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Tax VOX

Posters hang in the halls of the US Internal Revenue Service building in Washington. (Ann Hermes/Staff)

Want to understand tax reform? Read this report.

By Guest blogger / 05.07.13

If you are a tax geek, or even a normal person who wants to keep up with the ongoing debate over restructuring the tax code, download a copy of the congressional Joint Tax Committee’s Tax Reform Working Group Report.

It is 568 pages long, doesn’t have much of a plot, has no character development (unless you are good at reading between the lines) and sort of peters out at the end. Yet, it is likely to prove an invaluable resource as tax reform moves ahead.

Think of it as the ballpark program you pick up before a baseball game.  You can watch the game without it, but it is much more fun if you can keep score and know a little something about who plays for the visiting team.

The report is divided into three parts. The first is a brief summary of the revenue code. Each provision of the law gets explained in a couple of sentences or, sometimes, a few paragraphs. You’ll learn about everything from adoption assistance to retirement plans, and from the tax treatment of U.S. territories to depreciation of manufacturing equipment.  ( Continue… )

President Barack Obama waves as he arrives to speak at the Anthropology Museum in Mexico City, Mexico, Friday, May 3, 2013. Potential new immigration policies could have a big effect on the economy that will be difficult to predict, Marron writes. (Dario Lopez-Mills/AP/File)

How immigration policy impacts budget projections

By Guest blogger / 05.05.13

Immigration policy poses an unusual challenge for the Congressional Budget Office and the Joint Committee on Taxation. If Congress allows more people into the United States, our population, labor force, and economy will all get bigger. But CBO and JCT usually hold employment, gross domestic product (GDP), and other macroeconomic variables constant when making their budget estimates. In Beltway jargon, CBO and JCT don’t do macro-dynamic scoring.

That non-dynamic approach works well for most legislation CBO and JCT consider, with occasional concerns when large tax or spending proposals might have material macroeconomic impacts.

That approach makes no sense, however, for immigration reforms that would directly increase the population and labor force. Consider, for example, an immigration policy that would boost the U.S. population by 8 million over ten years and add 3.5 million new workers. If CBO and JCT tried to hold population constant in their estimates, they’d have to assume that 8 million existing residents would leave to make room for the newcomers. That makes no sense. If they allowed the population to rise, but kept employment constant, they’d have to assume a 3.5 million increase in unemployment. That makes no sense. And if they allowed employment to expand, but kept GDP constant, they’d have to assume a sharp drop in U.S. productivity and wages. That makes no sense. ( Continue… )

A statue of former Treasury Secretary Albert Gallatin stands outside the Treasury Building in Washington. The taxation of foreign transactions of multinational companies is a vexing challenge in tax reform, Gleckman writes. (Jacquelyn Martin/AP/File)

Tax reform: how to fix the international tax mess

By Guest blogger / 05.03.13

There may be no more vexing challenge in the Revenue Code than the taxation of foreign transactions of multinational companies. Most everyone agrees that the current system is a mess. And corporate tax reform is impossible without addressing international issues. Yet, this corner of the tax law is not only immensely complex but most proposed solutions inevitably run into massive political and policy roadblocks.

In an attempt to surmount those hurdles, two highly-respected international tax economists have proposed an intriguing solution—a corporate minimum tax that allows firms to immediately expense the costs of their foreign investments instead of depreciating them over a period of years.

The proposal was devised by Rosanne Altshuler of Rutgers University (a former director of the Tax Policy Center) and Harry Grubert, a career economist at the Treasury Dept. While Grubert works for the Treasury, the proposal in no way represents the views of the Treasury or the Obama Administration which, in fact, has proposed its own, quite different international tax plans.

There are two basic problems with the taxation of multinational corporations:  ( Continue… )

The exterior of the Internal Revenue Service building is shown in Washington. The current mortgage interest deduction is hard to justify on policy grounds, Toder writes. (Susan Walsh/AP/File)

How to improve the tax subsidy for home ownership

By Eric ToderGuest blogger / 04.30.13

Last week, at the request of the House Ways and Means Committee, I testified on how Congress could reform the mortgage interest deduction, a popular tax expenditure provision with a big sticker price.

The congressional Joint Committee on Taxation estimates the mortgage interest deduction will cost $380 billion over the next five years, making it one of the largest individual tax preferences in the Internal Revenue Code. The Urban-Brookings Tax Policy Center estimates that 40 million taxpayers will benefit from the deduction in 2015.

In spite of its widespread use and large fiscal cost, the deduction does little to promote home ownership. It provides no subsidy to the nearly two-thirds of taxpayers who do not itemize and only a modest subsidy to those in the 15 percent bracket.

The subsidy’s value is largest for families in high tax brackets who are most likely to own a home even without preferential tax treatment. Instead of promoting more home ownership, the deduction mostly encourages those who already own homes to buy larger and more expensive houses with borrowed money.  ( Continue… )

Senate Finance Committee Chairman Sen. Max Baucus (D) of Montana, leaves his committee office on Capitol Hill in Washington, Tuesday. Being a lame duck may be liberating, Gleckman writes, but it also makes a politician a rapidly-depreciating asset. (J. Scott Applewhite/AP)

Will Max Baucus retirement help tax reform? Don't count on it.

By Guest blogger / 04.25.13

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… )

A box from Amazon.com sits on the porch of a house in Golden, Colorado.A new online sales tax bill will not be a tax increase, nor will it make things any more complicated for online buyers, Gleckman says. (Rick Wilking/Reuters/File)

Online sales tax is not a tax increase: Five things to know

By Guest blogger / 04.23.13

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… )

The exterior of the Internal Revenue Service building is shown in Washington. The Marketplace Fairness Act of 2013 would give states authority to require online sellers to collect sales tax on the products they sell to consumers within their jurisdictions. (Susan Walsh/AP/File)

Online sales tax: Is it in our future?

By Norton FrancisGuest blogger / 04.22.13

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.

A framed 1040 form hangs in the halls of the Internal Revenue Service building in Washington. Under President Obama's budget, households making between $100,000 and $200,000 would end up paying an average of about $380 more in taxes in 2023, up from $150 in 2015, Gleckman writes. (Ann Hermes/Staff)

Taxes: Who would pay more under Obama budget?

By Guest blogger / 04.22.13

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… )

An employee offers assistance to income tax payers at the Illinois Department of Revenue, in Springfield, Ill. It is much easier for politicians to cut rates than it is to finance them with offsetting tax hikes, Gleckman writes. (Seth Perlman/AP/File)

What happened to state tax reform?

By Guest blogger / 04.17.13

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… )

John F. Coakley, who works in Paterson, files his taxes before going to work Monday. Making expense limits uniform or getting rid of at least one provision It would be a good way to declutter the tax code, even if we can’t get broad tax reform. (Tariq Zehawi/The Record/AP)

How to simplify child-care tax benefits

By Elaine MaagGuest blogger / 04.16.13

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.

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… )

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