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. ( Continue… )
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. ( Continue… )
Senate Majority Leader Harry Reid (D-NV) plans to bring the Marketplace Fairness Act of 2013 to the floor today for a preliminary vote. The measure would give states authority to require on-line sellers to collect sales tax on the products they sell to consumers within their jurisdictions.
This is big news. Two years ago, Senate Finance Committee Chairman Max Baucus (D-MT) refused to send the bill to the Senate floor.
So this year, Reid is bypassing the committee. The idea has growing bipartisan support among the nation’s governors–many of whom are strapped for tax revenues. A few weeks ago, 75 senators voted to include it in the non-binding Senate budget resolution, and an identical version in the House appears to have support. That sounds promising.
This year’s bill doesn’t differ much from the 2011 version, but it does increase the threshold for covered businesses to firms with sales over $1 million, making it easier for small business groups to stomach. And if it really does bring in the millions of dollars promised, it might make up for the sequester’s cuts in just about every program that helps states.
Let’s see what the Senate does and, if the Senate OKs the bill, what happens in the House. As I said inFebruary, this might be the year the decades old impasse over taxing remote sales is finally resolved.
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. ( Continue… )
Just months ago, to the joy of conservatives and the consternation of liberals, several Republican governors proposed major tax reform plans. At least three–Bobby Jindal of Louisiana, Dave Heineman of Nebraska, and Pat McCrory of North Carolina– vowed to completely repeal their state corporate and individual income taxes.
But by Tax Day, two of those governors, Jindal and Heineman, had abandoned their plans, at least for this year. In North Carolina, McCrory and House Republicans appear to be scaling back their ambitions.
What happened? Pretty simple really. The chief executives thought they could pay for abolishing their income taxes by boosting sales tax revenues. They’d do it by raising sales tax rates and eliminating exemptions. For instance, many services that are now exempt from sales tax would become subject to the levy.
Instead, the exercise became an object lesson in special interest politics. Much of the business community (especially those firms whose goods and services are now exempt from the sales tax) rose up in revolt. So did local governments that saw their own sales tax revenues jeopardized by a big new state levy. ( Continue… )
Every year at tax time I am reminded of two tax benefits that subsidize my children’s child care – the employer-provided child care exclusion and the Child and Dependent Care Tax Credit (CDCTC). Families with sufficient expenses can benefit from both provisions. Congress could simplify these child care benefits by harmonizing the maximum allowable expenses for both benefits, or eliminating one of the benefits altogether.
Here’s how the child care exclusion and CDCTC work. The exclusion allows me to set aside up to $5,000 from my salary to pay for child care expenses (regardless of the number of children I have) and exclude that from taxable income. However, I can only take the exclusion if my employer offers this benefit.
The credit applies to as much as $3,000 of child care expenses per child, to a maximum of $6,000. Unlike the Child Tax Credit (CTC) – which is refundable, the CDCTC is nonrefundable. It only benefits families with child care expenses who owe federal income taxes. The actual amount of the CDCTC depends on my adjusted gross income (AGI), and ranges from 35 percent of expenses for parents with AGI up to $15,000 down to 20 percent for those with AGI over $43,000.
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Higher income parents tend to benefit more from the exclusion while middle-income parents are the primary beneficiaries of the credit. Because the credit only goes to families who owe taxes, very low-income families benefit more from the exclusion (because they don’t owe payroll taxes on the excluded income). However, relatively few of these workers have access to the exclusion because their employers are less likely to let them put aside pre-tax child care dollars. ( Continue… )
The president’s FY 2014 Budget would limit tax benefits for workers with high-balance retirement saving accounts. Although critics call the plan a blow to workers’ retirement saving, I consider the plan a smart way to roll back the billions in tax breaks that go to investors who don’t need tax incentives to save for retirement. (As a recent senior economist with the President’s Council of Economic Advisers, my support for this provision might not come as a surprise, but note that I didn’t work on this proposal during my tenure at the White House.)
Under current law, annual defined-benefit distributions are limited to $205,000 per plan. The president’s proposal extends the limitation to defined-contribution accounts like 401(k)s and IRAs and recognizes that, unlike in the past, individuals may have multiple pensions. If the combined value of a worker’s retirement accounts exceeds the amount necessary to provide a $205,000 annuity, they can no longer receive tax benefits for retirement saving. As under current law, the maximum benefit level would be indexed to the cost-of-living and would be sensitive to interest rates, which determine the price of an annuity. This year, the cap would affect individuals with defined-contribution account balances exceeding about $3.4 million.
The absence of a cap on defined-contribution accounts allows some high-income workers to shield large amounts of saving from tax. A worker and his employer can contribute up to $51,000 each year to a workplace retirement account (a worker can contribute up to $17,500 on their own) and a worker without a retirement plan can generally contribute $5,500 annually to an IRA. Limits are higher for workers over age 50, and contributions can be made regardless of an account’s balance. The president’s plan would disallow new contributions if account balances exceed the limit, although balances could still grow tax-free.
One analysis estimated that the cap would apply to only one in a thousand current account holders aged 60 and older and would eventually affect just one in a hundred current workers later in their careers. While there are caveats with the analysis—the data are for 2011 and do not include defined-benefit pensions—the point remains that the proposal would affect few workers now or in the future. ( Continue… )
From the start of his 2008 campaign, President Obama has called for raising taxes on the rich. He got much but not all that he wanted in the American Taxpayer Relief Act (ATRA) earlier this year. Now his FY2014 budget takes another couple of bites at that apple.
The first repeats his proposal to cap at 28 percent the value of itemized deductions and specified exclusions, which would raise $530 billion over ten years. The president has pushed this idea in each of his five budgets, expanding it last year to include selected exclusions ranging from interest on municipal bonds to employer-paid health insurance premiums.
This year’s new wrinkle would extend the limitation to some taxpayers with income below Obama’s threshold for being rich—$250,000 for couples and $200,000 for singles. That will surely elicit howls from Obama’s critics on the left and the right, but it does recognize implicitly the budgetary need to raise taxes on more than just the top 2 percent of households.
Obama’s other bite on the rich is a Buffett Rule that would ensure that high-income households pay at least a minimum percentage of their income in taxes. Until now, the president has only spoken aspirationally about this idea. But his budget includes a concrete plan, dubbed the Fair Share Tax, or FST, that would collect $53 billion over ten years (and $99 billion if Congress doesn’t raise taxes on the rich with the 28 percent cap). ( Continue… )
Liberal Social Security advocates are furious. By shifting to a measure called the chained Consumer Price Index, the retirement system would boost benefits by a bit less each year than under the current formula, a gradual change whose bite would grow over time. These advocates are vowing to kill the idea dead. This is something of a conversation-stopper.
Here’s a better idea: Use this technical change as an opportunity to redesign the retirement program. Most Social Security experts, no matter their political persuasion, know this must be done. Why not do it now?
While there may be broad disagreement on the solutions, there is a fairly strong consensus on the nature of the problem. Social Security has done a remarkable job of reducing poverty among the elderly. But its design is badly outdated, better reflecting the nature of work and family structure in 1935 than in 2013. And it has insufficient resources to pay all promised future benefits. ( Continue… )
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… )