Daily Deduction

from the Tax Policy Center

Tax Rates: Growth, Competition, and Debt

By :: August 25th, 2014

Congress is in recess until September 8. The Daily Deduction will next appear on Tuesday, September 2. It will resume its regular schedule on Monday, September 8.

Individual tax rates: If you cut them, what will grow? Representative Paul Ryan, who is likely to become the next chair of  the House Ways and Means Committee, wants to cut the top individual tax rate because he’s a “classic growth conservative.” But what might such a cut do to the deficit? TPC’s Howard Gleckman describes TPC’s latest estimates. “A one percentage point cut in the top rate would add $108 billion to the deficit over 10 years. Nearly all the benefit would go to those making $1 million or more.” An across-the-board 1 percent rate cut would add $662 billion to the deficit.

Is the US corporate tax rate really so bad? In a new paper, Ed Kleinbard of the Gould School of Law at the University of Southern California says “no.” While the US statutory corporate tax rate is among the highest in the world at 35 percent, the average effective  rate is just 12.5 percent, in part because  $2 trillion in offshore earnings are not subject to US tax. Kleinbard argues that offshore money is not, as corporations would suggest, “trapped.” Since a US multinational can use interest earned on offshore profits to offset its US interest expense, the tax code leaves a firm “in the same economic position as if it had simply repatriated the cash tax-free.”

But inversions remain. So does the need for corporate tax reform. Reincorporating overseas for a lower tax rate might be a great deal for corporations, but it’s not always so great for shareholders. Treasury Secretary Jack Lew has made it clear that while the Administration would like to see business tax reform or retroactive legislation to curb corporate inversions, it may act on its own without waiting for Congress. The Treasury may make a move to limit them as early as next month.

Hollywood or bust? North Carolina isn’t interested in giving film producers a 25 percent refundable tax credit anymore. It joins Florida, New Mexico, and Wisconsin in cutting film industry tax incentives. Arizona, Idaho, Indiana, Kansas, Nebraska, North Dakota and South Dakota have ended tax breaks for filmmakers, too. Meanwhile, the pressure is on Democratic Governor Jerry Brown to quadruple California’s tax incentives for the film industry. But with fewer subsidies in other states, do producers really need them in California?

Also on the entertainment front….Philadelphia Mayor Michael Nutter has abandoned administrative efforts to tax lap dancing after a local judge ruled he didn’t have the authority to impose such a levy. Instead of appealing, Nutter may throw the issue into the lap of the city council.

Will Congress extend the Mortgage Forgiveness Tax Relief Act? The credit, which  expired December 31, 2013, would offset the tax bills of any Bank of America borrowers who accept a loan reduction as part of the bank’s $16.7 billion settlement with the US Department of Justice for financial fraud. If the bill stalls in Congress, BofA has to set aside $490 million to cover its borrowers’ tax bills. If Congress makes the credit retroactive for 2014 and available in 2015 for all eligible taxpayers, it would cost the Treasury $5.4 billion, according to the Joint Committee on Taxation.

Meanwhile, tax expenditures for asset building, like homeownership, are expected to grow. The latest Tax Fact from TPC’s Gene Steuerle and Caleb Quackenbush shows that asset-building tax subsidies cost more than $370 billion in 2014 and are projected to grow to more than $500 billion annually over the next 5 years.

The South likes sales tax holidays. The latest data from the State and Local Finance Initiative maps the geographic clustering of the holiday. Sales tax holidays make little sense as tax policy, since they’re more beneficial to affluent shoppers and don’t encourage additional spending to boost economic growth. They may, however, prompt consumers to stock up on supplies for hurricane season—a good plan in Southern or Gulf states.

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  1. Michael Bindner  ::  11:38 pm on August 25th, 2014:

    Ryan is serving the interests of this donors, and those of the Tea Party, rather then the nation. I hope the voters let him go back to the role he loves so much – Ranking Member. Cutting rates should only happen if lower income taxpayers pay nothing and everyone pays Value Added Taxes and Net Business Receipts Taxes (which would be hidden). In the end, wealthier taxpayers should pay MORE so that we can begin to get ahead of Net Interest on the Debt again and maybe start paying it off.

    The only problem with corporate and non-corporate taxes is that there are two systems. Consumpton taxes would fix that – with and idividual income based income surtax with a single rate. If Klienbard is correct, that could mean money coming home – possibly to a higher tax rate for dividend check recipients.

    Inversions can also be stopped by doing a VAT – because VAT will tax profit as well as wage income. The real question is whether there should be a tax holiday and whether that should accompany an increase in dividend taxes (and yes, it should). Of course, those take congressional action. Jack Lew can act alone but he can expect an attempted raid on his budget if he does.

    The studios do not need a subsidy to do work on-site. Their talent pool is mostly there – especially craft workers. Taking California union workers (the ones who know what their doing) to a location is much more expensive than what it would cost them to do away with tax breaks. And face it, if you need the Grand Canyon or Mt. Rushmore in your shot – you simply do it – which is why South Dakota and other places realized no incentive would help them get more play.

    A lap dancing excise probably needs state sanction. Whether the dancers are paying their state income taxes is not his problem either. Sales taxes on drinks most likely get paid without special attention from the City. As long as there are good bouncers on site, the girls should be safe.

    I suspect that Bank of America still has enough influence to shed its borrowers from income taxes on loan forgiveness. Sadly, the Fed has not been empowered to arrange the same thing for the rest of us (not the tax benefit – the forgiveness) – which means the recovery will be slower than we need.

    Tax benefits for asset building are likely inevitable – but I would rather see a tax benefit for a larger family size. On its own, that benefit will make larger families and bigger houses follow on naturally. As for share building – equalizing the employer contribution to Social Security and diverting some of it to buying shares in employer voting stock is the most obvious way to not only build employee assets, but their power – which is more important.

    I commented on these last week. Poor families often benefit from free school supplies if they go to a Title I school, so these holidays don’t apply to them at all (we picked up ours day). Do they actually encourage hurricane preparedness? Maybe, but a recent hurricane probably does that more acutely – and the best thing to do in those cases is to move people away from the shore. Of course, many shore people are rich and have another home anyway (those that serve them are poor). The rational policy would be to simply condemn most of this property – but the lawyers and lobbyists of rich beach dwellers and vacationers will have nothing of that. This brings us to the real reason we have tax holidays – people give donations to state government to get them. Its most likely a payoff to industry lobbyists. The only way to stop them is publicly funded elections – which rich lobbyists and donors will never allow.