Who Pays How Much News

How Inflation Results in Higher State Taxes for Low-Income People

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New national data on poverty and income released this week by the U.S. Census Bureau reveals that from 2014 to 2015, median household income increased by 5.2 percent and poverty declined by 1.2 percent — good news by any measure. But these statistics don’t tell the full story.

Despite positive growth in incomes from 2014-2015, low-income earners were worse off in 2015 than they were 15 years ago because income growth has not been sufficient to keep up with inflation. Once the impact of rising prices is taken into account, incomes among the bottom 20 percent of earners in 2015 were actually 8 percent lower than they were in 2001, and incomes among the next 20 percent of earners were 4 percent lower than they were in 2001.

While low- and moderate-income taxpayers have less buying power today than they did 15 years ago, many are paying more in state taxes because too many state tax codes do not take the nuances of inflation into consideration. This phenomenon, dubbed ‘bracket creep,’ is the subject of a recent ITEP policy brief, “Indexing Income Taxes for Inflation: Why It Matters.”

State tax systems have many features that are defined as fixed dollar amounts, including the income levels at which various tax rates start to apply. If these fixed income levels aren’t adjusted periodically, taxes can go up substantially simply because of inflation. For example, in 1969 Illinois enacted a personal exemption of $1,000. If this amount had been adjusted for inflation since its enactment, taxpayers could exempt $6,550 per filer and dependent instead of the current $2,175.

Consider a hypothetical state that taxes the first $20,000 of income at 2 percent and all income above $20,000 at 4 percent. A person who earns $19,500 will only pay tax at the 2 percent tax rate (Figure 1). But over time, if this person’s salary grows at the rate of inflation, she will find herself paying at a higher rate—even though, in terms of the cost of living and ability to pay, her income hasn’t gone up at all. In this example, suppose the rate of inflation is 5 percent per year and the person gets salary raises that are exactly enough to keep up with inflation. After four years, that means a raise to $23,702. Whereas before all of this person’s income was taxed at the 2 percent rate, part of this person’s income ($3,702) will now be taxed at the higher 4 percent rate because the tax brackets haven’t also increased with inflation.  

In this way, as the ITEP report Who Pays? notes, unfair state tax systems exacerbate widening income inequality. To learn more about “bracket creep” and the importance of indexing tax policy provisions, check out the brief!

Late last year, the New York Times published an article revealing the disturbing but not surprising news that the nation has separate and unequal tax systems: one for the rich and powerful who have created a cottage “income defense industry” and another one for we regular Joes and JoAnnes.

The same day, the IRS released data showing that the average effective tax rate for the richest 400 Americans rose to 22.9 percent in 2013 (the latest year for which data are available), a substantial increase over the historically low effective rate of 16.7 percent that the group collectively paid the previous year.  How this happened is no mystery. Tax changes enacted at the end of 2012 as part of the “fiscal cliff” deal as well as Affordable Care Act tax provisions that took effect in 2013 increased top income tax rates on both wages and capital gains.

Members of the exclusive, richest 400 club on average derive 70 percent or more of their income from capital gains. They also each enjoyed $100 million or more in income in 2013. The increase in their tax rate in 2013 is notable for several reasons. One, it is 6 percent more than the average from the previous year. Two, the rate, nonetheless, remains far below the nearly 30 percent average rate the group paid in the 1990s when the IRS first began publishing these data.

Average tax rates for the richest remain well below 1990s-era levels because even after the fiscal cliff deal, the top tax rate on capital gains is still only 23.8 percent, compared to the 28/29 percent capital gains tax rate in the early 1990s and the 39.6 percent top tax rate now applicable to wages. The way the IRS taxes income from wages versus income from wealth creates a disparity in the tax system that favors the wealthiest Americans and allows them to reduce their effective tax rates to well below the rates paid by less affluent Americans.

This is important information in the context of a presidential election in which all of the major Republican presidential contenders have proposed top-heavy tax cut proposals that would mostly benefit the wealthiest Americans while adding trillions of dollars to the national debt. On the Democratic side, none of the candidates have yet released comprehensive tax proposals. However, Hillary Clinton this week released a plan that, among other things, would close “certain” tax loopholes, impose a 4 percent surtax on households with income over $5 million, restore the estate tax to 2009 levels and increase the tax rate, a move the campaign says would raise $400 billion to $500 billion over a decade.

The next president’s policy on taxes will determine whether an elite sliver of the nation’s population will see their effective tax rates go back down to historically low levels or inch up and move the nation toward a more progressive federal tax system.

The sheer amount of wealth held by the top 400 means that tax increases on this group would have a measurable effect on the nation’s revenues and its ability to fund roads, bridges, education, public safety, public health, nutrition and other vital programs and services. Ending special tax breaks for capital gains would have an even better effect on tax fairness and our budget deficit.

And because the nation’s income continues to concentrate at the top—the richest 400 Americans, a tiny group, enjoyed 1.17 percent of nationwide AGI in 2013, more than twice as big as their 1992 share of nationwide income—failing to end tax breaks for these best-off Americans hurts public investments more and more each year. Obviously, the answer to the nation’s need to raise more revenue cannot solely be to tax this exclusive group more. Lawmakers and candidates, though, must stop peddling massive tax cuts--especially for the rich--as a policy panacea at a time when the nation isn't raising enough revenue to meet its priorities.

It’s welcome news that tax rates on the top 400 Americans have rebounded from their recent historic lows. But the recent reversal of the downward trend in tax rates for the richest Americans is only a first step toward undoing the regressive, top-heavy tax cuts of the past 20 years rather than a sea-level change in tax fairness. 

How Citizens for Tax Justice Models the Impact of Tax Proposals

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Over the course of the year, CTJ has published a series of analyses estimating the revenue impact of tax plans proposed by half a dozen Republican presidential candidates. It published a summary of the findings earlier today in a blog post.

These findings have sensibly drawn a lot of media attention, and the first question CTJ staff usually gets is “how do you come up with these numbers?” Here’s a quick answer to this question.

The starting point for Citizens for Tax Justice and the Institute on Taxation and Economic Policy’s work is the ITEP Microsimulation Model. This is a computer model built on a large database of more than 150,000 records, each representing a tax payer’s actual federal tax return.  Since 1960, the Internal Revenue Service (IRS) has made these databases available to researchers seeking to understand the nation’s tax system and the impact of proposed changes.

The result is a researcher’s dream: mountains of data showing everything from basic data on wages and capital gains to details of itemized deductions and business tax breaks.

Starting with this database’s economic profile of the incomes of all Americans, the ITEP model can easily be used to estimate the effect of different tax rules. With a point and a click, the ITEP model can show the effect of, for example, increasing the top capital gains tax rate from 20 to 25 percent, or repealing the itemized deduction for charitable contributions on the taxes paid by every single one of these 150,000 records. The result is a statistically valid estimate of how much federal tax revenues would increase (or fall) as a result of such a tax change, which means we can use the model to generate revenue estimates on federal tax reform plans.

Because we know the income levels of every single one of these records, we can also use these results to show how tax changes would affect different income groups, from the poorest twenty percent to the very wealthiest 1 percent.

The ITEP model produces a traditional or “static” revenue estimate, meaning that in general it does not calculate how tax changes affect behavior as does “dynamic” modeling. The latter is a type of modeling advocated by those who support supply-side economic theories, which claim dramatic tax changes will spur economic growth. But as we have noted elsewhere, economists can’t agree on whether such an effect exists, which means that the most responsible approach to revenue estimating is to present a static analysis.

Taken on its own, the ITEP Model can only analyze changes in taxes that already exist at the federal level. This means that when we want to analyze an entirely new proposed tax at the federal level, such as a value-added tax or a national sales tax, we supplement the model using other data sources to augment the economic profile we get from the IRS’ income tax database.

We use a similar process to analyze taxes levied by state and local governments, such as property taxes and sales and excise taxes, that aren’t included in the IRS data. 

Architect of Disastrous Bush Tax Cuts Is Lead Witness at Hearing on "Tax Fairness"

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A decade and a half ago, the federal government was running a surplus, the economy was humming along, poverty had continually declined for the previous seven years, and the Republican candidate for president essentially told the nation we could cut taxes and maintain the status quo.

Today, the Republican-led Senate Finance Committee held a hearing on tax fairness featuring none other than Larry Lindsey, the architect of the Bush tax cuts, as the chief witness. This is quite alarming since the Bush tax cuts did more to undermine tax fairness and adequacy than any other legislation since 1981. The nation is still reeling from its effects.

It may be hard to believe now, but when then-presidential candidate George W. Bush put out his tax plan, in late 1999, Lindsey argued that the proposed tax cuts would make the tax system fairer.

“Governor Bush’s tax cuts would reduce income taxes for all Americans,” he said, “but would especially benefit lower and middle-income families. . . . More affluent Americans also receive a tax cut, but they will also shoulder a larger portion of the federal income tax…. The result is an income tax burden that is fairer.”

But this was pure sophistry. The Bush/Lindsey plan was designed to lower the progressive personal income tax while leaving untouched other, more regressive taxes levied by the federal government. Since these other taxes, including payroll and excise taxes, capture far more income from working low-income families, reducing their relatively low personal income taxes didn’t make much of a dent in their overall federal tax load. But because the personal income tax is the primary federal tax paid by the best-off Americans, even a 10 percent cut would dramatically reduce their tax bill. Put another way, the Bush tax cuts resulted in the best-off Americans paying a slightly smaller share of a much smaller pie, with close to half of the tax cuts going to the best-off one percent.

Lindsey also used gimmicks to make the Bush tax cuts look far less expensive than they actually were. When Bush announced his plan, Lindsey and others pegged the 10-year cost at $1.3 trillion. But, as CTJ’s tax policy team discovered, it turned out that Lindsey’s policy team had found a way to shave hundreds of billions off the apparent cost of the Bush plan by designing it in a way that would force 20 percent of Americans to pay the Alternative Minimum Tax (AMT), a backstop tax designed to prevent tax-dodging by high-income Americans. So, Bush proposed to dole out large tax cuts to almost, but not quite rich families, and then quietly take a big chunk of them back through the AMT.

Of course, no one thought for a minute that Congress would actually allow the AMT to swallow the upper middle class, and in fact, Congress fixed that problem soon after it passed the Bush tax cuts. But this ruse helped Lindsey and the Bush administration to low-ball the cost of their tax plan by about 25 percent.

In addition, many of Bush’s proposals were to be phased in over half a decade or more, the full impact of the tax cuts on federal revenues was muted. But in 2004, the phase-ins were sped up. As a result, the supposed $1.3 trillion ten-year tax cut turned out to cost twice as much as originally billed.

Maybe Senate Finance Committee Republicans are looking to Lindsey to help them repeat the chicanery that helped get the Bush tax cuts enacted. If so, everyone should be worried, since he was very good at hiding the truth back then.

The Facts Missing from the Debate Over Tax Fairness

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In preparation for a Senate Finance Committee hearing on "Fairness in Taxation" on Tuesday morning, the Joint Committee on Taxation (JCT) issued a report diving into the distributional impact of the federal tax system. Unfortunately, this report leaves out a lot of crucial context for its numbers, which will likely allow advocates of tax cuts for the rich to spin the numbers to make the tax system sound significantly more progressive than it actually is. Here are some important points to keep in mind:

1. The overall tax system is just barely progressive.

First, it is critical for lawmakers not to just look at the federal tax system in isolation, as the JCT report does, but at the tax system as a whole. While the federal tax system is generally progressive, state and local taxes are notoriously regressive. In fact, a recent report by the Institute on Taxation and Economic Policy found that the poorest 20 percent of taxpayers pay about twice the state and local tax rate of the top 1 percent.

A study of the overall tax system in 2014 (including federal, state and local taxes) by Citizens for Tax Justice (CTJ) found that our tax system is just barely progressive overall. For example, the richest taxpayers are paying tax rates very close to the rates paid by middle class Americans, with the middle 20 percent of taxpayers paying a 25.2 percent rate and the top 1 percent paying 29 percent on average. In addition, each income group's share of total taxes paid closely mirrors their share of total income, with the top 1 percent paying 23.7 percent of all taxes while earning 21.6 percent of all income.

2. The tax system is not getting any fairer.

Opponents of raising taxes on the rich will likely point to the tables in the JCT report showing that the share of income taxes paid by the top 20 percent of households has gone up significantly in recent years, from 55.4 to 68.7 percent in 2011 to argue that taxes on the rich are at historic highs and should not be increased further. What this argument misses is that the portion of taxes paid by the rich have grown largely due to the increasing share of national income earned by the wealthy, rather than any increase in the progressivity of the tax system itself.

Providing insight on this issue, the JCT report shows that the progressivity of the federal tax system in 2011, as measured by the Reynolds-Smolensky index, is at precisely the same level as it was in 1980. Because income inequality has grown since 1980, this means that the federal tax system is having less of an impact that it once did in reducing income inequality overall. In fact, the federal tax system only reduced income inequality (as measured by the Gini Index) by 8 percent in 2011, in contrast to 9.5 percent in 1980. If anything, lawmakers should increase the progressivity of the tax system so that it can further reduce income inequality, rather than letting its positive impact stagnant or even decrease.

3. Wealthy investors pay a lower tax rate than other members of the top 20 percent.

One final point to keep in mind when discussing fairness in the tax code is that the preferential rate on capital gains and dividends allows many in the top 20 percent of taxpayers to pay a lower tax rate than the middle class. In its overall look at the distribution of the tax system, the JCT found that in 2011 the middle 20 percent of taxpayers paid a total federal tax rate of 11.2 percent, while the top 20 percent paid an overall tax rate of 23.4 percent. This comparison could be used to create the impression that all wealthy individuals are in fact paying their fair share, but grouping all of the top 20 percent together ignores the fact that they may pay significantly different tax rates depending on what percentage of their income comes from investment income, and thus is subject to a preferential rate compared to wage income.

When you break out those wealthy individuals, like Warren Buffett, who earn a significant amount of income from capital gains or dividends, the tax system ends up looking a lot more regressive. For example, in 2011, a taxpayer making between $60-65,000 would pay an average effective tax rate of 21.3 percent, yet a taxpayer making more than $10 million primarily through investments would have only paid an average effective tax rate of 15.3 percent. To make the tax system truly progressive, lawmakers should end the preferential tax rate for investment and tax it like wage income.

Who Pays? Report Brings out the Red Herring Brigade

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Last week, the Institute on Taxation and Economic Policy released Who Pays?, a report that examines the state and local tax system in all 50 states. The analysis concludes that every state’s tax system is regressive, meaning the lower one’s income, the higher one’s tax rate.

Not surprisingly, the report ruffled a few feathers. It’s about taxes, after all. A few critics cried foul because the study, which made clear it’s an analysis of state and local tax systems, only discussed state and local tax systems. Such a focus doesn’t paint a complete picture of all taxes people pay, they argue. Well, no kidding. Proponents of progressive taxes made a similar argument in 2012 when Mitt Romney made his widely disproven, notoriously wrong remark that 47 percent of the population doesn’t pay any taxes, based on a narrow analysis of federal income taxes.

State governors and lawmakers have a clear set of policies they can control. Federal tax laws are not among them. State and local tax systems fund all manner of public services that benefit all state residents, including public education, public health and safety, and infrastructure. How states fund these vital services and who the responsibility falls on to pay for them are precisely the questions state policymakers should be debating.  

It is indisputable that states are raising revenue in a regressive way that demands a greater share of income from those who have the least. When state lawmakers are forced to deal with difficult fiscal circumstances that may require tax hikes, what they need to know is who’s getting hit hardest to begin with. And that’s exactly what the Who Pays? report shows.

If it is easy to conclude from Who Pays? that states seeking to increase taxes should not look first to low- and middle-income families, including federal taxes makes this conclusion even more obvious. An April 2014 report from Citizens for Tax Justice shows that the lion's share of taxes paid by low- and middle-income people are state and local. Yes, our collective federal and state tax system is somewhat progressive overall, but that doesn’t mean states should be absolved from imposing an unconscionably high tax rate on Americans living at or below the poverty line. If our tax system is indirectly contributing to income inequality, state and local taxes are the main reason why.

For those who would argue that regressive state taxes are just fine because the federal system makes taxes more progressive, well, please make that argument to the low-income families in Washington state who pay an effective state tax rate of 16.8 percent while the richest 1 percent pay only 2.4 percent. And while you’re at it, make your case to the residents of Kansas who are dealing with the fallout from Gov. Sam Brownback’s failed supply-side experiment that cut state taxes for businesses and the very rich – and raised taxes on lower-income residents. It’s well documented that Kansas’s irresponsible tax cuts have left the state struggling to raise enough revenue to adequately fund basic public services.

These kinds of facts should be the starting point for tax reform debate in the states—not nuanced ideological arguments that seek to justify regressive state and local taxes because the federal system is comparatively progressive.

Those of us who advocate for just, progressive tax policies are accustomed to anti-tax advocates dangling shiny objects and trying to detract from big picture questions about how to raise revenue in a fair way. But criticizing a 50-state analysis for analyzing 50 states, not the federal system, is an obvious red herring.

New CBO Report: Yes, the Rich Are Paying "a Bit" More

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On Wednesday, the Washington Post’s Wonkblog reported on new data from the Congressional Budget Office, explaining that “President Obama appears to have achieved at least one of his goals for the nation's pocketbook: The very richest Americans are finally shelling out a bit more in federal taxes.” But it’s important to not read too much into this. As the blog post illustrates with a graph from the CBO report, the average effective federal tax rate for the richest one percent was actually higher in the late 1990s when the economy was thriving.  

The blog post also notes that people in other income groups are also paying a bit more than they were before enactment of the “fiscal cliff” law that allowed several tax cuts to expire. We provided figures in 2013 showing that it had little effect on the overall distribution of the tax system because Americans at all income levels were, in fact, paying a bit more than would be the case if tax policies in effect in 2012 had been extended.

The term “fiscal cliff” actually described a sudden drop in the budget deficit that would have occurred if Congress did nothing in 2013, when several tax cuts were scheduled to expire and a health care tax for the rich was scheduled to go into effect. The fiscal cliff law made permanent most of the Bush tax cuts except some provisions that only benefited the rich. Lawmakers allowed a payroll tax cut for low- and middle-income Americans to expire, and the health care tax for the rich was allowed to go into effect. The result was slightly higher taxes for everyone.

Wonkblog does leave out a significant piece of the picture when it quotes the CBO report as saying the richest fifth of Americans receive “a little more than half of total before-tax income and paid more than two-thirds of all federal taxes in 2011.” The CBO data describe federal taxes alone. The CTJ figures include state and local taxes, which are generally regressive, and show that the tax system as a whole is just barely progressive.

What's the Matter with Kansas Is What Ails All 50 States

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It’s easy to hold up Kansas as the poster child for regressive tax policies gone awry.

By now it’s apparent Gov. Sam Brownback and his allies in the state legislature were wrong when they predicted lopsided tax cuts would boost the state’s economy.  The state will have trouble funding priorities such as education and services for the disabled since its revenue is hundreds of millions less than projected. And just last month, Standard & Poor’s downgraded the state’s bond rating because Brownback’s tax cuts cost far more than promised.

But make no mistake. The tax cuts, which disproportionately benefited higher-income earners and corporations, made worse an already regressive tax code. And in that sense, Kansas is not alone.

When all taxes assessed by state and local governments are taken into account, every state imposes higher effective tax rates on low-income families than the richest tax payers. On average, the lowest income households (bottom 20 percent) pay 11.1 percent of their income in state taxes, middle income households pay about 9.4 percent and the top 1 percent only pay 5.6 percent. This means state tax systems are actually making it harder for families to escape poverty.

Given a high poverty rate, stagnant wages and eroding family wealth, it’s perplexing that governors and state legislatures are getting away with selling the public the bill of goods that is trickle-down economics. We don’t all do better when the wealthy prosper at the expense of everyone else. In fact, we’re all worse for the wear and tear.

State and local data on income and poverty released today by the U.S. Census reveal, as did the national numbers, that not much has changed since the previous year and poverty remains significantly higher than before the Great Recession took hold. Most state poverty rates held steady. Three states experienced an increase in the number or share of residents living in poverty, and two states had a decline.

As I mentioned in a previous post, new Census poverty data is newsworthy more so because we’ve all become desensitized to a poverty rate that continually grew throughout the 2000s and remains higher (currently 2 percentage points) than it was before the Great Recession.

But when experts project the youngest generations may be worse off than their parents, or when median family income is 8 percent less today that it was in 2007, or when poverty is near generational highs, we all should pay attention, especially our elected officials.

The Institute on Taxation and Economic Policy today released a study, State Tax Codes as Poverty Fighting Tools, which examines four specific tax policies in each of the 50 states. The report recommends that states should enact or expand refundable Earned Income Tax Credits (EITC), offer refundable property tax credits for low-income homeowners and renters, create refundable, targeted low-income credits to help offset regressive sales and excise taxes, and increase the value of existing child- related tax credits. The full report includes state-by-state analysis of current polices.

Specifically, the report notes, “In most states, a true remedy for state tax unfairness would require comprehensive tax reform. Short of this, lawmakers should use their states’ tax systems as a means of providing affordable, effective and targeted assistance to people living in or close to poverty in their states.”

This is certainly a better approach than soaking the poor. A Standard & Poor’s study released earlier this week demonstrated that growing income inequality is a reason states are failing to collect enough revenue to meet their needs. It’s easy to surmise that, as wealth concentrates at the top and incomes stagnate for low- and middle-income people, states’ tax the poor more strategies result in flat or declining revenue and ultimately more difficulty funding priorities from education to infrastructure.

There’s a better way. A recent report from Citizens for Tax Justice reveals the average single-parent, two-child family receives a $4,550 income boost with the federal EITC, and a two-parent, two-child low-income, working household receives a boost of $5,790.  Twenty-five states and the District of Columbia offer state Earned Income Tax Credits based on the federal EITC, and a May 2014 report from ITEP outlines how this is an effective tool.

We are under no illusion that progressive taxation will solve poverty, but it can play a big role in mitigating poverty. And the harsh reality is that no state is fully living up to that promise. What is painfully clear, as Kansas tax cuts have demonstrated, is that adding more regressive tax cuts to an already unfair tax structure exacerbates poverty, shortchanges families, and starves states of funds to invest in vital services on which we all rely.

Poverty Data Not Surprising, No Matter How You Spin It

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The top 20 percent of households captured more of the nation’s collective income (51 percent) than the rest of population, according to the Census report Income and Poverty in the United States: 2013 released today.

This is consistent with what we know about worsening income inequality in this nation.

Median household income remained relatively stagnant in 2013 at $51,939, a mere $180 more than the previous year, giving average families no more buying power than they had the year before and 8 percent less than they did in 2007, just before the throes of the economic recession.

This is consistent with what working people all over the nation are saying: They work harder and harder, but they can’t get ahead.

The poverty rate dipped by half a percentage point to 14.5 percent, but that number is nothing to cheer about as it still represents generational highs.  

Child poverty declined by 2 percent, one of the bright spots in the report. But overall, what’s most notable about the data is that the numbers aren’t shocking. Troubling? Yes. Surprising? No.

In recent years, myriad studies have affirmed the nation’s growing income divide and economic mobility problem. Just yesterday, Standard & Poor’s released a study that revealed states are struggling to raise enough revenue because of income inequality. Institute on Taxation and Economic Policy experts noted that state tax systems are largely regressive. So, of course, as wealth concentrates at the top states, which tax poor and moderate-income families more than the rich, aren’t able to raise enough money to fully fund basic priorities.

A study released in June by the Russell Sage Foundation revealed that from 2003 to 2013, the net worth of the median American household fell, adjusted for inflation, by more than a third, but the best-off families experienced double-digit growth in their real net worth.  In 2013, a UC Berkeley economist released a study revealing income inequality in the United States is at its highest level since 1928, just before the Great Depression.

Today’s data on poverty and income simply confirms what other data sets have repeatedly revealed. Clearly, we don’t have a problem aggregating and analyzing data in these parts. Our problem is getting lawmakers to agree on policy solutions.

Just as the Census data are predictable, so, too, are the rallying cries. There will be calls for investments in proven poverty-alleviating programs such as job training and early education. At the same time, there will be calls from the extreme right that blame the poor for being poor and call for pull-yourself-up-from-your-bootstraps (even if you have neither boot, nor strap) "solutions."

As I started writing this piece for taxjusticeblog.org, I envisioned it as a way to highlight how progressive tax policies can play a big role in reducing income inequality. The Institute on Taxation and Economic Policy and Citizens for Tax Justice have plenty of research that supports this, which you can read here, here, here, and here. You’ll want to read these pieces if you have any doubt that tax policy makes a significant difference.    

But we need lawmakers to recognize every day--not just the day some new study reveals a new data set—that worsening income inequality and high poverty is not good for the nation and its families in the short or long term. Child poverty declined, but it’s still high. How many children were born into poverty in the year since the Census’s last report on poverty? And what will the economy look like 20 or more years from now if millions of children and their families continue  lacking the resources it takes to thrive?

Census data will confirm what we already know again next year and the next if policymakers don’t take action. Our elected officials must be willing to explore policy solutions that address widening income inequality and poverty with the same level of urgency that they expend raising money for their next campaign.

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

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

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

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

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

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

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

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

Gene Simmons Should Stick to Breathing Fire on Stage

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Gene Simmons rocks. The front man for glam-band Kiss rocked decades ago, he rocks now, and he will continue to rock into his old age. Few Americans who came of age in the 1970s would contest this assertion.

But Simmons’ views on tax policy are a little more questionable. Earlier this week, Washington Post, fact-checker Glenn Kessler usefully picks apart Simmons’ recent claim that “[t]he 1 percent pays 80 percent of all taxes” and that “[f]ifty percent of the population of the U.S. pays no taxes.”

Simmon’s “50 percent” assertion is apparently a slightly garbled version of former presidential candidate Mitt Romney’s infamous assertion that 47 percent of Americans pay no federal income taxes. Romney’s claim had the virtue of being narrowly true, although (as we’ve shown) highly misleading: the income tax is only one of the ways in which the federal government collects tax revenue, and when other taxes (especially the payroll tax on workers’ earnings) are included, most of the “47 percent” are paying substantially more than nothing.

But Simmons’ claim isn’t just misleading—it’s ludicrously wrong. As Kessler points out, the best-off 1 percent of Americans don’t pay anywhere near “80 percent of all taxes.” As a CTJ/ITEP report shows, the top 1 percent really pay less than 24 percent of all federal, state and local taxes—and since this group enjoys almost 22 percent of all nationwide income, they’re likely not complaining very much.

Breathing fire was an integral part of Simmons’ stage act during the heyday of Kiss. But in the political arena, this sort of fire-breathing only confuses what should be a fairly straightforward debate over who pays taxes in America.  

New Report: Addressing the Need for More Federal Revenue

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A new report from Citizens for Tax Justice explains why Congress should raise revenue and describes several options to do so.

Read the report.

Part I of the report explains why Congress needs to raise the overall amount of federal revenue collected. Contrary to many politicians’ claims, the United States is much less taxed than other countries, and wealthy individuals and corporations are particularly undertaxed. This means that lawmakers should eschew enacting laws that reduce revenue (including the temporary tax breaks that Congress extends every couple of years), and they should proactively enact new legislation that increases revenue available for public investments.

Parts II, III, and IV of this report describe several policy options that would accomplish this. This information is summarized in the table to the right.

Even when lawmakers agree that the tax code should be changed, they often disagree about how much change is necessary. Some lawmakers oppose altering one or two provisions in the tax code, advocating instead for Congress to enact such changes as part of a sweeping reform that overhauls the entire tax system. Others regard sweeping reform as too politically difficult and want Congress to instead look for small reforms that raise whatever revenue is necessary to fund given initiatives.

The table to the right illustrates options that are compatible with both approaches. Under each of the three categories of reforms, some provisions are significant, meaning they are likely to happen only as part of a comprehensive tax reform or another major piece of legislation. Others are less significant, would raise a relatively small amount of revenue, and could be enacted in isolation to offset the costs of increased investment in (for example) infrastructure, nutrition, health or education.

For example, in the category of reforms affecting high-income individuals, Congress could raise $613 billion over 10 years by eliminating an enormous break in the personal income tax for capital gains income. This tax break allows wealthy investors like Warren Buffett to pay taxes at lower effective rates than many middle-class people. Or Congress could raise just $17 billion by addressing a loophole that allows wealthy fund managers like Mitt Romney to characterize the “carried interest” they earn as “capital gains.” Or Congress could raise $25 billion over ten years by closing a loophole used by Newt Gingrich and John Edwards to characterize some of their earned income as unearned income to avoid payroll taxes.

Read the report. 

Has the Tax Code Been Used to Reduce Inequality During the Obama Years? Not Really.

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Many expect that during his State of the Union address tonight, President Obama will speak of income inequality, which he has previously called the “defining issue of our time.” As our nation hopefully begins this much-needed debate, everyone should be clear about one thing that has not been used much in recent years to reduce income inequality: the tax code.

The table below shows that effective tax rates were slightly higher in 2013 for all income groups (not just the rich) than they would have been if Congress had simply extended the tax rules in effect in 2012, as Congressional Republicans had called for in the debate over the “fiscal cliff.”

For the poor and middle-class, slightly higher effective tax rates resulted from the expiration of a Social Security payroll tax cut. For the rich, higher effective tax rates resulted from the end of parts of the Bush-era tax cuts and an effective increase in the Medicare tax as a part of health care reform.

The result is that the share of total taxes paid by each income group did not change much at all. As the table below illustrates, the richest one percent of Americans paid 24 percent of the total taxes in 2013, but would have paid 23.1 percent if the 2012 tax rules had been extended as Congressional Republicans called for. The shares of total taxes paid by the bottom four fifths of Americans were almost unchanged.

These figures are taken from one of the many CTJ reports that analyzed the impacts of the “fiscal cliff” deal that allowed certain tax cuts to expire. In other reports we have demonstrated that the tax code is not particularly progressive. For example, the richest one percent of Americans paid 24 percent of the total taxes in America in 2013, which may seem like a lot until you consider that this same group also received 21.9 percent of the total income that year. The poorest fifth of Americans paid only 2.1 percent of the total taxes in 2013, and received just 3.3 of the total income that year.

In other words, America’s tax system can just barely be called progressive.

Income Tax Deductions for Sales Taxes: A Step Away from Tax Fairness

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Sales taxes are the biggest tax fairness problem facing state and local governments: they inexorably fall hardest on the low-income families who are least able to pay them, while asking far less, as a share of income, from the very best-off taxpayers. So if the federal government enacts a tax break designed to offset the impact of sales taxes, that can’t be a bad thing, right? As it turns out, it IS a bad thing, as explained in a recent report from Citizens for Tax Justice.

A deduction for sales taxes existed in the past but was repealed as part of the loophole-closing Tax Reform Act of 1986. In 2004 Congress brought the concept back as the itemized deduction that federal income taxpayers can claim for state and local sales taxes they pay each year.

Spearheaded by then-House Majority Leader Tom DeLay, the provision, enacted as part of the “American Jobs Creation Act of 2004,” gave itemizers the choice of deducting either their state and local income taxes or their sales taxes. The provision was set to expire two years later–and that’s how it joined the big happy family of “tax extenders,” the motley crew of temporary tax giveaways Congress now extends every couple of years.

Almost a decade later, the sales tax deduction is once again set to expire at the end of 2013. However, the deduction has a vocal fan base among politicians in the nine states that have no broad-based income taxes and rely more on sales taxes to fund public services. Since these states include large states like Florida and Texas, it’s a constituency that is difficult to ignore. Their Congressional delegations argue that it’s unfair for the federal government to allow a deduction for state income taxes, but not for sales taxes, but this misses the larger point. The underlying problem with sales taxes is their impact on low-income families, and itemized deductions don’t help low-income people, who mostly take the standard deduction rather than itemizing. Also, the higher your income, the more the deduction is worth, since the tax benefit depends on your income tax bracket.

The table above includes taxpayer data from the IRS for 2011, the most recent year available, along with data generated from the Institute on Taxation and Economic Policy (ITEP) tax model to determine how different income groups would be affected by the deduction for sales taxes in the context of the federal income tax laws in effect today.

As illustrated in the table, people making less than $60,000 a year who take the sales-tax deduction receive an average tax break of just $100, and receive less than a fifth of the total tax benefit. Those with incomes between $100,000 and $200,000 enjoy a break of almost $500 and receive a third of the deduction, while those with incomes exceeding $200,000 save $1,130 and receive just over a fourth of the total tax benefit.

So the sales tax deduction is both complicated and regressive, not to mention an added burden on the vast majority who don’t use it but have to pay for it (in the form of higher tax rates or skimpier public services). Yet too many of our politicians seem to think “other than those flaws, what’s not to like?”

The good news is that all Congress has to do in order to make this bad dream end is... nothing. Since the tax break is set to expire on New Year’s Day, Congressional tax writers can achieve a small, but meaningful, victory for tax fairness and simplification by simply sitting on their hands.

Inequality for All, Starring ITEP Board Member Robert Reich, Opens Today

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Professor Robert Reich is a former Secretary of Labor, the star of a new documentary generating all kinds of buzz, and he is also a member of the board of our partner organization, the Institute on Taxation and Economic Policy (ITEP).  His new movie, "Inequality for All," examines the scale and causes of the economic inequality that plagues the United States (including, argues Reich, our democracy). Watch the trailer!

Here at our blog we track new reports and research on the interaction of tax policy and income inequality. We write about the unequal treatment the tax code gives to investment income in contrast to the ordinary income most Americans take home. We tell anyone who will listen there are no freeloaders when it comes to paying taxes – unless you’re talking about the super rich or big corporations.

In a recent interview, Professor Reich explained,

There’s a lot of confusion about inequality. People know that inequality is surging. Many people have a feeling the game is rigged. But they don’t really understand why, how it’s happened and why it is dangerous. Or what they can do about it. This film also provides a kind of guide to people. There’s a social action movement that is connected to the film. We hope that the film really spurs not just a different discussion in this country, but also a movement to take back our economy and democracy.

Click here to find out when "Inequality for All" is coming to a city near you.

And…. If you are in the DC area, join us Monday! After a screening of "Inequality for All" on October 1 at 7:15 PM at E Street Cinema, ITEP's Executive Director Matt Gardner will join a panel to discuss how what should be done to reverse the growth of income inequality locally and nationally.

The Facebook event has the details – see you there!

New CTJ Report: Reforming Individual Income Tax Expenditures

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Congress Should End the Most Regressive Ones, Maintain the Progressive Ones, and Reform the Rest to Be More Progressive and Better Achieve Policy Goals

A new report from Citizens for Tax Justice explains how Senators responding to the “blank slate” approach to tax reform should prioritize which “tax expenditures” to preserve, repeal or reform.

Read the report.

Senators Max Baucus and Orrin Hatch, chairman and ranking member of the tax-writing committee in the Senate, have asked their colleagues to assume tax reform starts from a “blank slate,” meaning a tax code with no tax expenditures (special breaks and subsidies provided through the tax code). Senators are asked to provide letters to Baucus and Hatch by this Friday explaining which tax expenditures they would like to see retained in a new tax code.

CTJ’s report evaluates the ten costliest tax expenditures for individuals based on progressivity and effectiveness in achieving their stated non-tax policy goals — which include subsidizing home ownership and encouraging charitable giving, increasing investment, encouraging work, and many other stated goals.

CTJ’s report concludes that:

1. Tax expenditures that take the form of breaks for investment income (capital gains and stock dividends) are the most regressive and least effective in achieving their stated policy goals, and therefore should be repealed.

2. Tax expenditures that take the form of refundable credits based on earnings, like the Earned Income Tax Credit (EITC) and the Child Tax Credit, are progressive and achieve their other main policy goal (encouraging work) and therefore should be preserved.

3. Tax expenditures that take the form of itemized deductions are regressive and have mixed results in achieving their policy goals, and therefore should be reformed.

4. Tax expenditures that take the form of exclusions for some forms of compensation from taxable income (like the exclusion of employer-provided health insurance and pension contributions) are not particularly regressive and have some success in achieving their policy goals, and therefore should be generally preserved.

Read the report.

Congress Members' Home States Have Fiscal Stake in Immigration Reform

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We still don’t know what the U.S. House of Representatives is going to do about immigration reform. The Senate passed a bill with a solid majority, and that legislation enjoys support from the Chamber of Commerce and the labor movement, from George W. Bush and Barack Obama.  What we do know, though, is that members of the House leadership had a nice long talk about it this week because they know the pressure is on them to do something. 

Also this week, the Institute on Taxation and Economic Policy (ITEP) released a study with a bland title, Undocumented Immigrants’ State and Local Tax Contributions, that held some interesting numbers. What it shows is that once unauthorized immigrants are legalized and participating fully in the tax system, state tax revenues will go up, just as the CBO showed they would at the federal level. In fact, the report shows that state tax payments from this population are already at $10.6 billion a year, and that will rise by $2 billion under reform. The report (with a clickable map on the landing page!) shows how those tax dollars are distributed state by state.

According to reports, the following Representatives are now the key players on whatever immigration bill comes from the House. So, in hopes of informing the debate, we are sharing the total amount of estimated annual revenue each of their respective states would get in the form of tax payments from legalized immigrants following reform.

Rep. Mario Diaz-Balart, Florida: $747 million a year, up $41 million
Rep. Raul Labrador, Idaho: $32 million a year, up $5.5 million
Rep. John Boehner, Ohio:  $95 million, up $22 million
Reps Michael McCaul, John Carter and Sam Johnson, Texas: $1.7 billion, up $92 million
Rep. Jason Chaffetz, Utah: $133 million, up $31 million
Reps Eric Cantor and Bob Goodlatte, Virginia: $260 million, up $77 million
Rep. Paul Ryan, Wisconsin: $131 million, up $33 million

Undocumented Immigrants Pay Taxes, and Will Pay More Under Immigration

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As the battle over immigration reform shifts to the U.S. House of Representatives, some opponents of reform continue to focus on the alleged costs of reform. Yet, as a recent Congressional Budget Office (CBO) report reminds us, immigration reform involves both costs (in the form of health, education and other services provided to legalized immigrants) and benefits (in the form of federal taxes paid by newly legal immigrants)—and in the long run, the benefits to the US Treasury from immigration reform are likely to exceed the costs. Put another way, immigration reform will make our federal budget situation better, not worse.

A new report from the Institute on Taxation and Economic Policy (ITEP) shows that state and local budgets will also receive a new jolt of needed tax revenues as a result of immigration reform—and that undocumented taxpayers are already paying a substantial amount of state and local taxes across the nation. The report estimates that these families pay $10.6 billion a year in state and local sales, excise, income and property taxes right now, and would pay an additional $2 billion if these families were, as part of immigration reform, allowed to fully participate in state tax systems.

How are undocumented taxpayers contributing such a large amount right now? The main reason is that the sales and excise taxes that fall most heavily (PDF) on low-income taxpayers don't depend on your citizenship status. Anytime you buy a cup of coffee, a pair of jeans or fill up your tank up with gas, you're paying state and local sales and excise taxes. Property taxes are similarly unavoidable-- especially for renters, who pay them indirectly because landlords generally pass some of their property tax bills on to their tenants in the form of higher rents. And many undocumented taxpayers have state income taxes withheld from their paychecks each year.

The $2 billion in new tax revenues ITEP estimates will be paid by currently-undocumented families as a result of legalization is the product of two factors. Most importantly, legalization will bring all undocumented workers into the income tax system. The best estimates are that about half of undocumented workers are currently “off the books.” But legalization will also likely bring a substantial wage boost for these currently-undocumented workers—further boosting state and local income tax collections as well.

There are, of course, costs associated with immigration reform. Newly-legalized families will (eventually) be able to rely on the same important public services, from education to health care, that U.S. citizens can depend on. This is as it should be. But the scope of these costs will vary substantially depending on how future political battles play out, and are virtually impossible to calculate on a state by state basis at this time – one particular think tank’s lonely insistence that they can notwithstanding. However, the recent CBO report’s finding, that at the federal level these costs would be outweighed by the benefits from new tax revenues, suggest that a similarly positive outcome is likely at the state and local level.  

The undocumented population is notoriously hard to measure —but under any reasonable assumptions about the size and income levels of this population, they are already paying billions of dollars a year to support the state and local services from which they benefit, and will likely pay billions more on legalization.

Front Page Photo via SEIU International Creative Commons Attribution License 2.0

What Are the Tax Implications of the Supreme Court Ruling on Marriage Equality?

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The Supreme Court’s decisions striking down the law banning federal recognition of gay marriages, as well as the Court’s decision to not rule on the California ban on gay marriage that the state government has decided not to enforce, make our nation’s tax system fairer and are expected to reduce the federal deficit.

Up until the Supreme Court's ruling, the Defense of Marriage Act (DOMA) prevented the recognition of same-sex marriage for the purposes of more than 1,100 different federal laws, including many tax provisions that consider marriage status when determining an individual’s rights and responsibilities. For example, the original petitioner in the Supreme Court case challenging DOMA, United States v. Windsor, Edith Windsor was forced to pay an additional $363,053 more in federal estate taxes because her same-sex marriage was not recognized for the “surviving spouse” estate tax exemption. Because of the Supreme Court ruling in her favor, however, the IRS will have to pay Windsor back the $363,053 taxes she paid originally, plus interest.

Windsor’s windfall notwithstanding, the overall effect of recognizing gay marriage is likely to reduce the federal deficit. A 2004 report from the Congressional Budget Office (CBO) concluded that if the federal government recognized gay marriages performed in all the states, revenues would increase by around $400 million a year and outlays would decrease by $100 million to $200 million a year. These are relatively small numbers in the context of the federal budget, and the effect of this week’s rulings will be smaller because the Court ruled that the federal government must recognize gay marriages only in the minority of jurisdictions that have legalized it. (Currently, only 31 percent of the US population lives in a state that allows the freedom to marry or honors out-of-state marriages between same-sex couples.)

Nonetheless, CBO’s findings provide an answer to critics like the chairman of the Alabama Republican Party, who complained on Wednesday that Alabama taxpayers would “be on the hook” for funding federal benefits for same-sex spouses.

The reason for the revenue increase is that same-sex spouses will now generally file jointly, whereas previously they were barred from doing so. While the effect of this will increase revenues overall, some same-sex spouses would actually see their tax rates go down, depending on how much each spouse makes.

On the state level, studies have similarly found that allowing same-sex marriage would increase revenue slightly. One think tank found, for instance, that allowing same-sex couples to marry will generate $7.9 million benefits to state coffers in Maine and $1.2 million in Rhode Island.

Immigration Reform Bill Will Substantially Reduce the Deficit, According to CBO

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On Tuesday, the non-partisan Congressional Budget Office (CBO) found that the immigration reform bill currently making its way through the US Senate will actually decrease the deficit by $197 billion between 2014-2023. The report’s findings are at odds with claims by the bills opponents that increased immigration would be fiscally harmful to the US. In fact, House Speaker John Boehner said today that if the CBO is right, those revenues could be a “real boon” for the US.

According to the CBO, the bill would generate $459 billion in additional revenue over the next decade. Allowing unauthorized immigrants to seek legal status would increase tax compliance, and also increase the wages and thus the taxes of those same immigrants. In addition, the CBO found that the increase in the immigrant population and the number of individuals working in the US as a result of the bill would also substantially increase revenue.

Conservative critics of the immigration bill have tried to argue that the bill will drain public resources as immigrants obtain government benefits. The reality, according to the CBO, is that the required increase in government outlays (primarily in the form of refundable tax credits, Medicaid, and health insurances subsidies) would amount to only $262 billion over the next decade, meaning that immigrants as a group would end up paying more than they receive. This would be even more true over the bill's second decade (from 2024-2033), during which the CBO estimates the federal deficit would be decreased by an additional $700 billion.

The bill’s positive fiscal impact could undermine efforts by lawmakers like Senators Marco Rubio, Orrin Hatch, and Jeff Sessions to add amendments to the bill that would create extra obstacles for immigrants in terms of taxes and government benefits.


First it was Mitt Romney, and now two more aspiring public servants are in the spotlight for questionable tax maneuvers – Penny Pritzker, President Obama’s Commerce Secretary Nominee, and Massachusetts Republican Senate candidate, Gabriel Gomez.  The complex tax avoidance strategies exercised by both these two candidates for federal office demonstrate the stunning extent to which wealthy individuals of all stripes can play by a different set of tax rules than everyone else.

Avoiding Every Last Penny of Taxes

While many wealthy families go to great lengths to avoid taxes, the Pritzker family (most famous for it’s ownership of the Hyatt hotel chain) is unique in its role as “pioneers” in the use of offshore tax shelters. Many of its existing offshore trusts were set up as long as five decades ago, and some have allowed the family to continue benefitting from tax loopholes that have long since been closed.

As the graphic below from a 2003 Forbes story details, one of the primary ways the Pritzker family uses offshore trusts to avoid taxes is by having income from their businesses funneled into offshore trusts. Those trusts then pay debt service to a bank, owned by the family trust, that loans that money right back to the business. The upshot is that all the taxable profits disappear and the family wealth accumulates unabated. A more recent Forbes article looking at the Pritzker family fortune notes that these trusts were not at the margin but rather “played a substantial role in the growth of the Pritzker fortune.” The same article notes that this fortune makes up the vast majority of Pritzker’s $1.85 billion empire and has allowed 10 members of the Pritzker family to earn a spot on the list of Forbes 400 richest people in America.

When the New York Times asked Penny Pritzker for her thoughts on the ethical implications of her family’s use of offshore trusts, she remarked that the trust was set up when she was only a child, after all, and that she does not control how the offshore trusts are administered. Her continued vagueness on these issues makes it likely that she will face more questions about her views of offshore tax avoidance more generally next week when she goes before the Senate for her confirmation hearing.

While Pritzker’s personal involvement with her family’s most infamous tax avoidance legacy is unclear, it is clear that she has actively used tax avoidance strategies in her own professional and private life. For example, a family member in this Bloomberg News profile from 2008 recounts one of her very first assignments working for Hyatt, which was to set up a like-kind property exchange to help avoid taxes on a property owned by Hyatt.

It turned out Penny was a natural at this particular tax avoidance scheme, in which a company takes deductions for the purported depreciation of their property and then sells the property at an appreciated price, but avoids paying capital gains tax by swapping the property for another like-kind property. (Originally created for use by farmers trading acreage, this tax break is a perfect example of a loophole in the tax code that is abused by companies and should be eliminated (PDF).)

In her personal finances, Penny Pritzker has run into criticism for making 10 appeals to lower the property tax assessment for her mansion in Chicago’s Lincoln Park. Like many wealthy taxpayers, Pritzker is able to retain lawyers who, through repeated appeals, have been able to save her an estimated $175,905 (PDF), even though their appeals have only succeeded half the time.

Gabriel Gomez and the Façade of Charitable Donations

While not on the same scale, according to the Boston Globe, U.S. Senate candidate Gabriel Gomez claimed a $281,500 income tax deduction in 2005 for “pledging not to make any visible changes to the façade of his 112-year-old Cohasset home” because the value of such an agreement is considered a charitable deduction by federal law. The only problem is that local laws already prohibit he and his wife from making any changes to the exterior of their home, meaning that his “agreement” to leave the façade alone is more like complying with local laws rather than a choice, so it may not have an actual “value” that is deductible.

In fact, just five weeks after Gomez claimed this deduction, the IRS listed the abuse of historic façade easements as one of its “Dirty Dozen” tax scams. Moreover, the organization with which Gomez made the agreement, the Trust for Architectural Easements, has been criticized by the IRS, Department of Justice, and Congress for encouraging tax avoidance. Altogether the IRS estimates that the Trust cost American taxpayers $250 million in lost revenue.

Fortunately for Gomez, the IRS did not challenge his use of this deduction, as it has with hundreds of others. If they had done so, they likely would have rejected the deduction and Gomez would have had to pay thousands in back taxes and an additional penalty. For his part, Gomez’s lawyer argues that the restrictiveness of the agreement goes further than local zoning laws, but it appears unlikely that the additional restrictions are so great as to justify such a substantial deduction.

Two new analyses from Citizens for Tax Justice demonstrate that the richest Americans still are not shouldering a disproportionate share of taxes and that the poor are still not avoiding them, despite stories that are commonly told every year around Tax Day.

The first is Who Pays Taxes in America in 2013?, a fact sheet we release each year. It examines all the taxes paid by Americans (all federal, state and local taxes) and finds that people in all income groups do pay taxes (despite claims to the contrary by Mitt Romney and others) and that the tax system overall is just barely progressive.

The second analysis is our six-page report called New Tax Laws in Effect in 2013 Have Modest Progressive Impact. This goes into more detail and explains that the tax code has not changed in 2013 despite recent headlines about unprecedented taxes on the rich.

For example, Americans in all income groups are paying more than they would pay if Congress had just extended the tax laws in effect in 2012, but the share of taxes paid by the top one percent has risen only slightly. The richest one percent, who will receive 21.9 percent of America’s income in 2013, will pay 24 percent of all the taxes in 2013. If, instead of enacting the “fiscal cliff” deal that allowed some tax cuts for the rich to expire, Congress had just extended the 2012 tax laws, then the richest one percent would pay 23.1 percent of all the taxes in 2013.

In other words, the “fiscal cliff” deal made our tax system slightly – not dramatically –more progressive.

Study: US Tax Code Fails to Slow Widening Economic Inequality

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Are economically disadvantaged families in the US likely to reverse their fortunes anytime soon? Not according to a new report by the Brookings Institution, which found that growing economic disparities between Americans are becoming increasingly permanent and irreversible. In other words, the study confirms that disadvantaged Americans are finding it increasingly difficult to move up the income ladder, while at the same time the position of the well-off is increasingly secure.

Brookings also found that between 1987 and 2009 the US tax system only “partially mitigated” the increase in income inequality and that it was not enough to “sufficiently alter its broadly increasing trend.” This result is not all that surprising given that the overall (combined state and federal) tax system is barely progressive, meaning that it can only have a small redistributive impact.

While many countries have taken dramatic steps to reduce income inequality, the US has allowed income inequality to grow so extreme that it now has the fourth highest level of income inequality in the developed world. Looking at the low end of the scale, the US Census Bureau found that over 46 million (PDF), or 1 in 6, Americans were below the poverty line in 2011 (the most recent year for which data is available).

But don’t expect a revolution just yet. Most Americans are wholly unaware of how off track our economic system has gotten. For example, as the viral video “Wealth Inequality in America” explains, there is a huge disconnect between the actual distribution of wealth, the distribution of wealth as the public perceives it, and the distribution that the public believes is desirable.

According to the study (PDF) on which the video was based, Americans believe that the top 20 percent hold only 58 percent of the country’s wealth and that under an ideal system, the top 20 percent would own just 32 percent of the wealth. The reality, however, is that the top 20 percent actually own about 84 percent of the country’s wealth. Consider, for example, that the heirs to the Wal-Mart fortune alone own as much wealth as the bottom 40 percent of Americans combined.

One of the best ways to combat rising economic inequality and increase economic mobility would be to enact progressive tax reforms and use the additional revenue raised to pay for critical investments in education, healthcare, and other areas that are needed to improve the economic mobility of lower and middle income Americans.

SCOTUS Rulings Could Change Same-Sex Spouses' Taxes

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This week the Supreme Court heard arguments on two cases looking at the constitutionality of same-sex marriage. Specifically, the cases were about measures that ban recognition of gay marriage by the federal government and the state of California. At the federal level, the Court heard about the Defense of Marriage Act (DOMA), which bans the recognition of a same-sex marriage and entails over 1,100 different laws that consider marriage status when determining an individual’s rights and responsibilities.  And some of those laws determine how much that individual owes in taxes.

The discriminatory effect of the DOMA, which was signed into law in 1996, in tax law is at the center of United States v. Windsor. The original petitioner in the case, Edith Windsor, was forced to pay $363,000 more in federal estate taxes because under DOMA, her same-sex marriage is not recognized for tax purposes and thus is not eligible for the “surviving spouse” estate tax exemption available to heterosexual spouses. If the Supreme Court rules in favor of Windsor and declares DOMA unconstitutional, it would mean that same-sex marriages will be recognized by the federal government for all purposes, including taxes.

While such a ruling would have a relatively small impact in terms of the estate tax since almost no one pays it, there are many other federal tax provisions that do affect most married couples. The New York Times, for example, points to the fact that DOMA prevents same-sex spousal health benefits from being treated as a tax-exempt benefit, therefore increasing the tax bill of individual same-sex couples by a few thousand dollars each year. 

Perhaps the most widespread tax impact would be on same-sex spouses who are not currently allowed to file their federal tax returns jointly. According to an analysis by CNN and tax experts, some same-sex spouses may currently be paying as much as $6,000 in extra taxes each year because of DOMA. While many same-sex spouses could receive a substantial tax benefit from filing jointly, they could also end up paying more in taxes due to the infamous marriage penalty, depending on each spouse’s level of income.

There is also a larger fiscal effect to consider. A 2004 Congressional Budget Office (CBO) report (PDF) estimated that federal recognition of same-sex marriage would actually reduce the deficit by roughly $450 million each year, through a combination of higher revenues and lower outlays. In other words, ruling DOMA unconstitutional would not only end same-sex marriage discrimination in the tax code and other parts of federal law, but would also have the bonus effect of slightly reducing the deficit.

Mobile Millionaires and the Search for the Holy Grail Tax Jurisdiction

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Actor John Cleese, most famous for his central role in the British comedy group Monty Python, has decided to move back to Great Britain from Monaco, after concluding that the tax benefits of moving to the tax haven last year were not worth it after all. The actor’s return to Great Britain provides a high profile counterpoint to the false narrative that “high” taxes are driving wealthy people to migrate to low-tax jurisdictions, like Florida in the United States, or like Monaco, Russia or Bermuda for the globe trotting set.

The quest for a lower tax rate has not proven to be as much of a factor for wealthy individuals as anti-tax advocates would have you believe. Several studies confirm this, including a recent academic analysis based on actual tax returns that concludes the effect of tax rates on migration is “negligible” between the different tax jurisdictions in the United States.

What anti-tax advocates ignore is the fact that taxes actually play a very small role in an individual’s decision where to live, especially compared to factors like employment opportunities, family and friends, housing and even weather. In addition, lower taxes may actually discourage migration if they result in lower quality government services (a well-funded Ministry of Silly Walks  maybe especially close to John Cleese’s heart for example). What wealthy person wants to move to a jurisdiction with poor public schools, dirty streets and parks, and inadequate law enforcement?

The real lesson is that non-tax benefits of living in a location usually outweigh higher taxes, even in cases where the individual could save substantial sums of money by moving elsewhere. A recent case in point? The billionaire hedge-fund manager John Paulson’s decision not to move to Puerto Rico, despite the fact that doing so would have allowed him to avoid billions of dollars in capital gains taxes. In other words, Paulson has indicated that he’d just as soon keep paying billions more in taxes for the advantages of living in New York City. Colorful anecdotes and threats aside, the holy grail of tax codes ends up being the one that allows for a quality of life worthy of millionaires – and everybody else.

EITC Awareness Day Should Be a Heads Up for Lawmakers, as Well as Potential Recipients

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On Friday, the IRS held its EITC Awareness Day, working with local governments, non-profits and community groups to ensure that people potentially eligible for the Earned Income Tax Credit (EITC) file tax returns and claim it. The IRS says that one in five who are eligible for the EITC do not claim it.

The EITC, which is basically a tax credit equal to a certain percentage of earnings (up to a limit) to encourage work and reduce poverty, is widely misunderstood by many pundits and members of Congress. Like the Child Tax Credit, the EITC is a refundable tax credit, meaning it provides a benefit even when the credit is larger than the federal personal income tax that a taxpayer would otherwise owe. This can result in a negative income tax, meaning the IRS will send a check to the taxpayer.

These refundable credits are one reason why some Americans do not owe federal personal income taxes. (There are other reasons as well, like the fact that most of the Social Security benefits that retirees and people with disabilities receive are not subject to the income tax.)

Conservative Opposition to 2009 Expansions of EITC and Child Tax Credit

For the past couple years, conservative politicians and pundits have largely missed or ignored the fact that taxpayers with a negative income tax rate resulting from refundable credits do pay other types of taxes, which tend to be regressive. Federal payroll taxes, to take one example, are paid by everyone who works (and the EITC and the refundable part of the Child Tax Credit are only available to those with earnings). And all Americans pay state and local taxes, which are particularly regressive. The refundable credits in the federal personal income tax offsets some of the regressive impact of these other taxes.

Conservative politicians actually came out against expanding the EITC and the refundable part of the child tax credit in 2009, when President Obama proposed expanding the EITC for larger families and families headed by married couples and expanding the refundable part of the Child Tax Credit for very-low income working families. Those provisions were included in the economic recovery act enacted in 2009 and again in the deal the President made with Republicans at the end of 2010 to extend all the expiring tax cuts for another two years.

But each time Congressional Republicans introduced a proposal to extend tax cuts, it allowed these particular provisions to expire. CTJ’s figures showed what was at stake if these 2009 provisions expired. For example, CTJ’s state-by-state figures showed that in 2013, benefits for 13 million families with 26 million children would be lost if the provisions were not extended.

All Americans Pay Taxes

Conservative pundits claimed that these provisions led to nearly half of Americans not paying taxes. Paul Krugman at the New York Times, Ruth Marcus and Ezra Klein at the Washington Post and other observers have noted CTJ’s data showing that once you account for all of the different types of taxes, Americans in all income groups do, in fact, pay taxes and that our tax system overall is just barely progressive.

Mitt Romney and the 47 Percent

Perhaps the misinformation came to its spectacular climax when presidential candidate Mitt Romney was recorded making disparaging remarks about the 47 percent of Americans who, in his words, “believe that they are entitled to health care, to food, to housing, to you-name-it... These are people who pay no income tax.”

2009 Expansions of EITC and Child Tax Credit Extended for Only Five Years

One might think that the backlash produced by Romney’s comments, and his subsequent electoral loss, might have prompted conservatives to change their thinking. But they can only evolve so much, so fast. As an apparent concession to the right, the fiscal cliff deal approved by the House and Senate on New Year’s Day extended President Obama’s 2009 expansions of the EITC and Child Tax Credit for just five years — even though it made other tax cuts permanent.

Making permanent the EITC and Child Credit expansion would have cost in the neighborhood of $100 billion over a decade, and the five-year extension of these provisions cost around half that amount. This is real money, but insignificant compared to the $369 billion spent on making permanent estate tax cuts for millionaires or the $3.3 trillion spent on making permanent most of the income tax cuts first enacted under George W. Bush.

The EITC and the Child Tax Credit do a lot to offset the regressive impacts of the many types of taxes paid by low-income Americans. Congress should remember this and make the recent expansions of these refundable credits permanent.

New Numbers: Comparing Obama vs. GOP Approaches to Extending Bush Tax Cuts

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New Analysis Finds GOP Approach to Bush Tax Cuts would Give Richest One Percent of Americans $50,660 Per Year More and Give Poorest 20 Percent $150 Less on Average than Obama’s Approach

Citizens for Tax Justice Compares the Two Approaches to Extending Some or All of the Bush Tax Cuts, Nationally and State-by-State

Washington, DC – Middle-income and low-income Americans would pay somewhat more in taxes under the Congressional Republicans’ approach to extending the Bush tax cuts than they would under President Obama’s approach, while high-income Americans would pay far less under the Republican approach, according to a new analysis from the Institute on Taxation and Economic Policy (ITEP) and Citizens for Tax Justice (CTJ).

Under the President’s approach, in 2013, the poorest 20 percent of Americans would receive an average tax cut of $270 while the richest one percent would get an average tax cut of $20,130.  Under the Congressional Republicans’ approach, the poorest 20 percent of Americans would receive an average tax cut of $120 while the richest one percent would receive an average cut of $70,790.

The Bush tax cuts extension outlined by the President would cost one trillion dollars less over 10 years than would making all the Bush tax cuts permanent, as the GOP proposes.

“Both President Obama and Congressional Republicans have proposed to extend far too many of these unaffordable tax cuts,” said Robert S. McIntyre, director of Citizens for Tax Justice.  “But if we have to choose between the Congressional Republicans’ and President Obama’s approach, the President’s proposal is fairer and more responsible.”

The national and state reports are all available at: www.ctj.org/bushtaxcuts2012.php.

The term “Bush tax cuts” refers to income tax cuts and estate tax cuts enacted in 2001 and 2003 and extended several times since then.  In 2009, President Obama expanded some parts of these tax cuts that benefit low income and working families.  In December of 2010, the President and Congress agreed to extend all of these tax cuts through the end of 2012.

Republicans in Congress have indicated that they would extend all of the tax cuts first enacted in 2001 and 2003, but not the 2009 expansions for lower income families. President Obama wants to extend the 2001 and 2003 tax cuts only for the first $250,000 a married couple makes annually, or the first $200,000 a single person makes. Obama also wants to extend the 2009 expansions.

The findings from CTJ and ITEP also show:

  • Of the tax cuts going to Americans, under Obama’s approach, three percent would go to the poorest 20 percent of Americans, 9.9 percent would go to the middle 20 percent and 11.4 percent would go to the richest one percent.
  • Of the tax cuts going to Americans, under the Congressional Republicans’ approach, one percent would go to the poorest 20 percent of Americans, 7.4 percent would go to the middle 20 percent of Americans and 31.8 percent would go to the richest one percent of Americans.

CTJ and ITEP are also releasing state-specific versions of this report showing the specific distribution of the benefits, and amounts of tax cuts, from each approach in each of the fifty states and the District of Columbia.  All the reports are at www.ctj.org/bushtaxcuts2012.php.

The report also addresses the economic effects of tax cuts versus direct government spending and cites Moody Analytics research concluding that government spending is more stimulative by a factor of five or more than tax cuts.


 Citizens for Tax Justice (CTJ), founded in 1979, is a 501 (c)(4) public interest research and advocacy organization focusing on federal, state and local tax policies and their impact upon our nation ( www.ctj.org).

Founded in 1980, the Institute on Taxation and Economic Policy (ITEP) is a 501 (c)(3) non-profit, non-partisan research organization, based in Washington, DC, that focuses on federal and state tax policy. ITEP's mission is to inform policymakers and the public of the effects of current and proposed tax policies on tax fairness, government budgets, and sound economic policy (www.itepnet.org).




The IRS 35,000: How the Richest Americans Pay the Lowest Taxes

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A new study from the Internal Revenue Service confirms your worst fears about the tax code: it’s riddled with loopholes and Congress isn’t doing anything about it.  Year after year since 1977, the IRS has dutifully issued its “data on individual income tax returns reporting income of $200,000 or more, including the number of such returns reporting no income tax liability and the importance of various tax provisions in making these returns nontaxable” because Congress mandates it. And year after year, it shows that some of the very richest Americans are finding entirely legal ways to avoid federal income taxes altogether.

The new (and most recent) IRS data show that in 2009, more than 35,000 Americans* with incomes over $200,000 paid not a dime in federal income tax. For this group—less than one percent of all the Americans with incomes over $200,000, according to the study— itemized deductions and tax-exempt bond interest are among the main tax breaks that make this tax-avoiding feat possible. 

And, as if to illustrate how loopholes never die, these two tax breaks are among the oldest on the books; the exemption of bond interest dates to the century old statute establishing the income tax itself!

Sensible tax reforms could close (or at least shrink) these holes in the tax code.  The president, for example, has proposed a limit on the value of itemized deductions for the wealthiest Americans, and to extend the “Build America Bonds” program which keeps revenues flowing to cities but phases out the tax shelter the current system provides for the bond holders.

Of course, these wealthy taxpayers avoiding all their federal income tax responsibilities don’t even include the ones paying zero or low federal taxes because of the low rates at which investment income is taxed.

There is no excuse for hundred-year-old loopholes in a tax code: it’s time for Washington to clean up the tax code and take a brave stand against unwarranted exemptions that drain revenues and reward the rich.

* Others have focused on a smaller number of taxpayers, 21,000, who have an adjusted gross income (AGI) of over $200,000. But simple AGI excludes many types of income, such as tax exempt bond interest which is key to the low tax liabilities.


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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.

Step Aside, Tea Party - A New Kind of Tax Protest is Here

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On Tax Day 2012, thousands of people throughout the country rallied in favor of progressive taxation and against the low (or sometimes zero rates) paid by the wealthiest Americans and corporations. These protests were the latest in the growing progressive tax movement dubbed “Tax Revolt 2.0” for its focus on tax fairness rather than tax cuts.  As one commentator declared, "Tax Day doesn't belong to the Tea Party anymore."

The popularity of these protests should be no surprise considering that 68 percent of Americans believe the current tax system benefits the rich and is unfair to ordinary workers. While efforts by grassroots groups have begun to change the conversation about tax fairness, these tax day 2012 protests reveal a reach and momentum that show no signs of receding.

You could hardly travel around the US on tax day this year without running into one of over 200 rallies including: Los Angeles, Fort Worth, Kansas City, Boston, Duluth, Grand Rapids, Bangor, Chicago, Pittsburgh, Green Bay, New York City, Ames, Toledo, Kalamazoo, Newark, Seattle, and many, many more.

While the broad theme of the nationwide protests was tax fairness, the targets differed. In Jersey City, NJ for instance, protestors rallied at their local Wells Fargo bank to call out the company for its role as an infamous tax dodger, while protestors in Tuscon, AZ held their rally at a local post office to highlight how the failure to tax wealth results in the loss of jobs and critical public institutions like the Postal Service.

To be sure, the anti-tax lobby is well established, but you gotta’ believe that activists as energetic and creative as these will win the day:


Photo of the "Tax Dodgers" via  D*Unit Creative Commons Attribution License 2.0

CTJ Fact Sheet: What You Need to Know About America's Tax System

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CTJ issued a one-page fact sheet that includes the information you need to understand the debates that will continue long after Tax Day. America is NOT overtaxed... Virtually all Americans, including the poorest Americans, are paying some type of tax... Wealthy Americans are NOT overtaxed... Some millionaires who live off their investments are paying a smaller share of their income in taxes than many middle-income people pay... U.S. corporations are NOT overtaxed... Tax cuts have not helped our economy...

Read the fact sheet.

Garth: The Only American Who Doesn't Pay Taxes?

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For years we’ve been hearing how half of all Americans don’t pay taxes –but our numbers say otherwise. So we set out to find even one American that didn’t pay any tax and, amazingly, we did! He is unique, and he is Garth.

Click on Garth below to learn more about how he does it:

VIDEO: Mitch, Who Wants to Pay No Taxes

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Our three-minute movie in which an ordinary guy makes a shocking discovery. "Are you telling me," he says, "that unless I'm General Electric or Mitt Romney I have to pay more taxes than Warren Buffett?!"

Watch it at the CTJ YouTube Channel


New Polls Show Growing Sentiment that Wealthy and Corporations Don't Pay Enough Taxes

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A new Washington Post-ABC News poll shows that only nine percent of Americans believe the tax system works for the middle class, with 68 percent saying it actually favors the wealthy. The survey shows a public overwhelmingly convinced that our tax system is unfair and that taxes should be raised on wealthy Americans.

The belief that the tax system is unfair has surely been fueled by the recent revelation of presidential candidate Mitt Romney’s super low 14% tax rate on his $21 million income. In fact, the same poll found that 66 percent of the public generally – and even a near majority of Republicans! – believe that Romney is not paying his fair share in taxes.

Not surprisingly, then, Americans overwhelmingly support increasing taxes on the wealthy, according to this poll, with 72 percent saying that taxes should be increased on millionaires. Of course, time and time again polls have shown the public’s robust support for progressive taxation.

A Growing Gap Between Small and Big Business

In related news, a nationwide survey released by the American Sustainable Business Council, Main Street Alliance and Small Business Majority shows that small business owners are fed up with how our corporate tax system favors big corporations at the expense of small businesses.

Indeed, 9 out of 10 small business owners said that big corporations use loopholes to avoid taxes that small businesses have to pay, with three quarters of the small business owners noting that their business is harmed by such loopholes. The same survey found that 67 percent of small business owners believe big corporations pay less than their fair share.

Even when small and large busineses agree that they want more tax handouts from Congress, they're talking about very different things, according to a new Bloomberg (subscription only) poll.  Asked what tax changes would help them most, advisors to smaller businesses prioritize things like reducing payroll taxes on employers and making permanent the deduction for self-employment. Big business priorities included 100 percent expensing (a.k.a. bonus depreciation) of equipment and complete overhaul of the corporate tax code – including a reduced tax rate.

These studies are more reason corporate lobbyists and their patrons in Congress should stop pretending they’re all about small business. They’re not.

Citizens for Tax Justice has calculated that President Obama’s “Buffett Rule” would, if in effect this year, raise $50 billion in a single year and affect only the richest 0.08 percent of taxpayers — that’s just eight percent of the richest one percent of taxpayers.

During his State of the Union address, President Obama proposed that Congress enact his Buffett Rule, inspired by billionaire Warren Buffett’s complaint that he has a lower effective tax rate than his secretary.

CTJ has long argued that the most straightforward way to fix this problem is to end the special low tax rate for capital gains and stock dividends.

A document released from the White House on Wednesday suggests the President would take a different approach. It explains that

the President is now specifically calling for measures to ensure everyone making over a million dollars a year pays a minimum effective tax rate of at least 30%. The Administration will work to ensure that this rule is implemented in a way that is equitable, including not disadvantaging individuals who make large charitable contributions.

The last sentence apparently means that charitable deductions for millionaires would not be affected.

To calculate the $50 billion figure, we assumed that there would be a minimum tax that applies to adjusted gross income (AGI) minus charitable deductions. (We’ll call this modified AGI.)

We assumed that a taxpayer with modified AGI greater than $1 million would face a minimum tax of 30 percent of modified AGI. The taxpayer would pay whichever is greater, their personal income tax under the existing rules or this minimum tax.

Revenue Impact Would Depend on Details

Of course, taxes always have to be a little more complicated than that. We had to assume that this minimum tax is phased in over a certain income range rather than allow it to kick in fully for everyone with exactly $1 million or more in modified AGI. Otherwise, a person with modified AGI of $999,999 might have an effective rate of 15 percent, and if they make $2 more their effective tax rate will shoot up to 30 percent. Congress generally avoids enacting any tax rules that have this sort of “cliff” effect.

So we assumed that the minimum tax would be phased in for taxpayers with income between $1 million and $2 million. That means that only half of the minimum tax applies if you make $1.5 million, and the entire minimum tax applies if you make $2 million or more. This means that the Buffett Rule could raise less revenue or more revenue if Congress chose different rules to phase it in.

CTJ Report Explains Need for Buffett Rule

A report from Citizens for Tax Justice explains how multi-millionaires like Romney and Buffett who live on investment income can pay a lower effective tax rate than working class people.

As the report explains, there are two reasons for this. First, the personal income tax has lower rates for two key types of investment income, capital gains and stock dividends. Second, investment income is exempt from payroll taxes (which will change to a small degree when the health care reform law takes effect).

The report compares two groups of taxpayers, those with income in the $60,000 to $65,000 range (around what Buffett’s famous secretary makes), and those with income exceeding $10 million.

For the first group, about 90 percent have very little investment income (less than a tenth of their income is from investments) and consequently have an average effective tax rate of 21.3 percent. For the second group (the Buffett and Romney group) about a third get the majority of their income from investments and consequently have an average effective tax rate of 15.2 percent. This is the problem that the Buffett Rule would solve.

Photo of Warren Buffett via Track Record Creative Commons Attribution License 2.0

How Obama Could Get Buffett and Romney to Pay at Least 30 Percent in Taxes

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During his State of the Union address, President Obama proposed that Congress enact his “Buffett Rule,” inspired by billionaire Warren Buffett’s complaint that he has a lower effective tax rate than his secretary.

President Obama said, “Tax reform should follow the Buffett rule: If you make more than $1 million a year, you should not pay less than 30 percent in taxes.”

This might mean that Congress would enact a new minimum tax of 30 percent for those with incomes over $1 million. But a simpler way to implement the Buffett Rule would be to simply end the tax preference for capital gains and stock dividends, which is the reason people like Mitt Romney and Warren Buffett can pay such low tax rates.

CTJ Report Explains Why Romney and Buffett Pay Such Low Tax Rates

A report from Citizens for Tax Justice explains how multi-millionaires like Romney and Buffett who live on investment income can pay a lower effective tax rate than working class people.

As the report explains, there are two reasons for this. First, the personal income tax has lower rates for two key types of investment income, capital gains and stock dividends. Second, investment income is exempt from payroll taxes (which will change to a small degree when the health care reform law takes effect).

The report compares two groups of taxpayers, those with income in the $60,000 to $65,000 range (around what Buffett’s famous secretary makes), and those with income exceeding $10 million.

For the first group, about 90 percent have very little investment income (less than a tenth of their income is from investments) and consequently have an average effective tax rate of 21.3 percent. For the second group (the Buffett and Romney group) about a third get the majority of their income from investments and consequently have an average effective tax rate of 15.2 percent.

This problem could be largely solved by doing what President Reagan did with the Tax Reform Act of 1986, which taxed all income at the same rates.

Romney Confirms CTJ Calculation of His Super-Low Tax Rate, Demonstrates Why We Need Buffett Rule

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Three months ago, CTJ's Bob McIntyre told TIME that GOP candidate Mitt Romney likely has an effective federal tax rate of around 14 percent because of the tax break for investment income that Romney enjoys. Today, the candidate said, “What’s the effective rate I've been paying? It's probably closer to the 15 percent rate than anything.”

Romney went on to say, “Because my last 10 years, I've ... my income comes overwhelmingly from investments made in the past, rather than ordinary income or rather than earned annual.”

In other words, a wealthy person like Romney can receive most of his income in the form of capital gains and stock dividends, which are subject to a top rate of just 15 percent under the personal income tax and not subject to payroll taxes.

A CTJ report from last year explains that about one third of people with income in excess of $10 million annually get the majority of their income from investments and, because of these tax preferences, pay a lower effective tax rate than many middle-income taxpayers, who typically get their income from work. Romney is a member of this lucky group of wealthy individuals.

Ending the tax preference for capital gains and stock dividends is therefore the primary way to implement President Obama’s Buffett Rule, the principle that tax reform should reduce or eliminate those situations in which millionaires pay lower effective tax rates than middle-income people.

In Romney’s case, there is actually a very specific loophole that probably allows his income to be taxed as capital gains (taxed at the 15 percent rate) even when it is actually compensation for work. We call this the Romney Loophole, which allows wealthy fund managers to treat their “carried interest” (profits that they receive as compensation for their work) as capital gains and thus subject to the low 15 percent tax rate.

President Obama’s budget plans all contain a proposal to close the Romney Loophole, which would at least end the very worst abuse of the tax preference for capital gains and stock dividends. But to truly implement the Buffett Rule, the tax preference for investment income must be eliminated entirely.

Warren Buffett Is Right, the Wall Street Journal Is Wrong

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Warren Buffett, the billionaire investor and CEO of Berkshire Hathaway, called for higher taxes for millionaires in a widely-noted op-ed this week. As expected, the Wall Street Journal reacted with a variety of misleading counter-arguments. We conclude that:

  1. Buffett is correct that the tax breaks that benefit the wealthy investor class, like the capital gains and dividends preferences, are unfair.

  2. The Wall Street Journal’s arguments that these types of investment income are double-taxed are incorrect.

  3. Contrary to what the Journal claims, President Obama’s tax plan is in keeping with Buffett’s call for higher taxes on millionaires.

Billionaire Investor Is Right to Call for Higher Taxes for the Rich and End of Breaks for Investment Income

Buffett points out that middle-class Americans are being asked to “sacrifice” as Congress and the new twelve-member “super committee” search for ways to reduce the budget deficit, but millionaires have not been asked to sacrifice anything. He argues that the super committee should ask millionaires to pay at higher rates than they pay today and should also end or reduce special tax preferences for investment income, which makes up most of the income of millionaires.

Citizens for Tax Justice has long made the case that these tax preferences — the special low income tax rates for capital gains and stock dividends, should be repealed entirely.

CTJ offers the example of an heiress who owns so much stock and other assets that she does not have to work. She receives stock dividends, and when she sells assets (through her broker, of course) for more than their original purchase price, she enjoys the profit, which is called a capital gain. On these two types of income, she only pays a tax rate of 15 percent.

Now consider a receptionist who works at the brokerage firm that handles some of the heiress’s dealings. Let’s say this receptionist earns $50,000 a year. Unlike the heiress, his income comes in the form of wages, because, alas, he has to work for a living. His wages are taxed at progressive rates, and a portion of his income is actually taxed at 25 percent. (In other words, he faces a marginal rate of 25 percent, meaning each additional dollar he earns is taxed at that amount).

On top of that, he also pays the federal payroll tax of around 15 percent. (Technically he pays only half of the payroll tax and his employer pays the other half, but economists generally agree that it’s all ultimately borne by the employee.) So he pays taxes on his income at a higher rate than the heiress who lives off her wealth.

What make this situation even worse are the various loopholes that allow wealthy individuals to receive these tax breaks for income that is not really even capital gains or dividends. As Buffett explains, fund managers use the “carried interest” loophole to have their compensation treated as capital gains and taxed at the low 15 percent rate, while the “60/40 rule” benefits traders who “own stock index futures for 10 minutes and have 60 percent of their gain taxed at 15 percent, as if they’d been long-term investors.”

CTJ has found that if Congress simply repealed the preference for capital gains entirely, three fourths of the tax increase would be borne by the richest one percent of taxpayers. (See page 19 of this report for estimates.) The tax preference for dividends expires at the end of 2012 if Congress does not extend it.

The Myth of Double-Taxed Investment Income

The Wall Street Journal starts with the following complaint about Buffett’s argument that his capital gains and dividend income is insufficiently taxed:

“What he doesn't say is that much of his income was already taxed once as corporate income, which is assessed at a 35% rate (less deductions). The 15% levy on capital gains and dividends to individuals is thus a double tax that takes the overall tax rate on that corporate income closer to 45%.”

Anti-tax ideologues often claim that corporate profits are taxed twice, once under the corporate income tax and then again under the personal income tax when the shareholders receive them in the form of capital gains and dividends. There are several fatal flaws in this argument:

First, many corporate profits are not taxed, as GE, Verizon, Boeing, and many other corporations have demonstrated.

Second, two thirds of those dividends are actually paid to tax-exempt entities like pension funds or university endowments.

Third, a capital gain from selling a corporate stock is not necessarily a form of corporate profit. If stock value rises based on some expectation of a future increase in profits (which a drug company might enjoy after the FDA approves a new product, for example) that does not have anything to do with profits that the company has already received or paid taxes on.

In any case, the capital gains earned outside of tax-exempt plans are not taxed until shareholders sell their corporate stock at a profit, meaning those gains can be deferred indefinitely. Even when shareholders do report capital gains they often offset them with capital losses.

If one applies the logic of the “double-tax” argument more broadly, one would have to conclude that the wage and salary income of ordinary Americans is subject to several forms of taxes that wealthy investors don’t worry much about. For most Americans, income consists entirely of wages and all of it is subject to Social Security taxes and much or most of it is subject to the federal income tax. Then when people spend their income, a great deal of their purchases are subject to sales taxes.

Somehow the Wall Street Journal and its devotees only express concern over taxing income multiple times when wealthy investors are involved.

Ending Tax Cuts for Income Over $250,000 Actually Targets Millionaires

The Wall Street Journal also complains that, “Like Mr. Obama, Mr. Buffett speaks about raising taxes only on the rich. But somehow he ignores that the President's tax increase starts at $200,000 for individuals and $250,000 for couples.”

But President Obama’s plan does target millionaires. A recent report from Citizens for Tax Justice explains that if enacted in 2011, 84 percent of the revenue savings from Obama’s income tax plan would come from people who make more than $1 million annually.

What is often not understood is that Obama’s plan would leave in place the Bush income tax reductions for the first $250,000 of adjusted gross income (AGI) for all married couples (and the first $200,000 for all unmarried taxpayers).

A married couple with adjusted gross income of $250,001 would pay higher taxes on at most one dollar, and face a tax hike of only 3 cents at most. But even that tiny tax hike would be extremely rare, since almost all couples at that income level itemize deductions. Typically, couples would have to make more than $295,000 before they lost any of their Bush income tax cuts.

Married taxpayers with incomes between $250,000 and $300,000 would lose just one percent of their Bush income tax cuts, on average, under President Obama’s plan.

The Wall Street Journal calls taxpayers with AGI in excess of $250,000/$200,000 “middle-class.” CTJ estimates that in 2013, when the Bush tax cuts are scheduled to expire, only 2.6 percent of taxpayers will have adjusted gross income in excess of the $250,000/$200,000 threshold.

This shows that President Obama is asking too few, rather than too many, Americans to pay higher taxes than they do today. 

Photos via The White House Creative Commons Attribution License 2.0

New Report from CTJ: U.S. One of the Least Taxed Developed Countries

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Revenue Increase the Obvious Answer to Budget Deficits

Some members of Congress are threatening to allow the U.S. to default on its debt obligations — and send financial markets into a tailspin — unless the President agrees to large, sudden cuts in the budget deficit without any increase in tax revenue. But the most recent data reveal that the U.S. is already one of the least taxed countries in the developed world. Only two OECD countries have lower taxes as a share of gross domestic product (GDP) than the United States.

Read the report.

Number of High Income Taxpayers Who Owe Nothing in Income Taxes Just Doubled

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The Internal Revenue Service (IRS) recently released new data showing that the number of individuals paying zero US income taxes on an adjusted gross income (AGI) of $200,000 or more almost doubled between 2007 and 2008.

In 2008, the number of returns declaring an AGI of over $200,000 represented about 3.1 percent of the total returns filed to the IRS. Out of these returns, as many as 18,783 had no U.S. income tax liability whatsoever in 2008; that’s nearly double the 10,465 who owed nothing in 2007.

Although this may represent only 0.43 percent of taxpayers reporting an AGI of over $200,000, it is the biggest percentage of non-payers in this category since the IRS began reporting the data in 1977.

The IRS report also revealed that the much publicized top marginal rate of 35 percent exists primarily on paper: according to the data, only 0.007 percent of ALL taxpayers pay an effective tax rate of 35 percent or higher. Put differently, nine times as many high income taxpayers pay zero in taxes than pay an effective, actual 35 percent tax rate.

Much of the explanation for the low effective rates for higher income individuals can be explained by the over $1 trillion in special tax deductions and treatment often referred to as tax expenditures. Examples of expenditures that rich taxpayers exploit would be: special treatment of capital gains, tax-exempt interest and the mortgage interest deduction.

Reducing or eliminating tax expenditures for businesses and investors would not only help reduce the deficit, it would also make the system more fair by reducing the number of higher income taxpayers who are able to avoid paying a substantial part or all of the taxes they owe.

The IRS data proves once again what Citizens for Tax Justice has said all along, our tax system is not as progressive as you think.

New Report from CTJ: 400 Highest-Income Americans Paid an Effective Rate of 18.1% in 2008

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Should Tax Hikes on these Americans Be “Off the Table?”

As House Speaker John Boehner and other Republican leaders in Congress continue to assert that tax increases even on the very wealthiest Americans are “off the table,” one rationale sometimes advanced for this view is that Americans who work hard and become successful have to pay over a third of their income in federal income taxes.

A new CTJ report describes data recently released from the IRS showing that this is not remotely true. The IRS data show that the federal income tax rates paid by the highest-income Americans have dropped substantially since 2000, largely due to cuts in the tax rates on capital gains and dividends pushed through by the Bush Administration.

Read the report.

Undocumented Immigrants Pay Taxes

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Weeks after the New York Times broke the story of General Electric's tax avoidance, it's still hard for many Americans to believe how successfully GE has managed to avoid owing any tax on its profits. Yet some anti-immigrant groups find it much more plausible that undocumented immigrants somehow pay no taxes at all, while relying heavily on state and local government services.

A new report from the Immigration Policy Center, fueled by data from ITEP's Microsimulation Model, shows that in fact, undocumented families pay a substantial amount of state and local taxes across the nation. The report estimates that these families pay over $11 billion a year in state and local sales, excise, income and property taxes.

It's notoriously difficult to know precisely even the basic facts about the changing undocumented population in the US, and the IPC report should be understood not as a definitive answer but as a sensible estimate based on the best available data. But the new IPC report serves as an important reminder that undocumented taxpayers make important financial contributions to the fiscal health of state and local governments.

CTJ's Tax Day Report: America's Tax System Is Not as Progressive as You Think

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Conservative lawmakers and pundits often claim that the richest Americans are paying a disproportionate share of taxes while a huge number of lower-income Americans pay nothing at all. CTJ has updated its report on federal, state and local taxes that explains why they're wrong.

Read the report.

On Wednesday, the co-chairs of the President's fiscal commission put forth a series of options to reduce the long-term federal budget deficit by $3.8 trillion over ten years. The vast majority of the savings would come from cuts in public investments rather than from closing tax loopholes and reforming the tax system.

This makes little sense, given that the United States is one of the least taxed countries in the developed world. A new report from Citizens for Tax Justice explains that the most recent data from the Organization for Economic Cooperation and Development (OECD) show that the U.S. is the third least taxed country of the 27 OECD countries for which data are available.

Read the report.

New Report from CTJ: All Americans Pay Taxes

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Conservative pundits and media outlets have seized upon an estimate that 47 percent of taxpayers owe no federal income tax for 2009. This statistic has morphed into the claim by conservatives that “47 percent of all Americans don’t pay any taxes.”

The conservative pundits are wrong. It’s true that many taxpayers don’t pay federal income taxes, but they still pay federal payroll taxes (and some federal excise taxes) and also pay state and local taxes. Most of these other taxes are regressive, meaning they take a larger share of a poor or middle-class family’s income than they take from a rich family. This largely offsets the progressivity of the federal income tax.

A new report from CTJ estimates that the share of total taxes (federal state and local taxes) paid by taxpayers in each income group is quite similar to the share of total income received by each income group in 2009.

Read the report.

The 2009 federal income taxes that come due on April 15 have been cut for nearly all working Americans, including Americans at all income levels, by the Recovery Act signed by President
Obama last year. But no one seems to be aware of this. Recent polls indicate that the vast majority of Americans think that the President either raised taxes or left them the same for 2009.

CTJ has new state-specific reports that aim to clear up this widespread misunderstanding. They show that the President cut taxes for working people at all income levels for 2009 and they show who was helped by each individual tax break.

Read the fact sheet and report for your state.

The Tea Party and Misconceptions about Taxes

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So who exactly are these "Tea Party" folks who have been protesting health care reform? We leave it to others to report on their more shocking behavior. But we'll consider the concept of "TEA" (taxed enough already) that seems to drive their world view.
David Frum (the scholar recently fired from the American Enterprise Institute for excessive honesty) sent interns into the tea party crowd to ask them some questions about taxes.
The accuracy of their responses was pretty dismal. When asked how much a family earning $50,000 a year pays in federal income taxes, the average answer was about $10,000. What's the real answer? After deducting the standard deduction and personal exemptions, a family of four owes only $1,965 in federal income taxes.
When asked whether federal taxes are higher, lower, or the same since President Obama took office, more than two-thirds of the group thought they were higher. The reality is that they are lower by every measure. For that working family, last year's stimulus bill reduced their federal income tax by $800.
As we reported last tax day, misconceptions about the level of federal income taxes are particularly common among those with anti-tax views.

Dispatch from Anti-Tax La La Land: Health Care Edition

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The Institute for Research on the Economics of Taxation (IRET) is at it again. If you've ever wondered where the Wall Street Journal's editorial board gets its most half-baked ideas about taxes and economics, the IRET is your answer. Last year, they released a remarkable report concluding that repealing the estate tax would actually increase federal revenue. (See CTJ's response.) 
Now the IRET claims that the Medicare tax reform included in the health care compromise before Congress would decrease GDP by 1.3 percent and actually reduce federal revenue by $5 billion a year. 
The problem, according to IRET, is that taxes on investment income reduce incentives to invest, which results in less economic activity, fewer jobs and lower incomes. They believe that business profits and wages would fall so much that the resulting loss of tax revenue would more than offset the gain resulting from the increase in the Medicare tax. This is the flip side of the coin for "supply-side" theorists who believe that tax cuts (particularly tax cuts for investment income) will result in increased revenue.
Proponents of this analysis call it "dynamic" revenue scoring. Sadly for IRET, no one believes it. Even George W. Bush's Treasury concluded that the gross increase in revenue resulting from the economic impact of tax cuts is tiny and comes nowhere near the level needed to actually offset the cost of tax cuts (much less result in a net revenue gain). Economic advisers to conservative Republican presidents agree. For example, Martin Feldstein, Chairmen of Council of Economic Advisers under President Reagan, and Glenn Hubbard and Greg Mankiw, both CEA chairmen during the George W. Bush administration, all have been quoted as saying that tax cuts do not raise revenue. One would assume that they believe the reverse, that tax increases do not reduce revenue.
Some more moderate supply-siders (if such a thing is possible) concede that many tax increases do raise revenue and many tax cuts do reduce revenue, but they argue that taxes on investment income are something different. Certain types of investment income like capital gains and dividends, are more responsive to tax rates, they argue. 
But there is no evidence to back this up. Proponents of this argument often point to the upticks in revenue from income taxes on capital gains income and claim that they are caused by the latest increase in the tax preference for capital gains. As we've pointed out before, capital gains tax revenue was higher at the end of the Clinton years, when the top rate for capital gains was higher, than any time since. The truth is that investment income simply bobs up and down in response to whatever is happening in the broader economy, without much discernable impact from tax policy.  
There are other problems with the IRET's claims. In some places they are just factually wrong. One claim IRET makes is that the new Medicare tax on investment income "would be triggered by earning even a single dollar above the thresholds, after which all of the taxpayers’ passive income would be immediately subject to the tax. This creates a huge tax rate spike or 'cliff' at the thresholds."
Wrong. The memo and revenue estimates that the Joint Committee on Taxation (JCT) distributed by lawmakers on February 24 made clear that the President's version of the Medicare tax on investment income would be phased in over a range of income exceeding $200,000/$250,000, while the text of the revised version says it would apply only to unearned income to the extent that AGI exceeds the $200,000/$250,000 threshold. In other words, if a single person has AGI of $201,000 and $51,000 of this income is investment income, the 3.8 percent Medicare tax would only apply to $1,000 of investment income (not the entire $51,000). 
In other words, IRET either talks about a tax policy that no one has proposed (such as a "cliff" for people with one dollar of income over the $200,000/$250,000 threshold) or retreats into a theoretical and fantastical world (where increasing taxes causes revenue to plummet and cutting taxes causes revenue to rise).
Of course, if we could raise revenue to pay for health care reform by actually cutting taxes, surely Democrats in Congress would have passed health care reform long ago.

New IRS Data Show that Income of the Richest 400 Grows While their Effective Tax Rate Declines

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New data from the IRS show that in 2007 the richest 400 taxpayers in America increased their incomes by 31 percent over the previous year, increased their share of total income in America, and paid an even lower effective tax rate than ever before.

Writing for Tax Analysts, David Cay Johnston finds that the average income of the richest 400 grew from $263.3 million in 2006 to $344.8 million in 2007. Meanwhile, their effective income tax rate fell from 17.17 percent in 2006 to 16.62 percent in 2007.

As usual, a major cause of the low effective tax rates is the preferential rate for capital gains and stock dividends, which are taxed at a top rate of 15 percent instead of the top rate of 35 percent that applies to other income for the very rich. Capital gains made up 66.3 percent of income for the top 400 in 2007, up from 62.8 percent in 2006.

The data seem to highlight the need to allow the Bush tax cuts, which cut the top rate for capital gains and stock dividends to 15 percent, to expire as scheduled at the end of 2010.

The report released last week by Citizens for Tax Justice on the President's budget argued that Congress should at least allow the Bush tax cuts to expire for the rich (which Obama defines as married couples with incomes above $250,000 and unmarrieds with income above $200,000) and should enact at least as many revenue-raisers as the President proposes.

Read ITEP's New Report: Who Pays? A Distributional Analysis of Tax Systems in All 50 States

By an overwhelming margin, most states tax their middle- and low-income families far more heavily than the wealthy, according to a new study by the Institute on Taxation & Economic Policy (ITEP).

“In the coming months, lawmakers across the nation will be forced to make difficult decisions about budget-balancing tax changes—which makes it vital to understand who is hit hardest by state and local taxes right now,” said Matthew Gardner, lead author of the study, Who Pays? A Distributional Analysis of the Tax Systems in All 50 States. “The harsh reality is that most states require their poor and middle-income taxpayers to pay the most taxes as a share of income.”

Nationwide, the study found that middle- and low-income non-elderly families pay much higher shares of their income in state and local taxes than do the very well-off:

-- The average state and local tax rate on the best-off one percent of families is 6.4 percent before accounting for the tax savings from federal itemized deductions. After the federal offset, the effective tax rate on the best off one percent is a mere 5.2 percent.

-- The average tax rate on families in the middle 20 percent of the income spectrum is 9.7 percent before the federal offset and 9.4 percent after—almost twice the effective rate that the richest people pay.

-- The average tax rate on the poorest 20 percent of families is the highest of all. At 10.9 percent, it is more than double the effective rate on the very wealthy.

“Fairness is in the eye of the beholder.” noted Gardner. “But virtually anyone would agree that this upside-down approach to state and local taxes is astonishingly inequitable.”

The “Terrible Ten” Most Regressive Tax Systems

Ten states—Washington, Florida, Tennessee, South Dakota, Texas, Illinois, Michigan, Pennsylvania, Nevada, and Alabama—are particularly regressive. These “Terrible Ten” states ask poor families—those in the bottom 20% of the income scale—to pay almost six times as much of their earnings in taxes as do the wealthy. Middle income families in these states pay up to three-and-a-half times as high a share of their income as the wealthiest families. “Virtually every state has a regressive tax system,” noted Gardner. “But these ten states stand out for the extraordinary degree to which they have shifted the cost of funding public investments to their very poorest residents.”

The report identifies several factors that make these states more regressive than others:

-- The most regressive states generally either do not levy an income tax, or levy the tax at a flat rate;

-- These states typically have an especially high reliance on regressive sales and excise taxes;

-- These states usually do not allow targeted low-income tax credits such as the Earned Income Tax Credit; these tax credits are especially effective in reducing state tax unfairness.

“For lawmakers seeking to make their tax systems less unfair, there is an obvious strategy available,” noted Gardner. “Shifting state and local revenues away from sales and excise taxes, and towards the progressive personal income tax, will make tax systems fairer for low- and middle income families. Conversely, states that choose to balance their budgets by further increasing the general sales tax or cigarette taxes will make their tax systems even more unbalanced and unfair.”

Implications for State Budget Battles in 2010

“In the coming months, many states’ lawmakers will convene to deal with fiscal shortfalls even worse than those they faced last year,” Gardner said. “Lawmakers may choose to close these budget gaps in the same way that they have done all too often in the past—through regressive tax hikes. Or they may decide instead to ask wealthier families to pay tax rates more commensurate with their incomes. In either case, the path that states choose in the upcoming year will have a major impact on the wellbeing of their citizens—and on the fairness of state and local taxes.”

Is "Tax Day" Too Burdensome for the Rich?

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New Data from Citizens for Tax Justice Shows that the U.S. Tax System Is Not as Progressive as You Think

Many politicians, pundits and media outlets have recently claimed that the richest one percent of American taxpayers are providing a hugely disproportionate share of the tax revenue we need to fund public services. New data from Citizens for Tax Justice show that this simply is not true. CTJ estimates that the share of total taxes (federal state and local taxes) paid by taxpayers in each income group is quite similar to the share of total income received by each income group in 2008.

- The total federal, state and local effective tax rate for the richest one percent of Americans (30.9 percent) is only slightly higher than the average effective tax rate for the remaining 99 percent of Americans (29.4 percent).

- From the middle-income ranges upward, total effective tax rates are virtually flat across income groups.

Read the fact sheet.

Answers to Your Tax Day Questions

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A new report from Citizens for Tax Justice answers many of the questions that are frequently asked about taxes during this time of year and clears up the old myths that are still accepted by many as fact. Here is just a sample of some of the questions that are answered:

Question: Does President Obama plan on raising our taxes?

Question: There might be cyclical downturns and upturns in the economy that no one can control, but don't tax cuts help us climb out of downturns a little faster?

Question: What are "tax havens" and why are some people in an uproar over them?

Question: What does it matter to me if someone else is hiding their income from the IRS?

Read the report.

As we approach April 15th, one complaint we often hear is that Americans who work hard and become successful have to pay over a third of their income in federal income taxes. But a recent report from the Internal Revenue Service (IRS) shows that this is not remotely true.

As a new CTJ fact sheet explains, the IRS data show that the federal income tax rates paid by the highest-income Americans have dropped substantially since 2000, largely due to cuts in the tax rates on capital gains and dividends pushed through by the Bush Administration. While income from work (salaries and wages) is subject to rates as high as 35 percent, income from investments (long-term capital gains and stock dividends) is taxed at only 15 percent.

The IRS report shows that in 2006 (the latest year for which data are available), the 400 richest income tax filers paid just 17.2 percent of their adjusted gross income (AGI) in federal income taxes. That is down from 22.3 percent in 2000, and is less than half of the top statutory income tax rate of 35 percent.

Read the CTJ fact sheet.

President Bush Has Made Tax Day Easier for the Rich - at the Expense of Everyone Else

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A report released this week from Citizens for Tax Justice explains how "tax day" has changed under President George W. Bush. The answer for most Americans is: very little. Despite claims made by the President and his supporters, the tax breaks enacted after 2000 provide little benefit for the middle-class. However, for the richest one percent of American families, tax day is considerably easier. Once the President's tax cuts are fully phased in, the majority of the benefits will flow to this small group of lucky families.

What has changed for most Americans is the very real threat posed by the increased national debt resulting from these tax cuts. The national debt must eventually be paid off with tax increases or cuts in public services that Americans -- particularly the middle-class -- rely on.

The report explains that:

  • The tax cuts received by the typical American are nowhere near as large as the President and his supporters imply, and are in fact too small to make any difference in the life of a typical American family.

  • When the Bush tax cuts are fully phased in, the majority of the benefits will go to the richest one percent.

  • If the Bush tax cuts are made permanent, as the President proposes, the cost will be $5 trillion over the 2011-2020 period. To put that in context, the federal government collected $2.6 trillion in revenue last year.

  • The Bush tax cuts received by the richest one percent in 2008 will be more than the funding received by the Department of Education, almost twice as much as the funds received by the Department of Homeland Security and over ten times as much as received by the Environmental Protection Agency.

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, http://www.justtaxesblog.org/

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