Tax VOX
IRS employees exit the US Internal Revenue Service building in Washington. Congress can get a lot done on the tax code without getting into theological battles over whether we are taxed too much or not enough, Gleckman writes. (Ann Hermes/The Christian Science Monitor/File)
How to simplify the tax code in 2013
As regular readers of Tax Vox know, I don’t believe there is much chance President Obama and Congress will agree on individual broad-based tax reform in 2013. Without a deal on how much this new tax system should raise, talking about a big rewrite is futile. However, Obama and Congress still have an opportunity to do something very useful: Clean up the law so it is simpler and smarter.
Making the code less complicated and more efficient may not achieve the rate-cutting, base-broadening reform many want. And it surely is not the cosmic shift to a consumption tax favored by others. But it can have important consequences for real people.
Until now, Democrats and Republicans have been like a couple that has been living in the same house since 1986. For decades, they’ve been having the same argument: She wants to put on a big addition. He wants to move. While they’ve bickered, the house has deteriorated.
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But they have an alternative: Call a cease fire and upgrade what they have: Put in energy-efficient appliances, update that pink-tiled bathroom, and give the place a fresh paintjob. Neither spouse may be fully satisfied, but they’ve made the house a lot more pleasant to live in. ( Continue… )
President Barack Obama speaks about the sequester in the Eisenhower Executive Office building on the White House complex in Washington. Obama warned darkly of layoffs if the spending cuts kick in, Gleckman writes. (Charles Dharapak/AP)
Bowles-Simpson II: a new plan to avoid the sequester
With 10 days to go until the dreaded sequester—the automatic across-the-board spending cuts that most lawmakers profess to hate—the Washington drama machine is starting to get in gear. Today, President Obama stood in front a group of uniformed first responders and warned darkly of layoffs if the spending cuts kick in.
At the same time, two veteran deficit hawks—Erskine Bowles and Alan Simpson—proposed their own new framework for deficit reduction aimed at replacing the sequester.
Simpson and Bowles, who chaired a 2010 White House deficit reduction panel, presented a broad frameworkaimed at reducing the debt to “below” 70 percent of Gross Domestic Product in 10 years. The debt/GDP ratio has become a favorite new target for both Democrats and Republicans though, naturally, they disagree on what it should be.
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Many Democrats and some progressives want to aim for about 73 percent of GDP, which is what it is today. Many Republicans and other deficit hawks are shooting for about 60 percent, which was the upper bound of member state deficits set by the creators of the Eurozone (not that it’s done them much good). For context, the Congressional Budget Office figures that under the most likely fiscal scenario, the debt will approach 90 percent of GDP by 2022. ( Continue… )
Amazon shipments are packaged in Koblenz, Germany. Increasingly, Democratic and Republican governors have had their eye on online sales taxes, Francis writes. (Harald Tittel/dapd/AP)
Congress makes bipartisan push for online sales tax
How many tax bills introduced have bipartisan support in today’s hyper-partisan Congress? Not very many but last week identical bills were introduced in the House and Senate that enjoyed rare bipartisan support. Twenty senators and 37 members of the House from both parties signed on to the Marketplace Fairness Act of 2013 (MFA)—legislation that would allow states to collect taxes on what consumers buy over the Internet.
The measure would finally resolve a decades-old dispute over whether states can collect sales taxes on mail-order and online purchases. Currently, states are barred from requiring out-of-state sellers to collect sales taxes, unless the retailers have a physical presence (or nexus) in their jurisdiction. The MFA would allow states to require sellers to collect these levies no matter where the firms are located.
The MFA is similar to bills that died in 2012 and which my TPC colleagues discussed here and here. Under the new measure, states would be permitted to require online sellers to collect tax, though the decision would be left to each state. Today, online buyers owe tax on their purchases (through use taxes) whether sellers collect the levy or not, though few taxpayers bother to comply.
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Increasingly, Democratic and Republican governors have had their eye on online sales taxes. The issue has taken on increasing importance with several GOP governors proposing to repeal their state income taxes, a step that would force them to rely even more on sales levies. ( Continue… )
Shantel Jackson, the fiancee of undefeated welterweight boxer Floyd Mayweather Jr. of the U.S., shows her engagement ring in Las Vegas in 2011. High-income married couples will get hit with a new 'marriage penalty' this year, except those who have a nonworking spouse. (Steve Marcus/Reuters/File)
A new marriage penalty for the rich
Our new Marriage Bonus and Penalty calculator, despite all its Valentine’s Day finery, ignores the new 0.9 percent Medicare payroll tax hike buried in the 2010 health law. The extra levy affects only a few high-income couples but in very different ways. Lucky couples will collect marriage bonuses of up to $450. But those less fortunate—if anyone making $250,000 can be considered less fortunate—will incur marriage penalties of as much as $1,350 in additional Medicare tax.
The culprit? The income thresholds for paying the tax. The new levy equals 0.9 percent of wages above unindexed thresholds—$200,000 for singles and $250,000 for married couples. Because the threshold for couples is less than double that for singles, the tax imposes a marriage penalty on couples with two high earners but gives a bonus to those with a high earner and a low- or non-earner.
Consider the simplest case of a penalty: each spouse earns $200,000. If they weren’t married, they wouldn’t owe the new tax because their separate earnings don’t exceed the singles threshold. As a married couple, their $400,000 combined earnings are $150,000 over the threshold for couples and they owe 0.9 percent of that in tax—$1,350.
The penalty stays the same if their earnings grow. As long as each has earnings above $200,000, they’ll pay $1,350 more each year. Marriage takes away $150,000 of the total exclusion the tax provides for two single workers. ( Continue… )
House Speaker John Boehner, R-Ohio, leaves a news conference after telling reporters that the looming sequester and resulting budget cuts would be like "taking a meat ax to our government," at the Capitol in Washington. Arbitrary spending cuts aimed mostly at one relatively small piece of the budget are no substitute for a comprehensive deficit-reduction package, Harris writes. (J. Scott Applewhite/AP/File)
Spending cuts: five reasons allowing sequestration is bad policy
In two weeks, about $1 trillion in automatic spending cuts will begin to kick in, a testament to the inability of policymakers to reach a grand fiscal bargain. Allowing these cuts to happen would be terrible policy.
Here’s the background: In August 2011, Congress passed the Budget Control Act (BCA) as a last-minute solution to an impending debt ceiling crisis. BCA averted fiscal and financial disaster by allowing additional Treasury borrowing authority, but also put in place deficit-reduction measures that would cut the deficit by $2.1 trillion over 10 years.
These measures included caps on discretionary spending—cutting outlays by over $900 billion over the decade—and a requirement that Congress achieve an additional $1.2 trillion in deficit reduction. BCA stipulated that if Congress failed to cut the deficit by this amount (and it did), deficit reduction would be automatically achieved by “sequestration”—formulaic cuts in federal spending.
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The cuts were originally due to begin on January 2, but fiscal cliff legislation pushed off the official commencement until March 1. On that date, the Office of Management and Budget will implement $85 billion in cuts for the remainder of the 2013 fiscal year—this translates into cuts of about 9 percent for affected non-defense discretionary programs and 16 percent for defense. If no action is taken, sequestration will reduce spending by $109 billion per year for the subsequent eight years. In all, cuts will total $960 billion, with an additional $216 billion in saving coming from lower interest payments. ( Continue… )
A card used by food stamp recipients to purchase food is shown at the Sacramento County Economic Development Department in Sacramento, Calif. Rather than promoting work and savings, these programs punish such otherwise positive behavior, Steuerle writes. (Rich Pedroncelli/AP/File)
Why welfare, food stamps, and other programs often discourage work
Economists and many policymakers generally agree that our tax and transfer systems should promote opportunity, work, saving, and education rather than consumption. The problem is these programs often penalize people for earning that extra dollar of income. Rather than promoting work and savings, these implicit taxes punish such otherwise positive behavior.
These penalties occur in TANF (formerly welfare), SNAP (formerly Food Stamps), Medicaid, the new health exchange subsidy, Pell grants, student loans, and unemployment compensation. The tax code also is loaded with disincentives to work, save, and study. They include PEP and Pease (reductions in tax allowances for personal exemptions and itemized deductions), child tax credits, and the earned income tax credit. These implicit taxes combine with explicit taxes to create incentives for many households that are often inefficient and inequitable, to say nothing of strange and anomalous.
At some income levels, families face prohibitively high penalties for moving off assistance. For instance, a single worker with children could face a steep cut in child care assistance simply for accepting a higher paying job or getting a raise. For some, the rapid phaseout of benefits can more than offset the additional take-home pay. Asset tests in means-tested programs create similar barriers to saving.
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One way couples avoid some of these penalties or taxes is to not get married. Indeed, this strategy is the major tax shelter for low- and moderate-income households with children. Our tax and welfare system thus favors those who consider marriage optional—to be avoided if it raises taxes or reduces benefits but embraced if it comes with a financial bonus. The losers tend to be those who consider marriage a social or religious necessity. ( Continue… )
A jogger runs past the US Internal Revenue Service building on Constitution Avenue at the end of the day in Washington. The Tax Policy Center marriage bonus and penalty calculator makes it easy to determine tax consequences of marriage in 2013, Williams writes. (Ann Hermes/The Christian Science Monitor/File)
Valentine's Day 2013: love and taxes after the 'fiscal cliff'
Love is blind, says the adage, and that can be a good thing when it comes to taxes. That’s because married couples often pay a marriage penalty—a higher federal income tax bill than they would if they were single. But for most couples, marriage means a lower tax bill—a marriage bonus in tax-speak.
Just in time for Valentine’s Day, the Tax Policy Center has updated its marriage bonus and penalty calculator to reflect the provisions of the American Taxpayer Relief Act of 2012 (ATRA), the new tax law Congress passed earlier this year. The new calculator lets you compare the tax bills of a couple filing as singles and as a couple for either the 2012 or 2013 tax year.
My TaxVox post about TPC’s original marriage bonus and penalty calculator explained why the tax code rewards some married couples and penalizes others so I won’t repeat all of that here. Instead I’ll discuss three tax provisions that will increase marriage penalties a lot in 2013 for many high-income couples.
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1. ATRA’s new top tax rate: ATRA created a new 39.6 percent top tax bracket, which starts at $400,000 for single filers and $450,000 for couples filing jointly. Consider two people, each with $400,000 of taxable income. Unmarried, neither would hit the 39.6 percent rate. Married, they would pay the top rate on $350,000. That and other rate effects would impose a marriage penalty of more than $30,000. ( Continue… )
President Barack Obama is greeted after giving his State of the Union address during a joint session of Congress on Capitol Hill in Washington, Tuesday. (J. Scott Applewhite/AP)
Obama's State of the Union and the great deficit debate
House Republicans say they want to balance the budget in a decade with only spending cuts and no tax hikes. In his state of the union address Tuesday, President Obama—perhaps channeling his new pal New Jersey Governor Chris Christie—had a response. In a word, fuhgedaboutit.
Obama’s priorities: Gun control and immigration reform, along with a dozen new government programs that he says will improve the lot of the middle-class and won’t add to the deficit–but surely won’t cut it.
The fiscal goal he described is the same one he’s had for months: By his count $1.5 trillion in new deficit reduction over 10 years that would stabilize the debt at slightly below current levels—a far cry from balance.
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The president would anchor that effort with a tax reform that he says will eliminate hundreds of billions of dollars in “tax loopholes and deductions for the well-off and the well-connected.” Of course, there are not hundreds of billions in loopholes in the Tax Code. There are, however, hundreds of billions of dollars in deductions and exclusions for mortgage interest, charitable gifts, employer-paid health insurance, and state and local taxes—none of which will be easily scaled back, even for the well off. ( Continue… )
President Barack Obama waves to reporters as he walks through the colonnade of the White House in Washington Tuesday. White House officials say Obama is serious about a corporate tax rewrite, Gleckman writes, but he does not seem prepared to take on the individual revenue code as well. (Yuri Gripas/Reuters)
State of the Union address: Can Obama pull off corporate tax reform?
In what will probably be the usual endless laundry list of State of the Union promises, President Obama is likely to include tax reform, by which he means a rewrite of the corporate revenue code. The White House seems ready to take a run at lowering corporate rates and scaling back targeted business subsidies. So is House Ways & Means Committee Chairman Dave Camp (R-MI), who is taking the lead in both individual and corporate reform.
But any corporate tax initiative will run into an odd coalition of resistance: liberal Democrats and big segments of the business community itself.
Progressives are fine with ending business subsidies, of course. But only if some of the new revenue the effort generates is used to either buy down some of the automatic spending cuts due to bite over the next decade or helps reduce the deficit. Obama, by contrast, seems ready to reform corporate taxes in a way that produces the same amount of tax revenue as today’s code.
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The tension between these two goals becomes transparent when, for instance, Obama talks about some of his favorite business tax targets—special tax breaks for corporate jets and oil production. Sometimes, Obama vows to kill these subsidies in the name of deficit reduction. Sometimes, he’d ditch them to finance lower corporate rates. But even presidents can’t use the same money twice. ( Continue… )
Congressional Budget Office Director Douglas Elmendorf is reflected on a table as he speaks about the office's annual Budget and Economic Outlook during a news conference at the Ford House Office Building in Washington. Even if seemingly everything goes right, Gale writes, we are still on the edge of dangerously high debt and deficit levels with little room to spare. (Jacquelyn Martin/AP/File)
What you should know about the budget outlook
The Congressional Budget Office released its latest Budget and Economic Outlook earlier this week. As always, the Outlook provides insight into the fiscal status of the federal government. My three overarching reactions are:
First, because American Taxpayer Relief Act of 2012 (ATRA) instituted tax changes that had been widely expected, the official (“current law”) baseline is now much more reflective of plausible outcomes than it has been in the past. Hence, the baseline is now a more reliable guide to the fiscal outlook.
Second, unlike in long-term budget scenarios – where rising health care spending is the single most important factor – there is no “smoking gun” in the 10-year projections. Mainly, there is “just” an overall continuing imbalance between spending and taxes. Revenue is not projected to collapse, as it did in 2009-12, but rather to grow to higher-than-historical-average levels. Spending isn’t spiraling out of control—it is at the same share of GDP in 2023 as it was in 2012. Large projected cuts in discretionary spending are offset by net interest rising to historically high levels and increases in mandatory spending.
Third, while we do not face an imminent budget crisis, the data in the Outlook imply that we are not out of the woods. The 10-year budget outlook remains tenuous. Even if seemingly everything goes right – in economic terms and in political terms – we are still on the edge of dangerously high debt and deficit levels with little room to spare. For example, under the current law baseline, even if: ( Continue… )
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