middle-income Americans a tax cut of about $2,500 a year. But paying for that tax cut will eventually cost them about $4,600, for a net loss of about $2,100 a year. For the same group, Ted Cruz’s plan will have a net annual cost of more than $7,000. And Marco Rubio’s promised tax cut for the middle of $1,400 ends ups as a net cost of almost $2,500 a year.
The same logic applies to plans that would increase taxes. Democratic candidate Bernie Sanders has proposed to increase taxes and provide a government-funded universal health insurance program. As part of that proposal, employer-related health insurance would become unnecessary, and would likely be converted into higher cash wages. Of course, those higher wages would be subject to taxes, but most workers would end up with significantly higher after-tax earnings. Meanwhile, they would get the same or better health insurance coverage than they have now, as would all Americans.
A complete analysis of Sanders’s health proposal would find that the vast majority of Americans, especially those with limited or no health insurance, would be much better off than they are now. Yet according to tables published by some groups and widely covered by the media, all income groups would be worse off because everyone would pay a portion of the taxes imposed to fund the universal insurance program, albeit a very small portion for most of us. 
The bottom line is this: Focusing solely on the tax side while ignoring the public services that taxes make possible doesn’t just tell only half of the story. It gets the whole story completely wrong. 
Robert McIntyre is the director of Citizens for Tax Justice, a Washington D.C.-based policy organization that does analyses and advocacy for fair tax policies that allow the nation to raise the revenue it needs to fund its priorities.  

For almost four decades, American voters have been fed a tall tale by anti-tax politicians and their allies. They’ve been told that government wastes their money, produces nothing of value, and needlessly robs American workers of their hard-earned pay. And they’ve been told that since their tax dollars aren’t buying anything worthwhile to begin with, even the biggest tax cuts don’t need to be paid for.

These calculated, misleading messages have helped pave the way for a series of irresponsible, unfunded tax cuts that have endangered our nation’s long-term fiscal health. The huge, deficit-financed tax cuts pushed through by President George W. Bush more than a decade ago were one result of this movement. In the current election cycle, the major Republican presidential candidates have presented the American public with tax-cutting plans that would double down on the Bush tax cuts, but they have offered few or no details about how they would pay for these cuts. It’s clear that the latest generation of Republican leaders views fiscal policy through the same rose-colored lenses as their supply-side predecessors.

Such breathtaking fiscal irresponsibility creates an analytic challenge for those who care about tax fairness. On its face, a plan to cut taxes by $12 trillion over the next decade, as Donald Trump’s proposal would do, would result in a net income gain for virtually all Americans in the same way that dropping hundred dollar bills from a helicopter would benefit all those beneath it. But any analysis of Trump’s plan that focuses solely on the tax cuts is woefully incomplete: in the long run, tax cuts of this magnitude will have to be paid for, and it won’t be pretty. If history is any guide, a mix of unpopular spending cuts and across-the-board tax increases will be required to offset most or all of the tax cuts.

My organization, Citizens for Tax Justice, has a new report that tells both sides of the story. We not only show the effects of the tax cuts that GOP presidential candidates boast about, but we also count what the candidates don’t want to talk about: the effects of the inevitable spending cuts and/or offsetting tax increases that will be necessary to avoid fiscal catastrophe.

Looking at the GOP tax proposals this way tells a very different story: every income group except the very highest ones would be worse off under the GOP candidates’ tax plans.

For example, Donald Trump’s tax plan ostensibly offers middle-income Americans a tax cut of about $2,500 a year. But paying for that tax cut will eventually cost them about $4,600, for a net loss of about $2,100 a year. For the same group, Ted Cruz’s plan will have a net annual cost of more than $7,000. And Marco Rubio’s promised tax cut for the middle of $1,400 ends ups as a net cost of almost $2,500 a year.

The same logic applies to plans that would increase taxes. Democratic candidate Bernie Sanders has proposed to increase taxes and provide a government-funded universal health insurance program. As part of that proposal, employer-related health insurance would become unnecessary, and would likely be converted into higher cash wages. Of course, those higher wages would be subject to taxes, but most workers would end up with significantly higher after-tax earnings. Meanwhile, they would get the same or better health insurance coverage than they have now, as would all Americans.

A complete analysis of Sanders’s health proposal would find that the vast majority of Americans, especially those with limited or no health insurance, would be much better off than they are now. Yet according to tables published by some groups and widely covered by the media, all income groups would be worse off because everyone would pay a portion of the taxes imposed to fund the universal insurance program, albeit a very small portion for most of us.

The bottom line is this: Focusing solely on the tax side while ignoring the public services that taxes make possible doesn’t just tell only half of the story. It gets the whole story completely wrong.

Robert McIntyre is the director of Citizens for Tax Justice, a Washington D.C.-based policy organization that does analyses and advocacy for fair tax policies that allow the nation to raise the revenue it needs to fund its priorities.  

 

 

 


Corporate Tax Watch: Facebook and Verisign


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Facebook: An Industry Leader in Rolling the Dice on Probably-Illegal Tax Breaks

The Facebook Corporation has been criticized for paying no income taxes in the U.S and in the rest of the world. The company leads the Fortune 500 in its use of executive stock options as a way of cutting its tax bill. But the company’s latest annual report, covering tax year 2015, adds a new wrinkle: Facebook is now an industry leader in its reliance on tax breaks it doesn’t believe are actually legal. The company discloses $1 billion in new “uncertain tax benefits” related to tax year 2015.These benefits in financial-reporting jargon are tax breaks the company claimed, but that Facebook believes have a greater than 50 percent chance of ultimately being disallowed by tax authorities. The Securities and Exchange Commission (SEC) requires corporations to disclose the value of these tax breaks because this statistic is a great indicator of which corporations are most aggressively pushing the legal envelope in the tax avoidance schemes they concoct each year. Facebook’s 2015 uncertain tax breaks are bigger than those disclosed by Amazon, Boeing, DuPont, Ford Motor and Goldman Sachs put together.

Verisign: Cornerstone of the Tuvalu Economy?

Verisign is less visible than tech giants such as Microsoft and Facebook, in part because the company specializes in maintaining the infrastructure of the Internet. But the company has been every bit as successful as its larger compatriots in avoiding corporate income tax liability. The company’s latest annual report shows that it paid no federal or state income taxes, after subtracting an executive-stock-option tax break, on $250 million in U.S. profits in 2015. And over the past five years, Verisign reports just $1 million in current federal income taxes on over $1 billion in income, for a five-year tax rate of just 0.1%. The company’s low foreign tax rates look downright confiscatory by comparison: Verisign paid an 11.5 percent foreign tax rate on $970 million in foreign profits over the same period. The company notes cryptically that “[a] significant portion of our foreign earnings for the current fiscal year was earned in low tax jurisdictions,” but doesn’t specify what fraction of these profits were placed in Verisign’s subsidiaries in the Cayman Islands or Tuvalu. 


United Technologies' Long History of Avoiding Taxes


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Indiana-based Carrier Corporation and its parent, United Technologies (UTX), are drawing the well-deserved ire of presidential candidate Donald Trump after announcing that Carrier will move 2,100 jobs from Indiana to Mexico next year. Indiana Governor Mike Pence reportedly is assigning part of the blame for Carrier’s move to our nation’s “high federal corporate tax rates.”

But a quick look at United Technologies’ taxpayer profile suggests that the company is already quite adept at avoiding federal income taxes. Over the past fifteen years, the company has enjoyed $38 billion in U.S. pretax income and has paid a federal tax rate averaging just 10.3 percent during that period—which means that the company is consistently finding ways to shelter more than two-thirds of its U.S. profits from federal taxes. 

Indiana Senator Joe Donnelley and Governor Pence are sensibly upset that Carrier raked in federal and state tax incentives for job creation before announcing this move. And United Technologies has benefitted, big-time, from the largesse of the federal government in the past: the company was the seventh largest federal contractor in 2014, enjoying almost $6 billion of federal contracts in that year alone. Even more troubling to Governor Pence should be the fact that last year, the company didn’t pay even a dime of state income taxes on its $2.7 billion in U.S. profits.

If this move seems profoundly unpatriotic, it shouldn’t be surprising: United Technologies has been more aggressive than almost all other Fortune 500 corporations in shifting its profits, on paper, into foreign jurisdictions. The company now claims to hold a staggering $29 billion of its profits abroad—that’s one out of every three dollars the company has earned over the past fifteen years. The company’s limited financial disclosures make it impossible to know how precisely much of these profits have been assigned to UTX’s tax haven subsidiaries in the Cayman Islands, Luxembourg, or Gibraltar—or whether the company has paid any tax on these offshore profits.

If Carrier and UTX go ahead with their plans to shift thousands of jobs to Mexico, the local economic effect on Hoosiers will be potentially devastating. But the company’s long history of avoiding federal and state income taxes makes it clear that this move wouldn’t be driven by our tax laws.

 

 

 

Indiana-based Carrier Corporation and its parent, United Technologies (UTX), are drawing the well-deserved ire of presidential candidate Donald Trump after announcing that Carrier will move 2,100 jobs from Indiana to Mexico next year. Indiana Governor Mike Pence reportedly is assigning part of the blame for Carrier’s move to our nation’s “high federal corporate tax rates.” 
But a quick look at United Technologies’ taxpayer profile suggests that the company is already quite adept at avoiding federal income taxes. Over the past fifteen years, the company has enjoyed $38 billion in U.S. pretax income and has paid a federal tax rate averaging just 10.3 percent during that period—which means that the company is consistently finding ways to shelter more than two-thirds of its U.S. profits from federal taxes.
Indiana Senator Joe Donnelley and Governor Pence are sensibly upset that Carrier raked in federal and state tax incentives for job creation before announcing this move. And United Technologies has benefitted, big-time, from the largesse of the federal government in the past: the company was the seventh largest federal contractor in 2014, enjoying almost $6 billion of federal contracts in that year alone. Even more troubling to Governor Pence should be the fact that last year, the company didn’t pay even a dime of state income taxes on its $2.7 billion in U.S. profits. 
If this move seems profoundly unpatriotic, it shouldn’t be surprising: United Technologies has been more aggressive than almost all other Fortune 500 corporations in shifting its profits, on paper, into foreign jurisdictions. The company now claims to hold a staggering $29 billion of its profits abroad—that’s one out of every three dollars the company has earned over the past fifteen years. The company’s limited financial disclosures make it impossible to know how precisely much of these profits have been assigned to UTX’s tax haven subsidiaries in the Cayman Islands, Luxembourg, or Gibraltar—or whether the company has paid any tax on these offshore profits. 
If Carrier and UTX go ahead with their plans to shift thousands of jobs to Mexico, the local economic effect on Hoosiers will be potentially devastating. But the company’s long history of avoiding federal and state income taxes makes it clear that this move wouldn’t be driven by our tax laws. 

 

 


Corporate Tax Watch: CMS Energy, Expedia, and Netflix


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February is a special time of the year for corporate tax watchdogs: it’s when hundreds of Fortune 500 corporations release their annual financial reports to shareholders, including potentially embarrassing details about their relationship with the U.S. tax system.

CTJ and ITEP’s corporate tax analysts will be knee deep in these reports for much of the next month, but will come up for air every now and then to give quick updates on their findings. Here’s a first take on what we’re seeing so far.

Perfecting the art of long-term tax dodging

A February 2014 CTJ/ITEP report highlighted 26 profitable corporations that paid no current federal income taxes over the five years between 2008 and 2012. The Michigan-based utility CMS Energy this week confirmed that its inclusion in this list was no accident: in the three fiscal years since CTJ’s original report, CMS has enjoyed $2.2 billion in U.S. profits—and hasn’t paid a dime in federal income taxes over this period. For those needing a scorecard, this means over the past eight years CMS has paid no federal income taxes on $4.6 billion in profits. Like many other big utilities, CMS appears to be relying on generous tax breaks for accelerated depreciation. With the resurrection of expired “bonus depreciation” measures in the December 2015 “extenders” package, the good times will likely continue to roll for CMS going forward.

Sending customers and profits all over the world

Washington-based Expedia is no stranger to arranging worldwide travel—and a side benefit appears to be that the company is adept at sending its own profits to exotic foreign climates. The company’s newest annual report discloses that Expedia is now declaring $1.5 billion of its profits to be “permanently reinvested” in undisclosed foreign nations. Taking advantage of a toothless provision in the Securities and Exchange Commission’s rules on corporate tax disclosure, the company refuses to divulge whether even a dime of income tax has been paid to foreign nations on these profits—but if their six Cayman Islands subsidiaries are any indication, a big chunk of these offshore profits may be enjoying the same beachfront view Expedia routinely provides its clients.

Changing the way we view television and avoiding tax at home and abroad

Not all corporations are as evasive about their offshore profits as Expedia: the Netflix corporation remains as open about their foreign and domestic tax avoidance as ever in its latest annual report. The company discloses that if it repatriated $65 million stashed offshore, it would face a tax bill of just a hair under 35 percent—which means that wherever its foreign profits are located, it’s someplace that levies about a zero percent tax rate. Domestically, the company is likely not too worried about that 35 percent rate since in 2015 it was able to use just one tax break, an unwarranted giveaway for executive stock options, to zero out all federal income taxes on its $95 million in U.S. profits.

 

 


New ITEP Report: Tax Foundation Model Seeks to Revive Economic Voodoo


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How do tax reform plans affect economic growth? And can an economic model that always assumes tax cuts stimulate economic growth and tax increases stifle growth credibly answer this important question? In a word, no.

A new paper by Carl Davis, research director at Institute on Taxation and Economic Policy (Citizens for Tax Justice’s research partner), takes an analytic look at the Tax Foundation TAG (Taxes and Growth) Model and outlines why observers of the organization’s data should be skeptical.

“The TAG model currently views government investments in infrastructure, education and other services as worthless,” Davis wrote. “The model ventures even further into the territory of economic voodoo by depicting tax cuts as a means of raising federal revenues, and tax increases as ineffective at achieving that same goal.” 

Read the full paper here


More Details Emerge on President's Proposed Oil Tax


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As expected, the budget unveiled by President Obama this week includes a proposed new tax of $10.25 per barrel of crude oil.  The revenues raised by this tax would go toward not just shoring up our nation’s anemic Highway Trust Fund, but also expanding it into a more ambitious (and renamed) Transportation Trust Fund that would bring with it a heavier emphasis on public transit projects.

Since most crude oil is ultimately converted to gasoline or diesel fuel, much of the impact of this oil tax would be identical to a 20 or 25 cent increase in the nation’s existing fuel taxes.  The primary difference is that a tax on crude oil would also fall on a wider range of products, including heating oil and jet fuel.

In a sense, a tax on crude oil can be thought of as straddling a middle ground between the nation’s current taxes on transportation-related fuel use, and a more comprehensive tax on all carbon emissions.  In its budget proposal (PDF), the Obama Administration’s case in support of an oil tax sounds very similar to one that could be made for a carbon tax: “a fee on oil … creates a clear incentive for private-sector innovation to reduce America’s reliance on oil and invest in clean energy technologies.”

In addition to its likely environmental benefits, a crude oil tax of this size could also ensure solvency in the nation’s transportation account throughout the entire 10 year budget window (in contrast to the 2021 insolvency being forecast today), and is described (PDF) by the Administration as generating “a sustainable revenue level … going forward.”  Part of this sustainability hinges on the fact that the President’s proposed $10.25 per barrel tax would be allowed to grow alongside inflation in the years ahead.  This is in sharp contrast to the nation’s current gas tax which has stagnated at a fixed rate of 18.4 cents per gallon for over 22 years and lost roughly 40 percent of its purchasing power in the process.

Even if a new tax on crude oil is “dead on arrival,” as House Speaker Paul Ryan recently claimed, members of Congress should take note of the inflation indexing component of this proposal and consider its relevance to the gas and diesel taxes already on the books today.  As we’ve explained in the past, tying fuel taxes to inflation is smart policy and, at least at the state level, is becoming increasingly routine.

As expected, the budget unveiled by President Obama this week includes a proposed new tax of $10.25 per barrel of crude oil.  The revenues raised by this tax would go toward not just shoring up our nation’s anemic Highway Trust Fund, but also expanding it into a more ambitious (and renamed) Transportation Trust Fund that would bring with it a heavier emphasis on public transit projects.
Since most crude oil is ultimately converted to gasoline or diesel fuel, much of the impact of this oil tax would be identical to a 20 or 25 cent increase in the nation’s existing fuel taxes.  The primary difference is that a tax on crude oil would also fall on a wider range of products, including heating oil and jet fuel.
In a sense, a tax on crude oil can be thought of as straddling a middle ground between the nation’s current taxes on transportation-related fuel use, and a more comprehensive tax on all carbon emissions.  In its budget proposal (PDF), the Obama Administration’s case in support of an oil tax sounds very similar to one that could be made for a carbon tax: “a fee on oil … creates a clear incentive for private-sector innovation to reduce America’s reliance on oil and invest in clean energy technologies.” 
In addition to its likely environmental benefits, a crude oil tax of this size could also ensure solvency in the nation’s transportation account throughout the entire 10 year budget window (in contrast to the 2021 insolvency being forecast today), and is described (PDF) by the Administration as generating “a sustainable revenue level … going forward.”  Part of this sustainability hinges on the fact that the President’s proposed $10.25 per barrel tax would be allowed to grow alongside inflation in the years ahead.  This is in sharp contrast to the nation’s current gas tax which has stagnated at a fixed rate of 18.4 cents per gallon for over 22 years and lost roughly 40 percent of its purchasing power in the process.
Even if a new tax on crude oil is “dead on arrival,” as House Speaker Paul Ryan recently claimed, members of Congress should take note of the inflation indexing component of this proposal and consider its relevance to the gas and diesel taxes already on the books today.  As we’ve explained in the past, tying fuel taxes to inflation is smart policy and, at least at the state level, is becoming increasingly routine.

 

 


A Fish Tale That's More Harmful Than Your Average Whopper


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The recently released annual report from the Celanese Corporation, a Fortune 500 manufacturer of engineering polymers, is a helpful reminder of why multinational companies should be required to report their earnings to tax authorities in countries where they claim to earn profits. In its 2015 annual report, Celanese discloses that its foreign income over the past three years totaled $1.46 billion, the bulk of which ($900 million) it reported earning in four tax havens: Bermuda, Luxembourg, the Netherlands and Hong Kong. This means the company is claiming that more than 60 percent of its foreign income, and an incredible 30 percent of its worldwide income, is earned in these tax-haven countries.

As we’ve argued in the past, country-by-country reporting is a vital tool for tax administrators in the United States and abroad to help them detect corporate tax avoidance schemes. The Internal Revenue Service has released rules implementing OECD recommendations for country reporting, but Rep. Charles Boustany, chair of the House Ways and Means Tax Policy Subcommittee, is doing whatever he can to postpone this effort in the United States.

Whether you’ve heard of Celanese or not, you’ve used a product created with raw materials manufactured by the company. Its customers are industries as varied as agriculture, pharmaceutical, electronics, aerospace and automotive. And while it profited handsomely over the last three years, the company’s claims about where it is earning its profits are, at best, questionable. Country-by-country reporting would provide much-needed transparency and, possibly, prevent the company’s elaborate tax-dodging scheme.

What makes the company’s income reporting seem implausible is that Celanese also discloses the location of its sales, property, plant and equipment—and remarkably little of it appears to be in any of these tax havens. [See CTJ’s report on tax haven abuse for a brief explanation of why corporations’ claims of massive profits in tax haven countries is unbelievable.]

In 2015, Celanese reports that $146 million of its $5.67 billion in worldwide sales are generated in a residual “other” category of countries, which includes but is presumably not limited to these four tax havens. These “other” countries also represent just $70 million of the company’s worldwide $3.6 billion in property, plant and equipment.

So how can it be that a small group of tax havens in which Celanese has at most 2.6 percent of its sales and 1.9 percent of its property is nonetheless generating 30 percent of its worldwide income?

The only information about the company’s Bermuda operations in its financial statement is the existence of a subsidiary, Elwood Limited. If the well-documented income shifting hijinks of other big multinationals are any indicator, Celanese’s Bermuda subsidiary exists solely to act as a home away from home for the company’s intellectual property, patents and trademarks, most of which were really generated in a country in which the company actually has sales, property and employees.

Rep. Boustany has argued that country-by-country reporting would result in foreign governments engaging in “fishing expeditions” to ferret out sensitive information about corporate practices. But even the limited disclosures made by Celanese show that in fact, the main effect of country-by-country reporting would be to put an end to the tall tales many corporations are creating about where they earn their profits. Like the proverbial “fish that got away,” the invisible manufacturing plants allegedly creating nearly a third of Celanese’s income in four tax havens are a whopper, but a far more harmful one than your average fish tale. 


What Free Roaming Chickens and Accounting Tricks Have in Common


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Is offshore tax avoidance a victimless crime? That was the question underlying my recent visit to the Cayman Islands, where I spent a whirlwind weekend helping to film a BBC2 documentary on the real-world impact of tax havens on economic inequality.

On paper, at least, the Cayman Islands is an economic powerhouse. The latest data from the Internal Revenue Service show that U.S.-based corporations claim that their subsidiaries earn $51 billion a year there, an astonishing figure for an island nation that has a population of just 59,000.

But official statistics peg the size of the entire Caymans economy at just $3 billion a year. Put another way, for every $1 of economic activity that occurs in the Caymans, American corporations are telling the IRS that they earn $16.

In this context, my visit to the Caymans was a surreal exercise in “Where is Waldo”: could anyone find any evidence that these billions in alleged Cayman profits enjoyed by American corporations are actually flowing through the local economy and affecting the lives of the island’s residents?

The answer is categorically no. The only visible indicators of handsome corporate profits are a number of low-slung, nondescript buildings that dot the country’s small capital, George Town. Seldom more than a few stories high, these modern buildings have virtually no in-and-out traffic, giving the impression that all are closed for an extended holiday. The most infamous of these is Ugland House, the building in Grand Cayman where 18,000 corporations claim they have subsidiaries. President Barack Obama drew attention to it in 2009, when he joked that it was either “the largest building in the world or the largest tax scam in the world.”

Just a stone’s throw away from these Potemkin office buildings, in which Bank of America alone disclosed basing 143 subsidiaries in its 2013 annual report, chickens casually wander across unpaved streets lined with broken-down cars. Most of the residents of these neighborhoods who have jobs work in tourism, which is made possible by the country’s pearly white beaches, not the financial or manufacturing industries.

After several high-profile investigations of tax haven abuse by elected officials in the United States and the United Kingdom, we’re more familiar with the broad outlines of how the Cayman Islands facilitates tax avoidance.

Companies earn profits in countries with advanced economies and then take elaborate steps to make it appear that these profits are earned in tax haven countries such as the Cayman Islands or Bermuda. Typically this is done by having a corporation with valuable intellectual property, like patents or trademarks, put that property in the hands of a shell corporation in the Caymans, which then leases the right to use this intellectual property back to the parent corporation. While this transaction is essentially invisible in the real world, requiring virtually no corporate personnel in these tax havens to execute, its effect on the location of corporate profits is profound: the Cayman Islands subsidiary reaps huge profits from leasing patents, and the U.S. or U.K.-based parent corporation is able to reduce its taxable profits through the large expenditures it allegedly incurs by paying for the use of its own patents.

A brief visit to the dilapidated neighborhoods of George Town makes it obvious that this tax accounting chicanery benefits only a wealthy few Cayman custodians and offers nothing to those who live in the shadow of desolate office buildings.

Offshore tax avoidance is not a victimless crime.

While Bank of America, for example, claims multiple subsidiaries in the Cayman Islands, it certainly doesn't employ many of the island’s residents. The same can be said for myriad other profitable corporations that falsely claim they are earning huge profits there. Tax havens have precisely the same effect on poor families the world over. Earlier this year, Oxfam released a report showing that the global elite have an even greater share of the world’s income. Part of the reason, it finds, is a “global network of tax havens” that enable corporations and individuals to dodge taxes.

Dodging taxes perpetuates income inequality and cripples nations’ ability to fund vital public investments that benefit their entire populations. In the United States, we face daunting fiscal challenges as we seek to pay for basic services in an environment with growing national debt.  The tax avoidance enabled by a steady flow of paper profits from the United States to the Cayman Islands and other tax havens directly affects our ability to raise adequate revenue. Congress has the power to change this. 

 


Tax Justice Digest: EITC Awareness -- Corporate Tax Watch -- Flint


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Read the Tax Justice Digest for recent reports, posts, and analyses from Citizens for Tax Justice and the Institute on Taxation and Economic Policy.

Our office survived the blizzard and got busy analyzing tax policies far and wide – take a look at what we’ve been commenting on this week:

EITC Awareness Day!
Today is EITC Awareness Day and we couldn’t be happier to join with the IRS and other groups to spread the word about this important credit that lifts millions of families out of poverty each year. For more on the EITC, how the recent expansions benefit your state, and how states are implementing the credit check out this post from ITEP senior analyst Aidan Davis.

Federal News

Corporate Tax Watch: Adobe, Johnson Controls and NASCAR
The last few weeks we’ve been busy monitoring companies getting increasingly creative when it comes to avoiding their taxes. ITEP’s Director, Matt Gardner, crunched the numbers and it appears that Adobe shifted hundreds of millions offshore. Apparently executives at Adobe think, like PDFs, its profits are portable too.

Johnson Controls is a Milwaukee-based company that makes batteries and HVAC systems. They’d also like to become Irish. Read more about its outrageous tax-dodging scheme here.

Did you know that a tax break for NASCAR was included in the $680 billion extenders package Congress passed late last year?

Flint Fail: Lessons
The Flint water crisis should not be happening.  Here we take a closer look at this “customer” service failure and the role that tax policy played.

State News

Looking Forward: 2016 State Tax Policy Trends
This week ITEP’s state tax policy team identified many of the trends they will be following this year in state tax policy - from tax shifts to tax cuts and working family tax credits. Read the first post in ITEP’s important series.

Chances Are You Live in a State Where Amazon Collects Taxes
Starting Monday, Amazon.com will begin collecting sales tax from its customers in Colorado.  Once this happens, the company will be collecting sales tax in a total of 28 states – including 19 of the 20 most populous states in the country. Here’s what ITEP’s Research Director, Carl Davis, has to say about this development.

Sign up for ITEP’s State Tax Rundown to Get Expert Info On Tax Debates In:
Alaska, Kentucky, Georgia, Indiana, Kansas, Massachusetts, North Carolina, South Carolina, and West Virginia

Now that many state legislatures are in session tax debates are heating up. During this busy time ITEP sends out two State Rundown emails a week detailing a myriad of state tax issues. To get these emails sign up for our Rundown here.  

State Spotlight: Louisiana
ITEP’s State Tax Policy Director, Meg Wiehe, weighs in on the tax and budget situation the new Governor of Louisiana faces. Stay tuned, the situation in Louisiana is quickly evolving.

Shareable Tax Analysis:

EITC Awareness

ICYMI: As part of EITC Awareness Day we wanted to remind you about CTJ’s interactive map which details the average benefit for working families of permanently extending the recent expansions in the EITC and Child Tax Credit. In good news for working families, these extensions were made permanent late last year.

As the compiler of this email, I’d love to hear from you anytime at kelly@itep.org

For frequent updates find us on the Tax Justice blog.


International Speedway Reaps Benefits of Revived "NASCAR Tax Break"


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DaytonaSpeedwayTax laws were good to the International Speedway in 2015. The company released its annual report this week, which reveals it’s just as fine a purveyor of tax dodging as it is race car driving. The company reports earning $73 million in U.S. pretax income in 2015, a handsome profit on which it did not pay a dime of federal or state income taxes. In fact, the company got an $8 million federal tax rebate in 2015.

This tax avoidance is partly enabled by an obscure tax break for “motorsports entertainment complexes.” The provision quietly expired at the end of 2014, but Congress revived it in December as part of its multi-billion dollar tax extenders package.  

It’s likely that few Americans realized that the much-maligned “NASCAR tax break” for a brief period was no more. This shouldn’t be surprising, since relatively few of us have the wherewithal to build a racetrack in our backyards. But, as we’ve noted previously, for the handful of corporations that own and maintain racetrack properties, the “NASCAR” break has been a tax-cutting bonanza. Two leading beneficiaries of this tax break, International Speedway and Speedway Motorsports, have paid federal tax rates averaging 11 percent and 7 percent, respectively, over five years.

2015 could have been the year when that all changed: the NASCAR tax break was one of dozens of temporary “extender” tax breaks that expired at the end of 2014. But faced with a rare situation in which inaction is the best course of action, Congress decided instead to bring the extenders back to life in the waning days of its 2015 session, and in doing so extended the NASCAR tax break for another two years.

In the context of our growing budget deficits, the annual cost of the NASCAR giveaway is a drop in the bucket at less than $20 million, making it a small part of the $680 billion extenders package. But because its benefits are narrowly focused on a few privileged companies, the damaging effects of this tax break go way beyond its fiscal cost. The prospect of well-heeled corporate lobbyists driving their employers’ tax rates to zero is exactly the sort of thing that makes Americans lose faith in their leaders, and in government more generally. For those scratching their heads at the rise of presidential candidates whose popularity appears to be driven by anger and resentment, look no further than tax breaks like this one. 


Congress' Christmas Present to the American Public: A Longer Tax Expenditure Report


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Earlier this week, the Joint Committee on Taxation (JCT) released its annual Tax Expenditure Report, a compendium of the many tax giveaways that drain federal revenues. In theory, this report is an essential cheat sheet for policymakers seeking to identify the best ways of closing unwarranted tax loopholes and making our tax system fairer and more sustainable.

In practice, Congress has made little progress in cleaning out the tax code in the four decades since the JCT began publishing this report. But the report remains a valuable yardstick for quantifying the cost of various tax breaks.

Here are a few takeaways from the newest report:

1)      It’s getting longer. This year’s report lists over 200 discrete tax breaks. In 1994, the JCT tabulated only 127 giveaways.

2)      Congress is poised to make it longer still. This year’s edition of the report is notably lightened by the temporary absence of the dozens of tax “extenders” that expired at the end of 2014, many of which will likely be resurrected by Congress before year’s end.

3)      Not all tax expenditures are created equal. Just a handful of the tax breaks listed in the JCT report account for a huge share of the $6.8 trillion in tax expenditures tallied here—and some of these largest giveaways have a truly pernicious effect on tax fairness.  To cite two:

The special lower tax rate on capital gains and dividends puts a $690 billion dent in five-year tax collections—while offering little or no benefit to millions of middle- and lower-income working families who get by on the wages they earn each year. It would be hard to devise a way of blowing $700 billion that offers less to working families.

The ability of multinational corporations to indefinitely defer tax on the income of their foreign subsidiaries will cost $563 billion over the next five years—and, as important, gives companies like Apple and Pfizer an incentive to pretend they’re keeping billions of dollars in cash in offshore tax havens. Ending deferral would shore up corporate tax revenues while largely ending the tax-avoidance games played by large multinationals.

In a more perfect world, Congress would annually ask tough questions about whether these and other upside-down tax subsidies such as the mortgage interest deduction are a sensible way of spending the public’s money. After all, if lawmakers proposed a $75 billion direct spending program for housing subsidies that reserved $30 billion for those earning over $200,000 a year, they’d be laughed out of town. But that’s what Congress does, indirectly, each year by leaving the mortgage interest deduction intact.

The timing of the JCT’s latest report is especially apt because Congress has spent much of the last week devising a plan that would dramatically expand the list (and the cost) of corporate tax expenditures. If lawmakers extend, or even make permanent, the dozens of mostly-business-oriented tax giveaways that expired at the end of 2014, next year’s tax expenditure report will be a lot longer—and the report’s tally of “perfectly legal” tax avoidance schemes will be a lot more expensive. It would be hard to find a clearer litmus test of whether Congressional tax writers take seriously the goal of paring back tax expenditures than the impending choice they face on the extenders. 


Memo to Mark Zuckerberg: Charity Begins At Home


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Facebook CEO Mark Zuckerberg made waves this week with his announcement that he will eventually giveaway virtually all of his wealth for charitable purposes. As Bloomberg’s Jesse Drucker noted, Zuckerberg appears poised to implement his plan through a new entity that, unlike more conventional charitable foundations, won’t actually be required to act philanthropically. 

But for those familiar with the tax avoidance tactics practiced by the Facebook Corporation in the U.S. and abroad, it should come as no surprise that Zuckerberg’s approach to philanthropy is set up to avoid any unnecessary tax liability.

Facebook has used an executive stock-option tax break to lower its taxes by $4 billion dollars over the past five years, allowing the company to pay a federal income tax rate of only about 8 percent during that time. Put another way, the company has been able to shelter almost eighty percent of its profits from tax during this period using just this one tax loophole. And Facebook has also been an unabashed user of a complex foreign tax dodge known as the “double Irish.”

These aggressive tax-avoidance maneuvers impose a real cost: every dollar of income tax that Facebook doesn’t pay is, ultimately, a dollar that must be made up by the rest of us, either through higher taxes on middle-income families or draconian cuts in infrastructure spending.

Since Andrew Carnegie, our country has had a long tradition of philanthropy among the wealthiest Americans. If Mark Zuckerberg ultimately lives up to his promise to donate his wealth to needy causes, his contributions could make a huge difference in the lives of many Americans. But we shouldn’t lose sight of the fact that his company’s pattern of aggressively reducing corporate income tax payments is making the lives of Americans worse right now, by shortchanging America’s tax system of needed revenues. 


Grover and the Gas Tax


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Congress is on the verge of passing a five year transportation funding package built around a strange mix of revenue sources.  As many observers have pointed out, a more coherent and long-term solution would have been to increase and reform the nation’s largest source of transportation revenue: the federal gasoline tax.  Unfortunately, this option has been kept off the table for over 22 years.

Why is that?

An article in The Washington Post linked the lack of Congressional interest in the gas tax to “a pledge inspired by the conservative activist Grover Norquist, promising never to raise taxes.”

Similarly, the former head of the National Association of Manufacturers recently said that “the Norquist anti-tax pledge” is the primary reason that Congress has not taken the “obvious” step of raising the gas tax.

And Sen. Sherrod Brown (D-Ohio) indicated that a gas tax increase was not seriously considered this year because the “majority party … signed a pledge to a Washington lobbyist.”

Without a doubt, anti-tax attitudes in Congress have been a major factor in keeping gas tax increases off the table since 1993.  And Grover Norquist of Americans for Tax Reform (ATR) has done quite a bit to shape and maintain those attitudes.

But when it comes to his “Taxpayer Protection Pledge,” it appears that Norquist’s reach is being exaggerated.

The full text of the 57 word pledge (PDF) signed by members of Congress is as follows:

I, ___________, pledge to the taxpayers of the state of __________, and to the American people that I will:

ONE, oppose any and all efforts to increase the marginal income tax rates for individuals and/or businesses; and

TWO, oppose any net reduction or elimination of deductions and credits, unless matched dollar for dollar by further reducing tax rates.

Clearly, there is no language in this pledge that is designed to prevent signers from voting for a gasoline tax increase.  Only income tax rates, deductions, and credits are mentioned in the federal pledge (the state-level pledge is another matter).

Of course, the folks at Americans for Tax Reform should know this better than anyone.  But when asked about the significance of the pledge during debates over the gas tax, the group is inevitably coy.  Politico, for example, reported earlier this year that ATR “did not say whether it would consider a gas tax hike this year a violation of its anti-tax pledge.”

In reality, Politico did not need to bother asking.  Anti-tax attitudes have certainly played a role in keeping overdue gas tax reforms off the table.  But Grover Norquist’s pledge is very clearly not a factor.


Ted Cruz's Tax Plan Would Cost $16.2 Trillion over 10 Years--Or Maybe Altogether Eliminate Tax Collection


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Update March 9th, 2016: We have since revised downward our analysis from $16.2 trillion to $13.9 trillion, to reflect that Ted Cruz's staff has informed the media that the actual VAT rate will be 18.56 percent, rather than the 16 percent that he had been advertising. 

During Tuesday’s Republican presidential candidates’ debate, Sen. Ted Cruz (R-TX) made a claim that, in theory, shouldn’t be too hard to live up to. He said his tax plan is less irresponsible than plans put forth by his competitors, and he claimed the ten-year cost of his plan is less than a trillion. “It costs less than virtually every other plan people have put up here,” Cruz said.

Being less irresponsible than Jeb Bush, Marco Rubio and Donald Trump—each of whom have proposed tax plans that would cost $7 trillion or more over the next decade—is a low bar to hurdle. Yet contrary to his assertions, Cruz’s plan would be more costly than any of the other plans put forth by his competitors. A Citizens for Tax Justice (CTJ) analysis of the Cruz tax plan finds that it would cost $1.3 trillion in its first year alone and a staggering $16.2 trillion over ten years.

Cruz’s plan would eliminate the corporate income tax, the estate tax, and the payroll tax, digging an $18 trillion hole in federal revenues over a decade. He also proposes to sharply reduce the personal income tax, replacing the current graduated rate system with a flat-rate 10 percent.  Cruz’s plan would repeal most itemized deductions and tax credits, but it would leave the mortgage interest and charitable deductions largely intact, along with the Child Tax Credit and the Earned Income Tax Credit. On balance, these personal income tax changes would lower income tax revenues by 60 percent and add another $12.8 trillion to the plan’s 10-year cost.

Cruz proposes making up for the $31 trillion in lost revenue by introducing a regressive value-added tax (VAT), and, it seems, a healthy dose of magic pixie dust.

Cruz’s claim that his plan would cost “less than a trillion” depends critically on raising an enormous amount from his 16 percent VAT, which would apply to almost everything American consumers purchase. The remaining revenue shortfall would, in Cruz’s estimate, be offset by a supposed economic boom based on the discredited supply-side magic that has been part of the far right’s economic fantasies for decades.   

But Cruz’s math has a gigantic hole in it. He wouldn’t just make consumers pay his VAT, he would also make the government pay the tax (to itself) on all of its purchases, from warplanes to paper clips and the wages it pays to its employees. Cruz’s claim that the government can raise money by taxing itself accounts for a third of the alleged yield from his VAT.

Without this sleight of hand, Cruz’s overall plan would cost more than $16 trillion over a decade and reduce total federal revenues by well over a third.

Even this enormous amount may be a low-ball estimate since Cruz insists that he would “eliminate the IRS.” If he really means that, then he would apparently reduce total federal revenues by closer to 100 percent. After all, without a tax collection agency, why would anyone pay taxes?


Candidates' Tax Cuts Unequivocally Skew Toward the Wealthy


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As Citizens for Tax Justice (CTJ) outlined in a post last week, most major Republican presidential candidates have released tax proposals that would overwhelmingly benefit the wealthy and balloon the national debt. No one can refute this, but candidates and anti-tax, trickle-down economics supporters are trying to obscure the facts.

Last week, the business-backed Tax Foundation released a blog that chides reporters for using dollar amounts instead of percentages to inform the public about how generous candidates’ tax cuts would be for the top 1 percent.  They may as well dangle a shiny object. Shifting the debate toward an analytic discussion of percentages versus average dollars is a distraction. The real issue is why are candidates and their allies trying to convince the public that corporations and the wealthy need more budget-busting tax breaks in the first place?

Federal lawmakers are struggling to find ways to fund the Highway Transportation Fund, pay for debts that have been built up over the past four decades and maintain essential public services. How enormous tax cuts fit into this equation is a far better issue to debate than average dollars versus percentages or shares. Better still, why not call candidates on the carpet and ask them to explain why the nation needs massive tax cuts and what programs they would cut as a result of the lost revenue?

The tax cuts for “jobs creators,” and trickle-down, stimulate-the-economy argument is tired, shopworn and unproven. The public has previously been sold the vision of a future in which everybody—but mostly and especially the rich—gets a tax cut and the nation’s economy grows by leaps and bounds. It didn’t happen in the past, and no serious person thinks it will happen in the future.

When CTJ analyzes tax proposals, its tables show average tax changes in dollars by income group, tax changes as a share of income and the overall share of the tax cut that each income group would receive. Including all three columns of data reveals a complete picture of the distributional effects, as opposed to just the change in after tax income which, in isolation, can obscure the impact.

The most important figures regarding the GOP candidates' tax plans are the enormous revenue losses that each would incur. In the case of Sen. Marco Rubio, CTJ estimates it would lose $11.8 trillion over a decade. Jeb Bush’s plan would add $7.1 trillion to the national debt over 10 years. Donald Trump’s plan would blow a $12 trillion hole in the federal budget over a decade. An analysis of Rand Paul’s flat tax plan found it would starve the federal government of $15 trillion over a decade, and a forthcoming CTJ analysis of Ted Cruz’s plan likely will find it would be equally as devastating to the federal budget.

It is fair game to evaluate whether the nation can afford a tax proposal in which the biggest share and dollar amount flow to the wealthy.

CTJ director Bob McIntyre says criticisms of using dollars to evaluate candidates’ tax plan are a ruse.

“Why is anyone even talking about tax cuts?” McIntyre said. “We already don’t raise enough revenue to pay for existing programs, and as more and more Baby Boomers continue to retire, we’ll need a lot more revenue to pay back IOUs to Social Security, while maintaining other essential programs.”

By trumpeting tax cuts without talking about the consequence and then attempting to shift the public debate toward theoretical discussions about percentages versus whole numbers, candidates and anti-tax advocates are trying to obfuscate the real issue, McIntyre said.

Given the reality of our nation’s fiscal situation, neither dollars nor percentages can justify more huge tax cuts for the wealthy. That’s the substantive discussion we should be having.


Tax Cut Crazy Talk


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Sometimes when presented with fantastical information, the only appropriate response is a heavy sigh and a plea to stop. Please. Just. Stop. 

Such has been the case time after time this year as presidential candidates have released tax reform proposals that promise to drastically slash taxes across the board and also generate strong, economic growth. Please. Just. Stop.

Earlier this week, Citizens for Tax Justice released an analysis of Republican presidential candidate Marco Rubio’s tax proposal, and the results are exasperating but not surprising. The senator’s plan reserves the greatest share (34 percent) of its tax cuts for the top 1 percent (average annual cut of $223,783), and it would balloon the national debt by $11.8 trillion over a decade.

If this story sounds familiar, well, it is.  

CTJ has analyzed other candidates’ tax plans, too. It found that Jeb Bush would give nearly half of his tax cuts to the top 1 percent and add $7.1 trillion to the national debt over 10 years. Donald Trump’s plan would target more than a third of his tax cuts to the top 1 percent, and, like Rubio, would blow a $12 trillion hole in the federal budget over a decade.

Sens. Ted Cruz and Rand Paul are offering flat tax proposals that would lower taxes for the rich, increase taxes on low-income people and cost even more than Trump or Rubio's plans. And Ben Carson has proposed a loosey-goosey “tithing” plan (at a rate of 10 percent or 15 percent, depending on when you ask him) with few details, but apparently with the highest revenue loss of all.

All of these candidates are telling the American public that they have the best interest of the middle class at heart. But a bit of simple math quickly refutes that falsehood.

Yes, most of the candidates claim they would cut taxes for all income groups (with the exception of Bobby Jindal, who fervently and explicitly calls for much higher taxes on the poor). But the superrich would be the greatest beneficiaries by far. And once enormous cuts in public services that these plans would require are taken into account, only the very rich would come out ahead.

To be sure, all of the candidates claim that their plans would produce an enormous increase in economic growth. For example, Bush, in a Wall Street Journal op-ed titled, “My Tax Overhaul to Unleash 4% Economic Growth,” stated, “By focusing on tax reform like I did in Florida, America can grow faster, too.” Likewise, Trump said his plan, "will create jobs and incentives of all kinds while simultaneously growing the economy.”

But these are just assertions with no backing. The candidates seem to have forgotten that the nation has tried trickle-down economic policies before without success.

When pressed about his deficit-busting plan on CBS’s Face the Nation, Rubio said, “It has to be a combination of things. You have to have the spending discipline on the mandatory spending programs and you need to sustain significant economic growth.”

Well, at least one candidate admits that we can’t have vast tax cuts and adequately fund the nation’s programs and services too.

Josh Barro at the New York Times compared the candidates’ plans to “puppies and rainbows.” Many others also have roundly criticized Republican promises of tax cuts without revenue consequence. You can read some of them here, here, here, here , here, and here.

Recall that George W. Bush promised the nation could cut taxes across the board — but especially for the rich — without budgetary fall out. Instead, Bush’s tax cuts turned surpluses into deficits, even with budget cuts. And as for boosting the economy, economic growth was poor throughout Bush’s presidency and toward the end saw the start of the worst economic recession since the 1930s. Even still, Republican candidates are proposing to double- and triple-down on Bush-era tax policies.

Please. Stop.

“These candidates don’t want to tell the American public the truth,” said Bob McIntyre, director of CTJ. “Taxes are already at historically low rates, and our nation cannot have more massive tax cuts and also meet our priorities. In fact, we need considerably higher taxes, especially on tax-avoiding corporations and wealthy investors.  Polls show that a large majority of Americans agree, which makes one wonder why the GOP candidates are calling for just the opposite.”

Today, federal lawmakers are struggling to find ways to fund the Highway Transportation Fund, pay for debts that have been built up over the past four decades and maintain essential public services. And this is with current tax rates. The answer to these very real complex national issues is certainly not crazy, fantastical tax-cut proposals that overwhelmingly benefit the wealthy.


Marco Rubio's Tax Plan Would Pile $11.8 Trillion on the National Debt


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A Citizens for Tax Justice's analysis of Republican presidential contender Marco Rubio’s tax proposal found that the senator’s plan would give the biggest tax cut to the wealthiest 1 percent of Americans and balloon the national debt by $11.8 trillion over a decade.

Rubio’s plan hugely favors the wealthy. And by reducing revenues by almost $12 billion over a decade, his plan will require draconian cuts to essential public services and likely wreck our economy.

The top 1 percent would receive an average tax cut of $223,783 under Rubio’s proposal. Lower income groups would also receive significant tax cuts under Rubio’s plan, but his campaign is already backtracking on its own claims of just how generous its cuts would be for the poor.

Read the CTJ analysis of the Sen. Rubio’s plan here.


After Failed Attempt to Become British, the Pfizer Corp. Now Wants to be Irish to Avoid U.S. Taxes


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How do you say Viagra in Gaelic? That’s an internal question the Pfizer Corporation may have to deal with if it’s successful in its latest attempt to avoid billions of dollars in taxes by trading its U.S. citizenship for an Irish passport in a process known as a corporate inversion.

The drug and consumer health products maker is attempting to buy Allergan, an Ireland-based firm, and assume that company’s Irish identity.

But that’s probably about as painful as the move would get for the New York-based pharmaceutical firm. When a company like Pfizer attempts to become a resident of Ireland or other tax haven countries, there generally aren’t a lot of moving trucks involved. Usually, corporate inversions are a purely paper transaction in which corporations shift their U.S. profits overseas for tax purposes without changing the way they do business. Inverting companies typically continue to rely heavily on the American education, transportation and healthcare infrastructure that have allowed them to prosper. The only real change is that post-inversion companies are no longer paying for the government benefits they consume. An inversion by Pfizer would very likely amount to pretending to be Irish, much like the Notre Dame mascot.

This is the second time in as many years that the company has attempted to renounce its U.S. citizenship. In 2014, the company attempted to trade its U.S. passport for a British one by acquiring the firm AstraZeneca.

The irony is that Pfizer has already been doing its best to pretend it’s a foreign corporation for some time. In each of the past seven years, Pfizer has reported losing at least a billion dollars a year in the United States while making money hand over fist in other nations. Between 2008 and 2014, Pfizer claims it lost $21 billion in the U.S. while enjoying $104 billion in foreign profits. Is it plausible that the maker of Viagra and ChapStick hasn’t made a dime of profits in the United States since 2007 even as it has averaged $15 billion a year in foreign profits?

A more likely explanation is that the company has been aggressively shifting its U.S. profits into foreign tax haven subsidiaries. A recent Citizens for Tax Justice report found that Pfizer has a stunning 151 subsidiaries in known foreign tax havens, more than all but five other Fortune 500 corporations. It’s probably no coincidence that the company also has been very aggressive in declaring its profits to be “permanently reinvested” offshore: at the end of 2014, Pfizer had $74 billion in offshore cash, fourth highest among the Fortune 500.

What makes Pfizer’s tax dodging especially galling is that its U.S. business plan heavily depends on federal government support. Over the past five years, Pfizer has received more than $5 billion in government contracts, each year making the list of the top 100 government contractors. In addition, Pfizer has profited directly from government-funded research by the National Institutes of Health (NIH) and rakes in billions of taxpayer dollars via government healthcare programs such as Medicare and Medicaid.

We don’t know how much of the company’s $74 billion is sitting in its Cayman Islands subsidiary, nor do we know whether the company has paid even a dime of tax on its offshore cash because the company refuses to disclose this information. But it’s a safe bet that if the company’s latest inversion attempt is successful, in practice Pfizer will remain as American as it’s always been since it was founded on U.S. soil in 1849.

 


Apple Shifts a Record $50 Billion Overseas, Admits It Has Paid Miniscule to No Tax on Offshore Cash


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For the die-hard fans who lined up to purchase Apple’s latest iPhone last month, it’s hardly news that the California-based company still lives up to its reputation for technological innovation. The world’s No. 1 smart phone manufacturer last week released its annual financial report revealing it also remains No. 1 in crafty tax avoidance strategies.

Apple moved a record $50 billion offshore in the last year, far more than any company has achieved in a single year. It now holds a staggering $186.9 billion in cash offshore.

The company's brazen exodus of cash is even more remarkable because it acknowledges it has paid virtually no tax to any nation on its offshore stash. Apple's recently released annual report indirectly admits the company has paid an effective tax rate of about 2.2 percent on its permanently reinvested foreign profits. This means the beloved iPhone maker has avoided $56.9 billion in federal income tax on its offshore cash.

Apple’s unsavory tax practices are well-documented. A 2013 Senate investigation conclusively demonstrated that the company artificially shifted its U.S. profits into foreign tax havens. And for much of the past year, European Union (E.U.) officials have focused on the special tax deals worked out between European tax haven countries and companies including Apple, Starbucks, Fiat and Amazon.

As Citizens for Tax Justice (CTJ) documented in a recent report, Apple is only part (albeit the biggest part) of the problem. Hundreds of Fortune 500 corporations admit owning subsidiaries in known tax haven countries, and most of these companies now claim to hold large amounts of cash abroad. CTJ’s sensible recommendation to end companies’ ability to indefinitely defer tax on allegedly foreign profits would very likely accomplish what public shaming of Apple’s tax avoidance clearly has not: putting an end to corporations’ use of offshore tax havens to avoid paying U.S. taxes. 


How Donald Trump's Carried Interest Tax Hike Masks a Massive Tax Cut for Wealthy Money Managers


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The emerging conventional wisdom on Donald Trump’s tax plan is that it is a trillion dollar giveaway to the best-off Americans coupled with a populist flourish in the form of a small tax hike for the carried interest income earned by hedge fund millionaires.

But even Trump’s so-called populism on carried interest is a fig leaf. What appears to be a small hike for money managers may actually be a major tax cut for this privileged group.

Carried interest is essentially wages that money managers disguise as capital gains to take advantage of a special low 23.8 percent tax rate on capital gains—well below the 39.6 percent current top tax rate on regular income. Trump’s tax proposal would eliminate the carried interest loophole but also drop the top rate on ordinary income to 25 percent. The tax rate on carried interest, then, would marginally increase from 23.8 to 25 percent, a small sum for the hedge-fund millionaires who Trump claims are “getting away with murder.”

This supposed tax increase, however, obfuscates the even larger tax break the Trump plan would give to money managers by creating a new, low 15 percent tax rate for pass-through business income.

Pass-through business income is the money that owners of businesses such as partnerships and sole proprietorships report on their personal income tax forms. The most likely consequence of having a special low 15 percent tax rate on pass-through income is that wealthy Americans, including money managers, will find ways to disguise their salaries as pass-through business income to take advantage of the low rate.

Put another way, the Trump plan creates an entirely new path for hedge fund and private equity money managers to game the tax system. Rather than imposing a 1.2 percent tax hike on carried interest income, Trump’s plan would effectively lower the tax rate on carried interest to 15 percent. Notwithstanding Trump’s claims about working families being taken off the tax rolls, it’s the hedge fund class that will be writing “I win” on their tax forms as a result of this provision.

If the idea of a special low rate for pass-through income sounds familiar, it’s because it has been tried before. Cutting the tax rate on pass-through income was a centerpiece of Kansas Gov. Sam Brownback’s supply-side tax-cutting experiment several years ago. Brownback claimed that a special zero percent tax rate on pass-through businesses would result in a wave of job creation—and, as is now widely recognized, no such wave ever occurred and the provision helped devastate the state’s revenue. 

The bottom line is that Trump’s pass-through tax break would likely make an already unsustainable tax plan even worse. A new Citizens for Tax Justice analysis of Trump’s proposal estimates that the plan would cost nearly $11 trillion over a decade and give the deepest tax cuts to wealthy individuals and corporations. The tax avoidance prompted by Trump’s business tax cuts would likely dig this fiscal hole even deeper.  

 


The EITC and Child Tax Credit are Anti-Poverty Programs that Should Be Expanded


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New data from the Census Bureau show that the Earned Income Tax Credit (EITC) and the refundable portion of the child tax credit (CTC) lifted 9.8 million people out of poverty, including 5.2 million children, in 2014. Taken together, these credits lifted more people out of poverty than any other program besides Social Security.

The new Census data revealed that the national poverty rate remained statistically unchanged at 14.8 percent in 2014, 18 percent higher than it was before the economic recession and 33 percent higher than its historic low in 1973. According to the latest international data, the U.S. poverty rate is the third highest among 33 economically developed countries in the world.

The data make a compelling case for using tax policy as one tool for fighting poverty. The nation’s lawmakers should take steps to not only maintain but expand effective anti-poverty programs such as the EITC and CTC. A critical first step would be to make permanent recent expansions to the credits enacted in 2009 under the American Recovery and Reinvestment Act. These provisions are set to expire in 2017, which would mean an annual loss on average of $1,073 to more than 13 million families.  Congress should also substantially improve the effectiveness of the EITC by expanding it to childless workers. One proposal would provide an estimated 10.6 million individuals and families an average benefit of $604.

For more on the new Census data and the critical role of the EITC and CTC, read CTJ’s new report: The EITC and CTC Greatly Reduce Poverty; Congress Must Act to Strengthen These Programs.

More Resources on the EITC/CTC:

Four Reasons to Expand and Reform the Earned Income Tax Credit - June 11, 2015

Proposed Expansion of EITC to Childless Workers Would Benefit 10.6 Million Individuals and Families - March 4, 2015

Making the EITC and CTC Expansions Permanent Would Benefit 13 Million Working Families - February 20, 2015

 


Congress and SEC Should Take Corporate Disclosure Rules One Step Further


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Earlier this month, the Securities and Exchange Commission finalized a new rule that will require most public corporations to disclose the ratio between CEO pay and median wages for rank-and-file employees. This rule will give shareholders and the public a clearer window on how corporate salary structures are affecting income inequality.

But while this rule represents an important step toward understanding how specific corporations are compensating ordinary workers compared to corporate executives, it also highlights the inadequacy of an even more fundamental way in which many corporations are likely undermining all middle-income working families: corporate tax avoidance.

Congress and federal regulators have it in their power to bring corporate tax dodging into the light just as they’ve done with executive pay, and should move quickly to do so.

Many of the biggest corporations avoid hundreds of billions of dollars in U.S. taxes in a way that is virtually impossible to glean from their public filings. Big corporations keep shareholders in the dark about whether they are using foreign subsidiaries to avoid paying their fair share of U.S. taxes. Corporate tax filings, for example, often omit disclosure of tax-haven subsidiaries and fail to acknowledge whether the company’s offshore cash is subject to any income tax by any country. Less corporate tax revenue has a direct and corrosive impact on economic inequality just as the executive pay levels do. This should matter to all taxpayers because every billion that a corporation dodges in taxes ultimately must be made up by either taxing individuals at higher rates or drastically cutting funding for vital government services and programs.

And the billions add up fast: a CTJ report earlier this year found that Fortune 500 firms are likely avoiding as much as $600 billion in federal income taxes through the use of offshore tax havens. As CTJ has noted before, there are straightforward steps Congress and the SEC can take that would allow shareholders to know when their investments are supporting tax-dodging corporate leadership.

Lavish CEO pay directly disadvantages a corporation’s middle-income workers, and the new SEC disclosure will hopefully help shame some big companies into treating all workers more equitably. But until the largest corporations are required to be transparent in their use of offshore tax havens, these companies will continue to erode the take-home pay of all working families in a way that is far less visible than the pay ratios public corporations must now disclose.


Will Etsy's Brazen Tax Avoidance Cost the Company Its "B Corporation" Status?


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The online craft website Etsy is facing new scrutiny for its recent decision to shift some of its intellectual property into a secretive Irish subsidiary. As Bloomberg reported last week, the company's Irish subsidiary has been made into an "unlimited liability corporation," a form that exists primarily to avoid disclosure of even the most basic financial information. This behavior might elicit yawns from a public weary of tax-avoidance tales from Apple to Xerox, except for one important detail: Etsy is one of the first publicly held corporations to structure itself as a "B corporation," or benefit corporation — and as such, is required to act in a socially responsible manner.

While the criteria for being a "B corporation" vary by state, the common theme is that a company claiming this status must keep in mind not just its bottom line, but also "workers, community and the environment." This is important because when corporate executives are called on the carpet to defend their tax-dodging ways, they routinely cite their fiduciary responsibility to their shareholders as the reason why tax avoidance is not only acceptable, but something they simply must do. B corporations were supposed to change all that. But apparently not: Etsy has engaged in a tax-avoidance two-step. First, like prominent tech corporations such as Microsoft, Etsy has found a way to move its intellectual property to a subsidiary in a low-rate tax haven. Then, on top of that, Etsy changed the legal form of its subsidiary so that it wouldn't have to disclose how much money it is funneling into its tax-haven Irish subsidiary.

When Google chooses "don't be evil" as its corporate slogan, it's just that: empty sloganeering. The company can, and should, face merciless scorn for the ways in which its tax-dodging practices violate that supposed ethos, but at the end of the day, as long as what it’s doing is legal, no one can stop them. In contrast, B corporations are, at least in theory, held to a higher standard. Yet already in the pages of Fortune, Etsy's behavior is being defended as "just being loyal to its shareholders." This raises the question of whether the B corporation’s mandate for social responsibility extends into the tax policy realm — or whether the folks at Fortune simply haven’t noticed that Etsy is a different kind of corporation.

The good news is that the organization responsible for B corporation certification, B Lab, is on the case. It turns out that a change in ownership, including an initial public offering (IPO), requires that companies with B corporation status must recertify their status. One of the questions Etsy must answer as part of its re-application for B corporation status is “[h]as the Company reduced or minimized taxes through the use of corporate shells or structural means." But as tax expert Robert Willens noted in the Wall Street Journal last week, “[t]here is nothing to be gained other than tax savings” from what Etsy has done.

The advent of the B corporation could be a welcome trend in corporate governance, opening the door for business leaders to think about important social policy outcomes, rather than just cold hard cash, in making their executive decisions. Responsible taxpaying is only one part of the high standards to which B corporations are held. But tax avoidance is a basic and fundamental betrayal of corporate citizenship. If Etsy is recertified despite persisting in its offshore tax hijinks, it will be harder to take seriously the “benefit corporation” label.


Hillary Clinton Would Limit Tax Breaks for the Well-Off to Make College More Affordable


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Hillary Clinton recently announced a $350 billion proposal to make college more affordable. It would be paid for by capping the value of itemized tax deductions for high-income households. It appears that the plan is a watered down version of President Obama’s proposal to cap the tax savings from a longer list of deductions and exclusions at 28 cents per dollar deducted or excluded.

Both Clinton and Obama’s plans would affect only taxpayers in tax brackets above 28 percent (currently the 33, 35, and 39.6 percent brackets). Thus, it would limit deductions only for single taxpayers earning more than $200,000 and married couples earning more than $250,000, and its effects would be trivial until incomes are much higher than that.

A CTJ analysis of President’s Obama’s broader proposal to limit the value of various deductions, which would have raised an estimated $529 billion over 10 years, found that only about three percent of taxpayers would see any tax increase, and that three-quarters of the tax hike would be paid by the best-off one percent.

The upside-down nature of tax deductions and exclusions means that taxpayers in higher brackets receive a greater percentage benefit than those in lower brackets.  For instance, taxpayers in the top bracket can save almost 40 cents for each dollar deducted while taxpayers in the 15 percent bracket save only 15 cents on the dollar. And, of course, low- and moderate-income taxpayers are much less likely to itemize deductions because their potential deductions are generally less than the flat standard deduction.

The American public would be unlikely to endorse a direct spending program that awarded its greatest percentage of benefits to the wealthiest taxpayers. But this type of top-heavy subsidy often seems to escape scrutiny when it is provided through the tax code. Clinton’s plan to limit the value of itemized deductions to 28 percent on the dollar is a step in the right direction.


Microsoft to U.S. Government: Catch Us If You Can


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Puzzle this. Microsoft believes the U.S. government is trying too hard to prove that it’s avoiding federal income taxes. The latest legal salvo out of the company’s Redmond, Wash., headquarters alleges that the IRS improperly hired outside lawyers to help prosecute its tax avoidance case against the tech giant.

But the company’s newest annual financial report, released without fanfare late last Friday, inadvertently confirms that the IRS’s assertion that Microsoft is shifting its profits offshore for tax purposes is basically true.

Like other corporations, Microsoft is required to annually disclose its offshore “permanently reinvested earnings” — profits that it has declared, for tax purposes, to be foreign profits that the company has no intention of repatriating to the United States. Companies also disclose the amount of tax they would pay if these profits were officially repatriated to the U.S. If Microsoft wants to convince the IRS, or the American public, that it is innocent of the tax-dodging charges that have been leveled against it, these disclosures aren’t helping its cause.

Microsoft’s latest annual report discloses that the company now has a total of $108.3 billion in permanently reinvested offshore profits, an astonishing $15 billion jump over the $93 billion they reported at this time last year. But some things don’t change: the company says that its U.S. income tax on repatriation of these profits would be $34.5 billion, or a 31.9 percent tax rate.

Since the tax due on repatriation is 35 percent minus whatever tax has already been paid to foreign governments, this means that Microsoft has paid an effective income tax rate of just 3.1 percent on its $108.3 billion offshore hoard, the same tiny rate that it reported last year. This disclosure strongly indicates not only that Microsoft is offshoring its profits more aggressively than any other company except Apple, but also it is continuing to put these profits — at least on paper — in low- or no-tax countries. Of course, this is exactly what the IRS is accusing Microsoft of doing.

So here’s the inconsistency: In its annual financial reports, Microsoft dutifully admits that it is aggressively stashing its profits in offshore tax havens, even as it protests the vigor with which the IRS is trying to crack down on this tax-avoidance activity. Perhaps the company’s PR and accounting departments need to get on the same page.


Wherefore art Thou Permanent Subcommittee on Investigations?


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The U.S. Senate’s Permanent Subcommittee on Investigations (PSI) ain’t what it used to be. That’s the obvious conclusion to draw from Thursday’s hearing on the “Impact of the U.S. Tax Code on the Market for Corporate Control and Jobs.”

Two years ago, the PSI, under the leadership of Sen. Carl Levin (D-MI), issued detailed investigative reports exposing the egregious tax avoidance practiced by Apple and Microsoft. But the committee’s new leaders are taking an entirely different tack. Committee chairman Rob Portman (R-OH), after listening sympathetically to corporate whining about the nation’s allegedly burdensome corporate tax system, lamented that “if there’s a villain in this story it’s the U.S. tax code.” This was in response to testimony from a number of corporate spokespeople who presented inaccurate pictures of how the tax code treats their companies.

A more critical audience (or a reader of CTJ’s recent memo to the PSI published in advance of yesterday’s hearing) might have drawn different conclusions from yesterday’s testimony. One invited witness, Boston Beer executive Jim Koch, complained that his company pays “a tax rate of about 38 percent” on its U.S. profits. A closer examination, however, shows that Koch’s estimate is hugely inflated.

To be sure, Boston Beer’s 2014 annual report does assert that its current and deferred federal and state income taxes were 38 percent of its U.S. income. But that figure is a fiction, for two reasons.

First, a large share of these so-called taxes were “deferred,” meaning that the company has not yet paid them, and may never do so. Second, Boston Beer benefitted handsomely from a tax break for executive stock options that, for arcane accounting reasons, is not reflected as a tax reduction in companies’ annual reports. Making these two adjustments shows that Boston Beer’s actual federal and state effective tax rate was only 15 percent.

This week’s PSI hearing confirms the analysis of Bloomberg reporters Jesse Drucker and Richard Rubin, who noted earlier this week that the new leadership of the PSI appears far more interested in investigating the U.S. government than in chasing down corporate tax dodgers. That’s a real shame.

Tax avoidance thrives on opacity, and the PSI’s previous in-depth investigations of convoluted international tax schemes brought to light important details of the tax dodges that real reform would bring to an end. The PSI’s new leadership would do well to follow the example set by Sen. Levin. But so far, it seems unlikely that they will do so.


Innovation Boxes and Patent Boxes: Congress Is Focusing on Corporate Tax Giveaways, Not Corporate Tax Reform


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After weeks of hinting about an “innovation box” tax proposal, U.S. Reps. Charles Boustany, Jr. (R-LA) and Richard Neal (D-MA) Wednesday released draft legislation that would provide a massive giveaway for high-tech and pharmaceutical companies as well as other industries that generate income from patents and copyrights. The details of the legislation raise the very serious concern that the “innovation box” could be the tax break minnow that swallows the corporate income tax whale.

The legislation would create a special low tax rate of 10.15 percent for income generated by intangible property such as patents, trademarks and copyrights. This is nearly a three-quarters discount on the 35 percent federal income tax rate.

The big question is how much such a low tax rate would cost. As we have argued, the patent box concept is ripe for exploitation and abuse, for two reasons. First, the legislative process, with immense lobbyists influence, will likely expand the definition of “income from intangible property” beyond recognition, and second, sophisticated corporate tax departments are certain to seek ways of undermining the system by reclassifying  as much of their income as possible to qualify for this tax break.

The federal tax code is littered with examples of a simple concept that morphed into an administrative nightmare once it went through the legislative process. The most salient example is the special lower corporate tax rate for manufacturing. When lawmakers floated this tax break in 2004, the ostensible goal was to lower U.S. manufacturers’ taxes. But when the dust settled, the final law expanded the concept of “manufacturing” to include roasting beans for coffee (an early example of the lobbying clout of Starbucks) and film and television production. When policymakers initially began discussing the manufacturing tax break, few would have imagined that the Walt Disney Company  would reap more than $200 million a year in tax breaks for “manufacturing” animated films.

In the 10 years that the “manufacturing deduction” has been in place, the business world has changed in ways that were unimaginable in 2004, and so has the tax break’s reach. Open Table Inc. now annually collects tax breaks for “manufacturing” reservations at your favorite local restaurant.

 It is reasonable to conclude that the legislative sausage making process will similarly contort the definition of “intangible property”. Even those who think a properly-defined “innovation box” is a good idea may shudder at the product that emerges from Congress.

The second concern with the proposed “innovation box” tax break is how corporations might seek to game the system once such a box is in place. It would be very difficult to disprove the claim that a dollar of corporate profit is generated by the research and development that yields patents and copyrights. Corporate profit is the function of many economic forces, of which corporate R&D expenses are only one. When big pharmaceutical corporations claim that huge chunks of their U.S. profits are generated by their investments in intangibles such as trademarks, evaluating these claims will require a huge enforcement effort by the Internal Revenue Service—a vital branch of government that already is finding its enforcement abilities hampered by funding shortfalls.

This second problem—namely, the endless inventiveness of corporations in finding ways of gaming the system to reduce their taxes—may be the reason Congress’s official bean counters at the Joint Committee on Taxation have been unable to produce a revenue estimate on the cost of patent box legislation.

A third huge problem would be the mismatch between the 35 cents on the dollar that deductions for the costs of producing patents, etc. would provide to companies and the 10 cents on the dollar that the profits from such property would be taxed. In effect, the government would pay for 35 percent of the costs, but get back only 10 percent of the profits in taxes. That’s a negative tax rate.

Few would argue directly that the biggest corporate tax dodgers should get a special prize for their tax-avoidance efforts—yet the innovation box would provide huge windfalls for companies such as Apple and Microsoft that appear to have saved billions by artificially shifting their intangible property into low-rate tax havens. The focus of corporate tax reform should be, first and foremost, to make sure that corporate scofflaws are held to account and made to pay their fair share. An “innovation box” would instead offer a brand new tax break for these companies.

At a time when federal corporate income tax collections are near historic lows as a share of the U.S. economy, the unanswered questions about the direction and enforceability of the proposed “innovation box” tax giveaway should, alone, be enough to stop this idea in its tracks.


Yes to Broadway, No to Blueberries: The Arbitrary and Bizarre Giveaways in the Latest Tax Extenders Bill


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This is how the tax code unravels.

The Senate Finance Committee, in a rare show of bipartisanship, took less than two hours Tuesday to approve the tax extenders, a hodgepodge of more than 50 temporary tax breaks that expired at the end of 2014. The extenders are primarily a giveaway to business and should remain expired­–an option that doesn’t require any congressional action–but on these corporate giveaways, the nation’s lawmakers agree.

This is bad enough — but it gets worse. Committee members presented a jumble of amendments that would broaden these tax breaks, and actually approved a handful of them. For example, one of the existing provisions gives a special tax break for film and television productions. Producers can immediately write off the costs associated with creating a film or TV show, instead of gradually writing off their investments over the life of the asset as required of most other businesses. But there are meaningless limits: production companies can only write off the first $15 million in costs per film or per television episode (which essentially means the entire cost of a single television episode could be fully tax deductible), and only the first 44 episodes of a TV series are eligible for the tax break. This, however, may reflect lawmakers’ awareness of the jumping the shark phenomenon rather than legislative restraint.

Committee Chairman Orrin Hatch decided that it’s unfair to give the producers of “House of Cards” a tax break without extending the same privilege to their counterparts on Broadway, and so the committee broadened the film and TV tax break to include “live theatrical productions.” This revision could have saved such gems as the big budget disappointment “Spiderman: Turn off the Dark,” and, if passed, would provide generous tax write offs for those who produce economically devastating Broadway duds in the future.

Discerning lawmakers decided a tax break for Broadway is one thing, but southern-grown blueberries went a step too far. Sen. Johnny Isakson (R-Georgia) offered an amendment to expand the “bonus depreciation” tax break to include expenses related to blueberry production. Georgia, it turns out, is the largest blueberry-producing state in the nation. Isakson’s proposal thankfully fell on deaf ears.

The committee’s actions Tuesday reflect a disappointing lack of legislative interest in achieving real tax reform. The tax fairness victory achieved by allowing this motley array of tax breaks to expire at the end of 2014 was purely accidental. The committee should have simply allowed the extenders to remain dead and buried. At the very least, they could have spent more than two hours on these corporate giveaways and taken the time to ask hard questions about each and every one of them.

Instead, they simply brought them all back to life in the legislative equivalent of A&E’s The Walking Dead. Of course, the enthusiasm of the members of the tax-writing committee for the extenders has nothing to do with good tax policy. Rather the tax   extenders are simply a periodic campaign fundraiser for senators and representatives at the expense of ordinary American taxpayers.


Like a Campy Horror Movie, the Tax Extenders Are Back


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Lawmakers are once again moving to pass a $96 billion package of controversial tax breaks that mostly benefit businesses under the pretense of incentivizing economic activity.

The Senate Finance Committee on Tuesday morning will hold a session to weigh the so-called merits of the tax breaks, widely known as tax extenders. Given that Sens. Orrin Hatch (R-Utah) and Ron Wyden (D-Fla.), respectively the chair and ranking member of the committee, have introduced bipartisan legislation to extend the tax breaks, the direction lawmakers are heading is clear.  

But as CTJ and others have repeatedly pointed out, the tax extenders are a motley array of ineffective corporate giveaways. To name a few, the extenders includes the research and development credit, the “active financing” loophole and the CFC look-through rule. The active financing loophole makes it easy for multinational corporations to cook their financial books in a way that makes it appear that they are generating income in low-rate foreign tax havens while their costs are deductible in the United States. And the “CFC look-through” rule gives companies additional options for offshoring their profits on paper. An exhaustive Senate investigation into Apple’s international tax avoidance found that the CFC look-through rule was a key part of the company’s tax-dodging strategy.

If committee members critically examine these and other tax breaks during tomorrow’s hearing, they will be in for a long day-- there are more than fifty of them. But it appears lawmakers are more concerned about quickly moving to pass the legislation.

Sen. Hatch has said moving fast is the only way to make sure these tax breaks will work, arguing that “these provisions are meant to be incentives, (and) we need to advance a package as soon as possible.”

There is a major problem with this argument: the bill would apply retroactively. The extenders generally expired at the end of 2014, and the Hatch-Wyden plan would reactivate the tax breaks as of Jan. 1, 2015. This would mean that the two-year extenders legislation would expire at the end of 2016, so a quarter of time covered under this plan has already passed. This makes the incentive argument less compelling: how can providing big corporations with a retroactive tax credit for past activity create an incentive?

The tax extenders, to be sure, include a few small provisions that would have some effect on middle-income families. The deduction for teacher expenses provides teachers with federal income tax liability the chance to reduce their tax slightly, and the deduction for state and local sales taxes allows upper-middle taxpayers a chance to deduct their sales taxes instead of state income taxes.

A thorough Finance Committee exploration of these tax breaks would allow Congress to evaluate whether these and other tax breaks serve any social purpose—and, importantly, whether the tax code is the appropriate policy tool to achieve these social goals.

But Congress doesn’t appear to be focused on weighing the individual merits of each of the extenders. And that’s a shame.


Dear Congress: Gas Tax Fix Could Solve Transport Crisis


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This week both the House Ways and Means Committee and the Senate Finance Committee are holding hearings to discuss how to deal with the looming insolvency of the Highway Trust Fund (HTF), and how to sustainability finance the nation’s transportation investments in the long-term.

In written testimony submitted to both committees, ITEP’s Carl Davis explains that the core reason the HTF is in crisis is that the federal gas tax is poorly designed.  On October 1st, the 18.4 cent federal gas tax rate will have gone precisely 22 years without being increased.  Over this same period of time, however, the cost of transportation construction has risen by 60 percent.  A stagnant gas tax rate coupled with inevitable inflation in the construction sector is a recipe for unsustainability.

In his testimony, Davis discusses how many states are leading the way with reforms that boost the gas tax’s long-term yield by allowing the tax rate to grow over time.  He also explains why experimental taxes on each mile driven are a promising long-run idea, but cannot raise revenue in the short-run and are susceptible to some of the same problems as the current gas tax.  Finally, Davis’ testimony notes that repatriation tax proposals actually lose revenue in the medium- and long-terms, and that these policies encourage corporations to conduct more of their operations offshore (either on paper or in reality).

Read the testimony


Sales-Tax-Free Purchases on Amazon Are a Thing of the Past for Most


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One of the main arguments used against efforts to crack down on online sales tax evasion just got a little bit weaker.  For years, e-retailers have been claiming that state and local sales tax laws are too complicated for them to bother complying with.  But Amazon.com’s decision to begin collecting sales taxes in Ohio last week belies that claim.

Effective June 1, Amazon is now collecting sales taxes in fully half the states that are collectively home to over 247 million people, or 77 percent of the country’s population.  In other words, more than three out of every four Americans now live in a state where Amazon willingly collects the sales taxes its customers owe.

 

In the shrinking number of states where Amazon is still refusing to collect the tax, the problem is clearly not that Amazon is incapable of participating in the sales tax system.  Instead, the company thinks it can retain a competitive advantage over mom and pop shops, and other brick-and-mortar stores, by continuing to offer its customers an avenue to evade state and local sales taxes.  And in at least half a dozen states (Arkansas, Colorado, Maine, Missouri, Rhode Island, and Vermont), Amazon has gone out of its way to preserve this advantage by cutting ties with local advertisers in order to dodge state-specific requirements that it collect sales tax.

As we’ve noted before, Congress could address this inequity quite simply if it were able to overcome its current gridlock and pass the Marketplace Fairness Act or similar legislation.  But until that happens, state sales tax enforcement as it applies to purchases made over the Internet will remain an inefficient and unfair patchwork. 


Tax Rate for Richest 400 People at Its Second Lowest Level Since 1992


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New IRS data released this month reveal that the nation’s 400 richest people paid their second-lowest average tax rate in the past quarter century.

These tax filers paid just 16.7 percent of their adjusted gross income (AGI) in federal income taxes in 2012, the latest year data are available. This means the nation’s wealthiest paid, on average, less than half the top statutory federal income tax rate of 35 percent that was in effect in that year. Since the IRS began tabulating these data in 1992, the only other year the wealthiest paid a lower tax rate was in 2007.

How the very richest paid such a low rate is no mystery. These individuals derived about 70 percent of their income from capital gains and dividends, which in 2012 were taxed at just 15 percent, a fraction of the top statutory rate to which those who get their income from working a 9 to 5 are subject.

Fortunately, tax changes enacted at the end of 2012 as part of the “fiscal cliff” deal, and as part of the legislation enabling the Affordable Care Act, increased top income tax rates on both wages and capital gains starting in 2013, so it’s likely that effective tax rates on the top 400 taxpayers will increase in 2013 to reflect this.

But federal income tax rules still allow a gigantic tax preference for capital gains relative to salaries and wages. The top tax rate on capital gains is now 23.8 percent, well below the 39.6 percent top tax rate now applicable to wages. This means that the best-off Americans still can reduce their effective tax rates well below those facing many middle-income Americans going forward.

For this reason, it makes perfect sense that President Obama’s new budget proposal would scale back tax breaks for capital gains. During his State of the Union address, the president proposed increasing the top capital gains rate to 28 percent for wealthy investors, restoring the rate to where it was through the Bush I Administration and until 1997. But even if Obama’s proposal is enacted, the best-off Americans would still enjoy a double-digit tax break on their capital gains.

Of course hackneyed talking points prevailed among anti-tax proponents after the president announced his proposal: Stifling investment, slowing economic growth, etcetera, etcetera. The fact is these doomsday scenarios have not proven to be true in the wake of previous tax increases, and we should be debating tax policy within the broader context of how to raise enough revenue to fund the nation’s priorities.

As much as some would like to delink tax policy from, say, the condition of roads and bridges or the quality of our public health system, schools, and the quality of public safety services, it’s all intertwined.  And make no mistake, the tax breaks available to just 400 of the best-off Americans absolutely make a difference in our ability to provide these important services. Astonishingly, these 400 individuals enjoyed almost 12 percent of all capital gains income nationwide in 2012—meaning that roughly one in every nine dollars of capital gains tax breaks went to these 400 individuals in that year.

Most Americans no longer need to be reminded that wealth has been concentrating more and more at the top, or that ordinary working people have been economically standing still. But the IRS’s data on the top 400 taxpayers has not lost its capacity to shock, and remains an important reminder that our political institutions, and especially our tax laws, often act to make inequality worse, not better.


CTJ Director Robert McIntyre: "Tax Extenders Bill a Tale of Corporate Influence"


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The 113th Congress concluded by passing a $42 billion, deficit-financed tax extender bill that mostly benefits businesses. CTJ’s director Robert McIntyre’s op-ed in The Hill argues that the tax package illustrates how savvy lawmakers can enact legislation that has almost no support from the general public. 

“These temporary tax provisions are a caricature of legislative backroom dealing and corporate influence. They include a tax credit for “research” defined so loosely that it includes the development of machines by Chili’s to replace staff in their kitchens and the development of new flavors by Pepsi. They include the “active financing exception,” a tax break for the offshore lending done by companies such as General Electric, a superstar at dodging taxes even by the standards of corporate America.”

Read the full op-ed.


New Trove of Leaked Luxembourg Documents Point to Disney, Koch Industries Tax Schemes


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A month after the International Consortium of Investigative Journalists (ICIJ) revealed leaked documents demonstrating that Luxembourg allowed Pepsi, IKEA, FedEx and 340 other corporations to use the country as a tax haven, ICIJ has now announced new evidence that Disney, Koch Industries and 33 additional companies are also in the game.

The new trove of leaked documents shows that Disney and Koch Industries have, like the other companies, obtained private tax rulings from Luxembourg’s Ministry of Finance that bless complex business and accounting structures shifting profits from countries where actual business is done into Luxembourg, and then in some cases into other countries.

The revelations further demonstrate the need to end the U.S. tax code rule allowing American corporations to defer paying U.S. income taxes on profits that they report to earn offshore. The ability to defer these taxes for years or forever creates a powerful incentive for corporations to use accounting gimmicks to make it appear as though profits are earned in countries where they won’t be taxed — like Luxembourg, thanks to the private tax rulings it hands out like candy to big corporations.

Ernst & Young advised both Disney and Koch Industries to set up a financial subsidiary in Luxembourg that lends money to the other subsidiaries, which then send their profits in the form of interest payments to the lender in Luxembourg.

Disney’s lending subsidiary in Luxembourg reported 1 billion Euros in profits from 2009 through 2013 and paid just 2.8 million Euros in income tax to Luxembourg, for an effective income tax rate of less than one percent.

ICIJ explains that Disney may use the “check-the-box” loophole in U.S. tax law, which allows corporations to simply assert (by checking a box on a form) whether its foreign-owned entities are separate corporations or merely branches of the U.S. company. This would allow Disney to tell the IRS that its payment to the Luxembourg lender is a deductible interest payment to a separate company, even while the Luxembourg lender tells its own government that it’s merely a branch of Disney receiving an internal company payment, which is not taxable. The result is that the profit is not taxed in any country.

The lending exists only on paper and the financial subsidiary is a shell company. It and four other subsidiaries of Disney’s in Luxembourg are all housed in one residential apartment and have one employee.

Koch Industries’ private tax ruling from Luxembourg’s Ministry of Finance blesses a tax-dodging scheme for its subsidiary Invista, a company that produces Lycra-brand fiber and Stainmaster-brand carpets. Invista publicly says it is headquartered in the U.S., but Koch owns it through a holding company incorporated in the Netherlands.

A Luxembourg subsidiary called Arteva facilitates loans from one subsidiary of Invista to another. Arteva reported profits of $269 million from 2010 through 2013 and paid just $6.4 million in income taxes to Luxembourg over that period, for an effective income tax rate of just 2 percent. Its highest effective rate in any one of those four years was just 4.15 percent. Like Disney, Koch may have exploited the check-the-box loophole to pull this off.

One section of Koch’s private tax ruling explains how $736 million would be shifted from one subsidiary to another until an American branch would become “both the debtor and creditor of the same debt, which is canceled at the level of the American branch.”

A huge amount of complex planning goes into these tax avoidance schemes. The article notes that Ernst & Young’s office in Luxembourg racked up $153 million in revenue last year, probably by peddling these tax dodges. A lot of this scheming could be brought to an end if Congress enacted tax reform ensuring that all profits of American corporations, regardless of where they are earned, are taxed when they are earned. If Disney and Koch Industries could not defer U.S. corporate income taxes on profits booked offshore, they would have little incentive to use these tactics to make profits appear to be earned in Luxembourg or other countries.


Update on the Push for Dynamic Scoring: Will Ryan Purge Congress's Scorekeepers?


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We explained in October that Rep. Paul Ryan was making noise about changing official estimates for tax measures to incorporate “dynamic scoring.” This approach assumes that tax cuts boost economic growth so much that they partly or completely pay for themselves.

Ryan’s call has only intensified since the election. Now the battlefront has expanded as organs of the conservative movement, like the Wall Street Journal and Grover Norquist’s Americans for Tax Reform have called for new leadership at the Joint Committee on Taxation (JCT), which scores tax measures, and the Congressional Budget Office (CBO), which scores spending measures.

There is simply no agreement among economists about how tax cuts affect the broader economy, which makes it impossible to incorporate such effects into an apolitical revenue-estimating process for Congress that is trusted by everyone. In fact, no one really knows whether cutting taxes encourages most people to work and invest more (because they get to keep more of their income) or less (because they can work and invest less and still achieve whatever after-tax income goal they have set for themselves).

But that has not stopped Douglas Holtz-Eakin, a former CBO director, from siding with Ryan. His logic is that the budget-estimating process incorporates all sorts of guesswork so lawmakers should be willing to accept even more guesswork and embrace dynamic scoring.

Nor has it stopped the Wall Street Journal from putting forward people such as  Steve Entin of the Tax Foundation to lead JCT.

Incidentally, in 2009 Citizens for Tax Justice blasted both Holtz-Eakin and Entin for reports they penned on the federal estate tax. Holtz-Eakin cherry-picked evidence to conclude that repealing the estate tax would create 1.5 million jobs. Entin concluded that estate tax repeal would magically increase revenue. To say these people have controversial views on the effects of tax cuts would be an understatement.

JCT always considers the effects of changes in tax policy on individual and business’s behavior. But only when it considers certain major tax legislation, such as Rep. Dave Camp’s tax reform plan, does JCT provide dynamic analysis, which considers possible impacts of the policy change on the size of the economy overall. Currently, this analysis provides a wide range of scenarios because no one can agree on which model and which assumptions are correct.

For example, Camp’s reform plan is, based on conventional revenue-estimating, revenue-neutral in the first decade. (It loses $1.7 trillion in the second decade, but that’s a different story.) The dynamic analysis provided by JCT provided eight different scenarios about the dynamic impact on revenue, ranging from a low of $50 billion to a high of $700 billion. Naturally Camp chose to highlight the version that speculated that dynamic effects would raise $700 billion over a decade and ignored the rest.

Sen. Rob Portman has introduced a so-called Accurate Budgeting Act that would require JCT to provide a single dynamic score for tax legislation. The House passed a similar bill in April. Given the range of uncertainty and lawmaker’s desire to clutch at whatever analysis presents the rosiest assessment of their proposals, this could warp the estimating process and cause a lot of misinformation.


CTJ Report: Extenders Bill Is a Wasteful Corporate Giveaway


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After President Barack Obama’s veto threat last week ended discussion of a $450 billion package of tax breaks mostly benefiting businesses, the House of Representatives on Wednesday approved a smaller bill, H.R. 5771, that would extend most of the tax cuts for one year at a cost of $42 billion.

A new report from Citizens for Tax Justice explains that while the President deserves credit for stopping a much bigger corporate giveaway, even the $42 billion bill is an absurd waste of money from a Congress that has been unable to find a way to fund basic public investments like highways and bridges.

Here are just a few of the problems with H.R. 5771:

Most of the tax breaks fail to achieve any desirable policy goals. For example, they include bonus depreciation breaks for investments in equipment that the Congressional Research Service have found to be a “relatively ineffective tool for stimulating the economy, a tax credit for research defined so loosely that it includes the work soft drink companies put into developing new flavors, and a tax break that allows General Electric to do financial business offshore without paying U.S. taxes on the profits.

The tax breaks cannot possibly be effective in encouraging businesses to do anything because they are almost entirely retroactive. The tax breaks actually expired at the end of 2013 and this bill will extend them (almost entirely retroactively) through 2014. These tax provisions are supposedly justified as incentives for companies to do things Congress thinks are desirable, like investing in equipment or research, but that justification makes no sense when tax breaks are provided to businesses for things they have done in the past.

The bill increases the deficit by $42 billion to provide tax breaks that mostly benefit businesses, even after members of Congress have refused to enact any measure that helps working people unless the costs are offset. The measures that Congress refused to enact without offsets include everything from creating jobs by funding highway projects to extending emergency unemployment benefits.

 

Read the full report.


Why Now May Be the Time to Implement Higher Gas Taxes


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Earlier this year, copious potholes on highways and roads due to severe winter weather conditions exposed the harsh truth about our nation’s transportation funding: there’s not enough of it, and potholes and other crumbling infrastructure could become the norm if the states and the federal government don’t address the issue.

Twenty-four states have gone a decade or more without increasing their gas tax, and 16 states have gone two decades or more without an increase. The last time Congress increased the federal gas tax was in 1993.

A blog in Wednesday’s Washington Post pondered whether now is the time for the federal government to raise the tax since gas prices have dropped to levels last seen four years ago. While there will not be any movement on the federal level in the short term, a couple of states are weighing increases. 

South Carolina Gov.  Nikki Haley and a majority of House members have historically refused to increase the state’s gas tax, but The State newspaper reported that lawmakers are increasingly recognizing that the South Carolina’s transportation infrastructure needs are woefully underfunded. Perhaps a hike in the gas tax isn’t that unrealistic.  A state Department of Transportation report released earlier this year found that the state needs to generate an additional $43 billion over the next 25 years to meet those needs.

South Carolina’s gas tax is one of the lowest in the country (PDF) and hasn’t been raised in more than 25 years. After adjusting for inflation, ITEP found that the state’s current gas tax is lower today than at any point in history – going all the way back to the tax’s creation in 1922. For example, while the 2 cent gas tax that South Carolina levied in 1922 may sound very low to today’s drivers, in the context of the 1922 economy it was actually higher than the 16 cent gas tax South Carolina levies today. In fact a 2-cent tax in 1922 is roughly equivalent to a 28.3-cent tax in today’s dollars. Simply restoring the South Carolina gas tax to the same inflation-adjusted levels would represent a big step toward fully funding the state’s transportation needs. More and more states are realizing that undoing inflationary tax cuts is the most straightforward way to keep their infrastructure from crumbling beneath their feet.

In Michigan, Governor Rick Snyder is putting pressure on the House of Representatives to follow in the footsteps of the Senate and pass legislation that would replace both the state’s current 19-cent gas tax and 15-cent tax on diesel with a tax on the average wholesale price of gas. Based on current gas prices the tax rate would increase to 44 cents in 2018 and raise an additional $1.2 billion for transportation by 2019.   The Governor admits this is asking representatives to take a “tough vote”, but it’s one that the Senate already took by a nine-vote margin (23-14). Gov. Snyder said of the state’s infrastructure crisis, “Every day that passes it's only going to get worse. Pothole season isn't going to be any better next year.”

Because this legislation links the gas tax to the wholesale price of gas the state is putting itself in a better position to ensure that transportation funding keeps up with inflation overtime. 

Policymakers in South Carolina and Michigan aren’t alone in their quest for dealing with infrastructure woes. ITEP’s report State Gasoline Taxes: Built to Fail, But Fixable concludes that the poor design of gas taxes “has resulted in sluggish revenue growth that fails to keep pace with state infrastructure needs.” ITEP recommends raising gas taxes especially in states that haven’t increased their taxes in several years, restructuring gas taxes to take into account increased fuel efficiency and construction costs, and offsetting regressive gas tax hikes with targeted low-income tax relief.

In this political environment, tax increases may be a tough sell. But roads aren’t going to fix themselves, and the D-grade results of inadequate transportation funding will only get worse. States and the federal government should present and consider serious policy proposal for raising gas taxes to repair our nation’s roads and bridges.

 


Dave Camp's Reform Plan Should Not Be the Starting Point for the Tax Debate


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There was only one detailed tax reform plan introduced during this Congress, and Hill staffers of both parties are calling it a starting point for tax reform discussions in the next Congress. But there’s a huge problem. The plan, introduced by Rep. Dave Camp, is a $1.7 trillion tax cut for corporations and the wealthy.

Republican and Democratic congressional aides spoke at an event focused on tax reform two days after the midterm elections. Even the Democratic aides said that the plan, introduced by Camp, a Republican, addressed tax reform “in a revenue-neutral, responsible way,” and that the plan “was a great contribution to the discussion.” Here’s why they’re wrong.

Rep. Camp, the outgoing chairman of the House Ways and Means Committee, claimed that his plan would be revenue-neutral, meaning it would end some loopholes and breaks but use all the resulting revenue savings to offset reductions in tax rates. He also claimed that it would be distributionally neutral, meaning, for example, that the richest one percent of Americans would contribute about the same percentage of federal tax revenue as they do today.

These sound bites from Camp are extremely misleading. Citizens for Tax Justice studied the plan and concluded that they would be true only in the first decade after enactment, which is the typical period of time that Congress’s tax analysts examine for tax proposals. But Camp uses various timing gimmicks to ensure that the true costs of his plan would not appear until later, outside the window of time that lawmakers usually pay attention to. CTJ concluded that in its second decade, the Camp tax plan would reduce revenue by $1.7 trillion. That’s $1,700,000,000.

For example, the statutory corporate income tax rate would be reduced from 35 percent to 25 percent, but that would be phased in over a five-year period. Thus the full cost of this rate reduction would therefore not show up in the first ten years.

Another of Camp’s gimmicks involves changing the rules for well-off taxpayers who make voluntary extra contributions into their retirement plans. Camp would encourage or force people to put a large share of these contributions, which are currently deductible, into nondeductible Roth IRAs. These lost tax deductions are estimated to raise $230 billion over the first decade. But when people eventually withdraw funds from Roth IRAs, the withdrawals would be tax-free. So in the second decade, the change would lose almost as much revenue as it raised in the first decade.

It is possible that Democratic staffers complimented Camp’s budget-busting tax reform plan merely to contrast it to the far worse approach Camp and the rest of his party put forward more recently. The Republican-controlled House approved bills to make certain temporary tax breaks permanent without offsetting their costs and without addressing broader problems with the tax code. (More on that here.) These bills, the Democratic staffers argued, were a step away from tax reform. That’s true as far as it goes.

But the conversation at the tax reform event became more alarming when a moderator asked the aides how everyone on the Hill should think about revenue as the next Congress discusses tax reform. Should lawmakers choose a specific amount of revenue that should be raised, or should lawmakers agree to pursue a tax reform that is revenue-neutral? Even the Democratic staff discounted the importance of revenue, replying that lawmakers and their staffs should try to “get the policy right” without setting any revenue goal.

This approach to tax reform is outlandish. The point of the tax system is to raise revenue to pay for public investments and services. We need more of it.

Why We Need More Revenue

The U.S. is one of the least taxed of all developed countries. And Washington seems to suffer from amnesia about how our lack of revenue has hurt us recently.

To take just one example, no one seems to remember that in 2011 Congress declared a budget emergency and enacted the Budget Control Act, which imposes more than $100 billion a year in automatic spending cuts (sequestration) for several years. When sequestration went into effect, it cut into things that most Americans would say are investments in our future, cutting 600 medical research grants and eliminating 57,000 Head Start slots.

A last-minute deal in Congress partially undid these cuts for 2014 and 2015, but they will likely return in 2016, when sequestration will be fully in effect once again. It would be hypocritical and shortsighted for lawmakers to spend their time discussing a tax reform proposal that raises no new revenue (or one that loses revenue) even as they tell American families that the government cannot afford to provide early education, research or other basic investments in their future.


Congress Should Reject Half-Trillion-Dollar Corporate Tax Giveaway


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The lame-duck Congress is poised to conclude by passing a $450 billion package of deficit-financed tax breaks that primarily benefit businesses. Democratic leader Sen. Harry Reid is negotiating a deal with House Republicans, according to news reports.

The bill would make permanent several temporary tax breaks for businesses and extend others for two years without offsetting the cost. This Congress, which has refused to provide measures such as emergency unemployment benefits or highway projects unless the costs were offset, should not make one of its final acts a package of special interest tax breaks that fail to achieve any desirable policy goals. President Barack Obama has wisely threatened to veto the emerging deal.

It is especially troubling that both Democratic and Republican members are supporting tax extenders yet continue to ignore two temporary tax measures that should be made permanent, provisions that boost the Earned Income Tax Credit (EITC) and Child Tax Credit (CTC) for low-income, working families. These expire at the end of 2017 under current law.

Bill Makes Permanent Problematic Temporary Tax Breaks
Earlier this year, the Senate Finance Committee approved a limited package of two-year tax breaks, which is the sort of tax extenders legislation Congress has enacted in the past. A CTJ report explained that even a more limited bill would provide $85 billion in tax cuts that mostly go to businesses and fail to achieve policy goals.

The House of Representatives took an approach that was even more irresponsible, approving bills that would make many of the most costly and least effective tax breaks permanent.

To be sure, some of the proposed permanent tax breaks cost relatively little and achieve a policy goal that is not entirely unreasonable, such as an increase in the break for people who take mass transit to work. But the vast majority of the provisions that would be made permanent are costly breaks that do not seem to accomplish any policy goal. Here is some of what we said in our report earlier this year about these breaks:

The Research Tax Credit
The research credit needs to be reformed dramatically or allowed to expire. Accounting firms are helping companies obtain the credit to subsidize redesigning food packaging and other activities that most Americans would see no reason to subsidize. These firms also approach businesses and tell them that they can identify activities the companies carried out in the past that qualify for the research credit, and then help the companies claim the credit on amended tax returns. When used this way, the credit does not accomplish the goal of increasing business research.

Deduction for State and Local Sales Taxes
Lower-income people pay a much higher percentage of their incomes in sales taxes than the wealthy, but lower-income people also are unlikely to itemize deductions and are thus less likely to enjoy this tax break. In fact, the higher your income, the more the deduction is worth, since the amount of tax savings depends on your tax bracket. People earning less than $60,000 a year who take the sales-tax deduction receive an average tax break of just $100, and receive less than a fifth of the total tax benefit. Those with incomes between $100,000 and $200,000 enjoy a break of almost $500 and receive a third of the deduction, while those with incomes exceeding $200,000 save $1,130 and receive just over a fourth of the total tax benefit.

Section 179 Small Business Expensing
Section 179 is an accelerated depreciation break for smaller businesses, allowing them to write off most of their capital investments immediately (up to certain limits). A report from the Congressional Research Service reviews efforts to quantify the impact of depreciation breaks and explains that “the studies concluded that accelerated depreciation in general is a relatively ineffective tool for stimulating the economy.”

Bill Extends More Than 50 Special-Interest Tax Breaks for Two Years
As explained in CTJ’s report, many of the remaining more than 50 tax breaks that would be extended for two years under the deal are also bad policy. For example, two provisions encourage U.S. corporations to shift their profits offshore. One of these breaks is the active financing exception (the G.E. loophole), which provides an exception to the general rule that corporations cannot defer paying U.S. taxes on offshore income when it takes the form of interest (which is easy to manipulate for tax avoidance purposes). Another is the seemingly arcane “CFC look-through rule” which aided Apple’s infamous tax avoidance schemes.

EITC and CTC Expansions Not on the Table
Expansions in the EITC and CTC that were first enacted as part of the economic recovery act of 2009 were last extended in the “fiscal cliff” legislation of early 2013. That law maintains these provisions through the end of 2017. The changes make the refundable part of the CTC more accessible to parents with very low earnings and increase the EITC rate for families with three or more children and for some married families.

A report published by Citizens for Tax Justice during the fiscal cliff debate concluded that 13 million families with 26 million children would be affected in 2013 by these provisions. The report includes national and state-by-state figures.

Congress Should Not Pass a $450 Billion Business Giveaway
The 113th Congress has had two years to make its mark and pass important legislation that would benefit ordinary Americans. At so many turns—from expanding emergency unemployment benefits, to passing transportation funding—they chose gridlock. In fact, Republican members used the deficit as a scapegoat for not doing anything for ordinary working people. This Congress should not make deficit-financed tax breaks that primarily benefit businesses one of its final acts. If the lame-duck Congress insists on making its mark on the tax system by making temporary tax breaks permanent, the EITC and Child Tax Credit expansions should be their top priority.

 


White House Faces Opposition After Nominating Corporate Inversion Adviser to Treasury


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File this in the category of you can’t make this stuff up. The U.S. Treasury Department’s next high-ranking political appointee may be Antonio Weiss, a Wall Street dealmaker who helped orchestrate major corporate inversion deals. This comes just two months after the administration announced regulatory changes to address the inversion crisis. Needless to say, the nomination is not sitting well with some Democratic lawmakers.

On Wednesday, Senator Elizabeth Warren of Massachusetts took to Huffington Post to tear into the Obama administration for nominating Weiss to serve as Under Secretary for Domestic Finance. Warren has many objections to Weiss, but the one that stands out is that he “helped put together three of the last four major corporate inversions that have been announced in the U.S.” One of these deals was Burger King’s pending acquisition of Tim Hortons, the Canadian coffee and donut chain, for the purpose of claiming that the newly merged corporation is based in Canada rather than the U.S.

Warren is not satisfied with the Administration's response to criticism:

“The response from the White House to these concerns has been two-fold. First, they say that Mr. Weiss was not involved in the tax side of the Burger King deal. But let's speak plainly: This was a tax deal, plain and simple. It was designed to reduce Burger King's tax burden, and Weiss was an important and highly-paid part of the team. Second, the White House claims that Mr. Weiss is personally opposed to inversions. Really? Did he work under protest, forced to assist this deal against his will? Did he speak out against tax inversions? Did he call out his company for profiting so handsomely from its tax loophole work?”

Prompted by public outcry over multiple major corporations’ inversion deals, the administration on September 22 announced regulations intended to slow or halt inversions by making them less financially enticing. The nomination re-enforces Warren and others’ concerns that Wall Street bankers are over-represented in senior administration positions.

On Thursday, Senator Richard Durbin of Illinois, an outspoken advocate of legislation to stop corporate inversions, joined the chorus. Anyone in corporate America who hoped that the lame duck Congress is too distracted to be angry about inversions might be very disappointed.


"Research" Tax Credit Used to Develop Soft Drink Flavors and Machines to Replace Workers


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The tax extenders legislation that Congress enacts every couple of years to extend dozens of tax breaks for businesses has been criticized from the right and the left as pork for special interests. Yet Congress is considering making some of these tax breaks permanent. The leading candidate--the research tax credit--is one of the most problematic of the bunch. The credit  subsidizes everything from the development of new soda machines to the invention of kitchen equipment that replaces staff in fast food restaurants.

Many business activities qualifying as “research” are ones that Americans would not want to subsidize. For example, the accounting giant Deloitte openly advertises its services to help the food industry receive the credit for “developing new packaging” or “redesigning existing packaging.” Deloitte tells potential clients, “Developing new product flavors, appearances, textures, health benefits, and extending shelf life are all potentially qualifying activities.”

A Long Island firm is more specific, explaining that the credit can help companies improve “kitchen science” and then lists several activities that presumably qualify for the credit: “PepsiCo researchers utilize ‘flavor fibers’, small chemical sensors, in the test kitchen.” Coca-Cola developed the “Freestyle” soda machine. Using newly developed kitchen equipment, “Chili’s will be able to cut out 40 hours of labor each week.”

The firm even boasts how these activities can allow restaurant chains to replace workers with machines to save costs.

“In addition, many states are considering raises to the minimum wage, including the wage of tipped workers. Meanwhile, fast food workers in cities like New York have staged protests and walk-outs regarding issues of compensation. The ability to reduce labor needs through machine innovation is therefore a major way restaurants can continue to maintain margins.” 

As explained in CTJ’s 2013 report on the research tax credit, one of the major problems is that the definition of qualifying research has never been sufficiently clarified through regulations. Efforts to resolve that at the end of the Clinton years were thwarted by the incoming Bush administration, and have not been revived by the Obama administration.

House Bill Would Expand and Make Permanent the Research Credit without Examining Its Effects

Of course, none of this means that the research credit always goes toward questionable activities. It simply means that lawmakers should look into the matter, particularly as they debate expanding and making it permanent.

Unfortunately, most members of Congress have endorsed legislation that would at least extend the wasteful tax break for two years. Earlier this year the Senate Finance Committee approved, with bipartisan support, a tax extenders bill euphemistically called the Expiring Provisions Improvement Reform and Efficiency (EXPIRE) Act. It would extend for two years more than 50 tax breaks, including the research credit. CTJ described this bill as a legislative travesty because it would increase the budget deficit by $85 billion to provide unnecessary tax breaks for businesses.

But the approach taken by the House of Representatives makes the Senate bill look like a model of fiscal responsibility. The House this year approved several bills that would increase the budget deficit by hundreds of billions of dollars by making some of these business tax breaks permanent. The one that seems to have the most support would make the research credit permanent — and double its cost by increasing the rate at which activities qualifying as “research” are subsidized. This proposal would increase the budget deficit by $156 billion over the coming decade.

The Obama administration sensibly indicated that the President would likely veto the bill if it came to his desk because its costs are not offset.

But some members of the House insist that they will not approve any tax extenders bill unless it also makes the research credit permanent. The implicit threat seems to be that if the House’s demands are not met, Congress will go home without enacting a tax bill and no Democratic member or Republican member will get to extend any of their cherished tax breaks. To which we say, what’s so bad about that?


The Internet and Taxes: Good and Bad Ideas Might Be Combined in Compromise Tax Bill


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Congress is considering two proposals related to taxes and the internet, one that would facilitate state and local governments in exercising their tax authority, and another that would restrict it. The first, a very good idea, would allow state and local governments to require internet retailers (and other remote retailers) to collect sales taxes from customers, just as any bricks-and-mortar store is required to do. The second, a bad idea, would continue and possibly expand a federally imposed ban on state and local governments taxing internet access the same way they tax other services.

A bill in the Senate combines these two proposals as a compromise, but the future of that legislation is cloudy given the vortex of political maneuvering and obstruction in that chamber.

The Good Idea: The Marketplace Fairness Act

The Marketplace Fairness Act would allow state and local governments to require internet retailers and other remote sellers to collect sales taxes from customers, just as bricks-and-mortar stores are required to do.

If a sales tax applies to something you’re buying, you’re supposed to pay it regardless of whether you make the purchase at a store, over the internet, or through a mail order catalogue. But the Supreme Court decided in 1992 that state and local governments cannot require a remote seller (which could include an internet retailer like Amazon if it has no physical presence in a given state) to collect that tax.

So if you buy something online and you’re not charged whatever sales tax applies, you are supposed to send that sales tax payment to the state or local government on your own. Few people comply with that requirement or even know it exists so, in effect, the Supreme Court decision turned us into a nation of sales tax evaders.  

The Court did leave Congress the option of addressing this problem by allowing state and local governments to require remote sellers to collect sales taxes, which the Marketplace Fairness Act would do. The Senate approved the bill last year with 69 votes — including 21 Republicans, 46 Democrats, and 2 independents that caucus with the Democrats.

It’s obvious why the bill has bipartisan appeal. Unlike other bills that mention the word “tax,” this bill does not raise taxes but only makes it possible to collect taxes that are already due (but rarely paid) under existing state and local law. It also addresses a major source of unfairness. Internet retailers are given an unfair advantage over bricks-and-mortar stores because the former allow customers to evade sales tax.

Opposition to the Marketplace Fairness Act sometimes focuses on the complexity a multistate company faces if it must collect the different sales taxes levied by many different jurisdictions. But retailers like Wal-Mart and Home Depot, which sell goods online and also have a physical presence in most states, have been collecting sales taxes on online purchases for years.

The Bad Idea: The Internet Tax Freedom Act

The Internet Tax Freedom Act, first enacted in 1998, banned state and local governments from taxing internet access. This seemed like a bad idea from the very beginning. Some of the same lawmakers who insist that the federal government not interfere with the economy and not intrude upon states’ rights rushed to restrict states’ taxing authority in a way that favored the internet relative to other services. The law was extended several times and is now scheduled to expire on December 11.

If anyone thought in 1998 that the internet was an “infant industry” that needed to be nurtured and subsidized, that argument is surely even weaker today than it was then.

In July, the House approved the Permanent Internet Tax Freedom Act. In addition to making the ban permanent, this bill would also repeal the grandfather provision that allowed seven states that had enacted Internet taxes prior to 1998 to keep those laws in place. This move would cost those states half a billion dollars in revenue each year. And the remaining states would collectively forgo billions in revenue that they could otherwise raise each year.

The Possible Compromise: The Marketplace and Internet Tax Fairness Act

The Marketplace Fairness Act has not advanced in the House and the Permanent Internet Tax Freedom Act has not advanced in the Senate. A group of Democratic and Republican Senators introduced the Marketplace and Internet Tax Fairness Act (MITFA) as a compromise. The bill essentially attaches the Marketplace Fairness Act to a 10-year extension of the ban on taxing internet access, leaving in place the grandfathering provisions for the seven states that levied such a tax before 1998.

As Senate Majority Leader Harry Reid began to advance MITFA in the Senate, House Speaker John Boehner signaled that he will not bring such a compromise to the House floor. It is unclear how this will be resolved. The worst possible outcome would be an extension or expansion of the ban on taxing internet access without action on the Marketplace Fairness Act. Given that Senate supporters of the latter are more than numerous enough to block passage of the former, they should ensure this does not happen.  


Exit Poll Reveals Public Wants Investment in Priorities, Not Tax Cuts


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Senate Republican leader Mitch McConnell of Kentucky, who will lead the chamber as majority leader starting in January said Wednesday that tax reform is one priority he could pursue. But it’s unclear how the caucus he leads could possibly produce a tax reform that the public would support, given exit polling that indicates little interest among voters in the sort or revenue-neutral, rate-reducing tax overhaul that Republicans support.

Hart Research Associates conducted an exit poll for the AFL-CIO in states with key Senate races (Alaska, Arkansas, Colorado, Georgia, Iowa, Kansas, Kentucky, Louisiana, Michigan, North Carolina, New Hampshire).

Voters were asked, “Which one of the following do you think should be the higher priority for the president and Congress right now–(A) reducing taxes on businesses and individuals or (B) investing in key priorities like education, healthcare, and job creation?” A solid 67 percent said “investing in key priorities” and only 29 percent said “reducing taxes.”

It seems public opinion is particularly set against the idea tax reform that is revenue-neutral for corporations (which many Republicans and Democrats, including President Obama, have proposed).

To the question “What should revenue from closing corporate tax loopholes be used for?” 66 percent chose “reduce budget deficit and invest” while only 22 percent chose “reduce tax rate on corporations.”

And the public supports a worldwide tax system, which would subject American corporations’ profits to the same tax rates regardless of whether they are earned domestically or offshore. This is the very opposite of a territorial tax system, which would exempt the offshore profits of American corporations from U.S. taxes and which is the basis of Republican tax reform proposals.

A whopping 73 percent of voters said they would support “increasing taxes on the profits that American corporations make overseas, to ensure they pay as much on foreign profits as they do on profits made in the United States,” while only 21 percent said they would oppose this.

It’s not immediately obvious how pursuing his party’s unpopular positions on taxes could possibly be appealing for McConnell. But he may have no choice. In the House of Representatives, Paul Ryan will likely chair the Ways and Means Committee and could demand action on tax reform and force his hand.

Keep in mind that the tax reform proposal from the outgoing chairman, Dave Camp of Michigan, turned out to be a regressive $1.7 trillion tax cut and was abandoned by his caucus because it was thought to not cut taxes enough. Apparently House Republicans are determined to give away even more revenue and it’s unclear whether they would allow something as trivial as public opposition to change their plans. 


Obscure Law Allows Wealthy Professional Sports Team Owners to Reap Tax Windfalls


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San Francisco Giants fans, giddy from their team’s third World Series win in five years, would be forgiven for scoffing at the notion that their team’s reputation will be worth nothing in 15 years.

Yet an obscure federal tax law allows professional sports team owners to make just that assertion—and to financially benefit from it. A new analysis from the Financial Times suggests part of the impetus behind the L.A. Clippers’ absurd purchase price—at $2 billion, more than 3 times the previous record for an NBA franchise’s sale price—is that new owner Steve Ballmer may be able to receive a tax write off worth more than half of his purchase costs. The source of Ballmer’s tax break, which FT pegs at a cumulative $1 billion, is an obscure tax rule, enacted in 1993 and expanded a decade ago under former Texas Rangers owner George W. Bush, that lets Ballmer reduce his taxable income by the value of something called “goodwill.”

In this case, goodwill is the difference between the $2 billion Ballmer paid for the Clippers and the value of the team’s tangible assets, such as the ballpark and the land it sits on. Goodwill represents intangible assets as varied as media rights, the value of the Clippers logo, and the team’s reputation. Any company with a recognized logo, from Coca-Cola to Burger King, likely has some “goodwill” value associated with the logo and the company’s reputation.

Before 1993, companies were not allowed to gradually write off the value of intangible assets (goodwill) in the same way that they could write off the cost of machinery and equipment. This approach generally made sense because there’s no reason to assume the value of logos and trademarks will decline, let alone disappear. But in 1993, Congress made goodwill an amortizable expense—something to be gradually written off in the same way as items such as heavy machinery, which lose value over time.

The 1993 law allows companies to write off the goodwill of companies they acquire over the fifteen-year period following the acquisition. The law, a boon for corporations, explicitly excluded professional sports teams from using this tax break. But in 2004, President George W. Bush’s American Jobs Creation Act made sure that sports teams were invited to the party, extending the same treatment to sports team owners that had already been given to most other businesses.

The path from the 2004 law to the historically mediocre Clippers’ absurd purchase price seems clearer when one considers Ballmer may be able to get a tax break worth half the cost of the team.

It’s bad enough that the goodwill tax rule allows companies to deduct costs they may never incur—but it’s even worse that wealthy team owners can bid up the asking price of their teams as a tax shelter. In addressing this disturbing practice, Congress could certainly start by reversing the 2004 change allowing sports team owners to use the goodwill tax break, but a more complete response would be to gut the 1993 law.


Tax Foundation's State Business Tax Climate Index: Is the "Tax" Silent?


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Earlier this week the Tax Foundation released its “2015 State Business Tax Climate Index,” the latest in its annual series purporting to provide a single overall ranking of business tax structures in each of the 50 states. States scoring the best on the Index have one thing in common: there is a major tax, usually the income tax, which other states levy that the “best” states don’t. But the report has two major flaws: the Index itself is constructed in a way that is arbitrary at best, and, more vitally, it essentially pretends that tax revenues aren’t used for any public investment that businesses might find valuable.

As a 2013 report from Good Jobs First explains, the report’s Tax Climate Index is arrived at by separately ranking each of the major taxes levied by state and local governments—including corporate income, personal income, sales and property taxes—and then merging those rankings together in an arbitrary way to create a single mega-ranking. There is, of course, no obviously correct way of weighting the importance of these various taxes, and in fact different types (and sizes) of businesses in any given state will likely have very different opinions of the various taxes they pay. But the single most basic flaw of the Tax Foundation report is clearly stated in its title: it purports to rank “State Business Tax Climate” as a free-standing policy choice.

The folly of this approach can be seen most obviously in two findings of the report. First, the only states receiving a perfect “10” grade on any of their specific taxes are those that simply don’t levy the tax. Alaska gets a “10” for not levying a personal income tax. Nevada and Wyoming are awarded separate “10s” for the lack of personal or corporate income taxes. The obvious implication is that from the perspective of the State Business Tax Climate Index, the perfect business tax system is one that doesn’t tax *anything*.

Of course, this is an utterly irresponsible strategy. Architects of the major tax cut pushed through by North Carolina lawmakers last year—in which the state dramatically cut the personal and corporate income tax—are facing persistent criticism that the cuts were fiscally irresponsible, forcing damaging cuts to the state’s education system and likely creating a longer-term increase in local property taxes to pay for the cuts.
Fallout from these controversial cuts is even spilling over into statewide elections in the Tarheel State this fall. In the world of the State Business Tax Climate Index, however, North Carolina’s 2013 tax changes are cheerfully rung up as “the single largest rank jump in the history of the Index.”

This disconnect exists because (as, again, the Tax Foundation makes quite clear) the report is attempting to evaluate taxes taken on their own, without evaluating the impact taxes have on vital public investments. The problem with the report’s hermetically-sealed look at business taxes is that no policymaker reading the report is going to interpret it that way. The unambiguous message sent by these rankings is simply “you should cut business taxes.” In that important sense, the “Tax” in “State Business Tax Climate Index” is silent—it’s all too easy for readers to interpret this report as a recommendation on how states should improve their business climate, full stop.

Constructing a truly useful business climate index, one which attempted to quantify the impact of the spending cuts forced upon North Carolinians by last year’s tax plan on elements of the state’s infrastructure that businesses depend on, would be a herculean task. But the Tax Foundation’s one-sided approach to this task should not be mistaken for a second-best effort at this goal. At best, the report tells readers which states do the best job of pretending public investments don’t cost anything.


Senator Rob Portman: Case Study in Radical, Rightwing Arguments for Slashing Corporate Taxes


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Ohio Sen. Rob Portman’s recent Bloomberg op-ed about corporate taxes reads like a catalogue of Chamber of Commerce talking points. He uses one misleading and inaccurate statement after another to argue that corporations will flee the United States unless we slash our corporate tax and adopt a so-called territorial tax system.          

The Nature of Corporate Inversions

Toeing the corporate line, Portman pretends that corporate inversions involve companies  physically leaving the United States. He writes that, “When companies leave the U.S., they take along jobs and investment, so inversions must end,” and he complains that the anti-inversion regulations issued by the Treasury Department on Sept. 22 do not address “the flaws in our tax system that drive our companies overseas.”

The Chamber of Commerce headquarters in Washington, DC.

Inversion is actually a maneuver by which a corporation claims to the IRS that it is newly based offshore for tax purposes even though nothing about where the business is managed or located has changed. Congress can easily change the laws that allow this pretense, even if lawmakers are unable to settle on a broader overhaul of the tax system.

America’s Corporate Tax Rate

Portman makes use of the old canard that we have “the highest corporate tax rate in the developed world,” which is untrue or at best misleading. The U.S. may have the highest statutory corporate income tax rate among OECD countries, but the effective corporate income tax rate is quite low. CTJ and ITEP examined Fortune 500 corporations that were profitable each year from 2008 through 2012 and found that collectively they paid just 19.4 percent of their profits in corporate income taxes. A third of the companies paid less than 10 percent.

Even more interesting, the study also examined corporations that report earning at least a tenth of their profits offshore and found that two-thirds of these corporations actually paid lower effective rates in the United States than they paid in the other countries where they do business.

Of course, there are countries that have a much, much lower corporate tax rate than the United States or any OECD country. Bermuda and the Cayman Islands have corporate income tax rates of zero percent. Existing loopholes allow our corporations to claim that their profits are earned in these zero-tax countries (or to invert to countries like Ireland that make it even easier to do so). Lowering the U.S. tax rate from 35 percent to 25 percent as Portman advocates, would not solve that problem at all.

Worldwide vs. Territorial Taxation

Portman’s business-backed proposal would actually make corporate tax avoidance worse. He advocates for a territorial tax system, which would exempt corporations’ offshore profits. He ignores that fact that the territorial systems adopted by other OECD countries have caused a crisis of corporate tax avoidance that spurred the OECD’s Base Erosion and Profit Shifting (BEPS) project.

He further toes the corporate line by complaining that the United States imposes its corporate income tax “not only on income companies make at home, but also on income earned around the world,” but fails to mention the tax credit that prevents double taxation of these profits. He notes that corporations are allowed to defer U.S. tax on offshore profits until those profits are repatriated (brought to the U.S.). But his solution, a territorial system, would only expand deferral into an exemption for offshore profits, which is an even bigger break for any company that can make its profits appear to be earned in tax havens.

$2 Trillion Sitting Offshore

Another favored argument among corporations and their allies is to describe offshore profits as “trapped” outside the American economy by our tax system. Portman claims that “$2 trillion that could be reinvested in the U.S. economy sits in foreign bank accounts or is spent in other countries” and apparently the only solution is the sort of tax overhaul he advocates. Actually, the profits that could be repatriated are largely invested in the U.S. economy already, so any attempt to lure them here with lower taxes would be foolish. A December 2011 study of 27 corporations most likely to benefit from such a break concluded that in 2010, 46 percent of the profits held offshore were invested in U.S. assets like U.S. bank deposits, U.S. stocks, U.S. Treasury bonds and similar investments. Other offshore profits are invested in the assets of the offshore business and thus are not likely to be repatriated.

Short-term v. Long-term Revenue Effects

President Obama has said that tax reform overall should raise revenue, but the part affecting corporations and businesses should be “revenue-neutral,” meaning revenue saved from closing loopholes would be used to pay for tax rate reductions. Given that Congress used an alleged budget crisis to enact automatic spending cuts (which will be fully in effect again in 2016) to everything from Head Start to medical research, it’s utterly ridiculous that the President does not seek more revenue from corporations.

Portman wants to be even more generous to corporations than Obama. He complains that Treasury Secretary Jacob Lew has been “saying that the traditional, 10-year budget window shouldn't apply” to the official estimates of any tax reform proposal. This may seem arcane, but it actually means that President Obama and Secretary Lew are trying to stop the sort of tricks included in the tax reform plan proposed by House Ways and Means chairman Dave Camp in February, which Camp claimed was revenue-neutral. CTJ concluded that the plan was revenue-neutral in the first decade but would then loose $1.7 trillion in the second decade.  

Who Pays the Corporate Income Tax?

The most unconvincing piece of Portman’s argument is that that the nation should want to lower the corporate income tax because it’s ultimately paid by working people. But in fact the Joint Committee on Taxation, which provides all official tax estimates used by Congress, concluded in 2013 that 75 percent of the corporate income tax is ultimately paid by owners of corporate stocks and other business assets (the owners of capital). This makes it a progressive tax.

Corporations are capturing a growing share of U.S. income while paying an ever-shrinking percentage of U.S. taxes. Quarterly after-tax U.S. profits have exponentially and continually increased since 2000, only falling briefly during the recession and now raising to the highest levels on record. The U.S. may have a corporate tax problem, but contrary to Portman and his corporate allies’ claims, the problem is not that we’re taxing corporations too much.


Senators Defend LIFO, a Tax Break that Obama and Camp Want to Repeal


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On October 21, fourteen Senators, including nine Republicans and five Democrats, sent a letter to Treasury Secretary Jacob Lew pleading to save a business tax break known as last-in, first-out  (LIFO) accounting, which both President Obama and Republican House Ways and Means Chairman Dave Camp have proposed to repeal as part of tax reform. Over 100 members of the House sent a similar letter to Camp in May. Here’s why defenders of LIFO are wrong.

LIFO is an inventory accounting method that allows some businesses to make their income for tax purposes look smaller than it otherwise would. We tend to think of profit this way: A company creates or purchases products at a cost of $90 and sells them for $100, resulting in a profit of $10. But consider a company that has built up an inventory of, say, barrels of whiskey at different points in time. The barrels it created or purchased five years ago may have cost $80, while those obtained this year cost $90. LIFO allows the company to tell the IRS that the barrels it sold today for $100 were those it most recently obtained (resulting in a $10 profit) rather than those it obtained five years ago (which would result in a profit of $20).

President Obama has proposed to repeal LIFO in his budget plans. Dave Camp, who will be retiring from Congress at the end of this year, included repeal of LIFO in the tax reform plan he released in February.

One reason is that LIFO is an unwarranted tax subsidy. When corporations that use LIFO report profits to their shareholders, they use normal accounting, not LIFO. In the example above, the company would tell shareholders that it made a profit of $20, so why should it be allowed to tell the IRS that it made a profit of just $10?

A second reason is that LIFO complicates tax and accounting rules. A third reason is that LIFO is not permitted under the International Financial Reporting Standards that have been adopted by several countries to streamline the rules for multinational companies, and thus is an obstacle to adoption of these rules by the United States.

The letter from the fourteen Senators supporting LIFO includes a couple of misleading statements. For example, the letter claims that “one of the most troubling effects of the proposed reform is the retroactive tax. If this reform is passed, the penalty to the businesses that used LIFO could extend decades into the past, forcing companies to pay off the ‘reserve’ to which they had legally been entitled.”

When supporters of LIFO talk about “LIFO reserves,” that’s a euphemism for untaxed profits. Returning to the example above, the company that has really profited $20 from selling a barrel of whiskey but is allowed under LIFO to tell the IRS it only had $10 of profit has a “reserve” of $10. In theory, the tax on this reserve is only being deferred, given that the goal of such a business is to sell all of its inventory eventually.

The letter goes on to state that subjecting these “reserves” to normal accounting and tax rules would be a “retroactive” tax increase. Because the idea of a retroactive tax increase seems unfair to most people, opponents of taxes have stretched the term “retroactive” to apply to any tax increase they want to stop. But in this case, the new rules proposed by Obama and Camp would apply to sales going forward. What would change is that a company would use normal accounting rules and assume that it has sold its oldest inventory, rather than its newest inventory. If one thinks of the difference between LIFO and the normal accounting rules as “reserves,” then it is true that companies will have to pay taxes they have deferred on these reserves as companies continue to earn profits from sales going forward.

But a retroactive tax on profits would, in contrast, be something like an increase in tax rates applied to previous years’ income so that additional taxes must be paid this year for income earned in the past — even for a company that has no profits at all this year.

Further, neither the Obama proposal nor the Camp proposal would come fully into effect immediately. Obama’s proposal would be phased in over ten years while Camp’s proposal would be phased in over four years starting in 2019.

LIFO should be repealed as Obama and Camp propose. But one should not overstate the importance of this reform. While Obama’s LIFO-elimination proposal would raise over $100 billion in the decade after enactment according to the Joint Committee on Taxation, it would raise considerably less revenue in years after that.

Because LIFO is largely a way to defer taxes rather than avoid them completely, repeal of LIFO mostly moves forward tax payments that would have otherwise occurred further out in the future. Some estimates suggest that in later years LIFO would raise around only $2 billion a year. Of course, lawmakers have bickered over far less than that.


What Horrors Await Us in Congress after the Election?


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There are two types of tax legislation Congress may enact after it returns to Washington for its lame duck session in November: bad policy and extremely bad policy. 

The Least Bad Scenario

Let’s start with the least terrible scenario, which would involve Congress enacting the Expire Act, the “tax extender” legislation approved by the Senate Finance committee in April. This bill would extend for two years a list of tax breaks so long that almost no one understands them all. (Except us, of course, see our report explaining them.)

The bill is an $85 billion deficit-financed handout to businesses at a time when lawmakers refuse to provide any help to working people hit hard by the recession unless the costs are somehow offset.

You want to extend emergency unemployment insurance? That must be paid for. Want to undo the automatic spending cuts that slashed Head Start and medical research before Congress curbed them last year? Savings were found elsewhere to prevent an increase in the deficit. But businesses get a free pass as Congress shovels another $85 billion in deficit-financed tax cuts at them. If Congress continues this tradition of extending these breaks every couple of years, the cost over the next decade will be around $700 billion.

The tax extenders are also mostly bad policy. Some provide subsidies to businesses for doing certain things, like investing in research or equipment, that they would have done anyway, resulting in a windfall for companies and no clear benefit to the rest of the taxpayers. As our report explains, some of the extenders even encourage offshore tax avoidance by corporations.

However, the damage of this bill pales in comparison to what the House of Representatives has pursued this year.

The Very Bad Scenario

Not satisfied with the Senate’s approach, the House voted to make several of these provisions permanent, which of course has a much bigger price tag and eliminates the possibility of ever getting rid of them, or at least reforming them. The question on everyone’s mind is whether or not House Republicans will demand that tax legislation enacted during the lame duck session must include at least some of these permanent provisions.

Research Credit

One tax break the House has voted to make permanent is the research credit, at a cost of $155 billion over a decade. CTJ has assailed the research credit for subsidizing activities that most Americans would not consider “research.”

“In fact, the definition of ‘research’ is so vague that Congress seems to be inviting companies to push the boundaries of the law and often cross it. The result is the type of trouble associated with accounting firms like Alliantgroup, which is managed by a former high-level staffer of Senator Chuck Grassley of Iowa and has former IRS commissioner Mark Everson serving as its vice chairman. Alliantgroup’s clients range from a hair care products maker who claimed its executives were doing ‘research,’ to a software company who was advised to claim that its purchasing manager was doing ‘research.’”

Bonus Depreciation

Another tax break the House has voted to make permanent is “bonus depreciation,” which is a significant expansion of existing breaks for business investment, at a cost of $269 billion over a decade. The Congressional Research Service's (CRS) review of the research on bonus depreciation found that it does not affect the overwhelming majority of firms’ investment decisions and is an ineffective way to stimulate the economy.

Members of the House majority might clamor for some other tax cuts that they also approved this year.

Repeal of the Medical Device Tax

Enacted as part of healthcare reform, the medical device tax raises a critically needed $26 billion over the next ten years to help pay for the costs of expanding healthcare to millions of Americans. It’s interesting that the House is so eager to award the medical device company Medtronic, which has lobbied for repeal of the tax, even while the same corporation plans to “invert,” and claim to the IRS that it is a foreign company that is mostly not subject to U.S. corporate income taxes. 

Ban on State Taxes on Internet Access

While the argument for restricting state and local governments from placing any tax on internet access was weak back in 1998, it makes zero sense in 2014 to continue to coddle the goliath internet companies by allowing them to escape the kinds of taxes that states impose on other services.

Before leaving Washington, the House voted to combine these provisions into a staggering half-trillion-dollar giveaway as part of the so-called Jobs for America Act.

Wild Cards

Corporate Inversions

If Congress is going to throw $85 billion in tax cuts at corporations, it would seem logical to at least attach one of the proposals that would end the worst tax dodging we have seen in years: corporate inversions. Corporations are basically claiming to be foreign companies to avoid taxes. In a spectacular failure to take responsibility, Congress went home to campaign without closing the loopholes that make inversions possible. The chairman of the Senate Finance Committee, Sen. Ron Wyden, is said to be negotiating with the committee’s ranking Republican, Sen. Orrin Hatch. Sen. Hatch has declared that he could not agree to any anti-inversion legislation unless it met a list of impossible and bizarre conditions, including absolutely no revenue raised and steps taken towards a territorial tax system. A deal between Wyden and Hatch seems unlikely, but it could happen.

Two Offshore Corporate Tax Breaks

The House has not voted to make permanent the two tax extenders that provide breaks for corporations’ offshore profits — but there is reason to wonder if they will try before this Congress ends. One of these breaks is the active financing exception (the G.E. loophole), which provides an exception to the general rule that corporations cannot defer paying U.S. taxes on offshore income when it takes the form of interest (which is easy to manipulate for tax avoidance purposes). Another is the seemingly arcane “CFC look-through rule” which aided Apple’s infamous tax avoidance schemes.


Ireland's Soft Pedaling Tax Avoidance Crack Down


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The Irish government’s announced plans to  phase out the infamous "Double Irish" loophole represents a significant victory for tax justice advocates worldwide who have sought to end this practice, but also leaves an opening for corporations to find new tax avoidance schemes.

The loophole — used by companies like Apple and Google to dodge billions in taxes — allows multinational corporations to route international profits to Irish subsidiaries and then tell Irish authorities that these subsidiaries actually have tax residence in a tax haven such as Bermuda or, in the case of Apple, have no tax residence at all. Irish lawmakers have proposed requiring corporations registered in Ireland to also be tax residents of the country.

The move comes just two weeks after the European Commission ratcheted up pressure on the country by announcing that the special tax deal that Apple cut with Ireland could violate the European Union's trade rules. This crackdown came on top of last year's blockbuster U.S. Senate hearing, where Sen. Carl Levin laid out the breathtaking audacity of Apple's tax avoidance scheme, including its use of Irish subsidiaries to pay nothing in taxes on tens of billions in profits.

The use of Irish subsidiaries to dodge taxes is widespread. A joint 2014 report by CTJ and U.S. PIRG found that more than 30 percent of Fortune 500 companies had at least one Irish subsidiary. While not every company with an Irish subsidiary is necessarily using it to dodge taxes, IRS data indicates that the amount of income being reported as earned in Ireland by U.S. companies is laughably implausible considering that it would constitute as much as 42 percent of the country's overall GDP.

While Ireland's current move appears to be more substantive than the empty gesture it proposed last year in an effort to assuage critics, there is still much to be desired about the proposal. To start, it keeps the loophole in place for all companies currently using it until 2020, which leaves plenty of time for companies to find new tax avoidance schemes or for the country to reinstate the loophole. In addition, Ireland’s announced plans to close the loophole coincided with Irish lawmakers announcing they would enact a new "patent box" tax break, which, depending on the details, could mean creating a substantial new loophole for companies to use.

Though Ireland's decision to close its most egregious tax loophole shows that international pressure can push tax haven countries to change course, such reforms do not fundamentally change the incentive for U.S. multinational corporations to find other offshore tax loopholes to exploit. The way to end this incentive once and for all would be to end the rule allowing corporations to indefinitely defer U.S. taxes on their offshore profits. Short of ending deferral entirely, Congress should pass the Stop Tax Haven Abuse Act, which takes aim at the worst abuses of deferral. At the very least, Congress should not expand deferral by renewing the active financing exception and CFC look-through rule as part of the tax extenders package.


Steris, the latest to renounce U.S. Citizenship, Only Paid a 16.3% Tax Rate Over Three Years


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After announcing Ohio-based Steris Co.’s plans to become British for tax purposes on Monday, CEO Walter Rosenbrough later said on a conference call, “We’re not typically users of aggressive tax policies and I don’t think we are here.”

That’s his story, and he’s sticking to it. But even a cursory look at the company’s financial reports tells another story. Like so many other U.S.-based multinational companies, Steris pays nowhere near the 35 percent statutory federal rate. But early coverage has pointed to Steris’s potential financial benefits due to Britain’s lower 21 percent statutory tax rate.

A Bloomberg story estimates that Steris “set aside about 32 percent of its pretax earnings to pay taxes” over the past three years, and the Wall Street Journal pegs the company’s most recent tax rate at 31.3 percent. This, of course, provides much fodder for anti-corporate tax advocates who argue inversions and other tax shenanigans are justified because the U.S. corporate tax is too high and is what’s driving Steris (and other poor, defenseless health care giants and multinationals) to abandon their U.S. citizenship.

But Steris isn’t writing a check for 32 percent of its profits to the U.S. government. The Bloomberg and Wall Street Journal numbers are both worldwide tax rates. This means the figure includes income earned in other nations, and the foreign taxes the company paid on those earnings. It also includes not just the current taxes the company actually pays in each year, but also deferred taxes, which the company does not pay.

The tax rates that actually matter in the debate over corporate inversions—the current federal taxes, as a share of pretax U.S. profits, that Steris reports each year— paint a starkly different story. Steris’s average tax rate for the last three years was 16.3 percent, less than half the 35 percent statutory federal income tax rate that the company presumably uses at least some of its lobbying muscle to complain about.

In fact, over the same three-year period, Steris reported a foreign tax rate of 28.5 percent, which is well above its 16.3 percent U.S. tax rate. All of this suggests that Steris’s activities in developed nations with real tax systems around the world are generally being taxed at rates at or above those it faces in the U.S.

As we noted Tuesday, it’s clear that prior to its announced inversion, Steris already engaged in foreign tax hijinks, contrary to its CEO’s claims that the company doesn’t aggressively exploit tax policies to its maximum benefit.

Even though about 75 percent of the company’s profits and revenues are earned in the United States, and roughly 90 percent of its assets are stateside as well, the company discloses, in a Houdini-esque flourish, that fully 94 percent of its worldwide cash somehow now resides outside the country, possibly in its tax-haven subsidiaries in the British Virgin Islands and Mauritius.

And that’s probably what Steris’ inversion is all about: the company has gradually accumulated $222 million in offshore cash, much of which is likely U.S. profits in disguise, on which it would prefer to not pay any U.S. tax.

More than three weeks ago, the U.S. Treasury Department announced regulations intended to crack down on corporations seeking to invert to dodge U.S. taxes. But the Obama Administration can only do so much through regulatory action. Congress should take steps to make sure that Steris’s offshore profits—much of which may be untaxed—and offshore profits of other companies seeking to renounce their citizenship are brought back to the United States and fairly taxed.  

 


The Inversion Parade Continues: Steris Announces Pretend Move to Britain


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As we mentioned a couple weeks ago, the Treasury Department cannot fix the inversion crisis by itself. Only weeks after the Obama Administration announced that Treasury will take important regulatory steps to help prevent U.S. -based companies from inverting to foreign havens as a tax-dodging strategy, the Ohio-based Steris Corporation announced its plan to purchase a British health care firm and reincorporate in the United Kingdom.

While Treasury’s new efforts appear to have dissuaded at least one company from going forward with previously-announced inversion attempts, all it appears to have done in this case is to make Steris’s leadership deny that inversion was their idea: Steris’ CEO, Walt Rosebrough, said in a press conference that "[i]t was only our advisers that brought [the tax advantages] to us. It's not naturally something we would think of."

This is a little hard to swallow given the company’s recent history. Steris has subsidiaries in a wide range of tax havens, from the British Virgin Islands and Barbados to Mauritius and Luxembourg. Despite consistently earning more than two-thirds of its revenue in the United States and holding about 90 percent of its assets domestically, the company discloses that, somehow, 94 percent of its cash is currently being held (at least on paper) outside the United States.  Steris now holds a total $222 million in “permanently reinvested earnings” abroad—profits that have never been taxed by the U.S., and after a successful inversion may never be subject to our federal income tax. It’s impossible to know just how much of this cash is sitting in beach-island tax havens, but it seems unlikely that Steris owns a Virgin Islands subsidiary because of that country’s lucrative market for hand hygiene compliance programs (that’s one of the things Steris sells). 

As recently as 2012, the company reported a large cut in its U.S. taxes as the result of what it cryptically describes as “the rationalization of operations in Switzerland.”

So when it comes to tax avoidance, this is emphatically not Steris’s first rodeo.

Even more interesting, it appears that Steris is currently paying lower income tax rates to the federal government than it is to the other nations in which it does business. Over the past three years, the company has faced a current federal tax rate averaging 16.3 percent—well below the 28.5 percent foreign tax rate Steris paid on its overseas profits over the same period.

If Steris’ inversion is a naked attempt to avoid paying any taxes on its offshore cash, will the Treasury Department’s new regulatory strategy prevent it? No. As CTJ’s Rebecca Wilkins points out, the Treasury “can make getting at that offshore cash a longer and more complicated process, but ultimately cannot stop Steris from dodging taxes—they can only slow them down.”

All the more reason why the next Congress should do what this Congress couldn’t find the courage to—enact legislative fixes that will stop inversions in their tracks.


Former CBO Director Holtz-Eakin on Dynamic Scoring: Revenue Estimating Is Already a Big Guessing Game So Why Stop Now?


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An article in today’s Politico (subscription only) describes plans by congressional Republicans to change the budgeting rules to incorporate “dynamic scoring” of tax proposals should they gain control of the Senate.

Dynamic scoring is a fancy way of claiming tax cuts partly or completely pay for themselves.

This might sound strange to anyone not familiar with the fuzzy math employed by proponents of tax cuts. They rest on the extreme version of “supply-side” economics, promoted most prominently by Arthur Laffer, which claims tax cuts encourage work and investment so profoundly that the subsequent increase in incomes and profits will result in a revenue increase that partly or completely offsets the revenue loss from the reduction in tax rates.

Dynamic scoring is sometimes used to describe a way of estimating the revenue impact of tax proposals that accounts for this supposed effect on the broader economy. The official revenue estimates already do incorporate expected behavioral changes resulting from new tax policies, but not changes to the broader economy, which most economists consider too uncertain to predict.

If tax cuts really did pay for themselves to any significant degree, of course politicians of both parties would rush to enact more of them, knowing there would be little or no cost. But, alas, supply-side economics has been disproven so many times that even most members of Congress can understand the evidence stacked against it. Most famously, a report from President George W. Bush’s Treasury Department failed to find a positive dynamic effect of his tax cuts and concluded that they must be paid for somehow.

But Politico reports that Congress could, nonetheless, start to incorporate these supposed dynamic impacts if Rep. Paul Ryan, who chairs the House Budget Committee and is expected to chair the Ways and Means Committee next year, gets his way. He has long proposed steep tax cuts and has been vague on how he would avoid an increase in the budget deficit.

As several experts quoted in the article explain, there is simply no agreement among economists about how tax cuts affect the broader economy, which makes it impossible to incorporate such effects into an apolitical revenue-estimating process for Congress that is trusted by everyone. In fact, no one really even knows if cutting taxes encourages most people to work and invest more (because they get to keep more of their income) or less (because they can work and invest less and still achieve whatever after-tax income goal they have set for themselves).

Douglas Holtz-Eakin, former director of the Congressional Budget Office and economic adviser to George W. Bush and John McCain, is untroubled by the uncertainty involved. Politico tells us:

Holtz-Eakin recalled being asked to determine how much providing terrorism risk insurance would cost the government, which required him to predict the next terrorist attack. Another time, he said, he was asked to forecast — before the Iraq War even began — how much it would cost to pay $100,000 to the survivors of each soldier killed. “Tell me how to do that,” he said. “There are a lot of assumptions in all of this” and “I don’t think that dynamic scoring is all that different… The mystery surrounding it is overrated.”

Holtz-Eakin’s logic apparently is that because revenue-estimating sometimes involves guesswork, it’s alright if we incorporate a whole lot more guesswork. That’s hardly reassuring.

Perhaps the most damning aspect of the push for dynamic scoring is that proponents refuse to acknowledge the flipside to their logic. If tax cuts increase economic growth by putting money in the economy, then surely government spending could have the same effect. Does anyone really doubt that highways that facilitate commerce or education that provides a productive workforce help grow our economy? If tax cuts grow the economy enough to partly or completely pay for themselves, couldn’t the same be true of federal spending? It’s safe to say you won’t hear Paul Ryan talking about that.


New Report from Global Witness: Anonymous Company Owners and the Threat to American Interests


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What do a Manhattan skyscraper secretly purchased by the Iranian government, a Louisiana Congressman hiding half a million dollars in bribes and a Russian crime boss stealing $150 million from investors all have in common? All were made possible by shell companies incorporated in the United States, according to a new report from Global Witness.

It explains that some states in the U.S. require less identification from people forming corporations than they require from those applying for a library card. We have long noted that one result is the use of anonymous corporations formed in the U.S. for tax evasion by Americans and by people from all over the world, which in turn makes it much more difficult to persuade other countries to cooperate with the U.S. in stamping out tax evasion.

On the bright side, there is a bill — with Democratic and Republican cosponsors in both the House and Senate — that would address this problem. The Incorporation Transparency and Law Enforcement Assistance Act would require that each state finds out and records who is incorporating each company and make that information available for law enforcement purposes.

Arguably this information should be made public for all, but this bill would nonetheless vastly strengthen efforts to crack down on tax evasion, money laundering, terrorist financing and other crimes.


Why Congress Still Needs to Act on Corporate Inversions


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The Obama Administration’s action on Monday to crack down on corporate tax dodging by companies claiming to be foreign (corporate inversions) is the right decision, but Congress needs to act to address the significant problems that remain.

Current tax law blocks only the most outrageous attempts by American corporations to claim a foreign address for tax purposes. The administration's actions enforce the law more effectively but do not strengthen it in any fundamental way.

For example, after a U.S.-foreign merger, the law treats the resulting merged company as domestic if it is 80 percent owned by former shareholders of the U.S. company. The new regulations will prevent corporations from avoiding this rule by, for example, making a party to the merger appear smaller or larger than it really is to create the appearance that the 80 percent threshold is met.

But Congress should fundamentally strengthen the law by lowering the threshold from 80 percent to 50 percent, which the Stop Corporate Inversions Act would accomplish. Under this approach, an American corporation could no longer merge with a foreign company and claim to be a new corporation based abroad even though the majority of its ownership has not changed.

It is also important to eliminate tax benefits that American corporations receive if they become foreign for tax purposes, which motivate inversions. One relates to profits earned in the past (and booked offshore) while another relates to future profits that can be shifted offshore through earnings stripping. Tax experts like Stephen E. Shay, Victor Fleischer and others agree that the plain language of our tax law gives the administration the power to address both of these. Unfortunately the administration’s regulatory action addresses the first problem (avoiding tax on profits earned in the past and booked offshore) but not the second (earnings stripping on future profits).

Congressional action can fully address both problems. First, Congress should require any U.S. corporation that inverts or becomes foreign to pay U.S. taxes it has deferred on profits held offshore. This rule would be similar to the one requiring individuals to pay the income tax they have deferred on capital gains when they renounce their U.S. citizenship.

Second, Congress should end corporations’ ability to strip earnings out of the United States by enacting the strong proposal first introduced by President Obama in his fiscal 2015 budget and recently introduced as legislation by Rep. Mark Pocan of Wisconsin.

These steps, combined with the Stop Corporate Inversions Act introduced by Rep. Sander Levin and Sen. Carl Levin in May, would put an end to the inversion crisis.

While Citizens for Tax Justice agrees with lawmakers that the ultimate goal of Congress should be to enact comprehensive tax reform, the cost of waiting for both parties to come to a sensible agreement is too high.

Congress should immediately enact the anti-inversion reforms outlined here. A decision to wait is a decision to allow more American corporations to pretend that they are foreign simply because loopholes in our tax laws allow it. The victims of inaction will be ordinary patriotic Americans, who pay their taxes every year.


The Estate Tax Is Not Doing Enough to Mitigate Inequality: State-by-State Figures


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Given the focus over the last few years on income and wealth inequality, it's strange that almost no one in Congress has turned to the tax that was explicitly designed to mitigate such inequality: the federal estate tax. A proposal from Sen. Bernie Sanders would do this, and new state-by-state figures from Citizens for Tax Justice demonstrate why Congress should enact it.

Read the CTJ report.

The figures show that under the estate tax rules in effect today 0.1 percent — just one-tenth of one percent — of deaths in the U.S. result in federal estate tax liability. State-by-state figures show that even in "rich" states, the numbers are not much higher. For example, the figure in California is just 0.3 percent of deaths, and in Connecticut it's 0.2 percent of deaths. In other words, the majority of the richest one percent of Americans are likely to be unaffected by the estate tax, thanks to dramatic reductions in the tax in recent years.

Even for the 0.1 percent of deaths that do result in estate tax liability today, the vast majority of the estates involved still go to heirs and charity. For the most recent year of data, more than 72 percent of these estates went to heirs while 11 percent when to charity. (For the 99.9 percent of estates not subject to the estate tax, all of the estate value went to heirs and charity.)

A bill introduced on Sept. 18 by Senator Bernie Sanders of Vermont would restore some of the revenue lost because of those estate tax reductions. The bill would exempt the first $3.5 million of every estate (double that for married couples) from the estate tax, which was the rule in 2009. Opponents of the estate tax will howl dramatically that this is socialism and an attack on freedom, but the figures in CTJ's report show that only 0.3 percent of deaths nationwide in 2009 resulted in federal estate tax liability, so this legislation is not overly radical or far-reaching. Under Sen. Sanders' proposal, the estate tax would still only affect the largest estates. 

President Obama has a similar proposal that would raise $85 billion over a decade, but Sen. Sanders's bill is the better of the two because it would raise more revenue, thanks to a graduated rate structure that recognizes that a family inheriting a billion is even better off than a family inheriting $10 million.

Of course, Congress needs to do many, many things to address the growing inequality in our society. But the estate tax is an obvious place to start.

 

 


New Proposals from Congressman Pocan and CTJ to Stop Corporate Inversions


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The crisis of corporate inversions remains unresolved in Congress, but some new proposals could set the stage for a resolution.

An August report from CTJ explained that the inversion crisis really consists of three related problems. The first is that American corporations are able to use mergers with smaller foreign corporations to claim a foreign address for tax purposes even though almost nothing has changed about their business, management, or ownership. This problem would be addressed by the Stop Corporate Inversions Act introduced by Rep. Sander Levin and Sen. Carl Levin in May.

The second problem is that those corporations claiming to be based abroad (and corporations that really are based abroad) are able to use “earnings stripping” to make profits earned in the United States appear to be earned in countries where they will be taxed more lightly or not at all. This problem would be addressed very effectively by a new proposal from Congressman Mark Pocan of Wisconsin, and less effectively addressed by a proposal introduced by Senator Charles Schumer last week.

The third problem is that profits American corporations earn offshore through their subsidiaries are supposed to be taxed by the U.S. when they are brought to the United States, but after becoming “foreign,” corporations are able to use accounting tricks to escape that rule. An op-ed from Citizens for Tax Justice and Americans for Tax Fairness explains how this problem can be resolved by requiring corporations that give up their American citizenship to pay taxes they have deferred on these profits, just as individuals who give up their American citizenship must pay any tax on capital gains they have deferred. A CTJ report also explains this idea in detail.

The following describes these proposals in more detail.

Earnings Stripping

As CTJ’s August report explained, earnings are stripped out of the U.S. when a U.S. corporation (which after inversion is technically the subsidiary of a foreign parent corporation) borrows money from its foreign parent corporation, to which it makes large interest payments that wipe out U.S. income for tax purposes. The loan is really an accounting gimmick, since all the related corporations involved are really one company that is simply shifting money from one part to the other.

The August report explained that the strongest proposal to address this is the one President Obama proposed as part of his fiscal year 2015 budget plan — which has now been introduced as legislation for the first time by Rep. Pocan. When the President proposed this provision, the Joint Committee on Taxation estimated that it would raise $41 billion over a decade.

It would, with good reason, apply to all corporations, not just those that have inverted. It would allow a multinational corporation doing business in the U.S. to take deductions for interest payments to its foreign affiliates only to the extent that the U.S. entity’s share of the interest expenses of the entire corporate group (the entire group of corporations owned by the same parent corporation) is proportionate to its share of the corporate group’s earnings (calculated by adding back interest deductions and certain other deductible items). A corporation doing business in the U.S. could choose instead to be subject to a different rule, limiting deductions for interest payments to ten percent of its income.

Sen. Schumer’s proposal is much more similar to the one that President Obama included in his previous budget plans, which is much weaker. Schumer’s proposal only applies to inverted corporations. Most importantly, it would bar an inverted American corporation from taking deductions for interest payments to a foreign parent company in excess of 25 percent of its income. The current rule sets the limit at 50 percent.

Accumulated Offshore Profits

The U.S. theoretically taxes all the profits of American corporations, including the profits earned by their offshore subsidiaries. (The U.S. corporate income tax is reduced by whatever corporate income tax has been paid on these profits to foreign governments.) But U.S. corporations are allowed to defer paying U.S. tax until these profits are officially brought to the U.S., which may never happen. As a result, one of the key questions is what will become of the offshore profits that American corporations’ subsidiaries have accumulated offshore after they invert.

In The Hill, CTJ and ATF point out that deferral is a break we give American corporations, supposedly to help them compete with corporations based in other countries. It therefore makes no sense to continue giving corporations this break once they declare that they are no longer American. In other words, the profits held offshore by a corporation that announces a new foreign address should be subject to U.S. taxes as if they are repatriated to the U.S. at that point. This would only be fair, and would certainly discourage inversions. 


Will the OECD's Recommendations to Stop Corporate Tax Dodging Actually Work?


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On September 16, the Organization for Economic Cooperation and Development (OECD) released the first part of its recommendations to implement its 2013 “Action Plan on Base Erosion and Profit Shifting.” Base erosion and profit shifting, or BEPS as it’s known among international tax experts, is the fancy way of describing tax dodging by corporations that use offshore tax havens. CTJ criticized the action plan in 2013 for not going far enough, and it remains to be seen how much good can be accomplished with the reforms that OECD now recommends.

At the same time, the OECD recommendations are surely a step in the right direction. This is important because many members of Congress, including the top Republicans on the House and Senate committees with jurisdiction over taxes, consider even the OECD’s mild reforms to be asking too much of corporations. Rep. Dave Camp and Senator Orrin Hatch issued a statement in June making clear that they would likely oppose enacting OECD’s recommendations into law. Neither has issued any further statement on the matter.

According to one international law expert, it will likely be five to ten years before many countries enact the recommendations into law. But some countries, like the U.K., France and Australia are expected to be early adopters of the changes, and corporations would need to change their reporting methods in order to comply at least in those countries. This could make it easier for other governments to follow.

Some of the significant recommended changes include the following:

—End the ability of corporations to take advantage of loopholes like the U.S.’s “check-the-box,” which essentially allows a company to characterize a tax haven subsidiary in different ways to different governments so that the profits funneled there are taxed by no government at all. (Such tax haven entities are often euphemistically called “hybrid instruments.”)

For example, right now an American corporation can have an Irish subsidiary that pays royalties to its own subsidiary in Bermuda, which it characterizes as a separate corporation for Irish tax purposes so that it can deduct the interest payments from its Irish taxable income. But the American parent company can tell the U.S. government that the Bermuda subsidiary is just a branch of the Irish company and the payment was a payment internal to the company, meaning there is no profit to be taxed.

—End the shifting of corporate profits through certain countries to take advantage of tax treaties in schemes like the “Dutch sandwich.” In the example above, the Irish government might apply a withholding tax to payments made to Bermuda, but not if they are first routed through a country like Netherlands that has a tax treaty with Ireland precluding such withholding taxes. In theory, developed countries have negotiated such treaties with countries they trust to not facilitate tax avoidance. But the system has obviously broken down, as parties to such treaties including Ireland and the Netherlands are now facilitating tax avoidance by huge corporations like Google and Apple.

—Require country-by-country reporting of sales, profits and taxes paid by corporations to tax authorities, who would then have a better handle on when and how these tax avoidance schemes are being carried out. While it would be helpful to have this information made available to tax authorities who do not currently have it, a much stronger reform would make this information public for all to see. In the U.S., the I.R.S. already collects this type of information (which is necessary for certain purposes like the calculation of foreign tax credits in the American system). Providing information to the government makes a difference only to the extent that corporations are doing something that is actually illegal, but the entire point of the BEPS project is that corporations are able to abuse the system legally, thanks to various tax loopholes. The success or failure of the OECD’s attempts to close those loopholes will be known only to the extent that tax reformers, lawmakers and the public can actually see where profits are booked and what taxes are paid by multinational corporations in different countries.

—Implement new rules determining how intangible assets (like patents and royalties) are valued for transfer pricing. This is intended to address one of the thorniest questions and one that the OECD may not be able to solve without more dramatic reforms. When the OECD’s action plan was first released in 2013, CTJ was skeptical that it could work because

“…the OECD does not call on governments to fundamentally abandon the tax systems that have caused these problems — the “deferral” system in the U.S. and the “territorial” system that many other countries have — but only suggests modest changes around the edges. Both of these tax systems require tax enforcement authorities to accept the pretense that a web of “subsidiary corporations” in different countries are truly different companies, even when they are all completely controlled by a CEO in, say New York or Connecticut or London. This leaves tax enforcement authorities with the impossible task of divining which profits are “earned” by a subsidiary company that is nothing more than a post office box in Bermuda, and which profits are earned by the American or European corporation that controls that Bermuda subsidiary.”

Transfer pricing rules require multinational corporations to deal with their offshore subsidiaries at “arm’s length.” This means that, for example, a corporation based in New York that transfers a patent to its offshore subsidiary should, in theory, charge that subsidiary the same price that it would charge to an unrelated company. And if the New York-based corporation pays royalties to the offshore subsidiary for the use of that patent, those royalties should be comparable to what would be paid to an unrelated company.

But this system has broken down. As we have argued before, when a company like Apple or Microsoft transfers a patent for a completely new invention to one of its offshore subsidiaries, how can the IRS even know what the market value of that patent would be? And tech companies are not the only problem. The IRS apparently found the arm’s length standard unenforceable against Caterpillar when that company transferred the rights to 85 percent of its profits from selling spare parts to a Swiss subsidiary that had almost nothing to do with the actual business.

A more dramatic reform could eliminate the problems associated with transfer pricing. For example, CTJ’s tax reform plan would end the rule allowing American corporations to defer U.S. profits on its offshore subsidiaries’ profits. With deferral repealed, an American corporation would pay the same tax rate no matter where its profits were earned and would therefore have no incentive to make profits appear as if they were earned in a zero-tax country.


New S&P Report Helps Make the Case for Progressive State Taxes


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The latest report from Standard & Poor’s Rating Services reminds us that progressive tax reform can help mitigate income inequality and ensure states have enough revenue to fund their basic needs.

As has been documented by everyone from the Federal Reserve Board to Thomas Piketty, the share of income and wealth accruing to the very best-off Americans has grown substantially over the past century. The problem worsened in the years immediately following the financial crisis. This trend raises important philosophical questions about whether low-income Americans really have the same opportunities to share in the American dream that the wealthiest have been granted.

But Standard & Poor’s new report finds that there’s also a more mundane, practical reason to be concerned about inequality: it can make it harder and harder for state tax systems to pay for needed services over time. The more income that goes to the wealthy, the slower a state’s revenue grows. Digging deeper, S&P also found that not all states have been affected in the same way by rising inequality. States relying heavily on sales taxes tend to be hardest hit by growing income inequality, while states relying heavily on personal income don’t see the same negative impact.

This finding shouldn’t be surprising. As we have argued before, it doesn’t make sense to balance state tax systems on the backs of those with the least income.  When the top 20 percent of the income distribution has as much income as the poorest 80 percent put together, relying disproportionately on the poorest Americans to fund state services is not the path to a sustainable, growing revenue stream. The vast majority of states allow their very best-off residents to pay much lower effective tax rates than their middle- and low-income families must pay—so when the richest taxpayers grow even richer, these exploding incomes hardly make a ripple in state tax collections. And when the same states see incomes stagnate or even decline at the bottom of the income distribution it has a palpable, devastating effect on state revenue.

Conversely, when states like California enact progressive personal income tax changes that require the best-off taxpayers to pay something close to the same tax rates applicable to middle-income families, growth in income inequality doesn’t appear to damage state revenue growth significantly.

But the clear trend at the state level has been exactly the opposite: regressive tax systems relying more heavily on sales tax and less on the progressive personal income tax. Far more typical of the most salient tax “reform” ideas afoot at the state level these days is Kansas Gov. Sam Brownback’s hatchet job on the state income tax. And, as a front-page New York Times article reminds us today, states considering a shift from income to sales taxes are likely to regret it. S&P and Moody’s have recently downgraded Kansas’s bond rating precisely because reckless income tax cuts have endangered the state’s ability to pay for needed public investments.

Income inequality and declining state tax revenues are both serious issues that go to the heart of our ability to provide economic opportunity for individuals and businesses. Because of growing income inequality, it is more important than ever for states to move toward a more progressive tax system. Regressive tax systems hitch their wagons to those with shrinking or stagnant incomes.  Progressive tax reform is needed to make our tax code more fair and ensure that income inequality does not do damage to states’ ability to collect adequate revenue over the long-term.


New CTJ Report: Congress Should Require Inverting Corporations to Pay Up Taxes They Owe on Profits Held Offshore


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A new report from Citizens for Tax Justice explains that Congress should change our tax laws to require inverting corporations to pay the taxes they owe, but have deferred paying, on profits they accumulated offshore before inverting. As the report explains, requiring inverting corporations to pay taxes they have deferred on offshore profits would be akin to the existing rule that individuals who renounce their citizenship must pay taxes they have deferred on unrealized capital gains (on appreciation of assets they have not sold). This reform would complement others that have been introduced in Congress to address inversions.

Americans and their lawmakers are increasingly alarmed by corporate inversions, in which an American corporation merges with a smaller foreign one and then claims the foreign country as its address for tax purposes even though little or nothing has changed about where the business is conducted or managed. Burger King’s plans to declare itself Canadian and Pfizer’s stated commitment to pursuing an inversion are only the latest evidence of the crisis.

Under current law, both individuals and corporations are allowed to defer paying U.S. taxes on key parts of their income, but wealthy individuals are required to give up this benefit when they renounce their American citizenship, while corporations are not. Individuals are allowed to defer paying income taxes on capital gains until they sell their assets. But upon renouncing their U.S. citizenship, wealthy individuals are required to give up that benefit and must pay tax on their unrealized capital gains.

Corporations, on the other hand, are allowed to defer paying income taxes on their offshore profits until those profits are officially brought to the United States, and continue to enjoy this benefit even after renouncing their U.S. citizenship. After becoming a foreign company for tax purposes, a corporation is likely to use accounting tricks to ensure those profits are never subject to U.S. taxes.

The CTJ report explains there is no reason to continue granting this tax break to corporations that declare they are no longer American. This is especially true given that after inverting a corporation can often route these offshore profits through its new foreign parent company to get them into the hands of U.S. shareholders without triggering the U.S. taxes that would normally be due upon repatriation.

The most straightforward solution is to change the tax code so that these offshore profits are taxed as if they are repatriated at the point when the company inverts.

This is the one part of the inversion crisis that, so far, is not addressed by any legislation before Congress. A bill introduced in May by Rep. Sander Levin and Sen. Carl Levin would stop inverted companies from being treated as foreign for tax purposes. Legislation introduced this week by Sens. Charles Schumer and Richard Durbin would prevent inverted companies from dodging taxes on future profits through the practice called earnings stripping.

Left unaddressed is the part of the problem described in CTJ’s report — the ability of inverted companies to avoid taxes on the profits they have already earned and hold (at least as an accounting matter) offshore. Edward Kleinbard, former chief of staff to the Joint Committee on Taxation, argues that avoiding U.S. taxes on these profits is one of the major reasons why corporations invert.


Republican National Committee Wants to Abolish the IRS


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abolishtheirs.jpgWith the 2014 election season in full swing, the Republican National Committee (RNC) has found its new fundraising campaign: calling for outright abolishment of the Internal Revenue Service (IRS). While the RNC's new fundraising campaign is not surprising given the IRS's unpopularity and recent controversies, it does promote the deeply irresponsible idea that the IRS is not a critical component of a properly functioning government.

The RNC's campaign depends on its potential donors who will embrace their anger at the IRS and contribute to a campaign that claims it will abolish it, but ignores the fact that there is no viable way to have a functioning federal government without the IRS or some agency performing its exact function. Needless to say, the IRS collects nearly all the money that pays for the federal government, so those calling for its abolition would still need a way to collect the trillions of dollars necessary to fund Social Security, Medicare, the military, highways and the myriad of other crucial services that they support.

Even accepting the fact that this fundraising campaign is just overblown rhetoric, the underlying point that the IRS should be punished through "abolishment" or even just significant spending cuts is destructive. In fact, recent cuts in the IRS's budget have already hamstrung the organization's ability to respond to taxpayers’ needs and directly contributed to poor training and procedures that fueled the agency's recent controversies in the first place. In addition, cutting the IRS's budget actually increases the national deficit because every dollar spent on tax enforcement generates at least $10 in return.

While many GOP candidates have shied away from the irresponsible rhetoric of the RNC, Iowa senatorial candidate Joni Ernst has embraced the RNC's messaging saying that "closing the door" at the IRS would be a wonderful start to fixing the federal government. Similarly, anti-tax conservatives like Sens. Rand Paul and Ted Cruz have long established their conservative bonafides by calling for the abolishment of the IRS. Perhaps more disconcerting than all this rhetoric is the fact that the House GOP has voted to exacerbate problems at the agency by using the IRS's recent unpopularity to push deep cuts to the agency's budget, including a particularly short-sighted cut of a quarter of the IRS's enforcement budget.

Rather than demagoguing about abolishing the IRS, national political parties and their members in Congress should call for a substantial increase in the agency's budget and consider the multitude of thoughtful reforms proposed by groups like the non-partisan National Taxpayer Advocate.


Everyone Who Calls for Repealing the Corporate Tax Is Wrong


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Every now and then something happens — a Senate investigation into Apple’s tax dodging, Burger King’s plan to become Canadian — that demonstrates that our corporate income tax is very ill. Every time, pundits debate how to cure this disease, offering various tax reform proposals. And every time, a few suggest we shoot the patient, that is, repeal the corporate income tax, which is expected to raise $4.6 trillion over the coming decade.

The idea of repealing the corporate tax seems to have just one virtue, which is that it’s simplistic enough to fit into a blog post or op-ed. In every other way this idea is terrible.

The argument made is usually some variation of the idea that corporate profits are eventually paid out as stock dividends to shareholders who pay personal income taxes on them, so there is no need to also subject these profits to a corporate income tax. But in real life that’s not how things usually work.

CTJ published a fact sheet last summer that explained three very important reasons why we need the federal corporate income tax.

First, a corporation can hold onto its profits for years before paying them to shareholders. This means that if the personal income tax is the only tax on these profits, tax could be deferred indefinitely. It also means that people with large salaries could probably create shell corporations that would sell their services. Their income would then be transformed into corporate income and any tax would be deferred until they decide to spend the money, which could be decades later, if ever.

Second, even when corporate profits are paid out as stock dividends to shareholders, under our current system about two-thirds of those stock dividends are paid to tax-exempt entitles, such as pensions and university endowments which are not subject to the personal income tax. In other words, a lot of corporate profits would never be taxed if there was no corporate income tax.

Third, our tax system overall is just barely progressive and it would be a lot less progressive if the corporate income tax were repealed. The corporate income tax is a progressive tax because it is mostly paid by the owners of capital — people who own corporate stocks (which pay smaller dividends because of the tax) and other business assets.

Some have tried to argue that the corporate tax is mostly borne by labor because it chases investment out of the United States, leaving working people with fewer jobs and/or lower wages. But corporate investment is not perfectly mobile and, as a result, the Treasury Department has concluded that 82 percent of the corporate income tax is paid by owners of capital, and consequently, 58 percent of the tax is paid by the richest 5 percent of Americans and 43 percent is paid by the richest one percent of Americans. Congress’s Joint Committee on Taxation has reached similar conclusions.

There are various ways Congress could conceivably repeal the corporate income tax and get around these problems but each presents so many complications and uncertainties that one wonders what could possibly be gained in the effort. One proposal that has received attention would partly offset the cost of repealing the corporate income tax by taxing dividends and capital gains as ordinary income (repealing the lower rates for those types of income) and taxing the gains on corporate stocks each year rather than only when they are realized when the stocks are sold. Those are all fine ideas in themselves, but they don’t make up the revenue loss from repealing the corporate income tax. The net effect of the proposal, as its proponents acknowledge, would be to lose about half the revenue raised by the corporate income tax.

Congress could make additional changes, for example, ending the tax-exempt status of those pensions and university endowments that receive so many stock dividends without paying any tax on them, but that seems politically unrealistic to say the least.

Moreover, repealing the corporate tax could create worrisome problems of tax compliance. For example, Jared Bernstein has noted that we do, of course, have many businesses structured as “pass-through” entities whose profits are subject only to the personal income tax and not the corporate income tax, but these businesses are linked to even greater tax compliance problems.

"One study found that the tax gap — the share of taxes owed but not collected — was 17 percent for corporations and 43 percent for business income reported by individuals. That research is over a decade old, but more recent tax gap research found that business income taxed at the individual level was the single largest source of the gap, and that sole proprietors report less than half of their income to the I.R.S."

The bottom line is that repealing the corporate income tax is a seemingly simple answer that would create far more problems than it would solve and would almost surely result in less revenue, a more regressive tax system, and even more complexity and compliance problems than we have now.


Will Congress Let Burger King's Shareholders Have It Their Way?


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Burger King’s statement that its planned merger with the Canadian donut and coffee chain Tim Hortons is not about avoiding taxes might be one of the biggest whoppers we’ve heard about corporate inversions.

The merger will allow Burger King to claim for tax purposes that it is owned and controlled by a smaller Canada-based company. We’ve heard this song before — several times in the last three months (Medtronic, Mylan, Walgreen and Pfizer) and 13 so far this year. Corporate bosses and their lobbyists continue to claim that they are doing nothing wrong. Gaping loopholes in the law allow them to do this, and without action from Congress or the administration, there is no incentive for corporations to stop exploiting those loopholes. 

Corporate inversions have made so many headlines lately that even people outside the tax world know how big businesses are using the practice to game the system: Buy a smaller foreign corporation, maintain the same executives, continue managing the firm from an office in the United States, maintain most of the same shareholders, but file a bit of paperwork and claim the company is based in a foreign county. In the case of Burger King, that country is Canada. The most likely motivation for this sleight of hand is tax avoidance.

Inversions are confusing partly because corporations pursue them for different reasons. For example, some corporations invert to avoid paying U.S. taxes on the profits they have already earned (or claimed to have earned) offshore. After inverting, corporations can get this offshore cash to their shareholders without paying the U.S. tax that would normally be due. This may not be relevant for Burger King, which has little offshore cash compared to other corporations.

But another reason corporations invert is to avoid paying U.S. taxes on profits earned in America in the future, and this is relevant for a company like Walgreen’s (which was considering inversion until recently) or Burger King. This can be accomplished through earnings stripping, a practice that effectively shifts profits earned in the United States to another country where they will be taxed less. So for Burger King, this means it could continue to earn profits off the burgers and fries its sells to Americans yet use accounting tricks to shift those profits to Canada so they will not be subject to U.S. taxes.

Looking past the technical details, the bottom line is this: It’s insulting that the company intends to continue profiting by selling a quintessentially American product to U.S. consumers but then pretend to be Canadian when the time comes to pay taxes.

Of course, the real insult is that a majority of our elected members of Congress have so far not closed the loopholes in our tax laws that allow this nonsense to continue. Several proposals, which have been described by Citizens for Tax Justice, would accomplish this.

Sadly, our lawmakers’ motto regarding big, powerful corporations seems to be “Have it their way.”


New CTJ Report: Proposals to Resolve the Crisis of Corporate Inversions


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The ongoing wave of American corporations inverting, or reincorporating as offshore companies to avoid U.S. taxes, has resulted in a bewildering variety of solutions being debated in Washington and in the editorial pages. A new report from Citizens for Tax Justice explains how these proposals differ and which are most effective.

The proposals vary in several ways. Some target inversion by stopping the IRS from recognizing the “foreign” status of a corporation that has not actually moved abroad except on paper, while others target the tax dodging practices that inversion facilitates and which provide its true motivation.

Contrary to corporate lobbyists’ claims, corporations do not seek to become foreign for tax purposes simply because other countries have lower statutory corporate tax rates. They do it because inversion makes it easier to use accounting tricks to dodge U.S. taxes. For example, an inverted company can strip earnings out of the American business by making large interest payments to the ostensible foreign company that owns it, and it can use accounting tricks to move offshore profits into the U.S. without triggering the tax normally due when U.S. companies repatriate offshore profits.

An American corporation can accomplish these feats after it creates, through inversion, the pretense that it’s owned by a foreign company, even if this change exists only on paper. So, in addition to changing the basic rules about when an American corporation will be recognized as having become a foreign one (the basic proposal to crack down on inversions), many people in Washington are also thinking about ending these two tax dodges to eliminate the incentives to invert.

Another difference between the proposals being debated is that one approach would do this through legislation while another would accomplish this through regulatory changes under existing law. The regulatory route is important in case Congress fails to provide a legislative solution — which seems increasingly likely given some of the impossible conditions key lawmakers have placed on approving any legislative solution.

There is nothing inevitable about corporate inversions. There is no fundamental reason why corporations that are American in every sense and that benefit from taxpayer-funded services should be allowed to pretend they are foreign when it comes time to pay taxes. Congress and the White House have the tools to solve this problem, and simply need to choose the right ones.


How to Combat the Rapid Rise of Tobacco Smuggling


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According to the Bureau of Alcohol, Tobacco, Firearms and Explosives (ATF), an estimated $7 and $10 billion is lost in federal and state tax revenue annually due to cigarette smuggling, which is astounding considering that total federal and state tobacco tax collections were about $32 billion in 2013. This means that as much as a quarter of all tobacco tax revenue is being lost each year.

One of the biggest drivers of the extensive cigarette smuggling is the substantial differences in state excise taxes. For example, Virginia's state tax is only 30 cents on a pack of 20 cigarettes, whereas New York’s combined state and city excise tax is 19.5 times higher at $5.85 per pack. From a practical perspective, this means that an individual could evade $166,500 in tobacco taxes by simply buying up 50 cases of cigarettes in Virginia, driving them to New York City and then illegally reselling them to retailers in the city.

While some level of smuggling may be inevitable due to the high profitability of this enterprise, the good news is that there are a host of simple measures that state governments can take to combat the flow of cigarette smuggling, including simply increasing the quality of tobacco tax stamps and better record keeping by retailers. Lawmakers in Virginia and Maryland, for instance, have already started to crack down on cigarette smuggling by stepping up enforcement and increasing criminal penalties on smugglers.

On the federal level, Rep. Lloyd Doggett has proposed the Smuggled Tobacco Prevention (STOP) Act, which would require unique markings on tobacco products for tracking purposes, ban the use of tobacco manufacturing equipment to unlicensed persons, require better disclosure by export warehouses and increase the penalty on tobacco smuggling offenses. Taken together, these measures provide the critical framework needed for federal and state authorities to significantly stem the flow of cigarette smuggling.

Taking a step back, it's important for state and federal lawmakers to remember that tobacco taxes are most useful as a mechanism to discourage smoking, rather than a particularly desirable revenue source given that they are regressive and the amount of revenue they generate declines over time. Still, allowing tax evasion to erode this revenue source at the state and federal level is simply unacceptable.


Tobacco Industry Games Rules to Dodge Billions in Taxes


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What's the biggest difference between small and large cigars or pipe and roll-your-own tobacco? Their level of taxation, according to the Government Accountability Office (GAO), which estimates that tobacco companies have managed to dodge an estimated $3.7 billion in federal excise taxes since 2009 by superficially repackaging their products to fit within the legal definitions of the least taxed forms of tobacco.

A Senate Finance Committee hearing last week examined the egregious methods tobacco companies use to accomplish this. One panelist related in his testimony (PDF) that Desperado Tobacco had literally pasted a label saying "pipe tobacco" onto its existing roll-your-own tobacco packages so it could avoid the higher rate on roll-your-own tobacco. Perhaps even more stunning, another panelist noted during the hearing that some companies had added cat litter to small cigars to add enough weight to their product so that it fit the definition of the lower taxed "large cigars."

What's driving these outrageous tactics is the substantial difference in the way each product is taxed. For example, roll-your-own tobacco is taxed by the federal government at a rate of $24.78 per pound compared to the $2.83 per pound rate on pipe tobacco. Similarly, small cigars are taxed at a rate of $50.33 per thousand, whereas large cigars are taxed as a percentage of the manufacturer's price, which in many cases results in a tax of about half that for small cigars. These differences in tax levels are so significant that according to the GAO, over the past few years there has been a dramatic rise (PDF) in both the purchase of large cigars and pipe tobacco along with a simultaneous collapse in the market for small cigars and roll-your-own tobacco, as consumers flock to the lower-priced alternatives.

The best way to solve this tax avoidance by tobacco companies would be for Congress to equalize the level of taxation of the varying tobacco products, which would once and for all end the incentive for companies to repackage their product to fit the different product definitions. In the event of congressional inaction, the Alcohol and Tobacco Tax and Trade Bureau (TTB) also has authority to issue clearer definitions between the varying tobacco products. For example, TTB could require that large cigars be defined as being six rather than three pounds per thousand. But it's unlikely that any definitions the bureau could issue would adequately solve the problem of companies gaming their products.

While tobacco taxes are not the best source of revenue given that they are regressive and decline over time, they still provide billions in much needed revenue at the state and federal level to offset some of the social costs of smoking. For these reasons, lawmakers should put an end to the ridiculous games tobacco companies are playing to avoid paying taxes.


Woody Guthrie on Corporate Tax Inversions


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Some will rob you with a six-gun,
And some with a fountain pen.
Woody Guthrie, “Pretty Boy Floyd” (1939)

Short of cash, you decide to rob a bank at gunpoint. But on your way out the door, the cops arrest you. You say, “Sorry about all this. I’d sure appreciate it though if you let me keep the money.” Fat chance.

But for big multinational corporations that are caught stealing from the U.S. Treasury, letting them keep the money seems to be exactly what Republicans in Congress favor.

Case in point involves the recent wave of American corporations renouncing their U.S. citizenship, on paper, to avoid billions of dollars in taxes. Almost everybody says they agree that this sleight of hand has to be stopped. But Senator Orrin Hatch, the ranking Republican on the Senate Finance Committee, says he’ll support closing this huge new corporate loophole only if the result is “revenue-neutral.” In other words, only if the big corporations get to keep the money.

Hatch is not an outlier. In fact, his screwball position reflects the general view of his party in Congress. Republicans in both the House and Senate are blocking legislative action to stop corporate foreign “inversions” unless the needed reforms are accompanied by a reduction in the statutory corporate tax rate.

“As through this world I’ve wandered,” sang Woody Guthrie, “I’ve seen lots of funny men.” Unfortunately, too many Washington politicians don’t want to make the corporate “funny men” play by the same rules as real people.


Statement: Despite Walgreens' Decision, Emergency Action Is Still Needed to Stop Corporate Inversions


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Following is a statement by Robert McIntyre, director of Citizens for Tax Justice, regarding emerging reports that Walgreen Co. will announce Wednesday that, although it still plans to buy Switzerland-based Alliance Boots, it will not use legal maneuvers to reincorporate as a Swiss company to avoid U.S. taxes.

“Reports are stating that Walgreen Co. has decided to set aside — for now — plans to avoid U.S. taxes by reincorporating as a foreign company. Only the proverbial fly on the boardroom wall truly knows what led the company to reach this decision. But a single company backing off plans to exploit loopholes in our tax code to dodge U.S. taxes does not fix the fundamental problem.

“Congress and the Obama Administration still need to act quickly because many other American corporations such as Medtronic, AbbVie and Mylan are still pursuing corporate inversions, while other major companies such as Pfizer have indicated that they may pursue inversion in the near future.

“Walgreens is a quintessentially American company and an easy scapegoat. But the company’s initial plans to dodge U.S. taxes were merely a symptom of a larger problem. The loopholes in our tax code are so gaping that corporations can simply fill out some papers and declare themselves foreign companies that are mostly not subject to U.S. taxes.

“Congress needs to, at very least, enact the legislation proposed by Sen. Carl Levin and Rep. Sander Levin that would disregard, for tax purposes, attempts by American corporations to claim a foreign status that only exists on paper.

“Refusing to address inversions except as part of comprehensive tax reform would be like refusing to put out a house fire until there is a detailed blueprint for rebuilding the house. Quick action is needed while there is still something to save.”  


"Dynamic Scoring" Advanced Again to Argue Tax Cuts Pay for Themselves


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The idea that tax cuts pay for themselves repeatedly has proven to be nonsense, perhaps most spectacularly when President George W. Bush’s own Treasury Department concluded that his enormous tax cuts did not produce anywhere near enough economic growth to recoup their costs. Yet this repeatedly disproven supply-side economics theory pushed by fringe economist Arthur Laffer and others is alive and well and was most recently promoted at a Ways and Means subcommittee hearing on July 30.

Supply-side economics suggests that by allowing people to keep more of their income, tax cuts encourage people to supply more capital and labor. This supposedly generates such increases in income and profits that the resulting boost in tax revenue will partly cancel out or even exceed revenue loss from the tax cut.

Proponents of tax cuts and supply-side economics have for years called on the Joint Committee on Taxation (JCT), the official revenue-estimators for Congress, to use a method called dynamic scoring to take into account these supply-side effects that allegedly reduce the cost of tax cuts or even result in a revenue increase.

But given the utter uncertainty about these macroeconomic impacts, it is entirely reasonable that they are left out of official revenue scores that Congress and the public must rely on to understand the effects of tax legislation.

Nonetheless, supply-siders and their elected allies twisted JCT’s arm into providing dynamic scoring for the tax reform plan introduced in February by House Ways and Means Chairman David Camp, and this analysis was the focus of last week’s hearing.

JCT found that the macroeconomic growth effects of Camp’s plan would increase revenue “by $50 to $700 billion, depending on which modeling assumptions are used,” over a decade. (CTJ found that while the Camp plan would be revenue-neutral in the first decade, it would lose $1.7 trillion in the following decade, a hole that no dynamic analysis can fix.)

Scott Hodge of the Tax Foundation, a hearing witness, argued that the macroeconomic benefits would have been greater if the Camp plan included more tax breaks. For example, he argued that revenue would actually be higher under the Camp plan if it made permanent the recently expired 50 percent expensing for investment (often called bonus depreciation), as the House of Representatives voted to do with a stand-alone bill in July. CTJ has explained why this tax break, which was projected by JCT to cost $276 billion over a decade, is unlikely to have any economic benefit at all.

The Problem with Dynamic Scoring

Supply-side economists sometimes claim that JCT provides only “static” analysis that ignores behavioral effects entirely, which is not actually true. For example, when JCT estimates the effects of a higher income tax rate on capital gains (profits from selling assets for more than they cost to purchase), it does account for behavioral effects by assuming that some people will want to avoid this tax increase by selling fewer assets. This will reduce the revenue increase that would otherwise result. (A CTJ report goes into great detail about the debate over these assumptions.)

What JCT usually does not take into account are impacts that tax legislation might have on the whole economy (macroeconomic impacts) because these are usually small and always impossible to predict. In fact, economists can’t even agree on the direction of such impacts. For example, a lower tax rate could in theory encourage people to work more because they’re able to keep more of what they earn, but it could also encourage people to work less because they don’t have to work as much to reach whatever earnings goals they’ve set for themselves. In other words, a tax cut could cause the economy to expand or contract.

Yet another problem with dynamic scoring is that its proponents never want to apply the same logic to spending. If tax cuts boost the economy enough to offset part of their costs, then surely the same could be true for public investments such as education and infrastructure, which everyone agrees boost the economy. But don’t expect Arthur Laffer or Dave Camp to be making that argument any time soon.


On Highway Bill, Congress Moves to the Right of Grover Norquist


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On Thursday, Congress ended a chapter of its latest manufactured crisis by addressing the shortfall in the Highway Trust Fund just hours before the Department of Transportation would have been forced to cut funding for state and local projects by 28 percent, sidelining hundreds of thousands of workers.

Approved Thursday, the measure extends funding through May. The House passed it after Republicans rejected tax compliance provisions in the bill first approved by the Senate — provisions so innocuous that they were even blessed by the anti-tax zealot Grover Norquist.

Norquist, head of Americans for Tax Reform, is famous for his so-called “Taxpayer Protection Pledge,” which by signing politicians promise never to raise income taxes no matter how apocalyptic the consequences. But Norquist apparently recognized that revenue provisions in the Senate’s bill were compliance measures, meaning they would not increase taxes owed by anyone but only ensure people would pay what they owe. Nonetheless, key Republicans in the House of Representatives (who are usually quick to please Norquist) insisted that they were in no mood to “give them [the IRS] more tools to harass taxpayers.” This meant that the Senate was ultimately forced to approve the House version of the bill, which did not include the revenue provisions.

How Another Long Foreseen Problem Became a Washington Nail-Biter

How to cover the costs and how long of an extension to provide were just two of the issues that allowed a totally foreseen and easily fixed problem to become another artificial crisis.

The trust fund that finances transportation projects was set to run out, and the Department of Transportation planned to cut funding to state and local governments for these projects by 28 percent starting Friday. Nothing about this was unforeseen. The trust fund has an estimated shortfall of $170 billion over the coming decade because it relies mainly on the 18.4 cent gas tax and 24.4 cent diesel tax, which have remained the same since 1993.

A September 2013 report from the Institute on Taxation and Economic Policy found that if the nation’s federal gas tax had been maintained at the same inflation-adjusted level since 1993, the trust fund would have enjoyed more than $200 billion in additional revenues, including $19 billion in 2013.

Congress ignored this blindingly obvious solution and instead bickered about a short-term measure that would continue funding just for a number of months to provide lawmakers with more time. How could Congress possibly need more time to address a problem everyone has known about for years? That has to do with politics, of course. For example, some lawmakers wanted to provide funding until right after the election, which is when politicians often make politically difficult choices, while some Republicans preferred to extend the trust fund until next year with the expectation that their party would control the Senate and thus the details of a long-term fix.

Taking the latter approach, the House of Representatives had already approved a bill to address the funding gap through May, with an $11 billion cost that would be offset by changes in customs fees and in the timing of pension payments (and thus the tax deductions that are taken for them by employers).

The Senate, on July 30 amended that bill to provide funding only through December and to rely partly on the tax compliance provisions that Senator Wyden, chairman of the Finance Committee, had included in his own bill. In a statement on his bill, Wyden said that his revenue provisions

“… are not tax increases. In fact, the Finance Committee even received a letter from Grover Norquist and the group Americans for Tax Reform saying so. Mr. Norquist is not soft on the question of tax increases, and he has indicated that these provisions are not tax hikes. What these provisions do is crack down on tax cheats and ensure that mortgage lenders provide homeowners with more tax information than they are usually getting today.”

One of the revenue measures would require more reporting related to mortgage interest deductions, another would alter the statute of limitations for overstatements of investment costs, while other provisions would increase certain penalties. Altogether, the provisions would have raised $4.3 billion, which seems like a small sum compared to the drama that has surrounded this debate.


New Bill Would Bar Inverted Corporations from Getting Federal Contracts


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It’s bad enough when an American corporation reincorporates as a foreign company to avoid U.S. taxes even as it benefits from research, education, highways, courts and everything else those taxes pay for. But it’s even worse when these companies are allowed to contract with the federal government and profit from business funded by the American taxpayers.

This is the argument behind the No Federal Contracts for Corporate Deserters Act, a bill introduced in the House and Senate on July 29 to bar corporations that invert (reincorporate as foreign companies) from getting federal procurement contracts.

Corporate inversions have been happening for decades, and Congress has enacted laws that are supposed to prevent corporations from dodging taxes by inverting and prevent inverted companies from getting federal contracts. Those rules were never entirely effective, and companies such as Ingersoll-Rand, which reincorporated in Bermuda before those laws were passed, have found numerous ways to get federal contracts through grandfathering and other loopholes and are doing a billion dollars worth of business each year with the federal government.

But the recent wave of announced inversions is a much bigger problem. Corporations have figured out how to circumvent the rules entirely, adding the slightest sheen of legitimacy to the arrangement by obtaining a smaller foreign company and then claiming that the newly merged, restructured company is based in the foreign country.

This is why the medical device maker Medtronic and the pharmaceutical company AbbVie have recently announced plans to acquire Irish companies and reincorporate in Ireland. Similar moves are being considered by Walgreens and (once again) Pfizer.

In May, several lawmakers introduced the Stop Corporate Inversions Act to strengthen the anti-inversion provisions in the tax rules. The No Federal Contracts for Corporate Deserters Act would update the contractor rules the same way. In other words, the two bills are different ways of addressing the current explosion of companies seeking to invert, providing lawmakers separate opportunities to act.

Under the existing rules, a merger with a foreign company can change almost nothing about the American business and yet it can claim to be a new, restructured entity based offshore, with no adverse consequences. The newly merged company can be managed in the U.S. and have significant business in the U.S., and up to 80 percent of its stock can be owned by the shareholders of the original American corporation — and yet it will be considered a brand new company based offshore for tax purposes, not subject to any bar on federal contracting.

Under the two new bills, this would be impossible unless the newly merged company really does become foreign-owned, meaning less than 50 percent of its stock is owned by the shareholders of the American company, and it is actually managed in the foreign country. That would mean an American corporation could no longer simply buy a smaller offshore company and then fill out some paperwork to create the fiction of being foreign.

As more and more corporations announce plans to invert, Congress is under increasing pressure to act to stop them. But key lawmakers, like Senator Orrin Hatch, the ranking Republican on the Senate Finance Committee, have laid out conditions that make it extremely difficult to imagine how progress will be made during this Congress.


Improving the EITC for Childless Workers: A Real Opportunity for Bipartisan Progress


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While experts have noted the many, many problems with Congressman Paul Ryan’s new poverty plan, the same experts have said that it does include a good idea about expanding the Earned Income Tax Credit (EITC) for childless working people.

Ryan, who chairs the House Budget Committee and is expected to chair the Ways and Means Committee in the next Congress, offers a proposal that is nearly identical to one in President Obama’s most recent budget plan. Rep. Ryan and President Obama agree that the EITC for childless workers should be increased roughly from $500 to $1,000 in 2015. They also agree that the age limit for childless people to receive the EITC should be lowered from 25 to 21, so the credit no longer excludes young people struggling at the start of their working lives when they need to gain work experience.

Several studies have found that the EITC boosts work incentives for low-income people with children, but the EITC for childless people is so meager that it may have little impact. Another problem is that childless, poor adults are the only group of people who often owe federal income taxes even if they live below the poverty line.

Although Rep. Ryan and President Obama agree that the EITC should be increased for childless workers, there are some issues to work out. President Obama (reasonably, in our opinion) proposes to pay for the EITC expansion by closing the “John Edwards/Newt Gingrich Loophole” for Subchapter S corporations and also close the “carried interest” loophole that allows buyout-fund managers like Mitt Romney to pay a lower effective tax rate than many middle-income people. (These proposals are all explained in a CTJ report.) Ryan, on the other hand, proposes to offset the costs by cutting spending.

Nonetheless, the fact that the President and a leading congressional Republican agree on how to change part of the tax code seems nearly miraculous in the current environment.

The Details

The EITC is a tax credit equal to a certain percentage of earnings up to a maximum amount and is phased out for people with incomes above a specific threshold.

Under current law, for childless people working in 2015, the credit will be just 7.65 percent of the first $6,570 in earnings, which equals a maximum credit of just $503 in 2015. The credit will be reduced by 7.65 percent of each dollar of income above $8,220 (there’s a higher threshold for married people). When you work out the math, this means that a single childless person receives no credit at all if income exceeds $14,790.

Ryan and Obama both propose to double the credit rate to 15.3 percent, which would double the maximum credit to about $1,005. They would also increase the income threshold at which the credit begins to phase out from $8,220 to 11,500. This means the credit will not be fully phased out for a single person until his or her income exceeds $18,070.

There is one improvement that appears in Obama’s proposal but not in Ryan’s. Obama would also raise the maximum age of eligibility from 64 to 66 to address the fact that people no longer can receive full Social Security retirement benefits at age 65, as was the case when the existing EITC rules were first enacted.

But overall Obama and Ryan are quite in agreement on what changes are needed. Of course, even under the expansion they propose, childless people would only receive the EITC when their incomes are quite low. But this would nonetheless make the EITC more effective in serving a group that it currently leaves behind.


House Approves Bill that Would Shift Child Tax Credit from Poor to the Better Off Families


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On July 25 the House of Representatives approved a Republican bill that would expand the child tax credit for better off families while doing nothing to extend or make permanent a 2009 provision that expands the credit to the working poor. President Obama has proposed to make permanent the 2009 provision before its scheduled expiration date at the end of 2017, which Congressional Republicans have refused to do.

Figures published by Citizens for Tax Justice illustrate how nationally and in each state, making permanent Obama’s provision would mostly help those families making under $40,000 in 2018, while the Republican bill (H.R. 4935) would mostly help those making over $100,000.

The child tax credit (CTC) provides a maximum tax break of $1,000 times however many children under age 17 a family has. If the family’s income is so low that this amount ($1,000 times the number of children under age 17) exceeds their entire income tax liability, they can receive a refundable credit, which means they actually receive money from the IRS.

The refundable part of the CTC is limited to 15 percent of their earnings above a certain threshold. (The total CTC including the refundable portion cannot exceed $1,000 per child.) That earnings threshold was lowered to $3,000 by the 2009 provision enacted under President Obama. If the 2009 provision expires as scheduled at the end of 2017, the earnings threshold will rise to $14,750, which means it will be much more difficult for very low-income working parents to claim the full credit.

While House Republicans would allow that provision to expire, their bill, H.R. 4935, would expand the CTC in ways that benefit better off families. It would index the $1,000 credit amount for inflation, which would help only those families with enough earnings to receive the full credit even with the higher earnings threshold. The Republican bill would also increase the income level at which the CTC starts to phase out from $110,000 to $150,000 for married couples. Finally, that $150,000 level for married couples and the existing $75,000 income level for single parents would both be indexed for inflation thereafter.

Given that both proposals are projected to cost around $11 billion each year that they are in effect, the House Republican proposal has the effect of shifting money that is going to low-income working families towards better off families.


Hedge Fund Managers in the Hot Seat


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What the heck is a derivative and why do we care?

A derivative is a financial instrument whose value and performance depends on another asset. For example, let’s say a lender owns mortgages worth $100 million. The lender can bundle those together and sell interests in the mortgage pool until all $100 million worth is sold. But if, instead, he sells derivatives contracts whose performance is tied to the performance of the mortgage pool, the lender can sell many times the original face value of the mortgages. As a result, he magnifies the return and also the risk of the pool of mortgages. Anyone remember AIG and the 2008 financial crisis?

The advantages and disadvantages of derivatives are many, but I’d like to focus on just two:

1)      the use of derivatives to game the tax system, and

2)      how derivatives contribute to the financialization of our economy.

On Tuesday the Senate Permanent Subcommittee on Investigations questioned hedge fund managers about their use of a complicated financial derivative known as “basket options” to avoid both taxes and regulatory limits on excessive borrowing. Representatives from Barclays and Deutsche Bank, which developed the strategy that they sold to hedge funds, also testified.

It’s just the latest in a series of investigations about the misuse of derivatives for tax purposes. See, for example, earlier reports about the J.P. Morgan Whale Trades and how offshore entities use derivatives to dodge taxes on U.S. dividends. While there are plenty of reasons why financial managers use derivatives, chief among them is avoiding taxes.

Tax-avoidance derivatives are created to take advantage of loopholes that give some special treatment to particular taxpayers, industries, or types of income. For example, if I own a partnership interest, part of the income I receive may be ordinary income subject to my highest marginal tax rate and some of it may be long-term capital gains that are taxed at a maximum income tax rate of 20 percent. On the other hand, if I own a derivative tied to the performance of a particular partnership and I keep the derivative for at least a year, all of my income may be treated as long-term capital gains. When Congress got wind of this game, they shut it down some years ago.

Unfortunately, Congress just can’t keep up with all of the derivatives that the financial industry invents to game the tax system. That’s the main reason why we need a tax system that taxes all kinds of income at the same rates. Whenever Congress passes a special rule that benefits a certain type of transaction or taxpayer, tax attorneys and accountants quickly come up with ways for their wealthy clients to qualify for the tax break in ways that Congress never intended.

Derivatives also contribute to the financialization of the economy—an increase in the size and importance of the financial sector relative to the overall economy. In 1950, financial services accounted for 2.8 percent of the U.S. gross domestic product. By 1980, that number was up to 4.9 percent and in 2008 in was 8.3 percent.

At some point—and many believe we are there or way past there—continued financialization of the economy has major negative consequences: rising inequality, reduced investment by other sectors, and risk magnification, just to name a few. Derivatives not only add to but compound these negative consequences because there is no limit to the amount of derivatives that can be issued.

Derivatives have another ugly side: many are created in offshore tax haven jurisdictions because they cannot be legally used in the U.S. (or other real countries). The derivatives that contributed to the collapse of Enron at the turn of the millennium and the staggering losses of AIG and other financial institutions in the 2008 financial meltdown were mostly related to transactions in offshore jurisdictions.

Kudos to Sen. Levin and the Permanent Subcommittee on Investigations for putting the spotlight on this important issue. A functioning Congress would take quick action to fix the problem. Sadly, however, too many of our legislators are fervent supporters of evil behavior when it comes to taxes.


Senate Hearing on Inversions Indicates No Bipartisan Progress on Addressing the Crisis


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Today the Senate Finance Committee discussed corporate inversions and other problems with the U.S. corporate tax code but showed no signs of bipartisan agreement on a solution. The hearing was held mainly to address the recent wave of corporations making bids to invert, or restructure (on paper) as foreign corporations to avoid U.S. taxes.

While committee chairman Ron Wyden (D-OR) called for immediate action from Congress to prevent corporations from avoiding taxes by inverting, the committee’s ranking Republican, Orrin Hatch, said his support was conditional on several stipulations that probably cannot be met by any reasonable legislation.

The public focus on corporate inversions began in April as the pharmaceutical giant Pfizer made a bid to merge with a smaller foreign company and then call itself a foreign corporation for tax purposes. The drug store chain Walgreens announced that it was considering doing the same. These were followed by the medical device maker Medtronic and the pharmaceutical companies Mylan and AbbVie.

Senator Wyden had previously said that Congress should enact a sweeping comprehensive tax reform that resolves all the problems with our tax code and that also has provisions addressing such inversions, which would be retroactive to May of 2014 to ensure that companies seeking to invert now are not successful in avoiding U.S. taxes. But as the number of corporations seeking inversions increased in recent weeks, Treasury Secretary Jack Lew called for immediate action. Senator Wyden is now calling for temporary legislation to address inversions until Congress can enact comprehensive tax reform.

Such legislation has been introduced in the Senate by Carl Levin (D-MI) and in the House by his brother Sander Levin, the ranking Democrat on the Ways and Means Committee.

During the hearing, Hatch said he could agree to short-term legislation to address inversions, but only if:
—    it is not “punitive,” which he considers the Levin proposal to be,
—    it is not retroactive,
—    it is “revenue-neutral,”
—    it moves the U.S. tax system closer to, rather than farther from, a “territorial” system, which would exempt the offshore profits of our corporations from U.S. taxes.

The Levin legislation that Hatch finds punitive would change the rules so that the newly restructured corporation that results from one of these mergers would be taxed as a U.S. company if it is majority-owned by the same people who owned the original U.S. corporation, or if it’s managed and controlled in the U.S. and has substantial business here. In other words, an American corporation would not be able to use a merger to undertake a “restructuring” that occurs only on paper and then claim to be a foreign company for tax purposes. This seems entirely reasonable and not punitive at all.

As for Hatch’s opposition to any retroactive change in the tax law, waiting even a couple weeks could result in more corporations that merge and claim to be foreign and able to avoid U.S. taxes forever. And a retroactive provision is not particularly burdensome for these corporations, which are on notice that such a change is likely to apply to any deals made from May on and are able to plan accordingly. In fact, Medtronic and other aspiring inverters are actually writing provisions into their merger agreements that allow them to walk away from the deals if Congress changes the rules to deny the tax benefits of inversion.

Finally, Hatch’s call to move towards a “territorial” system misses the problem completely. Hatch and many of the inverting corporations argue that companies are driven to invert because the U.S. taxes the offshore profits of American corporations when they are officially brought to the U.S. (in addition to taxing their domestic profits). Most other countries have a territorial tax system that only taxes the profits earned in that particular country. Hatch and others argue that inverting companies are trying to free their offshore profits from U.S. taxes.

There are many problems with this argument, and the biggest one is that inverting companies are trying to avoid taxes on the profits they earn here in the U.S., not just profits they earn offshore. Several witnesses at the hearing explained that after inverting, corporations typically engage in earnings stripping, which involves loading the U.S. part of the company up with debt that results in interest payments made to a foreign part of the company and interest deductions that wipe out the U.S. income for tax purposes.

For example, the manufacturer Ingersoll-Rand clearly engaged in earnings stripping after it inverted to become a Bermuda company, swiftly shifting from reporting large annual U.S. profits to reporting U.S. losses or very small profits each year along with dramatically larger offshore profits.

Some members of the Finance Committee complained that U.S. corporate tax rate is too high and that a tax reform that lowers the rate is the only answer. But it has been well-documented that the ultimate goal of much corporate tax maneuvering is to make profits appear to be earned in countries with no corporate tax at all like Bermuda, the Cayman Islands, or the British Virgin Islands. So long as loopholes remain that allow this, no reduction in the U.S. corporate tax rate can address this problem.

Comprehensive tax reform is certainly needed, but that cannot become an excuse for Congress doing nothing in the meantime to stop corporate tax avoidance schemes that will be difficult to reverse once they are in place.


Drug CEO Falsely Claims Inversions Don't Facilitate U.S. Tax Avoidance


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Abbott Labs CEO Miles White is shocked that anyone would see the recent wave of U.S. multinationals seeking to renounce their U.S. citizenship as a tax dodge.

In a July 18 Wall Street Journal op-ed, White suggests that there are no tax benefits to inversion: “Inversion doesn't change a company's tax rate. A company pays the same tax rate in the U.S. after inversion as it does before inverting. A company also pays the same tax rates in foreign domiciles before and after inversion,he wrote.

While it is technically true that inverted companies should continue to pay the 35 percent U.S. tax rate on any U.S. profits, the experience of previous inversions tells us that U.S. tax rates will likely become mostly irrelevant to these companies post-inversion because they will move aggressively to make their U.S. profits appear to be foreign.

For example, the manufacturer Ingersoll-Rand, after inverting to become a Bermuda corporation in 2001, immediately went from reporting annual U.S. profits of hundreds of millions to reporting losses or very small profits each year, while it’s reported profits outside the United States expanded dramatically. This did not reflect any actual loss of U.S. customers or business. Rather, the corporation accomplished this by loaning $3 billion to its U.S. subsidiary, which then deducted the interest payments on the debt to effectively wipe out its U.S. income for tax purposes. It seems likely that this practice, called earnings stripping, would be aggressively used by Walgreens, Medtronic, Mylan, and each of the other large U.S. companies that are currently contemplating an inversion.

It’s sad, but understandable that White would want to make this absurd claim. When Treasury Secretary Jack Lew called for a new “economic patriotism” among Fortune 500 corporations earlier this week, he was tapping into a growing public outrage over offshore corporate tax-dodging. Leading into next week’s U.S. Senate hearing on the ongoing inversion problem, White and other CEO’s are understandably nervous that Congress may take away their new favorite tax-avoidance tools.

But Congress should see White’s claim for what it is: a ruse. Corporate inversions are a brazen effort by large multinationals to avoid paying U.S. taxes. At a time when the nation finds itself with no ability to pay for vital transportation infrastructure, it should be obvious that the billions in tax revenue these companies refuse to pay are billions that must be made up by working families not to mention millions of small businesses that don’t have the luxury of creating a paper headquarters in Ireland.


Congress on the Highway Trust Fund: Our Middle Name Is Danger


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Does the 113th Congress live for an adrenaline rush? The current debate over the nation’s highway trust fund might lead one to think so.

As has been widely reported, the federal Highway Trust Fund, which is supposed to provide a steady stream of long-term funding for the nation’s highway infrastructure, is projected to be depleted by early August, rendering the federal government incapable of paying for hundreds of current and pending infrastructure projects.  In anticipation of this rapidly-approaching deadline, the federal Department of Transportation has sketched a contingency plan that would cut federal transportation spending by 28 percent while idling vital infrastructure projects around the nation.

The good news is that lawmakers have a blindingly obvious solution to this problem at their fingertips: restoring the federal gas tax to something resembling its level in the early 1990s. A September 2013 report from the Institute on Taxation and Economic Policy found that if our federal gas tax had been maintained at the same inflation-adjusted level since it was last increased in 1993, the trust fund would have enjoyed more than $200 billion in additional revenues, including $19 billion in 2013.

Despite having more than two decades to think about it, Congress has refused to acknowledged the existence of inflation, and the federal gas tax has essentially fallen by more than a quarter, in inflation-adjusted terms, since the last gas tax hike.

But not to worry—with less than two weeks before the Highway Trust Fund evaporates, congressional tax writers are elbowing each other aside to engineer a buzzer-beating fix for our highway funding woes. Unfortunately, the proposed fixes rely largely on, “pension smoothing,” a misnomer practice that actually won’t raise revenue over the long haul. Pension smoothing allows companies to contribute less to their pension funds over the next decade, which raises revenue because companies take fewer tax deductions for pension contributions.

The plan would increase corporate tax revenue over the next 10 years. But companies would have to make up the resulting pension shortfall later, which means federal revenue would once again be reduced. Conveniently, this falls outside Congress’s 10-year budget window. This transparent attempt to borrow from future taxpayers would only raise enough money to keep the Trust Fund solvent through May of next year. Congress will then confront exactly the same problem.

Responsibly overhauling the federal gas tax by increasing its inflation-adjusted value to 1993 levels and tying the tax to inflation going forward would help restore the Highway Trust Fund to its former health. If Congress can’t take this medicine now, they’ll have to do so next year. They should just stop the bandage politics of kicking the can down the road and address pressing issues such as the Highway Trust Fund in a real, sustainable way.

 


The House Votes to Treat the Internet Like an Infant


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Somehow, arguments that conservative lawmakers usually make about not interfering with the economy and respecting states’ rights have fallen silent as Congress rushes to pass a bill that provides special treatment for an industry that has grown very profitable and powerful.

The infant of 1998 now has the keys to the American economy.

On Tuesday the House of Representatives voted to make permanent a law banning state and local governments from taxing Internet access just as they tax other goods and services. First enacted as a temporary ban in 1998 (the Internet Tax Freedom Act) under the argument that the Internet was an “infant industry” needing special protection, the ban has been extended several times and is now scheduled to expire on Nov. 1.

As we have argued previously, the infant of 1998 now has the keys to the American economy, and yet Congress is still coddling it by shielding it from taxes that apply to other comparable services, such as cable television and cell phone service.

The pending bill is going one step further than previous extensions by stripping out the grandfather provision that allowed seven states that had enacted Internet taxes prior to 1998 to keep those laws in place. This move would cost those states half a billion dollars in revenue each year. And the remaining states would collectively forgo billions in revenue that they could otherwise raise each year if they chose to tax Internet access.

Members of Congress will take credit for shielding the Internet from taxes but the cost will be borne entirely by state and local governments. In other words, continuing the ban on taxing Internet access introduces distortions in the economy by favoring some industries over others and it interferes with state governments’ ability to raise revenue in the ways they find most sensible.


House Poised to Throw $276 Billion "Bonus" at Businesses


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On Friday, the House of Representatives is scheduled to vote on a $276 billion bill that would make permanent “bonus depreciation.” This huge tax break for business investment was first enacted to try to address the recession early in the Bush administration. Since then, it has been repeatedly re-enacted to try to stimulate the economy during the much more severe recession starting at the end of the Bush administration. It finally expired at the end of 2013.

Here are some reasons why Congress should allow bonus depreciation to remain expired rather than making it a permanent part of the tax code.

1. “Bonus depreciation” has not helped the economy in the past and is unlikely to help the economy in the future.

A July 7 report from the non-partisan Congressional Research Service (CRS) reviews research on bonus depreciation and finds that it has little positive impact on the economy as a temporary measure and is likely to have even less impact as a permanent measure. The report cites surveys of firms that “showed that between two-thirds and more than 90 percent of respondents indicated bonus depreciation had no effect on the timing of investment spending.”

Businesses will invest more only if they expect to have more sales. In a recession, when consumer demand falls, companies won’t invest more even with extra tax breaks. In a growing economy, business investment will naturally go up, with or without extra tax breaks. That’s why firms that take advantage of bonus depreciation are getting a break for investments they would have made anyway.

This is one reason why bonus depreciation provides far less stimulative effect for the economy than many other measures. The CRS report cites estimates that each dollar the government gives up for bonus depreciation increases economic output by just 20 cents, whereas each dollar the government spends on unemployment insurance increases economic output by more than a dollar.

2. Enacting the permanent “bonus” depreciation measure is hugely hypocritical when lawmakers refuse to approve much smaller, but more effective measures.

The House is set to approve this bill, which would reduce revenue by $276 billion over a decade to help businesses, after refusing for months to take up a $10 billion extension of emergency unemployment insurance, which would provide a greater impact for each dollar spent.

Many of the lawmakers who champion this bill, including Ways and Means Committee chairman Dave Camp, refuse to support other changes to the tax code unless they are part of a sweeping, comprehensive tax reform. In fact, Camp and others have even used this argument to oppose a bill that would raise $19.5 billion over a decade by preventing the “inversions” that more and more American corporations are seeking so that they can claim to be foreign companies to avoid U.S. taxes. Camp claims that Congress should not close the loopholes these companies use to pretend to be “foreign” unless it is done as part of a comprehensive tax reform. And yet, he supports a permanent change in the depreciation rules that would reduce revenue by $276 billion over a decade.

3. Bonus depreciation provides many business investments with a negative effective tax rate. In other words, these investments are more profitable after taxes than before taxes!

Companies are allowed to deduct from their taxable income the expenses of running their businesses, so that what’s taxed is net profit. Businesses can also deduct the costs of purchases of machinery, software, buildings and so forth, but since these capital investments don’t lose value right away, these deductions are taken over time

Of course, firms would rather deduct capital expenses right away rather than delaying those deductions, because of the time value of money, i.e., the fact that a given amount of money is worth more today than the same amount of money will be worth if it is received later. For example, $100 invested now at a 7 percent return will grow to $200 in ten years.

Bonus depreciation is an expansion of the existing tax breaks that allow businesses to deduct their capital expenditures more quickly than is warranted by the equipment’s loss of value or any other economic rationale.

The problem this presents is not confined to abstract ideas about the tax code. For example, because the tax code generally taxes the income (profits) of a business, it allows deductions for expenses like interest payments. This means that businesses can invest in equipment with borrowed money and the combination of accelerated depreciation and deductions for interest payments often results in these investments having a negative effective tax rate. This problem exists to some degree with the depreciation breaks that are already a permanent part of the tax code. Bonus depreciation makes the problem considerably worse.

The CRS report explains that for debt-financed investments, the effective tax “rate on equipment without bonus depreciation is minus 19 percent; with bonus depreciation it is minus 37 percent.”

Taxes are supposed to raise the money we need to pay for public programs. But bonus depreciation turns business taxes upside-down, allowing companies to make more money on their investments after taxes than they’d earn if there were no tax system at all.


New Report: Addressing the Need for More Federal Revenue


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A new report from Citizens for Tax Justice explains why Congress should raise revenue and describes several options to do so.

Read the report.

Part I of the report explains why Congress needs to raise the overall amount of federal revenue collected. Contrary to many politicians’ claims, the United States is much less taxed than other countries, and wealthy individuals and corporations are particularly undertaxed. This means that lawmakers should eschew enacting laws that reduce revenue (including the temporary tax breaks that Congress extends every couple of years), and they should proactively enact new legislation that increases revenue available for public investments.

Parts II, III, and IV of this report describe several policy options that would accomplish this. This information is summarized in the table to the right.

Even when lawmakers agree that the tax code should be changed, they often disagree about how much change is necessary. Some lawmakers oppose altering one or two provisions in the tax code, advocating instead for Congress to enact such changes as part of a sweeping reform that overhauls the entire tax system. Others regard sweeping reform as too politically difficult and want Congress to instead look for small reforms that raise whatever revenue is necessary to fund given initiatives.

The table to the right illustrates options that are compatible with both approaches. Under each of the three categories of reforms, some provisions are significant, meaning they are likely to happen only as part of a comprehensive tax reform or another major piece of legislation. Others are less significant, would raise a relatively small amount of revenue, and could be enacted in isolation to offset the costs of increased investment in (for example) infrastructure, nutrition, health or education.

For example, in the category of reforms affecting high-income individuals, Congress could raise $613 billion over 10 years by eliminating an enormous break in the personal income tax for capital gains income. This tax break allows wealthy investors like Warren Buffett to pay taxes at lower effective rates than many middle-class people. Or Congress could raise just $17 billion by addressing a loophole that allows wealthy fund managers like Mitt Romney to characterize the “carried interest” they earn as “capital gains.” Or Congress could raise $25 billion over ten years by closing a loophole used by Newt Gingrich and John Edwards to characterize some of their earned income as unearned income to avoid payroll taxes.

Read the report. 


41 Million July 4th Travelers Would Have a Nicer Trip if Corporations Paid Their Fair Share


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AAA estimates that 41 million Americans will travel for the July 4 holiday, including 34.8 million who will travel by car — the highest numbers since before the recession put a damper on holiday travel. Those travelers stuck in traffic bottlenecks may wonder why our government — you know, the one we fought the Revolution to have — can’t provide something as basic as roads and bridges that meet our needs. Infrastructure experts are also wondering that, and in fact, the American Society of Civil Engineers has given the U.S. infrastructure a D+. Now things are about to get worse because, once again, some lawmakers refuse to raise revenue to pay for anything.

Most federal funding for highways comes from the federal Highway Trust Fund, which will face a shortfall starting in August because Congress has not adjusted the 18.4 cent per-gallon gas tax and 24.4 cent per-gallon diesel tax, which are not indexed for inflation, since 1993. The fact that they have not been increased to keep up with the rising costs of construction or adjusted to account for reduced fuel consumption now means that these taxes no longer raise enough money to fund our infrastructure needs.

The straightforward solution would be to raise the fuel taxes, a reform that ITEP has called for before. As usual, many lawmakers oppose this simply because they oppose any and all tax increases even to fund something as basic and popularly supported as highways. Some lawmakers have turned to gimmicks that do not actually raise revenue, which CTJ has criticized.

If lawmakers cannot bring themselves to provide the most obvious solution, an increase in fuel taxes, a second best solution would be to raise revenue by closing corporate tax loopholes. It would be impossible for corporations to profit if the U.S. did not have the roads, bridges and other infrastructure that makes commerce possible, so it’s only reasonable that they pay some taxes to support the federal government and it’s reasonable for Congress to close loopholes allowing corporations to shirk that duty.

Two proposals introduced in Congress recently would raise $19.5 billion for the Highway Trust Fund by closing the loopholes that allow corporations to “invert.” In an inversion, an American corporation reincorporates itself abroad and claims to be a foreign company that is mostly not subject to U.S. taxes even if it is still managed from the U.S. and conducts most of its business in the U.S. There are many more corporate tax loopholes that must be closed, and much more Congress needs to do to provide adequate infrastructure funding. But it certainly makes sense to start by stopping the worst corporate citizens from avoiding taxes. 

The existing tax rules prevent an American corporation from simply reincorporating itself in a tax haven and declaring itself “foreign.” But a loophole allows inversions to take place when an American corporation merges with a smaller foreign corporation, even if the management and most of the business of the newly merged company stays in the U.S. In theory, the profits that any corporation (even a “foreign” corporation) earns in the U.S. are taxable in the U.S., but inversions are often followed by earnings stripping, which makes U.S. profits appear to be earned offshore where they won’t be taxed.

A proposal to close this loophole was first put forward as part of President Obama’s most recent budget plan and was introduced in Congress following the recent news of Walgreens, Pfizer and eventually Medtronic all pursuing inversions over the last several months.

 


The Consequences of Woefully Underfunding the IRS


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Following up on their efforts to enact dramatic cuts to the IRS's funding last year, Republican members of the House Appropriations Subcommittee on Financial Services voted to slash IRS funding by $341 million, pushing the agency's budget to its lowest level in more than five years. What makes these proposed spending cuts so ridiculous is that every dollar invested in the IRS’s enforcement, modernization and management system reduces the federal budget deficit by $200 and every dollar the IRS “spends for audits, liens and seizing property from tax cheats” garners ten dollars back.

From fiscal year 2010 to 2014, the IRS has seen its overall funding cut by as much as 14 percent (adjusting for inflation) and its staff cut by 11 percent. Making matters worse, these cuts come even as the IRS takes on increasing numbers of tax returns and the substantial new responsibilities of enforcing the Foreign Account Tax Compliance Act (FATCA) and the tax subsidies in the Affordable Care Act (ACA).

Because the IRS's job is to collect taxes that pay for the rest of the government, it is unique in that cuts to its budget have the effect of substantially increasing the deficit. In fact, the Treasury Inspector General for Tax Administration (TIGTA) found that the 14 percent reduction in enforcement personnel from fiscal year (FY) 2010 to 2012 forced by budget cuts resulted in a loss of $7.6 billion in revenue in FY 2012 alone.

A new must-read report by the Center on Budget and Policy Priorities (CBPP) catalogues the variety of ways that this decrease in funding has hamstrung the agency’s ability to do its basic duties. For example, the CBPP notes that budget constraints have contributed to the delays of critical computer infrastructure created to combat identity theft and the filing of fraudulent tax returns. As it stands now, the new system has still not come into place, meaning that victims of identity theft have to wait longer than six months for a resolution to their case.

While the recent IRS scandal is driving many House Republicans to push deeper cuts to the agency, the scandal is really just further evidence that the IRS needs a larger budget to get its job done right. The latest blowup over the IRS's failure to keep extensive email records, for instance, appears to be driven in part by the fact that the IRS could not afford the $10 million required to increase the capacity of the server where it stores emails. The non-partisan and well-respected National Taxpayer Advocate perfectly explained the fundamental problem with the IRS when she noted in a speech that while "the IRS can improve its policies and procedures," the recent cuts to the agency are "just plain nuts."

The Senate for its part has proposed increasing the agency’s budget by $236 million, which is $950 million lower than the increase the Obama administration requested. While this would be a significant step in the right direction, even the administration's request would not even restore IRS funding to its 2010 level if you take inflation into account. 


Clinton Family Finances Highlight Issues with Taxation of the Wealthy


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With the release of her new book and the 2016 election just around the corner, Hillary Clinton's wealth and tax rate have been fodder for talking heads the past couple weeks. Both the report on the Clintons estate tax planning and Ms. Clinton's comments that she pays "ordinary income tax" provide useful lessons on the problems with the way the United States taxes wealthy individuals.

When Avoiding the Estate Tax Becomes the "Standard"

According to an in-depth report in Bloomberg, Bill and Hillary Clinton transferred the ownership of their New York residence into a pair of Qualified Personal Residence Trusts (QPRT), which tax experts believe could allow them to avoid hundreds of thousands of dollars in estate taxes.

The substantial tax benefit that the Clintons generated is driven by two key aspects of the QPRT. Most importantly, placing the residence into the QPRT locks in its current value as part of the estate, so all the future growth in the house's value will not be taxable as part of the estate. In addition, because the residence ownership is split in half between two QPRTs, the total valuation of both trusts is discounted because partial ownership stakes are considered by the IRS to have a lower value.

In other words, the Clintons are indeed using a tax dodge. They are using a method that, unfortunately, has become "pretty standard" for wealthy individuals and, also unfortunately, is entirely legal under our broken estate tax system.

Unlike wealthy individuals such as Sheldon Adelson, the Clintons have historically supported strengthening the estate tax rather than dismantling it further. During the 2008 campaign for example, Ms. Clinton supported capping the per-person exemption at $3.5 million, which mirrors President Obama's current proposal to strengthen the estate tax in his most recent budget (PDF).

Noting the Difference between the Tax Treatment Investment and Wage Income

In a much publicized interview with The Guardian, Ms. Clinton noted that she pays "ordinary income tax, unlike a lot of people who are truly well off." While she certainly opened her mouth and inserted her foot, her adversaries attacks on her poor phrasing misses the point.  A big part of the problem with our tax code is the preferential treatment it gives to income derived from wealth (e.g. capital gains, stock dividends) versus income derived from work. So, indeed, the Clintons are wealthy by any standards. Between 2000 and 2007 had $109 million in adjusted gross income, and they paid a 31 percent tax rate. Their tax rate is more akin to the rate paid by working people because they derive a significant portion of their high annual income from speaking fees, book royalties and other activities that are classified as work.

A wealthy investor, like Mitt Romney and Warren Buffet, with the same income but all of it derived from capital gains and stock dividends would have paid about half the rate the Clintons paid. This preferential treatment helps to perpetuate income inequality.

Hopefully, Mrs. Clinton's criticism of these low rates is an indication that she favors substantially curtailing or even ending the preferential rate on capital gains. If so, it would mark a positive shift from her position during the 2008 campaign, when she stated that she would not try to raise the top capital gains tax rate above 20 percent (the level it is today). 


FIFA's World Cup of Tax Breaks


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All eyes are on Brazil and the World Cup, but Gov. Tarso Genro of Rio Grande do Sul believes the country’s decision to host the World Cup has been “a huge mistake”.

And many of the country’s residents as well as a host of global anti-poverty advocates agree with him. Brazil has been under increasing scrutiny for tax breaks it awarded to the sporting giant FIFA--tax breaks that many believe the country can ill afford given the high concentration of poverty in some of the country’s districts.

According to InspirAction, Christian Aid’s Spanish affiliate, Brazil will give up $530 million in tax revenue to benefit the World Cup’s corporate sponsors such as McDonalds, Budweiser and Johnson & Johnson. The country is allowing corporations to import an array of products from food, medical supplies and promotional materials tax-free, while also exempting seminars, workshops and other cultural activities from taxes.

InspirAction and other advocates have said the millions saved by FIFA and its sponsors through these breaks should be used to benefit the poor, not corporations and their shareholders. Foregone World Cup tax revenue could help lift 37 million people out of extreme poverty and help improve basic services. Instead, FIFA, a supposed non-profit organization, is reporting historic profits while leaving the host country to foot the bill.

The bidding to receive games such as the World Cup or the Olympics is always intense. During the publicity runs surrounding the bidding, potential host countries and the sponsoring organization tout the economic benefits including increased tourism dollars. Unfortunately, economic benefits that arise from the events often are as short-lived as the event itself. The economic burden, however, can be lasting.

In 2010, South Africa hosted the World Cup. FIFA reported that it received $3.8 billion tax-free in revenue and that year was “the most profitable in FIFA history”. However, South Africa had a $3.1 billion net loss from hosting the games. The same year, the number of tourists in South Africa dropped by half compared to previous years. The displacement of usual tourists is a reoccurring event in World Cup-host countries including Germany, China and Korea. Similarly, the European Tours Operations (EOTA) conducted a study in 2006 of countries that hosted the Olympics, which showed tourism declined the year pre and post-Olympics.

Host countries also have the financial burden of maintaining specially built stadiums. German economist Wolfgang Maennig conducted a study which found that the utilization of accommodation actually fell by 11.1 percent in Berlin and 14.3 percent in Munich during the 2006 World Cup. In Brazil’s case, the country spent $300 million in public funds constructing Arena Amazonia, which Brazilian officials portrayed as an investment into the Manaus’ economy and tourism in spite of the research indicating otherwise.  There has been speculation that the 42,000-capacity Arena Amazonia will be turned into a detention centre after the games as sporting events in the small town rarely attract 1,000  people. Neither a huge stadium nor a detention center is likely to boost tourism figures for Manaus, despite what officials are saying.

Mayor of Porto Alegre, Jose Fortunati, defended the corporate tax breaks and said his city would not have been able to take part in the games without them.  This reasoning still doesn’t sit well with much of the Brazilian public. Former Brazilian footballer, manager and now politician with the Brazilian Socialist Party, Romário de Souza Faria, noted that FIFA is projected to make $1.8 billion in profits, which should generate $450 million in tax for public services, but FIFA won’t pay anything.

Hosting the World Cup and other international sporting events surely is a public relations boon. But underneath the games’ hype, there are serious questions about who really benefits—questions that are worth broad public debate.

Two years from now, Brazil is set to do this all over again when it hosts the summer Olympics and offers the same sort of tax breaks to the Olympic Committee. It seems that now is as good a time as any to address these issues.  


Congress, Take Note: More States Are Reforming Antiquated Fuel Taxes This Summer


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Transportation funding in the United States is in trouble. With the Highway Trust Fund set to go broke by late August, Congress has forgone any increase in the grossly inadequate federal gas tax (unchanged at 18.4 cents per gallon since 1993) in favor of plugging recurring funding gaps with general revenues. Currently, Senators Chris Murphy (D-Connecticut) and Bob Corker (R-Tennessee) are floating a proposal to hike the federal tax by 12 cents, but the new revenues would be offset by new tax cuts and its chances of passage are at any rate tenuous before a full legislature that habitually shies away from increasing taxes.

Fortunately, states need not wait for Congress to take action. With an eye toward long-term sustainability, several states will increase their own fuel taxes on Tuesday, July 1.

According to an analysis by the Institute on Taxation and Economic Policy (ITEP), four states will hike their gasoline or diesel taxes next week. The changes generally take two forms – automatic inflationary increases designed to keep pace with the rising cost of building and maintaining transportation infrastructure and hikes resulting from recent legislation.

 

Four states will see gasoline tax increases on Tuesday. Increases in Maryland and Kentucky are the result of 2013 legislation requiring an annual adjustment to reflect growth in the Consumer Price Index and a quarterly adjustment reflecting an increase in wholesale gas prices, respectively. New Hampshire deserves special kudos after the state legislature passed its first gas tax increase – and the largest of any state this year – since 1991. An additional levy of 4.2 cents per gallon – a decade’s worth of inflationary value – will be added at the pump on Tuesday to support needed transportation projects. Unfortunately, the tax is essentially a fixed rate increase rather than a variable-rate design which could have kept pace with annual increases in infrastructure costs, and it will be repealed in roughly 20 years when bonds for the I-93 project are paid off. Vermont will see a second structural tweak in its tax formula as a result of 2013 legislation overhauling the state’s gasoline and diesel taxes. The imposition of a higher motor fuel percent assessment combined with a decrease in the per gallon tax will result in an overall net increase next Tuesday of 0.6 cents per gallon.

 

On the diesel tax front, four states will see hikes next week ranging from 0.4 to 4.2 cents per gallon. Changes in Maryland and Kentucky again reflect annual or quarterly price growth. New Hampshire’s diesel tax increase matches that for gasoline (4.2 cents per gallon). Vermont will raise its diesel tax by an additional 1 cent on top of last year’s 2 cent hike as the state’s 2013 tax structure overhaul is fully phased in.

Two more states should have made the list this year, but officials there have actually blocked scheduled fuel tax increases. Georgia Governor Nathan Deal suspended an automatic 15% increase in his state’s variable-rate gas tax by way of executive order earlier this month, citing concerns over the cost burden for families and businesses. North Carolina lawmakers passed legislation during the 2013 session freezing the state’s variable-rate gas tax at 37.5 cents per gallon, effective through June 30, 2015. Officials in these states will likely take credit for enacting “tax cuts” this year as infrastructure projects go underfunded.

Two other states will see their fuel taxes decrease on Tuesday. California will cut its gasoline excise tax from 39.5 to 36 cents per gallon, reflecting a decrease in gas prices. Connecticut’s diesel tax rate is revised each July 1 to reflect changes in the average wholesale price over the past year, and will see a decrease this year of 0.4 cents per gallon.

Fortunately, gasoline tax reform is already on the horizon in Rhode Island, where lawmakers agreed as part of this year’s budget plan to index the tax to inflation, which will mean a roughly 1 cent increase effective July 1, 2015. Michigan’s legislature was expected to come to an agreement this session on a fuel tax increase after voters there expressed a willingness to pay for repairs on badly deteriorating roads and bridges, but proposals to increase the tax by 25 cents per gallon over four years or to index it to keep pace with construction costs stalled. With lawmakers promising to take up the issue again in the fall, another summer construction season is now lost in the state.

Including the budget agreement passed by Rhode Island earlier this month, the total number of states with variable-rate fuel taxes designed to rise alongside the price of gas, overall inflation, or both increases to 19 (plus DC). In the past year, Massachusetts, Pennsylvania, and DC have all switched from fixed-rate fuel tax structures to variable-rate structures.

Given the level of debate and the major changes in states’ fuel tax structures that have taken place in 2013 and 2014, it seems that more states are recognizing the need for a sustainable fuel tax capable of keeping pace with the inevitable increases in transportation infrastructure costs.

NOTE: Differences among states in the direction and magnitude of gas price changes evident in rate revisions reflect states' use of state-specific price data as the basis for rate changes. In particular, California experienced the largest gasoline price drop of any state over the past year and will, therefore, see a large negative change in their rate.


For Education Tax Breaks, Progressivity = Effectiveness


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On Tuesday, when the Senate Finance Committee contemplates the patchwork of tax breaks that are supposed to subsidize postsecondary education, they will likely consider ways to streamline these breaks and make them less confusing. That’s a good idea, but it’s not enough. The bigger problem is that too much of these tax subsidies are going to families who are well-off and would send their kids to college no matter what, and too few are going to lower-income families who are likely to send their kids to college only if they can find sufficient assistance.

The current collection of tax breaks can be confusing. A 2012 report from the Government Accountability Office found that more than a fourth of taxpayers eligible for postsecondary education tax breaks don't take advantage of them, and those who do use them often don't use the most advantageous tax break for their situation.

But Congress also needs to make these tax benefits more targeted to those households that actually need them to access postsecondary education. That could mean scaling back or eliminating some poorly targeted breaks and beefing up the American Opportunity Tax Credit, which is the best targeted of the bunch.  

It’s not clear that lawmakers will take up this cause, especially given that they are likely to move in the opposite direction by extending the most regressive of these tax breaks, the deduction for tuition and related fees. The deduction for tuition and related fees is among the temporary tax provisions that would be extended for two years under the “tax extenders” legislation approved by the Finance Committee on April 3, with the support of committee chairman Ron Wyden and ranking Republican Orrin Hatch.

Tax Breaks for Postsecondary Education Are Poorly Targeted, and Deduction for Tuition and Fees Is the Worst

A report from the Center for Law and Social Policy explains that unlike the direct federal spending provided through Pell Grants, the tax breaks for postsecondary education overall favor relatively well-off households, as illustrated in the graph below.

The graph below shows that the most regressive of the tax breaks is the deduction for tuition and related fees, followed by the Lifetime Learning Credit (LLC) and the deduction for interest payments on student loans.

One option would be to simply end the practice of providing these subsidies through the tax code and instead increase spending on Pell Grants or other similar assistance. While this would be logical, Congress may be too politically committed to the concept of tax breaks for education to seriously consider this.

There are certainly ways to make these tax breaks work better. The more regressive tax breaks could be scaled back, and the savings could be put toward expanding the American Opportunity Tax Credit (AOTC). The figures illustrate that the AOTC, first signed into law by President Obama in 2009, is the most progressive of the postsecondary education tax breaks (or perhaps it’s better described as the least regressive of the education tax breaks).

The biggest reason why the AOTC is better targeted to low-income families than the other breaks is the fact that the AOTC is a partially refundable credit. The working families who pay payroll taxes and other types of taxes but earn too little to owe federal income taxes will benefit from an income tax credit only if it is refundable, such as the Earned Income Tax Credit.

Unfortunately, the AOTC is currently scheduled to expire at the end of 2017, when it will revert to a less generous credit that existed before 2009. If lawmakers were serious about making tax breaks for postsecondary education more effective, they would at very least make the AOTC permanent and allow the deduction for tuition and fees to expire as scheduled.


Good and Bad Proposals to Address the Highway Trust Fund Shortfall


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As a result of Congress’s reluctance to raise the gas tax for the past 20 years, the Highway Trust Fund will run out of money in August. That could bring transportation construction and repairs all across the country to a stop and cost 600,000 jobs, according to one estimate. Experts project a nearly $170 billion shortfall over the next decade. Several proposals have been offered to address this, some of them better than others.

Nonsensical “Repatriation Holiday” Proposal

Last week we described a nonsensical proposal from Democratic Senate Majority Leader Harry Reid and Republican Sen. Rand Paul that supposedly would pay for transportation with a “repatriation holiday,” even though this measure would raise almost no revenue even according to their own description of it. The term “repatriation holiday” is essentially a euphemism for temporarily calling off most of the U.S. tax that is normally due on corporations’ offshore profits when they are officially brought to the United States. One of many problems with such proposals is they encourage corporations to shift even more profits offshore.

Increase the Gas Tax… But Give All the Revenue Away with New Tax Cuts?

This week, Democratic Sen. Chris Murphy and Republican Sen. Bob Corker proposed to finally fix the 18.4 cent gas tax and 24.4 cent diesel tax, which are not indexed for inflation and have not been increased since 1993, but unfortunately they also propose to give an equal amount of revenue away with new tax cuts.

Their proposal would raise both taxes by 12 cents over two years and index them to inflation thereafter. ITEP has long called for this type of reform. Of course, attaching tax cuts of equal value to this proposal turns it entirely into a budget gimmick because no revenue would actually be raised overall. The two proponents suggested that the tax-cutting could take the form of making permanent six of the “tax extenders,” the tax cuts that mostly benefit corporations and that Congress extends every couple of years with little debate, without offsetting the costs. 

Close Offshore Corporate Tax Loopholes

If lawmakers cannot bring themselves to fix the gas tax without giving the revenue away with new tax cuts, perhaps they should consider closing corporate tax loopholes. Given that American corporations would be unable to profit without the infrastructure that makes commerce possible, it seems entirely reasonable that they pay their share in taxes to support it, and that Congress close the loopholes corporations use to avoid paying.

Sen. John Walsh of Montana introduced a bill this week to do exactly that with two provisions that close offshore tax loopholes used by American corporations.

The first provision is President Obama’s proposal, which was incorporated into Sen. Carl Levin’s Stop Tax Haven Abuse Act, to bar corporations from taking deductions for their U.S. taxes for interest expenses related to offshore investments until the profits from those offshore investments are subject to U.S. taxes.

American corporations are allowed to defer paying U.S. corporate income tax on their offshore profits until those profits are officially brought to the U.S. (which may never happen). But the current rules allow them to borrow to invest in that offshore business and deduct the interest expenses right away from their U.S. income when they calculate their U.S. taxes. That means that the tax code is essentially subsidizing companies for investing offshore (at least on paper) rather than in the United States. Sen. Walsh (and Obama and Levin) sensibly propose that if the U.S. tax on offshore profits is deferred, then the interest deduction associated with those offshore profits should also be deferred.

The second revenue provision in Sen. Walsh’s bill is the anti-inversion proposal that Sen. Levin and Rep. Sander Levin, the ranking Democrat on the Ways and Means Committee, introduced in May. A corporate inversion happens when a company takes steps to declare itself  “foreign” for tax purposes, even though little or nothing has changed about where its business is really conducted or managed. Given that several corporations have announced plans (or attempts) to do this in recent months, this is a reform Congress should want to enact even in the absence of any immediate revenue need.


Medtronic's History of Shirking Its Tax Responsibilities


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Defenders of widespread corporate tax avoidance often say the real responsibility lies with Congress for allowing tax loopholes to exist. While partly true, corporate lobbying and political contributions are a significant reason why our corporate tax code is a mess. Some companies pursue tax avoidance schemes so aggressively that it’s clear the people running them lack even a minimal sense of responsibility to the country that makes their companies’ profits and their executives’ huge salaries possible. Medtronic is such a company.

Medical Device Tax

As Congress was debating health care reform at the start of Obama’s presidency, Medtronic had plenty of problems with scandals relating to some of its products and faced diminishing returns from its research. So its leaders decided to make a big deal out of a rather small tax item, the medical device tax, that lawmakers wanted to include in health reform law.

The principle behind the medical device tax was simple enough. All parts of the health care industry, including hospitals, pharmaceutical companies, health insurers, clinical laboratories and others, would benefit from expanded health care coverage provided by health insurance reform. Therefore, such companies should help pay for reform through various types of taxes and cuts in Medicare spending.

After Congress proposed the medical device tax, Medtronic and AdvaMed (the trade association for medical device companies) managed to persuade members to chop it in half before enacting the Affordable Care Act. Medtronic publicly celebrated this victory and lavished praise on lawmakers from both parties who made this happen.

But that wasn’t enough for Medtronic and AdvaMed, which have since demanded full repeal of the tax. The ensuing campaign has included claims by AdvaMed about its potential harmful impacts on the industry, claims that are easily disproven.

Medtronic’s leadership could have joined the honest medical device executives who stated publicly that the 2.3 percent excise tax is not going to hurt their business. As a report from the Center on Budget and Policy Priorities explains:

…Martin Rothenberg, head of a device manufacturer in upstate New York, calls claims that the tax would cause layoffs and outsourcing “nonsense.” The tax, he writes, will add little to the price of a new device that his firm is developing. “If our new device proves effective and we market it effectively, this small increase in cost will have zero effect on sales. It would surely not lead us to lay off employees or shift to overseas production.” Michael Boyle, founder of a Massachusetts firm that makes diagnostic equipment, insists that the device tax is “not a job killer. It would never stop a responsible manager from hiring people when it’s time to grow the business.”

Offshore Tax Havens

Recently, it has become increasingly clear that this is not the only tax that Medtronic has tried hard to avoid. “Offshore Shell Games,” the recent report from Citizens for Tax Justice and US PIRG Education Fund, found that Medtronic has disclosed 37 subsidiaries in countries that the Government Accountability Office has characterized as tax havens. (Companies may have subsidiaries that are not disclosed.) For example, Medtronic has five subsidiaries in the Cayman Islands and one in the British Virgin Islands.

Based on the data available, it’s impossible to know how much of the company’s profits are officially earned in these countries for tax purposes. But it’s clear that little if any of its profits are earned there in any real sense. In the aggregate, the profits that American corporations report to the IRS that they earn in Bermuda are 16 times the size of Bermuda’s economy, and the profits they report to earn in the British Virgin Islands are 11 times the size of that country’s economy. Obviously, corporations use a lot of accounting fictions when they claim to earn profits in these countries, and Medtronic is apparently one such company.

Demonstrating a lot of chutzpah even for a Fortune 500 corporation, Medtronic responded to questions about its offshore schemes by complaining that it would have to pay U.S. taxes on its tax-haven profits if it decided to officially bring them into the U.S.

Corporate Inversion

This week, Medtronic’s leadership went even further to show its distain for the country that makes its profits possible. It announced that it would attempt a corporate “inversion,” which is a euphemism for the practice of American corporations pretending to be foreign companies to avoid U.S. taxes.

The tax laws in this area used to be so weak that American corporations could simply fill out some papers to reincorporate in a country like Bermuda and then declare themselves “foreign” corporations. This had huge benefits. As American corporations, their profits outside the U.S. could, at least in theory, be subject to some U.S. taxes if they were ever officially brought to the U.S. But as “foreign” corporations, their offshore profits would never be subject to U.S. taxes.

A bipartisan law enacted in 2004 tried to crack down on corporate inversions, but a loophole in the law makes it possible for an American corporation to invert if it acquires a relatively small foreign company. The resulting merged company can be considered a “foreign” company even if it is 80 percent owned by the people who owned the American corporation, and even if its business is still mostly conducted and managed in the U.S.

This is exactly what Medtronic aims to do with its bid to acquire Covidien, another device maker, and then reincorporate in Ireland. (Covidien itself is an inverted company, incorporated in Ireland but run out of Massachusetts.)   

Medtronic’s CEO has ludicrously claimed that “this is not about lowering tax rates.” But this is entirely contradicted by the terms of the takeover agreement, which allow Medtronic to call off the deal if Congress changes the tax laws in a way that would treat the merged company as an American corporation for tax purposes.

In fact, legislation to curb inversions has been introduced. Congress should waste no time in enacting it. Otherwise, plenty of other corporations will feel pressure from their shareholders to invert if Medtronic gets away with pretending to be “foreign.”


The Koch Brothers' Ugly Vision for Tax Deform


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The billionaire brothers Charles and David Koch are in the news once again as they step up their efforts to influence elections and the political process with a new super PAC called Freedom Partners Action Fund. It's worth thinking about how tax policy could be affected if they succeed.

Last year, the Koch-Brothers-funded Americans for Prosperity released a 37-page report laying out the group’s vision for what it calls “tax reform.”

Read CTJ's quick take on what that vision would mean.


How Obama Could End the Romney Loophole Right Now


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For the last two decades, a regrettable IRS ruling called the “carried interest loophole” has allowed wealthy private equity and venture capital managers to pay a lower tax rate on their income than the rest of us. Fair tax advocates have long called on Congress to close this loophole as a step toward tax fairness. While the prospects for legislation improving tax fairness in Congress have languished this year, the Obama Administration could bypass Congress and take immediate action to close the loophole.

The carried interest loophole has gained even more notoriety in recent years because former Republican presidential nominee Mitt Romney during his time at Bain Capital, resulting in the loophole being nicknamed the "Romney loophole."

The way the carried interest loophole (PDF) works is that managers of investment partnerships such as private equity and venture capital funds are often compensated with a percentage of the profits earned by assets under their management. Because of an unfortunate 1993 IRS ruling, this income is incorrectly treated as capital gains, which means the managers of these partnerships receive the special preferential rate of 20 percent rather than paying the 39.6 percent rate applied to ordinary income. Given the extraordinarily high compensation that many of these fund managers earn, its unconscionable that the tax system allows them to pay a lower tax rate on their income than their receptionists pay.

As tax professor Victor Fleischer noted in the New York Times, to end this preferential treatment of fund managers, all the administration has to do is direct the IRS to reclassify them as service providers, which would require that their income be taxed as ordinary income. Ironically, even some private fund managers have admitted (PDF) in the past that they the work they do should be characterized as "income earned in exchange for the provision of services," rather than as a capital gain.

While there is not an official estimate on the revenue impact that such an executive action would have, the Obama administration's most recent budget proposals include a provision substantially restricting the carried interest loophole and projected to raise almost $14 billion over 10 years.

Over the long term, it would be preferable to end preferential treatment of capital gains, but closing the carried interest loophole would represent a significant step the Obama administration could take now, without congressional approval, to improve fairness in the tax code. 


Much of What You've Heard about Corporate "Inversions" Is Wrong


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With yet another big U.S. corporation (this time it’s the medical device maker Medtronic) announcing its intentions to “invert” and officially become a “foreign” company for tax purposes, it’s time to correct a few misunderstandings.

1. What is a corporate inversion?

Incorrect answer: A corporate inversion happens when a company moves its headquarters offshore.

Correct answer: A corporate inversion happens when a company takes steps to declare itself a “foreign” corporation for tax purposes, even though little or nothing has changed about where its business is really conducted or managed.

The law used to be so weak that an American corporation could simply reincorporate in Bermuda and declare itself a foreign company for tax purposes. In 2004, Congress enacted a bipartisan law to prevent inversions, but a gaping loophole allows corporations to skirt this law by acquiring a smaller foreign company. The loophole in the current law allows the company resulting from a U.S.-foreign merger to be considered a “foreign” corporation even if it is 80 percent owned by shareholders of the American corporation, and even if most of the business activity and headquarters of the resulting entity are in the U.S. (A proposal from the Obama administration to change these rules has been introduced in Congress by Carl Levin in the Senate and his brother Sander Levin in the House.)

2. How are the offshore profits of American corporations taxed?

Incorrect answer: When American corporations officially bring their offshore profits to the U.S., they must pay the 35 percent U.S. tax rate, and this is why they want to escape the U.S. tax system.

Correct answer: When American corporations officially bring their offshore profits to the U.S., they must pay the U.S. tax rate of 35 percent only if their profits have been shifted to tax havens.

When American corporations “repatriate” offshore profits (officially bring offshore profits to the U.S.) they are allowed to subtract whatever corporate taxes they paid to foreign governments from their U.S. corporate tax bill. (This break is called the foreign tax credit.) The only American corporations that would pay anything close to the full 35 percent U.S. corporate tax rate on offshore profits are those that claim their profits are in countries where they are not taxed — countries we know as tax havens.

American multinational corporations report to the IRS massive amounts of profits earned in countries that either have an extremely low (or zero) corporate tax rate or otherwise allow them to escape paying much in corporate taxes. It is obvious that these reported tax haven profits are not truly earned in these countries, and in fact that would be impossible. For example, the profits American corporations overall report to earn in Bermuda are 16 times the size of Bermuda’s economy. Obviously, these profits are truly earned in the U.S. or other countries with real consumer markets and real business opportunities, and then manipulated to appear to be earned in countries where they are not taxed.

The corporations that make the most use of these tax haven maneuvers — maneuvers that are probably legal, but which should be barred by Congress — are the corporations that would pay close to the full 35 percent tax rate if they repatriated their offshore profits.

3. What profits are corporations trying to shield from U.S. taxes when they invert?

Incorrect answer: When American corporations invert, they do it to escape the U.S. system of taxing offshore profits, which is something most other countries don’t do. After they become a foreign company, their U.S. profits would still be subject to U.S. taxes.

Correct answer: American corporations invert to avoid paying taxes in any way possible, and often that includes avoiding U.S. taxes on their U.S. profits. It’s true that, in theory, all corporate profits earned in the U.S. (even profits of a foreign-owned corporation) are subject to the U.S. corporate income tax. But corporate inversions are often followed by “earnings stripping” to make any remaining U.S. profits appear to be earned offshore where the U.S. cannot tax them.

Earnings stripping is the practice of multinational corporations reducing or eliminating their U.S. profits for tax purposes by making large interest payments to their foreign affiliates. Corporations load the American part of the company with debt owed to a foreign part of the company. The interest payments on the debt are tax deductible, reducing American taxable profits, which are shifted to the foreign part of the company and are not taxed.

If the American part of the company is the parent corporation shifting its profits to offshore subsidiaries, then the benefit is that U.S. tax will not be due on those profits until they are repatriated, which may never happen. But if the American part of the company can claim to be just a subsidiary of a foreign parent company — which would technically be the case after a corporate inversion — then the benefits of earnings stripping are even greater because the profits that are officially “offshore” are never subject to U.S. taxes.

This is part of what motivated the 2004 reform and a 2007 report from the Treasury Department that found that rules enacted earlier to address earnings stripping did not seem to prevent inverted companies from doing it.


Senate Democrats, Joined by Three Republicans, Come Up Short on Buffett Rule, Student Loan Bill


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Three Senate Republicans (two of whom have signed Grover Norquist's infamous no-tax-increases pledge) joined their Democratic colleagues Wednesday to support a bill that would use the “Buffett Rule” to raise taxes on millionaires and offset the cost of easing student loan repayments.

Introduced by Sen. Elizabeth Warren (MA), the bill had the support of 57 senators, three short of the threshold for cloture in the Senate.

The three Republicans voting in favor were Susan Collins (ME), Bob Corker (TN) and Lisa Murkowski (AK). Corker and Murkowski have publicly said they do not feel bound by the Norquist pledge.

The “Buffett Rule” started out as the principle, proposed by President Barack Obama, that the tax code should be reformed in a way that ensures that millionaires don’t pay lower tax rates than middle-income people. It was inspired by the billionaire investor Warren Buffett, who famously argued that it was unfair that his effective tax rate was lower than his secretary's rate.

As a CTJ report explains, some millionaires have lower effective tax rates than middle-income people mostly because investment income that mainly goes to the wealthiest Americans is subject to lower rates under the personal income tax and is not subject to the Social Security tax. The simplest remedy is to eliminate the special, low personal income tax rates that apply to two types of investment income, capital gains and stock dividends.

The tax provision in Sen. Warren’s bill, which was first introduced by Senate Democrats in 2012, takes the more roundabout approach of imposing on millionaires a minimum effective tax rate (including personal income taxes and health care taxes) of 30 percent. It is projected to raise $73 billion over a decade.

In 2012, CTJ called this measure “a small step in the direction of tax fairness” and explained it would raise much less revenue than simply taxing capital gains and dividends like other income under the personal income tax. One reason is that taxing capital gains and dividends like other income would subject them to a top personal income tax rate of 39.6, plus an additional 3.8 percent under the Obamacare tax, rather than 30 percent. Another reason is that there is a great deal of capital gains and dividend income that goes to taxpayers who are among the richest five percent or even one percent but who are not millionaires and therefore not affected by the Senate Democrats’ proposal.

Sen. Warren’s proposal is a good start that should be enacted and built upon one day with a more comprehensive reform.


Reid-Paul "Transportation Funding Plan" is No Plan at All


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The nation has a number of pressing problems, and our polarized Congress all too often can’t seem to compromise on policies that would address fundamental issues that most of us care about. In this context, it seems a pending proposal by Democratic Senator Majority Leader Harry Reid and Sen. Rand Paul, a Republican senator and libertarian stalwart, would be a refreshing change from the norm. But not so much.

Unfortunately, Sens. Reid and Paul have proposed to “fund” the Highway Trust Fund with a nonsensical measure that would reward corporate tax avoidance and raise almost no revenue, according to their own description of the plan.

Policymakers know our nation’s roads are chronically underfunded. Since 2008, Congress has covered $53 billion of transportation funding shortfalls by taking needed tax dollars out of general fund revenue, and official forecasts show the need for a huge infusion of new cash to maintain our roads and bridges. There is a straightforward policy solution—increasing the federal gas tax to offset large inflationary declines over the past two decades—that requires a legislative champion.

Instead of taking the obvious step of fixing the federal gas tax, Reid and Paul propose a repatriation tax holiday, which would give multinational corporations an extremely low tax rate on offshore profits they repatriate (profits they officially bring back to the United States). The idea is that corporations would bring to the United States offshore profits they otherwise would leave abroad, and the federal government could tax those profits (albeit at an extremely low rate) and put the revenue toward the transportation fund.

The first problem with such a proposal is many of these offshore profits are clearly earned in the United States and then manipulated through accounting gimmicks so corporations appear to earn the money in countries where it won’t be taxed, as demonstrated by several recent CTJ reports. In fact, profits corporations report earning in zero-tax countries would receive the biggest breaks under a repatriation holiday because the U.S. tax normally due on repatriated profits is reduced by whatever taxes have been paid to foreign governments.

The second problem with a repatriation holiday is that Congress enacted this type of proposal in 2004, and critics have widely panned that measure as providing no increase in employment or investment but only enriching shareholders and executives.

The third problem is that it loses revenue. The non-partisan Joint Committee on Taxation (JCT) has estimated that a repeat of the 2004 measure would reduce revenue by (and increase the budget deficit by) $96 billion over a decade.

According to JCT, one reason for the massive revenue loss is that some of the offshore profits would be repatriated anyway absent any new tax break, and companies would pay the full tax. Another reason is that the measure would encourage corporations to engage in even more accounting games to make their U.S. profits appear to be earned in offshore tax havens, with the expectation that a little lobbying could prod Congress to enact another repatriation holiday in a few years.

Reid and Paul have added a detail that they claim improves their proposal. They argue that companies would rather borrow money than tap profits they claim to hold “offshore.” Reid and Paul therefore propose to also limit the tax-deductibility of corporate borrowing by asserting that any business borrowing that is done for the purpose of avoiding repatriating offshore cash would be non-deductible.

It is unclear how this could possibly be implemented, but even if it works, the New York Times reports that Reid’s staff believes the net effect would raise just $3 billion over a decade. This is laughably insufficient. Replenishing the Highway Trust Fund just to maintain spending until the end of 2015 will cost $18 billion


Tax Foundation's Dubious Attempt to Debunk Widely Known Truths about Corporate Tax Avoidance Is Smoke and Mirrors


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Yesterday, the conservative Tax Foundation wrote a misleading response to the report, “Offshore Shell Games,” by U.S. Public Interest Research Group (PIRG) Education Fund and Citizens for Tax Justice (CTJ).

Major Conclusions Not Challenged by the Tax Foundation

The Tax Foundation does not challenge most of the report’s findings because a strong body of research by academics, journalists and other tax policy analysts reach the same conclusions.

USPIRG Ed Fund/CTJ conclude that American corporations in the aggregate are obviously engaging in tax avoidance when they report to the IRS that their subsidiaries earn $94 billion in profits in Bermuda during a year when that country has a GDP (total economic output) of just $6 billion. We conclude that American corporations are engaging in obvious tax avoidance when they report to the IRS that they earn $51 billion in the Cayman Islands when that country has a GDP of just $3 billion. The Tax Foundation does not challenge this.

We also conclude that when Apple discloses it would pay a U.S. tax rate of about 33 percent on its offshore profits if it officially brings those profits to the United States, that means Apple has only paid a 2 percent effective tax rate to countries where it claims to have earned those profits. We conclude that when U.S. Steel discloses that it would pay a U.S. tax rate of about 34 percent on its offshore profits if it officially brings them to the U.S., that means U.S. Steel has only paid a 1 percent effective tax rate to the countries where it claims to have earned those profits. The findings are similar for Nike, Microsoft, Oracle, Safeway, American Express, Wells Fargo, Citigroup, Bank of America, and several other companies. This strongly suggests that most of these profits are reported to the IRS as earned in tax havens.

The Tax Foundation challenges none of this.

Tax Foundation’s Own Analysis Depends on Wildly Misleading Use of Data

The Tax Foundation claims that we ignore IRS data that “reports corporations actually paid a tax rate of about 27 percent on their reported foreign income” in 2010, as one of its own reports claims.

This is outrageously misleading. The Tax Foundation’s 27 percent figure is based on the offshore profits that American corporations “repatriate” to the U.S., which excludes profits that are reported as “earned” in tax havens or other countries with low tax rates. (Specifically, the Tax Foundation uses data reported on form 1118, which applies to offshore profits actually taxed by the U.S. in a given year.) The profits booked offshore for tax purposes that the U.S. PIRG Ed Fund/CTJ cite are those that companies have claimed are “permanently reinvested” offshore, meaning they have no plans to ever pay U.S. tax on them. By definition then, the Tax Foundation study does not factor in those profits at all.

As our report explains, when offshore corporate profits are “repatriated,” (officially brought to the U.S.) they are subject to U.S. corporate income tax minus a credit for any corporate income tax they paid to foreign governments. (This is the foreign tax credit.) As a result, American corporations are far, far more likely to repatriate offshore profits that have been subject to relatively high foreign tax rates, because they generate larger foreign tax credits. They are far less likely to repatriate offshore profits that they reported to earn in tax havens, because these profits would generate few if any foreign tax credits.

Tax Foundation’s Attempts to Pick Apart US PIRG Ed Fund/CTJ Analysis Do Not Withstand Scrutiny

The Tax Foundation attempts to pick apart pieces of the analysis in order to create a general sense that there is disagreement about the data and what the data can tell us. For example, we explain that only 55 companies disclose how much they would pay in U.S. taxes on their offshore profits if they officially brought those profits to the U.S. That’s how we determined that Apple, U.S. Steel, and those other companies officially hold most of their “offshore” profits in tax havens. The Tax Foundation claims that we are “cherry-picking” because most companies do not disclose this. We cannot possibly be “cherry-picking” if we provide the data for every Fortune 500 company that discloses such data. Further, there is no reason to believe (and none suggested by the Tax Foundation) that these 55 corporations are not representative of the rest of the Fortune 500 that have significant offshore profits.

In addition, the Tax Foundation challenges our use of IRS data to show how much of the officially “offshore” profits of American corporations are reported to be earned in tax havens, claiming that double-counting makes the data unreliable. The fact is that this data have been used in the same way in the report on tax havens by the non-partisan Congressional Research Service (CRS). Another report from CRS used data from the Bureau of Economic Analysis (BEA), which is similar, and noted (on page 9) that any double-counting in the BEA data would not have a significant impact on the results.

For some unknown reason, the Tax Foundation also challenges our definition of the countries that are tax havens. As discussed in the text of the report, the definition of tax haven is based on the list of countries created by the non-partisan General Accountability Office's (GAO) review of research done by the Organization for Economic Cooperation and Development (OECD), the National Bureau of Economic Research (NBER), and a U.S. District Court.

Rather than disputing the robust research done by various independent authorities that classify these countries as tax havens, the Tax Foundation makes the baseless claim that our list includes countries that have “international recognized normal tax systems.” In reality, each of the countries they define as normal has a well-known history of facilitating tax avoidance. For example, the Tax Foundation lists the Netherlands and Ireland as having normal tax systems, despite the well publicized use of international tax avoidance techniques like the ‘Double Irish With a Dutch Sandwich’ that utilize subsidiaries in these countries.

The bottom line is that the Tax Foundation is probably close to right that American corporations pay about a 27 percent tax rate to foreign countries where they actually do business. Of course, that finding contradicts the Tax Foundation’s frequent false claim that U.S. companies pay lower taxes to real foreign governments than they pay to the United States on their U.S. profits.

But the profits that American corporations book in offshore tax havens for tax purposes are mostly U.S. profits that these companies have artificially shifted offshore to avoid paying U.S. taxes. Such profit shifting is one reason why American corporations pay only a little over half the 35 percent corporate tax rate on the profits they actually earn in the United States.


New IRS Report Demonstrates yet Another Reason Income Inequality Persists


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New IRS Report Demonstrates Yet Another Reason Income Inequality Persists

If we reported that the rich continue to find ways to avoid paying taxes, the statement would elicit no more than a passing yawn, as by now this fact is common knowledge. But a new report released earlier this week by the IRS reveals why the nation shouldn't continue to accept wealthy tax dodging as inevitable.

The IRS report confirms that the best-off taxpayers (those with incomes of $200,000 or more) continue to find legal ways to make their federal tax obligation $0. Worse, the report finds that this is occurring at a pace not seen for decades.

From the report’s first publication in 1977 through 2000, the number of high-income Americans paying no tax never exceeded 3,000. But the past four years have seen an explosion of high-end tax avoidance: in each of these years, the number of zero-tax Americans found in this report has exceeded 30,000.

In 2011 (the latest year for which data are available), almost 33,000 people with incomes over $200,000 paid no federal income tax. For this group—less than one percent of all Americans with incomes over $200,000 in 2011—tax-exempt bond interest and itemized deductions are among the main tax breaks that make this tax-avoiding feat possible. 

In 1977, Congress mandated the IRS publish this report annually to help policymakers understand whether high-income tax avoidance was an ongoing problem, and (presumably) to help build the case for reform. This latest report paints a clear picture of a growing problem.

The good news is that tax reforms included in President Barack Obama’s budget plan for the upcoming fiscal year would pare back tax breaks for itemized deductions and bond interest, making important strides toward restoring these high-income Americans to the tax rolls.

Whether it’s gigantic Fortune 500 corporations or super-rich individuals, tax avoidance has a corrosive effect on the public’s confidence in our tax system, not to mention it perpetuates worsening income inequality. Ensuring the best-off Americans have some “skin in the game” should be a basic priority of tax reform.


Even the Weak Anti-Abuse Measures Contemplated by OECD Are Too Much for Republican Tax Writers


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Representatives of Organization for Economic Co-operation and Development (OECD) countries are meeting in Washington this week to determine what reforms they should recommend to address offshore corporate tax avoidance. Such recommendations would implement the Action Plan on Base Erosion and Profit Shifting (BEPS), which OECD issued last summer. The plan doesn’t go far enough, but the Obama administration has recently indicated that it is restraining OECD talks from resulting in more fundamental reforms, and the top Republican tax writers in Congress issued a statement on June 2 that seems even more opposed to reform.

As we wrote about the Action Plan last summer,

While the plan does offer strategies that will block some of the corporate tax avoidance that is sapping governments of funds they need to make public investments, the plan fails to call for fundamental change that would result in a simplified, workable international tax system.

Most importantly, the OECD does not call on governments to fundamentally abandon the tax systems that have caused these problems — the “deferral” system in the U.S. and the “territorial” system that many other countries have — but only suggests modest changes. Both tax systems require tax enforcement authorities to accept the pretense that a web of “subsidiary corporations” in different countries are truly different companies, even when they are all completely controlled by a CEO in, say New York or Connecticut or London. This leaves tax enforcement authorities with the impossible task of divining which profits are “earned” by a subsidiary company that is nothing more than a post office box in Bermuda, and which profits are earned by the American or European corporation that controls that Bermuda subsidiary.

In April, we noted that the Obama administration seems to be blocking any more fundamental (more effective) reform and is clinging to the “arms length” principle that supposedly prevents subsidiaries owned by a single U.S. corporation from over-charging and under-charging each other for transactions in ways that make profits disappear from one country and magically reappear in another. As we explained,

But when a company like Apple or Microsoft transfers a patent for a completely new invention to one of its offshore subsidiaries, how can the IRS even know what the market value of that patent would be? And tech companies are not the only problem. The IRS apparently found the arm’s length standard unenforceable against Caterpillar when that company transferred the rights to 85 percent of its profits from selling spare parts to a Swiss subsidiary that had almost nothing to do with the actual business.

This week, just to kill any lingering possibility that the OECD will do some good, Rep. Dave Camp and Senator Orrin Hatch, the Republican chairman of the House Ways and Means Committee and the ranking Republican on the Senate Finance Committee, issued a statement claiming they are “concerned that the BEPS project is now being used as a way for other countries to simply increase taxes on American taxpayers [corporations].”

Of course, major multinational corporations from every country will, in fact, experience a tax increase if the OECD effort is even remotely successful. American corporations are using complex accounting gimmicks to artificially shift profits out of the U.S. and out of other countries into tax havens, countries where they will be taxed very little or not at all. There is no question this is happening. As CTJ recently found, American corporations reported to the IRS in 2010 that their subsidiaries had earned $94 billion in Bermuda, which is obviously impossible because that country had a GDP (output of all goods and services) of just $6 billion that year.

In their statement, Camp and Hatch complain that “When foreign governments – either unilaterally or under the guise of a multilateral framework – abandon long-standing principles that determine taxing jurisdiction in a quest for more revenue, Americans are threatened with an un-level playing field.”

But what exactly have these long-standing principles, like the “arm’s length” standard accomplished? They’ve allowed American corporations to tell the IRS that in 2010 their subsidiaries in the Cayman Islands had profits of $51 billion even though that country had a GDP of just $3 billion. They’ve allowed American corporations to tell the IRS that in 2010 their subsidiaries in the British Virgin Islands had profits of $10 billion even thought that country had a GDP of just $1 billion.

Camp and Hatch have claimed in the past that the solution for our corporate income tax is to essentially adopt a “territorial” tax system that would actually increase the rewards for American corporations that manage to make their U.S. profits appear to be earned in Bermuda, the Cayman Islands, the British Virgin Islands, or any other tax haven. Congress needs to move in the opposite direction, as we have explained in detail. 


The Obama Administration Just Made the Research Credit an Even Bigger Boondoggle


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New IRS regulations issued on June 2 expand the ability of companies to claim the research credit retroactively for prior tax years on amended tax returns. This makes it far more likely that the credit will subsidize activities that businesses would have carried out anyway, even in the absence of any tax incentive.

The research credit is supposedly designed to encourage companies to expand the amount of research they conduct. That means it can be thought of as effective only to the extent that it subsidizes research that businesses would not have carried out anyway even if no tax break was offered to them. Of course, if a company carried out research and did not even become aware that it could claim the credit until three years later, there is no way that research was the result of the credit.

In our December 2013 report, “Reform the Research Tax Credit — Or Let It Die,” Citizens for Tax Justice called upon Congress to bar companies from claiming the credit on amended returns. There are two main versions of the research credit available, the regular research credit and the “alternative simplified credit” (ASC). Companies were already allowed to claim the regular credit on amended returns — which CTJ sought to ban. But IRS regulations had barred companies from claiming the ASC on amended returns — until now.

As the CTJ report explained, at least two senators explicitly called for allowing companies to claim the ACS on amended returns, giving absolutely no policy rationale for such a change. It appears likely that the pressure to make this change came from accounting firms like Alliantgroup who approach businesses and offer to help them claim the research credit for activities they carried out in the past.


House Committee Votes to Increase Deficit by Nearly $300 Billion with "Bonus" Depreciation


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Once again, a Congress that cannot enact a $10 billion extension of emergency unemployment benefits is headed toward increasing the deficit by hundreds of billions of dollars to benefit corporations. 

Republicans on the House Ways and Means Committee voted today to make permanent “bonus” depreciation, the most costly provision within the “tax extenders.” Bonus depreciation is a significant expansion of existing breaks for business investment. The Congressional Research Service has reviewed quantitative analyses of the tax break and found that, “... accelerated depreciation in general is a relatively ineffective tool for stimulating the economy.”

This conclusion is not surprising. What businesses need are customers. No business is going to invest to expand operations if there are no customers and thus no way of profiting from that expansion. A tax cut for investment cannot change that logic. The most likely effect of such tax cuts is that they subsidize investment that would have occurred anyway even without a tax break.

Bonus depreciation also departs from general rules on which the tax system is built. Companies are allowed to deduct from their taxable income business expenses so only net profit is taxed. Businesses can also deduct costs of purchases of machinery, software, buildings and so forth.  Since these capital investments don’t lose value right away, these deductions are taken over time. In other words, capital expenses (expenditures to acquire assets that generate income over a long period of time) usually must be deducted over a number of years to reflect their ongoing usefulness.

In most cases firms would rather deduct capital expenses right away rather than delaying those deductions, because of the time value of money. For example, inflation will erode the value of $100 over time, but $100 invested now at a 7 percent return will grow to $200 in ten years.

Bonus depreciation is a temporary expansion of existing breaks that allow businesses to deduct these costs more quickly than is warranted by the equipment’s loss of value or any other economic rationale.

Of course, this tax break makes even less sense if it is permanent. It was enacted to address a recession early in the Bush administration and then enacted again to address the much more severe recession at the end of the Bush administration. The theory behind it had been that firms would be encouraged to invest and expand right away, counteracting the immediate impacts of the recession, because the break would be available only for a limited time. Making the break permanent obviously destroys even this argument for bonus depreciation. 


Pay-Per-Mile Tax is Not a Panacea


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There’s been an increasing amount of talk about whether hybrids and electric cars have made the gas tax obsolete, and whether the time has come to switch to a different system of taxing drivers—like a vehicle miles traveled tax (VMT tax).  In a new report, the Institute on Taxation and Economic Policy (ITEP) argues that the gas tax still has a lot of life left in it, and that lawmakers are setting themselves up for disappointment if they think switching to a flat, per-mile VMT tax is going to fix their transportation budget in the long-run.

As ITEP explains, our roads and bridges are crumbling mainly because federal and state gas tax rates are outdated.  It’s true that fuel-efficiency gains have chipped away at the gas tax base by letting drivers travel further on each tank of gas, but so far that issue has been dwarfed by the impact of inevitable increases in construction costs.  ITEP estimates that “for every $1 that fuel efficiency gains drained from the purchasing power of the nation’s transportation funds, inflation has taken a much larger $4.08.”

In other words, the biggest problem with the gas tax is also one that’s easy to fix: gas tax rates should gradually rise alongside inflation, just like many features of federal and state income tax law.  Or as ITEP explains in a Huffington Post op-ed, “The fact that asphalt tends to become more expensive over time doesn't mean that we need to throw out the gas tax entirely. It only means that we shouldn't expect decades-old gas tax rates to keep pace with the cost of building and maintaining the nation's infrastructure.”

ITEP’s report also reminds readers that the funding problems created by flat tax rates are not unique to the gas tax.  Oregon, for example, is in the process of launching a pilot project that will allow 5,000 volunteer drivers to exempt themselves from gas taxes in exchange for paying a VMT tax.  But Oregon decided to set their experimental VMT tax rate at a flat 1.5 cents per mile—despite the fact that 1.5 cents is guaranteed to buy less asphalt and machinery in the future when those materials become more expensive.  By 2025, Oregon’s VMT tax rate will likely need to rise to 1.89 cents per mile just to maintain the value it has today.

Before completely overhauling its system of taxing drivers, states like Oregon should join the growing list of states that plan ahead for inflation with a “variable-rate” gas tax where the tax rate can grow over time.  And VMT tax proponents should be aware that this more sustainable “variable-rate” style tax rate will need to be carried over into any VMT tax that might eventually be enacted.

Read the report:

Pay-Per-Mile Tax is Only a Partial Fix


Credit Suisse Gets Off Easy for Aiding Tax Evasion


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On Monday, the Department of Justice announced that Credit Suisse, the second largest bank in Switzerland, has agreed to plead guilty to criminal charges for helping Americans open secret bank accounts and use them to evade U.S. taxes. The bank will pay $1.9 billion to the federal government and $715 million to the state of New York in restitution and fines. 

Surprisingly, the agreement does not require the bank to hand over the names of its U.S. customers. In a statement issued the same day, Senator Carl Levin remarked “it is a mystery to me why the U.S. government didn’t require as part of the agreement that the bank cough up some of the names of the U.S. clients with secret Swiss bank accounts. More than 20,000 Americans were Credit Suisse accountholders in Switzerland, the vast majority of whom never disclosed their accounts as required by U.S. law. This leaves their identities undisclosed, with no accountability for taxes owed.”

This is in stark contrast to the 2008 deferred prosecution agreement with UBS, the largest Swiss bank. The financial giant agreed to pay $780 million in penalties and, unlike Credit Suisse, handed over 4,700 names of American account holders.

The Credit Suisse agreement comes after years of investigations into the bank’s illegal activities aiding tax evasion which were detailed in a February report by the Homeland Security Permanent Subcommittee on Investigations. The report lambasted the American and Swiss governments for dragging their feet in efforts to stop it.

The report noted that Switzerland has bank secrecy laws that prevent banks from disclosing the identities of account holders to U.S. tax enforcement authorities. Switzerland enacted a law specifically allowing UBS to provide that information to the U.S. government, but no such law was enacted this time around for Credit Suisse. Instead, the Department of Justice relied on the convoluted process outlined in a U.S.-Swiss treaty to get the information. That process has given greater power to the Swiss government and Swiss courts that have provided as little cooperation as possible.

Although the agreement imposes big fines, it does not revoke Credit Suisse’s license to continue to operate in the U.S. Apparently some fear the repercussions of taking a harder line against the big banks, apprehensive that stronger actions might precipitate a financial crisis. The possibility that the Department of Justice wanted to avoid this and did not push as hard as it might (for example, by demanding the disclosure of account holders) may mean that some banks really are “too big to jail.”

Switzerland has long been known as a tax haven for individuals from all over the world who want to hide their income from tax authorities with the help of banks like UBS and Credit Suisse. It has also been known as a tax haven for corporations like Alliance Boots that want to artificially shift profits there to avoid paying taxes in the countries where their profits are really earned. One might think it would be easier to solve the problem of individuals using tax havens to evade taxes, since that is illegal, whereas the tax avoidance of big corporations like Alliance Boots is not actually illegal (but should be). But the laws against tax evasion by individuals using Credit Suisse and other banks to hide their income are only as strong as the will of governments to enforce them.

A commonsense bill introduced today would prevent American corporations from pretending to be "foreign" companies to avoid taxes even while they maintain most of their ownership, operations and management in the United States.

Sponsored by Sen. Carl Levin and Rep. Sander Levin, the Stop Corporate Inversions Act requires the entity resulting from a U.S.-foreign merger to be treated as a U.S. corporation for tax purposes if it is majority owned by shareholders of the acquiring American company or if it is managed in the U.S. and has substantial business here.

These are common sense rules and many people might be surprised to learn that they are not already part of our tax laws. In fact, the law on the books now (a law enacted in 2004) recognizes the inversion unless the merged company is more than 80 percent owned by the shareholders of the acquiring American corporation and does not have substantial business in the country where it is incorporated.

The current law therefore does prevent corporations from simply signing some papers and declaring itself to be reincorporated in, say, Bermuda. But it doesn’t address the situations in which an American corporation tries to add a dollop of legitimacy to the deal by obtaining a foreign company that is doing actual business in another country.

The management of Pfizer recently attempted to acquire the British drug maker AstraZeneca for this purpose and a group of hedge funds that own stock in the drug store chain Walgreen have been pushing that company to increase its stake in the European company Alliance Boots for the same purpose.

The Stop Corporate Inversions Act is based on a proposal that was included in President Obama’s most recent budget plan, which is projected by the administration and the Joint Committee on Taxation to raise $17 billion over a decade. The only difference between the House and Senate version of the bill is that the House version is permanent while the Senate version is effective for just two years. Apparently the Senate cosponsors include some lawmakers who believe that the issue of inversions can be addressed as part of tax reform at some point over the next two years and a stopgap measure is needed until then.

Either way, Congress needs to act now. House Ways and Means Committee chairman Dave Camp and Senate Finance Committee ranking Republican Orrin Hatch have both suggested that Congress should do nothing at all except as part of a major comprehensive tax reform. Given that the only tax reform plan Camp has been able to produce was a regressive $1.7 trillion tax cut that didn’t even meet his own stated goals of revenue and distributional neutrality, it’s obvious that Congress is a long way off from settling all the issues related to tax reform. In the meantime, how often will we be asked to play along as major American corporations pretend to be “foreign” in order to avoid paying taxes?


Just in Time for Memorial Day: Primers on Federal and State Gasoline Taxes


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The summer driving season is kicking off this weekend, so our colleagues at the Institute on Taxation and Economic Policy (ITEP) have released a pair of updated policy briefs explaining everything you need to know about the federal and state gasoline taxes that pay for our roads and transit systems.

The federal brief explains that the nation’s 18.4 cent gas tax has been stuck in neutral for over 20 years, and that construction cost inflation and fuel efficiency gains have steadily chipped away at the value of the tax.  Since 1997 (the year in which the gas tax was rededicated exclusively to transportation spending), the federal gas tax has lost 28 percent of its value as a result of these two factors.

The state brief is slightly more optimistic, noting that while most states still levy stagnant fixed-rate gas taxes similar to the federal tax, the clear trend is toward a more sustainable, variable-rate design where the tax rate can grow over time alongside inflation or gas prices.

Read the briefs

The Federal Gas Tax: Long Overdue for Reform

State Gasoline Taxes: Built to Fail, But Fixable


States' Failed Tax Policies Have Some Governors Throwing Red Herrings


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Two years ago as part of the fiscal cliff deal, members of Congress sensibly allowed a subset of the Bush tax cuts for the wealthy to expire, including an increase in taxes on capital gains. Many wealthy investors, who have the benefit of tax advisors, chose to sell stocks in 2012 rather than wait for potentially higher federal income tax rates in 2013. The result was a boost in federal and state income tax collections in fiscal year 2013.

To be clear, the fiscal cliff deal’s anticipated tax hikes on the investor class didn’t increase the amount of revenue from capital gains income—it just shifted that income from fiscal year 2014 to fiscal year 2013. This meant that state lawmakers needed to plan for an extra shot of revenue in 2013, and an equivalent amount of missing revenue in 2014.

Most states planned accordingly. In states such as California, this basic budgeting matter hardly caused a ripple: the Golden State experienced a surge in personal income tax revenues in April 2013 and a large decline this year.  But, they saw the decline coming and when the dust cleared, the state actually brought in more money from personal income taxes than expected in April.

A handful of other states, however, didn’t plan as well and are attempting to blame their failed tax policies on the fiscal cliff deal. Kansas is a prime example.

Two years ago, Kansas Gov. Sam Brownback declared that his plan to repeal the state’s income tax would be “a real live experiment” in supply-side economics. He pushed through two successive tax cuts that disproportionately benefited the richest Kansans, assuring the public these cuts would pay for themselves. Now he is facing a barrage of criticism over growing evidence that state tax revenues are declining in the wake of these cuts.

The pressure seems to be getting to the Brownback administration: earlier this month, Brownback’s revenue secretary, faced with a 45 percent decline in April tax revenues relative to the same month in 2013, called the month’s revenue slide “an undeniable result of President Obama’s failed economic policies.”

Kansas experienced the same revenue bubble in 2013, and the same trough in 2014, as did California and many other states. The state Department of Revenue’s April 2014 tax report notes that April 2013 revenues “increased dramatically from the previous year, about 53 percent,” due to accelerated capital gains encouraged by the fiscal cliff deal. In that context, the reported 45 percent decline in April 2014 is not only predictable, it sounds like a pretty good deal.

So why is Gov. Brownback’s administration citing this income-tax timing shift as evidence that President Obama’s policies have caused “lower income tax collections and a depressed business environment?” And why are governors in New Jersey and North Carolina making similar claims? In both Kansas and the Tarheel State, the governor is under pressure to defend the affordability of recently enacted income tax cuts.

Pinning the blame for revenue shortfalls on the fiscal cliff deal deflects scrutiny from state tax cuts costing more than advertised. In New Jersey, as the Tax Foundation has noted, Gov. Christie has been accused of using wildly optimistic revenue forecasts as part of his 2013 reelection campaign, and now he has some explaining to do about why his projections were so wrong. Once again, the Obama Administration serves as a convenient scapegoat for poor fiscal management decisions by state leaders.

But the news is not all bad out of Kansas: in a rhetorical flourish that would make North Korea envious, just one month before the Kansas Department of Revenue blamed President Obama for April’s decline in tax revenues, they explained a March increase in tax revenues as evidence that “ [w]e’re seeing the Kansas economic engine running.”

Kansas is, by all accounts, in a real fiscal jam. The ballooning cost of Brownback’s tax cuts and a recent state Supreme Court mandate that Kansas spend additional money on schools has made the task of a balanced budget very difficult for state lawmakers. But if Kansas lawmakers are in a fiscal hole, they need look no further than the state capitol to determine who is wielding a shovel.


Why Does Pfizer Want to Renounce Its Citizenship?


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After years of being a bad corporate citizen, Pfizer is now seeking to renounce its U.S. citizenship entirely by reincorporating in Britain as part of its hoped-for purchase of British pharmaceutical company AstraZeneca. While the deal would allow Pfizer to claim on paper that it’s a British company, it would not require the company to move its headquarters abroad.  In fact, the main effect would be to allow Pfizer to reduce its taxes to an even lower level than they already are.

While the audacity of this newest maneuver by Pfizer is striking, it’s not shocking. The company has a history of engaging in offshore income-shifting games. Over the past five years for example, the company has reported that it lost about $14.5 billion in the United States, while at the same time it earned about $75.5 billion abroad. Is the United States just a really bad market for Pfizer? It’s unlikely given that Pfizer also reports that around 40 percent of its revenues are generated in the United States. The more realistic explanation is that Pfizer is aggressively using transfer pricing and other tax schemes to shift its profits into offshore tax havens.

Despite its already low U.S. taxes, Pfizer has been aggressive in pushing Congress to preserve and expand loopholes in the corporate tax code. Over the past five years, Pfizer spent more than $72 million lobbying Congress. It reports that “taxes” are second only to “health” among issues it lobbies on. In addition to its own efforts, Pfizer has helped sponsor four different business groups (Alliance for Competitive Taxation, Campaign for Home Court Advantage, LIFT America and the WIN American Campaign) pushing for lower corporate taxes.

Over the years, Pfizer’s aggressive lobbying efforts have taken billions of dollars out of the U.S. Treasury, at the expense of ordinary taxpayers. Its biggest coup was the passage of a repatriation holiday (PDF) in 2004, for which it was the largest single beneficiary and ultimately saved the company a whopping $10 billion. On the state and local level Pfizer has also done very well for itself, receiving over $200 million in subsidies and tax breaks over the past couple decades.

What makes Pfizer’s tax avoidance efforts particularly galling is how it’s also happy to take full advantage of U.S. taxpayer assistance via government spending. From 2010 to 2013 for instance, Pfizer sought and received $4.4 billion in contracts to perform work for the federal government. On top of this, Pfizer has directly benefited from taxpayer funded research to develop drugs like Xelijanz, which was first discovered by government scientists at the National Institutes of Health (NIH). Finally, it’s worth remembering that without Medicaid and Medicare, Pfizer would lose out on billions from customers who would be unable to afford to purchase their drugs.

All this begs the questions of why Pfizer thinks it is worthy of profiting from taxpayer-funded research, corporate tax subsidies, and federal health care spending,  but feels no corporate responsibility to pay its fair share of U.S. income taxes.

Congress, should it decide to do so, can easily put a stop to Pfizer’s offshore shenanigans. To prevent Pfizer, as well as companies like Walgreens, from relocating to another country to avoid taxes, Congress could pass a proposal by the Obama administration that would limit the ability of domestic companies to expatriate. It would nix any repatriation if a company continues to be controlled and managed in the United States or if at least 50 percent of the shareholders stay the same after the merger. To address Pfizer’s broader tax dodging, Congress should also require that companies pay the same tax rate on both their offshore and domestic profits, by ending deferral of taxes on foreign profits.

Photo of Pfizer Pill via Waleed Alzuhair Creative Commons Attribution License 2.0


Rep. Dave Camp's Latest Tax Gambit Is "Fiscally Irresponsible and Fundamentally Hypocritical"


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Fresh off a two-week spring recess, House Ways and Means Committee Chairman Dave Camp today shepherded through six bills that would provide corporate tax breaks at a whopping cost of more than $300 billion over the next decade.

The tax breaks are a subset of the temporary business tax breaks or “tax extenders.” Given the nation’s many other pressing priorities, its nothing short of outrageous that the committee, on a party-line vote, approved this package of corporate giveaways.

Rep. Sander Levin, the committee’s ranking Democrat, called this approach “fiscally irresponsible and fundamentally hypocritical” given House leaders’ refusal to extend emergency unemployment assistance or make permanent tax breaks that will help working people with children, including recent EITC and child tax credit expansions.

“To say Republican action today is hypocritical is a serious understatement,” Levin said. He and his Democratic colleagues voted against each of the measures, while Camp’s Republican colleagues voted in favor of each.

The party-line vote was not a certainty given many of the committee’s Democrats are sponsors of the bills. Ultimately, many Ways and Means Democrats said although they support making certain business tax breaks permanent, they oppose doing so in a way that provides hundreds of billions of dollars in deficit-financed tax breaks for businesses while the House refuses to address the needs of the unemployed and working people with children. The unified opposition may mean the full House and Senate may think twice before following Camp’s approach.

Citizens for Tax Justice has explained that the tax breaks made permanent by this legislation demonstrate fealty to corporations over ordinary people and are simply bad policy.

A recent CTJ report describes significant problems in the research credit that should be addressed before it is extended or made permanent. CTJ and other organizations have also called upon Congress to allow the expiration of two breaks that encourage offshore tax avoidance: the so-called “active financing exception” and “look-through rule” for offshore subsidiaries of American corporations.

The Senate Finance Committee has taken a different approach. Instead of choosing certain temporary tax breaks to make permanent, it voted earlier this month to extend the entire package of 50-plus expiring provisions (often called the “tax extenders”) for two years, without offsetting the cost. CTJ has explained that this approach is also deeply problematic.

Some of the tax extenders should be dramatically reformed, and some should be allowed to expire altogether. None should be enacted unless Congress offsets the costs by repealing other tax breaks or loopholes that benefit businesses.

Rep. Dave Camp, the chairman of the House Ways and Means Committee, will take the first step to make permanent certain business tax breaks on Tuesday, when his committee marks up legislation that would increase the deficit by $300 billion over the coming decade.

The provisions are among the “tax extenders,” the package of tax breaks that mostly benefit businesses and that Congress extends every couple of years. We have pointed out that even if Congress simply continues its practice of extending these tax breaks for another two years, it would signal that these corporate tax breaks will likely be with us forever — which the Congressional Budget Office projects would increase the deficit by $700 billion over the coming decade. Camp’s move to make certain of the tax extenders permanent would make that unfortunate outcome even more likely.

These bills should be rejected for several reasons.

1. It is plainly hypocritical for Congress to provide hundreds of billions in deficit-financed tax breaks for corporations while refusing to help the long-term unemployed, ostensibly because of the impact it would have on the federal budget.

2. One of the provisions Camp would make permanent is the research tax credit, which needs major reform before it can come close to carrying out its goal of encouraging businesses to conduct research.

3. Two other provisions Camp would make permanent are tax breaks that facilitate offshore tax avoidance by corporations —the “active finance exception” and “CFC look-through rule.”

Each of these three reasons to reject the legislation is discussed below.

1. Congressional Hypocrites Would Provide Deficit-Financed Tax Breaks for Businesses, Nothing for the Unemployed

It is plainly hypocritical for Congress to provide hundreds of billions of dollars in deficit-financed tax breaks for corporations while refusing to extend Emergency Unemployment Compensation (EUC) to the long-term unemployed, which expired in December, ostensibly because of the impact it would have on the federal budget. Since the 1950s, Congress has always continued such help until the long-term unemployment rate fell lower than it is today. As the Coalition on Human Needs explains

EUC has long been considered an emergency program that does not have to be paid for by other spending reductions or revenue increases. Five times under President George W. Bush, when the unemployment rate was above 6 percent, unemployment insurance was extended without paying for it and with the support of the majority of Republicans.

Now many lawmakers are establishing a new norm: All direct spending must be paid for, even if it’s temporary emergency legislation to help families of unemployed workers, but spending in the form of tax cuts for businesses does not have to be paid for. The bill approved by the Senate before the April recess to extend EUC includes provisions that offset the cost. (House Speaker John Boehner has nonetheless refused to bring the bill to a vote in the House.)

2. Congress Should Not Make Permanent the Research Credit before Reforming It

The most costly of the bills that will be marked up Tuesday would make permanent the research credit, which is supposed to encourage research but actually subsidizes activities no one would call research, and activities that companies would do in the absence of any subsidy.

A report from Citizens for Tax Justice explains that the research credit needs to be reformed dramatically or allowed to expire. One aspect of the credit that needs reform is the definition of research. As it stands now, accounting firms are helping companies obtain the credit to subsidize redesigning food packaging and other activities that most Americans would see no reason to subsidize. The uncertainty about what qualifies as eligible research also results in substantial litigation and seems to encourage companies to push the boundaries of the law and often cross them.

Another aspect of the credit that needs reform is the rules governing how and when firms obtain the credit. For example, Congress should bar taxpayers from claiming the credit on amended returns, because the credit cannot possibly encourage research if the claimant did not even know about the credit until after the research was conducted.

As it stands now, some major accounting firms approach businesses and tell them that they can identify activities the companies carried out in the past that qualify for the research credit, and then help the companies claim the credit on amended tax returns. When used this way, the credit obviously does not accomplish the goal of increasing the amount of research conducted by businesses.

3. Congress Would Make Permanent Two Tax Provisions that Facilitate Offshore Tax Avoidance

The general rule is that American corporations are allowed to “defer” (indefinitely delay) paying U.S. taxes on offshore profits that take the form of “active” income (what most of us think of as payment for selling a good or service) as long as those profits are officially offshore. The general rule also is that American corporations cannot defer paying U.S. taxes on “passive” income like dividends or interest on loans, because passive income is extremely easy to shift from one country to another for the purpose of tax avoidance.

Two of the provisions that would be made permanent on Tuesday poke holes in this general rule.

One of these provisions is the “active financing exception” but ought to be remembered as the “G.E. loophole.” In a famous story reported in the New York Times in 2011, the director of General Electric’s 1,000-person tax department literally got on his knees in the office of the House Ways and Means Committee as he begged for an extension of the “active finance exception,” which allows G.E. to defer paying any U.S. taxes on offshore profits from financing loans.

G.E. publicly acknowledges (in the information it provides to shareholders by filing with the Securities and Exchange Commission) that the company relies on the active finance exception to reduce its taxes. 

The other provision is the “look-through rule” for “controlled foreign corporations,” (for the offshore subsidiaries of American corporations). The look-through rule allows a U.S. multinational corporation to defer paying U.S. taxes on passive income, such as royalties, earned by an offshore subsidiary if that income is paid by another related subsidiary and can be traced to the active income of the paying subsidiary.

The closely watched Apple investigation by the Senate Permanent Subcommittee on Investigations a year ago resulted in a report — signed by the subcommittee’s chairman and ranking member, Carl Levin and John McCain — that listed the CFC look-through rule as one of the loopholes used by Apple to shift profits abroad and avoid U.S. taxes.

 

If a group of Walgreens shareholders get their way, the drug retailer will restructure itself to become — on paper — a foreign company for tax purposes. It’s likely that nothing would actually change in terms of Walgreen’s business or management. The scheme is a simply a gimmick to avoid taxes. The bad news is that the laws that are supposed to to prevent this kind of tax avoidance are weak, and Congress, particularly its Grover Norquist-directed contingent, has shown no inclination to address this sort of problem. The good news is that the Obama administration has at least proposed a reform that probably would prevent this sort of corporate tax avoidance.

In some parts of the United States, there is a Walgreens every few miles or even every few
blocks, and it’s difficult to think of a company that seems more American. But tax rules don’t always conform with common sense.

Walgreens recently acquired nearly half of the Swiss-based pharmacy chain Alliance Boots, and could acquire a majority of the company. A group of hedge funds that own almost 5 percent of Walgreens’s stock demand that it use the merger to officially become a “foreign” corporation for tax purposes. This type of maneuver is often referred to as a corporate “inversion.”

When a corporation renounces its Americanism, little or nothing about the way the company does business or is managed changes, and yet the company can claim to be a brand new entity incorporated in another country. For example, a U.S. corporation can merge with a foreign corporation resulting in a new company that is 80 percent owned by shareholders of the original U.S. corporation and still be treated as a foreign corporation for tax purposes. This is true even if the new company is managed and controlled in the United States.

Some anti-tax types argue that the problem facing Walgreens and other American corporations is that the United States taxes both domestic and offshore profits, and that this is unfair. But that’s neither true nor the real motivation behind corporate inversions.

U.S. taxes levied on American corporations' offshore profits are extremely minimal or non-existent in practice. One reason for this is that American corporations get a tax credit equal to any taxes they pay to foreign governments. Another reason is that companies are allowed to “defer” U.S. taxes until they officially bring their offshore profits to the U.S.

The real reason American corporations sometimes invert is that it makes it easier to avoid U.S. taxes on their U.S. profits. Corporate inversions are often followed by “earnings-stripping,” which makes U.S. profits appear, on paper, to be earned offshore. The American part of the company is loaded up with debt that is owed to the foreign part of the company, so that interest payments officially reduce the American profits, which are effectively shifted to the foreign part of the company.

Congress can tighten up rules to prevent all this from happening. As CTJ has explained, under a reform included in President Obama’s most recent budget plan, a company that results from the merger of a U.S. corporation and a foreign corporation will be taxed as an American company if more than half its voting stock is owned by shareholders of the original U.S. corporation. That’s far more reasonable than the current rule, which would allow the resulting company to pretend that it’s a “foreign” corporation for tax purposes even if 80 percent of its voting stock is still owned by the shareholders of the original U.S. corporation.

Under another part of the Obama proposal, the resulting company would be taxed as an American corporation (regardless of how much the ownership has or has not changed) if it has substantial business in the U.S. and is managed and controlled in the U.S.

The President’s budget also includes a proposal to make it more difficult for all U.S. corporations (not just those involved in inversions) to engage in earnings stripping.

It’s impossible to know what Walgreens will do. Maybe it will be too ashamed to renounce its ties to the U.S., or fear customer blow back. But Congress should enact common sense reforms to ensure that it and other American corporations don’t avoid U.S. taxes simply by pretending to be foreign companies.

Photo via Kai Morgener Creative Commons Attribution License 2.0


Partners in Crime? New GAO Report Shows that Large Corporate Partnerships Can Operate Without Fear of Audits


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More than a decade ago, a Republican-led Congress held a series of “show trials” designed to paint a picture of the Internal Revenue Service as intrusive, jackbooted thugs. It worked — at least well enough to convince Congress, which has since embarked on a decade-long trend of gradually defunding the IRS’s enforcement capabilities. But a new report from the General Accounting Office  (GAO) is the latest indicator that the pendulum has swung too far toward defanging the IRS’s enforcement capabilities. The GAO report shows that a business form known as “widely held partnerships” is growing dramatically — and that the IRS is able to audit less than 1 percent of the very largest such firms.

Businesses that are partnerships are not subject to the corporate income tax. Instead, the profits are passed along to the partners, who pay personal income taxes on them. Under current rules, this means that when the IRS wants to audit the partnership’s tax filings, it must examine the tax returns of each of the organization’s partners — and levying an adjustment is similarly burdensome for the IRS. The largest such partnerships, including hedge funds and private equity firms, can have hundreds or even thousands of partners. Even an adequately funded IRS might understandably find it difficult to audit even the most blatant partnership tax dodger.

But of course, the IRS is not adequately funded.The agency has lost 10,000 employees since 2010, more than 30 percent of which worked in enforcement areas.

If the prospect of large partnerships being able to bank on the inability of the IRS to audit them sounds like trouble, it is: the revenue stakes are potentially huge. The GAO estimates that the largest partnerships had $69.1 billion in total net income in 2011 alone. Any aggressive tax avoidance practiced by these firms will have a real effect on our nation’s budget deficit.

In a statement on the report, Senator Carl Levin from Michigan said, “Auditing less than 1 percent of large partnership tax returns means the IRS is failing to audit the big money. It means over 99 percent of the hedge funds, private equity funds, master limited partnerships, and publicly traded partnerships in this country, some of which earn tens of billions each year, are audit-free.”

Astonishingly, both President Barack Obama and outgoing House Ways and Means Chair Dave Camp have proposed sensible (partial) solutions to this problem. Both propose to allow the IRS to audit partnerships at the entity level, the same way they audit publicly traded corporations. Sadly, neither has proposed to completely reverse the damaging loss of IRS audit capacity caused by recent budget cuts.

Unfortunately, Camp’s proposal is embedded within a larger tax plan that altogether would result in a massive $1.7 trillion dollar deficit and make the tax code more regressive. Congress should enact the specific reform that would address the problem with partnerships now, on its own.


NASCAR Tax Breaks Just Another Reason Corporate Tax Is on the Skids


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Back in 2004, as the presidential contest between George W. Bush and John Kerry heated up, so-called NASCAR dads were identified as a potential key constituency in swinging the election results—and the NASCAR dad vote was courted accordingly by both sides. Entirely coincidentally, Congress chose to codify a four-year “NASCAR tax break” into law in 2004 as part of the American Jobs Creation Action of 2004, a corporate-gift-laden package pushed through just before the election. The idea was that corporations building race tracks and related facilities should be able to write off costs of these investments over seven years, a much shorter period than the likely lifespan of the tracks.

Although some members of Congress have attempted to make this tax break permanent since then (most notably former Pennsylvania Sen. Rick Santorum’s Fairness and Permanency Act of 2005) none have succeeded. But Congress has done what, in the eyes of the racing industry, is the next best thing: they’ve made the NASCAR break part of the “tax extenders,” the growing array of temporary, primarily corporate tax breaks that are routinely authorized by Congress for one or two years to obscure their long-term cost.

The International Speedway Corporation, which owns tracks in Daytona, Darlington and Watkins Glen, has benefitted handsomely from Congress’s largesse. In 2013, the company reported $73 million in U.S. profits, didn’t pay a dime in federal income tax but received a rebate of $8 million. In fact, over the past five years, ISC has enjoyed a federal tax rate of just 11 percent on $400 million in US profits.

ISC’s competitor Speedway Motorsports has been even more blessed: the company reports a 6.9 percent federal tax rate over the past five years on $287 million in U.S. profits, and reports zeroing out its federal income tax entirely in two of those years.

To be clear, if the federal corporate income tax is on the skids, the NASCAR tax break plays only a small direct part in this decline. The temporary extension of the tax break envisioned by Sen. Ron Wyden’s “Expiring Provisions Improvement Reform and Efficiency Act of 2014” would never cost more than $18 million a year. But the NASCAR giveaway is perfectly emblematic of the “death by a thousand cuts” that plagues the corporate tax: as long as the racetrack industry continues to enjoy this special privilege, it will be difficult for Congress to repeal tax breaks for other favored businesses. Any movement toward true corporate tax reform needs to start by rooting out even the smallest targeted corporate giveaway. Wyden’s extenders bill fails utterly to achieve this.   


Delayed Action on Cap and Trade Comes at a Cost


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In spite of mounting evidence that greenhouse gas emissions will continue to increase the earth’s temperatures, political polarization in Washington is standing in the way of the United States doing its part to address this global crisis.

A new report from the United Nations’ Intergovernmental Panel on Climate Change paints a sobering picture of the need for the governments to take immediate action to reduce carbon emissions. The report finds that despite ongoing efforts by developed nations to curb these emissions, greenhouse gas emissions "have grown at about twice the rate in the recent decade (2000–2010) than any other decade since 1970.” The report also outlines compelling arguments for enacting policy solutions (such as a carbon tax or a “cap and trade” mechanism) to curb emissions in the very near term, because delays could make it impossible to prevent substantial increases in worldwide temperatures and would likely increase the cost of any mitigation efforts.

But as the New York Times notes in its coverage of the report, these findings are falling on deaf ears in Congress. The Times spends far more ink detailing the political impossibility of a carbon tax than it does discussing the report’s bleak findings. The politics surrounding the carbon tax are, indeed, challenging. Congressional efforts to reform the tax code are widely perceived to have ground to a halt in this election year, and any effort to hike carbon taxes would face additional opposition from lawmakers.

This opposition is, in part, sensible: in general, a national tax on consumption is a bad idea that would make our already unfair tax system even more so. Taxes on consumption are regressive, taking a much larger percentage of income from middle- and low-income families than from the rich. This is because middle- and low-income families must spend most or all of their income on basic necessities, while rich families can put a lot of their income toward savings (which are not touched by a consumption tax).

A tax on carbon emissions, while inherently regressive, could be coupled with features to keep it from burdening middle-income Americans and hitting low-income Americans the hardest. Because any such tax would likely generate substantial new revenues—the Congressional Budget Office (CBO) has found that a carbon tax that starts off at $20 per ton and then rises by 5.6 percent annually could raise as much as $1.2 trillion over ten years—it would be straightforward to design a tax cut, such as a reduction in the federal payroll tax or a targeted tax credit, that would help to offset the impact of the carbon tax on middle- and low-income families. Since our tax system already imposes substantial taxes on low-income families who would be hit hardest by a carbon tax, a low-income offset must be part of any acceptable environmental tax reform.

And there are other compelling arguments in favor of some form of carbon tax. It would create a market incentive to develop low- or zero-carbon emission energy sources and simultaneously create a market disincentive to using carbon emitting energy sources. In other words, while it would raise substantial new revenues, it would reduce the amount of greenhouse gasses released into the atmosphere, as manufacturers, shippers, and consumers shift away from fossil fuels.

Of course, discussions of environmental tax reform should not distract lawmakers from the fundamental challenges facing our existing tax code. As we have argued, both the individual and corporate income taxes are ridden with loopholes that should be repealed as part of revenue-raising federal tax reform. And we’ll shed no tears if Congress starts its 2015 session by requiring General Electric and other big multinationals to pay their fair share of the corporate tax rather than dealing with the thorny carbon tax issue. But the latest UN report is a stark reminder that the potential costs of delay on environmental tax reform will be substantial.

According to the Daily Tax Report (subscription only) a Treasury Department official said publicly on April 8 that the government’s goal in international negotiations over corporate tax dodging is to prevent dramatic change and preserve the “arm’s length” standard that has proven impossible to enforce.

Last summer, the Organization for Economic Co-operation and Development (OECD) released an “Action Plan on Base Erosion and Profit Shifting” in response to public outcry in several nations that multinational corporations are using tax havens to effectively avoid paying taxes in the countries where they do business.

At that time, CTJ criticized the plan as too weak, arguing that:

While the plan does offer strategies that will block some of the corporate tax avoidance that is sapping governments of the funds they need to make public investments, the plan fails to call for the sort of fundamental change that would result in a simplified, workable international tax system.

Most importantly, the OECD does not call on governments to fundamentally abandon the tax systems that have caused these problems — the “deferral” system in the U.S. and the “territorial” system that many other countries have — but only suggests modest changes around the edges. Both of these tax systems require tax enforcement authorities to accept the pretense that a web of “subsidiary corporations” in different countries are truly different companies, even when they are all completely controlled by a CEO in, say New York or Connecticut or London. This leaves tax enforcement authorities with the impossible task of divining which profits are “earned” by a subsidiary company that is nothing more than a post office box in Bermuda, and which profits are earned by the American or European corporation that controls that Bermuda subsidiary.

The rules that are supposed to address this today (but that fail miserably) require multinational corporations to deal with their offshore subsidiaries at “arm’s length.” This means that, for example, a corporation based in New York that transfers a patent to its offshore subsidiary should charge that subsidiary the same price that it would charge to an unrelated company. And if the New York-based corporation pays royalties to the offshore subsidiary for the use of that patent, those royalties should be comparable to what would be paid to an unrelated company.

But when a company like Apple or Microsoft transfers a patent for a completely new invention to one of its offshore subsidiaries, how can the IRS even know what the market value of that patent would be? And tech companies are not the only problem. The IRS apparently found the arm’s length standard unenforceable against Caterpillar when that company transferred the rights to 85 percent of its profits from selling spare parts to a Swiss subsidiary that had almost nothing to do with the actual business.

It turns out that some of the OECD governments are proposing reforms that challenge the arm’s length concept at least to some degree, but the US government is pushing a line that is more favorable to the multinational corporations.

Robert Stack, the Treasury Department deputy assistant secretary for International Affairs in the Office of Policy, is quoted by the Daily Tax Report as saying that the “main challenge for the U.S. is to get this project to work back from blunt instruments and towards policies that are understandable, fair, clear, administrable, and reach the right technical tax results.”

Stack also said that the “United States feels very strongly that the 2014 deliverable should be a clear articulation of intangibles under the arm's-length principle—and should reserve on the evaluation of potential special measures to treat BEPS [base erosion and profit-shifting] that depart from the arm's-length principle.”

The international tax system needs reform that is more fundamental than anything that either the OECD or the US is contemplating. Any system that relies on the artificial boundaries between the dozens (or hundreds) of entities in a multinational group and the ways they price transactions between them is unworkable. The US’s “deferral” system and Europe’s “territorial” system, which both require transfer-pricing rules and the hopeless “arm’s length” standard, should be eliminated. CTJ has proposed its own tax reform plan that would provide fundamental solutions. 


"Tax Extenders" Would Mean Even Lower Revenue than the Ryan Plan


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The tax extenders making their way through Congress would cut federal revenue below the level proposed in Rep. Paul Ryan’s budget. This once again demonstrates that anything goes when it comes to providing tax breaks for corporations.

As CTJ explained in its report last week, the Ryan plan includes huge tax cuts for the very rich. But Ryan nonetheless proposes to eliminate unspecified tax breaks to offset the costs and thus collect the same amount of revenue as current law.

The tax extenders, on the other hand, would cut revenue, and increase the deficit, by $700 billion over the coming decade if Congress continues its practice of extending these breaks every couple of years or makes them permanent.

Even organizations not particularly known for progressive positions have pointed out this fact and how it damages the fiscal outlook that lawmakers claim to care about whenever they are discussing domestic spending.

CTJ has explained that the tax breaks that make up the bulk of the “tax extenders” do not provide any economic benefits that would justify the increase in the budget deficit that would result.

We have called the “tax extenders” the biggest budget buster many have never heard of. Fortunately, more and more people are publicly decrying this giveaway to corporations.

Citizens for Tax Justice:
“Four Reasons Why Congress Should Reject the "Tax Extenders" Unless Dramatic Changes Are Made”

Citizens for Tax Justice op-ed in the Hill:
“Tax Extenders: The Biggest Budget Buster You’ve Never Heard Of”

Americans for Tax Fairness:
“35 National Organizations Say Oppose Offshore Corporate Tax Loopholes in Tax-Extenders Legislation”

The Financial Accountability & Corporate Transparency (FACT) Coalition:
“FACT Urges Chairman Wyden: Don’t Let First Major Action Favor Multinationals”

The National Priorities Project:
“Congress May Extend Corporate Tax Breaks But Not Unemployment Benefits”

U.S. PIRG:
Offshore Loophole Got Snuck Back in Tax Extenders Bill Behind Closed Doors

New York Times editorial:
“Hypocritical Tax Cuts”

Washington Post editorial:
“Lawmakers Should Offer Up a Fiscally Responsible ‘Tax Extenders’ Bill”

 


How'd Caterpillar Dodge All Those Taxes?


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Large tech companies are among the most notorious tax dodgers, but they are hardly the only ones to enlist crafty accountants to avoid paying U.S. taxes.

So it’s refreshing to see lawmakers also taking a look at other companies, as Sen. Carl Levin’s Permanent Subcommittee on Investigations did last week when it documented that Caterpillar is exploiting loopholes to dodge taxes just like companies in Silicon Valley.

Caterpillar is one of the most widely recognized manufacturers of heavy construction equipment in the United States. Its major profit center is spare parts sales.ons did last week when it documented that Caterpillar is exploiting loopholes to dodge taxes just like companies in Silicon Valley.

So just how did Caterpillar dodge taxes?

Until 1999, Caterpillar purchased spare parts from suppliers and subsequently resold them to local dealers. But for the past 15 years, Caterpillar has transferred ownership of most of its parts to a Swiss subsidiary, CSARL. Even though the Swiss subsidiary “owned” the parts, Caterpillar continued to store them in its Illinois warehouse and send them directly to buyers, exactly as it always has.

But when Caterpillar shipped the parts to overseas customers, it attributed the profits to CSARL, even though the Swiss subsidiary never took physical possession. The result? According to the subcommittee report, the company declared at least 85 percent of its profits on sales to non-U.S. customers—profits that appeared on U.S. tax returns before 1999—as Swiss income, subject only to a special single-digit tax rate negotiated directly with the Swiss government.

In depositions before the subcommittee, Caterpillar executives and tax attorneys were sometimes remarkably candid in admitting that this maneuver did not change the way the company does business, and the rationale for the move was simply to avoid taxes. During investigations prior to last week’s hearing, this exchange occurred:

Government: Was there any business advantage to Caterpillar, Inc., to have this arrangement put into place other than the avoidance or deferral of income taxation at higher rates?

Caterpillar: No, there was not.

Caterpillar Counsel: Let’s take a break.

The subcommittee report estimates that since 1999, Caterpillar has shifted $8 billion in profits offshore, avoiding $2.4 billion in U.S. income taxes.

Policy solutions?

Fortunately, Congress has the option to enact straightforward policies to end shenanigans practiced by Caterpillar, as well as the army of tech-company tax dodgers. Ending deferral—the ability of multinationals to postpone paying U.S. taxes on their foreign profits until those profits are brought home to the US—would remove the incentive of companies to shift their income into foreign tax havens because it would require companies like Caterpillar to pay tax at the U.S. rate (minus any taxes already paid to foreign governments) on offshore profits. Until Congress finds the backbone to enact this needed reform, it can put a stop to Caterpillar’s hijinks using the “economic substance” doctrine it codified in 2010, which says that for a corporate transaction to be recognized for tax purposes, the transaction must have a legitimate non-tax business purpose—a purpose Caterpillar executives were generally at a loss to identify.

Congress should also take a hard look at the role played in this mess by their accountant, PricewaterhouseCoopers, which actually dreamed up this tax dodge for Caterpillar in its capacity as the company’s tax advisor, and later approved its own tax-dodging ideas in its capacity as Caterpillar’s tax auditor.

It’s not acceptable for burglars to moonlight as parole officers, nor should accounting firms be free to create clear conflicts of interest by evaluating their own tax schemes.


Some Unregulated Preparers Use Tax Season for Illicit Profits


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It’s tax time. Across the nation, millions of families are rolling up their sleeves to file federal and state income tax forms—and millions more are awaiting refunds. But as a New York Times report documents, a cottage industry of untrained, unregulated “tax preparers” is jeopardizing those refunds for many low-income families. Astonishingly, more than half of the 79 million returns filed in 2011 were completed by paid preparers who were entirely unregulated. And all too often, these unregulated tax preparers are using tax season as an illicit profit-making enterprise, illegally claiming tax breaks for their taxpayer clients and keeping a share of the haul.

The Obama administration has, sensibly, attempted to implement regulations that would allow the Internal Revenue Service to regulate tax preparers. But earlier this year, a federal court struck down the regs as beyond the IRS’s regulatory authority.

Some tax preparers are vociferously opposed to having their industry regulated. Hysterically, one itinerant tax preparer complained to the author of the Times report that, “Each year it’s getting tighter and tighter…It’s hard to defraud the government now.” But a recent report from the National Taxpayer’s Advocate—a position created to represent the interests of individual taxpayers in their dealings with tax administrators—concludes that there is currently no “meaningful IRS oversight of preparers” at all, and calls for reforms mirroring those sought by the IRS’s now-discontinued attempts to regulate the industry.

The good news is that Congress can easily enact legislation that achieves the regulatory goals President Obama has proposed. In fact, Obama’s proposed budget for the upcoming fiscal year includes such a measure. Senate Finance Committee Chair Ron Wyden has scheduled a hearing on predatory tax preparers for today, saying that “there should be a floor of basic consumer protection and fairness” for low-income taxpayers depending on tax filing assistance.

Congress has, laudably, enacted a variety of targeted tax breaks designed to reduce the federal income tax’s impact on middle- and low-income families. These families deserve an infrastructure of tax preparers that they can trust to help them claim the tax breaks to which they are entitled. 


Five Key Tax Facts About Healthcare Reform


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With Obamacare exceeding the Administration's goal of 7 million sign-ups for private health coverage this week, there's no longer any doubt about the dramatic impact that the Affordable Care Act (ACA) is having on healthcare coverage throughout the country. Unfortunately, there is a lot of misunderstanding about the various tax provisions included as part of the ACA.

Here are the five key facts to remember about tax policy in the ACA:

1. The Affordable Care Act includes tax subsidies of $940 billion for low- and middle-income families.

While endless coverage has been given to the tax increases (mostly on the rich) used to pay for the ACA, the reality is that the act also includes over $940 billion in tax subsidies over the next decade to help individuals and families pay for health insurance. In fact, a recent report by the Kaiser Family Foundation found that as of February 28, 2014, 3.5 million people have already qualified for a total of about $10 billion in annual premium subsidies, which breaks down to an average subsidy of $2,890 per person. By 2018, the CBO expects the number of people receiving tax subsidies to help pay for healthcare to reach as high as 20 million.

2. Only two percent of Americans will pay the tax penalty for not having insurance.

The tax penalty on individuals who do not purchase health insurance will be paid by hardly anyone. According to the CBO, only an estimated two percent of the US population will owe the rather modest penalty.

More importantly, the provision in the ACA banning discrimination against pre-existing conditions cannot work without the penalty for not purchasing health insurance. Without the tax penalty, the ban would cause a significant increase in the cost of health insurance premiums because it would allow individuals to simply delay obtaining insurance until they need care.

3. About three-fourths of the tax increases included to pay for health reform apply to businesses or married couples making over $250,000 and single people making over $200,000.

Our calculations show that about three-fourths of tax increases apply to businesses or married couples making over $250,000 and single people making over $200,000. For example, the biggest revenue-raiser in the ACA is the expansion of the Hospital Insurance tax so that it applies at a higher rate for very high-earners and no longer exempts wealthy people’s investment income. These reforms were originally proposed (PDF) by Citizens for Tax Justice.

4. Healthcare reform includes billions in tax subsidies to help small businesses.

Every politician loves to talk about helping small businesses, but opponents of the ACA have been surprisingly quiet when it comes to discussing the estimated $14 billion in tax subsidies that the ACA will provide small businesses over the next decade to help pay for health insurance for their employees. The tax credit can actually be worth up to 50 percent of a small business’s contribution toward its employees’ premium costs.

5. The medical device excise tax is worth keeping.

Since the passage of the ACA, the effects of the medical device excise tax have been wildly distorted by industry opponents of the tax. They will enjoy increased business as a result of the ACA’s increase in coverage, but don’t want to shoulder any of the costs. Despite their claims to the contrary, the tax is not large enough to have a significant impact on the industry.

Repealing the tax would cost about $30 billion over 10 years, which would either require raising taxes on other groups or increasing the deficit. It’s also worth nothing that medical device companies like Baxter International already pay extremely low effective income tax rates tax rates and enjoy substantial profits. 


New "Corporate Tax Explorer" Site Details What Fortune 500 Companies Pay in Corporate Taxes


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A new web tool, the Corporate Tax Explorer, from Citizens for Tax Justice (CTJ) and the Institute on Taxation and Economic Policy (ITEP), is a one-stop shop for the state and federal data we analyze on corporate taxes. Just search for a company by name or browse the list of companies to get detailed information on what the company paid in federal, state and foreign corporate income taxes, as well as information about offshore holdings and various tax breaks. This database includes all of the data from our recent corporate studies, The Sorry State of Corporate Taxes and 90 Reasons We Need State Corporate Tax Reform, which analyzed data from 2008-2012.


Enter a Company's Name and Click on Their Page to See What They Pay:

Browse




Data on Top Tax Dodgers


Four Reasons Why Congress Should Reject the "Tax Extenders" Unless Dramatic Changes Are Made


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*This post was updated on April 2, 2014 to address news that "bonus depreciation," the biggest and most inefficient break among the "tax extenders" will be included in the legislation before the Senate Finance Committee this week.*

Congress appears likely to enact legislation that Capitol Hill insiders call the “tax extenders” because it extends several tax breaks that are technically temporary. These tax breaks, which mostly benefit corporations, are effectively permanent because Congress extends them every couple of years with almost no debate or oversight.

Here are four reasons why that should change this year and Congress should reject the tax extenders unless dramatic modifications are made to the legislation.

1. The tax extenders are deficit-financed tax cuts for corporations, breaking all the “fiscally responsible” rules that Congress applies to benefits for the unemployed, low-wage workers, and children.

In the past several weeks, Congress made clear that it will not enact an extension of emergency unemployment benefits (which have never been allowed to expire while the unemployment rate was as high as today’s level) unless the costs are offset to prevent an increase in the budget deficit.

Congress has also, in the last several years, enacted automatic spending cuts of about $109 billion a year known as “sequestration” in order to address an alleged budget crisis. Even popular public investments like Head Start and medical research were slashed. The chairman of the House and Senate Budget Committees (Republican Paul Ryan and Democrat Patty Murray) struck a deal in December that undoes some of that damage but leaves in place most of the sequestration for 2014 and barely touches it in 2015.

Meanwhile, lawmakers have expressed almost no concern that the “tax extenders” are enacted every two years without any provisions to offset the costs. According to figures from the Congressional Budget Office, if Congress continues to extend these breaks every couple years, they will reduce revenue by at least $700 billion over a decade.

2. “Bonus depreciation,” the most costly of the tax extenders, is supposed to encourage businesses to invest, but there is little evidence that it has this effect.

Bonus depreciation is a significant expansion of existing breaks for business investment. Congress does not seem to understand that business people make decisions about investing and expanding their operations based on whether or not there are customers who want to buy whatever product or service they provide. A tax break subsidizing investment will benefit those businesses that would have invested anyway but is unlikely to result in much new investment.

Companies are allowed to deduct from their taxable income the expenses of running the business, so that what’s taxed is net profit. Businesses can also deduct the costs of purchases of machinery, software, buildings and so forth, but since these capital investments don’t lose value right away, these deductions are taken over time.

Bonus depreciation is a temporary expansion of the existing breaks that allow businesses to deduct these costs more quickly than is warranted by the equipment’s loss of value or any other economic rationale.

We believed bonus depreciation to be truly temporary until recently because there was very little talk in Congress of extending this particular break. The fact that it is included in the legislative package before the Senate Finance Committee is startling.  

A report from the Congressional Research Service reviews efforts to quantify the impact of bonus depreciation and explains that “the studies concluded that accelerated depreciation in general is a relatively ineffective tool for stimulating the economy.”

3. The second most costly of the tax extenders is the research credit, which is supposed to encourage research but actually subsidizes activities no one would call research, and activities that companies would do in the absence of any subsidy.

A report from Citizens for Tax Justice explains that the research credit needs to be reformed dramatically or allowed to expire. One aspect of the credit that needs to be reformed is the definition of research. As it stands now, accounting firms are helping companies obtain the credit to subsidize redesigning food packaging and other activities that most Americans would see no reason to subsidize. The uncertainty about what qualifies as eligible research also results in substantial litigation and seems to encourage companies to push the boundaries of the law and often cross them.

Another aspect of the credit that needs to be reformed is the rules governing how and when firms obtain the credit. For example, Congress should bar taxpayers from claiming the credit on amended returns, because the credit cannot possibly be said to encourage research if the claimant did not even know about the credit until after the research was conducted.

As it stands now, some major accounting firms approach businesses and tell them that they can identify activities the companies carried out in the past that qualify for the research credit, and then help the companies claim the credit on amended tax returns. When used this way, the credit obviously does not accomplish the goal of increasing the amount of research conducted by businesses.

4. Another costly provision among the tax extenders would extend a break called the “active finance exception,” which should be called the “G.E. Loophole.”

In a famous story reported in the New York Times in 2011, the director of General Electric’s 1,000-person tax department literally got on his knees in the office of the House Ways and Means Committee as he begged for an extension of the “active finance exception,” which allows G.E. to “defer” (indefinitely delay) paying any U.S. taxes on offshore profits from financing loans.

The general rule is that American corporations are allowed to “defer” U.S. taxes on offshore profits that take the form of “active” income (what most of us think of as payment for selling a good or service) as long as those profits are officially offshore. The general rule also is that American corporations cannot defer U.S. taxes on “passive” income like dividends or interest on loans, because passive income is extremely easy to shift from one country to another for the purpose of tax avoidance.

G.E. managed to get Congress to enact an exception, so that it can defer paying U.S. taxes on offshore financial income that it calls “active finance” income — which is ridiculous because these profits are the ultimate example of the sort of passive income that can be easily shifted between countries. G.E. publicly acknowledges (in the information it provides to shareholders by filing with the Securities and Exchange Commission) that the company relies on the active finance exception to reduce its taxes. 

Congress should eliminate deferral or further restrict it to prevent corporations from making their U.S. profits appear to be earned in offshore tax havens, but this break actually expands deferral.

Congress Should Reject “Tax Extenders” Legislation that Mostly Benefits Corporations Unless Corporate Tax Loopholes Are Closed to Offset the Costs

The Senate committee with jurisdiction over taxes has announced that it will take up legislation called the “tax extenders” (legislation extending several tax breaks mostly benefiting corporations) that could undo half of the savings achieved through the much-debated “sequestration,” or automatic spending cuts.

This comes just weeks after the Senate failed to provide any extension of emergency unemployment benefits until it was agreed that the costs would be fully offset to avoid any increase in the deficit.

The package of provisions that Capitol Hill insiders call the “tax extenders,” which the Senate Finance Committee will take up the week of March 31, includes tax breaks that are officially temporary (mostly in effect for two years) but are effectively permanent because Congress routinely extends them without any debate or oversight whatsoever.

The last extension of these breaks was tucked into the deal that Congress approved on New Year’s Day of 2013 to address the “fiscal cliff” of expiring tax breaks. Before that it was tucked into the legislation enacted in late 2010 to extend all the Bush-era tax breaks for two years. Before that it was tucked into the legislation that created TARP (the bank bailout), which was signed into law by President George W. Bush in 2008. Congress has never offset the costs of these tax breaks.

While Congress has been generous in providing subsidies to corporations through the tax code, it has taken a very different approach to providing subsidies in the form of direct spending, especially when it would benefit working people. Most mainstream economists believe that governments should not cut spending when their economies are still climbing out of recessions, but that’s pretty much exactly what Congress did by approving the 2011 law resulting in sequestration (automatic spending cuts) of about $109 billion each year for a decade.

The resulting cuts in public investments like Head Start and medical research caused widespread public outcry. But even the deal that Rep. Paul Ryan and Senator Patty Murray struck in December to undo some of the damage eliminates less than half of the sequestration for 2014 and a much smaller portion in 2015.

The Ryan-Murray deal undid $63 billion of sequestration over two years. The last time Congress enacted the tax extenders (extending tax breaks for two years) the cost was over $71 billion. Figures from the Congressional Budget Office show that if the tax extenders are never allowed to expire, they will cost at least $450 billion over the next decade (and over $700 billion if the package includes more recent breaks for writing off business equipment).

In this deficit-obsessed environment, it would be logical for Congress to refuse to enact any corporate tax breaks unless they can also offset the costs by ending other corporate tax breaks or tax loopholes. Otherwise, Congress should do something it has never done — vote down the tax extenders.

Tax Extenders Legislation Provides More Harm than Help to the Economy

It would be different if the tax breaks included in this legislation were helpful to the economy. But they are mostly wasteful subsidies for businesses with no obvious benefit to America.

The most costly provision among the “tax extenders” would extend the research credit. As a report from CTJ explains, this break is supposed to encourage companies to perform research but appears to subsidize activities that are not what any normal person would call research (like redesigning packaging for food). It also subsidizes activities that businesses would carry out in the absence of any tax break — including activities that businesses performed years before claiming the credit.

The third most costly provision among the tax extenders would extend the seemingly arcane “active financing exception,” which expands the ability of corporations to avoid taxes on their “offshore” profits and which General Electric publicly acknowledges as one of the ways it avoids federal taxes.

Next in line is the deduction for state and local sales taxes. Lawmakers from states without an income tax are especially keen to extend this provision so that their constituents will be able to deduct their sales taxes on their federal income tax returns. But, as CTJ has explained, most of those constituents do not itemize their deductions and therefore receive no help from this provision. Most of the benefits go to relatively well-off people in those states.

Even those few provisions that seem like they would help ordinary families are mostly bad policy. For example, the deduction for postsecondary tuition and related fees seems, on its surface, like a nice idea, but CTJ has explained that it’s actually the most regressive of all the tax breaks for postsecondary education. In other words, this break is targeted more to the well-off than any other education tax break, as illustrated in the graph below.

There simply is no provision among the “tax extenders” that justifies Congress enacting this enormous, costly package once again without asking corporations to pay for it.

Last week, the Congressional Progressive Caucus released its budget proposal, the Better Off Budget, which eliminates the automatic spending cuts (the “sequestration” that has slashed public investments and harmed the economy) while also increasing employment by 8.8 million jobs and cutting the deficit by $4 trillion over a decade.

The Better Off Budget is able to accomplish all of this partly because it is willing to do the one thing that Congressional majorities have refused to do: raise revenue. Estimates for the revenue provisions in the Better Off Budget were provided by Citizens for Tax Justice and the Economic Policy Institute.

The budget proposes returning to the tax rules that applied at the end of the Clinton years for Americans with incomes exceeding $250,000 and taxing investment income at the same rates as income from work. The budget also incorporates a proposal from Congresswoman Jan Schakowsky to provide additional income tax brackets (with rates of 45 percent and higher) for those with incomes exceeding $1 million.

A tax credit similar to the Making Work Pay Credit (which was provided temporarily under the recovery act enacted in 2009) would be available in 2015 and 2016, and in a scaled back form in 2017. Citizens for Tax Justice has explained that the Making Work Pay Credit was more targeted towards families struggling to get by, and therefore more effective in stimulating the economy, than other tax breaks.

The Better Off Budget also makes some important changes to the corporate income tax, including doing away with the rule allowing American corporations to “defer” paying U.S. taxes on profits that are officially “offshore.” CTJ has long argued that deferral encourages corporations to use accounting tricks to make their U.S. profits appear to be earned in countries where they won’t be taxed (offshore tax havens). While the administration and members of Congress have proposed complicated rules to crack down on this type of tax avoidance, the most straightforward and effective solution is to stop rewarding these games by ending deferral.

Because the Congressional Progressive Caucus is willing to take on the corporate interests and others that the rest of Congress tiptoes around, it is able to put forward a plan that actually provides more deficit reduction with less pain for working Americans. The Better Off Budget would reduce the deficit to 1.4 percent of gross domestic product (1.4 percent of economic output) within a decade, as illustrated by the chart from the Caucus below. The President’s budget would leave a larger deficit, 1.6 percent of GDP, while under the current law the deficit would be 4 percent of GDP.


New CTJ Reports Explain Obama's Budget Tax Provisions


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New CTJ Reports Explain the Tax Provisions in President Obama’s Fiscal Year 2015 Budget Proposal

Two new reports from Citizens for Tax Justice break down the tax provisions in President Obama’s budget.

The first CTJ report explains the tax provisions that would benefit individuals, along with provisions that would raise revenue. The second CTJ report explains business loophole-closing provisions that the President proposes as part of an effort to reduce the corporate tax rate.

Both reports provide context that is not altogether apparent in the 300-page Treasury Department document explaining these proposals.

For example, the Treasury describes a “detailed set of proposals that close loopholes and provide incentives” that would be “enacted as part of long-run revenue-neutral tax reform” for businesses. What they actually mean is that the President, for some reason, has decided that the corporate tax rate should be dramatically lowered and he has come up with loophole-closing proposals that would offset about a fourth of the costs, so Congress is on its own to come up with the rest of the money.

To take another example, when the Treasury explains that the President proposes to “conform SECA taxes for professional service businesses,” what they actually mean is, “The President proposes to close the loophole that John Edwards and Newt Gingrich used to avoid paying the Medicare tax.”

And when the Treasury says the President proposes to “limit the total accrual of tax-favored retirement benefits,” what they really mean to say is, “We don’t know how Mitt Romney ended up with $87 million in a tax-subsidized retirement account, but we sure as hell don’t want to let that happen again.”

Read the CTJ reports:

The President’s FY 2015 Budget: Tax Provisions to Benefit Individuals and Raise Revenue

The President’s FY 2015 Budget: Tax Provisions Affecting Businesses

The tax reform plan released last week by Congressman Dave Camp, the Republican chairman of the House Ways and Means Committee, fails to accomplish what should be the three basic goals for comprehensive tax reform: 1) raise revenue from individuals and corporations, 2) make our tax system more progressive than it is now, and 3) tax the offshore profits and domestic profits of our corporations at the same time and at the same rate. (See more details on these three goals.) As explained below, Camp’s plan also manages to restrict state and local governments’ ability to make important public investments.

 Our lastest study documenting corporate tax avoidance dispels the myth that corporations need the sort of revenue-neutral tax reform that Rep. Camp proposes. But that is only one of  many problems with his plan. Here are some other basic ways in which it fails.

FAILS TO RAISE REVENUE:
Tax reform should result in more revenue collected from both the personal income tax and the corporate income tax.

The United States is the least taxed of all OECD countries besides Chile and Mexico. Neither individuals nor corporations are taxed at high rates. American corporations even pay lower effective tax rates in the United States than they pay in other countries where they do business. At a time when Congress continues to bitterly argue whether we have the resources to fund important public investments that most Americans support like Head Start and medical research, we need to take a critical look at our nation’s tax structure and determine how we can raise more revenue in a way that is fair and just. Rep. Camp’s proposal makes no attempt to raise more revenue from wealthy individuals or profitable corporations.

We have been very critical of both Rep. Camp and President Obama for proposing that business tax reform be revenue-neutral. But Camp’s approach is far worse, proposing  that all of tax reform (including changes that affect individuals, as well as changes affecting businesses) be revenue-neutral.

FAILS TO ENHANCE FAIRNESS:
Tax reform should result in a tax system that is more progressive than the one we have now.

When you account for the different federal, state and local taxes that people pay, the tax code is just barely progressive. Camp’s plan fails to address this. Partly this is because Camp’s plan would continue to tax capital gains and stock dividends, which mostly go to the wealthy, at lower rates than income from work.

Under Camp’s plan, the personal income tax would have two regular rates, 10 percent and 25 percent, and then a surcharge (an additional tax) of 10 percent would apply to very high-income people. The rules for the regular tax and the surcharge would be somewhat different. For example, no itemized deductions could be taken against the surcharge, except the charitable deduction. But the combination of the regular tax and the surcharge would be similar to having one tax with rates of 10 percent, 25 percent, and 35 percent.

The plan claims that capital gains and dividends would be taxed at the same rates as other income, but effectively they would be taxed at lower rates because 40 percent of capital gains and dividends would be excluded from taxable income. The top effective personal income tax rate on capital gains and dividends would be 21 percent. This is a one percentage point increase over the current top rate of 20 percent, which is probably enough to cause Grover Norquist to have an aneurism but will not address the fundamental unfairness of taxing income from wealth at lower rates than income from work.

Camp’s plan also reduces the EITC and eliminates personal exemptions while also increasing child tax credits and the standard deduction. Citizens for Tax Justice is currently producing estimates of how the combination of these changes would affect people in different income groups. But we already know that low-income families in certain situations would experience a substantial tax increase.

FAILS TO END OFFSHORE TAX SHELTERS:
Tax reform should result in rules that tax American corporations’ offshore profits and domestic profits at the same time and at the same rate.

This is the only way to end the tax incentives for corporations to shift jobs offshore and make their U.S. profits appear to be earned in offshore tax havens (countries where they are not taxed). Under the current system offshore profits and domestic profits are not taxed at the same time, because American corporations can indefinitely “defer” paying U.S. taxes on profits that are officially “offshore” until they are officially brought to the U.S. Under Camp’s plan, offshore profits and domestic profits would not be taxed at the same rate, and in fact the default rule would be for offshore profits to be taxed at a rate of 1.25 percent.

While Camp claims that various other measures he proposes would prevent corporate tax avoidance, it is impossible to believe that they would work since his overall proposal would dramatically increase rewards for any American corporation that can make its U.S. profits appear to be earned in offshore tax havens.

HURTS STATE AND LOCAL GOVERNMENTS:
Camp’s plan would hurt state and local governments by repealing the most justified deduction in the tax code.

Rep. Camp’s plan would limit and repeal many different tax breaks, but one of the most significant changes would be repeal of the deduction for state and local taxes. As the Institute on Taxation and Economic Policy (ITEP) has argued, this is the one of the most justified of all the deductions in the federal personal income tax.

The deduction for state and local taxes paid is often seen as a subsidy for state and local governments because it effectively transfers the cost of some state and local taxes away from the residents who directly pay them to the federal government. For example, if a state imposes a higher income tax rate on residents who are in the 39.6 percent federal income tax bracket, that means that each dollar of additional state income taxes can reduce federal income taxes on these high-income residents by almost 40 cents. The state government may thus be more willing to enact the tax increase because its high-income residents will really only pay 60.4 percent of the tax increase, while the federal government will effectively pay the remaining 39.6 percent. This is why Rep. Camp and many anti-government lawmakers want to do away with this particular deduction.

But viewed a different way, the deduction for state and local taxes is not a tax expenditure at all, but instead is a way to define the amount of income a taxpayer has available to pay federal income taxes. Another view is that the deduction encourages state and local governments to make public investments that they would otherwise underfund because the benefits spill outside their borders. For example, state and local governments provide roads that, in addition to serving local residents, facilitate interstate commerce. They also provide education to those who may leave the jurisdiction and boost the skill level of the nation as a whole, boosting the productivity of the national economy.

In this light, eliminating the deduction for state and local taxes is not a brave attempt to trim unnecessary breaks out of the tax code, but just one more attempt to restrict our ability to make the public investments that allow America’s economy and people to thrive.


Tax Preparers Should Be Regulated


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When individuals fill out their tax returns, billions of dollars -- both for individual taxpayers and for the federal government -- are at stake. This is one reason why more than half of U.S. taxpayers rely on paid tax preparers to help them.

And yet, there are no national standards to ensure tax preparers are well qualified to play this critical role (only four states have taken licensing into their own hands) despite the fact that many preparers are error-prone, or worse. When the Treasury Inspector General for Tax Administration sent auditors into the field to pose as taxpayers seeking preparer services in 2008, 61 percent of the resulting tax returns were found to be flawed. While 65 percent of the mistakes were honest lapses, the other 35 percent were “willful or reckless” misstatements or omissions. The Government Accountability Office reached similar conclusions in a 2006 study, and the National Taxpayer Advocate has been sounding the alarm on this issue for years.

The IRS recently found that the net "tax gap" (the difference between taxes owed and taxes paid after enforcement measures are taken) was $385 billion in 2006, and that $235 billion came from individual income tax underreporting. Tax preparers certainly had a great deal to do with this.

And even relatively small parts of this problem -- like underreporting related to income tax credits, which accounted for $28 billion of the tax gap -- can have huge implications for the individual families affected. For example, the Earned Income Tax Credit (EITC) involves complicated rules and steep penalties for the taxpayer if any misrepresentations are identified, even if the mistakes are inadvertent or caused by preparer error. Roughly half of returns claiming an EITC in 2011 were filed with the help of an unregulated preparer.

While the rate of EITC overpayments has been greatly overstated, the truth is that there are too many overpayments and underpayments of EITC benefits and incompetent or nefarious preparers are partly to blame. Some have been known to offer EITC refunds in the form of deceptive loan products with exorbitant fees.

In reaction to these concerns, the IRS issued regulations in 2011 that would require unenrolled paid preparers to pass a certification exam, pay fees, and take continuing education courses. These regulations are not unprecedented. Some paid preparers who also represent taxpayers before the IRS during appeal proceedings -- like attorneys, certified public accountants, and “enrolled agents” -- are already regulated. And similar requirements currently apply to volunteer tax preparers who work through the Volunteer Income Tax Assistance (VITA) program.

Unfortunately, the 2011 regulations were never implemented because commercial tax preparers attempting to avoid the certification requirements brought suit and won in federal district court. The challengers claimed that the IRS only had statutory authority to regulate preparers that assist taxpayers in their dealings with the IRS after their returns have already been filed (the aforementioned “enrolled” agents), not those who help prepare the return before filing. While it may not seem like a meaningful distinction, federal judges have now ruled against the IRS twice. The latest rebuke came this week from the D.C. Circuit Court of Appeals.

Assuming the Supreme Court does not take up the case (the IRS has not yet announced if it will appeal), the burden will fall on Congress to give the IRS the explicit authority to pursue these important reforms. As the National Community Tax Coalition and the National Consumer Law Center wrote in their amicus brief to the DC Circuit Court, “Without such regulation, consumers are at the mercy of an industry with no minimum training or competency standards for one of the most critical financial transactions that consumers engage in every year.”

If Congress decides it cannot spend money to help working families and the unemployed without offsetting the costs by cutting spending, then lawmakers should also refuse to enact tax cuts for businesses unless they can offset the costs by closing business tax loopholes. Sadly, both Democrats and Republicans refuse to acknowledge this commonsense principle as they discuss enacting the so-called “tax extenders” without closing any business tax loopholes — after failing to extend Emergency Unemployment Compensation (EUC) because of a dispute over how to offset the costs.

If there is any federal spending that should not be paid for, surely it is EUC and other temporary spending that is designed to address an economic downturn. As our friends at the Coalition on Human Needs explain:

In January, the national unemployment rate dropped to 6.6 percent from 6.7 percent in December, but jobs grew by a less than expected 113,000. Congress, by failing to renew unemployment benefits, is making things worse.  According to the Congressional Budget Office, restoring EUC throughout 2014 will increase employment by 200,000 jobs… EUC has long been considered an emergency program that does not have to be paid for by other spending reductions or revenue increases. Five times under President George W. Bush, when the unemployment rate was above 6 percent, unemployment insurance was extended without paying for it and with the support of the majority of Republicans.

Unfortunately, on February 6, a measure to extend EUC by three months and another to extend it by 11 months both failed to garner the 60 Senate votes needed for passage.

Compare this to Congress’s approach to provisions that are often called the “tax extenders” because they extend a variety of tax breaks that mostly go to business interests. Unlike EUC, these provisions cannot be thought of as temporary, emergency measures. Even though these tax cuts are officially temporary, Congress has routinely extended them every couple of years with little or no review of their impacts, so that they function as permanent tax cuts.

And, sadly, lawmakers of both parties are guilty of enacting these provisions time after time without closing any business tax loopholes to offset the costs. In some years, Democrats have introduced bills that would close tax loopholes to offset the cost of the extenders. For example, in 2009, Citizens for Tax Justice and several other organizations supported legislation that would have offset the costs of the tax extenders by closing the “carried interest” loophole and other tax loopholes.  

But in other years, neither party even bothered to discuss paying for the tax extenders. This happened the last time they were enacted as part of the “fiscal cliff” legislation that also extended most of the Bush-era tax cuts. Sadly, 2014 may be another year when neither party even pretends to be “fiscally responsible” when it comes to lavishing businesses with tax breaks. Several news reports indicate that Senators are discussing how to enact the tax extenders with as little debate as possible. 

There Is No Provision among the “Tax Extenders” that Is So Beneficial that It Justifies Enacting the Entire Package Without Offsetting the Costs

The feeling among lawmakers that the tax extenders must be enacted under absolutely any circumstances is simply not justified, as demonstrated by examining the most costly provisions among them. This is explained in detail in CTJ’s report on the tax extenders.

The pie chart above, which is taken from the CTJ report, illustrates the costs of the individual tax extenders provisions the last time they were enacted, at the start of 2013 as part of the “fiscal cliff” legislation.

The most costly is the research credit, which is supposed to encourage companies to perform research but appears to subsidize activities that are not what any normal person would consider research, and activities that a business would have performed in the absence of any tax break including activities that the business performed years before claiming the credit. The second most costly is the renewable electricity production credit, which even many supporters agree will be phased out at some point in the near future. The third most costly is the seemingly arcane “active financing exception,” which expands the ability of corporations to avoid taxes on their “offshore” profits and which General Electric publicly acknowledges as one of ways it avoids federal taxes. These three tax provisions make up over half of the cost of the tax extenders.

Next in line is the deduction for state and local sales taxes. Lawmakers from states without an income tax are especially keen to extend this provision so that their constituents will be able to deduct their sales taxes on their federal income tax returns. But, as the CTJ report explains, most of those constituents do not itemize their deductions and therefore receive no help from this provision. Most of the benefits go to relatively well-off people in those states.

Even the provisions that sound well-intentioned are really just wasteful subsidies for businesses. The Work Opportunity Tax Credit ostensibly helps businesses to hire welfare recipients and other disadvantaged individuals, but here’s what a report from the Center for Law and Social Policy concludes about this provision:

WOTC is not designed to promote net job creation, and there is no evidence that it does so. The program is designed to encourage employers to increase hiring of members of certain disadvantaged groups, but studies have found that it has little effect on hiring choices or retention; it may have modest positive effects on the earnings of qualifying workers at participating firms. Most of the benefit of the credit appears to go to large firms in high turnover, low-wage industries, many of whom use intermediaries to identify eligible workers and complete required paperwork. These findings suggest very high levels of windfall costs, in which employers receive the tax credit for hiring workers whom they would have hired in the absence of the credit.

It’s Time for Congress to Change How It Does Business

For Congress to enact unnecessary tax cuts for businesses without closing any business tax loopholes would be very problematic under any circumstances. To do so now, after making clear that help will not be provided to the unemployed unless the costs are offset with spending cuts, is simply outrageous.


What's NOT in the Queue for Netflix: A Tax Bill


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Hidden in the footnotes of the financial report released last week by Netflix is an admission that the company reduced its taxes by $80 million in 2013 by deducting the “cost” of executive stock options. This means that as a result of this single tax break, the company didn’t pay a dime of federal or state income tax on its $159 million in US profits last year.

Last year CTJ reported that a dozen emerging tech firms, including Twitter, Facebook and Priceline, were poised to shelter as much as $11 billion in profits from tax using this arcane loophole. For some of these companies, the stock option tax break can singlehandedly wipe out all income tax liability, as it did for Facebook last year.

Stock options are rights to buy stock at a set price. Corporations sometimes compensate employees (particularly top executives) with these options. The employee can wait to exercise the option until the value of the stock has increased beyond that price, thus enjoying a substantial benefit. The problem is that poorly designed tax rules allow corporations to deduct the difference between the market value of the stock and the amount paid when the stock option is exercised. In practice, corporations are often able to deduct more for tax purposes for stock options than they report to shareholders as their cost.

The defenders of this tax break sometimes argue that when companies pay their employees, it shouldn’t matter whether the pay takes the form of salaries and wages or stock options. But this argument glosses over the fact that while paying salaries imposes a dollar-for-dollar cost on employers, issuing stock options simply does not. As we have argued elsewhere, a sensible analogy is airlines giving employees the opportunity to fly free on flights that aren’t full, which costs the airlines nothing. It would be ludicrous to argue that airlines should be able to deduct the retail value of these tickets.

Senator Carl Levin (D-MI) has introduced legislation that would pare back (but not repeal entirely) the stock option tax break. Levin’s legislation (the Cut Unjustified Tax Loopholes Act) would address situations in which corporations take tax deductions for stock options that exceed the cost they report to their shareholders. It would also remove the loophole that exempts compensation paid in stock options from the existing rule capping companies’ deductions for compensation at $1 million per executive.

Allowing high-profile tech companies to zero out their taxes using phantom costs erodes the public’s faith in the tax system; any meaningful attempt to reform our corporate tax should remedy this situation.


US PIRG Report: States Can Crack Down on Corporations that Shift Profits to Tax Havens


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Citizens for Tax Justice has long argued that offshore tax avoidance by corporations will never be fully addressed until Congress reforms our laws to tax the domestic profits and the offshore profits of our corporations at the same time and at the same rate. Only then will corporations have no incentive to make their U.S. profits appear to be generated in tax havens like Bermuda and the Cayman Islands. But a new report from US PIRG explains that state governments can at least protect state corporate income taxes from the worst offshore abuses with reforms newly adopted by Montana and Oregon.

As PIRG explains, these two states

“simply treat profits that companies book to notorious tax havens as if it were domestic taxable income. This simple loophole closing uses information that multinational companies already report to states. The reform could be introduced anywhere, but is readily available to the 24 states and District of Columbia that have already modernized their tax codes by enacting “combined reporting,” which requires companies to report on how profits are distributed among jurisdictions so that they are taxed based on how much business activity they do in those places. All told, closing this tax haven loophole could save the remaining 22 states and District of Columbia over a billion dollars annually.”

Read the US PIRG report.


Has the Tax Code Been Used to Reduce Inequality During the Obama Years? Not Really.


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Many expect that during his State of the Union address tonight, President Obama will speak of income inequality, which he has previously called the “defining issue of our time.” As our nation hopefully begins this much-needed debate, everyone should be clear about one thing that has not been used much in recent years to reduce income inequality: the tax code.

The table below shows that effective tax rates were slightly higher in 2013 for all income groups (not just the rich) than they would have been if Congress had simply extended the tax rules in effect in 2012, as Congressional Republicans had called for in the debate over the “fiscal cliff.”

For the poor and middle-class, slightly higher effective tax rates resulted from the expiration of a Social Security payroll tax cut. For the rich, higher effective tax rates resulted from the end of parts of the Bush-era tax cuts and an effective increase in the Medicare tax as a part of health care reform.

The result is that the share of total taxes paid by each income group did not change much at all. As the table below illustrates, the richest one percent of Americans paid 24 percent of the total taxes in 2013, but would have paid 23.1 percent if the 2012 tax rules had been extended as Congressional Republicans called for. The shares of total taxes paid by the bottom four fifths of Americans were almost unchanged.

These figures are taken from one of the many CTJ reports that analyzed the impacts of the “fiscal cliff” deal that allowed certain tax cuts to expire. In other reports we have demonstrated that the tax code is not particularly progressive. For example, the richest one percent of Americans paid 24 percent of the total taxes in America in 2013, which may seem like a lot until you consider that this same group also received 21.9 percent of the total income that year. The poorest fifth of Americans paid only 2.1 percent of the total taxes in 2013, and received just 3.3 of the total income that year.

In other words, America’s tax system can just barely be called progressive.


Republican Platform Now Endorses Gutting Laws that Stop Offshore Tax Evasion


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(Updated 1/24/2014 to reflect the fact the resolution passed.)

At its yearly winter meeting, the Republican National Committee approved a resolution calling for the repeal of the Foreign Account Tax Compliance Act (FATCA), a major law enacted in 2010 (as part of the HIRE Act) to clamp down on offshore tax evasion.

FATCA was enacted in the wake of revelations that the Swiss bank UBS had helped American citizens evade U.S. income taxes by illegally hiding income in offshore accounts. The most important provisions of FATCA basically require Americans, including those living abroad, to tell the IRS about offshore assets greater than $50,000, and apply a withholding tax to payments made to any foreign banks that refuse to share information about their American customers with the IRS.

Those who are directly affected by FATCA are likely to be few in number and they certainly have the means to fill out the disclosure form required with their federal income tax return under its provisions. The $50,000 threshold excludes housing and other non-financial assets. That means that even a relatively well-off American who works for a few years abroad and even someone who owns a house abroad will not be affected unless they hold over $50,000 in cash or financial assets in the other country.

Whatever inconvenience is caused by these requirements is far outweighed by the benefits to the U.S. and its law abiding taxpayers. According to the Congressional Joint Committee on Taxation (JCT), FATCA's anti-tax evasion measures are estimated to raise $8.7 billion (PDF) over their first decade of implementation. (JCT does have a history of underestimating tax enforcement measures.) Considering that the U.S. loses an estimated $100 billion (PDF) annually due to offshore tax abuses, this seems like a modest reform.

In May 2013, Senator Rand Paul introduced legislation to repeal the important parts of FATCA, claiming that this is necessary to protect privacy. But there simply is no right of Americans to hide income from the IRS. As we explained at that time, for a country with a personal income tax (like the U.S.), that kind of information sharing is indispensible to tax compliance, as the IRS stated in its most recent report on the “tax gap”:

“Overall, compliance is highest where there is third-party information reporting and/or withholding. For example, most wages and salaries are reported by employers to the IRS on Forms W-2 and are subject to withholding. As a result, a net of only 1 percent of wage and salary income was misreported. But amounts subject to little or no information reporting had a 56 percent net misreporting rate in 2006.”

Other opponents of FATCA, like the Wall Street Journal, have claimed that it is causing Americans living abroad to renounce their U.S. citizenship, but as we have pointed out, those renouncing citizenship make up a tiny fraction of one percent of the six million Americans living abroad.


The Bennet-Blunt Corporate Tax Amnesty Must Be Stopped


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On January 17, Senators Michael Bennet (D-CO) and Roy Blunt (R-MO) and nine of their colleagues introduced the Senate version of Congressman John Delaney’s proposal providing a tax amnesty for profits that corporations officially hold offshore on the condition that they purchase bonds to fund an infrastructure bank.

Instead of tapping corporate profits that are “locked” offshore as supporters claim, this proposal would provide an enormous tax break for profits that already are in the U.S. economy but which are booked in offshore tax havens in order to avoid taxes, a practice that will be more common  if this proposal is enacted. In fact, the net effect of this bill could be to reduce employment.

Background of Delaney Bill

In the spring of 2013, Congressman John Delaney, a Democrat from Maryland, proposed to allow American corporations to bring a limited amount of offshore profits to the U.S. (to “repatriate” these profits) without paying the U.S. corporate tax that would normally be due. This type of tax amnesty for repatriated offshore profits is euphemistically called a “repatriation holiday” by its supporters. The Congressional Research Service has found that a similar proposal enacted in 2004 provided no benefit for the economy and that many of the corporations that participated actually reduced employment.

Rep. Delaney and the 50 House cosponsors to his bill seem to believe they can avoid that unhappy result by allowing corporations to repatriate their offshore funds tax-free only if they also fund a bank that finances public infrastructure projects, which they believe would create jobs in America. How much a corporation could repatriate tax-free would be determined through a bidding process, with a maximum cap of six dollars in offshore profits repatriated tax-free for every one dollar spent on the bonds. Unfortunately, as explained below, the proposal is designed to give away two dollars in tax breaks for every one dollar spent on infrastructure.

So-Called “Offshore” Corporate Profits Are Largely Invested in the U.S.

Many lawmakers seem to mistakenly believe that the $2 trillion in “permanently reinvested profits” that American corporations officially hold abroad are locked out of the American economy. This has led many to support proposals to exempt American corporations’ offshore profits from U.S. taxes, either on a permanent basis (through a so-called “territorial” tax system) or a temporary basis (with a tax amnesty for repatriated offshore profits).

But the premise is wrong. As a recent report from the Center for American Progress explains, American corporations’ offshore profits are actually invested in the U.S. economy already because they are deposited in U.S. bank accounts or invested in U.S. Treasury bonds or even corporate stocks. The real problem is that our tax system traps badly needed revenue out of the country by allowing American corporations to “defer” (delay) paying U.S. taxes on profits characterized as “offshore” — even if they are really earned here in the U.S.

A study from the Senate Permanent Subcommittee on Investigations (chaired by Carl Levin of Michigan) that examined the corporations benefiting the most from the repatriation amnesty enacted by Congress in 2004 found that almost half of their offshore profits were actually in U.S. bank accounts, Treasury bonds, and U.S. corporate stocks. Corporations are, in theory, restricted by law from using their offshore profits to pay dividends to shareholders or to directly expand their own investments. But even these rules can be circumvented when the corporations borrow money for these purposes, using the offshore profits as collateral.

Biggest Benefits Would Go to Corporations Disguising their U.S. Profits as Tax Haven Profits

The proposal would provide the biggest benefits to the most aggressive corporate tax dodgers. Often, an American corporation has offshore profits because its offshore subsidiaries carry out actual business activity. But a great deal of the profits that are characterized as “offshore” are really U.S. profits that have been disguised through accounting gimmicks as “foreign” profits generated by a subsidiary (which may be just a post office box) in a country that does not tax profits (i.e., an offshore tax haven). These tax haven profits are the profits most likely to be “repatriated” under such a proposal for two reasons.

First, offshore profits from actual business activities in foreign countries are often reinvested into factories, stores, equipment or other assets that are not easily liquidated in order to take advantage of a temporary tax break, but profits that are booked as “foreign” profits earned by a post office box subsidiary in a tax haven are easier to “move” to the U.S.

Second, profits in tax havens get a bigger tax break when “repatriated” under such a tax amnesty. The U.S. tax that is normally due on repatriated offshore profits is the U.S. corporate tax rate of 35 percent minus whatever was paid to the government of the foreign country. Profits that American companies claim to generate in tax havens are not taxed at all (or taxed very little) by the foreign government, so they might be subject to the full 35 percent U.S. rate upon repatriation — and thus receive the greatest break when the U.S. tax is called off.

Not a Way to Create Infrastructure Jobs

While infrastructure spending is economically stimulative, this plan is an absurdly wasteful and corrupt way to fund job creation. First, the proposal is designed to give away two dollars in tax breaks for every one dollar spent on infrastructure (and the jobs to build infrastructure) — to give away up to $105 billion in corporate tax breaks in order to raise $50 billion to finance the infrastructure bank. Because up to six dollars could be repatriated tax-free for every one dollar corporations spend on the bonds, up to $300 billion would be repatriated tax-free to raise $50 billion for the infrastructure bank. As already explained, the profits most likely to be repatriated have not been taxed at all by any government so under normal rules the full 35 percent U.S. tax rate would apply, and 35 percent of $300 billion is $105 billion.

Second, this proposal would be the second tax amnesty for offshore profits (the first was enacted in 2004), and once Congress signals its willingness to do this more than once, corporations could be encouraged to shift even more profits (and even jobs) offshore in hopes of benefitting from another tax amnesty in the future. In other words, the proposal’s net effect on U.S. job creation could be negative.


CTJ Submits Comments on Finance Committee Chairman Baucus' International Tax Reform Proposal


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Today Citizens for Tax Justice submitted comments to the Senate Finance Committee on the discussion draft that the committee recently published under the direction of its chairman, Max Baucus of Montana. Tax reform seems to be on hold, with Baucus’s expected departure to serve as ambassador to China being just one of many complications. But the discussion draft may nonetheless be a starting place for future debates on how the corporate tax should be overhauled.

And that would pose problems because, as CTJ’s comments explain, Baucus’s discussion draft fails to accomplish what should be three goals for tax reform:

1. Raise revenue from the corporate income tax and the personal income tax.
2. Make the tax code more progressive.
3.Tax American corporations’ domestic and offshore profits at the same time and at the same rate.

As CTJ’s comments explain, the discussion draft would, in a proclaimed revenue-neutral manner, impose U.S. corporate taxes on offshore corporate profits in the year that they are earned. But it would do so at a lower rate than applies to domestic corporate profits.

The goal of revenue-neutrality causes the discussion draft to fail the first goal of raising revenue as well as the second, because any increase in corporate income tax revenue would make our tax system more progressive. The discussion draft also fails to meet the third goal. Although it would tax domestic corporate profits and offshore corporate profits at the same time, it would subject the offshore profits to a lower rate, preserving some of the incentive for corporations to shift investment (and jobs) offshore or to engage in accounting gimmicks to make their U.S. profits appear to be generated in offshore tax havens.

Read CTJ’s comments (8 pages) on the Finance Committee discussion draft.

 


Center for American Progress: There Are No Corporate Profits "Trapped" Offshore


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A new report from the Center for American Progress (CAP) explains that, despite the well-known complaints of America’s largest multinational corporations, our tax system is not trapping corporate profits offshore. In fact, the profits characterized as “offshore” are invested in the U.S. economy already because they are deposited in U.S. bank accounts or invested in U.S. Treasury bonds or even corporate stocks. The real problem is that our tax system traps badly needed revenue out of the country by allowing American corporations to “defer” (delay) paying U.S. taxes on profits characterized as “offshore” — even if they are really earned here in the U.S.

Many lawmakers seem to mistakenly believe that the $2 trillion in “permanently reinvested profits” that American corporations hold abroad are locked out of the American economy. This has led many to support proposals to exempt American corporations’ offshore profits from U.S. taxes, either on a permanent basis (through a so-called “territorial” tax system) or a temporary basis (with a tax amnesty for repatriated offshore profits).

But nothing restricts corporations from investing these profits in the U.S. The CAP report cites a study from the Senate Permanent Subcommittee on Investigations (chaired by Carl Levin of Michigan) that examined the corporations benefiting the most from the repatriation amnesty enacted by Congress in 2004 and finding that almost half of their offshore profits were actually in U.S. bank accounts, Treasury bonds, and U.S. corporate stocks.

American corporations continue to designate these profits as “permanently reinvested earnings” offshore (to use the technical term) because these profits will be subject to U.S. corporate taxes when they are officially “repatriated” (brought to the U.S.).

Corporations are, in theory, restricted by law from using their offshore profits to pay dividends to shareholders or to directly expand their own investments. But even these rules can be circumvented when the corporations borrow money for these purposes. Because these companies have so much accumulated profits (offshore and often in the U.S. also) they are effectively able to borrow money at very low or even negative interest rates. The report explains how Apple and Microsoft both borrowed in this way to finance dividends and share buybacks.

Apple and Microsoft are also examples of another problem, which is that much of these “offshore” profits are actually U.S. profits that the companies characterize, using accounting gimmicks, as earned in countries like Bermuda or the Cayman Islands that do not tax them (offshore tax havens). The existing rule allowing American corporations to “defer” U.S. taxes on their offshore profits already encourages companies to engage in these tricks. Rather than expanding that break into a bigger one (a territorial system or a repatriation amnesty), the CAP report suggests either repealing deferral or cracking down on the worst abuses of deferral, as Senator Carl Levin has proposed.


Should It Bother Us that Boeing Says It Needs a Tax Incentive to Make Its Planes Safe?


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How worried should we be that Boeing argues it should get a tax break for performing safety tests on its new planes? This is the argument the corporation seems to have made at an IRS hearing on January 8 and in comments submitted (sorry, subscription only) to the agency about proposed regulations governing tax breaks for research.

Tax breaks designed to encourage research can only be said to be effective if they result in their recipients conducting research that they would not otherwise conduct. Boeing seems to argue that this includes safety testing of airplanes. But isn’t this something that Boeing must do anyway?

On one hand, if Boeing is not naturally inclined, in the absence of a tax incentive, to make its planes safe, you might want to consider that before you book your next flight. On the other hand, if we trust that the FAA and comparable foreign agencies have stringent safety requirements, then why does Boeing need a tax incentive to do what is required by law?

In its comments on the regulations, Boeing criticizing a proposed “shrinking-back rule” that would provide the research tax break only for companies that develop and test individual components of an aircraft rather than those who put together and test the entire aircraft (which is what Boeing does). Another issue Boeing raises is whether it can receive the break for multiple pilot models (prototype planes, for example) for safety testing.

Boeing argues that “in the aerospace industry, companies such as Boeing that have built tens of thousands of aircraft through the years know from experience that they need multiple pilot models for testing. Indeed, without multiple pilot models, a failure may not be correctly identified as a design problem or a unique problem encountered by the pilot model because of, for example, a defect in materials.”

To which the sensible response seems to be, so what? Are we supposed to believe that Boeing will not do the appropriate safety testing if it does not receive a tax incentive for doing so? Indeed, Boeing goes on at length about the FAA safety standards it must meet through testing.

Firms are allowed to deduct their business expenses each year, except that capital expenses (expenditures to acquire assets that generate income in the future) must usually be deducted over a number of years to reflect their ongoing usefulness. In 1954, Congress enacted section 174 of the tax code, which relaxed the normal capitalization rules by allowing firms to deduct immediately their costs of research. This immediate deduction is the specific tax break addressed by the proposed regulation that is causing Boeing so much angst.

But that’s not all that’s at stake. Businesses must meet the requirements of section 174 (and some additional requirements) to get an even bigger break, the research tax credit, which was first enacted in 1981.  Of those corporations that make public how much they claim in research tax credits, Boeing is near the top of the list. This is illustrated in the table, which was published in our recent report on the many problems with the research tax credit.

You really have to hand it to Boeing. The company has managed to have billions in profits for a decade while paying nothing in federal or state corporate income taxes over that period. Yet, President Obama argues that companies that use tax breaks to shift operations and profits offshore ought to pay more U.S. taxes and that the revenue “should go towards lowering taxes for companies like Boeing that choose to stay and hire here in the United States of America.” Likewise, after Washington State recently gave Boeing the biggest state tax break in history, other states like Missouri still seem to think they can lure the corporation by lavishing it with even more tax breaks. At this rate, Boeing could probably threaten that its planes will explode midair if it doesn’t get more tax breaks, and the Treasury Department and Congress probably would provide them.


Congressional Research Service: Stop Assuming Tax Rate Reductions Will Help the Economy


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Several reports released by the Congressional Research Service (CRS) in the first week of January refute claims that tax rate reductions will boost the economy and even pay for themselves by generating economic growth.

Changes in Personal Income Tax Rates

A report released on January 2 “summarizes the evidence on the relationship between tax rates and economic growth” and finds “little relationship with either top marginal rates or average marginal rates on labor income.” It also finds that work effort and savings are “relatively insensitive to tax rates.”

While many advocates of tax cuts claim that a high top marginal personal income tax rate hinders investment by the wealthy, the report finds that “periods of lower taxes are not associated with higher rates of economic growth or increases in investment.”

The January 2 report also concludes, “Claims that the cost of tax reductions are significantly reduced by feedback effects do not appear to be justified by the evidence.” Many advocates for tax cuts claim that reducing tax rates will cause so much growth of income and profits that the additional taxes collected (the “revenue feedback effects”) will replace much of the revenue lost from the rate reduction.

But the report explains that “the models with responses most consistent with empirical evidence suggest a revenue feedback effect of about 1% for the 2001-2004 Bush tax cuts,” meaning the effects that the tax cuts had on the economy and on behavior of taxpayers offset just 1 percent of their total cost. And much of this effect may have taken the form of taxpayers changing how many deductions they take, and other tax planning changes, rather than actual economic growth.

Even cuts in tax rates for capital gains, which are often argued to have the most significant “revenue feedback effects,” don’t come close to paying for themselves.

“Capital gains taxes have been scored for some time as having a significant feedback effect through changes in realizations, one that had a revenue offset of around 60 percent,” the report explains.  In other words, some analysts have claimed that a tax cut for capital gains increases those gains to such an enormous degree that up to 60 percent of the lost tax revenue is ultimately regained.

But the report explains, “More recent estimates, however, have suggested a feedback effect of about 20 percent.” CRS’s descriptions of these more recent estimates have been used in CTJ’s analyses of capital gains tax changes and are explained in the appendix to this report. (Another CTJ report proposes coupling higher capital gains tax rates with a policy change that would largely eliminate any negative effect on revenue.)

Changes in the Corporate Income Tax

The idea of changing the corporate income tax rate has received so much attention that the topic apparently warranted a separate report, which CRS released on January 6.

“Claims that behavioral responses could cause revenue to rise if rates were cut do not hold up on either a theoretical basis or an empirical basis,” the report explains. It also shoots down the argument that the corporate tax is a regressive tax because it chases investment offshore in a way that ends up hurting American workers.

This report goes into great detail about some of the problems with the studies that advocates of reducing corporate tax rates rely on. Much of the report details how CRS, using the same data and methods found in these studies, found that the results either disappeared or became insignificant after correcting for various errors

For example, the CRS report cites an op-ed published by R. Glen Hubbard, chairman of President George W. Bush’s Council of Economic Advisers. In it, Hubbard cites a study by Kevin A. Hassett and Aparna Mathur that was rife with methodological problems.

As the CRS report explains, Hassett and Mathur conclude that “a 1% increase in the corporate tax causes manufacturing wages to fall by 0.8% to 1%. These results are impossible, however, to reconcile with the magnitudes in the economy... corporate taxes are only about 2.5% of GDP, while labor income is about two thirds. These results imply that a dollar increase in the corporate tax would decrease wages by $22 to $26, an effect that no model could ever come close to predicting.” A later report by Hassett and Mathur “continued to produce implausible estimates” because it “implies a decrease of $13 in wages for each dollar fall in corporate taxes.”

To take another example, the CRS report also examines a cross-country study concluding that corporate taxes reduce investment. But CRS finds that some of the results seem to be affected by countries that are outliers, like Bolivia, for which a transaction tax is mistakenly counted as a corporate income tax. When such mistakes are corrected, the results are found to no longer be statistically significant.

This CRS report is particularly helpful because advocates of cutting the corporate income tax rate often rely on econometric studies that they claim support their case. These studies are often mind-numbingly complicated and it is rare that policymakers or their aides have the time and ability to go through these studies to understand whether or not they actually make sense. Thankfully, the Congressional Research Service has done that job for everyone.


Reasons Why Congress Should Allow the Deduction for Tuition to Remain Expired


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You might be surprised to learn that Congress is likely to extend a tax break that is claimed mostly by high-income individuals paying for graduate education and by families of undergrads who are mistakenly taking this break instead of one that would benefit them more.

The deduction for tuition and related fees is part of the “tax extenders,” which is the nickname often given to a package of provisions that Congress approves every couple of years to extend various arcane tax breaks that mostly go to businesses. This deduction is one relatively small piece of the larger “tax extenders” package, and it’s one that does go to families. But unfortunately, it’s also the most regressive of all the tax breaks for postsecondary education, meaning it’s targeted more to the wealthy than any other education tax break.

Congress last extended the deduction for tuition and related fees in the tax extenders package that was included in the “fiscal cliff” legislation approved on January 1 of 2013. That legislation extended it retroactively to 2012 and prospectively through the end of 2013. The two-year extension cost $1.7 billion.

Here’s a list of reasons why Congress should allow it to remain expired.

The deduction for tuition and related fees mainly supports graduate education.

Americans paying for undergraduate education for themselves or their kids in 2009 or later generally have no reason to use the deduction because starting that year another break for postsecondary education was expanded and became more advantageous. The more advantageous tax break is the American Opportunity Tax Credit (AOTC), which has a maximum value of $2,500. The deduction for tuition and related fees, in contrast, can be taken for a maximum of $4,000, and since it’s a deduction that means the actual tax savings even for someone in the highest income tax bracket (39.6 percent) cannot be more than $1,584.

The AOTC is more generous across the board. Under current law, the AOTC is phased out for married couples with incomes between $160,000 and $180,000, whereas the deduction for tuition and related fees is phased out for couples with incomes between $130,000 and $160,000. For moderate-income families, the AOTC is more beneficial because it is a credit rather than a deduction.   The working families who pay payroll and other taxes but earn too little to owe federal income taxes – meaning they cannot use many tax credits – benefit from the AOTC’s partial refundability (up to $1,000).

Given that a taxpayer cannot take both the AOTC and the deduction, why would anyone ever take the deduction? The AOTC is available only for four years, which means it would normally be used for undergraduate education, while the deduction could be used for graduate education or in situations in which undergraduate education takes longer than four years.  The deduction can also be used for students who enroll for only a class or two, while the AOTC is also only available to students enrolled at least half-time for an academic period during the year.

For graduate students and others in extended education, under current law the Lifetime Learning Credit (LLC) is generally a better deal than the tuition and fees deduction. Because the upper income limit for the LLC is lower — $124,000 if married, $62,000 if single, the tuition and fees deduction primarily benefits taxpayers whose income is above these thresholds.

Taxpayers confused by all the education tax breaks may mistakenly take the deduction rather than a tax break that benefits them more.

One reason a family paying for undergraduate education would claim the deduction instead of the AOTC is confusion. Because the panoply of education tax breaks is so confusing, many taxpayers mistakenly claim a break that is not the best deal for them. A 2012 report from the Government Accountability Office found that over a fourth of taxpayers eligible for postsecondary education tax breaks don't take advantage of them, and those who do use them often don't use the most advantageous tax break for their situation.

The deduction for tuition and related fees is the most regressive tax break for postsecondary education.

The distribution of these tax breaks among income groups is important because if their purpose is to encourage people to obtain education, they will be more effective if they are targeted to lower-income households that could not otherwise afford college rather than well-off families that will send their kids to college no matter what.

The graph below was produced by the Center for Law and Social Policy (CLASP) using data from the Tax Policy Center, and compares the distribution of various tax breaks for postsecondary education as well as Pell Grants.

The graph illustrates that not all tax breaks for postsecondary education are the same, and the deduction for tuition and fees is the most regressive of the bunch. Some of these tax breaks are more targeted to those who really need them, although none are nearly as well-targeted to low-income households as Pell Grants. Tax cuts for higher education taken together are not well-targeted, as illustrated in the bar graph below.

One proposal offered by CLASP would expand the refundability of the American Opportunity Tax Credit (AOTC), represented by the blue bar above, increasing the assistance available to low-income families not helped by the other tax breaks. The proposal offsets these costs — and simplifies higher education tax aid – by eliminating the other tax breaks and reducing AOTC benefits for higher income households


Corporate Income Tax Repeal Is Not a Serious Proposal


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Another year, another campaign to give even bigger breaks to corporations and claim that this will create jobs. In 2014, the campaign opened with a January 5 op-ed by Laurence Kotlikoff in the New York Times titled, “Abolish the Corporate Income Tax.”

Before getting into Kotlikoff’s argument, let’s just remember a few reasons why we have a corporate income tax.

First, the personal income tax would have an enormous loophole for the rich if we didn’t also have a corporate income tax. A business that is structured as a corporation can hold onto its profits for years before paying them out to its shareholders, who only then (if ever) will pay personal income tax on the income. With no corporate income tax, high-income people could create shell corporations to indefinitely defer paying individual income taxes on much of their income.

Second, even when corporate profits are paid out (as stock dividends), only a third are paid to individuals rather than to tax-exempt entities not subject to the personal income tax. In other words, if not for the corporate income tax, most corporate profits would never be taxed.

Third, the corporate income tax is ultimately borne by shareholders and therefore is a very progressive tax, which means repealing it would result in a less progressive tax system.

This last point deserves emphasis. Proponents of corporate tax breaks argue that in the long-term the tax is actually borne by labor — by workers who ultimately suffer lower wages or unemployment because the corporate tax allegedly pushes investment (and thus jobs) offshore. But most experts who have examined the question believe that investment is not entirely mobile in this way and that the vast majority of the corporate tax is borne by the owners of capital (owners of corporate stocks and business assets), who mostly have high incomes. This makes the corporate tax a very progressive tax.

For example, the Department of the Treasury concludes that 82 percent of the corporate tax is borne by the owners of capital. As a result, the richest one percent of Americans pay 43 percent of the tax, and the richest 5 percent pay 58 percent of the tax.

But Kotlikoff argues that our corporate income tax chases investment out of the U.S. and his simplistic answer is to repeal the tax altogether. He writes that, “To avoid our federal corporate tax, they [corporations] can, and often do, move their operations and jobs abroad,” and cites the well-known case of Apple booking profits offshore.

But Apple is a perfect example of a corporation that does not actually move many jobs offshore but rather is engaging in accounting gimmicks to make its U.S. profits appear to be generated in offshore tax havens. These gimmicks take advantage of the rule allowing American corporations to “defer” (delay indefinitely) paying U.S. corporate income taxes on the profits they claim to earn abroad. Lawmakers will end these abuses when they see that voters’ anger over corporate tax loopholes is even more powerful than the corporate lobby.

Kotlikoff has constructed a computer model that purports to prove that the economy would benefit greatly from cuts in the corporate income tax. But any such model relies on assumptions about how corporations would respond to changes in tax policy. Economists have failed to demonstrate a link between lower corporate taxes and economic growth over the past several decades that would justify the assumptions Kotlikoff uses.

In fact, Kotlikoff’s assumptions are at odds with the historical record. As former Reagan Treasury official, J. Gregory Ballentine, once told Business Week, “It’s very difficult to find much relationship between [corporate tax breaks] and investment. In 1981 manufacturing had its largest tax cut ever and immediately went down the tubes. In 1986 they had their largest tax increase and went gangbusters [on investment].”

In any event, the U.S. corporate tax is effectively already among the lowest in the developed world because of its many loopholes. According to the Department of the Treasury, federal corporate tax revenue in the U.S. was equal to 1.3 percent of our economy in 2010 (1.6 percent if you include state corporate taxes). The average for OECD countries (which include most of the developed countries) besides the U.S. was 2.8 percent.


Ultra-Wealthy Dodge Billions in Taxes Using "GRAT" Loophole


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A new Bloomberg report describes how billionaires have dodged an estimated $100 billion in gift and estate taxes since 2000, according to the lawyer who perfected the practice.

The trick involves temporarily putting corporate stocks (or similar assets) into a “Grantor Retained Annuity Trust” (GRAT), where the grantor gets the stocks back after two years, plus a small amount of interest, while any appreciation of the stock goes to the grantor’s heirs tax-free.

Because the initial gift has no inherent value (it’s essentially a gift to oneself), there is no gift tax at the time the GRAT is set up. The loophole is that the appreciation of the stock that goes to the heirs is not subject to gift tax either. As a result, extremely wealthy individuals avoid billions of dollars in gift and estate tax.

This is what Sheldon Adelson did (to take just one example) when he put much of his Las Vegas Sands stock in GRATs when the stock had plummeted during the recession. Adelson knew that the stock was likely to rise significantly from that low point. If Adelson had simply given his heirs the stock, the gift tax would have  applied to the value of the stock at the time it was given. Or if he bequeathed the stock upon his death, the estate tax would apply.

But by using GRATS, neither the value of the stock at the time it was temporarily put into the GRAT nor the subsequent appreciation was subject to gift or estate tax. See the graphic below from Bloomberg for how the shelter works in practice.

Many well-known figures, such as Facebook CEO Mark Zuckerberg, Goldman Sachs CEO Lloyd Blankfein and fashion designer Ralph Lauren, have set up GRATs to shelter their assets from gift and estate tax. Bloomberg estimates that Adelson, whose net worth is more than $30 billion, has already avoided at least $2.8 billion in US gift taxes using at least 25 different GRATs over time.

For his part, Adelson has not just sought to follow (or exploit) whatever law is on the books, but has actually taken an active role in trying to shape the law and the government that enacts it. In 2012, Adelson spent an astonishing $150 million to support conservative candidates and has said that he’s ready to “double” his donations to candidates going forward. Considering the billions that Adelson has at stake, this exuberant campaign spending may actually be a prudent investment if it works to preserve the GRAT loophole and the plethora of other massive tax breaks for the wealthy individuals embedded in the tax code.

To their credit, the Obama Administration has proposed to curb (PDF) the use of GRATs by requiring that a GRAT have a minimum term of 10 years. As the Treasury explains (PDF, pg. 142), this would create some downside risk to using a GRAT because it increases the likelihood that the grantor will die before the GRATs paid out the appreciation to the heirs, at which point that appreciation would be subject to the estate tax. Unfortunately, this proposal has been brushed aside by Republicans who seek to eliminate the estate tax entirely and by some Democrats who are not enthusiastic about taking on a tax break used by the large campaign donor class.

The latest budget deal in Congress seems to indicate that anti-government, anti-tax lawmakers will not force a costly shutdown of the federal government in 2014 as they did in 2013, although they still threaten to cause the U.S. to default on its debt obligations if some yet-undefined demands are not met. In today’s dysfunctional Congress, that’s considered a great achievement. Congress could have replaced all of the harmful sequestration of federal spending for next year and the year after by closing the tax loopholes used by corporations to shift jobs and profits offshore, as recently proposed by Reps. Lloyd Doggett and Rosa DeLauro. Sadly, the deal negotiated by Senate Budget Chairman Patty Murray and House Budget Chairman Paul Ryan does none of that.

Deal Replaces Some Sequestration, Further Reduces the Deficit

On Wednesday the U.S. Senate approved the Murray-Ryan budget deal, which was negotiated by Senate Budget Chairman Patty Murray and House Budget Chairman Paul Ryan and approved last week by the House. It would undo $63 billion of the $219 billion sequestration cuts scheduled to occur in 2014 and 2015 under the Budget Control Act of 2011 (the deal President Obama and Congressional Republicans came to in one of the previous hostage-taking episodes).

Most mainstream economists believe that governments should not cut spending when their economies are still climbing out of recessions, but that’s pretty much exactly what Congress did by approving the 2011 law resulting in sequestration of about $109 billion each year for a decade.

The Murray-Ryan deal would reduce that by $45 billion next year and by $18 billion in the following year. While the deal replaces $63 billion of sequestration, the total savings in the deal add up to $85 billion, which means the deal technically reduces the deficit compared to doing nothing. But about $28 billion of the savings come from simply extending some of the sequestration cuts longer than they were originally intended to be in effect (extending them into 2022 and 2023). This enables Rep. Ryan to claim that the deal further reduces the deficit. But this has no real policy rationale except for those who believe that shrinking government is good in itself, regardless of the impacts.

Any major budget deal approved during a recession ought to provide an increase in unemployment insurance, which is the sort of government spending that puts money in the hands of the people most likely to spend it right away, thus enabling local businesses to retain or create jobs. But under the Murray-Ryan deal, the extended unemployment benefits that were enacted to address the recession would run out (at the end of this month for many people). As the Center on Budget and Policy Priorities explains, in the past Congress has not allowed these benefits to run out until the rate of long-term unemployment was much lower than it is today.

Tax Loopholes Left Untouched, but Revenue Raised through Fees

The Murray-Ryan deal does not close a single tax loophole for corporations or individuals. A bill recently introduced by Reps. Lloyd Doggett and Rosa DeLauro demonstrates exactly how this could be done. The DeLauro-Doggett bill basically borrows the loophole-closing provisions from Senator Carl Levin’s Stop Tax Haven Abuse Act and uses the revenue savings to replace sequestration for two years.

To take just one of many examples of how it would work, the DeLauro-Doggett bill would close the loophole allowing corporations to take deductions each year for interest payments related to the costs of offshore business even though the profits from that offshore business will not be taxable until the corporation brings them to the U.S. years or even decades later. This reform is estimated to raise around $50 billion over a decade. Another provision would reform the “check-the-box” rules that allow corporations to tell different governments different things about the nature of their subsidiaries and whether or not their profits have been taxed in one country or another, resulting in profits that are taxed nowhere. This reform is estimated to raise $80 billion over a decade.

These two reform options appear on a list of potential loophole-closing measures released by Senator Murray’s committee (as well as in the DeLauro-Doggett legislation). The committee’s list also included others that Citizens for Tax Justice has championed, like closing the carried interest loophole to raise $17 billion over a decade, closing the John Edwards/Newt Gingrich loophole (for S corporations) to raise $12 billion, closing the Facebook stock option loophole to raise as much as $50 billion, and several others. (Many of the reforms on the budget committee list are explained in this CTJ report.)

Instead of closing tax loopholes, the Murray-Ryan deal raises revenue through fee increases that are not technically tax increases but would probably feel like tax increases to the people experiencing them. For example, fees on airline tickets that pay for the Transportation Security Administration (TSA) would increase to $5.60 per ticket, raising $12.6 billion over a decade. The premiums paid by companies for the Pension Benefit Guaranty Corporation (to guarantee employee’s pension benefits) would increase, raising $7.9 billion over a decade. Another provision would increase federal employee pension contributions, raising $6 billion over a decade. These are just a few examples.

These measures do raise revenue, but it would seem more straightforward to remove the loopholes that complicate the main taxes we rely on to fund public investments and that eat away significantly at the amounts of revenue they can raise. Members of Congress can only run for so long before facing the need for tax reform.


Income Tax Deductions for Sales Taxes: A Step Away from Tax Fairness


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Sales taxes are the biggest tax fairness problem facing state and local governments: they inexorably fall hardest on the low-income families who are least able to pay them, while asking far less, as a share of income, from the very best-off taxpayers. So if the federal government enacts a tax break designed to offset the impact of sales taxes, that can’t be a bad thing, right? As it turns out, it IS a bad thing, as explained in a recent report from Citizens for Tax Justice.

A deduction for sales taxes existed in the past but was repealed as part of the loophole-closing Tax Reform Act of 1986. In 2004 Congress brought the concept back as the itemized deduction that federal income taxpayers can claim for state and local sales taxes they pay each year.

Spearheaded by then-House Majority Leader Tom DeLay, the provision, enacted as part of the “American Jobs Creation Act of 2004,” gave itemizers the choice of deducting either their state and local income taxes or their sales taxes. The provision was set to expire two years later–and that’s how it joined the big happy family of “tax extenders,” the motley crew of temporary tax giveaways Congress now extends every couple of years.

Almost a decade later, the sales tax deduction is once again set to expire at the end of 2013. However, the deduction has a vocal fan base among politicians in the nine states that have no broad-based income taxes and rely more on sales taxes to fund public services. Since these states include large states like Florida and Texas, it’s a constituency that is difficult to ignore. Their Congressional delegations argue that it’s unfair for the federal government to allow a deduction for state income taxes, but not for sales taxes, but this misses the larger point. The underlying problem with sales taxes is their impact on low-income families, and itemized deductions don’t help low-income people, who mostly take the standard deduction rather than itemizing. Also, the higher your income, the more the deduction is worth, since the tax benefit depends on your income tax bracket.

The table above includes taxpayer data from the IRS for 2011, the most recent year available, along with data generated from the Institute on Taxation and Economic Policy (ITEP) tax model to determine how different income groups would be affected by the deduction for sales taxes in the context of the federal income tax laws in effect today.

As illustrated in the table, people making less than $60,000 a year who take the sales-tax deduction receive an average tax break of just $100, and receive less than a fifth of the total tax benefit. Those with incomes between $100,000 and $200,000 enjoy a break of almost $500 and receive a third of the deduction, while those with incomes exceeding $200,000 save $1,130 and receive just over a fourth of the total tax benefit.

So the sales tax deduction is both complicated and regressive, not to mention an added burden on the vast majority who don’t use it but have to pay for it (in the form of higher tax rates or skimpier public services). Yet too many of our politicians seem to think “other than those flaws, what’s not to like?”

The good news is that all Congress has to do in order to make this bad dream end is... nothing. Since the tax break is set to expire on New Year’s Day, Congressional tax writers can achieve a small, but meaningful, victory for tax fairness and simplification by simply sitting on their hands.


Rental Housing and the Tax Code


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More than sixty years after President Franklin Delano Roosevelt made “freedom from want” one of the “four freedoms” he sought to guarantee to families worldwide, one important component of Roosevelt’s vision—affordable housing—is further and further away for many low-income families. It’s well-known that the gradually unfolding foreclosure crisis of the past half-decade put homeownership out of reach for millions of American families. But as a new study from Harvard’s Joint Center for Housing Studies (JCHS) shows, many of these families have found that shifting from homeownership to renting has hardly eased the burden of housing costs. The study, America’s Rental Housing: Evolving Markets and Needs, finds that half of all renters nationwide are now paying more than 30 percent of their incomes on rent.

This is significant because housing experts have traditionally viewed the 30-percent-of-income threshold as the upper limit on affordable housing costs—and because the share of American renters paying burdensomely high rents, by this measure, grew faster over the past decade than at any time in the past half century. In 1960, JCHS finds, the share of renter households paying more than 30 percent of their income was 22 percent. In 2000, that share had risen to 38 percent, and in the decade that followed it jumped to 50 percent.

The JCHS measure breaks out families whose rental costs are “moderate burdens” (30 to 50 percent of income) and “severe burdens” (more than 50 percent of income). Disturbingly, the last decade’s jump in unaffordable rents was driven primarily by those with “severe” rental costs. An astonishing 27 percent of American rental households now spend more than half their income on rent alone, up sharply from 19 percent at the turn of the century. 

But as a September 2013 ITEP report notes, an increasing number of state tax systems have a straightforward mechanism in place, the property tax “circuit breaker” credit, that can be tailored to reduce the burden of rental housing cost for families. Circuit breakers are designed to prevent housing costs from exceeding some “excessive” share of income, and nearly half of the states now offer renters at least a small tax credit to keep their rental costs below these excessive levels. Recent expansions in renter tax breaks in Minnesota and the District of Columbia, described in our September report, show that even in a fiscally challenging environment these relatively inexpensive tax credits can be achievable for states.

In fact, circuit breakers administered by state governments may be the most attainable policy solution going forward for mitigating the excessive rental housing costs that millions of low-income families currently face. This is because, as the JCHS report shows, direct rental subsidies have actually been provided to fewer and fewer rent-challenged families even as rental costs have soared. The share of eligible households receiving rental subsidies fell from 27 to 23.8 percent during the past five years alone. In other words, state circuit breakers may be the last backstop for near-poverty families facing severe housing costs.


New CTJ Report: Congress Should Offset the Cost of the "Tax Extenders," or Not Enact Them At All


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Congress should end its practice of passing, every couple of years, a so-called “tax extenders” bill that reenacts a laundry list of tax breaks that are officially temporary and that mostly benefit corporations, without offsetting the cost. A new report from Citizens for Tax Justice explains that none of the tax extenders can be said to help Americans so much that they should be enacted regardless of their impact on the budget deficit and other, more worthwhile programs. It is entirely inappropriate that lawmakers refuse to fund infrastructure repairs or Head Start slots for children unless the costs are offset, while routinely extending these tax breaks without paying for them.

The tax breaks usually considered part of the “tax extenders” were last enacted as part of the deal addressing the “fiscal cliff” in January of 2013. At that time most of the provisions were extended one year retroactively and one year going forward, through 2013. As these tax breaks approach their scheduled expiration date at the end of this year, they are again in the news.

Read the report.


American Express Uses Offshore Tax Havens to Lower Its Taxes


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American Express's Tax Avoidance Opposed by Most Small Businesses

Since 2010, American Express has boosted itself as a supporter of small businesses, by promoting “Small Business Saturday” as a counterpart to Black Friday. But American Express is no friend of American small business. Not only does it charge merchants high swipe fees, but it also uses and wants to expand offshore tax loopholes that most small businesses can’t use and want to close.

A short report from CTJ explains that the company's SEC filings indicate it is holding $8.5 billion in low-tax offshore jurisdictions, including at least 22 offshore subsidiaries in 8 jurisdictions typically identified as “tax havens.” By its own estimates, American Express has avoided paying $2.6 billion in U.S. taxes by holding these profits offshore. To give some perspective, this amount is two and half times the budget of the entire Small Business Administration.

Even on the $21.3 billion in pretax profits that American Express officially earned in the U.S. over the past five years, the company has paid only half the 35 percent federal statutory tax rate.

Read the CTJ report.


New CTJ Report: Reform the Research Tax Credit -- Or Let It Die


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Read the report.

Business lobbyists are pushing Congress to enact tax “extenders” — a bill to extend several temporary tax breaks for business that expire at the end of this year. A new report from Citizens for Tax Justice examines the largest of those provisions, the federal research and experimentation tax credit, a tax subsidy that is supposed to encourage businesses to perform research that benefits society. The report explains that the research credit is riddled with problems and should be either reformed dramatically or allowed to expire.

Created in 1981, the credit immediately became the subject of scandals when it was claimed by businesses that no ordinary American would consider deserving of a tax subsidy (or any government subsidy) for research — like fast food restaurants, fashion designers and hair stylists.

Reforms enacted in 1986 were supposed to prevent these abuses, but there is evidence that corporate tax planners have often out-maneuvered the reforms.

The report explains that many of the problems it describes are the work of accounting firms that wrote the book on abusing the credit — and quite literally wrote the credit regulations as well. The credit’s rules are so lax thanks in large part to Mark Weinberger, a Bush top Treasury appointee who had previously lobbied for a broader definition of “research” while he was at Ernst and Young and, after he left the Treasury, returned to a grateful Ernst and Young where he was eventually promoted to CEO.

Another firm behind abuses of the credit is Alliantgroup, a tax consulting firm with former IRS Commissioner Mark W. Everson serving as its vice chairman and Dean Zerbe, former senior counsel to former Senate Finance Committee Chairman Charles Grassley, as its managing director.

Members of Congress have pushed to remove what reasonable restrictions remain on the research credit. For example, the report explains that Senators Charles Grassley and Amy Klobuchar have both called on the Treasury Department to make it easier for businesses to claim the credit on amended returns for research done in previous years, which cannot possibly achieve the goal of providing an incentive to do research. (A business’s research cannot possibly be the result of a tax incentive that the business was unaware of until years after the research was carried out.)

Meanwhile, a report coauthored by former Clinton adviser Laura D’Andrea Tyson argues that Congress should simply repeal the reforms of 1986 and make legal the abuses that the IRS is trying to stop.

The CTJ report explains that even when the credit is claimed by companies doing legitimate research, it’s difficult to believe that the research was a result of the credit.

Congress should let the research credit expire, and redirect the billions of dollars that it costs into true, basic, truly scientific research, which businesses rarely engage in because the payoffs often take years to arrive.

The report explains that if lawmakers insist on extending the research credit once again when it expires at the end of 2013, they should address three broad problems. If these problems are not addressed, then the credit should be allowed to expire.

Read the report.


This Holiday, The Tax Justice Team Is Thankful For...


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During Thanksgiving we tend to reflect on the year’s events and remember what we’re grateful for. This was a doozy of a year for tax analysts, with the federal government shutting down and state legislatures across the nation threatening deep cuts to major sources of revenue. But, nonetheless, as we look back on the year we have many things to be grateful for:

— That the taxes we all pay help make our communities, our states and country stronger and more vibrant.  Our tax dollars are used to provide public education, clean air and water, well-connected road and public transit systems, safe streets, affordable health care, and income supports for working families.

— That every state that started 2013 with a personal income tax continues to have one, despite efforts in LouisianaNebraska, and North Carolina to dismantle their most progressive form of taxation.

— That poor families in Colorado, Iowa, Minnesota, Oregon, the District of Columbia, and Montgomery County, Maryland will find it a little easier to make ends meet now that lawmakers in those states and localities approved expansions to various low-income tax credits.

— For the Americans who have demanded that Congress address the tax avoidance uncovered by CTJ and carried out by huge corporations like GE, Apple, and Boeing.

— That CTJ’s proposal to increase the Medicare payroll tax for the wealthy, and subject their investment income to the same type of tax, is part of the health care reform law in effect now.

— That Senator Max Baucus’s tax reform proposals (so far) do not give corporations their dream of ending all U.S. taxes on profits they claim to earn offshore and that many members of Congress are signalling a new seriousness about closing loopholes that allow corporations to shift profits into offshore tax havens.

Additionally, we thank our donors and friends for making our work possible.  Unlike other groups, who have one large benefactor, CTJ and ITEP rely on our thousands of supporters for funding.  2013 has been a banner year for CTJ and ITEP as we have seen a dramatic increase in online contributions, but our work has never been so important, so please consider CTJ or ITEP in your holiday giving to help us prepare for the tax fights ahead in 2014.

We wish you all a very happy Thanksgiving!


Why Everyone Is Unhappy with Senator Baucus's Proposal for Taxing Multinational Corporations


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Max Baucus, the Senator from Montana who chairs the committee with jurisdiction over our tax code, has made public a portion of his ideas for tax reform. Multinational corporations that have lobbied Baucus for years are unhappy because his proposal would (at least somewhat) restrict their ability to shift jobs and profits offshore. Citizens for Tax Justice and other advocates for fair and adequate taxes are unhappy because his proposal would not raise any new revenue overall — at a time when children are being kicked out of Head Start and all sorts of public investments are restricted because of an alleged budget crisis.  

The Need for Revenue-Raising Corporate Tax Reform

Materials released from Senator Baucus’s staff explain that this part of his proposal is “intended to be revenue-neutral in the long-term.” The idea behind “revenue-neutral” corporate tax reform is that Congress would close loopholes that allow corporations to avoid taxes under the current rules, but use the savings to pay for a reduction in the corporate tax rate.

Among the general public, there is very little support for this. The Gallup Poll has found for years that more than 60 to 70 percent of Americans believe large corporations pay “too little” in taxes.

There is almost no public support for the specific idea of using revenue savings from loophole-closing to lower tax rates. A new poll commissioned by Americans for Tax Fairness found that when asked how Congress should use revenue from “closing corporate loopholes and limiting deductions for the wealthy,” 82 percent preferred the option to “[r]educe the deficit and make new investments,” while just 9 percent preferred the option to “[r]educe tax rates on corporations and the wealthy.”

Of course, Baucus also says that he “believes tax reform as a whole should raise significant revenue,” which would mean that reform of the personal income tax would raise revenue. But there are questions about how that can work, given that he also wants to reduce personal income tax rates.

A growing number of consumer groups, faith-based groups, labor organizations and others have called on Congress to raise revenue from reform of the corporate income tax, as well as from reform of the personal income tax. In 2011, 250 organizations, including groups from every state, signed a letter to lawmakers calling for revenue-positive corporate tax reform, and a similar letter in 2012 was signed by over 500 organizations.

CTJ has repeatedly demonstrated that most corporate profits are not subject to the personal income tax and therefore completely escape taxation if they slip out of the corporate income tax. We have also explained that the corporate income tax is a progressive tax, which is needed in a tax system that is not nearly as progressive as most people believe.

The Need to Stop Corporations from Shifting Jobs and Profits Offshore

While CTJ and other tax experts are still going through the fine print of Baucus’s proposal to understand its full impact, it is clear to us that the proposal would stop some American corporations from using offshore tax havens to avoid U.S. taxes as successfully as they do today. Some multinational corporations are upset by this, but that doesn’t in itself mean that Baucus’s proposal is extremely strict.

CTJ has demonstrated that several very large and profitable corporations — like American Express, Apple, Dell, Microsoft, Nike and others — are making profits appear to be earned in offshore tax havens so that they pay no taxes on them at all. Any proposal that makes the code even slightly stricter will cause these companies to pay more and, naturally, cause them to complain bitterly. 

These companies are taking advantage of the most problematic break in the corporate income tax, which is “deferral,” the rule allowing American corporations to “defer” (delay indefinitely) paying U.S. corporate income taxes on the profits of their offshore subsidiaries until those profits are officially brought to the United States. Deferral is really a tax break for moving operations offshore or for using accounting gimmicks to make U.S. profits appear to be generated in a country with no corporate income tax (like Bermuda or the Cayman Islands or some other tax haven).

CTJ has long argued that the best solution is to simply repeal deferral and subject all profits of our corporations to U.S. corporate taxes in the year they are earned, no matter where they are earned. (We already have a separate foreign-tax-credit rule that reduces U.S. corporate taxes to the extent that companies pay corporate taxes to other countries, to prevent double-taxation.) Barring this, Congress could at least curb the worst abuses of deferral with the type of reforms proposed by Senator Carl Levin.

The big multinational corporations lobbied Baucus and others to expand deferral into an even bigger break, an permanent exemption for offshore profits, often called a “territorial” tax system, which CTJ and several small business groups, consumer groups and labor organizations have always opposed.

Baucus did not propose either approach. His proposal is somewhat like a territorial tax system except that he would place a minimum tax on the offshore profits of American corporations, which would take away much of the advantage that the corporations thought they might obtain after their years of lobbying. American multinational corporations would be required to pay a minimum level of tax on their offshore profits, during the year that they are earned.

But if a corporation is paying corporate taxes to a foreign government at a rate as high or higher than the U.S. minimum tax, there would never be any U.S. taxes on the profits generated in that country. This means that offshore profits of American corporations would still be subject to a lower tax rate than domestic profits, which may preserve some incentive to shift jobs and profits offshore.

Baucus proposes two different versions of a minimum tax. One would require that profits generated in other countries be taxed at a rate that is at least 80 percent of the regular U.S. corporate tax rate. Baucus has not yet revealed what corporate tax rate he will propose, but if one assumes it is 28 percent, that would mean that the foreign profits must be taxed at a rate of at least 22.4 percent. If they are taxed by the foreign country at a rate of, say, 18 percent, that would mean the corporation would pay U.S. corporate taxes of 4.4 percent. (18+4.4=22.4)

The second option Baucus offers would require that “active” profits generated abroad be taxed at a rate that is 60 percent of the U.S. tax rate while “passive” profits generated abroad be taxed at the full U.S. rate (both before foreign tax credits). The concept of “active” income and “passive” income already is a major part of our tax code, but Baucus would define them differently for this option. The basic idea is that “passive” income (like interest payments, rents and royalties) is income that is extremely easy to move from one subsidiary to another and therefore easily used for tax avoidance if it’s not taxed at the full U.S. rate. 

The Baucus proposal has several other innovations that are too numerous to fully explain here. To give one example, the proposal says that if an American corporation has a subsidiary in another country that earns profits by selling to the U.S. market, those profits would be subject to the full U.S. corporate tax rate in the year that they are earned. How well this would work might depend heavily on how easily this can be administered.

Since there are no public estimates of the revenue impacts of the provisions Baucus has proposed, it is not yet clear how important many of them are. Stay tuned as we examine this proposal and learn more.

Senate Finance Committee Chairman Max Baucus (D-Mont.) today released a draft proposal for changing the way the United States taxes multinational corporations. Robert McIntyre, the director of Citizens for Tax Justice, made the following statement about the draft:

"Senator Baucus promises that his proposals will not increase the paltry federal income taxes that multinational corporations now pay. He also promises that he will later propose changes to the taxes on domestic corporations, which will also be 'revenue-neutral.' And he also says that he 'believes tax reform as a whole should raise significant revenue.'

"That must mean that Baucus plans to propose 'significant' increases in personal income taxes (or some new tax). Will this mean higher taxes on the rich? That seems unlikely, since Baucus is expected to propose a considerably lower top personal income tax rate. So that apparently will leave the middle class and maybe the poor holding the bag.

"That is certainly not what most Americans think tax reform should be about. Lawmakers should instead reform the corporate income tax in a way that raises significant revenue."


Poll Shows Almost No Support for Using Savings from Loophole-Closing to Lower Tax Rates


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A poll commissioned for Americans for Tax Fairness and released on November 13 shows almost no public support for the “revenue-neutral” approach to tax reform advanced by Rep. Dave Camp, the chairman of the House Ways and Means Committee.

One question put to respondents was how Congress should use revenue from “closing corporate loopholes and limiting deductions for the wealthy.”

To this, 82 percent preferred the option to “Reduce the deficit and make new investments,” while just 9 percent preferred the option to “Reduce tax rates on corporations and the wealthy.”

What 9 percent chose is basically the approach to tax reform laid out by House Budget Committee chairman Paul Ryan (in the various version of the infamous “Ryan Plan”) as well as the approach laid out by Ways and Means Chairman Dave Camp. Both have said that tax loopholes and tax breaks should be reduced and/or eliminated and the revenue savings should be used to offset reductions in tax rates, including reducing the top personal income tax rate and the corporate income tax rate to 25 percent.

Of course, Camp and Ryan present their approach as more than simply reducing rates for corporations and wealthy individuals. They will continue to make the case that they can include provisions that help middle-income Americans directly.

But this will be an impossible case for them to make. After Ryan released the most recent version of his plan, CTJ demonstrated that the tax reform section would provide those whose annual income exceeds a million dollars with an average tax cut each year of at least $200,000. In other words, even if Congress eliminated all of the tax loopholes and tax breaks that Ryan put on the table, millionaires would still end up with a huge net tax cut because of the rate reductions. And if the plan would be implemented in a way that is truly “revenue-neutral” as Ryan and Camp claim, that would mean someone further down on the income ladder would have to pay more than they pay today.

The budget resolution approved by the Democratic majority in the Senate in the spring called for raising $975 billion in taxes over a decade from corporations and wealthy individuals. President Obama has taken a disappointing middle ground, arguinug that reform of the personal income tax should raise revenue, but reform of the corporate income tax (and the personal income tax insofar as it affects businesses) should be revenue-neutral.


GE-Sponsored "Territorial" Study Promotes Agenda of Tax Avoidance


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A newly released study sponsored by General Electric and a corporate lobbying group argues in favor of a “territorial” tax system, which House Ways and Means chairman Dave Camp has proposed as part of comprehensive tax reform. Here’s Citizens for Tax Justice director Bob McIntyre’s take on the study.

General Electric and a corporate lobbying group called ACT have sponsored a “study” arguing that our economy would benefit from a “territorial” tax system — one that permanently exempts from U.S. taxes the offshore profits of American corporations. This flies in the face of overwhelming evidence that today many of these profits are really earned in the U.S. but characterized as “offshore” in order to obtain existing tax benefits that would be expanded under a territorial system. The “study” is hopelessly flawed for several reasons.

For starters, the long-term “improvement” in the U.S. economy that the report predicts is so small that it’s a rounding error. The authors claim that permanently exempting offshore corporate profits from tax would increase U.S. GDP by $22 billion a year. That’s an increase of only 0.1%. So even if one believed this would actually happen (we don’t), one wouldn’t care.

More fundamentally, the authors seem to believe that the trillions of dollars that multinational corporations claim they earn in tax havens are floating in baskets in the Caribbean, and are unavailable for use in the United States. But that’s not true. As we’ve learned from the annual reports of companies such as Apple, most of that money is actually invested in the United States, in the stock market, corporate bonds and government bonds. In other words, most of the money is already here. It just hasn’t been taxed.

The authors brush aside the problem that a permanent tax exemption for “foreign” profits would encourage American corporations to work even harder at making their U.S. profits appear to earned in other countries that don’t tax them. The authors simply assert that they don’t think a permanent exemption would be any worse than our current system of indefinite “deferral” of U.S. taxes on such profits. What they don’t mention, however, is that there is a straightforward way to fix our current system.

As CTJ and others have pointed out, the solution is to repeal “deferral” and make multinationals pay tax on their overseas profits, with a credit for taxes paid to foreign governments. This would make profit-shifting to tax havens useless, and would also end tax incentives to move operations abroad. As a bonus, ending “deferral” would reduce the federal budget deficit by over $500 billion over the next ten years, making it much easier to protect essential public programs such as Social Security and Medicare.

General Electric, one of America’s most notorious tax dodgers, wouldn’t like such a reform, of course. That’s probably why it’s never mentioned by the authors of the study.


Let's Face It: Delaware and Other U.S. States Are Tax Havens


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On November 1, The New York Times published on op-ed written by John Cassara, formerly a special agent for the Treasury Department tasked with following money moved illegally across borders to evade taxes or to launder profits from criminal activities. The place where the money often disappeared, he explains, was the state of Delaware, which allows individuals to set up corporations without disclosing who owns them.

“I trained foreign police forces to “follow the money” and track the flow of capital across borders.

During these training sessions, I’d often hear this: “My agency has a financial crimes investigation. The money trail leads to the American state of Delaware. We can’t get any information and don’t know what to do. We are going to have to close our investigation. Can you help?”

The question embarrassed me. There was nothing I could do.

In the years I was assigned to Treasury’s Financial Crimes Enforcement Network, or Fincen, I observed many formal requests for assistance having to do with companies associated with Delaware, Nevada or Wyoming. These states have a tawdry image: they have become nearly synonymous with underground financing, tax evasion and other bad deeds facilitated by anonymous shell companies — or by companies lacking information on their “beneficial owners,” the person or entity that actually controls the company, not the (often meaningless) name under which the company is registered.”

Americans might comfort themselves by thinking that all countries have this problem, but Cassara points out that it is particularly bad in the U.S. He explains that a “study by researchers at Brigham Young University, the University of Texas and Griffith University in Australia concluded that America was the second easiest country, after Kenya, in which to incorporate a shell company.”

This creates enormous problems for U.S. tax enforcement efforts. It’s more difficult to persuade foreign governments to help the IRS track down money hidden offshore when several U.S. states seem to be helping people from all over their world evade taxes owed to their governments. Another problem is that much of the money hidden in shell companies incorporated in Delaware or other U.S. states may be U.S. income that should be subject to U.S. taxes, and/or income generated by illegal activities in the U.S.

The good news is that legislation has been proposed to require states to collect information on the beneficial owners (i.e., whoever ultimately owns and controls a company) when a corporation or LLC is formed and make that information available when ordered by a court pursuant to a criminal investigation. The Incorporation Transparency and Law Enforcement Assistance Act has bipartisan sponsorship in the Senate (including Senators Levin, Feinstein, Grassley and Harkin) and has been referred to the Judiciary Committee. This is an improvement over the last attempt to pass this legislation, in 2009, when it was referred to the Homeland Security and Government Affairs Committee (HSGAC), where it was memorably sabotaged by Delaware’s Senator Tom Carper. Last month, a similar bill was introduced in the House by Rep. Maloney.

Of course, enactment of this legislation would not solve all of the problems with our tax code. For example, it would not address the major problem of big, publicly traded corporations like Apple avoiding taxes by using offshore tax havens in ways that are (probably mostly) legal under the current rules. But, the incorporation transparency legislation would be huge progress in clamping down on tax evasion (the illegal hiding of income from the IRS) by individuals, including those engaged in other criminal activities like drug trafficking, smuggling, terrorist funding and money laundering.

In fact, as we have argued before, it is disappointing that the Obama administration has not put any real energy into advocating for this type of comprehensive legislation. This is not too much to ask for. The Conservative Prime Minister of the UK recently announced that his government would go even farther — not just recording names of owners of all UK corporations and making them available to enforcement authorities, but even automatically making those names public.


Paul Ryan Says No to Any Revenue Increase, Again


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The House and Senate budget conference committee that was formed as part of the deal that ended the federal government shutdown and raised the debt ceiling is unlikely to come to any “grand bargain” that dramatically reduces the deficit or increases public investments. This is because, as House Budget Committee Chairman Paul Ryan reiterated this week, Congressional Republicans will oppose any proposal that includes new revenue.

“Taking more from hardworking families just isn't the answer. I know my Republican colleagues feel the same way,” Ryan said during a meeting of the conference committee on Wednesday. “So I want to say this from the get-go: If this conference becomes an argument about taxes, we're not going to get anywhere. The way to raise revenue is to grow the economy.”

There can be no reasonable “grand bargain,” which is usually interpreted to mean a deal including cuts to programs like Social Security and Medicare, if Congressional Republicans continue to block any and all revenue increases. The U.S. collects lower taxes as a percentage of its economy, than any Organisation for Economic Co-operation and Development (OECD) nations other than Mexico and Chile. Our current federal tax system is projected to collect revenue equal to 18.5 percent of our economy a decade from now. As we have pointed out before, in only a handful of years over the past three decades has federal spending been this low.

There are still useful things the committee might do, in theory, like changing the way sequestration affects certain programs. But the overall level of federal spending may be stuck at its current austere level, which has already done much damage to the economy.

Even the apparent glimmers of interest in revenue among Republicans on the conference committee are misleading. Rep. Tom Cole, for example, raised the possibility of “raising revenue” by enacting a tax amnesty for repatriated offshore profits like the one that was enacted in 2004. The non-partisan Joint Committee on Taxation has already concluded that allowing American corporations to officially bring to the U.S. their offshore profits (many of which are already being invested in the U.S.) would raise revenue for a few years and then lose revenue as companies are encouraged to shift even more profits offshore and wait for the next tax amnesty.

Committees can talk around the issue all they want, but there is simply no getting around the need for increased revenue.


Bruce Bartlett Is Wrong: New Conclusions on the Corporate Income Tax Change Nothing


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One question that comes up in debates about the corporate income tax is who pays it. Even though the corporate tax is officially paid by corporations, all taxes are ultimately paid by actual people.

It is clear that the corporate tax is, in the short term, borne by the owners of capital — meaning it’s paid by the owners of corporate stocks and other business and investment assets because the tax reduces what corporations can pay out as dividends to their shareholders. But those who promote corporate tax breaks sometimes argue that in the long-term the tax is actually borne by labor — by workers who ultimately suffer lower wages or unemployment because the corporate tax allegedly pushes production activity offshore.

Most experts who have examined the question believe that investment is not entirely mobile in this way and that the vast majority of the corporate tax is borne by the owners of capital, who mostly (but not exclusively) have high incomes. This makes the corporate tax a very progressive tax.

For example, the Department of Treasury concluded that 82 percent of the corporate tax is borne by the owners of capital. According to Treasury, this results in the corporate income tax being distributed as illustrated in the table to the right, which shows that the richest one percent of Americans pay 43 percent of the tax while the richest 5 percent pay 58 percent of the tax. These figures were used by CTJ to estimate the distribution of tax increases resulting from corporate loophole-closing in our new comprehensive tax reform proposal.

Treasury’s findings are similar to those of other analysts. The Tax Policy Center, for example, has concluded that 80 percent of the corporate income tax is borne by the owners of capital.

Two weeks ago, the Joint Committee on Taxation (JCT), the official revenue estimators for Congress, announced that it would finally include corporate income taxes in its distributional tables showing the effects of proposed tax changes. This will make JCT’s analyses more consistent with other analyses (including CTJ’s), and will mean that lawmakers will no longer get a free pass in JCT’s distributional tables when they enact regressive corporate tax cuts.

In conjuction with its announcement, JCT published a report estimating that in the short-run all of any change in the corporate tax will benefit or burden owners of capital, while in the long-run 75 percent of a corporate tax change will affect owners of capital (and the rest will affect labor income).

JCT’s conclusion is not all that different from the conclusions of others, but some observers seem to think it is “news” and have misinterpreted its importance. For example, Bruce Bartlett, who typically has a lot of insightful things to say about taxes, wildly misinterprets JCT’s conclusion:

Politically, it is now easier to show that a cut in the corporate tax rate will have benefits that are broadly shared, especially by those with incomes below $30,000. Conversely, it means that the Obama administration’s plan to raise new revenue by closing corporate tax loopholes will have a harder time gaining traction, because much of the burden will fall on those with low incomes.

This is all wrong. Bartlett includes some tables from the JCT report in his piece but fails to include the table that actually matters, which is at the top of page 27 and is titled “Distribution of a $10 Billion per Year Increase in Corporate Income Taxes.” This table shows JCT’s estimates of how much taxes would go up for taxpayers at different income levels in each of the next 11 years. JCT’s figures are in millions of dollars, but with some simple arithmetic, we can calculate the share of a corporate tax increase paid by each of the income groups that JCT presents. We focus on the first and last year that JCT analyzes, to show both the immediate and longer-term impacts.

The result is the table below, which shows that under JCT’s assumptions, over half of a corporate income tax increase would be paid by people with income exceeding $200,000. Well over three-fourths would be paid by people with incomes exceeding $100,000. Only about 6 percent would be paid by the 55 percent of taxpayers earning less than $50,000, whose average tax increase from a $10 billion corporate tax hike would be only $7.

In other words, any provision that raises revenue by closing corporate tax loopholes will have a progressive impact, meaning it will increase the share of taxes paid by high-income people.

Low- and middle-income Americans will be hurt by proposals being debated like cuts to Social Security, Medicare and Medicaid and proposals recently put into effect like sequestration of funds for Head Start. It would be far better for lawmakers to achieve whatever savings they think are necessary by closing corporate tax loopholes, because very little of the resulting tax increase would be paid by low- and middle-income Americans.

A headline in a publication read widely by tax experts (subscription only) this morning screamed “PwC Study: Effective Corporate Tax Rate Topped Statutory Rate From 2004 to 2010.”

The actual report, which was published in a rival publication this week (subscription only), provides three different ways of measuring effective corporate tax rates, and only one tells us anything about how our corporate tax system is working. That measure — the percentage of worldwide profits paid in worldwide taxes for corporations that were profitable from 2008 through 2010, was 22 percent, the study concludes.

This is not surprising at all. CTJ’s study of most of the Fortune 500 corporations that were consistently profitable from 2008 through 2010 found their effective U.S. federal corporate income tax rate on their U.S. profits to be 18.5 percent over that period. The PwC study finds that worldwide profits (not just U.S. profits) were subject to worldwide taxes (including U.S. federal and state taxes plus foreign taxes) of 22 percent.

These two findings are entirely compatible. The effective worldwide tax rate can be expected to be slightly higher than the effective U.S. tax rate that CTJ calculated because the CTJ study also found most of the corporations to pay higher taxes in the other countries where they did business, and because the worldwide rate includes state corporate taxes.

However, PwC’s report also includes two other, odd measures of corporate tax rates that are irrelevant to the policy debate, and tries to get reporters to focus on these irrelevant figures. One includes companies whether they were profitable are not in the years examined. Of course, corporations that are not profitable are not expected to pay the corporate income tax, which is a tax on profits. But including corporations with losses reduces the total amount of profits and makes the effective tax rate (taxes as a percentage of profits) appear much larger.

Another irrelevant measure used by the PwC study includes all corporations with positive taxable income. This measure leaves out corporations that actually are profitable but avoid taxes because of breaks (like depreciation breaks) that reduce their taxable income to below zero. This measure simply excludes the corporations that are most effective at dodging taxes.

The author of the PricewaterhouseCoopers report, Andrew Lyon, was called out by CTJ in 2011 for a report he wrote for the Business Roundtable claiming that U.S. corporations pay higher effective tax rates than corporations of other countries. It appears that this time around, his better angel compelled him to include a straightforward, relevant statistic even while he tries to divert readers’ attention to his report’s other, meaningless findings.


New Comprehensive Tax Reform Plan from Citizens for Tax Justice


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Citizens for Tax Justice released a detailed tax reform plan this week that accomplishes the goals we set out in an earlier report: raise revenue, enhance fairness, and reduce tax incentives for corporations to shift jobs and profits offshore.

A budget resolution approved by the House of Representatives in the spring called for a tax reform that raises no new revenue, while a budget resolution approved by the Senate called for $975 billion in new revenue over a decade. CTJ’s report on goals for tax reform explained why we need even more revenue than the Senate resolution calls for, and the plan we released this week would raise $2 trillion over a decade

Our proposal would accomplish this by ending some of the biggest breaks for wealthy individuals and corporations. The proposal includes the following reforms:

■ Repealing the special, low tax rates for capital gains and stock dividends, as well as the rule allowing accumulated capital gains to escape taxation when the owner of an asset dies.

■ Setting the top tax rate at 36 percent — which would be a significant tax increase on the wealthy because this rate would apply to the capital gains and stock dividends that mostly go to the richest Americans and which are now taxed at much lower rates.

■ Increasing the standard deduction by $2,200 for singles and twice that amount for married couples.

■ Replacing several “backdoor” taxes (like the Alternative Minimum Tax) with President Obama’s proposal to limit the tax savings of every dollar of deductions and exclusions to 28 cents.

■ Repealing several enormous corporate tax breaks, including the rule allowing American corporations to “defer” paying U.S. taxes on their offshore profits until those profits are officially brought to the U.S.

Read our tax reform reports:

Tax Reform Goals: Raise Revenue, Enhance Fairness, End Offshore Shelters
September 23, 2013

Tax Reform Details: An Example of Comprehensive Reform
October 23, 2013


Illinois Ruling Strengthens Case for a Federal Solution to Online Tax Collection


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Last week, the Illinois Supreme Court struck down a state law (commonly called the “Amazon law”) that would have helped solve some of the sales tax enforcement problems surrounding online shopping.  As things currently stand in Illinois (and most other states), traditional retailers with stores, warehouses, or actual employees in Illinois are required to collect  state sales taxes from their customers, while online retailers who don’t employ any Illinois residents (or have any other “physical presence”) are given a free pass.  Online shoppers are supposed to pay the sales tax directly to the state when e-retailers fail to collect it, but few shoppers actually do this in practice.

Illinois, along with nine other states, had tried to strengthen its sales tax enforcement by requiring more online retailers to collect the tax (specifically, those retailers partnering with Illinois-based “affiliates” to market their products).  But this court ruling strikes down Illinois’ law on the grounds that it treats companies partnering with online affiliates differently than companies who advertise in Illinois through traditional media.  According to a majority of the justices, this feature of Illinois’ “Amazon law” violates a federal law enacted in 2000 that bars “discriminatory taxes on electronic commerce.”

In his dissent, Justice Lloyd Karmeier points out that Illinois’ “Amazon law” didn’t actually impose any new taxes—it simply required a larger number of retailers to be involved in collecting and remitting sales taxes that are already due.  Karmeier went on to say that he would have upheld the law – in much the same way that New York’s highest court did with a similar law in that state earlier this year.

With Illinois’ and New York’s courts disagreeing on this issue, legal observers seem to think there’s a growing chance that the U.S. Supreme Court will consider the case next year.  But it’s a shame it’s come to this.  The Supreme Court already made clear over two decades ago that Congress has the authority to set up a more rational, nationwide policy for how states can tax purchase made over the Internet.  The U.S. Senate did exactly that this May with a bipartisan vote in favor of the Marketplace Fairness Act, but so far the U.S. House of Representatives has yet to act on it.  We presume it’s the