Tax VOX
A television screen displays a logo for the Dow Jones Industrial average surpassing 15,000 during trading day on the floor at the New York Stock Exchange last month. As the federal government has spent more and more money trying to pull the country out of budget deficits, it has also created an increasingly sizable investment portfolio. (Brendan McDermit/Reuters/File)
Uncle Sam's growing investment portfolio
The federal government has been borrowing rapidly to finance recent budget deficits. But that’s not the only reason it’s gone deeper into debt. Uncle Sam also borrows to issue loans, build up cash, and make other financial investments.
Those financial activities have accounted for an important part of government borrowing in recent years. Since October 2007, the public debt has increased by $6.9 trillion. Most went to finance deficits, but about $650 billion went to expand the government’s investment portfolio, including a big jump in student loans. Before the financial crisis, Uncle Sam held less than $500 billion in cash, bonds, mortgages, and other financial instruments. Today, that portfolio has more than doubled, exceeding $1.1 trillion.
Financial crisis firefighting drove much of the increase from 2008 through mid-2010. Treasury raised extra cash to deposit at the Federal Reserve; this Supplemental Financing Program (SFP) helped the Fed finance its lending efforts in the days before quantitative easing. Treasury placed Fannie Mae and Freddie Mac, the two mortgage giants, into conservatorship, receiving preferred stock in return; shortly thereafter, Treasury began to purchase debt and mortgage-backed securities (MBS) issued by Fannie, Freddie, and other government-sponsored enterprises (GSEs). And through the Troubled Asset Relief Program (TARP), Treasury made investments in banks, insurance companies, and automakers and helped support various lending programs.
Together with a few smaller programs, these financial crisis responses peaked at more than $600 billion. Since then, they have declined as Treasury sold off all its agency debt and MBS and most of its TARP investments and as quantitative easing, in which the Fed simply creates new bank reserves, eliminated the need for cash raised through the SFP. ( Continue… )
House Ways and Means Committee Chairman Rep. Dave Camp speaks on Capitol Hill in Washington last month. Wenesday, Camp gave an important update on tax reform to a group of Washington tax wonks. Yet his talk got almost no attention, Gleckman says. (Charles Dharapak/AP/File)
Tax reform hits a political wall
If Congress is going to reform the tax code, it will take an enormous amount of hard work and a lot of luck. The stars, as they say, will have to align. Unfortunately, those galactic bodies seem to be getting more and more disarranged.
Reform just can’t catch a break. The deficit is shrinking, taking away one possible driver of a rewrite. The Congressional Budget Office now projects the nation won’t bump up against its debt limit until October or even November, taking even more steam out of any Grand Bargain—or even a not-so-grand deal. And pols seem unable to disentangle themselves from distracting sideshows such as the IRS tea party flap.
Some have argued that these events make reform easier, not harder. The IRS scandal, they say, will encourage bipartisan compromise. Without immediate deficit pressures, Democrats would be more willing to accept a deal that raises the same amount of money as the current code and not insist on a reform that raises revenue.
I don’t think so. ( Continue… )
An American flag flies in front of the Supreme Court in Washington, D.C., in 2012. The Supreme Court is considering whether to grant same-sex married couples the right to file joint federal tax returns, but Gleckman wonders if the court is missing the point. (Alex Brandon/AP/File)
Is marriage — and joint tax filing — outdated?
Any day now, the Supreme Court will rule on whether same-sex married couples have the right to file joint federal tax returns. But Yale tax law professor Anne Alstott has me wondering whether the entire debate over the tax consequences of the Defense of Marriage Act is missing the point. In an upcoming paper for Yale’s Tax Law Review, she argues that it makes little sense to tie the Revenue Code so closely to formal marriage when so many people are in very different family relationships than they were even 40 years ago.
As Alstott notes, nearly half of American adults are now unmarried, 40 percent of children are born to unmarried parents, and labor force participation among married women is now very close to that of married men (thanks to the always-helpful Paul Caron at TaxProf blog for tipping me off to her paper). Ozzie and Harriet have been in reruns for half-a-century. So why even bother with the concept of joint tax filing?
Alstott borrows from Johns Hopkins University sociologist Andrew Cherlin, who calls the trend away from formal marriage “new individualism.” This, she says, “has rendered obsolete legal doctrines and policy analyses that treat formal marriage as a proxy for family life….Joint filing is no longer well-tailored to serve important social objectives.”
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And, she adds, this argument applies whether one is a liberal who embraces the new individualism or a conservative who is offended by it.
Reframing the tax treatment of families in this way will help solve some problems and create some new ones. And Alstott isn’t so much arguing for a specific alternative to joint filing as urging tax wonks to consider the law in the context of social change. ( Continue… )
Kansas House Speaker Ray Merrick, right, a Stilwell Republican, consults with his chief of staff, Christie Kriegshauser, during a caucus of GOP House members on May 30, 2013, at the Statehouse in Topeka, Kan. With a $700 million shortfall in its budget, Kansas will struggle to pull out of financial crises, Francis argues. (John Hanna/AP/File)
Is Kansas on the path to financial crisis?
Kansas Governor Sam Brownback (R) and the GOP-controlled legislature are struggling to accomplish two goals: They want to repeal the state income tax but need to balance a budget that, despite substantial spending cuts, faces a $700 million shortfall.
It is no easy trick. Their solution: new net short-term revenue increases accompanied by a promise to phase out the state’s income tax. This year’s final budget agreement includes both spending cuts and about $300 billion in new sales and income tax revenue that promise to balance the fiscal year 2014 books. But over the next five years, those new revenues will be overwhelmed by a proposed 20 percent cut in individual income tax rates, setting the stage for annual budget crises.
It isn’t easy to keep track of whether Kansas is cutting taxes or raising them. The agreement backtracks on income and sales tax cuts scheduled to happen this year. Much like the congressional tax debate of 2012, it is all about what baseline you prefer.
Let’s start with the new revenue, which the state projects will boost its coffers by about $365 million in 2014. About $195 million will come from setting the state sales tax rate at 6.15 percent, lower than the current temporary rate of 6.3 percent but above the 5.7 percent scheduled to take effect in July.
The remaining $170 million will come from changes to individual deductions. Itemized deductions, other than charitable contributions, will be trimmed by 30 percent in tax year 2013 and the haircut will gradually increase to 50 percent by 2017. At the same time, lawmakers scaled back a scheduled rise in the standard deduction, further increasing the tax base. ( Continue… )
This chart shows how transaction costs can dominate the cost of owning a house, especially for properties that are only owned for short periods of time. Transaction costs are the largest expense a homeowner faces for homes owned for less than four years. (Ben Harris)
Why tax breaks might not bring home prices down
Tax preferences for housing are under fire, with mounting evidence that these preferences are inefficient, unequal, and too expensive to warrant a place in the tax code. Critics of proposed changes in the tax treatment of home ownership argue that these reforms would slash home prices at the very time they are showing signs of recovery. But in a new paper, I find that changes to the deductions for mortgage interest and property tax payments might not reduce prices much at all, and some reforms might even boost prices.
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I estimate the impact on metropolitan housing prices of the higher tax rates imposed this year on high income households as well as three proposed tax changes: President Obama’s 28 percent limit on selected tax expenditures; eliminating deductions for mortgage interest and property taxes; and limiting the tax savings from the mortgage interest deduction to 20 percent while providing a flat credit for closing costs.
The president’s 28 percent limit on itemized deductions would barely move housing prices at all, causing them to fall just 0.3 percent. The higher top tax rates put in place in 2013, which drive up the value of deductions for housing for high-income taxpayers, are estimated to increase home prices by an even smaller margin.
By contrast, completely eliminating the mortgage interest and property tax deduction—a drastic change that probably would only happen if accompanied by a new tax preference for housing—would cause housing prices to fall by an average of 11.8 percent in the 23 cities studied. Estimated price declines would range from 10.3 percent in Seattle to 13.8 percent in Milwaukee. ( Continue… )
Posters hang in the halls of the Internal Revenue Service building in Washington. The bottom line when it comes to tax preferences, Gleckman writes, is that everybody wins. (Ann Hermes/The Christian Science Monitor/File)
Who benefits from tax preferences? You do.
The Congressional Budget Office report on the distribution of tax expenditures is getting lots of buzz, nearly all of it positive. This is a gratifying and somewhat surprising outcome. The paper confirms many of the findings of my Tax Policy Center colleagues who have done similar analyses in recent years.
The basic story is pretty simple: Just about everyone benefits from these tax preferences (which, for the most part, look like government spending). The highest income households get the biggest share of these tax breaks. But when looked at through a somewhat different lens—how much these subsidies increase after-tax income–the lowest income households are the big winners. And middle-income households do pretty well too.
But to me the most interesting results are in the details. Who benefits from which preferences? Or, to put it another way, who would lose if Congress trimmed or even eliminated some of these provisions as part of a broad-based tax reform.
And make no mistake, CBO was looking at the big commonly used tax preferences that politicians often dismiss as loopholes or special interest tax breaks. When pols talk about cutting rates by getting rid of loopholes, this is what they are talking about. ( Continue… )
The exterior of the Internal Revenue Service building is shown in Washington. It is hard to imagine any base-broadening, rate-cutting tax reform plan that doesn’t include some cuts in preferences for middle-income taxpayers, Gleckman writes. (Susan Walsh/AP/File)
Cut deductions to lower tax rates? Easier said than done.
Two interesting new papers from the Congressional Research Service highlight a major challenge faced by any tax reform that reduces itemized deductions to help pay for lower tax rates—lots of middle-income people would lose at least some benefits from scaling back those deductions.
It isn’t a new lesson, but it is one that bears repeating. For instance, a March 21 CRS paper shows that in 2010 about 40 percent of all deductions were claimed by households making between $20,000 and $100,000, with 28 percent going to those making between $50,000 and $100,000. Nearly half of tax filers making between $50,000 and $100,000 claimed deductions for mortgage interest and charitable giving, and more than half deducted state and local taxes.
Those three deductions alone represent more than two-thirds of all itemized deductions. Thus, it is hard to imagine any base-broadening, rate-cutting reform plan that doesn’t include some cuts in those preferences. And taking that step threatens to make a lot of middle-income taxpayers very unhappy. As Bruce Bartlett (who tipped me off to the CRS papers in his New York Times blog this morning) notes, this may explain why so few tax reform plans ever identify a single tax preference they would target.
Of course, higher income people disproportionately benefit from many deductions. For instance, the Tax Policy Center estimates that households making $500,000 or more represent less than 1 percent of all taxpayers. Yet, CRS estimates they claim about 15 percent of all deductions. ( Continue… )
Apple CEO Tim Cook, center, flanked by Peter Oppenheimer, Apple's chief financial officer, left, and Phillip A. Bullock, Apple's head of Tax Operations, are sworn in on Capitol Hill in Washington, Tuesday. (J. Scott Applewhite/AP)
Apple taxes: business as usual
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.
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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. ( Continue… )
Rep. Michele Bachmann (R) of Minnesota (center) speaks during a news conference with tea party leaders about the IRS targeting tea party groups, Thursday, May 16, 2013, on Capitol Hill in Washington. Some analysts say the IRS has been pushed into a no-win position of trying to regulate political speech. (Molly Riley/AP)
Free the IRS from regulating political speech
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. ( Continue… )
Tim Savaglio, a member of the Liberty Township Tea Party, displays one of the letters his group received from the Internal Revenue Service. A detailed look at how the IRS seemingly targeted Tea Party and other conservative groups, found bureaucratic bungling and a troubling bunker mentality up and down the agency, Gleckman writes. (Al Behrman/AP)
IRS and the Tea Party: A small but bungling scandal
The IRS’s botched processing of requests for tax-exempt status by political groups isn’t the new Watergate. It is, 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. ( Continue… )
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