Effective tax rates have been rising since 2009 and will continue to rise for a few more years before they flatten out, according to Tax Policy Center projections.
My TaxVox post earlier this week showed how average federal tax rates have changed over the past three decades. But that was based on a 30-year history of federal tax rates produced by the Congressional Budget Office (CBO) that ends in 2010.
While we don’t know the future for certain, TPC has projected effective federal tax rates out to 2024. There are significant differences between the CBO and the TPC estimates but splicing the two projections together gives a reasonable picture of what will happen to rates for various income groups under today’s tax law.
TPC projects that average rates will rise for all income groups from their recent lows caused by the Great Recession and the tax cuts put in place to combat it (see graph). With incomes rebounding and most of the temporary stimulus tax cuts expiring earlier this year, average rates will rise by 2 or 3 percentage points between 2009 and 2015 for all but the top 1 percent, who will see a steeper 7 percentage point jump. ( Continue… )
The budget deal announced Tuesday wouldn’t raise taxes—members of Congress can vote for it without violating their no-tax pledges. But the plan will collect billions of dollars in new revenue by boosting fees and increasing workers’ contributions to the Federal Employee Retirement System (FERS). To people paying them, those higher fees and payments will feel a lot like tax hikes.
The plan would raise fees in four areas.
Higher fees on air travelers would bring in an additional $12.6 billion over the next decade. Flyers would pay $5.60 for each one-way trip, up from today’s $2.50 per flight leg. The change would actually benefit some passengers—those who take three or more flights to reach their destinations—but most travelers would pay more. But, as the budget committee explains, the fee is voluntary—you only have to pay it if you choose to fly.
Boosting the amount paid by employers to fund the Pension Benefit Guarantee Corporation (PBGC)would bring in another $8 billion. The basic premium was already scheduled to rise from $42 per participating worker to $49 in 2014 and to climb with inflation after that. The budget plan would take it up to $57 in 2015 and $64 in 2016. Additional premiums for underfunded company plans and for discontinued plans would also increase. Of course, only firms that choose to hire workers have to pay the higher premiums. ( Continue… )
Just as President Obama was decrying our nation’s rising income inequality, the Congressional Budget Office provided him with some new ammunition. CBO’s latest report on household income and taxes—which goes only through 2010—shows that the rich have indeed gotten richer. (Full disclosure: In my former life at CBO, I helped assemble these income and tax data.)
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CBO finds that over the past three decades, a growing fraction of income has gone to the top of the income distribution (see first graph). The top fifth saw its share of pretax income rise from 43 percent in 1979 to more than 50 percent in 2010. Much of the gain went to the top 1 percent, whose share increased from 9 percent to 15 percent over that period.
In contrast, households in the bottom two quintiles saw their income shares drop. The poorest 20 percent collected just 5.1 percent of pretax income in 2010, down from 6.2 percent in 1979. Households in the second quintile suffered a bigger decline—from 11.2 percent to 9.6 percent over the period. ( Continue… )
Yesterday, by doing nothing, the U.S. Supreme Court took a giant step towards ending the decades-long dispute over whether states can require online retailers to collect sales taxes. In effect, the High Court ruled that, absent congressional action, states have broad authority to require Internet sellers to collect those levies just as their Main Street competitors must. And, in a delicious bit of online irony, the justices did it on Cyber Monday.
Twenty years ago, the High Court tentatively resolved the same dispute by placing a stiff burden on states that wanted to require mail order firms to collect those taxes. This time, the Court refused to even hear legal objections to New York State’s efforts to impose such a requirement on Internet sellers. As a result, it completely flipped the legal and political dynamics. Now, the burden will be on online sellers to prove that states cannot make them collect taxes.
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But the justices had another audience yesterday: By refusing to hear the New York case they sent a strong signal to their across-the-street neighbor on Capitol Hill: Fix this. It is your job.
By allowing the New York law to stand, the High Court appeared to recognize that the commercial and technological landscape has changed in unimaginable ways since it last tackled this issue in 1992. Two decades ago, in a case called Quill v. North Dakota, the Court ruled that a state could not require mail order companies to collect those levies from their customers unless sellers had a “substantial” physical presence in its jurisdiction. Back in the day, the Court worried that it would be too onerous for an out-state seller to comply with a myriad of local tax rules.
How much as the world changed? Quill Corp was an office supply company that mailed 24 tons of catalogs and flyers into North Dakota each year. That state was trying to make the firm collect tax on products such as yellow legal pads. In 1992, physical presence—or nexus in legalese—meant a factory, a warehouse, or a sales office.
Today, Quill sells downloadable software and tech services. And anyone with a smartphone can download an electronic book from an Internet seller headquartered 3,000 miles away. The concept of physical presence seems almost quaint.At the same time, sophisticated software makes it relatively easy for sellers to calculate tax, even from thousands of different jurisdictions. ( Continue… )
Congress’s latest flirtation with debt-limit default caused barely a ripple in the financial markets. Rates on short-term Treasuries spiked in early October, before quickly subsiding to more normal levels. The spread between one- and three-year Treasuries temporarily widened, but quickly fell back to a more normal trend. All told, financial markets barely blinked. Unfortunately, the next time may be worse. Here’s why.
If Congress is going to threaten the country with defaulting on bond payments, late October is a relatively good time to do it. In the year spanning October 1, 2013 to September 30, 2014, just 0.8 percent of interest payments were due on October 15st and only 6.3 percent were due on October 31st. (These calculations include Treasury bonds and notes, but not T-Bills.)
The small share of interest payments due in October meant that financial markets could absorb the threat of default—however small—without causing too much disorder. Money market funds could request that collateral come from the vast majority of bonds that would not be in default if no agreement were reached by the end of the month. Repo markets could charge higher rates on the small share of bonds scheduled to receive a payment on these days without disrupting the market for Treasuries too much. ( Continue… )
In an effort to jumpstart moribund tax reform efforts, Senate Finance Committee Chairman Max Baucus (D-MT) is suggesting major changes in the way U.S.-based multinational corporations are taxed on their overseas income.
The plan is quite specific (even including legislative language and a 90-page technical summary) but it is not a formal proposal and leaves many controversial issues unresolved. Normally, the chair of a tax-writing committee would release a “chairman’s mark” for the panel to consider. Baucus calls today’s document a “staff discussion draft” and is asking for public comments by mid-January.
According to the plan, passive income from overseas activities would continue to be taxed at U.S. rates. Most income from the sale of goods and services overseas would also be taxed at full U.S. rates. The draft would end the practice of deferral that allows firms to avoid U.S. tax on foreign earnings until they bring those profits home. However, income that is currently parked overseas would be taxed at a 20 percent rate payable over 8 years.
Baucus would move the U.S. closer to a territorial system favored by many multinationals and GOP lawmakers. Under such a system, income is taxed in the jurisdiction where it is earned rather than by the firm’s home country. While the plan does not fix a specific tax rate, staffers say Baucus is aiming to reduce the corporate rate from 35 percent to about 30 percent. ( Continue… )
For those of you keeping score, the Congressional Budget Office now figures the next showdown over the nation’s debt limit will occur in March, or maybe as late as May or early June. That means up to six more months of fiscal uncertainty, unless Congress decides to kick the can further down the road before the next government shutdown–now scheduled for mid-January.
You may recall that our last fiscal crisis concluded a month ago when Congress and President Obama agreed to reopen the government they had closed and suspend the debt limit until February 7.
But, as it happens, February 7 doesn’t really mean February 7. In your nation’s capital, February really means March. Or May. Or possibly June.
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Thus, May, or possibly June, is the same as February here, only hotter.
June may become fiscal February because the Treasury Department has the ability to take what are called extraordinary measures to keep borrowing for months after the law says it can’t. This is somewhat of a euphemism, however. I say this because Congress turns the debt limit into a political crisis practically every year. And each time Treasury takes the same steps to continuing borrowing long past the supposed deadline. At some point, an annual event probably stops being extraordinary. ( Continue… )
Congressional negotiators are trying to craft a budget deal by mid-December. Fareed Zakaria’s Global Public Square asked twelve experts what they hoped that deal would include. My suggestion: it’s time to fix the budget process:
Odds are slim that the budget conference will deliver anything big on substance. No grand bargain, no sweeping tax reform, no big stimulus paired with long-term budget restraint. At best, conferees might replace the next round of sequester cuts with more selective spending reductions spread over the next decade.
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Those dim substantive prospects create a perfect opportunity for conferees to pivot to process. In principle, Congress ought to make prudent, considered decisions about taxes and spending programs. In reality, we’ve lurched from the fiscal cliff to a government shutdown to threats of default. We make policy in the shadow of self-imposed crises without addressing our long-run budget imbalances or near-term economic challenges. Short-term spending bills keep the government open – usually – but make it difficult for agencies to pursue multiyear goals and do little to distinguish among more and less worthy programs. And every few years, we openly discuss default as part of the political theater surrounding the debt limit.
The budget conferees should thus publicly affirm what everyone already knows: America’s budget process is broken. They should identify the myriad flaws and commit themselves to fixing them. Everything should be on the table, including repealing or replacing the debt limit, redesigning the structure of congressional committees, and rethinking the ban on earmarks.
Conferees won’t be able to resolve those issues by their December 13 deadline. But the first step to recovery is admitting you have a problem. The budget conferees should use their moment in the spotlight to do so.
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When it comes to property taxes, location matters. In a new TPC report, my colleague Brian David Moore and I look at just how much property taxes vary across states and counties.
Using self-reported American Community Survey data, we find that residential property taxes tend to be close to $1,000 per year, with a small share of households paying substantially more, especially in Connecticut, New Jersey, New York and New Hampshire. In recent years, 48 percent of homeowners paid between $750 and $1,750 in property taxes. About one-third—31 percent—paid less than $750 and 21 percent paid more than $1,750. Just 3 percent paid more than $4,000, with a miniscule share of homeowners (0.2 percent) paying more than $8,000.
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These tax burdens vary by state and county. As shown here, seven states—Connecticut, Illinois, Massachusetts, New Hampshire, New Jersey, New York, and Rhode Island—had per household property tax collections in excess of $3,500. Five states—Alabama, Arkansas, Louisiana, Mississippi, and West Virginia—had per household property taxes of $750 or less. In dollar terms, property taxes tend to be highest in counties in the northeast and the west.
The counties with the highest property taxes paid per homeowner are those surrounding New York City. Westchester, Nassau, and Bergen counties had the three highest average tax burdens, all in excess of $8,500; this in part reflects higher house prices and higher reliance on property taxes to provide state and local services. In general, the counties with the highest property tax burdens tend to be in New York and New Jersey, with all but three of the top 25 counties being from these two states. ( Continue… )
What if we bought individual health insurance through our tax preparers? At first, the idea seems bizarre, but give me a minute to explain.
Given the well-known problems of HealthCare.gov and many of the state health exchanges, people seeking insurance coverage need a better way to buy. And commercial alternatives to government sites seem an obvious portal to Affordable Care Act coverage.
You can buy directly through insurance company websites, but the Obama Administration worries that would make it impossible to compare policies offered by different carriers in the way you could on a well-functioning exchange. For instance, if I go the Blue Cross site, I’m not likely to learn much about Kaiser Permanente’s offerings. On the other hand, commercial online health insurance marketplaces allow for comparison shopping, but raise issues of privacy (and perhaps even fraud from fake sites).
Or, you could make your purchase of health insurance a relatively seamless part of filing your tax return. ( Continue… )