Howard Gleckman is a Resident Fellow at the Urban Institute and editor of TaxVox. He is author of “Caring for Our Parents,” (St. Martin’s Press), a book on how we deliver and finance long-term care to seniors and adults with disabilities. He was formerly senior correspondent in the Washington bureau of Business Week, a Media Fellow at the Kaiser Family Foundation, and a Visiting Fellow at the Center for Retirement Research at Boston College.
The latest example of why bipartisanship is not necessarily good: A bill proposed by senators Chuck Schumer (D-NY) and Pat Roberts (R-KN) to require the IRS to hire private debt collectors. The last time Congress made the IRS try this, the agency lost money. It was a terrible idea then and it is a terrible idea now.
Schumer and Roberts slipped the plan into the (now-stalled) Senate version of a measure aimed at restoring 50+ tax breaks that expired last December. A big reason it found its way into the bill: The congressional Joint Committee on Taxation reported it would generate $2.4 billion in extra revenue over 10 years.
As it happens, this is JCT’s estimate of the gross amount of new revenue the debt collectors would bring in. But after figuring administrative and other costs, the plan would likely end up in the red. When Congress forced the IRS to try this from 2006-2009, the net return on the investment was negative $17 million.
The idea has generated massive opposition from those who understand the tax collections business. IRS Commissioner John Koskinen panned it. So did Nina Olson, the agency’s taxpayer advocate. And on Tuesday, the independent IRS Oversight Board weighed in. The panel was nothing if not refreshingly candid:
The Board believes resurrecting and expanding the unfunded Private Debt Collection concept is a bad idea. The experiment has failed twice and there is nothing to lead us to believe it will not fail again. If Congress wishes to collect more tax revenue to shrink the budget deficit and the tax gap, it should reinstate the levels of funding for IRS collection programs with proven high returns on investment.
It isn’t just the money, of course. For many taxpayers, these private debt collectors would become the public face of the IRS. And I’m not sure they are quite the people who should be playing that role. The agency already must deal with incendiary congressional rhetoric about jack-booted thugs. Imagine the possibilities when the service has only limited ability to oversee private tax collectors who are working in its name—and on commission.
Of course, the agency could always put more resources into training and supervising these private firms. This, of course, would increase the program’s overhead.
In contrast to private contractors, IRS employees have both more clout and more flexibility when it comes to debt collections. They have the hammer, including the ability to impose liens and even seize personal assets. On the other hand, they can also cut deals with taxpayers by granting them partial or installment payment opportunities or even effectively forgiving debts by declaring them not collectible.
Privatization has been an on-gain off-again fad in Congress and the White House for years. And outcomes have sometimes been less than optimal. Contractors played major roles in the wars in Iraq and Afghanistan. They were deeply embedded in the NSA’s ambitious surveillance efforts (Ed Snowden was one). And, let us not forget, they built the technology backbone of the Affordable Care Act’s health exchanges.
I’m not suggesting government contractors are always incompetent or unreliable. Indeed, they have become an integral part of government and are far more effective at doing some tasks than federal or state employees. But based on past experience, it’s pretty clear that collecting taxes is not one of them.
Following the recent offer by U.S drugmaker Pfizer to acquire British pharmaceutical firm AstraZeneca, congressional Democrats are proposing new limits on the ability of U.S.-based firms to establish foreign residence as a way to cut their U.S. corporate tax bill. Even before this latest flap, the Obama Administration proposed curbs on this practice, known as an inversion.
But why does it matter where a multinational corporation is headquartered? Certainly, it would affect U.S. tax receipts. By some estimates, Pfizer alone would pay $1.4 billion less in annual taxes by moving its corporate residence to London—though its offer has so far been spurned.
But beyond the revenue question, should we really care? After all, changing the corporate address of a firm has no real economic impact. There is no reason to believe the company would move production offshore if it shifts the address of its headquarters. After all, firms will produce goods and services wherever it is most cost-effective, after figuring regulatory, labor, and transportation costs.
Even the top executives and their staffs don’t need to go anywhere after an inversion since the U.S., unlike other countries, bases residence on where a firm is incorporated, not where its senior management or R&D is located. So the effect on labor markets is likely to be small or none at all.
Shifting legal residence isn’t likely to have any impact on a firm’s intellectual property either. U.S. based scientists or engineers will create cutting-edge software or a new drug irrespective of their firm’s mailing address. Many multinationals have long-since moved their patents and copyrights to low-tax jurisdictions—something they can easily do without relocating their legal address. Besides, does it matter to the U.S. economy if Apple’s patents are owned by an Irish subsidiary? Would it matter if it moved its corporate residence to Dublin?
The location of a firm’s legal headquarters has no economic effect on consumers either. Prices don’t vary based on where a firm is incorporated. Firms doing business in the U.S. are subject to U.S. regulation and pay the same corporate tax on U.S. source income, no matter where they are from. When Japanese-headquartered Toyota ran into high-profile problems with its brakes a few years ago, it was subject to the same laws as its Detroit competitors.
Is there evidence that firms are more likely to support U.S. foreign policy just because they are incorporated in, say, Delaware instead of Donegal? On the margins, perhaps. But who expects Exxon to withdraw its extensive energy operations from Russia in response to Moscow’s actions in Ukraine, just because the firm is incorporated in the U.S.?
So we are left with a sort of financial chauvinism. It is important to some politicians to be able to say that a company is a red-blooded American company. But when it comes to multinational firms in a global economy, why does that matter?
And what does it even mean? Is it an American firm if most of its shareholders are American? As my former Tax Policy Center colleague Chris Sanchirico pointed out recently, we don’t know the home countries of investors.
Is a firm somehow more American if its top management is American? Well, where does that leave Chrysler? Its recent turn-around was managed by now-CEO Sergio Marchionne, who is from Italy. The head of the firm’s truck division is a Canadian, and the head of its parts division is Italian. Does this make Chrysler less American?
All that said, the tax consequences of this sort of artificial corporate mobility are important, and yet more evidence that the U.S. tax system is out of synch with the rest of the world and needs fixing.
But beyond the tax issue, lawmakers may have better things to do than worrying about what makes a company American and what does not.
Is it possible that U.S.-based multinationals are getting tired of waiting for Congress to enact corporate tax reform? Seeking cash for domestic acquisitions, some of the nation’s best-known firms are starting to bring back their foreign earnings. Some are finding ways to avoid paying tax at all on that income. Others are so anxious to put the money to work in the U.S. that they are paying stiff taxes to do so.
The no-tax method is being practiced by U.S. based multinationals that move their headquarters to eliminate U.S. taxes on foreign profits. The current poster child for this tactic, known as an inversion, is drugmaker Pfizer. The firm is aggressively bidding to acquire the British firm AstraZeneca, a purchase that would make it possible for the merged company to establish its headquarters in the U.K. and thus avoid the 35 percent U.S. tax when it returns overseas revenues to the U.S.
Pfizer isn’t alone. Published reports identify Eaton Corp. and Chiquita Brands International as two other firms seeking to restructure themselves to avoid paying U.S. tax on repatriated earnings.
Other multinationals are paying hefty taxes to tap their foreign profits. For instance, in April eBay announced it would shift $9 billion in overseas earnings back to the U.S., even though it would have to pay $3 billion in taxes to do so. Others expected to repatriate foreign profits, even if they must pay tax, include Google, Oracle, and Merck–all reportedly seeking to finance acquisitions.
In the short run, at least, many lawmakers—and the Treasury—are happy to see eBay and others pay taxes on overseas income. By contrast, the Pfizer bid—which has so far been spurned—has predictably troubled Democratic lawmakers and even some Republicans. Senate Finance Committee Chair Ron Wyden (D-OR) wants to curb inversions. The Obama Administration included similar restrictions in its recent budget. And Senator Carl Levin (D-MI) promises his own bill this week.
But what does all this say about tax reform? For years, critics have argued that by taxing foreign income at high rates while allowing firms to defer taxes until they bring that money home, the U.S. tax system has locked up funds and discouraged domestic investment.
A tax rewrite would make deals like Pfizer’s less attractive in two ways. First, it would lower U.S. corporate rates. Second, it is widely expected that reform would couple a new tax regime with special transition provisions to allow firms to bring foreign earnings back to the U.S. with a big tax discount.
House Ways & Means Committee Chair Dave Camp’s reform bill and the rewrite proposed by former Finance panel chair Max Baucus both include a repatriation tax holiday. The idea is popular with lawmakers because congressional scorekeepers would count it as a tax increase, generating extra revenue to finance cuts in tax rates.
Trouble is, given ongoing political gridlock in Washington, tax reform is likely to happen later rather than sooner.
Some multinationals can afford to wait. They are awash in cash and seem to have little interest in doing much with it other than buying back their own stock. Plus, with interest rates so low, it is cheaper for them to borrow the money than repatriate foreign earnings at a 35 percent tax rate.
Other firms, however, need cash now. And they can’t keep their corporate profits locked up while Congress fiddles.
If repatriation and inversions really start to catch on, they could change the political dynamic for tax reform. The more firms repatriate foreign income, the less interested the business community will be in a corporate tax holiday and, perhaps, even broad reform. And, not incidentally, the less tax revenue a holiday would produce to finance rate cuts. These trends could further divide an already-split business community and end up making corporate reform even tougher than it is now.
In his new book, Dead Men Ruling, my Tax Policy Center colleague Gene Steuerle delivers a powerful indictment of the current epidemic of irresponsible fiscal policy. But Gene isn’t writing about deficits and today’s economy. His focus is on the long-term political, social, and economic consequences of mindless budgeting that increasingly functions on policy autopilot.
Gene’s argues that for short-term political gain, lawmakers have abdicated the future. They have made it almost impossible for government to adjust policy to reflect changing circumstances. Congress—often aided and abetted by the White House–spends prolifically (both directly and through the tax code) to subsidize current consumption, leaving few if any resources for new opportunities. The future is being written by lawmakers who will be long dead when our grandchildren come of age.
“We are left with a budget for a declining nation,” Gene writes, “that invests ever-less in our future…and a broken government that presides over archaic, inefficient, and inequitable spending and tax programs.”
All this has happened due to a confluence of two unhappy trends: The first is what the late conservative writer Jude Wanniski memorably described almost four decades ago as the “Two-Santa Theory.”
Wanniski’s insight was that Democrats had monopolized the role of Santa Claus by identifying themselves as the party of new government programs while budget-balancing Republicans played the unpopular role of Scrooge. Now, it was now time for Republicans to rebrand themselves as the second Santa, only instead of distributing generosity through spending, they’d do it through the tax code.
No longer would the party of largess be pitted against the party of austerity. Now, American politics could be defined as a battle between two forms of munificence. His observation came to define both GOP political success and fiscal policymaking for decades to come.
But Gene says it isn’t just that Democrats want to spend more and Republicans want to cut more taxes. It is the way they do it. More and more fiscal policy is designed to be permanent and out of the effective control of the lawmakers who create it.
On the spending side, more of government is in the form of entitlements—permanently growing and immune from the process of annual congressional budget review.
Similarly, spending in the form of tax subsidies often lives a life exempt from the tough trade-offs that come from the once-routine but now forgotten need to balance revenues and expenses.
As Gene notes, there is nothing immutable about tax cuts or even entitlement spending. Congress could repeal tax cuts or redesign programs such as Medicare and Social Security. But in the current political environment, it won’t. Just watch the ongoing game over 50+ tax “extenders.” These subsidies are temporary and open for review every year or two. Yet, time and again Congress mindlessly restores them with no serious debate.
The reason is the classic prisoner’s dilemma. Lawmakers (some of them anyway) know they’d benefit from a political grand bargain where Democrats agree to reduce spending by restructuring the big mandatory programs and Republicans agree to raise new revenues by slashing tax subsidies.
But, as we saw in the 2011 budget fiasco, neither side can bring itself to act, largely because it doesn’t trust the other.
While Gene is one of Washington’s most respected policy economists, Dead Men Ruling is not an economics treatise. In this book, he mostly focuses on what this policy means for the ability of 21st century America to govern itself.
Gene concludes Dead Men Ruling with a set of sensible budget process reforms, such as requiring Congress and the president to periodically renew entitlements and tax subsidies and obligating the president to propose and Congress to enact a budget that is projected to be balanced over the course of a business cycle.
But what are the incentives for that to happen? After all, lawmakers now represent congressional districts that overwhelmingly favor a single party and whose voter bases are driven by issues such as protecting Social Security or opposing anything that looks remotely like a tax increase. They are increasingly beholden to a relative handful of single-issue benefactors with unlimited financial resources and, thanks to recent Supreme Court decisions, almost unlimited ability to support candidates willing to do their bidding.
Much of what Gene writes is true, but the problem is bigger than fiscal policy. And it won’t be fixed without political reform.
The tax subsidy for employer-sponsored health insurance is huge. Not only are the premiums exempt from income tax, they are also immune from Social Security payroll tax. The two subsidies combined will add more than $1.6 trillion to the deficit over the next five years alone.
But because that income is not included in the Social Security wage base, some workers also lose out on future retirement benefits. So what would happen if Congress repealed the exclusion for employer-sponsored insurance?
That question has a very complicated answer. The reason has a lot to do with those Social Security benefits, according to a new paper by the Urban Institute’s Karen Smith and my Tax Policy Center colleague Eric Toder.
Overall, the present value of those more generous Social Security benefits offsets some, but not all, of the higher taxes. But for some workers—especially those at lower incomes—those greater retirement benefits would more than compensate for their higher taxes.
Taxing ESI moves three financial levers. Since employer-paid premiums would be treated like wages, most workers getting ESI would pay more in income, Medicare, and Social Security taxes. Those higher income and Medicare taxes would have no effect on their future Social Security benefits. But raising the wage subject to Social Security taxes would boost benefits for some retirees.
The story gets complicated because each of those taxes affects households in different ways. For example, very low income households who fall below the income tax threshold (about $19,000 for a childless couple) would not face higher income taxes but would pay more Social Security and Medicare taxes. At the other end of the income scale, workers earning more than about $117,000 in 2014 will have already maxed out on their Social Security tax so even if their ESI is included in income, they won’t pay any more of that levy. And since there is no wage cap and no floor on the Medicare tax, everyone would pay more of that levy.
All these crosscurrents would have important consequences, not just for family incomes, but also for federal deficits and the health of the Social Security trust fund.
Because most people paying higher taxes are not yet collecting Social Security, the federal budget deficit would decline by about 1.6 percent of Gross Domestic Product to start—roughly equal to the increase in federal receipts. But as those workers begin to retire and start collecting bigger benefits generated by their higher lifetime earnings, the net decline in the deficit would moderate and average 1.1 percent of GDP over the next half century.
Because higher payroll taxes would exceed benefit increases, taxing ESI also would improve the long-term health of the Social Security trust fund. However, it would not completely eliminate the account’s projected long-term deficit.
The effects of this trade-off between taxes and benefits would vary across and even within income groups. Overall, the present value of those higher Social Security benefits from including ESI in 2014 wages would offset only about 22 percent of the combined increase in payroll and income taxes. But it would compensate for about 72 percent of those higher Social Security taxes.
Since Social Security is progressive, workers in the lowest 20 percent of income would get a bit more in benefits then they’d lose in higher taxes. By contrast, households in the top five percent of income would recover only about one-third of their higher taxes in the form of bigger future Social Security benefits.
Over their lifetimes, all earnings groups would receive less in benefits than they pay in taxes. However, middle-income workers would face the largest tax increase as a share of their lifetime earnings. By contrast, low- and high-income workers would be hit by much smaller net tax rate hikes.
The bottom line: Eliminating the tax preference for employer-sponsored insurance would improve the government’s overall financial condition as well as the health of the Social Security trust fund. But the increase in Social Security benefits would affect different earnings groups in very complicated ways. And while the Social Security Trust Fund would be strengthened by higher payroll taxes, that improvement would be mitigated by an increase in benefits.
This morning, the White House released a massive report on the effects of climate change. In sum: The problem is already bad, it is going to get worse, and we need to address it quickly. The science of greenhouse gas emissions and climate change may be clear (though, of course, always evolving). But the policy response is far murkier.
Yet there is a relatively simple solution, based on the old economic maximum: If you want people to do less of something, raise the price. In this case, if you want people to use less carbon-emitting fuel, tax it—a lot. Sadly, the report barely mentioned carbon taxes anywhere in its 829 pages.
For years, the U.S. has fumbled with an alternative response: an incomprehensible maze of regulation and subsidies. This toxic mix of positive and negative incentives is confusing, easily gamed, inefficient, and largely ineffective.
Consider: We subsidize production of fossil fuels but then attempt to limit their use through fuel efficiency standards and emissions limits. Then we provide tax breaks for producers and consumers of alternative fuels so they can compete with subsidized carbon-based energy. You can’t make this stuff up.
A carbon tax could cut through the mess. The government could drain much of the current swamp of environmental and energy regulation, get rid of all those targeted subsidies and, instead, tax carbon fuels. By itself, this would cut demand for oil and coal and increase demand for alternative fuels such as solar, nuclear, and wind. Beyond the carbon-based/ non-carbon-based choice, it would sharply reduce government’s role in picking winners and losers and at least limit the potential for the next ethanol and Solyndra fiascos.
A carbon tax has broad support among economists across the ideological spectrum, but remains politically unpalatable. There are some serious policy reasons for this. For instance, a carbon tax (or its policy cousin, a cap-and-trade system) can be deeply regressive—a problem that could addressed with other tax changes.
But the political problems are far more challenging. Here are just a few:
If-Obama-is-for-it-we-are-against-it: Once, cap-and-trade was supported by influential Republicans such as President George H.W. Bush and 2008 presidential candidate John McCain. Then, President Obama embraced it. Now, it is an idea with many enemies and few friends.
Bureaucratic resistance: Inside the executive branch, officials love complex solutions to problem such as carbon emissions. No fewer than 16 federal agencies and a half-dozen separate White House offices had a hand in the Administration report released today. Everyone from Homeland Security to the Smithsonian got in the act. From a bureaucratic point of view, everyone wants a piece of climate change. But the role of most agencies would be limited or even eliminated if policy is based on a carbon tax.
Congressional resistance: It is the same problem with Congress. Today, just about every committee has some piece of the climate change action. Every lawmaker gets to hold a fundraiser (the deniers as well as the accepters). But with a tax-based system, only a relatively handful on the tax-writing committees could cash in.
The lobbyists: Entire industries have been built around all those regulations and subsidies. For instance, while solar prices are falling, the industry is still addicted to generous tax breaks. Could it make it in a carbon tax environment? It very well might. But business—even green business—does not like uncertainty.
Don’t mess with my car: Right now, Congress can’t work up the courage to raise the gas tax by a few pennies to support desperately-needed highway and bridge construction and repair. Imagine the firestorm if gasoline taxes were raised by, say, 25 cents. Tea party anyone?
Yet, there are enormous potential benefits to such a levy. A modest carbon tax could reduce greenhouse gas emissions by 10-15 percent, according to several recent studies. Last year, my Tax Policy Center colleagues Donald Marron and Eric Toder found that a tax of $20 per ton would raise enough revenue to significantly buy down corporate tax rates. Corporate tax reform would even be possible if some revenue from the carbon tax were used to finance a rebate to help offset the inevitable tax increases for low-income consumers.
The political system may not be ready for a carbon tax, but it is hard to read this new climate change paper without thinking about how valuable such a levy could be.
I truly hoped to never write about Donald Sterling, the L.A. Clippers owner who doesn’t seem to want too many African-Americans attending his team’s games. But thanks to a California congressman who wants to bar Sterling from taking a routine business tax deduction, I can’t resist.
In response to Sterling’s offensive remarks, the National Basketball Assn. imposed a number of sanctions on the Clippers’ owner, including a $2.5 million fine. It is likely that Sterling will deduct that fine as a business expense, as is his legal right. But California Democrat Tony Cardenas introduced a bill last week that would bar Sterling from taking the deduction.
Of course, the bill never mentions Sterling. It merely says the deduction would be disallowed for fines imposed on professional sports team owners after Dec. 31, 2013. But Cardenas’ target could not be more clear. “Are you paying the price for sports owners gone wild,” Cardenas asks on his congressional home page. In case you still don’t get it, the question is accompanied by a roll-off photo of Sterling.
This is so wrong in so many ways. Disallowing a deduction for one person is terrible tax policy. Disallowing the deduction retroactively is beyond terrible. And disallowing the deduction at all only further mangles our income tax, which, as a general matter, should tax income.
If you are offended by the IRS making life tough for political groups trying to get tax-exempt status, or by aides to New Jersey Governor Chris Christie tying up bridge traffic because they were mad at a mayor for not supporting Christie’s reelection, just imagine this. A congressman doesn’t like your politics, so he tries to take away your tax deduction. Not mine. Or your neighbor’s. Just yours. Richard Nixon, phone home.
People have been complaining about the ability of firms to deduct financial penalties for a while. Mostly, the complaints are aimed at banks that structure legal settlements with the Justice Department or the SEC so that a portion of their penalty payments is deductible.
The law is pretty clear. Fines paid to the government as punishment for breaking the law are not deductible. But a fine paid by a franchise owner such as Sterling to the sports league that sanctions his team clearly is a business expense.
If Congress wants to change the law, it may, of course. Last year, senators Chuck Grassley (R-IA) and Jack Reed (D-RI) introduced a bill to end deductions for penalties levied as part of legal settlements with the government. But their measure would apply to all firms, not just those in one industry, and certainly not to a single individual or company.
Sterling’s remarks were obnoxious. The NBA’s fine and other sanctions seem entirely appropriate. But the fine is clearly a deductible business expense. If Congressman Cardenas wants to repeal the deduction for all franchisees, he should try. But just for Sterling (or other owners of professional sports teams)? I don’t think so.
Special subsidies that benefit individual taxpayers are outrageous. But so are special taxes that punish individual taxpayers. Rep. Cardenas fouled out on this one.
The other day, the House Ways & Means Committee voted to cut taxes for certain businesses by $310 billion. Washington, being Washington, is now in the midst of a partisan debate over whether this is in fact a tax cut or, conversely, whether failing to cut those business levies would be a tax increase.
This really isn’t complicated. The Ways & Means bill is a tax cut. And if it is not offset by other tax hikes or spending increases, it would raise the federal deficit by $310 billion over the next 10 years.
At issue, of course, are some of the 50+ targeted tax subsidies that have been on the books for many years but expired last December. The operative word here is “expired.”
These provisions have come to be known around the Capitol as the “extenders.” This is because Congress has a long and ignominious history of passing these as temporary tax cuts, knowing full well that it will then repeatedly extend them for a year or two at a time.
Somehow, they seem to operate under a different set of rules than most laws. While Congress argues for months over whether or not to offset the costs of some bills (extending certain unemployment benefits, for example), pols seem happy to maintain the perpetual motion machine of the tax extenders without worrying about their cost.
Sometimes, lawmakers have found offsetting tax hikes to pay for these cuts. Often they have not. The Ways & Means bill, which would make six of the now-expired provisions permanent, does not trouble itself with offsets. Thus, the measure would add the aforesaid $310 billion to the deficit over the next 10 years.
Similarly, the Senate Finance Committee has voted to restore all of the expired provisions through 2015—and it hasn’t paid for them either.
But temporary or permanent, are they tax cuts? And if Congress leaves them moldering in their policy graves, is that a tax increase?
Not surprisingly, groups like Grover Norquist’s Americans for Tax Reform think so. In a Tuesday press release, the group said, “The permanent tax relief is targeted to prevent the worst anti-growth tax hikes from taking effect for good.”
We can argue about whether the better pro-growth policy is to restore them or leave them for dead, but not about whether Congress should pay for them.
Oh, you say, we are heading into one of those mind-numbing budget baseline arguments that bedeviled the debate over the fiscal cliff a couple of years ago. It got so bad that my Tax Policy Center colleagues modeled all tax proposals twice—against current law (where extenders die as scheduled) and against current policy (which assumes expiring tax cuts are extended).
But there is no baseline problem with these business provisions. They expired four months ago. They no longer exist. Congress can call them extenders if it wants, but at the moment there is nothing to extend. They are off the books. They must be passed as new law.
As an issue of budget scoring, none of this maters. Under Congress’s own pay-as-you-go rules, these tax cuts should have been paid for even if they were extended before they expired. But we are talking politics here.
In the often-Orwellian world of Washington, the words matter because they frame the argument for and against paying for the provisions. After all, if all you are doing is merely extending current law, you can at least claim there is nothing to pay for. If, by contrast, you are passing new tax cuts, it’s a lot harder to make that case with a straight face.
I’ve argued that walking away from many of the now-expired tax cuts is the better pro-growth policy. But even if Congress prefers to restore them, it should still find the money to pay for them.
This all reminds me of the old vaudeville routine. “Call me a cab,” says the first comic. “OK, you’re a cab,” replies the second.
Ba-da-boom. Bring on the dancing dogs.
We laugh at the stupid old joke because we know the comic isn’t a cab. His partner may say he is, three times a night, six nights a week. But that doesn’t make him a taxi.
And no matter how much supporters of these tax cuts say it, these provisions don’t preserve the status quo. And leaving them expired is not a tax hike. They are a tax cut. And they should be paid for.
Online retailers have argued for years that they’ll lose business if they have to collect sales taxes on their online transactions. A new study by three researchers at Ohio State finds they are right. Paradoxically, the study may increase support by some online sellers for federal legislation to standardize collections across states.
The study, by Brian Baugh, Itzhak Ben-David, and Hoonsuk Park, looked at five states that required Amazon.com to collect sales taxes. Once Amazon stated collecting, consumers in those states bought 9.5 percent less from the firm.
Not surprisingly, the authors found that consumers were especially likely to change their shopping behavior to avoid tax on more costly items. For instance, they cut spending by 15.5 percent on purchases larger than $150, and by nearly 24 percent on goods or services that cost $300 or more.
The authors also looked at where those consumers did buy. Most just shifted to other online sellers (that, presumably, did not collect sales tax). For instance, many simply bought from Amazon Marketplace merchants that are accessible on Amazon’s site but do not have to collect tax. Only a handful—about 2 percent—took their business to local bricks-mortar retailers, the study found. Those Main Street firms do have to collect tax.
The study, published as a working paper by National Bureau of Economic Research, looked at sales data from California, New Jersey, Pennsylvania, Texas, and Virginia before and after they required online sellers with a physical presence in their jurisdictions to collect sales taxes. In practice, the levy applied only to Amazon and a handful of other e-tailers. Technically, of course, buyers still owe tax whether the seller collects or not but, in reality, almost no-one pays these use taxes.
The Ohio State study is the latest research that appears to confirm that buyers change behavior to avoid paying sales tax. About a year ago, three researchers from Stanford and one from eBay found similar results after reviewing data from the firm’s online marketplace. They found that a 1 percentage point increase in a state’s sales tax rate leads to a 3-6 percent decline in online purchases from consumers in that state.
A third recent paper, by Ohio State’s Jeffrey Hoopes and the University of Washington’s Jacob Thornock and Braden Williams found that when investors expected that online sellers would have to collect sales taxes (following, for instance, published news that lawmakers were considering such a move), stock prices for those firms fell somewhat.
While some older research finds little or no evidence that online sales taxes reduce consumer spending, the Ohio State study and other new work shows strong effects. And they may help explain why the political climate for federal legislation aimed at consistent sales tax rules for all online sellers seems to be changing.
It may seem counterintuitive at first, but Amazon and other large online sellers (though not eBay) now support such a measure. The reason: States are increasingly requiring them to collect. And, rather than lose business to other online sellers, they’d just as soon every retailer face the same burden.
The paper by Baugh and colleagues suggests that these while these online retail powerhouses may have little to fear from Main Street, they need to keep a close eye on their Web-based competitors who don’t collect sales taxes.
In the cover essay in the current issue of The Milken Institute Review, Len Burman calls for a Value-Added Tax (VAT) to pay for government health care costs.
Len, the director of Tax Policy Center (and, thus, my boss), argues that a dedicated—and fully transparent–health care VAT would increase public support for efforts to slow the growth of medical costs. That’s because the VAT would rise, for all to see, with increases in government health spending. In effect, we’d be confronted with an explicit choice: Pay more tax or support steps to control health care cost growth.
Len’s argument is provocative, to say the least. And the article is accompanied by some art that is, umm, unusual. Thomas Piketty’s charts and graphs have nothing on this. (btw, Len had no role in creating the images).
Give Len’s essay a read, and let us know what you think.