Regressive Tax Proposals 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

Does a 15 Percent Corporate Tax Rate Sound Low? For Dozens of Major Corporations, Maybe Not

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President Donald Trump has promised to release new details Wednesday on what he says could be “the biggest tax cut we’ve ever had.” While much is unclear about the shape this plan will take, the Wall Street Journal reported yesterday that it will include a 15 percent tax rate on corporate profits, less than half the 35 percent statutory rate currently in effect.

If this sounds like a gigantic tax cut, that’s because it is: the corporate tax is projected to collect $320 billion in 2017, and Trump’s rate cut taken on its own would give away more than half of that. But as a recent ITEP report found, plenty of the biggest and most profitable corporations could be forgiven for being unimpressed by the plan: of 258 Fortune 500 corporations that have been consistently profitable over the last eight years, 69 companies—more than a quarter of them—paid an effective federal income tax rate of less than 15 percent over the eight-year period. These include Honeywell (14.9 percent), ExxonMobil (13.6 percent), FedEx (13.2 percent), Amazon (10.8 percent), United Technologies (10.4 percent), Verizon (9.1 percent), Time Warner Cable (7.8 percent), Boeing (5.4 percent), CBS (5.4 percent), and tax-avoidance industry leader General Electric, which paid a negative federal effective tax rate of -3.4 percent over the eight-year period. And 167 of these companies found a way to pay less than 15 percent in at least one year during this period, which means about two-thirds of profitable Fortune 500 corporations are already quite familiar with the experience of paying less than Trump’s proposed 15 percent rate.

These numbers suggest that the first sensible step toward corporate tax reform should be closing the many legal tax loopholes that make this widespread tax avoidance possible. We may find out tomorrow whether President Trump intends to answer the hard questions about tax reform—that is, how to pay for it—or whether he’ll continue to focus on the easy part by offering huge new giveaways to his wealthiest and most influential constituents. But early indications are that the President’s approach to corporate tax reform is precisely the opposite of what’s needed to ensure a sustainable and fair tax system going forward. 

GOP Healthcare Bill Cuts Insurance Coverage for Millions to Pay for Tax Cuts for the Wealthy; ITEP State-By-State Estimates

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The House GOP’s American Health Care Act is being pushed quickly through the legislative process, with a vote on the House floor scheduled for as early as Thursday. The Republican legislation seeks to pay for the cost of repealing highly progressive taxes enacted as part of the Affordable Care Act by making substantial cuts to Medicaid funding and tax credits used to subsidize the purchase of health insurance by middle- and low-income households.

The two biggest tax cuts in the package are its repeal of the Additional Medicare Tax and the Net Investment Income Tax, which increased taxes on investment and wage income for individuals making over $200,000. Together, these provisions represent a $275 billion tax cut for the country’s richest taxpayers over the next ten years. According to a new analysis from the Institute on Taxation and Economic Policy (ITEP), the repeal of just these two provisions would provide the top 1 percent of taxpayers an average annual tax break of $19,672 nationwide.

The egregious inequity of these tax cuts look even worse when you compare them on a state-by-state level with the cuts to the premium tax credits that help low- and middle-income families afford health insurance. The new ITEP analysis gives a state-by-state breakdown of how many taxpayers will be impacted, the percentage of taxpayers impact, the total tax cuts, average tax cut for the top 1 percent, and the percent of tax cuts going to the top one percent. For example, the Center on Budget and Policy Priorities (CBPP) finds that in North Carolina the average premium tax credit would be cut by $5,360 resulting in an equivalent hike in health insurance costs, while ITEP’s data show that the top 1 percent of taxpayers in the state would see an average tax cut of $11,540 from just the repeal of these two Medicare tax increases. Similarly, the tax cuts for the rich are larger in many states than those states are losing in funding for Medicaid. For example, in Colorado federal Medicaid funding would fall by $340 million, while the ITEP analysis finds that the richest taxpayers in the state will see a federal tax cut of $544 million.

The overall impact of the legislation would be devastating. The latest analysis from the non-partisan Congressional Budget Office (CBO) finds that by 2018 as many as 14 million more people would be uninsured under the legislation, and that by 2026 as many as 24 million more people would not have health insurance. The bill would reverse most of the progress in health insurance coverage achieved by the Affordable Care Act. Building on this, the bill, with its nearly $900 billion in tax cuts, will also help pave the way for tax reform legislation by substantially lowering the baseline needed for future legislation to achieve revenue- and distributional-neutrality.

While the legislative process is moving fast, it is still unclear if the legislation has enough votes to pass. In the House, the bill is facing opposition from moderate Republicans, who are concerned about the benefit cuts, and many conservative Republicans, who want a more complete repeal of the Affordable Care Act provisions. There is every indication that the legislation will face total opposition from Democrats, which means that the Republican leadership can only lose 23 Republican votes in the House. The legislation is also likely to face more opposition in the Senate, with many Republican senators expressing concerns about the benefit cuts and a much narrower working margin. The Senate leadership can only afford to lose two Republicans and still pass the legislation.

To help win over moderate and conservative Republicans, the House leadership released a potential manager’s amendment that seeks to mollify opposition on both sides. The proposed changes are modest and are unlikely to significantly affect the harsh overall impact of the bill on health insurance coverage.

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

State of Play: The Coming Debate Over the Ryan and Trump Tax Plans

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If the incoming Trump Administration and Republican-lead Congress have their way, fundamental changes to the tax code are afoot. The most important similarity between the Ryan and Trump tax plans are dramatic reductions in the corporate tax rate and across-the-board tax cuts whose benefits primarily flow to the richest Americans.

Because of their potentially catastrophic effect on federal revenue and tax fairness, neither plan should be the starting point for tax talks. Instead, lawmakers should  embrace tax reform plans that close down loopholes, increase the fairness of the tax code and raise more revenue.

One of the crucial dynamics in the upcoming debate over taxes will be whether Speaker Paul Ryan’s and President-elect Trump’s tax proposals can be combined in a way that will gain enough support from lawmakers to become law.

The plans have a lot in common, as this side-by-side comparison shows. Both Ryan and Trump would:

  • Eliminate the estate tax
  • Create an individual income tax rate structure of 12 percent, 25 percent, and 33 percent
  • Limit itemized deductions (Ryan would eliminate all deductions except the charitable and mortgage interest deduction, Trump would cap deductions)
  • Increase the standard deduction
  • Eliminate personal exemptions
  • Lower the tax rate on capital gains
  • Eliminate the alternative minimum tax
  • Cut the corporate tax rate
  • Provide a lower top rate for pass-through business income
  • Repeal the Affordable Care Act, which means repealing a series of tax provisions including higher taxes on investment income and tax credits for health insurance premium payments.

Ryan and Trump will still need to settle on the specifics of issues even where they embrace the same trajectory such as whether the corporate tax rate should ultimately be lowered to 15 (as Trump proposes) or 20 percent (as Ryan proposes).

There are a few areas in which the two plans differ meaningfully.

On corporate taxes, Ryan’s plan would eliminate the ability of companies to deduct interest, allow companies to immediately expense the full cost of their capital investments and enact a border adjustment which would exempt exports from taxation and not allow companies to deduct the cost of imports. In contrast, Trump would only allow full expensing (and disallow the interest deduction) for certain manufacturing firms. Also, Trump’s revised plan does not specify how it would deal with the treatment of international corporate earnings, though his original plan ended the ability of companies to defer taxes on these profits. In a recent interview, Trump specifically rejected the House GOP's border adjustment plan, calling it too complicated, and arguing that its reliance on increasing the value of the dollar could be damaging to trade.

Another area where Trump’s plan is significantly different than Ryan’s is that it includes  substantial new tax breaks for dependent or childcare expenses. In fact, a top Trump representative is reported to have pushed Ryan to include these provisions during last week’s tax reform discussion between Ryan and the Trump tax team.

While the focus of the tax debate so far has been on Ryan’s and Trump’s tax plans, it is critical to remember that any tax plan must also go through the Senate. Unlike the House GOP, Senate Republicans do not have a blueprint detailed enough to serve as a starting point for tax reform legislation. The closest thing they have to a vision on tax reform is articulated in a lengthy primer (here’s a summary of the document) on tax reform put out by the Republican Senate Finance staff in December 2014.

The big initial question will be whether Senate leaders such as Majority Leader Mitch McConnell or Finance Chairman Orrin Hatch will use Ryan’s or Trump’s plan as a starting point for reform, or if they will start from scratch and create their own plans. It is important to note that the Senate is likely to face different pressures that the House because it will have a lot less room for party defections in a vote on tax reform. Specifically, tax reform legislation could be defeated in the Senate if as few as three Republicans Senators vote against it (assuming all Democrats vote against it). In contrast, the House could lose as many as 23 defections from their party and still pass legislation.

Regardless of the vagaries of legislative wrangling, the fact is that the majority of Americans do not support tax cuts for corporations and the wealthy. Recent polling shows that 64 percent of Americans think that corporations and upper income people are paying too little in taxes. In fact, only a tiny sliver of the population, less than 14 percent, share the belief of Ryan and Trump that the wealthy and corporations are paying too much in taxes. Even among Trump voters specifically, only 18 percent favor lower taxes on the wealthy and only 39 percent favor them for corporations, with significant majorities saying that they should stay the same or be raised.

Congress Shouldn't Defy Public Opinion and Good Policy by Cutting Taxes for Corporations and the Wealthy

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Members of Congress have floated fundamental changes to the tax code for years, but last week marked a ramping up of these efforts as Republican Speaker of the House Paul Ryan met with President-elect Donald Trump and his advisors to discuss how to move forward with tax reform in 2017.

Plans floated by the incoming administration and Trump would dramatically cut taxes for the wealthy and corporations and eliminate revenue necessary to meet the nation’s most basic priorities. In other words, if either the blueprint for Ryan or Trump’s plans (or some combination of both) becomes law, the outcome will likely be the furthest thing from true “reform” of our tax system.

In the last major successful federal tax reform effort in 1986, lawmakers stood by the principle that any tax reform legislation should be revenue and distributionally neutral. The basic idea was that these two principles would allow Democratic and Republican lawmakers to put aside their broader ideological disputes and focus on making the tax code more efficient in ways that everyone could agree on. This approach resulted in the 1986 tax reform legislation, which is rightly heralded as a major milestone in improving the tax code.

More recently, former House Ways and Means Chairman Dave Camp sought to replicate this approach with his proposal for comprehensive tax reform in 2014. While the plan ultimately fell short of fully achieving revenue and distributional neutrality over the long run, Camp’s proposal at least laid out a path that lawmakers could revisit if they wanted to replicate 1986 tax reform efforts.

Ryan and Trump’s tax reform proposals are in sharp contrast to these previous reform efforts. At the heart of their tax plans is a major cut in the top income tax rates for the wealthy and corporations. As an ITEP analysis of Ryan’s “A Better Way” tax plan shows, his plan would lose $4 trillion in tax revenue over a decade, with as much as 60 percent of the tax cuts going to the top 1 percent. Similarly, ITEP found that Trump’s revised tax plan would lose $4.8 trillion, with 44 percent of the tax cut going to the top 1 percent. Rather than attempting to stay revenue or distributionally neutral, Ryan and Trump’s tax plans are chiefly a huge tax cut for the wealthy and corporations.

But even if Ryan and Trump chose to meet the lofty standards of the 1986 tax reforms, it would not be sufficient given our current fiscal and economic state. After decades of tax cuts, our nation faces an $8.5 trillion deficit over the next 10 years. It’s a hard truth for politicians to swallow, but the nation needs to roll back these tax cuts to help lower the growing debt and to create fiscal space for public investments in things like healthcare and infrastructure. In addition, our nation is facing an increasingly economically unequal society. For the past several decades income inequality has grown, with the top 1 percent now capturing more than 20 percent of all income. Increasing taxes on the wealthy and corporations would help counteract this trend.

Put simply, the guiding principles of tax reform should be to raise enough revenue to meet the nation’s priorities. Further, tax reform should be progressive and categorically avoid shifting more of the nation’s income to the wealthiest Americans, who already continue to capture a greater share of the nation’s wealth due to lawmakers’ past policy decisions.

Recent polling indicates the overwhelming majority of Americans (regardless of how they voted) neither want tax cuts for corporations nor the wealthy. Ryan and Trump’s so-called “tax reform” plans go against the will of the broader public. Our nation’s elected officials need to change course on tax reform. 

Examining the Three Key Unanswered Questions for Tax Reform in 2017

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After years of false starts, the passage of a major tax legislation package next year is looking increasingly likely given the election of Donald Trump and unified Republican control of Congress. While lawmakers and commentators agree that something called “tax reform” will move next year, a number of fundamental questions have been left unanswered as to what legislation might look like. Below we review the most critical outstanding questions on the shape tax legislation might take in 2017.

1. Will tax reform be revenue-neutral or a substantial tax cut?

2. Will tax reform be passed on a bipartisan basis or through budget reconciliation?

3. How will lawmakers reform the international corporate tax system?

1. Will tax reform be revenue-neutral or a substantial tax cut?

Perhaps the most fundamental question for tax reform is whether lawmakers are planning to pass revenue-neutral, revenue-positive or revenue-losing legislation next year. While revenue-positive reform seems to be off the table, there are mixed signals as to whether lawmakers will pursue a revenue-neutral or revenue-losing package.

For his part, Republican Chairman of the Ways and Means Committee Kevin Brady has repeatedly said that House Republicans will pass a revenue-neutral package. This claim is belied by the fact that the tax reform blueprint on which Brady and House Republicans are basing their efforts would lose an estimated $4 trillion over 10 years. In a fact-based world, this would mean that Republicans must either rewrite substantial portions of their proposal to raise more revenue or abandon their revenue-neutral goal.

However, Brady has created some wiggle room for Republicans in how he defines “revenue-neutral.” First, Brady has said that he would use dynamic scoring in designing a revenue-neutral package. This means that a tax package could lose substantial revenue under traditional scoring methods, and still be scored as revenue-neutral by dubiously claiming economic growth will partially offset the cost of the tax cuts. Brady has also indicated that he will seek revenue-neutrality only over the next decade, which could allow him to use one-time revenues from a repatriation holiday to conceal the longer-term fiscal irresponsibility of his plan.

While House Republicans have at least paid lip service to the goal of revenue-neutral reform, President-elect Trump has long advocated a substantial tax cut. For example, Trump said during one of the presidential debates that his tax cut would be the “biggest since Reagan.” Backing this up, Trump’s revised tax plan proposed during the campaign would cut taxes by $4.8 trillion over 10 years.

Given that Republicans have enough votes to pass a package without Democratic support (as discussed below), the big question facing tax reform could be whether Republicans can reconcile Trump’s call for a substantial tax cut and many congressional Republicans’ call for a revenue-neutral (however defined) package.

2. Will tax reform be passed on a bipartisan basis or through budget reconciliation?

The last major tax reform bill, the Tax Reform Act of 1986, was famously passed on a bipartisan basis. For the past thirty years, lawmakers have unsuccessfully sought to replicate this success. With Republicans now in control of the White House and Congress, the question is whether they will seek to pass reform along party lines or by pushing for a bipartisan bill.

Republicans leaders are giving mixed signals on this point. Senate Republican Majority Leader Mitch McConnell and Senate Finance Committee Chairman Orrin Hatch have both indicated their desire to pass a bipartisan package, as has House Ways and Means Chairman Brady. Republican leaders in the Senate have also indicated that they will pass a pair of budget resolutions that will allow them to pass tax reform (and Obamacare repeal) through a process called budget reconciliation, which would allow Republicans to avoid a Democratic filibuster and pass tax reform through the Senate on a slim party-line vote.

President-elect Trump himself has not specified a preference on the issue, but one of his economic advisers has suggested that combining corporate tax reform and infrastructure spending into a single bill would garner bipartisan support. A variety of bipartisan proposals would use revenue generated from a tax on the $2.5 trillion in earnings companies are holding offshore to pay for new infrastructure spending. This approach faces challenges, since many Republicans do not support new infrastructure spending and the tax credit-driven approach proposed by Trump is already being heavily criticized by Democratic policy analysts.

The key advantage of pursuing the budget reconciliation approach for Republican leaders is that they would not have to compromise with Democrats. On the other hand, the use of budget reconciliation would have two disadvantages. First, reconciliation bills prohibit provisions that do not affect revenue or spending. This restriction could exclude many of the transition and enforcement provisions that are required to make comprehensive tax reform legislation work. Second, budget reconciliation legislation may not result in revenue losses outside the ten-year budget, which the Republican proposals almost certainly would. To get around this requirement, Republican lawmakers could allow the tax reform legislation to expire after 10 years, which is the method they took to pass the revenue-losing Bush tax cuts in the early 2000s. However, this approach creates uncertainty in the tax code and opens the door for Democratic lawmakers to roll back the tax reform package when it expires, as happened in 2012 with the Fiscal Cliff Deal.

3. How will lawmakers reform the international corporate tax system?

While the broad contours of different Republican tax reform plans match up in many cases, these plans diverge sharply on reforming the international corporate tax system.

The House GOP plan proposes the most radical change in that it would shift our corporate tax system from a residence-based system to a destination-based one. The plan would exempt all exports of goods and services from taxation, while at the same time applying the tax to all goods and services imported into the United States. The key problem with this proposal is that it would almost certainly violate international trade rules and bilateral tax treaties with countries around the world. In addition, this approach is already raising the ire of retail and other major companies that depend on imports, which would face large tax increases under the new system. The question with this approach will be whether House tax writers will be able to convince enough lawmakers and the new administration to go along with this untested and complex new approach to international taxation.

In the Senate, Finance Committee Chair Orrin Hatch is working on a corporate integration proposal that he has pitched as the best approach to make our tax code more competitive in the international arena. The main feature of his plan would be to allow companies to take a deduction for dividend payments to shareholders. Hatch argues that a dividend deduction would be advantageous because it would make our tax system less dependent on taxing corporations directly and companies could wipe out any taxes owed on repatriated funds by simply issuing a dividend with the money. The main problem with this approach is that about two-thirds of dividend income goes to tax-exempt entities, meaning Hatch’s proposal will either need to eliminate the very popular tax advantage given to these entities to make up for lost revenue or else allow a huge portion of corporate income to go entirely untaxed.

A third approach advocated by President-elect Trump in his initial tax plan and the Democratic Ranking Member of the Senate Finance Committee Ron Wyden is to move the U.S. to a full worldwide tax system by ending the ability of corporations to defer paying taxes on their foreign profits. Ending deferral would be the ideal way to reform the international tax system because it would eliminate the ability and incentive for corporations to avoid taxes by shifting their profits into offshore tax havens. In his revised tax plan, Trump removed language advocating an end to deferral, but at the same time left the door open to this approach by not specifying a preferred alternative approach to international taxation.

While not preferred by any of the major tax writers at the moment, another frequently-discussed change to international tax rules would be to shift our code to a territorial tax system, in which corporations owe no U.S. taxes on their foreign profits. Moving to a territorial tax system would be disastrous for the corporate tax system because it would dramatically increase the incentive for companies to shift their profits offshore to completely avoid U.S. taxes on these profits. The amount of damage done to the tax base and resulting revenue loss would depend on the extent to which lawmakers pair this change with anti-base erosion measures. For example, in proposing a shift to a territorial tax system, President Obama proposed pairing this system with a minimum tax, which would help prevent companies from paying extremely low tax rates by shifting their profits into tax havens. Similarly, former Republican Chairman of the Ways and Means Committee Dave Camp proposed a number of important measures that would substantially limit the base erosion from the movement to a territorial tax system. Some form of a territorial tax system will likely be the fallback option if lawmakers reject the other approaches being pushed now. 

Donald Trump’s advisors have tried to spin his economic address earlier this week as yet another reboot of his campaign and of his tax reform plan.

Trump’s speech, coupled with the abrupt disappearance of his original tax plan from his campaign website, made it clear that his original tax plan has been “fired.”

He now embraces the higher personal income tax rate structure proposed by House Speaker Paul Ryan, and he also proposes a new tax break for child care expenses. Overall, however, the campaign has left many questions unanswered by releasing only limited details. This may be a deliberate strategy or a sign that the campaign has not fully fleshed out a revised proposal.

Among the unanswered questions:

1) How aggressively will Trump seek to close corporate loopholes? Even at the current 35 percent rate, U.S. corporate taxes are lower than those of most economically advanced/OECD nations. If the United States cuts its corporate tax rate without broadening the tax base, the nation’s corporate tax collections would spiral down and blow an even bigger hole in the federal budget. Corporate tax collections, mind you, are already at historically low levels. Under a best-case scenario argument for cutting the U.S. corporate income-tax rate, the U.S. would have to also aggressively close corporate loopholes and perhaps could settle on a revenue-neutral rate of 28 percent. But Trump proposes to drop the rate far below that level without closing even a single corporate loophole.

2) What about individual tax breaks? The personal income tax is equally riddled with unwarranted loopholes, and any sensible tax reform strategy must discuss how to deal with the elephant in the room: itemized deductions for mortgage interest, charitable contributions, and other expenses. Trump’s revised blueprint is silent on this point.

3) How would the revised Trump plan affect federal revenuesand the budget deficit? This is an area in which the contrast between Trump and his general election opponent, Hillary Clinton, has been most stark. Trump has proposed to cut taxes by $10 trillion over a decade, while Clinton’s plan would reduce the federal deficit somewhat over this period.

These blank spots notwithstanding, the dramatic reductions in tax rates outlined by Trump—a 15 percent corporate tax rate, a top rate of 33 percent for most individual income, a 15 percent rate on pass-through income, and the outright repeal of the estate tax—are a clear indication that no matter how aggressively Trump seeks to close loopholes, his plan overall would be a budget-busting giveaway to the best-off Americans.

Tax reform is never easy, but some parts are more painless than others. The easy part is cutting tax rates, and on this front the Trump plan is quite clear. Trump would repeal the estate tax while sharply cutting personal and corporate income tax rates.

The hard part of tax reform is paying for tax cuts: which tax breaks will be eliminated to make rate reductions affordable? And on this point, Trump remains virtually silent. Indeed, the biggest loophole-related change he announced this week is the full expensing of capital investments, which would create a giant new hole in the tax base. Until Trump provides more specifics on the hard work of loophole closing, the collection of ideas he presented this week may fit into the mold of a hyperbolic slogan, but it’s certainly not a real plan.  


Presidential candidate Donald Trump today announced a child-care tax break that offers nothing to the lowest-income, most vulnerable families, despite his claims to the contrary.

During a speech today in which he revealed the plan among other economic proposals, Trump said his economic policies are designed “especially for those who have the very least.”  But his proposed child-care tax break is incredibly light on details and, to the extent that it can be analyzed, it appears it will offer poor and even some middle- and upper-income families nothing.

Let’s start with those near (or below) the poverty line. The federal income tax is already designed to exempt most poor families. This doesn’t mean these families pay no taxes, of course—far from it. But it does mean that families earning too little to pay federal income taxes—including virtually all those living below the poverty line—can gain nothing at all from Trump’s plan to exclude child care expenses from taxable income.

Middle- and upper-income families are already eligible for a federal tax credit for dependent care expenses. The plan could benefit these families only if this new tax break is in addition to the existing credit. Again, the plan offers no clarity on this point. If the plan’s intent is to allow families to “double dip” by both excluding their child care from income taxation, and then taking a credit for the same expenses, it would offer a substantial—and likely regressive—income tax break for better-off families. If, however, the child care credit would be replaced with the deduction, then middle- and upper-income taxpayers could potentially get less help.

From a fairness perspective, Trump’s new exclusion would likely flip the existing tax break on its head. Right now, lower-income families can claim a credit for up to 35 percent of their expenses (up to a capped amount), and that percentage gradually drops to 20 percent for better-off Americans. By contrast, income tax exclusions of the sort Trump has proposed would pay for a higher percentage of child care expenses for high income families, since the tax savings would depend on their marginal income tax rate.

What makes this especially egregious is that this is an area where there is room to improve the tax system. Child care expenses can be a daunting financial burden for low-and moderate-income families. Simply making the federal credit refundable would help millions of families with children.  By choosing to create a new tax break that abandons the best features of the current child-care tax break rather than fixing its problems, Trump has missed an opportunity to truly help “those who have the very least,” as he claims he wants to do.

The Five Worst Tax Policy Proposals in the 2016 Republican Party Platform

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The Republican Party’s official 2016 platform, released on Monday, is wholly out of touch with reality. The plan would exacerbate the dual problems of rising inequality and continuous annual federal budget deficits with tax cuts that essentially put more money into the pockets of wealthy people and corporations and reduce federal revenues.

Some of the most troubling tax policy proposals:

1. Move the U.S. to a territorial tax system.

Under the heading “A Competitive America,” the GOP platform calls for the United States to “switch to a territorial system of taxation,” stating that such a system would help drive more investment and economic growth. In reality, a territorial tax system would create greater incentive for companies to shift profits and jobs offshore.

Under a territorial tax system, U.S. companies would no longer be required to pay tax on offshore profits. Such a system would encourage U.S. companies to move jobs and investments because they could take advantage of low- or zero-tax rates in tax haven countries. On top of this, U.S. companies would have more opportunities to avoid taxes under a territorial tax system because once they are able to artificially shift their U.S. profits offshore, they would never face any U.S. tax on these profits.

One striking thing about the GOP embrace of a territorial tax system is that Donald Trump proposes the opposite. His plan would end deferral and implement a full worldwide tax system.

2. Substantially lower corporate tax rates.

The GOP platform claims that American businesses face “the world’s highest corporate tax rates” and that the U.S. should lower its rate to be “on par with, or below, the rates of other industrial nations.” The key issue is that the GOP platform writers are only paying attention to the statutory U.S. rate, while ignoring the plethora of tax breaks and loopholes that enable most companies to pay well below the top rate. In fact, according to data from the OECD, the U.S. already has an effective corporate tax rate that places it just below the average rate of industrial nations. If the GOP succeeded in lowering the statutory rate to 25 or 20 percent, the most likely result would be a massive loss in revenue from one of the country’s most progressive sources of funding.

3. Enact a strict balanced budget amendment and require a supermajority vote to increase taxes.

One the more understated yet critically important tax policy proposals in the GOP platform is its call for a radical version of a balanced budget amendment that would not only require the budget to be in perfect balance each year, but would also place a cap on total spending and require a supermajority vote for any tax increase. A balanced budget amendment would cause a myriad of problems, but the most important is that it would restrict the ability of government spending to counteract recession through stepped up government spending.

The spending restraints would place a stranglehold on lawmakers’ ability to make any additional public investments and would likely require substantial spending cuts. In addition, it could make closing even the most egregious of tax loopholes impossible because closing such loopholes could require a supermajority vote. Many state governments have found themselves continuously hamstrung by such spending and revenue-raising restrictions.

4. Repeal FATCA

The GOP platform takes aims at the Foreign Account Tax Compliance Act (FATCA) anti-tax evasion 2010 legislation by specifically calling for its repeal. The key provision of the law is a requirement that foreign banks and foreign branches of U.S. banks share information on the accounts of U.S. citizens and residents with the IRS or face a harsh withholding tax. Access to this information will allow the IRS to track down those individuals who have been evading U.S. taxes by holding their assets in undeclared offshore accounts. The Joint Committee on Taxation (JCT) estimated that FATCA will help the IRS claw back $8.7 billion that would otherwise have been lost to tax evasion over the next decade.

In other words, the GOP platform is effectively advocating for tax evaders who would benefit to the tune of billions of dollars if the legislation is repealed.

5. Oppose any further increase in the gas tax.

In its section on transportation policy, the GOP platform opposes any increase in the federal gas tax, despite the fact that the federal gas tax has not been raised since 1993. Because of inflation, this means that the value of the 18.4 cent per gallon level has eroded nearly 40 percent over the past two decades. This erosion in value has led to a perpetual lack of revenue to adequately fund the infrastructure spending programs that lawmakers support, which has led them to embrace less- than-ideal funding sources for making up the difference. Last year for example, Congress essentially searched under the couch cushions for infrastructure funding by paying for it with things like higher user fees on unrelated transactions and selling off oil from the strategic petroleum reserve.

Rather than continuing its piecemeal approach, Congress should shore up transportation funding by increasing the gas tax now and indexing it to inflation. 

Tax Foundation Uses Dubious Modeling to Support Ryan's Tax Cuts for the Rich

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The rightwing Tax Foundation today released an analysis of Speaker Paul Ryan's tax plan. Not surprisingly, it found the plan would carry a relatively small price tag over the next decade, reducing federal revenues by only $191 billion. 

This dubious finding sharply contrasts with an analysis released by Citizens for Tax Justice last week, which pegged the 10-year cost of the Ryan plan at  $4 trillion, a figure 20 times larger than the Tax Foundation’s questionable estimate.

What explains the huge gap between these two sets of findings? The main driver is the Tax Foundation’s one-sided approach to “dynamic scoring,” the budgetary practice of assessing the fiscal impact of tax changes by looking not just at the direct effects on tax revenue, but the indirect effects of these tax policy changes on the economy. Before waving its “dynamic scoring” wand, the Tax Foundation assigns the Ryan plan a national debt-inflating $2.4 trillion ten-year cost. But the  magical dynamic effects of the Ryan plan, the Tax Foundation claims, would offset all but $191 billion of that.

An additional difference between the CTJ and Tax Foundation estimates has to do with the “border adjustments” that Ryan proposes for his corporate tax. This would amount to a 20 percent tariff on imports and a tax rebate on exports. There is some controversy about whether the World Trade Organization would find such a scheme acceptable. This means that the $1.1 trillion such a scheme might raise (on a net basis) should not be automatically included in a revenue analysis of the Ryan plan. The Tax Foundation breezily asserts that the tariff would be acceptable, while CTJ thinks that it is quite unlikely. This choice explains most of the remaining difference between the two organizations’ revenue estimates.

But Tax Foundation’s use of one-sided "dynamic scoring" explains the bulk of the difference. Under the best of circumstances, dynamic scoring is fraught with uncertainty. Cutting or increasing tax collections, and cutting or increasing government spending in a way that keeps budget deficits under control, can plausibly have an effect on economic growth.  But there is little or no agreement among economists on the direction of that effect, let alone its magnitude. So an economic model based on this unproven assumption is highly suspicious at best.  

The Tax Foundation’s approach to dynamic scoring notoriously assumes that while tax cuts always spur economic growth, government spending on education, roads and health care has no positive effect on the economy. This one-sided assumption effectively guarantees that any analysis from its model will always find that tax cuts are economically helpful--no matter how devastating their impact on the government’s ability to provide basic services--and tax increases are harmful. For example, studies have found that capital gains tax rates have no meaningful relationship to economic growth, yet the Tax Foundation has previously estimated that higher capital gains rates have such a huge negative impact on growth that raising them would lose revenue.

Further, the Tax Foundation model always finds that tax cuts for the rich will have a wildly unrealistic positive impact on the economy, in essence providing justification to policymakers who continually propose regressive tax policies that many academics have found contribute to growing income inequality.

A more clear-eyed approach to measuring the “dynamic” effect of federal tax changes would at least attempt to quantify the very real—and very beneficial—effect of public investments on the national economy. The Tax Foundation’s unwillingness to admit that government spending can be helpful renders its analysis of the Ryan plan’s revenue impact virtually meaningless.

A Dividends Paid Deduction is the New Front in the Push for Corporate Tax Cuts

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It seems that each year there is a new “it” tax break for which advocates for cutting corporate tax breaks and their supporters rally. Last year the “it” tax break was a patent box and a few years back it was a repatriation holiday. This year the tax break du jour is the dividends paid deduction.

A dividends paid deduction would allow corporations to deduct from their corporate income taxes the cost of the dividends that they issue to shareholders. In other words, companies would get a tax break for paying out dividends to shareholders. Taken alone, this deduction would cripple the corporate income tax at an estimated cost of roughly $150 billion annually. At a time of growing income inequality and government austerity, enacting a massive cut in one of our country’s most progressive revenue sources would be counterproductive, to say the least.

Advocates of the dividends paid deduction argue that this policy would help end the “double tax” on corporate earnings. The biggest problem with this argument is that it wrongly assumes these earnings are being fully taxed at either the corporate and individual level. On the corporate level, a study by Citizens for Tax Justice (CTJ) found that large profitable corporations pay just over half the statutory rate in federal income taxes, meaning that almost half of corporate income escapes taxation. On the individual level, so much of dividend income is paid to tax exempt shareholders that only 35 percent of dividends are taxable, which means that nearly two-thirds of dividends are escaping taxation on individual side as well.

In addition, there is no reason that many corporations should not be subject to a tax wholly separate from a tax on the individual level. For legal purposes, corporations are treated as separate entities with legal rights and responsibilities (such as paying taxes). Corporations are also granted a series of economic advantages such as limited liability and the ability to be publicly traded.

Advocates of the dividends paid deduction have found a new champion in Senate Finance Committee Chairman Orrin Hatch, who held a hearing on the subject this week and is working on draft legislation that would enact such a deduction. While the details of the proposal have not been made public or scored, it appears that Hatch’s proposal would attempt to stem the enormous cost of the break by enacting a withholding tax that in effect eliminates the tax break for dividends paid out to tax exempt shareholders (which as discussed above constitute nearly two-thirds of shareholders). Even with this withholding tax, Hatch’s proposal would likely cost tens of billions annually.

Rather than buying into the latest corporate tax break fad, lawmakers should instead focus on closing the many outrageous loopholes that pervade our tax system, such as the inversion and deferral loopholes. Closing such loopholes would not only make our tax system fairer, but would also help raise much-needed revenue for public investments. 

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.

Paul Ryan Wants to Cut Taxes for the Rich and Make Life Harder for Low-Income People

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Anti-tax champion Grover Norquist recently said Paul Ryan is a ‘prophet” who “points the way to the Promise Land.” Coming from Norquist, that statement alone is reason enough for pause. But the newly elected Speaker of the House’s record on tax and budget policy also raises serious alarm regarding the direction of the nation’s fiscal policy.

For years, Rep. Ryan has been one of the leading champions of regressive tax policies. Now, as Speaker of the House, he will have a bigger microphone and a more powerful platform to push his pro-corporate, anti-worker vision for the nation’s tax code.

As chairman of the House Budget Committee in 2014, Ryan called for consolidating the existing income tax brackets down to two (10 and 25 percent), eliminating an unspecified number of tax expenditures, repealing the alternative minimum tax, reducing the corporate tax rate to 25 percent, and instituting a territorial tax system for multinational corporations. Even under the most generous assumptions, a CTJ analysis found that his plan would give millionaires an average tax break of at least $200,000 each year. Under less generous assumptions, this tax cut for the rich would balloon to nearly $330,000.

“Ryan’s colleagues in the House have said he would unite the party. Based on his record on economic policy, that unfortunately means he and his colleagues would like to unite behind regressive tax policies that ask the least of those most able to pay,” said Bob McIntyre, director of CTJ.

Beyond supporting regressive tax changes, Ryan also staunchly opposes any tax increases. He signed Grover Norquist’s no-tax pledge and said he would not support any budget deal that included an increase in revenue. Not surprisingly, given his desire to reduce the deficit without increasing revenue, Ryan’s budgets require draconian cuts to critical public services. For example, Ryan’s 2014 budget includes $3.3 trillion in cuts to programs for low- and moderate-income families, such as SNAP, Medicaid and Pell Grants. In other words, Ryan’s budget simultaneously calls for massive tax cuts for the wealthy and devastating cuts to critical safety net programs.

One of the ways that Ryan has attempted to paper over the harsh reality behind these is to embrace the world of fuzzy math. During his brief tenure as chairman of the Ways and Means Committee, Ryan ushered in a new rule requiring that the non-partisan scorekeepers at the Congressional Budget Office and the Joint Committee on Taxation (JCT) use dynamic scoring in their official cost estimates on proposed tax changes. While it has not been used extensively up to this point, dynamic scoring could have the magical effect of making costly tax cuts appear to have little effect on revenue collection due to economic growth that supposedly would result.

The nation is already struggling to fund basic priorities that Americans widely support. Federal spending today as a percent of GDP is less than it was during Ronald Reagan’s entire tenure.

“The nation cannot tax cut its way to prosperity,” McIntyre said. “Unfortunately, House members have just elected a speaker who will unite the party behind ideological, status quo policy ideas that would benefit the elite few at the expense of the rest of us.” 

Although He Left out Key Details, It's Clear Kasich's Tax Plan Is a Deficit-Busting Giveaway to the Wealthy

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Presidential candidate John Kasich today released a tax proposal that is in lock step with other Republican candidates’ plans.  Most basic details are missing, but it is clear Kasich’s plan would lavish substantial tax breaks on the best-off Americans while blowing a huge hole in the federal budget. This plan is not surprising. As governor of Ohio, Kasich has supported and signed regressive tax proposals.

The centerpiece of Kasich’s plan is a drastic cut in the personal and corporate income tax rates. For the richest Americans, Kasich would cut the top tax rate from 39.6 to 28 percent and slash the tax rate on capital gains to 15 percent. He would outright repeal the estate tax.

For corporations, Kasich proposes dropping the rate from 35 percent to 25 percent and allowing companies to immediately write off their capital expenses. Kasich would also allow U.S. companies to avoid ever paying a dime on profits they shift offshore by moving to a “territorial” tax system.

The elements of Kasich’s blueprint are virtual carbon copies of plans put forth by Jeb Bush and Donald Trump. What sets Kasich apart is that he seems uninterested in closing tax loopholes to pay for his aggressive tax cuts. On the corporate side, he apparently doesn’t see a single corporate giveaway worth repealing. And although closing the "carried interest" loophole has gained bipartisan support, Kasich's proposal does not address this tax giveaway to wealthy money managers.

All of this means the revenue impact of Kasich’s plan would likely be just as devastating as the Trump and Bush plans, both of which would cost trillions over a decade. The only question is precisely how many trillions of dollars Kasich's plan would cost.

At the moment, it is nearly impossible to project how his plan would affect families at varying income levels because he proposes reducing the number of tax brackets from seven to three, but the limited details he has provided do not include income levels for his proposed tax brackets.

The lowest income families could very well get a tax cut because Kasich proposes a 10 percent increase to the Earned Income Tax Credit, but some middle-income families could experience a tax increase because Kasich’s plan implies that he would repeal all itemized deductions other than charitable contributions and mortgage interest.  

If Kasich’s goal is to set himself apart from the competition in the presidential tax cut sweepstakes, he hasn’t achieved it. What’s most striking about the Kasich plan is just how closely it hews to the disastrous fiscal blueprint of those candidates who have gone before him.



Bush and Trump's "Populist" Tax Rhetoric Is All Talk

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Presidential candidate Donald Trump made headlines last week for saying that hedge fund managers are “getting away with murder” in their tax-avoidance behavior. He said he would put a stop to this by closing the infamous carried interest tax loophole, leading to a rush of articles declaring that Trump is threatening to “blow up” the Republican Party’s orthodox support of tax cuts for the rich. This week, former Florida governor Jeb Bush followed suit in calling for the closure of the loophole and received similar accolades for challenging the “long-held tenets of conservative tax policy.”

But the populist rhetoric of both Trump and Bush around carried interest should not distract from their broader plans to dramatically cut taxes for wealthy investors in other ways. Their campaign rhetoric does not deserve accolades; it requires greater scrutiny.

Hedge fund and private equity managers usually structure investment deals in such a way that they receive a percent of an investment’s profits as compensation–carried interest–even if they do not invest their own capital. A loophole in our tax laws allows investment managers to claim this income as capital gains rather than normal income, allowing money managers to pay the special lower tax rate for investment income.

For the last decade, Democrats have called for Congress to close this loophole. Populist Sen. Elizabeth Warren has often railed against it. Democratic presidential candidate Bernie Sanders recently said the Treasury Department has the authority to close this loophole. And President Barack Obama, along with current presidential contenders Hillary Clinton, Bernie Sanders and Martin O’Malley, all have proposed closing the carried interest loophole.

Mostly, calling for closing the egregious carried interest loophole has been the purview of Democrats, although former Ways and Means Chairman Dave Camp proposed closing the loophole as part of his broad tax reform plan last year. So, it is to be expected that some would call Trump and Bush’s plans to close the loophole a “populist” policy position. But they also both propose to pile tax cuts on the rich many times larger than the roughly $2 billion a year that could be raised by taxing carried interest at the same rate as normal compensation.

Bush’s plan includes several substantial tax cuts that would directly benefit wealthy investors. To start, it would cut the already low preferential tax rate on capital gains from 23.8 percent to 20 percent, giving wealthy investors an annual tax cut of $30 billion (a break 15 times the size of the carried interest loophole). In addition, Bush is proposing to give corporations hundreds of billions of dollars in new tax breaks over the next decade.

As for Trump, if his soon-to-be-released tax plan resembles his most recent tax reform proposal, anti-tax conservatives and wealthy investors won’t have anything to fear after all. In his 2011 tax reform proposal, Trump proposed to eliminate the corporate income tax and the estate tax, drop the tax rate on capital gains income and cut marginal income tax rates. This  would result in huge tax cuts for the wealthy. The roughly $500 billion annual cost of eliminating the corporate income tax would pay back wealthy investors 250 times over for the tax hike they’d see from closing the carried interest loophole.

Residual public disdain for Wall Street due to the financial crisis makes it politically expedient to bash wealthy money managers. But the tax agendas outlined by Trump and Bush would lavish huge tax breaks on the very same wealthy investors they claim to be taking on.

Ben Carson's 10 Percent Flat Tax is Utterly Implausible

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During presidential primaries, we expect candidates to talk about their big plans for moving the country forward and addressing the nation’s most pressing issues. We expect soaring rhetoric based on so-called traditional ideals. Discussing the world in right v. wrong extremes is much easier than conceding that there are myriad shades of gray and that actual governing and policymaking is always easier in theory than it is in practice.

So, you can’t blame Republican presidential candidate Dr. Ben Carson, polling at second just a few percentage points behind current frontrunner Donald Trump, for touting a tax plan that would replace the nation’s current tax system with one based on tithing. Regardless of religious or secular affiliation, most of us understand the biblical concept of giving 10 percent of our income to religious authorities.

During the first GOP primary debate, Carson said under his 10 percent flat tax “tithe” plan, “[y]ou make $10 billion, you pay a billion. You make $10, you pay one.” Sure, it may sound easy, but it is utterly unrealistic, and, based on the limited details he has released, it would fail to raise enough revenue to fund Social Security, unemployment and labor programs, let alone the entire federal government.

Carson has never specified whether his plan would actually include all income or exclude capital gains incomes, as many other tax proposals do.

Without specific details, Citizens for Tax Justice (CTJ) Director Bob McIntyre made a generous estimate of how much Carson’s 10 percent flat tax could reasonably raise by simply multiplying total federal adjusted gross income estimated for 2016 ($11.25 trillion) by 0.10. This would yield tax revenues of only $1.1 trillion. The Office of Management and Budget (OMB) estimates that the federal government will raise an estimated $3.5 trillion and spend $4 trillion in 2016. In other words, Carson’s plan likely would raise only 32 percent of the revenue of the current tax system and pay for only 28 percent of estimated government spending.

Further, McIntyre said, arguing the U.S. Tax system could be based on tithing misrepresents how societies functioned during ancient times. “Tithing was instituted to support the church," he said. "But there were also taxes to support the government, too -- pretty heavy ones during the Roman ascendancy.”

But Carson is sticking to his guns, stating that he has talked to economists who said with enough loophole closing a workable tax rate would be “somewhere between 10 and 15 percent.” However, our calculation demonstrates that even with every deduction eliminated, Carson’s 10-percent flat tax would increase the deficit by $3 trillion in just one year.

Even if Carson increased the rate of his flat tax, it would still be bad policy for the nation. Flat taxes plans are generally regressive. A CTJ analysis of one revenue-neutral flat tax plan found that it would raise taxes on the bottom 95 percent of taxpayers by an average of $2,887, while cutting them by an average of $209,562 for the richest one percent of taxpayers each year.

Carson is not alone among the Republican candidates in advocating some form of a flat tax. Ted Cruz, Rand Paul, Mike Huckabee, John Kasich, Rick Perry, Bobby Jindal, Lindsey Graham, and even Donald Trump have either endorsed or said that they are considering proposing a flat tax system. The only candidate to specify his flat tax plan with any detail is Sen. Rand Paul, whose plan would blow a $15 trillion hole in the budget over the next ten years, according to CTJ’s estimate. But Carson’s 10-percent plan would cost far more than even Paul’s proposal.

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.

Chris Christie's Long History of Opposition to Progressive Tax Policy

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During his five years in office, New Jersey Gov. and now presidential candidate Chris Christie has consistently blocked progressive tax increases and sought to pass regressive and fiscally irresponsible tax cuts. The starkest example of how Gov. Christie has sought to make New Jersey’s tax code more unfair is that he consistently vetoed a small tax rate increase on millionaires but (conveniently until this week) refused to reverse his cuts to the state’s earned income tax credit (EITC). On the federal level, Gov. Christie has similarly laid out a broad tax cut plan that would heavily favor the wealthiest taxpayers while simultaneously slashing federal revenue.

Record as Governor of New Jersey

One of Gov. Christie’s very first actions as governor was vetoing the continuation of a temporary 2009 income tax increase on the state’s millionaires. The millionaire’s tax would have only affected the top 0.2 percent of New Jersey households and provided hundreds of millions in critically needed revenue as the state was still reeling from the recession.

Gov. Christie in 2010 pushed through a reduction in the state’s EITC from 25 to 20 percent of the federal credit. For all of Gov. Christie’s talk of the need for tax cuts, the reality is that his first year in office actually resulted in higher taxes for many of the state’s low- and middle-income families, while protecting the state’s wealthiest from paying a slightly higher tax rate.

It’s important to note that even with the millionaire’s tax, the state’s wealthiest residents would not have very much to complain about. The Institute on Taxation and Economic Policy (ITEP) calculated in 2015 that if the state were to restore the EITC to its previous level and reinstate the millionaire’s tax, the wealthiest 1 percent of taxpayers in the state would still pay a substantially lower state and local effective tax rate than the bottom 20 percent of taxpayers.

Worse, Gov. Christie also enacted a 2 percent cap on the growth of local property taxes. Like other property tax caps, Christie’s version severely limited the ability of local governments to raise enough revenue to provide basic public services. This limitation was especially harsh on local government because Christie also fought to cut state aid to them.

Beyond their effect on local government revenue, property tax caps are a poorly targeted way of providing tax breaks to individuals in need because wealthier taxpayers with better ability to pay also get a tax break. A better, targeted approach is the state’s property tax circuit breaker. Rather than expand the circuit breaker, Gov. Christie cut the rebates in half from 2011-2013. In addition, he delayed sending out rebates for nine months, choosing to prioritize other tax cuts instead.

Gov. Christie has attempted to pile on even more fiscally irresponsible and regressive tax breaks in recent years. He proposed a 10 percent across-the-board income tax cut, which would have cost the state billions and would have disproportionately benefited the wealthiest taxpayers. Gov. Christie tried to justify the cuts by relying on wildly unrealistic revenue projections, which assumed that New Jersey’s revenue growth rate would be nearly three times the national average.

Besides fighting for tax cuts on the personal side of the tax code, Gov. Christie has plowed a stunning $4 billion into tax subsidies for businesses in the state since the start of 2010. In contrast, the state awarded only $1.2 billion in subsidies during the entire previous decade. Despite investing so much more into tax subsidies, Gov. Christie recently vetoed commonsense legislation that would have required better scrutiny of the impact of his corporate tax break programs.

In 2010, Gov. Christie rejected $6 billion in federal funds for a critical transportation project to avoid paying just a third of the project’s cost. Two years ago, Gov. Christie privatized the state’s lottery system, promising that the move would pay substantial dividends for the state. Today, the gamble is already proving to be a revenue-losing dud, which should have been predictable given how unrealistic the projections were for how much the newly privatized lottery was supposed to realize.

To his credit, Gov. Christie reversed his position just this week on the state’s EITC and actually called for it to be raised to 30 percent of the federal EITC. The legislature quickly moved to pass this change, which will benefit an estimated 500,000 households in the state.

Gov. Christie’s Federal Tax Reform Plan

In the run-up to his official presidential announcement, Gov. Christie laid out his vision for federal tax reform in an op-ed in the Wall Street Journal. The plan follows in the footsteps of 2012 presidential candidate Mitt Romney’s tax reform proposal in that it calls for a dramatic drop in personal and corporate income tax rates without specifying how it would make up for the loss in revenue from the rate cuts. The only thing Gov. Christie says on this point is that breaks for charitable contributions and interest on home mortgages should be protected and that one potential approach would be to cap the total deductions and credits taxpayers can receive. A Citizens for Tax Justice (CTJ) analysis of Romney’s plan found that it would cut taxes for families making over a million dollars by an average of $250,000 annually and lacking more details from Gov. Christie, this is a pretty good proxy for the impact his plan would likely have.

In reviewing the proposal, CTJ’s Director Bob McIntyre noted that Gov. Christie’s plan “would almost certainly entail both a huge increase in the national debt and a huge increase in inequality.” Given Gov. Christie’s tax record in New Jersey, this should not be much of a surprise.

Detractor Dangles Shiny Objects to Obscure Facts about Rand Paul's Deficit-Inflating Flat Tax Proposal

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Since Sen. Rand Paul (R-KY) announced the broad outlines of his plan for restructuring the federal tax system yesterday, a number of research groups have weighed in on the question of how Paul’s proposed Value Added Tax (VAT) would work—and, critically, how much revenue such a tax could raise. This question is of vital importance in evaluating Paul’s plan because if his tax cuts add huge amounts to the budget deficit, there’s no way he will be able to keep his campaign promise to balance the federal budget.

Yesterday, a CTJ blog post estimated that Paul’s VAT would likely raise about $1.1 trillion a year if fully implemented in 2016—far below the $2.3 trillion in annual tax cuts that would result from other components of Paul’s plan. We estimated that this would translate into a $1.2 trillion revenue loss in the first year—and a $15 trillion budgetary hole over the next decade. 

The rightwing Tax Foundation has since claimed that CTJ understated the revenues that Rand Paul's VAT would raise by a huge amount, citing a 2012 analysis from the Tax Policy Center (TPC) for support. The Tax Foundation specifically claims that a VAT could actually raise about $2 trillion a year, far above our $1.1 trillion estimate. But a closer examination of the Tax Policy Center's VAT analysis proves just the opposite.

According to the Tax Foundation, Senator Paul’s VAT would include government spending in the VAT base. But the TPC analysis points out the obvious absurdity of this: "inclusion of government in the tax base has no effect on real federal spending or deficits. At the federal level, the government is simply paying tax to itself." The TPC goes on to add that taxing state and local governments under a VAT would also have to be offset by federal rebates so that those taxes can’t plausibly be counted as new revenue either.

TPC estimates that sensibly removing these phantom taxes reduces the VAT base by almost a quarter. Put another way, ending this shell game reduces the annual yield of Sen. Paul’s VAT from the Tax Foundation’s $2 trillion estimate to about $1.5 trillion.

Moving beyond the cheap parlor trick of government paying taxes to itself, the next question is whether it is politically feasible to tax every element of personal consumption. An analysis from the Congressional Budget Office (CBO) weighs in on this question. CBO’s analysis showed what a VAT might raise if private spending on health care, education, and religion  were excluded from the VAT base, as is commonly the case with existing European VATs and sales taxes in the United States. That, plus some other differences between CBO's analysis and TPC's, meant that the CBO's plausible VAT base clocked in at just 61 percent of total NIPA personal consumption.

We used CBO's 61 percent figure in calculating the tax base and potential revenue from a plausible VAT. Had we used an implausible 75 percent figure, our results would not have changed much—the Paul plan would still cost about $1 trillion per year or $12 trillion over a decade.

The main difference between our analysis and the Tax Foundation's is that the Tax Foundation is prepared to pretend that the government paying taxes to itself would be a huge revenue raiser. Alas, that's simply not true.

For more on this odd idea, see:

Rand Paul's Tax Plan Would Blow a $15 Trillion Hole in the Federal Budget

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Sen. Rand Paul (R-KY) outlined the broad contours of his plan for restructuring the federal tax system in a Wall Street Journal op-ed today.  He proposes replacing the personal income tax and payroll taxes with a flat-rate14.5 percent income tax, and replacing the corporate income tax with what amounts to a value-added tax (VAT). A CTJ preliminary analysis of the plan finds that it would likely cost $1.2 trillion a year and $15 trillion over a decade.

Paul’s plan would repeal the progressive personal income tax, the estate tax, and the federal payroll tax and replace them with a single 14.5 percent “flat tax” on all types of personal income. The plan would keep a few features of the current tax code, including itemized deductions for mortgage interest and charitable contributions and the Earned Income Tax Credit, and would create a large “no tax floor” by exempting the first $50,000 of income (for married couples) from the new income tax. A CTJ analysis estimates that the switch from the progressive personal income tax to the new flat-rate tax on personal income would cost more than $700 billion in 2016 alone.

Repealing payroll taxes, the estate tax and all customs duties would cost an additional $1.6 trillion, leaving a $2.3 trillion hole in the budget. Paul proposes to fill some of that hole with a 14.5 percent “business activity tax,” which appears to be conceptually identical to a VAT. While it’s uncertain exactly what would be included in the base of Senator Paul’s VAT, a VAT at this rate could plausibly raise about $1.1 trillion a year.

When the dust clears, this would leave the federal government with $1.2 trillion less in tax revenue in fiscal year 2016 if the plan were implemented immediately—a reduction of about one-third in total federal revenues. Over a decade, the plan would cost a stunning $15 trillion.

Sen. Paul seems unfazed by this math, arguing that these massive tax cuts would act as “an economic steroid injection” that would make it possible to balance the federal budget—something Paul has proposed he would do as President. (If this line seems familiar to residents of Kansas, it’s because they’ve heard it from their governor repeatedly over the past four years.)

But it’s hard to see how this could be possible. Even the Tax Foundation, which he cites as providing evidence that his plan wouldn’t cost anything, finds that the Paul plan would cost $960 billion over ten years when “dynamic scoring” is factored in. And the Tax Foundation’s approach to dynamic scoring notoriously assumes that while tax cuts always spur economic growth, government spending on education, roads and health care has no positive impact on the economy at all. A more clear-eyed approach to measuring the “dynamic” effect of federal tax changes would at least attempt to quantify the very real—and very beneficial—effect of public investments on the national economy.

It should go without saying that given the fiscal challenges facing America—and given the chronic deficits Congress and the President have authorized in recent years—the most sensible first step toward sustainable tax reform should be to raise more revenue. But it seems very likely that Paul’s plan would blow a trillion-dollar hole in the federal budget each year. That’s the furthest thing from a sustainable tax plan. 

Rick Perry Supports a Federal Tax System Akin to Texas's Regressive Tax System

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If his 2012 presidential campaign is any indication, former Texas Gov. Rick Perry will continue making a pitch in his 2016 presidential campaign for regressive tax policies and cuts in essential public services to fund tax breaks for the wealthy and corporations.

During his 2012 presidential campaign, Perry proposed to replace the individual income tax with a flat tax, at a rate of 20 percent. According to an analysis by Citizens for Tax Justice (CTJ), Perry’s flat tax plan would have cut taxes by an average of $272,730 annually for the top 1 percent of Americans, while reducing taxes by an average of $1,000 for those in the middle 20 percent.

This regressive tax plan would have exploded the deficit by $10.5 trillion in its first decade. While Perry did spell out some ill-advised program cuts, he never explained how he could possibly pay for a full $10.5 trillion in tax cuts.

Perry’s 2012 flat tax plan was essentially a call to replace our current federal tax system with something like the regressive and revenue-starved tax system already in place in Texas. That would be a boon for wealthy people at the expense of the vast majority of Americans.

His regressive federal tax proposals aren’t surprising based on his record as a three-term governor of Texas. During that time, Perry repeatedly demonstrated his support for tax cuts for the rich, even when it would mean tax increases—or reductions in public services—for low- and middle-income families.

High-Tax Texas

One of Perry’s biggest talking points is touting Texas’s low taxes. In reality, however, Texas taxes are only low for the state’s wealthiest residents. According to the Institute on Taxation and Economic Policy (ITEP), the wealthiest one percent of Texans pay only 2.9 percent of their income in state taxes on average. In contrast, the bottom 20 percent of taxpayers pay, on average, as much as 12.5 percent of their income in state taxes, meaning they pay a rate that is four times higher than the state’s richest residents. Because of this, Texas’s tax system is one of the most regressive in the entire nation. For low-income families, Texas is actually the 7th highest tax state in the country.

While Texas’s tax system is tough on lower-income taxpayers, it’s a haven for businesses seeking corporate tax breaks and other handouts. A 2012 analysis using data from Good Jobs First found that Texas gives more special tax incentives for business, totaling around $19 billion annually, than any other state in the country. In other words, Perry is more than happy to let working families pick up the tab for billions in tax breaks for big corporations.

Building on this, Perry has worked in recent years to ensure that Texas and its local governments are perpetually unable to raise adequate revenue to provide funding for critical public services. For example, in 2012, Perry campaigned around Texas calling on lawmakers to sign his Texas Budget Compact, which included promising to oppose any new taxes or tax increases, as well as setting a constitutional limit on spending increases. In addition, he fought to tighten the state’s already debilitating property tax cap, a policy that would have made it even more difficult for local governments to adequately fund education.

Perry’s record on taxes is nothing to brag about. As a presidential candidate in 2016, he is likely to continue making the same pitch for the benefits of regressive tax cuts and reductions in essential government investments. Such policies are only good for  corporations and an elite sliver of the population.

There's Nothing Blue-Collar About Rick Santorum's Tax Proposals

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Former Pennsylvania senator and now Republican presidential candidate Rick Santorum has long touted himself as a champion of the “blue-collar” crowd, yet his record on tax policy indicates he’s more interested in championing hedge-fund moguls.

During his time in the U.S. senate, Santorum voted continually for the budget-busting and extremely regressive Bush tax cuts, earning him an “F” in Citizens for Tax Justice’s (CTJ) congressional scorecard. Nearly a third of the benefits of the Bush tax cuts went to just the wealthiest 1 percent of taxpayers and added $2.5 trillion to the deficit through 2010.

Not only did Santorum help usher in the Bush tax cuts, 85 percent of which have been made permanent, as a presidential candidate in 2012 he also promised to double down on this blunder by proposing another $9.4 trillion in regressive tax cuts over a decade. A preliminary CTJ analysis of Santorum’s 2012 tax plan found that the wealthiest one percent of taxpayers would receive an average annual tax break of $217,000, while the middle fifth of Americans would receive an average tax break of $2,160. Because the tax cuts aren't paid for, the plan would require either draconian cuts in basic public services or would it would explode the deficit going forward.

During a GOP primary debate in 2012, the moderator asked if any of the candidates would support a deal that included ten dollars in spending cuts for every one dollar in new tax revenues, at which point Santorum joined the other candidates to affirm that he would absolutely reject such a deal.

In the years since his 2012 run, Santorum has spelled out a series of problematic corporate tax cuts he supports. For example, in his 2014 book “Blue Collar Conservatives,” Santorum advocates cutting the corporate income tax rate from 35 percent to 20 percent for all corporations except for manufacturers, for which he proposed a zero tax rate.

Like Santorum’s other tax proposals, his corporate tax plan would substantially increase the deficit, since even eliminating all corporate tax expenditures (with the exception of “deferral” on “foreign” profits) would only allow the rate to be lowered to 29.4 percent without losing revenue over the long term. Although Santorum does vaguely propose to eliminate most corporate tax expenditures, he would retain and double the size of the broken research credit, while creating a massive new and economically distortive tax expenditure by exempting manufacturers and expanding the exemption of foreign corporate profits from taxation. Altogether, Santorum’s corporate tax plan would blow a massive hole in the budget to provide a large windfall to corporations, which already face relatively low tax levels.

In contrast to his slew of regressive proposals, Santorum has recently proposed one progressive tax change: doubling the child tax credit. Doubling the credit could provide a much needed boost to many families, although not to those with the lowest incomes. Such a substantial expansion to the credit could also add to the deficit if revenue is not raised in some other way to pay for it. In a recent interview, Santorum suggested that this idea could be a potential opportunity for the left and right to come together to help working families.

Finally, while he has not explicitly endorsed the so-called “Fair Tax,” a regressive plan to replace all federal taxes with a national sales tax, in his book he wrote that there is “much to commend it as a starting point for discussion.” A study by the Institute on Taxation and Economic Policy (ITEP) found that a revenue-neutral national sales tax would increase taxes on the bottom 80 percent of taxpayers by an average of $3,200 a year, while cutting taxes by an average of $225,000 a year on the top one percent. This radically regressive tax shift is not a sound “starting point” for discussion.

Santorum’s overall tax policy platform would likely increase the deficit, reduce funding for basic services and do nothing for working families.

A Tale of Two Tax Proposals

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Within hours of each other today, New Jersey Gov. Chris Christie and New York Mayor Bill de Blasio along with U.S. Sen. Elizabeth Warren will propose two very different tax plans.

Christie’s plan resembles the budget-busting tax giveaway to the rich that Mitt Romney campaigned on in 2012. Like Romney, Christie proposes drastically dropping the top personal income tax rate to 28 percent from the current 39.6 percent. Also, like Romney, Christie would cut the corporate tax rate from 35 percent to only 25 percent.

Details are scarce about Christie’s plan, but here’s what we do know:

Our analysis of Romney’s plan revealed his proposed cut in the top personal tax rate would slash income taxes on families making more than a million dollars a year by an average of more than $250,000 annually. That analysis assumed that Romney would eliminate all deductions and credits for top earners, something that Christie would not do. So Christie’s plan would provide even larger personal income tax cuts to the wealthiest Americans.

Dropping the top corporate tax rate to only 25 percent would cost the Treasury about $100 billion a year and $1 trillion over a decade, according to the Joint Committee on Taxation. Most of the benefits of such a tax cut would go to — you guessed it — the highest earners.

Perhaps Christie would try to offset part of the cost of his huge corporate tax cut by closing some corporate loopholes. But probably not. The only other corporate tax changes he mentions would add still more to the deficit.

The bottom line is that Christie’s tax plan would almost certainly entail both a huge increase in the national debt and a huge increase in inequality. Yet he brazenly claims that President Obama “has worsened income inequality through his policies,” and claims his plan would narrow the income gap.

Sen. Warren and de Blasio would go in an entirely different direction, what one might call the “anti-Romney.”

Their broad proposal includes multiple tax reforms to make the tax system more progressive. They call for higher taxes on wealthy investors’ capital gains and dividends, along with a “Buffett Rule” that would make top earners pay at least 30 percent of their reported income in federal income taxes, no matter how many loopholes they enjoy.

On the corporate tax side, they would reduce the incentives that encourage multinational companies to move jobs and profits offshore by taxing companies on their worldwide income (with a credit for any foreign taxes paid). They would also apply the current million-dollar limit on what corporations can deduct for their top executives’ pay to executive pay in the form of stock options.

At the other end of the income scale, their plan would expand the earned-income tax credit for low- and moderate-income working families.

These progressive tax proposals, mostly taken from ideas put forward by President Obama, would reduce income inequality significantly. That’s quite the opposite of Chris Christie’s recycling of Mitt Romney’s tax-breaks-for-the-rich proposals.

Would the Real Mike Huckabee Please Stand Up?

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Despite having a relatively moderate record on tax policy as the governor of Arkansas, Mike Huckabee has wholeheartedly embraced a radically regressive tax plan as a central plank of his presidential candidate platform.

For years, Huckabee has been one of the main proponents of the “Fair Tax,” a plan that would replace all federal taxes with a national sales tax. Citizens for Tax Justice and the congressional Joint Committee on Taxation have each found that to raise the same amount of revenue as current law, the sales tax rate would have to be about 50 percent.

A study by the Institute on Taxation and Economic Policy (ITEP) found that under the “Fair Tax,” the top 1 percent of taxpayers would receive an average annual tax cut of $225,000. Meanwhile, the plan would increase taxes by about $3,200 on average on the bottom 80 percent of taxpayers. In other words, Huckabee’s tax plan would significantly increase taxes on the overwhelming majority of Americans to pay for huge tax cuts for the very wealthiest Americans.

While Senator Ted Cruz also has endorsed a national sales tax, Huckabee has been much more outspoken in his support. Just last year he appeared in and promoted the right-wing documentary, “Unfair: Exposing the IRS,” which lauded the “Fair Tax” as the best way to reform our tax system and as a way to abolish the Internal Revenue Service (IRS). To make its case for eliminating the IRS, the film called IRS agents “jack-booted thugs” and implied that, if left unchecked, the IRS will create concentration camps in America. 

The ironic thing about Huckabee’s call to abolish the IRS is that the “Fair Tax” would hardly collect itself. Rather than having a federal revenue agency, the plan would just shift the responsibility to already strapped state governments.

Huckabee’s advocacy for this radically unfair tax plan does not comport with his relatively moderate tax record as the governor of Arkansas. Largely in response to an Arkansas court ruling declaring education funding in the state constitutionally inadequate, Huckabee sensibly worked to enact a series of tax increases to increase funding for education in his state. An analysis by Arkansas’s Department of Finance and Administration actually found that over his time as governor Huckabee increased revenue raised via taxes by $505 million.

Even though Huckabee is outspoken in his support for the radical conservative agenda on taxes through his support of the “Fair Tax,” he has still earned the continuing ire of militant anti-tax conservative groups for his deviations from their anti-tax philosophy as governor of Arkansas. In fact, the Club for Growth is already running campaign ads against Huckabee’s presidential candidacy based on his Arkansas tax record. This move by the Club for Growth reveals the extremism of this and other anti-tax groups, considering how fully Huckabee has now embraced their tax-cuts-for-the-rich agenda. 

How Presidential Candidate Ted Cruz Would Radically Increase Taxes on Everyone But the Rich

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Texas Senator, and now presidential candidate, Ted Cruz is a supporter of radical tax plans that would dramatically increase taxes on poor and middle class Americans in order to pay for huge tax cuts for the wealthiest Americans. While he has not clearly established which he favors more, Cruz has endorsed both the creation of a flat income tax and a bill that would replace the progressive income tax system with a national sales tax, a plan misleadingly called the "Fair Tax."

While Ted Cruz may portray himself as wanting to lower taxes, the reality is that under the tax plans he has endorsed, the overwhelming majority of Americans would likely see their taxes go up considerably. Looking at the "Fair Tax," an Institute on Taxation and Economic Policy (ITEP) study found that the bottom 80 percent of taxpayers would see their federal taxes go up by about $3,200 on average annually. In contrast, ITEP found that the top 1 percent of taxpayers would receive an average annual tax cut of $225,000.

On the flat tax, Cruz has not yet spelled out a specific plan that he would like to see enacted, but it's unlikely that any plan he proposed will be significantly better than the extremely regressive flat tax proposals that have been offered in the past. For example, an ITEP analysis of Senator Arlen Specter's flat tax proposal found that the bottom 95 percent of Americans would see their annual taxes increase by $2,900 on average, while the top 1 percent of taxpayers would see their taxes decrease by $210,000 on average.

When speaking about the tax system, Cruz has also peddled a patently irresponsible promise to abolish the IRS, without specifying how our country might go about collecting tax revenues (including Social Security and Medicare taxes) without a revenue collection agency. Even though much of Cruz’s rhetoric is likely bluster and contains factual inaccuracies, it's still dangerous demagoguery.

Cruz's approach on taxes is so unfair that even some conservatives suspect that it will not prove politically popular. Making this point, Pew Research recently found that even 45 percent of Republicans believe some wealthy people don't pay their fair share in taxes, meaning a substantial portion of the Republican primary voters may not be able to stomach the massive tax breaks for the wealthy that Cruz is advocating.

Looking forward, here's hoping that we see other presidential candidates reject Cruz's regressive tax approach in favor of tax reform ideas that ensure that the rich and profitable corporations are paying their fair share. 

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.

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.

New Movie Aims to Scare Public by Depicting IRS as Jack-Booted Thugs

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Looking for a good scare this Halloween? Right-wing film producer John Sullivan will have you hiding under your covers with his portrayal of jack-booted IRS thugs going door to door looking for any Christian, veteran or true freedom-loving American that they can squash.

Pulling no punches, Lori Marcus, a commentator in the recently released documentary "Unfair: Exposing the IRS," says that if the IRS is not stopped then the next boxcar will be coming for you, an allusion to the boxcars used to carry Jews to Nazi concentration camps. Nazi allusions are part and parcel of Sullivan, whose right-wing propagandist films such as"2016: Obama's America" and "Expelled: No Intelligence Allowed," are chock full of factual errors and hyperbole in service of perpetuating a sense of mortal fear of all things Obama or progressive.

With Unfair, Sullivan uses the IRS's recent scandals as a jumping off point to argue that the IRS is an inherently criminal organization at the forefront of turning America into a "fascist state." In reality, the real scandal is how years of woefully underfunding the IRS has seriously hamstrung the agency's ability to perform its even its most basic tax collection duties. The lack of adequate funds for computer infrastructure, staff and training is more the cause of the scandals than any fake conspiracy dreamed up by Sullivan.

Rather than pushing for adequately funding the IRS, the film calls for  abolishing the agency through the enactment of the so-called "Fair Tax," which is a proposal that would essentially replace all federal taxes with a national sales tax. The film fails to mention that a realistic version of the Fair Tax would be extremely regressive, increasing taxes on the bottom 80 percent of taxpayers by an average of $3,200 annually, while cutting taxes for the top 1 percent of taxpayers by an average of $225,000 annually. In addition, the assertion that a Fair Tax system would "Abolish the IRS" is misleading in that it leaves out that fact that the IRS would simply need to be replaced by a complicated system of mini-IRS's at the state level.

In other words, the Fair Tax plan promoted by the movie is really just a bait and switch, promising low taxes and the end of any tax collection issues, but delivering higher taxes for most taxpayers and a whole new set of state tax collection issues.

Unfortunately, the push to abolish the IRS and/or enacting the Fair Tax is not just the province of right-wing filmmakers. The Fair Tax Act, for example, has actually gained some legislative traction, earning as many as 76 sponsors in the House of Representatives and 9 sponsors in the Senate. Even scarier, the Republican National Committee is now parroting the Fair Tax playbook by fundraising on the promise to "Abolish the IRS," though they did not exactly explain how they would go about doing this.

Rather than believing spun up stories about the ghouls and goblins having taken over the IRS this October, Congress should instead take its role seriously by substantially increasing the IRS's budget, so the agency can more effectively collect critically needed revenue and provide better service to U.S. taxpayers. 

House GOP Bill Combines Worst Tax Break Ideas of 2014 for Half-a-Trillion Dollar Giveaway

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With very few days left to legislate before the election, House Republicans are rushing through the Jobs for America Act, which includes several provisions to curb regulations as well as a grab bag of over $520 billion in tax breaks for businesses over the next decade. These tax cuts will do more to expand the deficit than expand employment.

The House already approved each of these tax breaks as separate pieces of legislation that went nowhere in the Senate. The first three of the breaks described below are usually temporarily extended as part of the “tax extenders” legislation that Congress usually enacts every couple of years. Making these breaks permanent, as this House bill would do, would destroy any hope that lawmakers will ever come to their senses and end this wasteful practice.

The five important tax provisions of the Jobs for America Act are as follows:

Make Permanent Bonus Depreciation - Bonus depreciation is a significant expansion of existing breaks for business investment. 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. It cites CBO research concluding that bonus depreciation increases economic output by $0.20 to $1.00 for every dollar given up, while increased unemployment benefits increase economic output by $0.70 to $1.90 for every dollar given up. This suggests that throwing $269 billion more in bonus depreciation breaks at businesses over the next decade would be an enormous boondoggle.

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. 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.

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. Unfortunately, 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.

Make Permanent Section 179 Small Business Expensing - Like bonus depreciation, section 179 is a depreciation break, meaning it allows firms to deduct the costs of investment in equipment more quickly than they can under current law. As with bonus depreciation, a systematic review of section 179 by the CRS has found the tax break to be ineffective at promoting growth. Making it permanent would cost $73 billion over the next decade.

Section 179 allows firms to deduct the entire cost of a capital purchase (to “expense” the cost of a capital purchase) up to a limit. The provision in this bill would allow expensing of up to $500,000 of purchases of certain capital investments (generally, equipment but not land or buildings). The deduction is reduced a dollar for each dollar of capital purchases exceeding $2 million, and the total amount expensed cannot exceed the business income of the taxpayer. This means that this break is targeted to companies smaller than, say, General Electric, even if the beneficiaries are not exactly what most Americans think of as “small businesses.”

Make Permanent the Research Credit - The research credit is a wasteful tax break that is used primarily to subsidize activities that would have been carried out by companies even without any tax incentive. One of many problems is that 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. A CTJ report explains why Congress should either substantially reform the research credit or simply let it stay expired. Making the research credit permanent would cost $156 billion over the next decade.

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. While some medical device companies complain that the tax will harm them, these hyperbolic claims ignore the fact that the healthcare expansion that is partly funded by this tax will massively expand the market for their products.

Ban States From Taxing 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. This legislation is actually worse than previous extensions of this policy in that it would disallow the seven states with grandfathered taxes on internet access from continuing them, resulting in an annual loss of over $500 million in revenues for those states.

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.

Chairman of House Tax-Writing Committee Reported to Push Ryan Plan as Tax Reform

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Republican Congressman Dave Camp of Michigan, chairman of the House Ways and Means Committee, reportedly told members of his committee on Wednesday that he would propose a tax reform based on the framework spelled out in the House budget resolution – also known as the “Ryan plan,” because it was developed by House Budget Committee chairman Paul Ryan.

The Ryan plan calls for Congress to enact some very specific tax cuts and offset their costs by eliminating or limiting tax expenditures that are left unspecified. A report from Citizens for Tax Justice concludes that no matter how the details of the plan are filled in, people who make over $500,000 would pay tens of thousands of dollars less each year and people who make over $1 million would pay hundreds of thousands of dollars less each year, than they do under the current tax system.

The Ryan plan calls on Congress to replace the current progressive rates in the federal personal income tax with just two rates, 10 percent and 25 percent, eliminate the AMT, reduce the corporate income tax rate from 35 percent to 25 percent, and enact other tax cuts. It calls on Congress to offset the costs of these tax cuts by eliminating or reducing tax expenditures which are left unspecified, although it is fairly clear that tax breaks for investment income (most of which goes to the richest one percent of Americans) would not be limited in any way.

CTJ’s report found that even if high-income Americans had to give up all the tax expenditures that could be eliminated under the Ryan plan, they would still benefit because the rate reductions under the plan are so significant. If Congress fills in the details of the plan in a way that makes it “revenue-neutral,” which Camp proposes, that can only mean that low- and middle-income people must pay more to make up the difference.

According to The Hill, on Wednesday Camp “told Ways and Means Committee members that he planned to push a framework similar to the tax revamp that was passed in the House GOP budget this year. That plan collapsed the current seven individual tax brackets into two — a 10 percent and a 25 percent bracket — while scrapping the Alternative Minimum Tax. Corporations’ top rate would drop from 35 percent to 25 percent under the plan, which would neither raise nor reduce revenue to the Treasury.”

Congressman Camp and Democratic Senator Max Baucus of Montana, the chairman of the Senate Finance Committee, have recently toured the country, making appearances in Minneapolis, Philadelphia, and suburban New Jersey to promote an overhaul of the tax code even though they do not say what that overhaul would look like during their appearances. As the Republican and Democratic chairmen of the two tax-writing committees, they argue that Congress can enact a bipartisan tax reform. However, the Ryan budget plan, which Camp says will be the basis of his proposal, failed to receive a single Democratic vote when versions of it were approved by the House in 2011, 2012 and 2013.

The Hill also reported that Camp planned to mark up a bill before Congress acts to raise the debt ceiling, and that tax reform could be linked to legislation to raise the debt ceiling. The administration has already announced that it will not negotiate over the debt ceiling, and that instead Congress must pass a “clean” bill to raise the ceiling to prevent a default on U.S. debt obligations and the economic tailspin that would result. 

Read CTJ's new report on the latest budget plan from House Budget Chairman Paul Ryan.

Paul Ryan’s budget plan for fiscal year 2014 and beyond includes a specific package of tax cuts (including reducing income tax rates to 25 percent and 10 percent) and no details on how Congress would offset their costs, all the while proposing to maintain the level of revenue that will be collected by the federal government under current law.

The revenue loss would presumably be offset by reducing or eliminating tax expenditures (tax breaks targeted to certain activities or groups), as in his previous budget plans.

CTJ's new report find that for taxpayers with income exceeding $1 million, the benefit of Ryan’s tax rate reductions and other proposed tax cuts would far exceed the loss of any tax expenditures. In fact, under Ryan’s plan taxpayers with income exceeding $1 million in 2014 would receive an average net tax decrease of over $200,000 that year even if they had to give up all of their tax expenditures.

Because these very high-income taxpayers would pay less than they do today in either scenario, the average net impact of Ryan’s plan on some taxpayers at lower income levels would necessarily be a tax increase in order to fulfill Ryan’s goal of collecting the same amount of revenue as expected under current law.

Grover Norquist Becoming A Political Ball and Chain?

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For years, conservatives and many moderates have believed that signing Grover Norquist’s no-tax pledge was a ticket to electoral success. Maybe it was, maybe it wasn’t. But on election night 2012, it began to look like the pledge was actually a liability as signatories to it were sent packing by voters in states from New Hampshire to Ohio to California. While the results are still coming in, at least 55 House incumbents or candidates and 24 Senators or Senate hopefuls who signed the pledge lost on Election Day.  That means in the next Congress, the number of pledge-signers will be 264 at most, down from 279, and Grover’s fans could potentially become the minority in the House, with only 216 seats, according to reports from Bloomberg (link not available).

Rather than a boon, in many Senate races signing Grover’s pledge turned out to be a burden this election year. In the Ohio Senatorial race for instance, Republican State Treasurer Josh Mandel attempted to portray himself as an independent and principled thinker, but this image was tarnished by the fact that he had signed the no-tax pledge. In fact, Mandel gave a pretty limp response to his opponent, Democratic Senator Sherrod Brown (who ultimately won the race), who pointed out during a debate that signing the pledge equaled “giving away your right to think.”

Similarly in Massachusetts, tax policy became the focal point of difference between Republican Senator Scott Brown and Democratic candidate Elizabeth Warren. During a debate between the candidates, Warren warned voters that “instead of working for the people of Massa­chusetts” Brown had “taken a pledge to work for Grover Norquist.” Such criticism helped voters see that he was not as independent from conservative influence and the Republican Party as he liked to portray himself in deep blue Massachusetts.

Earlier this year, the stranglehold of the no-tax pledge on the Republican Party and candidates was already showing signs of cracking as a substantial number of Republican candidates either refused to sign the pledge or repudiated their former fealty to it. Leading the charge, Virginia Republican Representative Scott Rigell advised fellow Republicans to not sign the pledge and ran explicitly on the platform of taking a balanced approach to deficit reduction. In contrast to many of his colleagues who lost running on the no-tax pledge, Rigell was easily re-elected to his House seat.

Moving forward, we expect more lawmakers will realize that taking a dogmatic anti-tax approach is not only bad policy, but that it’s also increasingly bad politics.

Picture of Norquist in a bathtub courtesy the New Yorker magazine. 

Boehner's Fake Offer of Compromise on Taxes

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Speaker Boehner Uses Different Words to Repeat Unchanged Opposition to Giving Up Tax Cuts for the Rich

On Wednesday, Republican House Speaker John Boehner repeated his stance that his caucus would not approve any increase in tax revenue except for a revenue boost driven by economic growth that they claim will result from the sort of tax overhaul proposed by Mitt Romney.

Boehner attempted to present this position as a compromise, saying his caucus is “willing to accept some additional revenues” but then went on to say, “There’s a model for tax reform that supports economic growth. It happened in 1986 with a Democrat House run by Tip O’Neill, and a Republican President named Ronald Reagan.”

The Tax Reform Act of 1986 was projected by Congress’s official revenue-estimators to be “revenue-neutral.” The law ended many tax loopholes and special breaks, but used the revenue saved to offset reductions in rates, just as Mitt Romney claimed (but failed to demonstrate) his plan would do.

Nonetheless, Boehner argued that this sort of tax reform improves the economy so much that the resulting increased incomes lead to increases in the amount of tax revenue collected. He said that by “creating a fairer, simpler, cleaner tax code, we can give our country a stronger, healthier economy. A stronger economy means more revenue, which is what the President seeks.”

But the projections of revenue-neutrality in 1986 were correct. Several studies on the impacts of the 1986 reform were done by economists on all sides of the tax issue in the 1990s, and none found evidence that it expanded the entire economy in a way that would boost revenue as Boehner claims.

The 1986 reform did a lot of good, but it was revenue-neutral and it was very different from what Republicans have been talking about today. The 1986 reform enhanced fairness by ending tax breaks for investment income that allowed wealthy investors to pay lower effective tax rates than middle-income people, and these reforms were sustained for several years before these breaks were brought back into the tax code. But Congressional Republicans want to expand those breaks or at least make permanent the Bush-era provisions that expanded them (the 15 percent special top rate for capital gains and stock dividends).

The 1986 reform also made U.S. corporations collectively pay higher taxes, by closing loopholes and cracking down on offshore profit-shifting, largely by curbing “deferral” on taxes on U.S. profits that companies artificially shifted to tax havens (reforms that have largely been eroded since then). Higher corporate taxes made it possible to reduce personal income tax rates, while keeping some popular and useful personal tax deductions and credits. But Congressional Republicans, and sadly even President Obama, propose that the corporate part of tax reform should, by itself, be revenue-neutral (if not revenue-negative).

Curbing unwarranted tax breaks, as happened in 1986, is an excellent idea. But the revenues from such reforms should be used to make public investments or cut the deficit, not reduce tax rates. In fact, the highest priority of tax reform should be raising revenue — real revenue, not the voodoo-economics sort of revenue gains that Boehner mistakenly claims will come from tax-rate reductions.

Most people forget that President Reagan actually increased taxes substantially (and repeatedly) after his 1981 tax reductions failed to achieve the economic goals he had been told to expect by his “supply-side” advisers (whom Reagan fired). Congressional Republicans, who say they admire Reagan, should emulate his responsible later policies, rather than try to repeat his early (and admitted) mistakes.

Presidential candidate Mitt Romney has proposed to make permanent the Bush tax cuts without offsetting the costs and also enact new, additional tax cuts that would be paid for by limiting tax expenditures (special breaks or loopholes in the tax code). Romney recently suggested that his new tax cuts could be paid for by limiting itemized deductions to $25,000 per tax return, which we estimate would offset just 36 percent of their costs. The percentage of Romney’s new tax cuts offset by this limit on itemized deductions would vary dramatically by state.

Read the report.

Tax Ideas in the Republican Platform, Part I: Same Old Supply-Side Stuff

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The GOP’s core philosophy about tax policy is perfectly distilled in its 2012 platform where it states simply that “[l]owering taxes promotes substantial economic growth.” What this one-sided analysis misses is that lower taxes do not promote economic growth, because they inevitably require (PDF) the government to either cut spending or to increase the deficit.

(Our GOP platform review Part II, Tax Ideas on the Fringe, is here.

Supports More Individual Tax Cuts

The fact that the GOP platform does not make the connection between tax cuts and deficits is starkly demonstrated by the platform’s warning that the US faces an “unprecedented legacy of enormous and unsustainable debt,” while at the same time calling for a complete extension of the Bush tax cuts, at a cost of $5.4 trillion (PDF). While some GOP leaders like to say that tax cuts boost the economy so much that they pay for themselves, there is no evidence to support that claim, and even economists from the Bush Administration and a former Reagan advisor have conceded that over the long run, the Bush tax cuts have no real discernable affect on economic growth.

Supports More Corporate Tax Cuts

Another misguided tax proposal in the GOP platform is the call for a lower corporate tax rate. For one, the platform rests on the mistaken assumption  that “American businesses now face the world’s highest corporate tax rate.” While it may be true that the US has the highest statutory rate on paper, the actual amount of taxes paid by US corporations is nowhere near the statutory rate because of the large swath of corporate tax breaks and loopholes that allow many enormously profitable companies, like General Electric and Verizon, to pay nothing at all in taxes.

Comparatively, the amount of corporate taxes paid as a percentage of GDP in the US is the second lowest in the developed world. In fact, a recent CTJ analysis found that two-thirds of the largest US multinational corporations with significant foreign profits paid a lower corporate tax rate on their US profits than the rate they paid to foreign governments on their foreign profits.

Rather than dealing with the breaks and loopholes that plague our corporate tax system, the GOP platform advocates expanding them, most notably by moving the US to a territorial tax system under which corporations would have a greater incentive to move profits and jobs offshore (a problem that can be solved by ending deferral).

The new Republican platform identifies high rates as the core problem with our current tax system, but the real problem is decades of cuts and proliferating breaks and loopholes are making it impossible over the long term for the government to provide critical services without dangerously increasing the national debt.

Tax Ideas in the Republican Platform, Part II: On the Fringe

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The GOP’s 2012 platform contains many of the policies that you would expect from the party, such as calling for the extension of the Bush tax cuts and reducing corporate tax rates. Here we focus, however, on three planks in the platform that fall far outside the mainstream of tax policy.

(Our GOP platform review Part I, Same Old Supply Side Stuff, is here.)

1. Support for a Radical Constitutional Amendment to Restrict Taxes and Budgets

Following efforts by the House GOP last year to pass the most extreme balanced-budget amendment ever, the GOP platform calls for the passage of a constitutional amendment that would require that the federal government have a balanced budget, cap federal spending at its historical average share of GDP (around 18 percent), and require a super-majority for any tax increase (with an exception for war or national emergency). This kind of amendment poses all kinds of problems, not the least of which is that it would immediately cause unemployment to double (according to nonpartisan, private sector economists) and drive the economy into a deep recession.  Balanced budget amendments in all their forms (including state level versions) are disastrous, because they essentially tie the hands of legislators and cripple government functions.

2. Nod to National Consumption Tax

Warning that we must “guard against hypertaxation of the American people,” the GOP platform says that the creation of a national sales tax or value-added tax (VAT) can only happen in conjunction with the repeal of the Sixteenth Amendment, which allowed for the federal income tax.

On the one hand, this plank is odd because a national sales tax or VAT is not a political possibility; even the hint of it prompted the US Senate to pass a resolution explicitly rejecting a VAT by an 85 to 13 vote just a couple of years ago.  Anyway, the fear that a national consumption tax would lead to some sort of “hypertaxation” is unfounded. Its implementation in Canada (PDF) is a case study showing how overall taxes can actually decrease following the creation of a national consumption tax.

On the other hand, the existence of this plank in the GOP platform suggests that the Republican party’s establishment might actually be considering a radically regressive policy like the so-called “Fair Tax” (which is just a national sales tax) and elimination of the federal income tax (the primary source of fairness in the tax code and sustainable, sensible revenue source).

3. Opposition to a United Nations Global Tax

Perhaps the most inexplicable plank in the entire GOP platform is opposition to “any form of UN Global Tax.” While there are conspiracy theories, such as how the UN may very well invade in Texas in order to enforce its radical tax agenda during Obama’s second term, the reality is that no one takes the possibility of a UN global tax seriously. To be clear, there is no indication of support among US lawmakers to implement such a UN tax, nor does the UN have the power to impose one.

Mitt Romney's Huge Personal Financial Stake in the Upcoming Election

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Mitt Romney appears to have a lot at stake in the upcoming election when it comes to his own federal taxes.

If Obama wins and gets his tax plan adopted, then Romney will pay an effective federal tax rate of 34.3 percent.

If Romney wins and he successfully promotes the tax plan that his running mate, Paul Ryan, proposed in 2010 (the only Romney-Ryan tax plan spelled out in any detail), then Romney will pay only 0.4 percent.

The dollar difference, per year: $7.7 million!

In contrast, Obama would actually raise his own tax rate to 28.4 percent and Romney would lower it 18.1 percent, saving Obama some $67,000.

Note: All these figures are based on the income and deductions reported on Romney’s 2010 federal tax return, the only return he has yet been willing to release.

The Paul Ryan Budget Roundup

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Updated 3/10/2015

On Saturday morning, Republican Presidential Candidate Mitt Romney announced Wisconsin Representive Paul Ryan as his vice presidential running mate. Over the past eight years, Citizens for Tax Justice has crunched the numbers and provided in-depth analysis on the succession of regressive budget plans proposed by Rep. Ryan as the former Ranking Member, and current chairman, of the House Budget Committee.

Below is a roundup of our reports and commentary on Rep. Ryan's current and past budget plans:

Another Ryan Budget Gives Millionaires Average Tax Cut of At Least $200,000 - April 2, 2014

Paul Ryan's Latest Budget Plan Would Give Millionaires a Tax Cut of $200,000 or More - March 13, 2013

Top GOP Tax-Writer Proposes Fast-Track for Ryan Plan Tax Changes, Giving Millionaires Average Tax Cut of at Least $187,000 in 2014
- July 26, 2012

Starving the Census in the House GOP Budget: Penny Wise, and Dumb
- May 14, 2012

Ryan Budget Plan Would Cut Income Taxes for Millionaires by at Least $187,000 Annually and Facilitate Corporate Tax Avoidance
- March 22, 2012

CTJ Figures Used in Budget Debate Show Ryan Plan Would Give Huge Tax Cut to Millionaires
- May 26, 2011

Obama Blasts Ryan Budget Plan
- April 15, 2011

House Budget Chairman Paul Ryan's Goal Is to Shrink Government, Not the Deficit
- April 8, 2011

Rep. Ryan's House GOP Budget Plan: Federal Government Would Collect $2 Trillion Less Over a Decade and Yet Require Bottom 90 Percent to Pay Higher Taxes
- March 9, 2010

Update on House GOP Budget Plan
- April 2, 2009

House GOP Leaders' Budget Plan: Poor Pay More and Rich Pay Less Under Plan that Costs $300 Billion More Annually than President's Plan
- March 27, 2009

House GOP Tax and Entitlement Plan Would Raise Taxes on Four Fifths of Americans While Slashing Taxes on the Wealthy
- July 7, 2008

House GOP Pins Comeback Hopes on Social Security Privatization, Dismantling Medicare, and Slashing Public Services
- May 23, 2008

Republicans Call for Replacing Alternative Minimum Tax with Alternative Maximum Tax
- October 12, 2007


On Tuesday, House Republicans released a proposal, H.R. 6169, that would relax some of Congress’s normal procedural rules in order to enact an overhaul of the tax code — so long as the tax overhaul meets the objectives laid out in the House budget plan authored by House Budget Committee Chairman Paul Ryan.

H.R. 6169 was introduced on Tuesday by House Ways and Means Committee Chairman Dave Camp and House Rules Committee Chairman David Dreier and lays out several components that the tax overhaul legislation must have in order to be passed through the easier legislative procedure. All of these components are identical to those laid out in the Ryan Plan

The required components of the tax overhaul, which are also those laid out in the Ryan Plan, include:

  • replacing the personal income tax rates with just two rates, 10 percent and 25 percent (or less)
  • repeal of the Alternative Minimum Tax (AMT)
  • reducing the statutory corporate income tax rate to 25 percent (or less)
  • adoption of a “territorial” tax system (exempting offshore profits of corporations from U.S. taxes)
  • collecting revenue equal to between 18 and 19 percent of GDP

The “findings” section of the bill states that revenue will “rise to 21.2 percent of GDP under current law,” meaning its proposed revenue target of between 18 and 19 percent of GDP is an explicit cut in revenue.

A Huge Tax Break for Millionaires No Matter How It’s Structured

CTJ issued a report in March concluding that Ryan’s proposed changes to the personal income tax would provide taxpayers with income exceeding $1 million in 2014 an income tax cut of at least $187,000 on average

Like Ryan’s plan, the bill introduced by Camp and Dreier does not say which tax loopholes and tax subsidies should be closed to ensure that the tax system still collects revenue equaling between 18 and 19 percent of GDP even after the plan’s steep rate reductions and the repeal of the AMT are in effect.

We estimated that even if those with incomes exceeding $1 million were forced to give up all the tax expenditures Ryan could possibly want to take away from them — all their itemized deductions, tax credits, the exclusion for employer-provided health insurance and the deduction for health insurance for the self-employed — even then the net result for these taxpayers would be an average income tax cut of $187,000 in 2014. That’s because the income tax rate reductions Ryan proposed are so deep that they would far outweigh the loss of all these tax loopholes and tax subsidies.

Increasing Incentives for Corporate Tax Dodging

The CTJ report on the Ryan plan also explains that reducing the statutory corporate income tax to 25 percent would likely lose revenue when we should be raising revenue from corporate tax reform. (CTJ’s major study last year of most of the profitable Fortune 500 corporations found that their effective tax rate, the percentage of profits they actually pay in taxes, was just 18.5 percent, far less than the statutory rate of 35 percent that Ryan and Camp complain about.)

CTJ’s report on the Ryan Plan also explains that a territorial tax system — exempting offshore profits of corporations from U.S. taxes — can only increase the incentives that U.S. corporations already have to disguise their U.S. profits as “foreign” profits through shady transactions that shift their earnings (on paper) into offshore tax havens.

Photo of Rep. Dave Camp via Michael Jolley Creative Commons Attribution License 2.0

Why Would Grover Norquist Misrepresent CTJ?

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 Recent evidence has lead Citizens for Tax Justice to wonder: do the “experts” over at Grover Norquist’s Americans for Tax Reform intentionally lie, or are they just sloppy?

Here’s what we’re looking at:

In their recent policy brief, Americans for Tax Reform links to one of our reports and writes:

"…[E]ven the left-wing Center for Tax Justice admits that “in some parts of the country, $250,000 is really not very much to raise a family on and it’s unclear whether families in such a position can afford to pay higher taxes.”

The problem is that the quote they attribute as the position of Center for Tax Justice (who’s that?) is actually us here at Citizens for Tax Justice (thank you very much) reporting something from the New York Times, and it’s something that we clearly oppose. Here’s the full quote from CTJ’s report:

“Recent articles in the New York Times and the Fiscal Times quote observers and analyses questioning President Obama’s proposal to allow the Bush income tax cuts to expire for adjusted gross income (AGI) in excess of $250,000. One theme of these articles is that in some parts of the country, $250,000 is really not very much to raise a family on and it’s unclear whether families in such a position can afford to pay higher taxes. The idea that Obama’s income tax plan will result in unaffordable tax increases for people who make $250,000 a year is wrong on several levels”

On the one hand, supporting the theory that this misquote results from pure sloppiness is their error of accidently calling us Center for Tax Justice – something busy journalists do all the time.

On the other hand, supporting the theory that Grover’s Americans for Tax Reform is intentionally misrepresenting the position of Citizens for Tax Justice is that our report was a laundry list of reasons why families who make $250,000 can afford to pay higher taxes, making it almost impossible for any semi-literate person to have missed that point. (Plus it’s no secret CTJ supports tax increases for this group.)

Which theory sounds right to you?

Did Grover Norquist's Americans for Tax Reform intentionally lie about CTJ or are they just really sloppy?






Hard to tell. free polls 

Photo of Grover Norquist via
Gage Skidmore Creative Commons Attribution License 2.0

Oklahomans Reject Laffer Plan, Preserve Their Income Tax

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Oklahoma Governor Mary Fallin admitted last week that she and her allies had failed in their efforts to roll back the state’s income tax this legislative session, despite high hopes among supply siders that the tax would be not only cut but entirely repealed.  As The Oklahoman explains, however, both voters and businesses recognized that reducing taxes would mean further cuts in education and public safety piled on top of those already inflicted in recent years.  Public opposition aside, however, it did seem all too possible that Arthur Laffer (the Governor’s tax advisor) and his colleagues’ pitch that shredding the tax code would lead to economic rebirth was going to be enough to get an income tax cut through the legislature.

Over a half dozen tax cut plans were given serious consideration this year in Oklahoma, most of which would have, in fact, raised taxes on low-income families by repealing important tax credits, and all of which would have tilted Oklahoma’s overall tax system even more heavily in favor of the wealthy.  Some of the proposals, like the modified version of Arthur Laffer’s plan pushed by Governor Fallin, would have repealed the income tax entirely.

In the final days of the session, it looked like lawmakers had come to an agreement on a comparatively modest plan to cut the top personal income tax rate from 5.25 to 4.8 percent, and then possibly to 4.5 percent a few years later.  Noticeably absent from the proposal, fortunately, was any repeal of low-income credits— likely due in part to analyses by the Institute on Taxation and Economic Policy (ITEP) showing that repealing these tax credits would mean a significant tax increase for a large number of the state’s most vulnerable residents.

Instead, lawmakers hoped to pay for their proposed rate cuts with a combination of spending cuts, repealing various business tax credits and eliminating a handful of tax breaks for individuals.  Even then, however, analyses by ITEP and the Oklahoma Tax Commission showed that a significant number of low- and middle-income Oklahomans would see their taxes rise under the plan.  And just as the state’s largest newspaper editorialized about these revelatory analyses, support evaporated in the state House of Representatives.

As the Oklahoma Policy Institute explained last week, “The failure of every tax cut proposal that was debated this session is a victory for Oklahoma… We know, however, that this is just a brief intermission in a long battle over the right tax policy for Oklahoma.  We need to look with renewed seriousness at our outdated tax system and do away with unnecessary tax preferences. And we must improve tax fairness and not allow middle- and low-income families to shoulder a larger share of the load.” 

(Photo from NPR State Impact)

Kansas Joins Uniquely Regressive Bad Tax Policy Club

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Last week Kansas Governor Sam Brownback signed into law Senate Substitute for House Bill 2117, a tax bill that dramatically changes the Kansas income tax structure and makes Kansas a real outlier when it comes to tax fairness. ITEP released a report which finds that the legislation includes a broad tax cut that will cost the state over $760 million a year, and yet will actually increase taxes on some low- and middle-income families – while the wealthiest Kansans will see their taxes reduced by $21,000 on average.

As a result of this legislation, Kansas is now a member of a uniquely regressive tax policy club; it joins Mississippi and Alabama in taxing food, but not offering any targeted tax relief for the poorest families who have to spend a larger portion of their budgets on groceries.  Until last week’s bill signing, Kansas offered a Food Sales Tax Rebate (FSTR) that targeted tax relief to Kansans over 55 and those with children and an income less than $35,400. Families with income of less than $17,700 could claim a flat $91 per family member to offset the sales tax they paid on food.

Even after cutting income tax rates and increasing the standard deduction, a family of four with $17,000 of income will still lose $294 because of the elimination of the food sales tax credit.

For more on the new law and to learn more about the various tax plans that were debated in Kansas this legislative session, check out ITEP’s Kansas Tax Policy Hub.

(Photo courtesy Wikipedia)

Virginia Gov. McDonnell Says He Wants Tax Reform, But....

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Virginia Governor Bob McDonnell wants to make tax reform a top priority during his upcoming (and final) year as Governor, according to the Associated Press (AP).  But while Virginia’s tax code is no doubt in need of reform, it’s hard to tell from the AP article what kind of change Virginians can realistically expect.

Virginia currently foregoes some $12.5 billion in tax revenue every year as a result of special breaks buried in the state tax code—almost as much as the $14.3 billion in annual revenues the Commonwealth takes in.  McDonnell said, “I think it’s time to take a look at all those tax preferences, both in income and sales, and see if there is not some way … we can save some money and put it into transportation.”

While such a development would be a positive one, McDonnell contradicts himself when he says that raising revenue is out of the question, and that the tax reform he has in mind might even reduce revenue overall.  Given that commitment, Virginians might expect the condition of their ailing transportation system to improve, but at a cost to other state services.

Moreover, there’s reason to be skeptical about how committed McDonnell really is to broadening the tax base.  While he’s right to point out that services like car repairs and pedicures should be subject to the state sales tax, his actual track record is not inspiring. Just two months ago, for example, McDonnell signed into law an expansion of a wasteful corporate tax giveaway that narrowed the tax base, despite very good reasons to doubt its effectiveness.

On transportation funding, too, McDonnell’s track record conflicts with his talk of tax reform. He has consistently refused to support tying—or “indexing”—the state’s stagnant gas tax rate to inflation, but now he says that “there may be a way to do that in the overall context of tax reform.”

That’s hardly a ringing endorsement of the idea, but at least it’s a start.  The Institute on Taxation and Economic Policy (ITEP) recently found that only Alaska has gone longer than Virginia without raising its gas tax. And if Virginia lawmakers had indexed the state gas tax to construction costs the last time the tax was raised, annual revenues would be some $578 million higher.

But indexing by itself is not enough to fix the state’s legendary transportation problems.  Indexing helps prevent future construction cost increases from eating into gas tax revenue, but it doesn’t address the cost increases that have already occurred. According to ITEP, Virginia’s gas tax would have to immediately rise by 14.5 cents just to offset the last two and a half decades of transportation cost growth. 

But even if McDonnell believed the state’s gas tax needs to be raised and indexed, his opposition to raising any new revenue overall is almost guaranteed make his reform agenda bad for the state.  That’s because every dollar in new revenue McDonnell might generate for transportation would have to be offset with a dollar in tax cuts elsewhere in the budget—presumably from a tax that funds education, human services, public safety, and other core government functions.  The AP story says McDonnell sees a reformed tax code as his own legacy, but what about the legacy he leaves the Commonwealth?

Photo of Rand Paul via Gage Skidmore Creative Commons Attribution License 2.0

Are States Really "Racing" To Repeal Income Taxes?

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Arthur Laffer recently teamed up with Stephen Moore, his friend on The Wall Street Journal’s editorial board, to pen yet another opinion piece on the benefits of shunning progressive personal income taxes.  Most of the article’s so-called “analysis” is ripped from Laffer reports that we’ve already written about, but there was one new claim that stands out.  According to Laffer and Moore, “Georgia, Kansas, Missouri and Oklahoma are now racing to become America's 10th state without an income tax.”  If this is true, it’s news to us.  So let’s take a look at the most recent reporting on these states’ tax policy debates.

In Georgia, the state’s legislative session ended almost a month ago with the passage of a modest tax package.  Last year, Georgia lawmakers debated levying a flat-rate income tax, but that effort (which should have been easy compared to outright income tax repeal) failed and left lawmakers with little interest in returning to the issue.

The debate over the income tax debate in Kansas isn’t quite done yet, but the most recent news from The Kansas City Star is that “lawmakers say the tax reform package they'll consider next week almost certainly will fall far short of the no-income-tax goal.”

In Missouri, a number of media outlets are reporting that the push to get income tax repeal on the November ballot is all but over because a judge ruled that the ballot initiative summary that proponents of repeal proposed to put before voters was “insufficient and unfair.”

And in Oklahoma, what started as an enthusiastic push for big cuts or even outright repeal of the income tax has since been watered down into something less ambitious.  The most likely outcome is a cut in the top rate of no more than one percent, although lawmakers are still toying with the idea of tacking on a provision would repeal the income tax slowly over time (so the hard decisions about what services to cut won’t have to be made for a number of years).  But in any case, budget realities have left lawmakers in a position where they’re hardly “racing” to scrap this vital revenue source.

Photo of Art Laffer via  Republican Conference Creative Commons Attribution License 2.0


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Yesterday, Eric Cantor, the Republican House Majority Leader, announced that those taxpayers who pay federal payroll taxes and other types of taxes, but who don’t have enough income to owe federal personal income taxes, should be required to pay the federal personal income tax as well. Cantor made his remarks at an event (subscription required) hosted by Bank of America.

“We also know that over 45 percent of the people in this country don’t pay income taxes at all,” Cantor said, “and we have to question whether that’s fair. And should we broaden the base in a way that we can lower the rates for everybody that pays taxes... Should they even have a dollar in the game on income taxes, which is the notion of broadening the base.”

When asked if this would mean “a tax increase on the 45 percent who right now pay no federal income tax,” Cantor said, “I’m saying that, just in a macro way of looking at it, you’ve got to discuss that issue.”

CTJ’s figures show that Americans in every income group do, in fact, pay taxes and that the tax system as a whole (including all the types of taxes that Americans pay) is just barely progressive.

For example, in 2011 the richest one percent of Americans paid 21.6 percent of the total (federal, state and local) taxes but also received 21 percent of the total income in the U.S. that year. Similarly, the poorest fifth of Americans paid just 2.1 percent of the total taxes in the U.S., but only received 3.4 percent of the total income in the U.S. In other words, the richest one percent are not paying more than their share, and the poorest Americans are not getting much largesse from the tax system.

The term “broadening the base” has often been used to describe a tax reform that would end the various loopholes and tax subsidies that reduce the amount of revenue a given tax at given rates can collect.

Republican House Budget Chairman Paul Ryan recently made it clear that his idea of base-broadening would not involve repealing those tax loopholes and tax subsidies that benefit wealthy investors (the tax preferences for capital gains and stock dividends which mostly benefit the richest one percent). Cantor’s comments suggest that, like Rep. Ryan, he is interested in ending those tax subsidies that benefit the lower-income or middle-income households but not those benefitting the rich.

Several tax expenditures in the federal personal income tax reduce or eliminate the federal personal income tax for many lower-income and middle-income Americans. The refundable Earned Income Tax Credit and the Child Tax Credit are available only to those who work and therefore pay federal payroll taxes. The rules exempting most Social Security income benefits people who paid taxes over the course of their working lives. The standard deduction and personal exemptions ensure that people whose income does not meet a basic threshold are not subject to the personal income tax, similar to how corporations that are not profitable are not expected to pay the corporate tax. (Our complaints about corporations are limited to those that are profitable and still manage to pay no corporate income taxes.)

It’s unclear if Cantor is proposing to repeal the EITC and the Child Tax Credit, or the rule exempting most Social Security benefits from income taxes, or the standard deduction and personal exemptions, or what exactly. Any of these options would take a tax system that is just barely progressive and make it regressive.

Rick Perry Pulls a Grover With No-Tax Pledge

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Rick Perry’s Texas has some of the lowest taxes in the nation and it trails the national average in important economic indicators.  But that’s not stopping Governor Perry from traveling the state promoting his new Texas Budget Compact, the center of which is an opposition to any new taxes or tax increases, which, he argues, will make the state stronger.  Politically, the compact is Perry’s effort to set the terms of election year debates, influence the next legislative session (eight months from now!) and assert his role as the Lone Star State’s conservative-in-chief.  In addition to opposing any new taxes, the Compact calls for: a Constitutional limit on spending tied to the growth of population and inflation; more program and agencies cuts; using the state’s Rainy Day Fund only for emergency purposes; making a temporary small business tax exemption permanent; and “truth in budgeting.”

Borrowing a page from anti-tax crusader Grover Norquist’s playbook, Perry said on Monday, “Each and every member of the Legislature or anyone aspiring to become a member of the Legislature should sign on.”  And right on the Governor’s website, individuals and lawmakers can sign on to the Compact: Yes, I stand with Governor Perry and I support his Texas Budget Compact. I want my state representatives in the Texas Legislature to sign on to Governor Perry's Texas Budget Compact.

Asked specifically, however, whether or not he would be keeping track of who has signed on or not, Perry responded, “I’m not going to have a pledge for anybody to sign. People are either going to be for them or they’re not. There’s not a lot of gray area.” 

Regardless of Perry’s intentions, the Compact smacks of the kind of binding pledge that ties lawmakers’ hands and restricts their ability to do the jobs they were elected to do.  (Happily, more and more lawmakers who took Norquist’s pledge are abandoning it on these very grounds.)

But worse than distorting the political process, the principles Perry promotes in his Compact could wreak havoc on Texas if fully embraced. 

As Texas State Rep. Mike Villarreal said in a statement released in response to the Compact:

"Governor Perry loves to talk about his principles in the abstract, but he doesn't want to discuss the disabled kids who lose health services when he won't close corporate tax loopholes, or the students crowded into full classrooms when he won't touch the Rainy Day Fund. After the deep and unnecessary education cuts that Governor Perry championed, it's no surprise that his Compact doesn't say a word about educating schoolchildren.

"The Governor doesn't seem to understand that we must educate our children if we are going to build our economy and create jobs."

News is that Rick Perry wants to run for president again in 2016. His hard line on taxes would certainly help him with his party’s base, even as it harms the state that already elected him.

Photo of Rick Perry via Gage Skidmore Creative Commons Attribution License 2.0

The Herminator Is Back - With His 9-9-9 Plan

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When CTJ analyzed Herman Cain’s 9-9-9 tax plan last year, we concluded it would cut taxes for the richest one percent by $210,000 on average and raise taxes for the bottom three-fifths of Americans by $2,000, on average if in effect in 2011. This did not surprise us, since the 9-9-9 plan incorporates elements of a “flat tax” and a national sales tax (often misleadingly called a “Fair Tax”) which are both far more regressive than our current tax system. We also concluded that the 9-9-9 plan would collect $340 billion less than our existing tax system in 2011 alone. What does surprise us is that people are still talking about the former pizza CEO’s tax plan, which is the focus of a two-day “Patriot Summit” that Cain is hosting today in Washington.

Today, Cain’s Revolution on the Hill will  roll out “the 9-9-9 educational campaign that will sweep the country in the Summer of 2012.” 

Flat tax and national sales tax plans vary, but they all would leave investment income – most of which goes to the richest Americans – untaxed. The “flat tax,” which is promoted by Dick Armey’s FreedomWorks, does not consist of one flat tax rate but actually two tax rates when you include the zero percent rate for investment income.

The national sales tax, which is promoted by the organization, is a straight-forward consumption tax, and this is likely to have the greatest impact on lower-income families who have no choice but to put all of their income towards consumption. (The other national, broad-based consumption tax you hear a lot about is a value-added tax, or VAT).

Cain is not the only presidential candidate to propose these types of radical changes to our tax system. Texas Governor Rick Perry flirted with both the flat tax and a national sales tax. Both Perry and Newt Gingrich eventually settled on a “flat tax” that would, like other flat tax proposals, exempt investment income from tax.

Watch this space for a look at other flat or fair tax proposals that surface during this election year.


Arthur Laffer's Rich States, Poor States Is More Wish List Than Analysis

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Arthur Laffer and the American Legislative Exchange Council (ALEC) have just released the 5th edition of their Rich States, Poor States report.  If you’ve fallen behind on your Laffer reading, Rich States, Poor States is mostly a collection of Laffer’s other reports from throughout the year, copy-pasted into one convenient location.

The centerpiece of this “new” report is the “ALEC-Laffer State Economic Competitiveness Index,” which is essentially a 15-item wish list of policies that Laffer and ALEC would like to see enacted in every state.  Over half the items in the Index are related to low or regressive taxes, while the others are mostly related to labor issues.

As we’ve pointed out before, the most laughable thing about the Index is the way it claims to provide a look at the important “policy variables” under the control of state lawmakers, but then ignores the ones that actually matter. For instance, few people would argue that good schools or basic infrastructure (power, transit, roads) are unimportant to states’ economic performance.  But the ALEC-Laffer rankings give states no credit for either of these outcomes. On the contrary, adequately funding any public service actually reduces states’ rankings since Laffer assumes that tax revenue is detrimental to economic growth (all research from ITEP and academic economists to the contrary).

Rich States, Poor States also attempts to rebut recent research from the Institute on Taxation and Economic Policy (ITEP) that we’d be remiss not to mention here.  According to ALEC and Laffer, “In its latest study, ITEP reaches a pro-tax conclusion by deliberately manipulating the data. It focuses on per-capita income instead of absolute income, which hides the economic losses of high tax states.”

ITEP explains in detail its reasons for using per-capita income growth as a measure of state economic performance in the report cited by Laffer. Indeed, while Rich States, Poor States is perhaps best known for the 15-item wish list, every edition of the report (first published in 2008) has also contained a section ranking states based on their actual, measurable economic performance.  And that ranking has always been based on what Laffer calls “three important variables:” absolute domestic migration, non-farm payroll employment, and per-capita personal income growth.

What’s more, ever since the first edition, Rich States, Poor States has included a set of state-specific fact sheets at the end of the report, the top of each being – that’s right – a graph of the state’s per-capita personal income growth.

The fact that this variable appears in the evidence-based section of Rich States, Poor States suggests they think it’s a reliable variable; the fact that Laffer et al characterize the variable as manipulative in the fiction-based portion of their report suggests that if there’s any deliberate manipulation going on, it’s being done by these so-called experts.

Photo of Art Laffer via  Republican Conference Creative Commons Attribution License 2.0

New Fiction from Arthur Laffer: Estate Tax Killed 220,000 Jobs in Tennessee

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Tennessee lawmakers are seriously considering repealing their state estate tax, in part because of a comically flawed report from supply-side economist Arthur Laffer.  The report’s bottom-line conclusion is that Tennessee would have benefited from 220,000 more jobs in 2010 if lawmakers had simply repealed the Tennessee estate tax one decade earlier.  But as the Institute on Taxation and Economic Policy (ITEP) explains in a new brief, while 220,000 jobs is certainly an impressive number, the reasoning Laffer used to arrive at that figure is far from convincing.

Laffer begins his argument by pointing to the “Laffer-ALEC State Competitiveness Index,” which is basically a wish list of fifteen conservative policies he would like to see states enact (low income taxes, low corporate taxes, low minimum wage, etc).  Tennessee ranks 8th overall on the Laffer-ALEC Index, and if the Index has any predictive power whatsoever, that means Tennessee’s economy should be doing pretty well.  But as Laffer admits, the reality is exactly the opposite.

Tennessee’s low economic and employment growth is particularly puzzling to Laffer because in a series of prior reports, he’s argued that states without income taxes (of which Tennessee is one) are outperforming the rest of the country.  So how then does Laffer explain Tennessee’s disappointing growth?  He decides to ignore a slew of factors that affect state economies in today’s complex world, and instead place all of the blame in one place: the state estate tax.

According to Laffer’s reasoning, if Tennessee had jettisoned its estate tax one decade ago, employment and economic growth more broadly would have sped up to a rate exactly equal to the average among all states not levying an income tax.  The natural result of this would be 220,000 more jobs in 2010, as well as $36 billion in additional yearly economic output.

Laffer says he can think of “no reason to believe” that things wouldn’t have played out this way.  But as ITEP explains in its brief, differences in economic growth rates are influenced by a range of factors that don’t appear to have even crossed Laffer’s mind, like differences in natural resource endowments, educational attainment, and infrastructure quality.  The unavoidable conclusion is that Laffer’s choice of scapegoat in Tennessee had a lot more to do with his ideology than with any sort of rigorous economic analysis.

For a closer look at Laffer’s deeply flawed argument in favor of repealing Tennessee’s estate tax, be sure to read ITEP’s full brief.

Photo of Art Laffer via  Republican Conference Creative Commons Attribution License 2.0

CTJ Report: Ryan's Budget Cuts Income Taxes for Millionaires by at Least $187,000

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House Budget Committee Chairman Paul Ryan has introduced a budget plan that, if implemented, would reduce revenues so significantly that they would be inadequate to pay for the federal spending under the Reagan administration, let alone the spending required in the years ahead.  The Ryan budget would provide income tax cuts for millionaires averaging at least $187,000 in 2014. The plan would also reduce corporate income taxes and would increase the (already considerable) incentives for corporations to shift profits and jobs overseas.

Each of these three problems is described in detail in a new report from Citizens for Tax Justice. Read the full report.


New Report: Arthur Laffer's Bad Data Misleads Lawmakers

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In an attempt to bolster income tax repeal efforts in states like Oklahoma, Kansas, and Missouri, supply-side economist Arthur Laffer recently teamed up with an Oklahoma-based group to perform an analysis that predicts huge economic gains as a result of cutting state personal income taxes.  A new report from the Institute on Taxation and Economic Policy (ITEP) shows, however, that the analysis is fundamentally flawed.

Bear with us as we guide you through a few methodological weeds.

At issue here is what’s called a regression analysis – a statistical tool used to explain the relationship between one set of variables and another.  In this case, Laffer has attempted to explain how state income tax rates affect economic growth, and, according to Laffer’s regression, the effect is enormous. He shows an inverse relationship between taxes and growth. That is, the lower the tax rates, the greater the economic growth.  Repealing Oklahoma’s income tax, he therefore predicts, will more than double the rate of personal income growth and state GDP growth, and create 312,000 jobs in the process.

If this sounds too good to be true, that’s because it is.

As ITEP’s new report explains, Laffer performs a data sleight of hand to produce his result.  He includes federal tax rates in an analysis supposedly aimed at explaining a state tax system. And as it turns out, this decision hugely distorts the results.  It allows him to include in his overall “tax rate” figures the Bush tax cuts – which caused a 4.1 percent drop in the top federal tax rate.  At the same time, his measure of economic growth just happens to be taken from the early 2000’s, when the country was climbing out of the post 9/11 recession. That is, the economic growth indicators were improving just as the Bush tax cuts were going into effect.

Laffer essentially creates a bogus measure (federal and state tax rates combined) and maps it onto an exceptional moment in economic history.  This allows him to create the illusion that cuts in state tax rates between 2001 and 2003 fueled economic growth later in the decade.  If the analysis is refocused on just state tax rates, the findings fall apart entirely, as the regression no longer shows any relationship between state tax rates and economic growth.

But Laffer’s analysis is plagued by more problems than these.  Also notable, as covered in an earlier report from ITEP, is its complete failure to measure the impact of other factors, from sunshine to oil production, that contribute to state economic growth.  The flaws in Laffer’s analysis are so fundamental that its findings cannot be taken seriously. 

ITEP’s two companion critiques of why Arthur Laffer’s analysis should not be trusted can be found here.

Photo of Art Laffer via Republican Conference Creative Commons Attribution License 2.0

The Top Five Tax Myths to Watch Out for this Election Season

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As the presidential campaigns rev up, taxes are emerging as the defining issue of the election. Unfortunately, a lot of misinformation and myths about taxes are spreading as candidates and commentators look to push their different economic agendas.

To start the election season off, here is a breakdown of the five biggest tax whoppers being told by the candidates and commentators alike.

1) Myth: 47 Percent of Americans Do Not Pay Taxes

Fact: All Americans Pay Taxes

Pundits and politicians will continue to rile up audiences this election season by claiming that half of Americans in the U.S. do not pay any taxes. This talking point is used to deflect questions about why the rich should pay their fair share.

The basis of this claim is data showing that 47 percent of Americans did not owe federal income taxes in 2009, which the recession was at it's peak. The claim ignores the much more regressive federal payroll taxes or state and local sales, income, and property taxes that all Americans pay. The reality is that three-quarters of American households actually pay more in payroll taxes than federal income taxes.

Adding to this, the very reason many low income Americans do not pay federal income taxes is because they benefit from highly effective tax credits like the earned income tax credit (EITC), which incentivize work while providing much needed support to working low and middle class family budgets.

2) Myth: The American People and Corporations Pay High Taxes

Fact: The US Has the Third Lowest Taxes of Any Developed Country in the World

Total US taxes are actually at the lowest level they’ve been since 1958. The US has the third lowest level of total taxes of the Organisation for Economic Co-operation and Development (OECD) countries, with the exception of only Chile and Mexico. President Obama, who is often falsely accused of raising taxes, actually cut taxes for 98 percent of the country on top of temporarily extending the entirety of the Bush tax cuts.

A related claim is that the US has the second highest corporate tax rate in the world. This is misleading because it’s based on the on-paper (statutory) corporate rate rather than the actual (effective) rate that corporations pay. Because of the plethora of corporate tax breaks and loopholes, the US actually has the second lowest coporate taxes as a share of GDP in the OECD. In fact, 30 major corporations, including Verizon, Boeing and General Electric, paid nothing in corporate taxes over the last 3 years.  Rather than cutting corporate taxes, the sensible solution is to pass revenue-positive corporate tax reform.

3) Myth: Cutting Taxes Creates Jobs and Raises Revenue

Fact: Tax Cuts Reduce Revenue And Are Not Associated with Economic Growth

Since the rise of supply-side economics, tax cuts for the rich have been regarded as a magic elixir that could unleash economic growth, while simultaneously increasing government revenue.

The reality is that the tax cuts that have been tried for over 30 years have proven to be a stunning failure in all regards. In fact, history has shown that the tax rate on the wealthy simply has nothing to do with economic growth. Just consider the strong growth that occurred after President Clinton increased taxes versus the dismal growth following the Bush tax cuts.

Not surprisingly, tax cuts have been definitely proven to reduce revenue. Even President Bush's own Treasury Department concluded that tax cuts do not create enough economic growth to to come close to offsetting their costs or raising revenue. The Bush tax cuts cost $2.5 trillion in their first decade and the Reagan tax cuts cost $582 billion.

4) Myth: The US tax system is very progressive because wealthy individuals already pay a disproportionate amount of taxes.

Fact: At a Time of Growing Income Inequality, the US Tax System is Basically Flat.

Conservative commentators and politicians claim that it would be unfair to raise taxes on wealthy individuals because they already pay a disproportionate amount of taxes, usually citing the fact that the top one percent of income earners pay 38 percent of federal income taxes. Once again, such claims ignore the fact that the federal income tax is just one of many taxes that individuals pay.

When you take into account all of the taxes that individuals pay, the truth is that our tax system is relatively flat. The top one percent of income earners receives 20.3 percent of total income while paying 21.5 percent of total taxes and the lowest 20 percent of income earners receive 3.5 percent of total income while still paying out two percent of total taxes.

In other words, wealthy individuals pay a high percentage of taxes because they earn a highly disproportionate amount of income. This is, of course, a consequence of growing income inequality in the United States, which is at a level not seen since before the Great Depression

5) Myth : The “Fair Tax” or a flat tax would be more “fair”

Fact: The “Fair Tax” or a Flat Tax Would Make Our Tax System Even More Regressive

Whether it’s Steve Forbes promoting his flat tax proposal in 1996 and 2000 or Rick Perry and Newt Gingrich in the 2012 presidential race today, the idea to sweep away our current tax system and replace it with a single rate, flat income or national sales tax (called the “Fair Tax”) has become a perennial campaign issue for Republican presidential candidates.

The simplicity of these proposals has much appeal for many Americans, who believe they would make filing taxes less complex and, at the same time, stop wealthy individuals from being able to game the tax system.

A deeper look, however, reveals that both the “fair” and flat tax are very regressive compared to our current system. One recent analysis of a typical flat tax proposal from last year shows that it would result in an average tax increase of $2,887 for the bottom 95 percent of Americans, while those in the top one percent would receive an average tax cut of over $209,562. Furthermore, the Institute on Taxation and Economic Policy’s analysis of the Fair Tax points out the under this system, the sales tax rate would have to be set at a politically and administratively unfeasible rate of at least 45 percent, and, the result would be the bottom 80 percent of American’s paying an average of 51 percent more in taxes compared to our current system.

It’s also important to note that “complexity in the tax code,” which a flat tax system purports to fix, is not caused by our progressive rate structure; rather, it’s the multitude of loopholes and tax breaks, all of which could easily be eliminated while keeping a progressive tax rate structure in place. 

With his recent dramatic rise to second place in the polls, Former CEO of Godfather’s Pizza Herman Cain and his infamous 9-9-9 plan were the belles of the ball at the last two Republican debates.

According to a full analysis by Citizens for Tax Justice, if Cain’s 9-9-9 plan was in effect in 2011 the poorest 60 percent of taxpayers would pay an average of $2,000 more in taxes, while the richest 1 percent of taxpayers would each pay an average of $210,000 less in annual taxes. Making matters worse, the plan would have actually raised $340 billion less in revenue in 2011, meaning that it would make our deficit much worse rather than better.

Since the CTJ analysis was released, the Cain campaign has been dribbling out additional details that change the plan in an ad-hoc fashion as he struggles to defend his tax proposals.

The Washington Post and Bloomberg economic debate on October 11 broke the record for most colorful tax policy jabs, as Former Utah Governor Jon Huntsman said he confused the 9-9-9 plan with “the price of a pizza”, while Minnesota Representative Michele Bachmann observed that “when you take the 999 plan and you turn it upside down, I think the devil is in the details.”

During the CNN Western debate on October 18, the candidates piled on the 9-9-9 plan, arguing that the imposition of a 9 percent new sales tax would ultimately lead to higher taxes because it would give the federal government another revenue stream and could be raised in the future. Interestingly, this particular charge is not borne out by the evidence from a plethora of countries that have imposed consumption taxes, including in Canada where total revenue collected actually went down after the imposition of its value-added tax.

As we have noted a few times, however, the regressiveness of the 9-9-9 plan is no joke. The plan would replace the entire federal tax code with a nine percent national sales tax, nine percent flat income tax, and a nine percent business flat tax. It’s important to note that although the last component is called a ‘business flat tax’, it’s essentially a payroll tax rather than a flat corporate income tax as the name would imply.

For his part, Cain defended the plan saying that reading his campaign’s full analysis of the 9-9-9 plan (which was only made available publically halfway through the CNN debate) would address the “knee-jerk” reactions to his plan.

His team’s own analysis directly contradicted Cain’s point during the debate that his plan does not contain a “value-added tax.” In reality, the report refers to the business flat tax as a “subtraction method value-added tax.”

Another problem for Cain is that his campaign’s own analysis provides no evidence that the 9-9-9 plan would not be extremely regressive, though it does include a previously unmentioned “poverty grant.”

Apparently, Cain himself knows that this “poverty grant” does not allay the concerns about the plan’s regressive impact, because Cain said the next day that he’s “not going to throw the people at the poverty level under the bus” and that he has “already made provisions for that,” but hasn’t “told the public and my opponents” about what those provisions are yet.

And just today Cain announced even more significant changes to his plan. His tax plan has always included “empowerment zones” that were not defined. The Cain campaign now calls these “opportunity zones” because the word “empowerment” sounded too liberal. It’s still unclear how living in or working in an “opportunity zone” would change one’s tax bill under Cain’s plan, but he announced today that these designated areas could be free of building codes and minimum wage laws.

The Washington Post reports that he will also change his individual tax from a single-rate tax to one with several brackets. If true, this means that Cain’s plan no longer consists of three flat 9 percent taxes… which means he has given up the “9-9-9” plan.

Texas Governor and presidential candidate Rick Perry has endorsed both the concept of a flat income tax and the so-called “Fair Tax,” which is a national sales tax. A three-page report from CTJ explains that both of these proposals would result in substantial tax increases for the poor and middle-class and significant tax cuts for the rich.

Read the report.

Photos via Gage Skidmore Creative Commons Attribution License 2.0

House Ways and Means Committee Considers a National Sales Tax Proposal that Would Increase Taxes on Low- and Middle-Income Households

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On Tuesday, the House Ways and Means Committee held a hearing to consider a national sales tax (often misleadingly called a “Fair Tax” by its proponents) and a value-added tax (VAT).

A national sales tax and a VAT are both consumption taxes and therefore both have the same regressive effect. Poor families have little choice but to spend all of their income on consumption while rich families tend to save most of their income. So a tax on consumption will naturally take a much larger share of income from poor and middle-income families than from rich families.

Proposals to implement a VAT take many forms and are usually discussed as a supplement to existing revenue sources. Proponents of a national sales tax, however, are usually describing a very specific proposal (and a specific bill that is reintroduced each year) misleadingly called a “Fair Tax.”

The so-called “Fair Tax” would replace the federal personal income tax, corporate income tax and estate and gift taxes with a 30 percent sales tax. (Proponents use a convoluted calculation to claim that it’s actually a 23 percent rate.) The tax would apply to all types of consumption, including those that would be difficult or impossible to tax in the real world (like rent, health care services, and, oddly, government spending.)

The proposal includes a rebate to all families that proponents claim mitigates the gross unfairness of the sales tax. The rebate would basically be a cash grant that would vary only by family size.

But as Citizens for Tax Justice and its research wing, the Institute on Taxation and Economic Policy (ITEP), have long explained, the national sales tax would be extremely regressive. ITEP’s classic report from 2004 illustrates that the poor and middle class would pay much more under a national sales tax (the so-called “Fair Tax”) in every state. (State-by-state figures are included in the report.)

Unfairness is not the only problem. Proponents of a national sales tax vastly understate what the sales tax rate would have to be in order to replace the revenue collected under the current federal tax system. As the ITEP report explains, sales-tax proponents’ convoluted claim that the national sales tax rate would be 23 percent instead of 30 percent is only the beginning of the distortions. To truly raise as much revenue as the current federal tax system, the theoretical rate would have to be between 45 and 53 percent. And because such a high rate would encourage cheating, the real rate would have to be higher still.

Sales-tax advocates sometimes try to make their plan look less regressive by focusing on the taxes people pay over their entire lifetimes. Professor Laurence Kotlikoff of Boston University used this technique during his testimony before the Ways and Means Committee to argue that the “Fair Tax” can be progressive! The non-partisan Congressional Research Service notes however that the use these sorts of “highly stylized life cycle models” is actually rather controversial.

Kotlikoff seems to be arguing that because everyone is going to use their income for consumption sooner or later, then a tax on consumption is not inherently any more regressive than a tax on income. A flat 30 percent tax applied to spending, he asserts, would have the same effect as a flat 23 percent tax applied to income over the course of someone’s life. Adding the rebate included in the Fair Tax proposal, Kotlikoff and other proponents claim, makes it progressive.

Here’s why this argument is all wrong. First, rich people don’t eventually use all of their income for consumption but leave a great deal of it to others after they die.

Second, a flat 23 percent tax on income would, of course, be more regressive than our current system, which taxes poor and middle-income people at rates below that and rich people at rates above that.

Third, the rebates included in the Fair Tax would not be enough to offset this regressive impact since the current income tax provides negative taxes for many low-income families.

Other advocates of a national sales tax have made even wilder arguments, like the claim that retail prices will somehow not rise even when the new national sales tax is included in the price, or the claim that the IRS would become unnecessary because states would voluntary collect the tax and remit it to the federal government. (This sounds a lot like the failed Articles of Confederacy, which were replaced by the U.S. Constitution in order to give the federal government the power to raise revenues on its own, rather than relying on voluntary contributions by the states.)

Many of the pro-sales-tax arguments were cogently refuted in testimony given by Bruce Bartlett, a former Reagan administration official. Bartlett has written a great deal about the Fair Tax and its history, starting with the original sales-tax proposal by the Church of Scientology.

Photo via John Beagle & Chasing Fun Creative Commons Attribution License 2.0

"Duck, Dodge, and Dismantle" Bill Passes House, Faces Defeat in Senate

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On Tuesday night, the House of Representatives passed the Cut, Cap, and Balance Act (CCBA), which would cap spending at levels set forth in the Ryan budget and allow an increase in the debt ceiling only after the adoption of a constitutional amendment severely restricting future budget and tax measures.

The balanced budget amendment required as a precondition to the debt ceiling increase would be even more extreme than previous incarnations. It would limit spending to about 16.7 percent of gross domestic product and require a two-thirds majority for any increase in revenue, in addition of course to requiring that government spending equal government revenue.

Although the CCBA passed with 234 votes, the tally signaled that the ultimate adoption of a balanced budget amendment in the House is unlikely. A constitutional amendment would require a two-thirds vote to be adopted, and that’s 56 more votes than CCBA received.

A less extreme amendment received 300 votes in 1995.

Fortunately, the CCBA faces “stiff opposition” in the Senate, where it is unlikely to pass at all. (Update: The CCBA was defeated in the Senate a 51-46 vote.)

President Obama has threatened to veto the CCBA if it passes the Senate and labeled the measure an attempt to “duck, dodge, and dismantle.” Nine of the Republican presidential candidates, including current frontrunner Mitt Romney, support the CCBA.

The Center on Budget and Policy Priorities has blasted the balanced budget amendment called for by the CCBA, noting how it would tie the hands of lawmakers to react to changing economic conditions. Five Nobel Laureate economists voiced their opposition to the amendment in a letter to the President and Congress.

The radical spending cap provision would force draconian cuts to essential government programs like Medicare and Social Security, which main stream economists believe would reduce consumer demand and make it far more difficult to create jobs. The amendment would require nearly $9 trillion in cuts over 10 years, which goes well beyond the extreme measures of the infamous Ryan budget.

The proposed amendment would be so damaging that over 240 national organizations have come together to oppose it.

Even the Wall Street Journal editorial page, well known for its extremism and willingness to disregard the facts to support spending and tax cuts, opposes the BBA. The paper notes that not even Ronald Reagan’s policies would have passed muster under the radically stringent amendment.

Former Republican Senator Judd Gregg summed up the debate over the CCBA perfectly, writing, “Lord save us from the well intentioned and those who are trying to score political points or raise money” by pursing this form of “conservative misdirection.”

Photo via Speaker Boehner Creative Commons Attribution License 2.0

As Tax Repatriation Gains Steam, Important Questions Need Answering

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On June 15, 2011, think tank Third Way held the event "The Next Stimulus? Bringing Corporate Tax Dollars Home to Work in America" supporting a tax repatriation holiday. When the panel was opened up for questions, they faced tough questioning from critics of the repatriation holiday, not all of which they could answer adequately.

Listen to an excerpt of the questions and answers here:

Questioning on Repatriation Holiday by taxjustice

Question 1: Steve Wamhoff, Legislator Director, Citizens for Tax Justice (0:00)
I just want to clarify your views on some of the other research that has been done. I think what your saying is that the bipartisan Congressional Research Service was wrong in issuing it’s study that said the last time this was tried it did not create jobs. And that the non-partisan Joint Committee on Taxation was wrong recently when it put out it’s analysis saying that if we repeat this repatriation holiday it will cost $79 billion over 10 years partially because some of those profits would’ve been brought back anyway, partially because ultimately corporation will shift even more profits offshore. Meaning even if your only goal is to get more of these profits to the US, even in that limited goal you fail on that. So do I understand you correctly that you think that the Congressional Research Service and the non-partisan Joint Committee on Taxation are incorrect and that Congress should ignore these analyses?

For the Congressional Research Service Analysis click here.

For the Joint Committee on Taxation Analysis click here.

Question 2: Richard Phillips, Research Analyst, Institute on Taxation and Economic Policy (3:40)
I’d like to ask a question based on this point we’re just talking about. Wouldn’t a better alternative to a tax repatriation holiday be to end deferral of offshore profits and go to a system where all companies have to pay taxes on offshore profits?

For more information on moving to a full worldwide system and ending deferral check out Citizens for Tax Justice's report here.

Question 3: Nicole Tichon, Executive Director, Tax Justice Network USA (6:22)
I think Mr. Rogers you said that we didn’t have as much offshore [then] as we do today in your comments. Doesn’t that speak to the issue that this actually incentivizes companies to keep their money offshore if they think they can just have a holiday every 5 or 6 years?

For more information on Tax Justice Network USA's take on the repatriation holiday see their op-ed in the Huffington Post.

Question 4: Scott Klinger, Tax Policy Director, Business for Shared Prosperity (9:56)
I think one of you noted that some companies are devoting a lot of effort to accounting way of moving profits offshore, through things like regressive transfer pricing. Some of our small business members think that that’s a pretty big loophole that needs closing that’s caused this swelling of offshore assets. Would you be in favor of looking at closing some of the tax haven loopholes and tightening transfer pricing restrictions as part of this repatriation bill?

For more information on Business for Shared Prosperity's take on the repatriation holiday see their website.

Most Extreme Balanced-Budget Amendment Ever Moves Forward in the House

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Last Wednesday, the House Judiciary Committee approved H.J.Res 1, the newest incarnation of the potentially disastrous balanced-budget amendment. As passed out of committee, the balanced-budget amendment is more extreme than versions proposed in the past, as it would not only require that government outlays equal receipts, but would also limit spending to about 16.7 percent of gross domestic product and require a 2/3’s majority for any increase in revenue.

In its comprehensive rebuke of the balanced-budget amendment, the Center on Budget and Priorities (CBPP) explains that the amendment has potential for “serious economic harm,” as it would force cuts in automatic stabilizers like unemployment insurance during recessions when they are needed most. It’s precisely for this reason that more than 1,000 economists, including 11 Nobel laureates, signed a statement in 1997 opposing the balanced-budget amendment that Congress nearly approved that year.

The spending cap would require catastrophic cuts to government services even when the country is economically prosperous. The amendment would cut spending to 18 percent of the previous year’s GDP, which is typically about 16.7 percent of the current year’s GDP.

As CBPP explains, the required cuts would go well beyond those in Rep. Paul Ryan’s plan and be more on the scale of the much more extreme Republican Study Committee’s plan, which includes cutting in half the Medicaid, Supplemental Nutrition Assistance Program (SNAP, formerly food stamps), and Supplemental Security Income programs, just to name a few, on top of dramatic cuts to Medicare and Social Security.

Fortunately, passage of the amendment is no easy task. It requires a 2/3’s majority of both chambers of Congress and ratification by 3/4’s of the states. A test vote in the Senate on a resolution expressing support of a balanced-budget amendment in March garnered only 58 of the 67 votes required, showing that proponents of the amendment may have an uphill fight. On the other hand, the 1997 amendment came within one vote of approval in the Senate.

Radical anti-tax and Tea Party groups believe they can change this equation by pushing the amendment as part of their new “Cut, Cap, Balance” plan, which calls on lawmakers to require the passage of the amendment as a condition for increasing the debt ceiling. In fact, conservative groups are pushing Congressional Republican’s to hold off having a vote on the amendment, knowing that the threat of the debt ceiling vote is their best opportunity to pass it.

Lawmakers need to stand up to these groups who are attempting to hold our economy hostage (by not raising the debt ceiling) in order to pass a radical budget amendment as a Trojan Horse for draconian service cuts.

Former Republican Senator Judd Gregg recently commented, “Lord save us from the well intentioned and those who are trying to score political points or raise money” by pursing this form of “conservative misdirection.”

What Is Congressman Jared Polis Thinking?

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The latest idea from Congressman Jared Polis (D-CO) is to protect the ability of tax professionals who have thought up creative tax avoidance schemes to get as much profit from these schemes as they possibly can.

Rep. Polis first made a name for himself in the tax world during the health care reform debate, when he drafted and circulated a letter that was signed by several freshmen House Democrats who opposed the surcharge that the Democratic caucus was considering to help finance health care reform.

Recently, Polis joined a group of five lawmakers in cosponsoring an amnesty for corporate tax dodgers, which he and other proponents call a “repatriation holiday.”

Now Rep. Polis is going to bat for lawyers and accountants who want to patent the creative tax avoidance schemes they have dreamed up. Tax strategy patents have to be one of the worst ideas of the last couple of decades. These patents allow tax professionals to obtain a patent on a particular tax planning strategy and charge royalties to taxpayers to allow them to use it.

The Senate has passed a major patent bill (H.R. 1249, the America Invest Act) that includes a provision banning the issuance of patents for tax strategies. Colorado representative Jared Polis has offered an amendment changing the effective date of the ban to allow patents to be issued in cases where the applications have already been filed. About 160 tax strategy patent applications are pending. A spokesman for the congressman said that it was a matter of protecting applicants that had already revealed their strategies.

No one should be able to have a monopoly over part of the tax code and taxpayers shouldn't have to pay royalties or defend themselves against lawsuits for legally using the tax laws. None of these types of patents should ever have been issued and there's no good reason to allow the patent office to issue any more.

Photo via Studio08Denver Creative Commons Attribution License 2.0

CTJ Figures Used in Budget Debate Show Ryan Plan Would Give Huge Tax Cut to Millionaires

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conrad ctj chart.gifOn Wednesday, May 25, Senator Kent Conrad, chairman of the Senate Budget Committee, delivered comments on the Senate floor about the budget, the deficit and why he rejects the House budget plan from Rep. Paul Ryan.

Senator Conrad cited new figures from Citizens for Tax Justice showing that taxpayers with income exceeding a million dollars would enjoy an average tax cut of at least $192,500 in 2013 if Congressman Paul Ryan's budget plan was enacted. Taxpayers with income exceeding $10 million in 2013 would get an average tax cut of at least $1,450,650 under the Ryan plan.

Conrad explains the obvious math that a deficit problem isn't solved by reducing revenues, and that it especially makes no sense to reduce revenues by cutting taxes for the super rich. His graphic illustrates the analysis CTJ provided. The Senate ulitmately voted against the House plan 57-40.

Watch Senator Conrad's remarks below:

Any rational proposal to balance the federal budget would rely on a mix of spending reductions and revenue increases. But, as explained in a new CTJ report, the House Republican budget plan relies on draconian spending cuts and actually reduces revenue.

The plan is motivated not by a desire to balance the budget but rather by the ideological goal of reducing the size of government to something that would be unrecognizable to Americans today.

The plan’s author, House Budget Committee Chairman Paul Ryan, is intentionally vague about his plans to overhaul the tax system. That may be because his previous attempt to explain how he would reduce the top income tax rate to 25 percent made it clear that the result would be a big tax increase for all income groups except the richest ten percent.

Read the report.

Not Just a Tax Cut: CTJ Exposes the Folly of John Boehner's "CutGO"

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Presumptive House Speaker John Boehner recently confessed that "what Washington sometimes calls 'tax cuts' are really just poorly disguised spending programs that expand the role of government in the lives of individuals and employers."  We couldn’t agree more.  What’s odd, though, is that Rep. Boehner has proposed moving Congress toward a “cut-as-you-go” system (or “CutGO”) that would actually make it easier for the government to overspend on these types of programs.  The folly of CutGO, and several much more sensible solutions, are the topic of this recent op-ed from Citizens for Tax Justice.

Read the op-ed

Tell Congress: Don't Cut Off Help for the Unemployed and Slash Taxes for Millionaires!

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Congress is about to make a choice that will define this moment in history: Support those unemployed by this recession, or give tax cuts to millionaires.

Your Senators need to hear from you today! Please call right now. Tell them you're a constituent. Tell them it's outrageous for lawmakers to say we can't afford to extend unemployment insurance for people laid off through no fault of their own — even as these same lawmakers support extending the Bush tax cuts for the very richest Americans.

We don’t have a choice — if Congress fails to continue the unemployment programs, 2 million people in December alone will be left with no income. In the next five months it will be almost 6 million people. Local economies will be devastated if the unemployed have no income to spend in local stores.

Click on the link below and all the information you need to make the call will be provided.

Call Now

Extending Tax Cuts for the Rich Is Only the Beginning for the Tea Party

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While attending the second annual 9/12 Tea Party rally in Washington, one could not escape the focus by speakers and participants on tax policy. If there was one overarching theme of the rally, it was that the Obama Administration has sought to dramatically increase the size of the federal government by proposing and enacting dramatic increases in taxes and government spending. (For a reality check, remember that President Obama cut taxes for 98 percent of working Americans last year, proposes to leave the Bush tax cuts in place for 98 percent of taxpayers this year, and enacted a health care reform that reduces the deficit.)

What Tea Party rally attendees support is awfully murky, but what they oppose is clearer. They are against the healthcare reform, the bailouts, the recovery act that created so many jobs, cap and trade, and allowing any of the Bush tax cuts to expire. This opposition was taken to an extreme by some of the individual Tea Party attendees whose signs argued that allowing the tax cuts to expire is equivalent to sexually abusing children or that Obama’s expansion of government made him comparable to Hitler, the Soviet Union, or just a plain old socialist.

Deftly mirroring the anger of the crowd, Rep. Mike Pence (R - IN) elicited enormous cheers saying that “No American should face a tax increase in January, not one. We will not compromise our economy to accommodate the class warfare rhetoric of the American left or of this Administration.” In reality, it's the possibility of a Republican filibuster of President Obama's tax plan that might lead to all Americans having more income taxes withheld from their paychecks starting in January.

The disconnect from reality doesn't end there. The anti-tax rhetoric was not followed by substantive and fundamental calls for equally large decreases in government spending. There were no signs or speakers calling for the enormous cuts to Medicare, Social Security, or Medicaid that would be required to make lower taxes possible. There was certainly no articulation of what cuts would be needed to make up for the $700 billion in lost revenue if the Bush tax cuts for the wealthiest Americans were extended.

The sponsors and speakers of the rally also promoted extremely regressive and radical changes to the tax system. Freedom Works, the chief sponsor of the event, advocates replacing the current system with a single flat rate income tax, which was promoted by its representatives who spoke at the rally. In addition, several speakers also alluded to the need for a single national sales tax, which is also known as the "Fair Tax," to "fix" our tax system. Echoing both sentiments without specifying one over the other, the Tea Party-backed “Contract From America” states that the current tax system should be replaced with a single rate tax set forth in a law that is not longer than the Constitution.

As Citizens for Tax Justice demonstrated over and over and over again in the 1990’s, the single rate flat income tax proposed by Dick Armey (the leader of Freedom Works) would dramatically raise taxes on all but the richest Americans while also massively increasing deficits unless the single rate was much higher than proposed.

Similarly, the Institute on Taxation and Economic Policy showed in its 2004 analysis of the "Fair Tax" that it would actually increase taxes by an average of $3,200, or roughly 50%, for the average individual in the bottom 80% of income earners. In addition, in order to raise the amount of revenue currently being spent, the rate would have to be between 45% and 53%, rather than the 23% that flat tax supporters advocate.

While calls for the flat or "fair" tax incited some excitement, the crowd seemed more enthusiastic about basic calls for lower taxes or a simpler tax system rather than the radical tax changes advocated by the rally’s sponsors.

In both opposing President Obama’s policies and advocating for a regressive tax overhaul, the Tea Party leaders are attempting to get away with promising lower taxes and better government without facing the real consequences of specific policies.

On Tuesday, CTJ participated in a press conference with reporters, along with House Majority Leader Steny Hoyer and the Center for American Progress, to discuss the House Republican Study Committee's so-called "Economic Freedom Act," H.R. 5029. Afterwards, CTJ was  misquoted as saying Congress would be "spinning its wheels" if it enacted this bill. What CTJ actually said, and what its new report on H.R. 5029 concludes, is much harsher than that.

The report finds that the plan would cost $7 trillion over a decade. If one adds the cost of extending the Bush tax cuts (which the sponsors of this plan clearly support) the cost would come to around $10 trillion over a decade. By the second year it's in effect, about 62 percent of the benefits would go to the richest 1 percent of taxpayers, and about three fourths would go to the richest 5 percent.

Read the report.

Arlen Specter, Proponent of Regressive "Flat Tax," Loses Primary Battle

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Arlen Specter, a long-time U.S. Senator for Pennsylvania who recently switched from the Republican party to the Democratic party, lost his primary battle on Tuesday against Representative Joe Sestak.

Since 1995, Senator Specter introduced legislation to create a federal “flat tax” in every session of Congress, including this session.  This single-rate tax would replace the existing progressive personal income tax, as well as the corporate income tax and estate tax.

A recent report from Citizens for Tax Justice found that Specter's proposal would cut taxes for the richest five percent of taxpayers and raise taxes for everyone else.

The Specter plan was based on the “Flat Tax,” first proposed in a 1983 book by Robert Hall and Alvin Rabushka. The Flat-Tax authors wrote that it “will be a tremendous boon to the economic elite” and also admitted that “it is an obvious mathematical law that lower taxes on the successful will have to be made up by higher taxes on average people.”

Sestak will go on to face Republican Pat Toomey, a former Representative and a former president of the right-wing Club for Growth.


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Former President Bill Clinton Endorses Regressive US National Sales Tax at Billionaire’s Conference, Recites Bogus Claim about Sales Tax Helping US Trade

Former President Bill Clinton recently endorsed enactment of a regressive U.S. national sales tax — a.k.a. a value-added tax or VAT. In doing so, he parroted a long-discredited argument that a sales tax would curb imports into the United State and encourage exports.

Clinton made his remarks in an interview at an April 28, 2010 conference sponsored by the Peterson Institute for International Economics, one of many organizations founded by Peter G. Peterson, a billionaire investment banker who has long advocated big cuts in Social Security and lower taxes on capital gains (i.e., on himself).

According to Clinton, “the one thing that blue collar America should like about [a sales tax] is it’s good for exports and it in effect, it doesn’t allow quite so much subsidy of imports — when other countries subsidize their production for export at least they get slapped with a value-added tax when it comes in here.”

Clinton seems to have failed to notice a critical flaw in his argument.

It’s true, as Clinton says, that American consumers would pay a U.S. national sales tax when they buy imported products. But that’s no help to U.S. manufacturers. After all, Americans would have to pay the same sales tax when they buy products made in the USA. How does that give an advantage to U.S.-made goods?

As for exports from the U.S., well, obviously Americans wouldn’t pay a U.S. sales tax on products sold abroad (i.e., Americans won’t be taxed on products they don’t buy). But that doesn’t help U.S. exports. How could it? (Meanwhile, foreign customers pay whatever sales taxes their own governments impose, whether the products are American-made, made in their own countries, or elsewhere.)

The bottom line is that a national sales tax would have no effect, positive or negative, on U.S. exports or imports.

As the congressional Joint Committee on Taxation put it in a report back in 1991, “even though imports are subject to tax, U.S. buyers’ choice between imported and domestically produced [goods] is not altered. Similarly, foreign consumers’ choice between goods produced in the U.S. and goods produced in their own country is not altered even though U.S.-produced goods [aren’t subject to U.S. sales tax] when exported.”

Think of it this way: Chinese companies export hundreds of billions of dollars a year in products to the United States. If the products are sold in California, customers will pay a sales tax of as much as 10 percent. Of course, they’ll pay the same sales tax if they buy products made in the United States. Conversely, Delaware has no sales tax, so Delaware customers pay no sales tax on either Chinese or American products. Is California at a competitive advantage versus Delaware because it has a steep sales tax? Of course not.

Everyone agrees that a national sales tax, like state and local sales taxes, would be hugely regressive, hitting the poor and the middle class hard, and the rich very lightly. Clinton knows this, and he does vaguely suggest implausible “adjustments in the other tax bills to make it — to keep the progressivity of our tax system.” But ultimately, his message to middle- and low-income Americans is simple and harsh: suck it up. “It’s a big leap,” Clinton said. “But if you look at it, people in Europe — just like any other sales tax — they just get used to payin’ it.”

By the way, in the same report cited above, the Joint Committee on Taxation noted that “providing a realistic number of employees to administer a U.S. VAT could mean a near-doubling of the size of the IRS.” That’s an extraordinary amount of added paperwork, complexity and bureaucracy. For what? A more regressive tax system?

We don’t need and shouldn’t tolerate a new and grossly unfair sales tax, whose alleged benefits to U.S. trade are nonexistent. Instead, we should attack the budget deficit by making our tax system fairer, in particular by closing unwarranted and hugely costly income tax loopholes that unjustly favor big corporations and the wealthy. Bill Clinton ought to know better.

It's difficult to design a tax plan that will lose $2 trillion over a decade even while requiring 90 percent of taxpayers to pay more. But Congressman Paul Ryan has met that daunting challenge. A new CTJ report shows that Congressman Ryan's budget plan has nothing to do with balancing the budget, but has everything to do with creating a tax system that takes more from the poor and less from the rich.

If the extensive tax proposals in his plan were fully in effect in 2011:

  • The federal government would collect $183 billion less in 2011 and more than $2 trillion less over a decade than it would if Congress adopted President Obama's tax proposals.

  • Federal taxes would be lower for the richest ten percent, and higher for all other income groups, than they would be if President Obama's proposals were enacted.

  • The bottom 80 percent of taxpayers would pay about $1,700 more, on average, than they would if President Obama's proposals were enacted.

  • The richest one percent would pay about $211,300 less on average than they would if President Obama's proposals were enacted.

  • The poorest 20 percent would pay 12.3 percent of their income more than what they would pay under the President's proposal, while the richest one percent would pay 15 percent of their income less than they would pay under the President's proposal.

Read the report.

Citizens for Tax Justice has a new report on the "flat tax" proposal introduced in each session of Congress since 1995 by Senator Arlen Specter of Pennsylvania. This single-rate tax would replace the existing progressive personal income tax, as well as the corporate income tax and estate tax.

The Specter plan is based on the “Flat Tax” first proposed in a 1983 book by Robert Hall and Alvin Rabushka. The Flat-Tax authors wrote that it “will be a tremendous boon to the economic elite” and also admitted that “it is an obvious mathematical law that lower taxes on the successful will have to be made up by higher taxes on average people.”

Our analysis of the Specter plan confirms this is true. We find that Senator Specter’s flat tax will result in:

- Enormous tax cuts for the richest five percent of taxpayers, including an average tax cut of $209,562 for the richest one percent in 2010.

- Tax hikes for all other income groups. The bottom 95 percent of taxpayers would pay an average of $2,887 more in federal taxes in 2010.

- Low-income Americans would lose the refundable credits that they receive under the current income tax.

- The form of income that mostly flows to the wealthy — investment income — would be exempt from the personal income component of the flat tax, while all compensation for work, including wages and even employer-provided health care benefits, would be taxed.

- There would be little simplification in taxes for the majority of Americans.

Read the report.

When anti-tax activists and lawmakers complain that Congress and the President are pursuing policies that will cause taxes to be too high, the first question anyone should ask is: Compared to what? What exactly is the alternative to allowing the Bush tax cuts to end (at least for the rich) and finding new ways to raise revenue?

This week the House GOP showed us what the alternative is and it's frightening. On Wednesday, the ranking Republican on the U.S. House of Representatives' Budget Committee, Congressman Paul Ryan (R-Wisc.), released a budget plan which he argues is a more fiscally responsible alternative to the budget outline proposed by President Obama and the similar budget resolutions approved by both chambers last night. His proposal is apparently an update of the plan that House GOP leaders introduced last week and is different in some key respects.

The revised House GOP budget plan would move towards cutting and privatizing Medicare, convert Medicaid into limited block grants to states, and even cut Social Security benefits for some retirees. The plan would deeply cut the relatively small amount of government spending devoted to non-military, non-mandatory programs by refusing to adjust the budgets of these programs for inflation and population growth for five years. The House GOP plan would repeal the recently enacted economic stimulus law (the American Recovery and Reinvestment Act of 2009, or ARRA) a year before its expiration at the end of 2010.

A report from Citizens for Tax Justice compares the income tax proposals in the House GOP plan to the income tax proposals in the House Democratic plan in 2010, and finds that:

  • Over a third of taxpayers, mostly low- and middle-income families, would pay more in taxes under the House GOP plan than they would under the House Democratic plan in 2010.
  • The richest one percent of taxpayers would pay $75,000 less, on average, in income taxes under the House GOP plan than they would under the Democratic plan in 2010.
  • The income tax proposals in the House GOP plan, which is presented as a fiscally responsible alternative to the Democratic plan, would cost over $225 billion more than the Democratic plan's income tax policies in 2010 alone.

Read the report.

Yesterday, the Republican leadership in the U.S. House of Representatives released the outlines of a tax and spending plan that they argue is a more fiscally responsible alternative to the budget outline proposed by President Obama and the similar budget resolutions working their way through the House and Senate.

A new report from Citizens for Tax Justice compares the income tax proposals in the House GOP plan to the income tax proposals in the President's plan and finds that:

  • Over a fourth of taxpayers, mostly low-income families, would pay more in taxes under the House GOP plan than they would under the President's plan.
  • The richest one percent of taxpayers would pay $100,000 less, on average, under the House GOP plan than they would under the President's plan.
  • The income tax proposals in the House GOP plan, which is presented as a fiscally responsible alternative to the President's plan, would cost over $300 billion more than the Obama income tax cuts in 2011 alone.

Read the report.


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The financial collapse and the economic downturn of the past months begs the question of whether the economic policies of the Bush administration will be repudiated. Supply-side economics, the ideology that has driven the economic agenda of President Bush, has survived for years despite its complete failure in practice. For example, some anti-tax lawmakers and activists now claim that the answer to the economic crisis is... more tax cuts for investors. But now that we have seen two presidents over the last thirty years run up massive budget deficits through supply-side tax cuts that did not seem to make the economy any stronger, there is reason to think that politicians may finally start to see the failures of this ideology.

The Supply-Side Theory

This issue of the Tax Justice Digest explores supply-side economics, which is generally the idea that policies, particularly tax cuts for investment or for those who invest, can change incentives to invest in a way that will yield huge increases in economic growth. Most incredibly of all, this resulting economic growth is often argued to result in so much new tax revenue that the tax cut can be cost-free or can even lead to increased revenues. Keep in mind there is no actual evidence that tax cuts can pay for themselves or actually lead to increased revenues. The Treasury Department under President Bush issued a report finding that there was no evidence for this, and Bush's current budget director has also said that tax cuts do not pay for themselves or lead to increased revenue. And yet, President Bush and many of his allies (including, recently, John McCain) have stated numerous times that tax cuts cause increases in revenue.

The Laffer Curve

This idea of revenue increases resulting from tax cuts -- the crown jewel of the supply-side belief system -- could of course be true in some conceivable context. The concept is illustrated by the Laffer curve, named after its creator, which is basically a diagram showing that tax hikes will increase revenues only up to a point, after which tax hikes will actually lead to a decrease in revenue because incentives to work and invest are so severely damaged. If profits are already taxed at 95 percent, raising that rate might, in fact, lead to less revenue, as people realize there is little to be gained from investing or running a business and there are consequently less profits to be taxed. Lowering that rate could instead lead to more business activity, more business profits, and even more taxes paid on business profits. (Or at the very least, more business profits might be reported, leading to more taxes paid.)

But supply-siders often take this idea, which might apply in very few situations in real life, and apply it to the United States today.

While this is the most bizarre form that supply-side economics takes, even the ideology's more mainstream adherents seem to believe that tax cuts will lead to economic growth that is so great that higher budget deficits and starved public services should be considered nothing more than a minor side-effect.

Lawmakers and Media: The At-Risk Community

When a person brings up the idea that a tax cut might lead to increased revenues, serious economists laugh, but lawmakers and reporters often find themselves strangely mesmerized. An idea that justifies offering constituents both a tax cut and higher spending on services is like a narcotic for some lawmakers, impossible to resist even though its ill effects are obvious to all observers. Meanwhile, reporters who find economics to be outside of their area of expertise give uncritical and expansive coverage to an idea that almost no serious economist actually believes in.

How It Began

The supply-side movement began with, to put it mildly, a colorful cast of characters, as Jonathan Chait describes in his excellent book, The Big Con. One is George Gilder, whose book Wealth and Poverty, helped launch the movement. He is also known for such quotes as "There is no such thing as a reasonably intelligent feminist," and he is a strong proponent of ESP (extrasensory perception). Another is Jude Wanniski, who wrote another important book (The Way the World Works) and preached that high taxes led to all evils, including Hitler's decision to invade his neighbors. He later compared Slobedan Milosevic to Abraham Lincoln and insisted that Saddam Hussein never gassed his people.

Then, of course, there is Arthur Laffer, who met with Wanniski and Dick Cheney one day, drew his diagram on a cocktail napkin and convinced Cheney that tax cuts could result in increased revenues. The Laffer curve was born, and progressives have been trying to throw it back into the fires of Mordor ever since.

Rather than dwelling on these interesting characters, we have decided to provide the following information for those who would like to know what supply-side economics is about, how it has influenced policy-making and how we can respond to it.

Two New Reports Explore the Strange Allure of Supply-Side Economic Policies and the Overwhelming Evidence of Their Failure

Supply-Side Ideas Influence the Presidential Race

Isn't It Time to Reassess the Bush Tax Cuts for Investment Income?

Supply-Side Disasters in the Making at the State Level

Two recent reports help explain supply-side economics, its logical inconsistencies and its failures in practice. One is "Take a Walk on the Supply Side: Tax Cuts on Profits, Savings, and the Wealthy Fail to Spur Economic Growth" by Michael Ettlinger of the Center for American Progress and John Irons of the Economic Policy Institute. The report spends some time pointing out how supply-side economics is questionable even on a theoretical level. Do we really know that tax cuts always result in more work or more savings? What if you have a certain earnings goal or savings goal and you have to work or save less to reach that goal as the result of a tax cut? And how do we know more savings would mean more investment? Couldn't it lead to investment overseas, or maybe lower consumption which could in turn be harmful to the economy?

But things get even more interesting when Ettlinger and Irons look at the empirical evidence to compare economic performance after supply-side tax cuts during the Reagan and Bush II eras to economic performance after the deficit-reduction policies in the Clinton era. They look at the evidence in two ways: first, measuring economic indicators in a period immediately following the introduction of the new tax policy, and second, measuring economic indicators during the first economic expansion to take place after the introduction of the new tax policy. Investment is found to be stronger during the Clinton era than during the two supply-side eras. The same goes for GDP growth and several other indicators.

The second report is "Tax-Cut Snake Oil: Two Conservative Theories Contradict Each Other and the Facts," by Jeffrey Frankel at the Economic Policy Institute. Frankel adds to our understanding of the supply-side theory and the evidence that has discredited it after the tax cutting under Reagan and Bush II. He also adds a lot of interesting information about the key players involved. For example, he provides quotes from economists who worked for Reagan and George W. Bush saying that tax cuts cannot lead to increased revenues, as well as quotes of their bosses saying that they can.

But Frankel describes another development in the anti-tax movement that sits very strangely with supply-side economics: the "Starve the Beast" hypothesis put forward by many conservatives that cutting taxes will reduce revenues, run up deficits, and force politicians to shrink government. (This is put forward by those who believe shrinking the government would be inherently good.)

Frankel points out that it's not at all obvious why lawmakers would feel more constrained from spending under such a regime. Clearly, if constituents are told that increased spending might require tax increases now to pay for it, that might give some pause. But if taxpayers are told that increased spending will result in some future tax increase, that is surely less threatening to constituents and those who depend on their votes, and so there might be less pressure on lawmakers to limit spending. This is exactly what happens under the supply-side regime as deficits soar as a result of tax cuts. And of course, as Frankel points out, the Starve the Beast hypothesis should now be discredited by the explosive spending in the Reagan and Bush II eras.

Most amazing of all is that these two ideas -- cutting taxes is OK because it will lead to increased revenues, and, cutting taxes is good because it will lead to decreased revenues and thus smaller government -- somehow coexist within the same anti-tax movement.

Supply-Side Ideas Influence the Presidential Race

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Presidential candidate John McCain has made statements in the last year indicating that he believes tax cuts pay for themselves. Whether he actually believes this and how he came to this conclusion is all very murky. Senator McCain famously voted against the Bush tax cuts in 2001 and 2003 and has now reversed himself by favoring a permanent extension of all the Bush tax cuts even for the richest Americans, plus a lower rate for corporations and other cuts for business. When asked to explain his previous votes and his reversals, McCain has always given baffling and incoherent answers.

John McCain now says that he opposed the Bush tax cuts in 2001 and 2003 because he thought they needed to be accompanied by cuts in spending to keep the budget deficit under control. Actually, what he said in 2000 about then-Governor George W. Bush's tax plan was, "I don't think the governor's tax cut is too big-it's just misplaced. Sixty percent of the benefits from his tax cuts go to the wealthiest 10% of Americans-and that's not the kind of tax relief that Americans need."

But even if we take his word that he was concerned about the budget, wouldn't that only mean he would be even more opposed to the Bush tax cuts now that we have deficits instead of surpluses? He explained at a debate on September 5 that he voted against the 2001 and 2003 tax cuts because they did not include cuts in spending, which he thought were also necessary. But then he claims that "it's very clear that the increase in revenue we've experienced is directly related to the tax cuts that were enacted, and they need to be permanent."

McCain claims he went from worrying about how tax cuts might damage a budget in surplus to believing tax cuts will help a budget that is in deficit. His conversion may be inexplicable, but it's very real. His tax plan would extend the Bush tax cuts for the rich and slash taxes for corporations, which would benefit stock-holders. He would create an alternative "simplified" tax that would generally make the tax code more complicated. Since it would be voluntary, people would calculate their taxes under the regular system and under the alternative system to see which yields a lower tax. Our estimates show that it would cost in the neighborhood of $98 billion in 2012, half of which would go to the richest one percent.

During his 2000 presidential campaign, Senator McCain said, "There's one big difference between me and the others -- I won't take every last dime of the surplus and spend it on tax cuts that mostly benefit the wealthy. I'll use the bulk of the surplus to secure Social Security far into the future to keep our promise to the greatest generation."

So McCain once said he won't spend an entire budget surplus on tax cuts for the wealthy, but apparently he has no problem cutting taxes for the wealthy when the budget is in deficit. We would like to say this reversal is surprising but, sadly, we've seen it before.

What about McCain's opponent? One would hope that presidential candidate Barack Obama would represent a clean break with the supply-side thinking of the past, but the reality is slightly more complicated. During his speech at the Democratic convention in Denver, Senator Obama said, "Change means a tax code that doesn't reward the lobbyists who wrote it, but the American workers and small businesses who deserve it." Curiously then, Senator Obama proposes to keep in place a loophole for corporate dividends created in the Bush years. President Bush and his allies in Congress enacted a special loophole for dividends (a top rate of 15 percent) that will expire at the end of 2010 along with the rest of the Bush tax cuts if Congress simply does nothing. Instead of allowing the dividends loophole to completely expire, Senator Obama wants dividends to be taxed at a top rate of 20 percent for, roughly, the richest two and a half percent of Americans and a top rate of 15 percent for everyone else.

At the time the dividend tax cut was enacted in 2003, Michael Kinsley pointed out that "[u]nlike, say, interest on a savings account or money-market fund, which are taxed every year, corporate profits are allowed to compound tax-free until they are paid out as dividends or the stock is sold. A notorious quirk in the tax law wipes out a lifetime of taxes on stock that is passed on to your heirs. Dividends and capital gains are also exempt from the Social Security and Medicare taxes. One way or another, it is the rare dollar of corporate profits that bears a tax burden heavier than the burden on an employee's wages."

True, Senator Obama does want to allow tax rates on ordinary income to revert to the rates that existed under Clinton for the very richest Americans, and he will allow the tax subsidy for capital gains to shrink back to the level that existed under Clinton (a top rate of 20 percent instead 15). But apparently Obama agrees with President Bush that taxing dividends just like the income most people receive as wages would be either unfair, or damaging to the economy, or both.

Of course, Obama certainly has never claimed that tax cuts can pay for themselves. But the less insane aspects of the supply-side ideology have influenced some of what he has said about taxes. In particular, he seems to believe that not allowing most Americans to keep the taxes they received under Bush would be bad for the economy. He told the multitudes in Denver, "I will -- listen now -- I will cut taxes -- cut taxes -- for 95 percent of all working families, because, in an economy like this, the last thing we should do is raise taxes on the middle class." We could probably think of all sorts of things that would be the "last" thing we want to do in an economy like this (cutting back on education spending, allowing the health care system to plod along in its current inefficient manner) and that would be worse than having a higher tax bill.

So Obama is certainly not a supply-sider, but he's not exactly facing down the supply-siders either. Allowing everyone but the richest 2 and a half percent to keep the Bush tax cuts (and even extending some cuts for these very richest taxpayers) is not exactly a clean break with the failed supply-side policies of Bush. At the same time, his tax cuts would be aimed at the middle-class and would make the tax code more progressive overall, which would be an enormous improvement over the policies of the current president.

(See CTJ's recent report, "The Tax Proposals of Presidential Candidates John McCain and Barack Obama.")

New Reports on McCain, Obama, and Tax Cuts from Citizens for Tax Justice

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Citizens for Tax Justice has recently released several reports on the tax issues being debated during this presidential election season.

1. The Tax Proposals of Presidential Candidates John McCain and Barack Obama

Last week CTJ released this 15-page report on the tax plans offered by the two candidates. The report includes estimates of the distributional and fiscal effects of both candidates' plans in 2012, a year when almost all of the provisions of either plan would be in effect if enacted. These estimates include the effects of making the Bush tax cuts permanent (partially, in Obama's plan, and almost entirely, in McCain's plan) as well as their proposed changes to the AMT, corporate tax, and the other tax changes they propose.

The report finds that Obama's tax plan would give a larger tax cut, on average, to taxpayers in the bottom 60 percent of the income distribution than McCain's plan. Interestingly, while Obama's plan would give a small tax cut, on average, to the richest one percent, McCain's plan would give this group an average tax cut that is 43 times as large.

2. Obama and McCain Propose New Stimulus Plans, Including More Tax Breaks

In addition to the tax plans that both candidates have been promoting for months, McCain and Obama both have recently proposed new, temporary tax cuts as a way to stimulate the economy and help people avoid the consequences of the downturn in the market. As this report explains, neither of the candidates' tax cuts seem very promising when it comes to helping Americans who are genuinely struggling, but McCain's proposals are particularly alarming because their benefits would be heavily targeted to the rich. He proposes to slash the capital gains rate, which would further bias the tax code against work and in favor of people who live off their wealth, and we estimate that over three fourths of the benefits would go to the richest one percent.

McCain also proposes that withdrawals of up to $50,000 from 401(k)s and IRAs, which are currently taxed as ordinary income, be subject to a top income tax rate of 10 percent. This obviously does nothing for a senior whose income is too low to trigger income tax liability or whose taxable income does not exceed the 10 percent bracket. But it would be a real boon for a very rich senior who would otherwise pay income taxes at a rate of 35 percent on such a withdrawal.

3. McCain's Proposal to Increase the Tax Loophole for Capital Gains Would Be Unfair and Counterproductive

This report explains in more detail why lawmakers should not take up McCain's proposal to expand the existing loophole for capital gains, and why they should move in the opposite direction and start taxing investment income just like any other income. Anyone who thinks that doing away with the lower rates for capital gains and dividends is too radical an idea is reminded that Congress has done it before -- under the leadership of President Reagan.

4. Does Joe the Plumber Need a Tax Break?

No discussion about this presidential race would be complete without some mention of Joe the Plumber, the man who asked Obama about how he would be affected by Obama's tax plan if he became a small business owner. Obama responded that someone like Joe needs a tax cut now, when he's working his way up and saving money, rather than later on when he's joined the ranks of the very richest Americans. We also note the oddity of McCain professing to be worried about a tax code that punishes this man's hard work while proposing to expand the very loopholes that bias the tax code against work.

Read the report:

Representative Paul Ryan (R-Wisc.), the ranking Republican on the House Budget Committee, introduced legislation on May 21 that would cut Social Security benefits and create private accounts, end Medicare as it is currently structured, dramatically reduce the revenues available to fund federal public services, and radically reduce the fairness of the federal tax system.

A new report from CTJ shows that the tax provisions in this legislation would increase taxes on the poorest four-fifths of taxpayers while slashing taxes on those at the top of the income scale. The upper-income tax cuts would far outweigh the tax increases on everyone else, with a net annual reduction in federal revenues of $286 billion if the plan were in effect this year.

Republican Presidential Candidates Vie to Offer the Biggest Tax Cuts

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The Republican presidential candidates have all promised to make the Bush tax cuts permanent if elected. This would cost $5 trillion in the first decade alone and most of the benefits would flow to the top 5 percent (or 1 percent if the AMT is not fixed). Any attempt to put our fiscal house in order while extending these tax cuts would require a scaling back of public services that would be truly dramatic and unthinkable, as we've pointed out before. Nonetheless, the GOP candidates are trying to prove that they're even more anti-tax than President Bush. They have apparently decided that the Republican primary voters will not be mobilized and energized by a promise to extend the policies that appear to be in place today. The Republican base wants something more and something new.

Romney's "Stimulus"

Former Massachusetts governor Mitt Romney unveiled a new tax plan last weekend, calling his proposal an "economic stimulus plan" even though most of the provisions would be permanent rather than limited to any temporary, recessionary period. Romney would cut the lowest federal income tax rate (10 percent) down to 7.5 percent, and he would make this change retroactive to 2007 for those with incomes below $97,500. He would also eliminate payroll taxes for people over 65 who are still working and repeats his intention to make interest, capital gains and dividends tax-free for those with incomes below $200,000, even though most people below this level don't enjoy much in the way of investment income.

Who Can Cut Corporate Taxes the Most?

For business, Romney would allow 100 percent "expensing" of equipment for two years retroactive to 2007 and he would cut the corporate tax rate from the current 35 percent down to 20 percent over two years. Last week we reported that Senator John McCain and former New York mayor Rudy Giuliani both want to reduce the corporate tax rate to 25 percent. While some conservatives like to point out that our nominal corporate tax rate is high compared to that of certain other countries, the effective corporate tax rate is certainly quite low because of the loopholes businesses use to avoid taxes. Last year Citizens for Tax Justice found that, measured as a share of GDP, our corporate tax ranks among the lowest among industrialized countries. Both Giuliani's and McCain's plans would create a permanent research credit, and McCain would, like Romney, allow "expensing" of "equipment and technology investments."

Giuliani's Friends Introduce His "Simplification"

Meanwhile, Giuliani's friends in Congress have introduced a bill to implement the former mayor's tax proposal. Called the "Fair and Simple Tax" or FAST, it would lower the corporate rate to 25 percent, lower the capital gains rate to 10 percent, repeal the estate tax, and allow taxpayers the option of using a simplified tax that has three rates, 10 percent, 15 percent and 30 percent. This would be a huge tax break for the wealthy. The 30 percent rate begins at income of $150,000 and we've reported before that most of the current capital gains and dividends tax break goes to the richest 0.6 percent.

Citizens for Tax Justice has produced preliminary estimates showing that Giuliani's tax plan would cost, at least, an eye-popping $11 trillion over a decade.

The Republican Presidential Primary: And In This Ring...

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McCain's Tax Plan: I Was Wrong About Everything

Senator John McCain (R-AZ) released his tax plan on Wednesday, which consists of repealing the Alternative Minimum Tax (AMT) without paying for it, extending the Bush tax cuts without paying for them, and requiring a 3/5 majority of both chambers of Congress to enact any tax increase.

Remarkably, this is the same senator who voted against the biggest of the Bush tax cut packages in 2001 and 2003. During a debate on September 5 he explained that he voted against those bills because they did not include cuts in spending, which he thought were also necessary. But at the same time, he also makes the claim that the tax cuts have boosted revenues, which would seem to imply that no cuts in spending are ever needed to pay for tax breaks.

This seems to be the position he has settled on, since he has no plans to pay for any of his tax cuts and has a somewhat vague proposal to require a "3/5 majority vote in Congress to raise taxes." Since even revenue-neutral bills are considered tax increases by the GOP now (because they offset the costs of, say a lower corporate rate by closing tax loopholes that benefit somebody) this apparently means a supermajority would be needed to enact any basic tax reform. John McCain is now committed to the idea that tax cuts will pay for themselves and even raise revenues.

(Those who are tuning in late to this ongoing debate may be utterly confused as to why anyone thinks tax cuts could cause revenues to increase. Anti-tax activists have convinced some conservative politicians that cutting taxes actually increases revenues because tax cuts encourage work and investment so much that incomes and profits increase enormously, in turn increasing tax collections by more than enough to make up for the costs of the cuts. Mainstream economists do not believe this and Bush's own Treasury Department and OMB director have admitted that they don't believe it either.)

Also, McCain would like to stop taxing "innovation" by making permanent the ban on internet access taxes and by banning taxes on cell phone use. As we've argued before, it's a shame that Thomas Edison didn't think to lobby for a moratorium on taxing electric devices, or that Henry Ford didn't lobby for a moratorium on taxes on automobiles, since those products were innovations for their time. McCain would also make permanent the research credit, which is a tax subsidy for certain companies supported by politicians who can't decide whether the free market works or doesn't work.

Huckabee's 50% Sales Tax

Now that former Arkansas governor Mike Huckabee has been climbing in the polls, reporters are suddenly inconvenienced by the need to read up on and explain the tax proposal Huckabee has been touting for months. His proposal is often described as a 23 percent national sales tax, but supporters prefer to call it the "Fair Tax," because they've apparently figured that the idea of a new sales tax is not inherently appealing to people. Actually the tax would be 30 cents on an item that costs a dollar, which most of us would call a 30 percent tax, but supporters argue that 30 cents is only 23 percent of $1.30. But that's not even half of the problem. Citizens for Tax Justice studied this proposal back in 2004 and found that to actually replace all the revenue collected by our current tax system, the national sales tax would actually have to be set at a rate of 50 percent.

So to recap:
  • The proposed national sales tax rate claimed by Fair Tax supporters: 23%

  • The proposed rate as any normal person would define it: 30%

  • The rate necessary for the Treasury to break even under realistic assumptions: 50%

  • The chances of anything like this being enacted: 0%

Giuliani's' Mind: A Place More Peaceful than Reality

Most Republican candidates reveal some sort of ambivalence or inner-conflicts over tax and fiscal matters. On one hand, they're all fairly intelligent people who must understand that revenues cannot be increased by tax cuts. On the other hand, they must find some way to appeal to the masses who want to hear the good news of free tax cuts without any troubling analysis that might disprove this appealing message. Hence you see McCain's convoluted explanations of his votes, Huckabee's attempts to avoid discussing the less right-wing aspects of his governorship, and Romney's policy acrobatics.

Former New York mayor Rudy Giuliani's mind appears to be serene and untroubled by such turmoil. He has been able to maintain throughout his campaign so far that the way to raise revenue for any initiative is to cut taxes, apparently freeing himself from any complicated thinking. He continued hammering this appealing message home at the debate on December 12. He argued that the solution to our national debt is that "the federal government has to restrain its spending" and that we need a policy "leaving more money in the pockets of the American people" without showing the slightest awareness of how little sense this makes.

Romney's Offshore Tax Evasion

Meanwhile, it has come to light that former Massachusetts governor Mitt Romney "was listed as a general partner and personally invested in BCIP Associates III Cayman, a private equity fund that is registered at a post office box on Grand Cayman Island and that indirectly buys equity in US companies." In other words, Romney was using a shell company -- a company located, on paper only, in a tax haven country -- to avoid paying taxes on money he was investing for his clients and himself. He had a similar arrangement in Bermuda. His campaign staff maintains that this was all perfectly legal. As far as we're concerned, that is the real scandal.

Thank you for visiting Tax Justice Blog. CTJ and ITEP staff will soon retire this domain. But ITEP staff are still blogging! You can find the same level of insight and analysis and select Tax Justice Blog archives at our new blog,

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