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 remarkable thing about the Senate Permanent Investigations Subcommittee’s report on Apple Inc.’s corporate tax avoidance is how unremarkable it is.
Because Apple is so profitable, the dollars involved will certainly attract attention (this is a Senate committee after all, so that is the point). The report alleges Apple reduced its U.S. corporate income tax by an average of $10 billion-a-year for the past four years. Since the corporate levy generated only about $240 billion in 2012, $10 billion foregone from one company is a very big number indeed.
But while it added a few interesting twists, Apple cut its taxes with the same tools multinationals have been using for years to minimize their worldwide tax liability. And if there is a scandal, I suppose it is the very ordinariness of these transactions. Apple’s tax avoidance shop, it seems, is a lot less innovative than its phone designers.
The tactics are complicated but the strategy is simple: A company designs its business to locate as much income as possible in those countries where taxes are low. At the same time, it allocates as many costs as possible to those high-tax jurisdictions (like the U.S.) where deductions are especially valuable. A deduction is worth 35 cents on the dollar in the U.S. but only one-third as much in Ireland, where the corporate rate is only 12.5 percent.
To achieve these twin goals, Apple mostly relied on the three golden goodies of international tax avoidance: deferral, transfer pricing, and check-the-box.
What on earth am I talking about?
Deferral allows U.S. firms to avoid paying U.S. tax on foreign income until earnings are brought back home. In practice, companies can keep these earnings offshore indefinitely and never pay U.S. tax. Transfer pricing and check-the-box make the system even more beneficial.
Transfer pricing is the way firms use internal bookkeeping to allocate expenses among various affiliates. For a company like Apple, nearly all the value of its products is in its patents and other intellectual property. By charging a relative pittance to a foreign subsidiary for use of that IP, it can maximize that affiliate’s profit and minimize its IP income in the U.S.
Firms are supposed to price these assets at market value. But what does that mean when it comes to, say, proprietary computer code?
Check-the-box has been around for 15 years. Originally aimed at simplifying filing, these Treasury rules allow firms to classify themselves as one of several different entities—corporations, partnerships and the like. One category, however, is a “disregarded entity”—an affiliate not subject to U.S. income tax.
Normally, firms might be subject to rules (called Subpart F) meant to prevent abuse of deferral. But multinationals avoid these strictures by designating foreign corporations they control as disregarded for tax purposes. All they have to do is, you got it, check a box.
There is some cost to deferral. Apple, for example, recently chose to borrow $17 billion to finance U.S. investments even though it has $100 billion stashed overseas. But if the benefits didn’t outweigh the cost, companies wouldn’t keep holding all that money offshore.
How did Apple do it? It set up two entities in Ireland through which it was able to funnel two-thirds of its pre-tax worldwide income. Of its $34 billion in total 2011 pre-tax income, $22 billion was allocated to these two firms. True, the Irish love to talk. But it is unlikely they bought enough phones to generate $22 billion in pre-tax income.
Remarkably, while these firms were physically located in Ireland, they were not Irish companies for Irish tax purposes. Thus, they produced what Harvard University tax professor Steve Shay describes as “ocean income.” That is, revenue that simply disappears into the deep blue.
As my Tax Policy Center colleague Chris Sanchirico notes, the committee staff found that while the income from those Irish subs was not repatriated to Apple (which would have triggered U.S. tax) it did apparently did make its way back to the U.S., where it is sitting in bank accounts of those Irish subs.
What’s the problem with all this? There is the revenue loss to the U.S., of course. But perhaps worse is the incredible inefficiency driven by the tax code. The price of high corporate rates is the raft of deductions and credits that encourage corporations to lower their taxes rather than produce great new products.
Just imagine if Apple could replace all those tax lawyers with creative new software geeks or industrial designers. It might win back some of the market share it has been losing to Android in recent years.
A final thought, I hope, on the IRS/tea party scandal: Why do we want the IRS regulating political speech? It seems crazy on its face, yet that is exactly the system we have created.
True, the agency bungled its scrutiny of conservative political groups seeking tax-exemptions. But should it even be deciding which political organizations should get favored tax treatment and which should not? Why is a tax collection agency regulating political speech at all?
That this is happening at all is an accident of history. The section of the law political organizations are using to win tax-exempt status was never intended for this purpose. Section 501(c)(4) has been around for a hundred years, but its purpose was to grant tax-exempt status to social welfare organizations such as community groups and citizens associations.
In the wake of the Supreme Court’s 2010 Citizens United decision, (c)(4) status became a popular mechanism for bankrolling political campaigns. Citizen’s United made it possible for unions and businesses to spend unlimited amounts of money on politics, but the vehicle they used for funneling cash to campaigns, Sec. 527 organizations, required public disclosure of their gifts.
501(c)(4)s are different. They can collect massive amounts of money anonymously.
But they have one restriction. Their primary purpose must be social welfare, not financing political campaigns.
And this has thrown the IRS into a cesspool. What does primary purpose mean? And what does campaigning mean? Where do you draw the line between social welfare and politicking? The law demands that the IRS make those distinctions. It must, in other words, define political speech—a role for which is seems particularly ill-suited.
IRS agents don’t have much help. The statute is murky. Case law is vague. The agency’s own guidelines require that these applications be decided on a case-by-case “facts and circumstances” basis.
So the IRS is put in an untenable position. On one hand, it has been under pressure to crack down on what some see as abuses (I wrote a Tax Vox blog urging the agency to act back in 2010). Yet, when it tried, it was rightly accused of political partisanship. True, it could have avoided much of the current mess if it was more even-handed in its investigation of these groups. But can the IRS ever define what is a permissible political activity and what is not? Should it even try?
Worse, no politician will ever defend the agency from criticism. Whatever the IRS does, elected officials of both parties will throw it under the bus at the first hint of criticism. Just watch President Obama.
What’s the answer? Alan Viard at AEI urges Congress to write rules that better delineate political activity by tax-exempts. The New York Times has called on Congress to retain (c)(4) status but only for groups that have no political activity.
I’d get the IRS out of the political speech business entirely. If Congress wants to regulate campaign finance, it ought to do so explicitly rather than through an ad hoc structure built around an obscure section of the tax law governing citizens associations. Congress could, for instance, simply pass a law requiring public disclosure of all campaign gifts, no matter how they are delivered. That one step would largely dry up requests for (c)(4) status.
Congress could reserve tax-exempt status for those organizations that completely eschew politics. We’d all be free to say what we want and give money to whom we want. But this activity would be entirely disconnected from tax-exempt status. Fellow Forbes.com blogger Peter J. Reilly made a similar argument yesterday. So has Bloomberg’s Josh Barro.
I know, you’re going to ask what agency would regulate this, the Federal Elections Commission? Well, you’re right, the FEC is a punchline today. But Congress could fix that. Besides, the FEC’s failures don’t justify dumping this mess into the lap of the IRS. Honestly, I’d rather have the Transportation Dept. regulating political speech than the IRS.
In effect, Congress and the Supreme Court have thrown the IRS into a lose-lose situation. And the agency has lost. Why are we surprised?
The IRS’s botched processing of requests for tax-exempt status by political groups isn’t the new Watergate. In fact, as scandals go, it is barely the Days Inn–based on what we’ve learned from a much-anticipated report by the Treasury Department’s Inspector General for Tax Administration (TIGTA).
That any report by TIGTA is much anticipated says something about Washington these days. This one, a detailed look at how the IRS seemingly targeted tea party and other conservative groups for special scrutiny, found bureaucratic bungling and a troubling bunker mentality up and down the agency.
The cost to groups seeking tax-exempt status was not insignificant, and is troubling. TIGTA confirms that some conservative organizations were singled out for special scrutiny and faced burdensome requests for information and long delays before approving requests (though it should be noted that delays are common at the IRS). At the very least, this raises questions about fairness and impartiality from an agency that must be above reproach.
Yet, despite dark conspiracy theories, TIGTA found no evidence of political meddling. Despite allegations that the agency singled out tea party groups for special scrutiny, of the nearly 300 cases the IRS labeled potentially political, only one-third were identified as tea party or other conservative organizations. And not one of those 300 cases, including the conservative groups, had its application for tax-exempt status denied, though some are still pending.
However, the TIGTA report also seems to confirm a long-standing unwillingness by top IRS officials to publicly acknowledge the mess. As often happens in Washington, the coverup may turn out to be far more problematic than the “crime.” There is some irony afoot when the same government agency that demands full transparency from 150 million taxpayers stonewalls requests for information about its own operations from Congress and news organizations.
Here is the outline of the story: From 2010 to 2012 the number of applications for 501(c)(4) tax-exempt status doubled, from 1,700 to 3,400.
While (c)(4) status was created 100 years ago for civic leagues and other community organizations, it became a valuable tool for political organizations in recent years. One reason: It allowed groups to collect money from contributors without disclosing the source of those funds.
The test for (c)(4) status is a difficult one: A group’s primary purpose must be enhancing the social welfare. It may engage in some political activity, but this may not be its primary role. The law does not clearly describe political activity.
In March and April of 2010, mid-level IRS staffers began screening groups with names that sounded “political” such as tea party. By May, agency staffers were told “to be on the lookout” for, among other applications, requests by groups with political-sounding names, such as tea party or patriot.
When the director of the Exempt Organizations office, Lois Lerner, learned of these activities in June, 2011, she ordered that the criteria be changed. The guidelines were somewhat revised in July, but then largely restored by the team reviewing the cases. In the end, it took 18 months for the agency to finally get staff to change its policy of focusing on political views of organizations.
The result: Conservative groups were required to answer wide-ranging and often unnecessary questions, 80 percent of applications were open for a year or more, and some were open for as long as 3 years and across two election cycles. The questions appeared to be an attempt to determine how political the organizations were (which, after all, is the test for (c)(4) status). But some were frankly weird: Whether an officer of the group will run for public office in the future, or what the roles were of audience members in group programs.
In sum, TIGTA found an IRS staff scrambling to keep up with requests for tax-exempt status in an area it did not understand well. The staff seemed unaware of the political implications of what it was doing, and was poorly managed. Senior officials seemed to be aware of the problem as early as 2011, yet could not fix it for a year and a half.
This is a huge embarrassment for the IRS and likely to make it more difficult for the agency to police groups that have stepped over the political line. But based on what we know so far, this is no Watergate scandal.
Let’s start with the obvious. Those IRS employees who singled out conservative groups for scrutiny over their tax-exempt status were wrong, wrong, wrong. Any whiff of politics at the agency is unacceptable, and this is far more than a whiff. In time, we shall see how far up the agency food chain the scandal goes.
But this unsavory episode should also shine a light on the law that gives tax-exempt status to political groups of all ideological stripes, often described by the code section that grants their exemption—501(c)(4)s. That is especially true since one outcome of this scandal will be to give these partisan groups even more freedom to operate outside of at least the spirit of the law.
The only way to stop the proliferation what are often-secret campaign money laundries is for Congress to change the law that grants these groups this form of tax-exempt status.
As I wrote in a blog post back in 2010, the tax law is relatively clear about what a (c)(4) can and cannot do. The IRS defines these groups as “civic leagues, social welfare organizations, and local associations of employees.” Their net earnings are supposed to be used for charitable, educational, or recreational purposes. They may lobby and participate in political activities but their primary purpose must not be campaigning.
Thanks to smart lawyers who have exploited an outdated law, the tax-exempt status of many groups may be perfectly legal. But others simply do not pass the smell test. Does anybody really claim the primary activity of these organizations is anything other than getting their favorite candidates elected to political office, or defeating those they disagree with?
If you have doubts, here is what one group, teaparty.org, says about itself on its website:
We are going to build on the foundation of success we used to elect more governors, grab more seats in the House of Representatives and force the Washington establishment to respect the demands of “We The People.”
In contrast to public charities organized as 501(c)(3)s, contributions to (c)(4)s are not tax-deductible. So why would they want (c)(4) status? One reason: It allows them to hide the names of their donors.
In the past, these groups would have claimed tax-exempt status as Sec. 527 organizations. There are no contribution limits, no restrictions on who may give, and no limits on how they spend their money (except they cannot advocate for a specific candidate). But 527s must disclose the names of the fat cats who use them to finance political campaigns. And groups that thrive on political dark money will do almost anything to avoid transparency. So they walked through the (c)(4) door opened by the Supreme Court’s 2010 Citizens United decision.
Because the law is so ambiguous and because IRS scrutiny of these groups is so fraught with political landmines (as the recent unpleasantness proves), the IRS had been reluctant to review this issue all. Now it seems, the agency took a much-needed hard look at some groups, but did so in a clumsy and seemingly partisan way.
Regrettably, by apparently focusing only on conservative (c)(4)s, the IRS has only succeeded in making all these groups—on the political right and the left– even more immune from investigation.
The solution, then, is for Congress to change the law. Many of these groups are not social welfare organizations by any reasonable standard. They clearly exist for political purposes. Many are unabashedly partisan—supporting only Democrats or only Republicans.
Last month, Sen. Tom Coburn (R-OK) introduced a bill to eliminate the tax-exempt status of professional sports leagues, such as the NFL (yes, Virginia, the NFL is tax-exempt). That’s an excellent idea, but maybe he ought to expand it to include practitioners of America’s other favorite sport—politics.
Upon these three facts everyone agrees: 1) After a long period of explosive increases, health cost growth has slowed markedly in recent years. 2) A share of the slowdown is partially, but not entirely, due to the recent economic slump. 3) If future medical costs continue to grow at their current low rate the federal budget will be in much better shape than most analysts thought.
However, the best health economists in the country are deeply divided about #2. And the implications of this disagreement are profound. If the recession was the major driver of lower health cost growth, there is a good chance that medical spending will bump up again as the economy improves, once again putting great pressure on the deficit. But if the slump was only a small part of a broader secular trend, the U.S. may have found the key to solving its long-term budget problems.
Keep in mind that all health care costs are growing more slowly, not just government-funded programs such as Medicare and Medicaid. But since TaxVox focuses its attention on fiscal issues, I’ll concentrate on the budget effects.
In a new article in the journal Health Affairs, Harvard University economists David Cutler and Nikhil Sahni estimate that medical costs grew by only 1.2 percent from 2009-2012, far below the 5.9 percent rate of 2000-2009. If the recent spending trend could somehow be sustained for the next decade, they estimate the deficit would be $770 billion less than the Congressional Budget office forecasts.
But that assumes the present trend can continue. And that in turn assumes that more is going on than consumers beaten down by the recession buying less medical care.
How deeply do economists disagree about this diagnosis? At first glance, quite a lot. But a closer look suggests that even skeptics of the secular change argument see some hope that the worst years of health spending increases may be behind us.
For instance, while Cutler and Sahni lay only about one-third of the slowdown in health costs at the feet of the recession, an April study by researchers at the Kaiser Family Foundation and the Altarum Institute estimated that more than three-quarters was driven by the Great Recession.
In their own just-released paper, my Urban Institute colleagues John Holahan and Stacey McMorrow focus on yet a third cause. They agree that medical cost growth has slowed in response to economic trends, but they focus on changes that are broader than, and predate, the recession. They blame a combination of falling real incomes and the loss of insurance benefits as employers offer less generous coverage, people lose coverage entirely, or get coverage through public programs. They argue both trends are drawing money out of the medical system and forcing providers to operate more efficiently.
But here is where it gets interesting. While their analyses differ on causes, the authors of all these studies agree that there is at least the potential for secular changes to slow costs in the future. And none are especially certain about the magnitude.
Even the authors of the Kaiser/Altarum paper, Kaiser’s Larry Levitt and Gary Claxton; Altarum’s Charles Roehrig; and Thomas Getzen of the Fox School of Business at Temple University, say changes in practice patterns, driven by both the ACA and economics, could slow future cost growth. Their main argument is it far too soon for cost changes from the payment and delivery reforms of the 2010 Affordable Care Act to show up in current cost statistics, not that these reforms won’t eventually slow spending by measurable amounts.
Of course, cost savings from more efficient delivery of care is likely to be partially offset by an increase in the demand for medical care driven by the ACA’s major goal–increasing the number of consumers with health insurance.
And even Cutler, who sees real secular change in health costs, acknowledges he can only speculate on what’s happening. For him, while the recession’s role in the health spending slowdown was modest, the true causes remain only ideas for conjecture: Some combination of changing technology, increased cost-sharing by patients, and greater efficiency by providers.
Are we seeing the bow-wave of a permanent trend as Cutler believes? I see real changes in health care delivery. But will they stick and both save money and improve health outcomes? In truth, no-one knows.
The answers will go far beyond federal budgets, but they are sure to drive the fiscal debate in some important and perhaps unexpected ways.
If you are a tax geek, or even a normal person who wants to keep up with the ongoing debate over restructuring the tax code, download a copy of the congressional Joint Tax Committee’s Tax Reform Working Group Report.
It is 568 pages long, doesn’t have much of a plot, has no character development (unless you are good at reading between the lines) and sort of peters out at the end. Yet, it is likely to prove an invaluable resource as tax reform moves ahead.
Think of it as the ballpark program you pick up before a baseball game. You can watch the game without it, but it is much more fun if you can keep score and know a little something about who plays for the visiting team.
The report is divided into three parts. The first is a brief summary of the revenue code. Each provision of the law gets explained in a couple of sentences or, sometimes, a few paragraphs. You’ll learn about everything from adoption assistance to retirement plans, and from the tax treatment of U.S. territories to depreciation of manufacturing equipment.
And, btw, it answers the musical question: How long does it take to describe the federal tax law in this shorthand? Answer: 444 single-spaced pages.
The second section summarizes a dozen different tax reform plans—ranging from President George W. Bush’s 2005 reform commission report to President Obama’s fiscal commission plan (aka Bowles-Simpson), and including proposals from the liberal Economic Policy Institute to the conservative Heritage Foundation (Full disclosure: the Tax Policy Center provided technical analysis for many of these plans).
The third section attempts to summarize public comments to the House Ways & Means Committee’s tax reform working groups. This section describes, in JCT’s best “just the facts” tone, the wide range of ideas presented to the work groups. They can be summarized like this: Keep the government’s filthy hands off my tax break.
The plot of the JCT tome, then, reads something like this: The tax code is mind-numbingly complicated and economically inefficient. Just about every reform plan from presidents Bush to Obama and across the spectrum of think-tanks would trim or even eliminate many of the tax code’s $1 trillion+ in preferences. Yet, pretty much every lobbyist who commented to the Ways & Means working groups echoed the long-ago doggerel of former Senate Finance Committee chairman Russell Long—“Don’t tax me, don’t tax thee, tax the fella behind the tree.”
And there we stand.
Nonetheless, download the JCT’s report. You’ll find yourself looking at it often.
There may be no more vexing challenge in the Revenue Code than the taxation of foreign transactions of multinational companies. Most everyone agrees that the current system is a mess. And corporate tax reform is impossible without addressing international issues. Yet, this corner of the tax law is not only immensely complex but most proposed solutions inevitably run into massive political and policy roadblocks.
In an attempt to surmount those hurdles, two highly-respected international tax economists have proposed an intriguing solution—a corporate minimum tax that allows firms to immediately expense the costs of their foreign investments instead of depreciating them over a period of years.
The proposal was devised by Rosanne Altshuler of Rutgers University (a former director of the Tax Policy Center) and Harry Grubert, a career economist at the Treasury Dept. While Grubert works for the Treasury, the proposal in no way represents the views of the Treasury or the Obama Administration which, in fact, has proposed its own, quite different international tax plans.
There are two basic problems with the taxation of multinational corporations:
U.S.-based multinationals face a 35 percent statutory rate, the highest in the world when combined with the average state corporate tax. They must pay this tax on profits they earn in the U.S as well as on overseas earnings returned home. Yet they must compete with overseas firms that pay low tax rates on their own domestic investments and no additional home country tax on active profits from investments in other countries (including the U.S).
At the same time, U.S.-based multinationals have lots of ways to drive down their effective tax rates. To oversimplify a bit, they pile as much income as possible into foreign subsidiaries that are located in very low-tax jurisdictions. At the same time, they load as many expenses as they can on to their U.S. entities where tax deductions are more valuable (a deduction is worth 35 cents on the dollar here, but only one-third of that in Ireland, where the rate is 12.5 percent).
This all works because the U.S. allows companies to defer U.S. tax on foreign earnings until those profits are returned to the U.S. And many multinationals never bring the money home. By some estimates, $2 trillion in foreign profits are stashed overseas.
Rosanne and Harry estimate that nearly half of this foreign income is subject to tax rates of less than 10 percent. And, they calculate that the marginal effective tax rate on investment by a U.S. firm in a low-tax country is, remarkably, a negative 24 percent.
How can the U.S. stop this erosion of the corporate tax base while keeping U.S. based firms competitive in international markets? There is no simple solution. Obama has proposed a couple of plans. House Ways & Means Committee chair Dave Camp (R-MI) has laid out three options. But each idea has problems, including great complexity that itself opens the door to more gaming.
Grubert and Altshuler have devised what many think is an elegant solution to both the competitivesness and the base erosion problems. They’d do it through a series of trade-offs. U.S. firms could effectively exempt from U.S. tax their normal profits from actual overseas investments by deducting their capital costs. They could also avoid tax on the dividends they bring home from foreign subsidiaries. But they’d have to pay a 15 minimum tax on the income of their overseas affiliates. As a result, they’d lose some of the tax benefits of artificially shifting income to low-tax countries by, say, moving patents or the value of their brand to offshore subsidiaries.
They’ve developed two versions of the minimum tax. One would require firms to calculate their tax separately for each country in which they do business. The second would allow firms to aggregate their tax liability across all countries.
Either way, the minimum tax dramatically increases effective taxes on foreign investment—money that could be used to buy down U.S. corporate tax rates, reduce the deficit, or both. Grubert and Altshuler figure the rate on investment in a low-tax country would rise to a negative 4.4 percent under the per-country version, far higher than the negative 24 percent under current law.
Strange as it sounds, their goal is to raise the effective tax rate on foreign investments by U.S.-based multinationals to zero, or close to it.
This is complicated stuff and international tax experts will surely identify problems with Grubert-Altshuler plan. At a conference last week cosponsored by the American Tax Policy Institute and Rice University’s Baker Institute, General Electric’s tax guru John Samuels raised a long list of concerns. But even John praised their idea as a “fresh look” at a vexing problem.
We are just beginning what will be a very long and complicated discussion. But the Grubert-Altshuler paper makes the conversation much richer.
It has become conventional wisdom in Washington that the just-announced retirement of Senate Finance Committee Chairman Max Baucus (D-MT) boosts chances for tax reform in the short term. I’m not so sure.
The upbeat argument goes like this: By announcing that he will not run for reelection in 2014, Baucus is free from the pressures of being a Democrat in a very red state. No longer will he fear tilting too far from his conservative constituents—a concern that helped drive his well-known caution when it came to Democratic priorities such as the 2010 Affordable Care Act and, more recently, background checks for gun buyers, taxes on Internet sales, and even the party’s own budget.
In addition, the optimists say, tax reform would be a wonderful political legacy for both Baucus and House Ways & Means Committee Chairman Dave Camp (R-MI), whose own chairmanship is term-limited after 2014. Thus, the two have both the freedom and the sense of urgency needed to drive politically-challenging reform.
All that may be true, but here’s why it may not result in a tax code rewrite.
Being a lame duck may be liberating, it also makes a politician a rapidly-depreciating asset. Baucus’s clout with his committee and the Senate leadership (already weak) will fade. His senior staff, looking to leverage its connections while the boss is still around, will rapidly decamp for K St. or other Senate offices. And Senate liberals may think they’ll get a better hearing from the panel’s next chair, most likely Ron Wyden of Oregon.
The biggest challenge, though, remains the nitty-gritty of tax reform itself.
At a Ways & Means hearing today, economists and housing industry representatives weighed in on reworking the housing subsidies that litter the tax code. To the surprise of no one, most of the economists (including my Tax Policy Center colleague Eric Toder) urged the panel to at least restructure the Mortgage Interest Deduction and other housing-related preferences. The industry…well, the industry did not.
Then, there is the matter of revenues. Baucus, like Camp, prefers a reform that lowers rates and scales back tax preferences but raises the same amount of money as the current Revenue Code. This base-broadening, revenue-neutral reform was the model of the 1986 Tax Reform Act, but it is not the goal of President Obama and many Senate Democrats. They insist on using reform as a vehicle for raising hundreds of billions of dollars in new revenues.
Camp, by contrast, must answer to a GOP caucus for whom this idea is toxic. And House Republicans seem to be digging ever more deeply into their ideological trenches.
Just yesterday, rank and file Republicans forced their own leadership to pull a bill aimed at making it easier for people with pre-existing conditions to buy health insurance. The leadership wanted to show it recognizes the need for this population get coverage. The rank and file wants only another vote to repeal Obamacare.
Similarly, few see a path through the House for either immigration reform or the Internet sales tax bill, though both have broad bipartisan support in the Senate. All this means that the great dividing line of tax reform—new revenue or no new revenue—grows ever-sharper. And it is hard to imagine that Baucus and Camp can bridge it, even if they want to.
However, there is a kind of tax reform Baucus might be able to help pull off before riding off into the Montana sunset. It isn’t a full-blown rebuild of the Code. It is, rather, a major spring cleaning.
Baucus and Camp might be able to engineer a measure that simplifies key elements of the tax law. For instance, they could improve the operation of refundable credits for low and moderate income families as my TPC colleague Elaine Maag has proposed. They could rationalize the dozens of tax-favored savings vehicles that confound workers, improve tax breaks for education as TPC’s Kim Rueben has proposed, or restructure the subsidy for charitable giving in a way that generates new revenue while not discouraging philanthropy as TPC’s Gene Steuerle has urged.
Baucus and Camp do have an opportunity here. It may not be a once-in-a-generation rewrite of the tax code, but it is a chance to vastly improve what we have. And that’s a pretty good legacy.
The Senate is close to passing a bill that would let states require online and catalogue sellers to collect sales taxes on the products they sell. Congress has been struggling with this issue for decades, yet few disputes have generated as much confusion and misinformation as this one. To help separate myth from reality, here are five things you should know about what the Marketplace Fairness Act of 2013 does, and does not, do.
It is not a tax increase. In most states, if you buy a good or service subject to sales tax you already owe the tax whether you purchase online or in a store. The dispute is merely over who collects it. If you buy on Main Street or in the mall, the seller collects the tax and remits it to the state. If you buy online and the seller does not collect the tax, you still must pay an equivalent use tax when you file your state income tax return.
True, almost no one does this and states rarely enforce their use tax laws, but that’s not the point. Legally, you already owe the tax. Fundamentally, this is a matter of tax compliance, not tax levels.
It is a back-door way for states to collect more tax revenue. While it isn’t a tax hike, it clearly will generate more revenue for states. But if you think taxes are too high or government is too big, then you should try to get states to lower or even repeal taxes. Indeed, making online sellers collect taxes ought to make it easier to lower tax rates.
It is not an “Internet tax.” The bill does not give states the power to tax access to the Web, the cloud, or even securities transactions, as some fear. All sorts of interests have raised the specter of a digital camel sticking its nose under the tax tent. But there is nothing in the bill that gives state the authority to tax this other stuff. In fact, the bill’s Section 3 explicitly bars states from using the law to try to impose new levies on products or services that are not now taxed.
It will not complicate life for buyers. In fact, it will simplify their lives. Those few of us who pay the use tax will finally be able to throw away our receipts. And while today almost no one can keep track of what is taxable and what is not, the law encourages states to participate in a multistate effort to simplify sales taxes.
It will not burden online sellers. The law exempts firms with less than $1 million in sales from collecting sales taxes. It requires states to provide sellers with the information they need to determine rates in multiple jurisdictions. It even requires states to give sellers free software to calculate the tax. And, if that isn’t enough, credit card companies and payment firms such as PayPal can easily do this at practically no additional cost. There may, in fact, be no tax that is easier to collect.
Remarkably, Congress has failed to solve this problem for nearly a half-century. The Supreme Court first recognized tax complexity problems for interstate sellers in 1967. In 1992, in a case called Quill v. North Dakota, the High Court practically begged Congress to sort out the mess. In 1999, Congress responded by doing what it often does when it doesn’t want to tackle a problem. It created a commission.
Finally, 21 years after Quill, the Senate may finally address the issue. It remains to be seen whether the House, dominated by tax-phobes, will do the same. But after two decades, it is long past time for Congress to sort this out—and get past the myths that delayed action for so long.
The revenue proposals included in President Obama’s 2014 budget would, as intended, significantly raise taxes on the highest-income American households. However, despite Obama’s long-standing pledge to protect individuals making below $200,000 (and couples making $250,000 or less) from any tax hikes, even many of those families would pay slightly more than under today’s tax law.
According to new estimates by my colleagues at the Tax Policy Center, nearly everyone making $1 million and above would pay more in 2015. Obama’s tax changes (including individual, corporate, estate, and excise tax hikes), would boost their taxes by an average of almost $83,000. Such a change would trim their after-tax income by 3.8 percent.
Obama would boost their average federal tax rate to a hair above 41 percent, an increase of 2.3 percentage points from today’s law.
Overall, those making a million and up would pay 60 percent of the tax increases, and those in the top 5 percent (who make more than $227,000) would pay 85 percent of the new taxes.
Middle-income households would also pay more than under today’s law, but not much more. Those making between $50,000 and $75,000 would face an average tax hike of about $60 in 2015, trimming their after-tax income by 0.1 percent. Overall, these households would pay about 2 percent of all the new taxes though they represent about one-sixth of all taxpayers.
Those making between $100,000 and $200,000 would also pay a bit more—about $150 on average—and their after-tax income would be cut by about 0.1 percent. While these households represent about 14 percent of all taxpayers, they’d pay roughly 4 percent of Obama’s proposed tax hike .
The story would be a bit different by 2023. A key provision of Obama’s plan—changing the way the income tax is indexed for inflation to a system known as the chained Consumer Price Index—would slowly but steadily raise taxes. Thus, middle-income households would pay a larger share of their incomes in taxes in a decade than in 2015. At the same time, Obama would extend his 2009 tax cuts for low-income families with children and those going to college beyond their 2017 expiration date, reducing taxes for those households.
Those households making between $100,000 and $200,000 would end up paying an average of about $380 more in 2023, up from $150 in 2015. And their share of the total tax hike would nearly double to a bit more than 7 percent.
Obama’s budget included dozens of changes to the revenue code–raising some taxes and cutting others. They include tax increases for high-income households and both tax cuts and tax hikes for others.
His proposed increase in the tobacco tax would disproportionately affect low- and moderate-income taxpayers, who spend a bigger share of their income on cigarettes than the wealthy. However, middle-income households would benefit from two other tax changes: a more generous child and dependent care tax credit, and Obama’s proposal to extend those relatively generous rules for the earned income credit, child tax credit, and education credit.
For high-income taxpayers, the news is nearly all bad. Obama would limit the value of itemized deductions and some other tax preferences to 28 percent, limit the benefits of large tax-favored retirement accounts, adopt a version of the Buffett Rule by imposing a Fair Share minimum tax of 30 percent of adjusted gross income over $1 million (less a charitable credit), and raise taxes on estates, gifts, and certain family trusts.
For the most part, Obama’s tax plan would do exactly what he promised: It would raise taxes by about $1 trillion (at least by his measure) over the next decade. And most, but not quite all, of those new revenues would come from those making $200,000 or more. The president stepped over his no-taxes line-in-the-sand for those making less, but not by much more than the length of his big toe.