Tax VOX
Floor traders work on the floor of the New York Stock Exchange on Thursday in New York. The US corporate income tax effectively puts a fee on companies that are publicly traded, which is neither efficient nor progressive. (Frank Franklin II/AP)
Why we need a better corporate income tax
Suppose someone proposed a special tax on businesses that make their ownership shares publicly available in affordable, easy-to-sell units. Such an idea would probably generate a lot of push-back. Efficiency advocates might complain that it taxed the very attributes that make equity markets efficient. Progressivity advocates might object on the grounds that it taxed those who have no alternative to publicly available investment opportunities.
In fact we already have such a tax. We call it the corporate income tax.
In what sense is the corporate tax a special levy on being publicly traded? And what do we know about the policy implications of such a charge?
Corporate earnings are taxed twice: First at the corporate level, then again as dividends when they are distributed to shareholders or as capital gains when those investors sell their shares. ( Continue… )
Tea party members on stage dance to their theme song sung by Lloyd Marcus, left, in Boston in this 2010 file photo. But the tea party has been silent on the fiscal cliff and long-term debt. (Melanie Stetson Freeman/The Christian Science Monitor/File)
Worst fiscal policy ideas of 2012
TaxVox proudly presents its 2012 Lump of Coal awards, Thelma and Louise edition, for the worst fiscal policy ideas of the year. The winners are:
10. California. The Golden State probably deserves a lifetime achievement Lump of Coal Award for its inability to balance its budgets, its government-by-initiative, and its endless bouts of fiscal wishful thinking. What, that bump in capital gains tax revenue won’t go on forever?
9. President Obama for proposing to pay for major corporate tax reform by eliminating a handful of minor tax preferences, including subsides for the purchase of corporate jets. Nothing wrong with corporate reform or with ditching the airplane subsidy. The problem is Obama had already pledged to use the same tax break to help reduce the deficit. Physics question: Can a jet flying at the speed of light pay for two things at once?
8. Congress’ decades-long inability to require online retailers to collect sales taxes, just as their bricks-and-mortar competitors must. C’mon gang, even Amazon says it will start collecting sales taxes for online sales. Maybe lawmakers are waiting for free shipping. ( Continue… )
In this November file photo, President Obama acknowledges House Speaker John Boehner of Ohio while speaking to reporters in the Roosevelt Room of the White House in Washington. The 'fiscal cliff' negotiations have included lots of strange politics, but even the policy is unusual. (Carolyn Kaster/AP/File)
Fiscal cliff debate: It's not just the politics that are weird
Somehow, the fiscal cliff tax debate has taken a truly weird turn. No, not the politics, which long ago became a parody of Washington deal-making at its worst. It is the policy that has gotten strange: Democrats and Republicans seem hell-bent on protecting millions of high-income people from deficit-cutting tax hikes.
President Obama started all this four years ago when he redefined the middle class as individuals making $200,000 or less and couples making up to $250,000, and vowing they would never, ever pay a penny more in taxes. This promise exempts 98 percent of households from paying higher taxes to reduce the deficit—a goal most of them say they support.
But that was just the start. Earlier this week, pressured by House Speaker John Boehner, Obama reportedly agreed to define the protected middle class as those making as much as $400,000, and the gossip around town is that he might even up the bidding to $500,000. All this seems to be headed in exactly the wrong direction.
For his part, the speaker has taken an even stranger turn by going rogue with his Plan B. He’d raise taxes on those making $1 million or more, who account for only about 0.2 percent of households. And he’d raise taxes on those making $50,000 or less. The result: Working families would help cover some of the revenue that’s lost from protecting those making between $200,000 and $1 million. ( Continue… )
Speaker of the House John Boehner, R-Ohio, is joined by Rep. Cathy McMorris Rodgers, left, and House Majority Leader Eric Cantor, R-Va., right, as they finish a news conference about the fiscal cliff negotiations in Washington, Tuesday. (J. Scott Applewhite/AP)
Fiscal cliff could impact low-income families the most
The 2001-10 tax cuts placed substantial emphasis on “pro-family” tax reform. The more prominent features favoring families with children included a doubling of the Child Tax Credit (CTC) to $1,000 per child and making it broadly refundable, increasing the Earned Income Tax Credit (EITC) for families with at least 3 children, increasing the point at which the EITC starts to phase out for married couples, increasing the credit rate of the Child and Dependent Care Tax Credit (CDCTC) for some families, and increasing the expenses eligible for a CDCTC for all families.
If left in place, in 2013 families with children would see over $43 billion in benefits from these provisions. But absent Congressional action, these expanded benefits will disappear over the cliff. Should the EITC, CTC, and CDCTC revert to their pre-2001 form, the Tax Policy Center estimates nearly three-quarters of all families with children will see their taxes rise or net rebates decline by an average of almost $1,200, compared with what they would pay if the provisions were extended. Keep in mind those changes would be in addition to the broad tax hikes that would affect nearly all working families such as the expiration of the payroll tax cut and any increase in marginal tax rates for all families with income above the tax entry thresholds.
Most low income and middle income families with children will see their taxes rise (almost 72 percent of families in the lowest 20 percent of incomes and 89 percent of families in the second income quintile), in many cases by a substantial share of their income. Among families whose taxes go up, the average increase will exceed $1,400 for families in the lowest quintile and $1,600 for families in the second quintile (see chart). Most of this increase comes from the reduction in the CTC to pre-2001 levels. Although the child credit phases out and the EIC is unavailable at higher incomes, even families in the top quintile are not immune to tax increases stemming from these three provisions. Just over one-third of families with children in the highest income quintile will see their taxes rise in 2013 by an average of about $600. ( Continue… )
In this November 2012 file photo, prices for shoes sit on display on a shelf at a Sears store, in Henderson, Nev. Changing the cost-of-living measure would also result in a gradual tax increase for many households that would average about $140 a decade from now, Gleckman writes. (Julie Jacobson/AP/File)
What changing the consumer price index would mean for taxpayers
President Obama and House Speaker John Boehner may be close to agreeing on a plan that, among other things, would revise the way government programs are adjusted for inflation. Most attention is focused on what this means for Social Security recipients. But the Tax Policy Center estimates that changing the cost-of-living measure would also result in a gradual tax increase for many households that would average about $140 a decade from now.
Before delving into the substance, I can’t help but note one delicious irony. Three decades ago, Ronald Reagan fundamentally changed the nature of the income tax by mostly ending what was called bracket creep—the phenomenon where people would slip into higher tax brackets as their incomes rose with inflation. Reagan convinced Congress to stop this by indexing tax brackets by the Consumer Price Index (CPI). Now, at the insistance of Republicans, Obama seems to have agreed to open the door to a bit more bracket creep.
So what’s this all about? At its heart is a technical argument about what measure of inflation best captures the fact that people respond to price changes. The model that Congress may adopt assumes that people adjust their behavior when prices rise (or fall). So, if beef gets more expensive, they buy chicken.
By buying the less expensive fowl, a shopper’s cost of food does not go up as much as it would if he stuck with beef. As a result, the rate of food inflation is a bit less than otherwise. While the traditional CPI reflects some of this, another version, called chained CPI, may do a better job. ( Continue… )
Senator Jay Rockefeller (D-WV) speaks with Representative Henry Waxman (D-CA) during a news conference calling for no reduction in the Medicare and Medicaid budgets on Capitol Hill in Washington in this December 2012 file photo. Today, nearly half of noninterest spending is in Social Security and health, Penner writes. (Joshua Roberts/Reuters/File)
The toughest obstacles in the budget debate? Entitlements.
Yesterday, I described President Eisenhower’s remarkable success in turning a large deficit in fiscal 1959 into a balanced budget in 1960. It was one of the biggest fiscal consolidations since World War II.
Although it was a very different time, there are lessons relevant to today’s fiscal challenges. One is that a president need not lose popularity just because he fights hard to impose a responsible, austere budget. Another is that Congress and the president can have intense ideological battles without paralyzing government.
Admittedly, this was easier when both Democrats and Republicans were more diverse ideologically and some of the most intense philosophical battles raged within the parties, not between them.
But the biggest difference may be in the nature of government spending. In 1959, Medicare and Medicaid did not exist. Today, nearly half of noninterest spending is in just two areas: Social Security and health. Almost all this spending is on entitlements. ( Continue… )
President Dwight D. Eisenhower is pictured at his second presidential inauguration, in this January 1957 file photo. Eisenhower was embarrassed when by early 1959 the budget deficit was heading toward $13 billion, Penner writes. (Gordon Converse/The Christian Science Monitor/File)
How Eisenhower and Congressional Democrats balanced the budget
The election results did not change the political status quo, and the status quo has not been conducive to solving the nation’s festering fiscal problems. In his victory speech President Obama pledged to seek bipartisan cooperation in solving problems, though it is not going so well so far. But we better hope that in the end he succeeds. That is the only way to avoid the fiscal cliff and cure the long-run fiscal imbalances that threaten our economic wellbeing.
Given the challenges faced by the president and Congress, it is instructive to look back almost 60 years to a time when divided government did not mean gridlock and intense ideological battles did not lead to paralysis. Unlike most presidents who followed him, Dwight Eisenhower truly believed that budgets should be balanced. Consequently, he was embarrassed when by early 1959 the budget deficit was heading toward $13 billion.
Today, that seems very small but it was the largest deficit since the aftermath of World War II. Eisenhower was determined to attain balance, and his 1960 budget incorporated severe spending restraint and only minor tax increases.
But budget balancing would not be easy. Democrats had won a landslide victory in the 1958 midterm elections and held large majorities in both the House and the Senate. ( Continue… )
Senate Majority Leader Harry Reid of Nev., accompanied by fellow Senate Democratic leaders, pauses during a news conference on Capitol Hill in Washington, Thursday, Dec. 13, 2012, to discuss the stalled fiscal cliff negotiations and other unfinished business in the Senate. There's talk that House Republicans will pass the Middle Class Tax Cut Act in the wake of stalled fiscal cliff negotiations, but Gleckman argues that it wouldn't be much help to middle class taxpayers in the long run. (J. Scott Applewhite/AP/File)
Fiscal cliff talks stall. Middle class tax bill won't help.
With fiscal cliff talks seemingly stalled , there has been growing talk that House Republicans would call President Obama’s bluff and simply pass the Middle-class Tax Cut Act approved by the Senate last summer. But for all the chatter, nobody has paid much attention to what is, and is not, in that bill.
They should, because a close look at the details suggests this option may not be quite so attractive to the GOP, or to anyone else who thinks seriously about tax policy. Granted, it may be politically tempting. In the words of fellow blogger Keith Hennessey (who has great connections with GOP insiders), such a step would be “terrible but not inconceivable.”
The bill extends for one year several provisions of the 2001-2009 tax cuts. For instance, it temporarily continues the low 2001-2003 ordinary income rates for individuals making less than $200,000 or couples making less than $250,000, repeals the limits on itemized deductions and personal exemptions (aka Pease and PEP), and extends marriage penalty relief. It also temporarily extends relatively generous treatment of the child tax credit and the earned income tax credit.
The measure also raises the tax rate on capital gains and dividends to 20 percent for high income households, and retains a zero rate on investments for those with very low incomes. ( Continue… )
A 2011 1040 tax form along with other income tax forms are seen at the entrance of the Illinois Department of Revenue in this April 2012 in Springfield, Ill. Congress once again has to decide what to do about estate and gift taxes, Williams writes. (Seth Perlman/AP/File)
Estate tax up in the air. Is the time to give now?
For over a decade, the federal estate and gift tax has been in constant flux with its exemption rising, its rates falling, and its near-death experience in 2010 followed by resurrection in a reduced state. Now Congress once again has to decide what to do about these levies, which affect relatively few taxpayers but get an inordinate amount of attention. Calling something the “death tax” will do that.
For a few more weeks, the estate and gift tax exempts $5 million of gifts or bequests and taxes any excess at 35 percent. In January, unless Congress acts, the tax will return to its old pre-2001 self with a $1 million exemption and a 55 percent top rate. That possibility means that the wealthy once again have to decide what to do with their assets.
Of course, Congress can prevent most of this mess. President Obama wants to revert to the 2009 parameters—a $3.5 million exemption and a 45 percent tax rate. Others want make this year’s tax permanent. Some deficit hawks want to let the rate and exemption return to pre-2001 levels to collect needed revenue. And, of course, many people would like the taxes to go away altogether.
The Tax Policy Center, in newly updated tables, shows how different policies would affect the number of estates subject to tax and the amount of revenue the government would collect. If Congress extends this year’s rules, an estimated 3,800 estates—representing less than 0.2 percent of all deaths—would owe taxes totaling just $12 billion in 2013. If the temporary tax cut expires, more than 47,000 estates would pay nearly $38 billion. ( Continue… )
Tax payers search through tax forms at the Illinois Department of Revenue in Springfield, Ill., in this April 2010 file photo. Some dividend-paying companies are doing their wealthier shareholders a big favor by paying some of their 2013 dividends in 2012, Williams writes. (Seth Perlman/AP/File)
Tax hikes ahead. Time to accelerate dividend payments?
Regardless of the outcome of the fiscal cliff negotiations, taxes on dividends will be higher in 2013 than in 2012. As a result, companies can save some shareholders plenty of taxes by paying some of next year’s dividends this year.
But not every shareholder will benefit from this presumed largess. While the very wealthy will be winners, many middle-income investors could be worse off.
For instance, that extra dividend income could throw some shareholders onto the alternative minimum tax. Some retirees could see more of their Social Security benefits subject to income tax. Some families with children will pay more tax as their child credits phase out.
While some investors would be hurt by the accelerated dividend payouts, many low- and middle-income taxpayers could benefit. Taxpayers in the 15 percent bracket and below will owe no income tax on 2012 dividends but would pay their ordinary tax rate on 2013 dividends if Congress doesn’t act. That includes many retirees who rely on dividend income to support themselves. ( Continue… )
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