Tax VOX
The Internal Revenue Service building at the Federal Triangle complex in Washington. Sometimes, the very tax policies and other public programs that are aimed at helping small businesses may discourage their growth, Gale writes. (Manuel Balce Ceneta/AP/File)
Why tax policies should support new business, not small business
Small businesses occupy an iconic place in the public policy debate and benefit from a broad range of tax and spending subsidies. But the economic issues surrounding small businesses and innovation are complex and nuanced, and not well understood. We are learning, however, that if Congress wants to encourage risk-taking, it may be better off focusing on new firms, not small ones.
In an effort to better understand the nature of small businesses and the government subsidies that support them, my Brookings colleague Sam Brown and I have reviewed decades of research in a new paper for the Kauffman Foundation. What we’ve found suggests Congress should tread very carefully as it thinks about how the tax code drives decisions by entrepreneurs to start and expand companies.
Being small, in and of itself, does not confer a special advantage to businesses in job creation or innovation. Rather it is young firms, which by definition start as small businesses, that serve these critical roles. Policies that aim to stimulate young and innovative firms may be very different than those that subsidize small businesses.
Sometimes, the very tax policies and other public programs that are aimed at helping small businesses may discourage their growth. For instance, when pro-small business subsidies or policies are phased out as firm size expands, they may unintentionally discourage businesses from expanding because expansion will lead to loss of those subsidies. ( Continue… )
The US Capitol in Washington. Not only did the 2010 payroll tax cut die at the end of 2012, but high-income workers now owe an extra 0.9 percent, thanks to the Affordable Care Act, Williams writes. (Susan Walsh/AP/File)
How much will payroll tax hikes cost you?
2013 is a tough year if you owe payroll tax, as most of us do. Not only did the 2010 payroll tax cut die at the end of 2012, but high-income workers now owe an extra 0.9 percent, thanks to the Affordable Care Act. Economists worry about what the combined new taxes will mean for workers’ net pay, consumer spending, and an economy still trying to get its footing. Now the Tax Policy Center’s updated Payroll Tax Calculator shows just what the tax hit means for individual households.
The 2010 tax act cut the workers’ rate for the Social Security payroll tax from 6.2 percent to 4.2 percent for 2011 and 2012. Congress allowed the reduced rate to expire as scheduled at the beginning of this year. The Tax Policy Center has estimated that the higher tax rate will take $115 billion out of workers’ pockets this year and cut consumer spending.
The ACA created a new “additional Medicare tax” that kicked in for the first time in January. Individuals earning more than $200,000 and couples earning more than $250,000 now pay a 0.9 percent tax on earnings above those thresholds. Few of us will pay the new tax, but it will nip at high earners’ wallets.
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Finally, the cap on earnings subject to the Social Security payroll tax increased from $110,100 to $113,700. ( Continue… )
Posters hang in the halls of the US Internal Revenue Service building in Washington. Some corporations would benefit from the chance to bring back their overseas profits without paying today’s repatriation tax, Toder writes. (Ann Hermes/Staff/File)
Should the US adopt a territorial tax system?
House Republicans, former GOP presidential hopeful Mitt Romney, and the chairs of President Obama’s 2010 fiscal commission, Erskine Bowles and Alan Simpson, have all called for changing the way the U.S. taxes multinational corporations. The concept: Shift from a system where U.S. firms pay U.S. tax on their worldwide income to one where they’d pay U.S. tax only on what they earn at home—a structure known as a territorial system. A territorial system would accomplish this by removing the current tax that U.S. multinationals pay, net of foreign income tax credits, on dividends that their foreign affiliates repatriate to the U.S. parent company.
Backers of a territorial tax, including CEOs of many multinationals themselves, argue that the current worldwide system puts U.S. firms at a competitive disadvantage since they must pay the high U.S. tax rate on repatriated profits earned by their affiliates in low-tax countries, while multinationals based in territorial countries pay only the local tax rate on these profits. They also argue that since nearly all of the rest of the world uses a territorial system, it only makes sense for the U.S. to follow suit. The United Kingdom and Japan are the latest nations to eliminate their taxes on repatriated dividends.
These are compelling claims but for one problem: Existing territorial systems are in fact hybrids that include elements of a worldwide tax. And the current U.S. system is itself a mix of worldwide and territorial systems, in large part because it allows U.S. companies to defer tax on foreign income until they repatriate those earnings back to the U.S.
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Any new system in the U.S. would almost certainly be a hybrid as well. As a result, the benefits to U.S.-based multinationals would vary widely. Some firms would come out ahead, but others would not. ( Continue… )
Crumbling sidewalks and shuttered businesses line a downtown street in Stockton, Calif. It will take some time to parse through the Stockton bankruptcy ruling, Gordon writes, and determine who will pay. (Kevin Bartram/Reuters/File)
Stockton to enter bankruptcy. What happens next?
A few years ago, it was fashionable to compare California, Illinois, or whatever U.S. state was struggling financially to the troubled island nation of Greece. Now, with Stockton, California the largest U.S. municipality to enter bankruptcy, it may be tempting to make another Mediterranean comparison – this time to the troubled island nation of Cyprus.
In Cyprus as well as Stockton (plus San Bernardino, California and Jefferson County, Alabama), the question is: Who will be left holding the bag? A common theme is “haircuts,” or possible losses for investors (bank depositors in Cyprus; bondholders in California) to spare wider pain to taxpayers, pensioners, public employees, and other local stakeholders.
One problem with haircuts is that they can impair future market access: the government in question may have to pay higher borrowing costs to regain investor confidence. A wider concern is contagion: If investors fear they won’t get their money back, they might demand higher interest rates from the sector as a whole. Moody’s Investors Service publicly worried about such contagion last summer, in a report critical of U.S. municipalities and what the organization viewed as changing norms toward bankruptcy.
But there are a few reasons to be skeptical about the contagion scenario applied to munis. First, although broad (worth about $3.7 trillion in 2012), the municipal bond market is not very deep. On the supply side, a few large issuers like California, New York, and Texas dominate. On the demand side, most investors are households or institutions representing households such as money market mutual funds. ( Continue… )
The Internal Revenue Service building at the Federal Triangle complex in Washington. Cutting corporate rates is a good thing, but it will inevitably create both big losers and big winners, Gleckman writes, to say nothing of some significant unintended consequences. (Manuel Balce Ceneta/AP/File)
Corporate tax reform is more complicated than politicians think
It is an article of faith at the White House and among some congressional Republicans that while individual tax reform may be off the table this year, corporate reform remains a reachable goal. Rewriting the corporate income tax, goes the theory, is easier because there is a consensus within the business community to lower rates and broaden the tax base.
A closer look suggests this may be more wishful thinking than smart analysis. That doesn’t mean reforming the corporate tax is a bad idea. It is not. It does mean that doing so may be harder than either President Obama or key Republicans want to admit—at least in public.
The Wall Street Journal’s John McKinnon wrote a nice piece on Friday on the divisive tax reform politics inside corporate America. John reported on how big business is dividing itself into opposing camps—preparing for what former senator and 1986 tax reformer Bill Bradley calls “total war” over reform.
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Also on Friday, the Tax Policy Center and the American Tax Policy Institute held a program on the economics of corporate tax reform. There, two panels of tax economists described some of the effects of corporate reform. The participants included Bill Gentry of Williams College, Jim Hines of the University of Michigan, George Plesko of the University of Connecticut, Doug Shackelford of the University of North Carolina, and Eric Toder of the Tax Policy Center. The moderator was Victoria Perry of the International Monetary Fund. ( Continue… )
The exterior of the Internal Revenue Service building in Washington. Finland recently announced plans to finance a cut in corporate tax rates with higher taxes on corporate dividends. A similar corporate tax reform plan would make sense in the US, Harris writes. (Susan Walsh/AP/File)
How should the US pay for corporate tax reform?
Finland’s government recently announced a broad fiscal reform package that cuts corporate tax rates—financed in part by higher taxes on corporate dividends. The plan makes sense for Finland and is worth considering here at home.
Finland will lower the corporate rate to 20 percent in 2014, down from the current rate of 24.5 percent (and 26.0 percent in 2011). The move follows rate cuts in competing European nations, including the UK and Sweden, and a planned rate cut in Denmark. Finland’s current corporate rate is at about the median in the OECD; dropping the rate to 20 percent will put Finland’s rate close to the bottom for European OECD countries.
Finland plans to pay for part of the rate cut by boosting the effective investor tax rate on dividends paid by companies listed on the Finnish stock exchange. (The reform is not a statutory rate hike, but rather a reduction in preferences for dividends.) Effective taxes will increase only on dividends, not on capital gains.
The swap makes sense. A lower corporate tax rate should help attract new business to Finland, which maintains an extremely open and competitive economy. As in other countries, a lower corporate rate will reduce distortions—such as the type and financing of business investment—that become more severe with higher rates. Moreover, the swap is likely progressive, and will help mitigate Finland’s rise in income inequality over the past decade. ( Continue… )
In this, Tuesday, March 12, 2013, photo, a sold sign is posted in front of a home for sale in Mariemont, Ohio. We may know a lot less about the relationship between the mortgage deduction and housing prices than we thought we did, Gleckman writes. (Al Behrman/AP/File)
Low home prices: Time to reform the mortgage tax subsidy?
Housing industry lobbyists often make the case that, whatever you think of the mortgage interest deduction, now would be a terrible time to eliminate or restructure the subsidy. After all, they say, the housing market remains so shaky that ending the deduction would send home prices back into a tailspin.
However, there is a contrary case to be made: It may be that with both interest rates and prices so low, this could be the ideal time to redesign the tax subsidy for home ownership. Because monthly mortgage payments for many homeowners and buyers are lower than they have been for years, trimming or restructuring the MID might have less impact than we thought.
Last November, a panel of housing experts brought together by the Urban Institute concluded that “current housing conditions reveal several factors that would likely dampen the marketwide effects” of reforming the mortgage interest deduction.
According to a summary of the session, the roundtable participants concluded that “post-recession housing market conditions have disrupted the normal relationships between user costs, rents, and house prices.” In other words, the market is such a mess that it is no longer possible to predict what would happen if the MID were repealed today. ( Continue… )
A man stands under an umbrella in a light, wet snowfall in front of the Supreme Court building in Washington, Monday. Under DOMA, same-sex couples are not considered married and thus must file as individuals. (Jonathan Ernst/Reuters)
Supreme Court gay marriage case: What does DOMA mean for taxes?
The 1996 Defense of Marriage Act (DOMA) was not primarily a tax law but it certainly affects the federal taxes that same-sex couples pay. In fact, taxes are the basis for the second of the two cases concerning same-sex marriage that the Supreme Court will hear this week.
Although the federal government generally recognizes state laws concerning marriage, DOMA requires the federal tax code treat all same-sex couples as unmarried. That standard applies to both the estate tax and the income tax. While the Supreme Court will be reviewing an estate tax case, Windsor v. United States, its ruling will likely affect both taxes.
The estate tax issue is this: Under DOMA, same-sex couples cannot take advantage of the unlimited deduction for bequests to spouses or share the doubled exemption that benefits federally-defined married couples.
New Yorkers Thea Clara Spyer and Edith Windsor married in Toronto in 2007 because their home state didn’t allow same-sex marriage. New York did recognize their status when Thea died two years later, but the IRS didn’t. It denied Clara the estate tax’s spousal exemption, resulting in a tax bill of more than $360,000. Lower courts subsequently ruled that denial unconstitutional and the federal government has appealed. In an extra twist, the Justice Department is not arguing the appeal—the House of Representatives is making the case. ( Continue… )
A man swims his daily mile at a retirement community in Sun City, Ariz. Evidence suggests that if California's automatic enrollment plan ever becomes policy, it will go a long towards increasing retirement saving, Harris writes. (Lucy Nicholson/Reuters/File)
Is automatic enrollment the future of retirement savings?
Automatic enrollment is slowly gaining steam as the choice strategy to encourage retirement saving. A bold plan in California would eventually make the practice widespread and could revolutionize the state’s saving landscape.
Last September, the California legislature approved a framework for automatically enrolling private-sector workers in a retirement savings plan. Employers with more than five workers would have to offer a workplace retirement plan, automatically enroll employees in the newly established California Secure Choice Retirement Savings Plan (SCP), or face a fine. Workers enrolled in SCP would automatically contribute 3 percent of their pay to an IRA-like account unless they opted out; like an IRA, benefits would be based on account contributions and investment returns. Employers are only required to set up the plan, not to contribute to the account, and there is no explicit cost to taxpayers.
A third-party—either a private firm or California’s pension administrator (CALPERS)—would administer the plan, investing no more than half the pooled funds in equities. (A private administrator may be the superior option given CALPERS’ recent history of fraud and mismanagement.) Annual administrative expenses would be limited to one percent of fund assets. The framework also calls for a guaranteed return, although the details have yet to be ironed out.
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The plan is a long way from becoming a reality. The framework calls for further study of the plan’s feasibility and costs, and additional legislation will be needed to turn the idea into policy. In addition, the IRS and Department of Labor must still rule on the legality of some of the details. ( Continue… )
The dome of the US Capitol Building is seen as the sun sets on Capitol Hill in Washington. The Senate Democrats’ budget, like the House version, rips unfair and inefficient tax preferences that litter the revenue code, Gleckman writes. (Charles Dharapak/AP/File)
Why the Senate budget's tax cuts do not add up
The Senate Democrats’ budget, like the House version, rips unfair and inefficient tax preferences that litter the revenue code. But the tax provisions of the Senate budget, which is being debated on the floor today, raise at least two big problems: They see flaws in only in those tax expenditures that benefit high-income households and big businesses. And while the fiscal plan promises to raise taxes on big business and the rich by $975 billion over 10 years, it tells us almost nothing about how.
There is a reason for that lack of detail: Raising nearly $1 trillion by eliminating tax preferences for some businesses and a tiny slice of households is very hard to do. Not impossible, perhaps, but very hard.
The Budget panel’s 345-page committee report describes its revenue aims in exactly six paragraphs (pg. 138 if you are following at home). In sum:
“Eliminating loopholes and cutting unfair and inefficient spending in the tax code for the wealthiest Americans and biggest corporations must be a significant element of a balanced and responsible deficit reduction plan….It is the clear intent of the Committee…that the savings found by eliminating loopholes and cutting unfair and inefficient spending in the tax code not increase tax burdens on middle-class families or the most vulnerable Americans.” ( Continue… )
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