Tax VOX

President Barack Obama delivers his Inaugural address at the ceremonial swearing-in during the 57th Presidential Inauguration in Washington, Monday. A government that provides for nearly all medical care of seniors and low-income children, even as it invests heavily in education, technology, and infrastructure, probably needs to collect at least 40 percent of the nation’s GDP in tax revenues, Gleckman writes. (J. Scott Applewhite/AP)

Obama's inaugural address defines domestic policy debate

By Howard Gleckman, Guest blogger / 01.22.13

 “We must make the hard choices to reduce the cost of health care and the size of our deficit.  But we reject the belief that America must choose between caring for the generation that built this country and investing in the generation that will build its future.”

With those words in his 2^nd  inaugural address, President Obama perfectly defined what will be the great domestic policy debate of not only the next four years but the next decade.

There is a simple answer to Obama’s core question: Can the U.S. pay for the health and retirement costs of its seniors while also supporting its children? Sure it can, but not without raising taxes or fundamentally changing the way it provides health and long-term care for the elderly.

This is much more than an argument about deficits. It is at the heart of a profound debate about the nature of government and its relationship to its citizens. Government that provides for nearly all medical care of seniors and low-income children, even as it invests heavily in education, technology, and infrastructure, is government that probably needs to collect at least 40 percent of the nation’s Gross Domestic Product in federal, state, and local tax revenues. That’s the Obama vision of government.  ( Continue… )

In this April 2011 file photo, Max Martinez, dressed as the Statue of Liberty, tries to alert motorists on the final day to file taxes. The right thing to do is reform the income tax so that we don’t need an alternative minimum tax to make sure that everyone pays an appropriate amount of tax, Williams writes. (Tony Dejak/AP/File)

How the 'fiscal cliff' deal affects the alternative minimum tax

By Roberton Williams, Guest blogger / 01.21.13

In the alphabet soup of Washington, ATRA fixed the AMT, sort of. In English, the newly enacted American Taxpayer Relief Act of 2012 will permanently protect millions of taxpayers from having to pay the alternative minimum tax without Congress having to approve a temporary patch every year or so. It even knocks a few hundred thousand people off the AMT this year. But it still doesn’t really fix the dreaded tax.

Since the first Bush tax cuts in 2001, Congress has protected millions of taxpayers from the AMT with one- or two-year patches. Each patch boosted the amount of income exempt from the tax, saving millions of households from having to pay the levy. The 2011 patch, for example, left just 4.3 million taxpayers owing AMT, down from 29 million who otherwise would have paid the additional tax. Congress never approved a permanent fix because it deemed the revenue loss too high.

With ATRA, Congress bit the fiscal bullet, which the Joint Committee on Taxation pegged at $1.8 trillion over the next decade. It set a higher permanent exemption for 2012 and indexed that and other AMT parameters for inflation. New estimates from TPC show what those changes—in combination with other ATRA provisions—will mean.

• More than 30 million taxpayers who would have owed AMT for 2012 won’t be dinged by the alternative levy. The higher exemption will save them and the 4 million who will still pay AMT more than $85 billion.
• The combination of a larger AMT exemption and higher thresholds for the exemption phaseout and top AMT tax bracket will further reduce the number of taxpayers owing AMT to just 3.4 million in 2013. Without ATRA, nearly 27 million more people would owe AMT this year.
• ATRA’s restoration of the 39.6 percent bracket and the return of the limitation on itemized deductions (aka Pease) and the personal exemption phaseout (PEP) will raise regular taxes enough to push some high-income taxpayers off the AMT. Of course, not owing AMT is small consolation for those folks, who I’m sure would be happy to pay the lower AMT bill.  ( Continue… )

A brochure provides instructions for filling out a Massachusetts W-2 form at the Volunteer Income Tax Assistance office in Boston, Mass., in this March 2010 file photo. (Mary Knox Merrill/The Christian Science Monitor/File )

Did the 'fiscal cliff' deal create the tiniest tax bracket ever?

By Howard Gleckman, Guest blogger / 01.17.13

Weird Tax Fact of the Day: The fiscal cliff deal (aka the American Taxpayer Relief Act of 2012) created what may be the world’s tiniest tax bracket. Under the new law, singles face a rate of 35 percent if their taxable income falls between $398,350 and $400,000. The bracket covers a grand total of $1,650.

The Tax Policy Center figures fewer than 500 taxpayers fall into this group, which makes it a very exclusive club indeed.

Given the amount of money these folks make, it does create some interesting social opportunities. Perhaps all of the singles in the 35 percent bracket could be invited to a nice dinner for the upcoming inauguration. They’d easily fit in a hotel ballroom.

Or a cruise might be in order. Of course, it does seem a little odd to create a tax bracket solely for a group of people who could fit onto the love boat (with plenty of room left over for a few of the hoi polloi).    ( Continue… )

Japan's new Finance and Deputy Prime Minister Taro Aso speaks at a press conference at the prime minister's official residence in Tokyo in this December 2012 file photo. The Japanese cabinet claims their latest fiscal stimulus package will boost real GDP by 2 percent and create 600,000 new jobs, Harris writes. (Shizuo Kambayashi/AP/File)

Japan tries fiscal stimulus (again)

By Ben Harris, Guest blogger / 01.16.13

Last week Japan announced a massive stimulus package designed to jumpstart its slumping economy, which is in the midst of its fifth recession in 15 years. The stimulus initiative, heavy on infrastructure spending and disaster preparedness, includes $117 billion in central government spending. Add in local government and private-sector support and spending could top $200 billion.  It’s a smart move if implemented quickly and effectively.

The Japanese cabinet claims the package will boost real GDP by 2 percent and create 600,000 new jobs; this sizable increase may be an understatement. In Japan’s $5.87 trillion economy, a $200 billion stimulus package could raise the short-run level of GDP by around 3 percent, assuming a dollar-for-dollar relationship between government spending and economic growth. (Government investment raises GDP when the outlay is made. Subsequent economic effects depend on the productivity of the investment—which can raise its net impact—and the effect on taxes and interest rates—which can reduce the net benefits.)

Moreover, research shows that when interest rates are at or near zero as is the case in Japan, the ability of government spending to stimulate economic growth is particularly acute. One economist estimated that each government dollar spent when interest rates are zero leads to over $3 in economic growth. If this is right, Japan’s stimulus will be a remarkable shot in the arm for a struggling economy.  ( Continue… )

In this July 2011 file photo, House Speaker John Boehner, of Ohio, listens at left as President Barack Obama speaks during a meeting with Congressional leadership to discuss the debt in the Cabinet Room of the White House in Washington. With little public support for the spending cuts and tax hikes needed to cut the deficit, Gleckman writes, few lawmakers are willing to make those tough votes absent a clear, easy-to explain, economic payoff. (Pablo Martinez Monsivais/AP/File)

Why a budget deal isn't going to happen in 2013

By Howard Gleckman, Guest blogger / 01.16.13

There is an obvious solution to Washington’s perpetual budget crisis. But it is unlikely to happen because all the incentives—both political and economic—are completely wrong.

First, the solution: The core of a deal was framed last December, when President Obama and House Speaker John Boehner were on the verge of a long-term fiscal agreement that would have cut spending by about $1 trillion and raised revenues by roughly the same amount. Sure, Ds and Rs were quibbling about the last few hundred billion, but this, more or less, would have been the compromise.

In the end, the American Taxpayer Relief Act of 2012 raised revenues by about $600 billion (at least as the negotiators counted it) and didn’t cut spending at all (in fact, it may have slightly increased outlays). The obvious next step: Finish the job by agreeing to combine another $400 billion in new taxes with $1 trillion in spending cuts.

To avoid the debt limit crisis, Congress could also extend federal borrowing authority for one year to give lawmakers time to turn those goals into law, then increase it for another year once the spending and tax changes are adopted.  ( Continue… )

In this July 2012 file photo, Louisiana Gov. Bobby Jindal speaks at a Republican Party of Arkansas fundraising dinner in Hot Springs, Ark. Jindal has proposed replacing the state’s individual income and corporate taxes with a higher sales tax, Harris writes. (Danny Johnston/AP/File)

Income tax vs. sales tax: What's better for Louisiana?

By Ben Harris, Guest blogger / 01.14.13

Last week Louisiana’s Republican Governor Bobby Jindal proposed replacing the state’s individual income and corporate taxes with a higher sales tax. While details are scarce, initial media reports suggest Jindal would both raise the sales tax rate and make more goods and services subject to the levy.

Louisiana’s current 8.86 percent average combined state and local sales tax rate (4 percent state rate and 4.86 percent average local rate) is already the third highest in the nation. Jindal’s plan would boost it to the highest level in the country by far. One published report suggests the state levy alone could be increased to as much as 7 percent.

Broadening the sales tax base is a mixed bag. On one hand, taxing more goods and services helps to limit the tax’s distortions across consumption and also allows for a lower tax rate, all else equal. But base broadening can also push more of the burden to low-income households. Louisiana currently excludes groceries and utilities from taxation; taxing them would be especially difficult for families with limited resources.

In fact, even without base broadening, the proposal would dramatically shift more of the burden of Louisiana’s taxes onto lower-income individuals. Since low-income households devote a higher share of their income to consumption, they end up paying higher effective tax rates than higher-income households which tend to spend less and save more. This concern is particularly stark in Louisiana, which was recently ranked as the sixth most unequal state in the country by one measure of inequality.  ( Continue… )

In this January 2013, file photo, Speaker of the House John Boehner, R-Ohio, walks past reporters at the Capitol in Washington after a closed-door meeting meeting of House Republicans. States should worry about what happens if Congress actually undertakes tax reform, Francis writes, when everything is likely to change yet again. (J. Scott Applewhite/AP/File )

What the 'fiscal cliff' deal means for states

By Norton Francis, Guest blogger / 01.11.13

The fiscal cliff deal is done and the question on everyone’s mind: What about the states?  Okay, so only a handful of us are actually asking this question. But there are some important provisions that will matter to states still woozy from the Great Recession.

The good news for states is that American Tax Relief Act of 2012 will end much of the uncertainty that has plagued the income tax code in recent years. No longer will states have to guess what will happen to many provisions of the federal revenue code that were set to expire. The bad news is some states will lose revenue they were counting on from scheduled changes in the federal estate tax that won’t happen.

The federal credit for state estate and inheritance taxes is gone for good. The 25 dormant states that had an estate tax only when the federal credit existed will continue to not collect estate taxes.  (My brief on state estate taxes and the fiscal cliff has more details but ATRA is the nail in the coffin on the state death tax credit.)  Twenty states and the District of Columbia, because they either have an inheritance tax or an estate tax independent of the current federal law, will continue to collect the tax that can still  be deducted on the federal return.  Five states completely repealed the estate tax.  Those  states with zombie estate taxes still on their books, knowing the credit is not coming back, may choose one of these options. Or some may just wait to see if Congress changes its mind again.

By engaging in a bit of wishful thinking that the credit would be revived, a few states included revenues from a resurrected estate tax in their latest budget forecasts. Now, with the credit gone for good, those states will have to hope for additional revenue from other taxes to avoid having to revise their projections downward. California used a projected—and now gone—$45 million in new estate tax revenue to help balance its 2012-2013 budget.Wisconsin’s executive budget office included it in its November 2012 forecast. The Colorado Legislative Council Staff was more prescient, revising its revenue forecast in December, eliminating estate tax revenue that had been previously included.  ( Continue… )

In this January 2013 file photo, the dome of the Capitol is reflected in a skylight of the Capitol Visitor's Center in Washington. When Congress doesn’t want to address the deficit, Gleckman writes, it will just wave away the penalties for inaction. (Jacquelyn Martin/AP/File)

'Fiscal cliff' II: predictions about the sequel

By Howard Gleckman, Guest blogger / 01.09.13

I spent lunchtime Tuesday moderating a thoroughly discouraging Urban Institute panel discussion on the fiscal cliff. The consensus of the speakers—all highly-regarded budget experts—was that the New Year’s cliff deal was pretty lame and the coming round of self-imposed budget crises will be even worse.

My Urban Institute colleagues Donald Marron, Rudy Penner, and Bob Reischauer—each of whom has directed the Congressional Budget Office—saw little good coming from the recent fiscal cliff drama. Bob scored the deal a paltry two out of a possible 10. Rudy felt little could come out of the next round of budget deadlines that will hit in February and March. Donald saw some benefit in the decision by Congress to make most of the tax code permanent, largely ending its recent practice of temporarily extending big chunks of the law a year or two at a time.

Donald even saw some slight prospects for corporate tax reform that raises the same amount of money as the current code, but brings rates more in line with the rest of the world. But the chances of broad-based individual tax reform in 2013 seem to be slipping by the day.

A big part of the problem is the vast gulf between Democrats and Republicans over how much revenue any new tax code should raise. The GOP insists it should be no more than 18 or 19 percent of the Gross Domestic Product, and the fiscal cliff deal already would raise that level to about 19.4 percent. Thus, it is no surprise to hear Senate Minority Leader Mitch McConnell say he is done talking about tax increases.  ( Continue… )

Vincent, 4, and his sister, Alana, 2, put money into the Salvation Army kettle as part of The Salvation Army’s 121st Red Kettle Campaign in LaPorte, Ind., in this November 2012 file photo. The "fiscal cliff" deal provides an economic incentive for donating to charity, Burman writes. (Bob Wellinski/The LaPorte Herald-Argus/AP/File)

Why the 'fiscal cliff' deal is an incentive to give to charity

By Len Burman, Guest blogger / 01.08.13

Huffington Post reports on this tweet/warning from former Bush press secretary, Ari Fleischer:

I increased donations to charity in 2012. This deal limits my deductions so I, & many others, will likely donate less in 2013.

Mr. Fleischer is referring to the phaseout of itemized deductions, which had temporarily expired but was reinstated by the Tax Relief Act of 2012 (the official name for the deal that averted the fiscal cliff).  Fleischer expanded on this point in an op ed in the Wall Street Journal.

Fleischer is wrong,  but it’s easy to understand why he might be confused since the phaseout is designed to obfuscate.  Here is the main point:  Even though it is called a phaseout of deductions, it’s really just a sneaky way to raise marginal tax rates by a little over 1 percentage point on high-income people. 

The phaseout works this way.  Singles with incomes over $250,000 and couples with incomes over $300,000 lose 3 cents of itemized deductions for every dollar of income above the threshold.  If Mr. Fleischer is married and makes $500,000, his itemized deductions are reduced by $6,000 (3% of the $200,000 of income above $300,000).  If he earns more money, his deductions will continue to be reduced.  The law limits the phaseout to 80% of deductions, but almost nobody hits that limit because deductions tend to increase with income.  Think state and local taxes and charitable donations, which are much more than 3% of income for almost everyone with higher income.  ( Continue… )