Daily Deduction

from the Tax Policy Center

Revenues, ‘Rithmetic, and the Power of Magical Thinking

By :: June 20th, 2014

What’s a nation to do with as-yet-untaxed US multinational corporate income? The Center on Budget and Policy Priorities analyzes what a repatriation tax holiday might mean for the US economy. In short: it wouldn’t help. The Business Roundtable, a group of corporate chief executives, doesn’t want to see temporary revenues from the tax holiday used to finance the Highway Trust Fund.

About that Highway Trust Fund: “Pay no attention to the man behind the curtain.” Or, read TPC’s Howard Gleckman’s latest assessment of the Corker-Murphy gas tax hike. Much like the proposed repatriation tax holiday, or a proposed cut of Saturday mail delivery, the numbers don’t add up. Maybe they would if we clicked our heels three times? The Senate Finance Committee may address the issue next week. We'll see what happens.

Could the US learn from countries with territorial tax systems for their multinationals? Experiences in Australia, Germany, Japan, and the United Kingdom were instructive to academic experts, government officials, and private sector tax practitioners who considered the model at a recent conference. TPC’s Eric Toder moderated the conference, and provides a review.

Donated tax refunds for education: Better than a bake sale? Teacher salaries in North Carolina have not increased since 2008. But Republican Lieutenant Governor Dan Forest thinks they could if taxpayers donated their tax refunds to a proposed state education endowment fund. The state’s Senate Appropriations Committee will consider the idea this month. Last year, North Carolina passed a tax reform package that created a flat personal income tax, lowered corporate income taxes, and repealed the estate tax so revenues are at a premium.

How has tax revenue changed since 1929? A new TPC Tax Fact illustrates federal, state, and local tax revenue as shares of Gross Domestic Product over time. The cost of World War II contributed to the tripling of federal taxes over the 1940s. Later, federal payroll taxes rose to fund a growing Social Security system and, after 1965, Medicare. Meanwhile, states relied more on  income and sales taxes. Those levies now each account for about one-third of state and local revenue. TPC's Bob Williams elaborates here.

Should Arizona rely on a sales tax for nearly all state revenues? Several Republican gubernatorial candidates would phase out or immediately eliminate the state’s income tax. Republican Governor Jan Brewer thinks that’s a bad idea, making the state too dependent on a volatile source of revenue. Arizona’s state tax revenues currently total about $8.7 billion, with $4.4 billion from individual and corporate income taxes. Sales tax revenues total $4.2 billion.

For small businesses, it’s not about the taxes. TPC’s Frank Sammartino reviews a recent survey of small business and other state economic development research. Based on the evidence, “policies that assist businesses with licensing, permitting, and tax filing; provide technical assistance to help firms grow; and provide well-targeted job training and education are much more effective than tax incentives in promoting business development and economic growth.”

Meanwhile, in Finland: Its government could be missing out on income from the Value Added Tax, to the tune of 1.4 billion euros a year. Some private companies might be failing to collect all the consumption tax they should, but not deliberately. The “gray economy” of unregistered businesses might also share the blame. Finnish tax authorities are looking for VAT leaks with help from the International Monetary Fund. Finland collected about 20 billion euros annually in VAT revenues in recent years.

As for tax administration in the United States: In case you missed it, check out yesterday’s IRS-TPC research conference here and abstracts of presented papers here.

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  1. Michael Bindner  ::  4:31 am on June 21st, 2014:

    The Business Round Table knows that the funds from any holiday will be distributed to shareholders as dividends, including and especially CEOs (how awkward is that for BRT?), and that any offset is silly. If we need to increase the Highway Trust Fund – raise the gas tax with no offsets for doing so. Of course, the BRT oilmen know that if gas taxes go up, they will likely have to lower prices to compensate, at least in part, and that takes money away from them personally. Corker-Murphy need write a clean bill and not worry about the backlash.

    Can we learn from territorial systems? Not really.They have VATs and likely no lower dividend tax rates.

    North Carolina did a tax deform, not a reform Each item they passed is silly – taken together they are a disaster. No, a bakesale is not appropriate nor is requesting more funds from local governments. Education is a redistributive activity and should be paid with a redistributive tax – a tax North Carolina seems to now be missing. It bears repeating that there was a boom in capital gains tax revenue in fall of 2012 – in advance of the increases in 2013 from the ATRA and the ACA. Cutting taxes based on that bonus is simply idiotic – like the NC changes.

    Congrats on the new long term analysis. I am sure many papers will come from it. Congrats also on the IRS./TPC tax administration conference.

    Jan Brewer is right about not cutting an income tax in Arizona for the same reason named above. We need a high level TPC paper on the revenue spike of 2013 so that states stop shooting themselves in the foot – even in advance of IRS data.

    I commented on Frank Sammartino’s paper at length – at least the TaxVox version. Unless the types of small business are deliniated (one person, family/small shop, franchise) conclusions on the data could be misinterpreted about both regulation and taxes. This also provides a nice contrast between small businesses who don’t object to tax rates and the large businesses which have the clout to demand favors.

    On Finland, while individuals firms in the chain may not collect all they should, the retail souce will collect the whole value added anyway. Of course, if the end seller is not registered there is little loss because the next link in the chain likely paid the tax – though a slightly smaller amount. I would think a new web page might help with this.

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