Tax VOX
The Internal Revenue Service building stands in Washington, D.C. The IRS isn't perfect, but concerns that masses of low-income taxpayers will lie about their income to receive tax exemptions are largely overblown, Gleckman says. (Susan Walsh/AP/File)
Do low-income taxpayers cheat?
My blog last Tuesday on overblown concerns about people falsely claiming subsides under the Affordable Care Act’s insurance exchanges generated a lot of response. Much focused on my assertion that the income tax system operates remarkably well as a largely voluntary program.
Their retort: I naively misjudged the willingness of low-income people to cheat. In the words of one reader (whose comment was posted on Forbes.com):
“I think you have substantially underestimated the ability and motivation of low income people to commit fraud when the opportunity arises. In light of the EITC and school lunch program experience, why should we expect the amount of overpayments on the Exchanges–especially in their very first chaotic year of operation–to be any smaller?”
That’s a pretty powerful statement so I checked into the Earned Income Tax Credit (I don’t know anything about school lunches). And, it turns out, there is no evidence of widespread cheating.
It is certainly true that some EITC taxpayers do cheat. But many others are simply baffled by the credit and make mistakes. The IRS has identified high error rates, though that may be, in part, because it also audits EITC returns much more frequently than other returns. ( Continue… )
Senate Minority Whip John Cornyn (R-Texas), center, and other GOP senators, speak with reporters at the Capitol about the Affordable Care Act, popularly known as "Obamacare," at the Capitol in Washington, D.C., on July 10, 2013. The delay of the full implementation of Obamacare will not cause massive fraud and abuse, Gleckman says. (J. Scott Applewhite/AP)
Obamacare delay: Will it encourage cheating?
The latest flap over the implementation of the Affordable Care Act involves the ability of the IRS to verify the income people use to calculate their health exchange subsidy. While critics of Obamacare warn darkly that this will cause massive cheating, it appears that there is much less to the matter of delayed income verification than some wish to believe.
With health exchanges due to open for business in just three months, the Obama Administration still needs to do an awful lot to make enrollment seamless. But widespread fraud? I don’t think so.
Here is the story: Earlier this month, the Obama Administration quietly acknowledged that a massive and complex government data hub aimed at verifying information about insurance buyers will not be ready by the time people begin purchasing on the exchanges in October. As a result, the IRS will be unable to immediately verify that a buyer is receiving the correct income-based subsidy and, in effect, will have to take the purchaser’s word for it.
The system was never going to be great. Even as designed, the income data for somebody buying in October, 2013 for coverage in 2014 would come from tax year 2012. Now, things will be even clunkier.
This has created two concerns: Some people will low-ball their income in order to get bigger subsidies. And some low-income people who live in red states will overstate their income so they can be eligible to buy on the exchanges. They are currently caught between their states refusal to participate in the law’s expansion of Medicaid and the ACA’s prohibition against those below a certain income buying on the exchange (since the law assumed they’d be eligible for expended Medicaid). ( Continue… )
The American flag and a sign for Wall St. are shown outside the New York Stock Exchange on July 15, 2013 in New York, New York. The Federal Reserve, usually ignored when thinking about fiscal policy, plays a key role in the government's financial position, Marron says. (Mark Lennihan/AP)
Five takeaways on America's debt
Is the Federal Reserve part of the government? You might think so, but you wouldn’t know it from the way we talk about America’s debt. When it comes to the debt held by the public, for example, the Fed is just a member of the public.
That accounting reflects the Fed’s unusual independence from the rest of government. The Fed remits its profits to the U.S. Treasury each year, but is otherwise ignored when thinking about fiscal policy.
In the era of quantitative easing, that accounting warrants a second look. The Fed now owns $2 trillion in Treasury bonds and $1.5 trillion in other financial assets. Those assets, and the way the Fed finances them, could have significant budget implications.
To understand them, we’ve calculated what the federal government’s debt and financial asset positions look like when you combine the regular government with the Federal Reserve, taking care to net out the debt owned by the Fed and Treasury cash deposited at the Fed:
This consolidated view offers five insights about America’s debt situation:
-
Less long-term debt. The Fed has bought $2 trillion of Treasury debt with maturities of a year or more. As a result, $2 trillion of medium- and long-term public debt is not, in fact, held by the real public. Interest payments continue, but they cycle from the Treasury to the Fed and then back again when the Fed remits its profits to Treasury. (This debt would become fully public again if the Fed ever decides to sell or allows the debt to mature without replacing it.)
( Continue… )
Tea party activists demonstrate on Fountain Square before marching to the John Weld Peck Federal Building in Cincinnati, Ohio, to protest against the Internal Revenue Service. The IRS is badly managed, but it's also critically understaffed. Criticizing it nonstop will not help the IRS fix its problems, Gleckman says. (Al Behrman/AP)
How not to fix the IRS
House Republicans have decided to make the IRS their summer piñata. Its leadership says it will bring a series of anti-IRS proposals to the floor later this month. And an appropriations subcommittee’s spending bill would slash the agency’s budget by $3 billion, 24 percent below levels Congress approved in March. If the plan is to score political points by hamstringing the agency’s ability to do its job, starving the beast this way makes perfect sense. But if you are interested in improving the way the IRS works, it is foolish and counter-productive.
This IRS-bashing is hardly surprising—or unexpected– given the agency’s bungled management of its tax-exempt entities office and its tone-deaf Star Trek videos. And, of course, few Democrats will leap to the defense of what is probably the government’s least popular agency.
Forgive me, but let’s try to apply a dash of common sense to the agency’s problems. After months of looking, the IRS’ most vocal critics have found no evidence that its poor processing of requests by political organizations seeking tax-exempt status was politically-motivated.
It was, however, real. And its cause seems to be a staff that suffered from low skills, poor training, low morale, a shortage of resources, and bad management. It is hard to see how cutting an organization’s budget by one-third will fix any of these problems.
To be even more specific: Tea Party and other conservatives groups had two main objections to the way they were treated by the IRS: They were subjected to lots of intrusive questions and the applications process took too long. ( Continue… )
The Capitol is seen in Washington, early Monday, July 8, 2013, as Congress returned to work following the Independence Day recess. The path toward broadly scaling back tax expenditures could lead to many different directions. (J. Scott Applewhite/AP/File)
Not all curbs on tax preferences are created equal.
Because politicians seem unwilling to confront specific individual tax preferences, it is likely that any broad-based tax reform will be based on across-the-board curbs on deductions, credits, and exclusions. That’s how lawmakers could generate the revenue they need to reduce tax rates and (perhaps) help reduce the deficit without seeming to tackle popular tax subsidies such as those for mortgage interest or charitable giving.
But there are many different ways to broadly scale back tax expenditures. And while the distinctions among them may be easily lost in what is sure to be a complicated political debate, these methods yield very different outcomes. Some options would target the highest income households, others would raise taxes more broadly. Some would be fairly simple to administer, others would be mind-numbingly complex.
The lesson, you might say, is that a cap is not a limit is not a haircut.
RECOMMENDED: Opinion 6 ways to make tax reform happen
To help sort out the differences, my Tax Policy Center colleagues Eric Toder, Joe Rosenberg, and Amanda Eng looked at six ways to reduce tax preferences across-the-board. To make sure they were comparing apples with apples, they designed each option so it would raise roughly the same amount of money (about $1 trillion over 10 years). ( Continue… )
White House Budget Director Sylvia Matthews Burwell testifies about the federal deficit on Capitol Hill in Washington, D.C. earlier this year. Low interest rates may be allowing the government to have a false sense of confidence about its economic standing, Penner says. (Carolyn Kaster/AP/File)
Are low interest rates masking the deficit?
Thanks to artificially low interest rates, the United States has been able to finance deficits exceeding $1 trillion every year from 2009 through 2012 at very low cost. Throughout the period, the ratio of interest to the GDP has remained almost stable and is not expected to start rising until 2015. Some argue that this has encouraged the Congress to be fiscally irresponsible, although others believe that deficits have not been large enough given the severity of the recession.
But low interest rates will not last. In June, Federal Reserve Chairman Ben Bernanke gave the impression – apparently unintentionally — that the Fed would soon reduce its purchases of Treasury debt and mortgage-related securities. That helped propel a major increase in bond yields. The 10-year Treasury rate rose from under 2.0 percent to over 2.8 percent in a matter of days.
The Congressional Budget Office (CBO) baseline assumes rates will gradually rise over the next few years until the 10-year rate stabilizes at a more normal 5.2 percent in 2018 and thereafter. The implications for federal interest payments are alarming. The bill is assumed to rise almost four-fold between 2013 and 2023 or at a rate of 14 percent per year. Interest would become the fastest growing expenditure item in the budget by far, leaving health costs in the dust.
CBO’s baseline must assume that current law does not change. For example, numerous tax reductions, such as the research and experimentation tax credit, are temporary under current law and the CBO must assume that they expire, even though Congress has routinely extended them over the years. ( Continue… )
Senate Finance Committee Chairman Sen. Max Baucus (D-Mont.), left, accompanied by the House Ways and Means Committee Chairman, Rep. Dave Camp (R-Mich.), speaks about tax reform to employees of 3M at the 3M Innovation Center on July 8, 2013 in Maplewood, Minn. (Hannah Foslien/AP)
Smart tax reform could shrink the government.
Max Baucus and Dave Camp, leaders of the Senate and House tax-writing committees, are on the road promoting tax simplification. One goal: cleaning out the mess of deductions, exclusions, credits, and other tax breaks that complicate the code.
Done well, such house cleaning could make for a simpler, fairer, more pro-growth tax code. It could also shrink government’s role in the economy. Eric Toder and I explore that theme in a recently released paper, Tax Policy and the Size of Government. Here’s our intro:
How big a role the government should play in the economy is always a central issue in political debates. But measuring the size of government is not simple. People often use shorthand measures, such as the ratio of spending to gross domestic product (GDP) or of tax revenues to GDP. But those measures leave out important aspects of government action. For example, they do not capture the ways governments use deductions, credits, and other tax preferences to make transfers and influence resource use.
We argue that many tax preferences are effectively spending through the tax system. As a result, traditional measures of government size understate both spending and revenues. We then present data on trends in U.S. federal spending and revenues, using both traditional budget measures and measures that reclassify “spending-like tax preferences” as spending rather than reduced revenue. We find that the Tax Reform Act of 1986 reduced the government’s size significantly, but only temporarily. Spending-like tax preferences subsequently expanded and are now larger, relative to the economy, than they were before tax reform.
We conclude by examining how various tax and spending changes would affect different measures of government size. Reductions in spending-like tax preferences are tax increases in traditional budget accounting but are spending reductions in our expanded measure. Increasing marginal tax rates, in contrast, raises both taxes and spending in our expanded measure. Some tax increases thus reduce the size of government, while others increase it.
Eric and I first presented this line of reasoning in How Big is the Federal Government? in March 2012. Our latest paper, recently published in the conference proceedings of the National Tax Association, is a pithier presentation of those ideas.
RECOMMENDED: Opinion 6 ways to make tax reform happen
Senate Finance Committee Chairman Sen. Max Baucus (D-Mont.) speaks on Capitol Hill in Washington, D.C., earlier this year. Baucus and fellow Congressman Sen. Orrin Hatch (R-Utah)'s 'blank slate' approach could be just what tax reform needs, Steuerle says. (J. Scott Applewhite/AP/File)
Baucus-Hatch 'blank slate' plan could reenergize tax reform.
No one quite knows what exactly Senate Finance Committee Chairman Max Baucus (D-MT) and Ranking Member Orrin Hatch (R-UT) mean when they say they will rely upon a “blank slate” as the starting point for tax reform discussions. But done carefully and with political artistry, taking advantage of their unique power, Baucus and Hatch could revolutionize how members of Congress negotiate the future of taxes.
But it’s all in the practice, not the theory. Done right, the strategy could reenergize the tax reform debate. Done wrong, it will be just another dead-end.
The idea of reforming the tax system from a “zero base” or building up from a blank slate is hardly new. And lawmakers always talk about everything being on the table. The challenge is in making it happen.
RECOMMENDED: How much do you know about taxes? Take the quiz.
Baucus and Hatch must accomplish two goals. First, they must shift the burden of proof from those who favor reform to those who would retain the status quo. Second, they must force members to pay for their favored subsidy, denying them the opportunity to pretend it is free.
As a veteran of the Tax Reform Act of 1986, I always emphasize the crucial role of process. Sure, serendipity smiles or frowns unexpectedly on any endeavor, but the ’86 effort took off when Treasury, President Reagan, House Ways & Means Chair Dan Rostenkowski (D-IL), and Finance Committee chair Bob Packwood (R-OR) all put forward proposals that started with specific rate cuts and removal of many tax preferences. ( Continue… )
Wal-mart International CEO Doug McMillon addresses a crowd during the Wal-mart shareholders meeting in Fayetteville, Ark., last month. Large US corporations have often taken advantage of the corporate tax system to minimize their taxes not only in the US but also abroad, Gleckman argues. (Gareth Patterson/AP/File)
Corporate giants work the tax system. Is it fair?
A new analysis by the Government Accountability Office finds that in 2010 large U.S. corporations paid an average effective tax rate on their worldwide income of 22.7 percent and U.S. federal tax of only about 16.6 percent. The federal rate was less than half of the 35 percent statutory rate.
Large firms that made a profit that year paid an even lower effective rate—an average of 16.9 percent in worldwide taxes and only 12.6 percent in U.S. federal tax.
It isn’t news that these firms pay low effective tax rates. Journalists and academic researchers have been reporting this for years. But for the most part they have been hamstrung by limited access to good data. Publically available financial statements include information about taxes, but there is often a huge gap between what firms report on their public books and what they actually pay. And when asked about their true tax liability, firms mostly respond with a curt, “none of your business.”
But GAO has access to new IRS data from a form called the M-3. That schedule requires firms with assets of $10 million or more to reconcile their book and tax reporting in a way that gives a much clearer picture of their actual tax liability.
These data are still not ideal. For one thing, GAO only had access to aggregate data, not firm-level information. And there are some big differences hidden behind those averages. A company’s effective tax rate can vary dramatically, depending among other things on what investments it makes in plant and equipment and how it finances those purchases. ( Continue… )
President Barack Obama gestures during a speech on climate change in June 2013 at Georgetown University in Washington, D.C. In the past, Mr. Obama has proposed rolling out highly-targeted tax subsidies to try to curb carbon-based fuel use. A study, however, suggests that such breaks would be ineffective. (Evan Vucci/AP)
Want to reduce greenhouse gasses? Don't subsidize taxes, study says.
The other day, President Obama proposed a modest and largely aspirational plan to respond to climate change. Unlike some of his past efforts, it did not include new proposals for highly targeted tax subsidies aimed at reducing the use of carbon-based fuels by encouraging “green” energy.
The tax breaks were missing in large part because Obama wanted a plan that would not require congressional approval (which he will not get). But a new congressionally mandated study by the National Academy of Sciences concludes that extending the sort of energy-related tax preferences that are already scattered throughout the Revenue Code would do little or nothing to reduce greenhouse gasses.
The report’s conclusion is damning: Although the Code included $48 billion in energy-sector tax preferences in 2010-2011, their effects were essentially nil. “The combined effect of energy-related subsidies for renewable sources and fossil fuels is very small, probably less than 1 percent of U.S. emissions, and could be either positive or negative.”
That’s not to say the tax code could not be a useful tool for reducing greenhouse gasses. For example, a broad-based carbon tax (or its cousin, a cap-and-trade system) could be powerful way to reduce emissions. But while that idea is dear to the hearts of economists, lawmakers are terrified to even talk about it.
The NAS report did conclude that one set of subsides—tax incentives for research and development in low-carbon technology—may be effective. However, the panel could not model those preferences. ( Continue… )
Become part of the Monitor community