ZURICH (Reuters) - A former Julius Baer banker acknowledged that he passed confidential client data to WikiLeaks but argued his actions were not illegal, as his trial resumed on charges of breaching Swiss banking secrecy law. The trial of Rudolf Elmer, a self-described "Gandhi of Swiss tax law", comes as banking secrecy in Switzerland is crumbling under international pressure from countries trying to recoup lost tax revenue. Whistleblowers have usually found little sympathy in Switzerland, the world's largest offshore financial center. ...
Don't Forget Bitcoin At Tax Time
The Internal Revenue Service (IRS) issued guidance to taxpayers in 2014 on how to treat Bitcoin – and other virtual currency – for federal income tax purposes. That guidance, IRS Notice 2014-21, (downloads as a pdf) indicates that Bitcoin and other ...
Bottom Lines: IRS net up 14%; average personal income shrinks
Press of Atlantic City
The top 1 percent of taxpayers — that nearly mythic group whose self interest is blamed for an ever-growing catalog of mankind's shortcomings — paid slightly more than 38 percent of all federal taxes, up from 35 percent the year before but still ...
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Wall Street Journal (blog)
How New Health-Care Rules Affect Your 2014 Tax Return
Wall Street Journal (blog)
For 2014, there are only two important federal income-tax changes for individual taxpayers, beyond the usual inflation-indexing of tax-rate brackets and various other parameters. Both have to do with the Affordable Care Act, also referred to as ...
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Not having health coverage will cost you more in 2015Greenville News
Tricky Tax Season: New Rules, Affordable Care Act Could Make for Complicated ...The Ledger
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Kiplinger Personal Finance
2015 Filing Season Opens Soon With Tax Questions And Answers
The Internal Revenue Service will kick off the upcoming 2015 tax filing season on Jan. 20 with reinstated deductions to help taxpayers. The agency also encouraged taxpayers and tax practitioners to take a fresh look at the many benefits of e-filing.
Where Do You Rank as a Taxpayer?Kiplinger Personal Finance
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Many expats have moved to Spain, lured by inexpensive housing and a mild climate. The struggling Spanish housing market has offered good deals and bargaining opportunities in prime vacation and retirement areas.
The bargain-seeking foreigners may have gotten a deal on the house but not on the taxes. The cash strapped Spanish government has declared that the property sales tax, known as Impuesto de Transmisiones Patrimoniales (ITP), should be levied on the government’s estimates of the houses’ values and not on the actual sales prices.
The Spanish tax authority has started to comb through the sales records of houses to find purchases where the official home value is different from the sales price. The tax authority has sent out tax bills for the difference, including interest for delayed payment. This has left many homeowners in Spain with a nasty surprise.
Does the Spanish government believe that the new homeowners did not pay their fair share? Unlikely. If this were the case, the Spanish government would have implemented a tax based on the characteristics of the house rather than the sales price.
Politicians want to raise tax revenues while not angering voters, a difficult feat for most governments. Expats, although residents of the country, are not citizens and cannot punish the local politicians in the polls for raising taxes. Thus, taxing primarily expats increases revenue without angering Spanish voters, a Spanish politician’s dream come true.
The Spanish government may see this as a win, but there are unintended consequences on the horizon. Such a change in policy will undoubtedly leave many homeowners with a bitter taste in their mouths. This becomes a warning to prospective homeowners and may reduce demand further in an already depressed housing market, ultimately reducing the revenue they hoped to increase.
Earlier this week Noah Smith on Bloomberg View criticized the concept of Tax Freedom Day calling it “hogwash.”
His main complaint is that Tax Freedom Day does not take into account the incidence of taxation. He claims that because the incidence of taxation may fall on other people besides you, you don’t really pay all of the tax. Additionally, he thinks because taxes pay for services, they shouldn’t be considered a burden. To him, Tax Freedom Day is meaningless.
While making his first point, he flubs the concept of tax incidence. He rightly states that because there are differences in supply and demand elasticities, tax burdens are shared between businesses and individuals. He concludes that this means people don’t really pay all of any given tax, businesses share the burden and correctly states that this is “one of the very first things they teach you about taxes in Econ 101.”
Unfortunately, he missed the next course. In Econ 201, they teach you that all taxes are born by people, none are born by businesses. Taxes imposed on businesses in any way are passed on to people through lower returns, lower wages, and higher prices. Tax burdens don’t simply disappear when a business pays. They are paid by shareholders, workers, and consumers.
More fundamentally, his first point demonstrates his misunderstanding of what Tax Freedom Day is.
Tax Freedom Day is not a measure of any one individual’s personal tax burden. People’s tax bills vary significantly based on the amount of money they make and the goods they purchase. Instead, it is an aggregate measure of the total taxes paid by all taxpayers at the federal, state, and local level. This includes individual income taxes, corporate income taxes, excise taxes, sales taxes, and property taxes at the federal, state, and local levels.
In other words, it does not tell us what I pay, rather, it tells us what we pay as a nation.
This brings us to Noah’s second point: most of the taxes we pay go to programs and services that benefit a great deal of people, so taxes are just a reflection of the benefits you receive and aren’t really a burden.
This, again, misses the point. It is very true that the federal, state, and local government provide important services for taxpayers. However, all government spending costs something, and whether the spending goes to transfer payments, military spending, roads, or bridges, we need to pay for it.
Sometimes it is hard to tell exactly how much we pay as a nation for the cost of government, given the plethora of taxes and fees that go towards funding it. That is why Tax Freedom Day is important: it gives us an easy-to-understand account of how much our government costs each year. In 2014, taxpayers paid $4.5 trillion in taxes to fund government.
We can quibble over how a specific tax may be split between buyer and seller, or between worker and employer, but at the end of the day it is you (the taxpayer) who pay taxes. We can also discuss the costs and benefits of different government spending programs. But both of these issues are entirely separate from Tax Freedom Day.
Tax Freedom Day may be a simple calculation, but it is important in understanding what America—as a whole—pays for the government spending it receives.
IRS Guidance On Retroactive 2014 Commuter Tax Break
The Internal Revenue Service released guidance today, Notice 2015-2, on the retroactive commuter transit parity tax break Congress passed in December as part of the Tax Increase Prevention Act. The break for transit riders was increased to $250 a month ...
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Though taxes are the most common and recognizable source of state government revenues, it's important to remember that they're not the only source. In fact, state governments received 31.5 percent of their total general revenues from transfers from the federal government in the 2012 fiscal year.
That number varies pretty widely for specific states, however. For example, Mississippi obtains 45.3 percent of its total state general revenues from the federal government (the largest share in the country). Also on the high end are Louisiana (44.0 percent), Tennessee (41.0 percent), South Dakota (40.8 percent), and Missouri (39.4 percent).
On the other end of the spectrum are those states who receive a much smaller share of general revenues from the federal government. The lowest federal share occurs in Alaska at 20.0 percent, followed by North Dakota (20.5 percent), Virginia (23.5 percent), Hawaii (23.5 percent), and Connecticut (23.6 percent).
For all fifty states, see the map below. Note that this measure of general revenue includes tax collections but excludes utility revenue, liquor store revenue, and insurance trust revenue.
Click on map to enlarge. (See our reposting policy here.)
Here are some useful background resources on this topic:The original data source from the Census Bureau's Survey of State and Local Government Finance. A Congressional Budget Office report from 2011 discussing where this federal funding comes from. A more detailed description from the Census Bureau of what goes into this category in their data. Analysis of what types of things federal aid to states funds from the U.S. Government Accountability Office (with descriptions and historical data).
Interested in more comparisons of state taxation? Check out Facts & Figures 2014: How does your state compare?
One thing that the incoming Congress will need to address soon is the state of the Highway Trust Fund, which will run out of money sometime this year. Readers may be curious why this seems to be a perennial issue. Everyone is always talking about the Highway Trust Fund, and the issue never seems to go away.
The reason for this is simple; Congress doesn’t make permanent fixes to the problem. The most recent budgetary shenanigan staved off the demise in the near term, but it ran out of money. Now we’re in the same position that we were in prior to the tomfoolery.
It would be easy to say that Congress has done nothing to solve the Highway Trust Fund problem, but that would be too charitable. The budgetary trick they used was a regulation to lower required contributions for pension funds. Because those contributions are deductible, they matter for budget scoring. With lower required contributions, firms contribute less early on, and instead realize taxable income. However, later on, the lower funding catches up to them, and they contribute more, and take more deductions.
The result is that Congress gets the temporary appearance of more revenue during the 10-year budget window, but cuts off some of the lost revenue outside the budget window.
In other words, the money that Congress “provided” to keep the trust fund solvent never really existed in the first place. They might as well have just directly taken money out of the general fund and done nothing. Instead, they monkeyed with pension provisions in order to pretend that they had improved the fiscal situation.
I am agnostic on the appropriate size of government surpluses or deficits. It is not my field. (Though over the very long run, of course, a government must run an approximately balanced budget.) However, there is no value – outside of political value – in creating fake sources of revenue. Meanwhile, there may be value in less haphazard pension regulations.
In sum, Congress’s imaginary source of revenue has inflicted real consequences on the pension industry, but now it’s running out – to the extent that fake money can even run out in the first place. A permanent solution is necessary.
It’s worth remembering that the tax extender compromise approved three weeks ago is already expired again.
The “extenders,” tax provisions that are approved on a haphazard temporary basis, were last month approved retroactively only for 2014, leaving their 2015 status in doubt. Taxpayers, including small businesses with expansion plans, will need to plan around deciding whether some of these provisions will be extended retroactively again.
Needless to say, this is just objectively dumb. Instead, we should decide once and for all which of these tax breaks should become permanent and which should be discarded. Around this time last year, we compiled a helpful guide for lawmakers on which extenders could actually be worth preserving.
Instead of rehashing that, I’d just like to consider how short the life of the 2014 extenders was. Two weeks. Tax extenders, we hardly knew ye. If you were spending your holidays with family and friends and not paying attention to legislation, you may have entirely missed the life of the tax extenders. Their life was shorter than most celebrity marriages. It was even shorter than the portion of the NFL season where the Jets actually have playoff hopes.
A tax professional who wrote me in response to a previous article said that her entire profession was “disgusted” with the practice of extenders.
Yes, it’s bad public policy, but even above and beyond that, it’s undignified.
Joliet tax preparer admits filing false returns, costing IRS $5.3M
(JOLIET) A southwest suburban tax preparer pleaded guilty Wednesday to filing hundreds of false federal income tax returns for clients, costing the IRS more than $5.3 million. Jeffrey Shelby Jr., 31, of Joliet, pleaded guilty to two counts of aiding ...
IRS starts tax season by getting a guilty pleaCrain's Chicago Business (blog)
Joliet Tax Preparer Pleads Guilty to Filing False Returns: FedsPatch.com
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Tax Returns Complicated by Health Care Law and IRS Staff Cuts
New York Times
But a combination of reduced help from the I.R.S., and potential confusion from new tax requirements under the Affordable Care Act, the federal health care law, may mean it could take longer to get your questions answered and file your return. The I.R ...
Health Care Penalties In 2015: How To Avoid Obamacare Fee And Report ...International Business Times
Bill Cobb: Obamacare complexifies tax seasonUSA TODAY
Frequently Asked Questions: How the Affordable Care Act Affects Your TaxesAARP News
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H&R Block expects a lot of new business from the Affordable Care Act – and that is, of course, a bad thing.
Simply put, while taxes take away money and resources from the private sector economy, tax preparation also takes away money and resources, in a way that is just as real.
Because of the Affordable Care Act, more Americans will spend their time dealing with Form 8965 (the form concerning the individual mandate) and Form 8962 (the form concerning the Premium Tax Credit.) Some will invariably hire tax professionals to file these.
To be clear, I really like tax professionals. They’re smart people. They sometimes read my articles, and write in with thoughts and facts that help keep me better informed. But I don’t like to see their tax filing business increase – precisely because they’re so smart and insightful. The world is full of opportunities for people who are smart and good with financial statements, most of which are far more productive than tax compliance. Our country would be a better place if some tax professionals were in other jobs that used their skills to solve real problems.
What is most striking about tax professionals is that they seem to agree with my sentiment, even against their own self-interest. They see themselves as solving a problem for their clients – the problem of an overly-complex tax code. But they don’t actually want to create bad taxes any more than firefighters want to be arsonists. They'd welcome a world in which they had fewer problems to solve.
Obamacare has given them more problems to deal with. Oh well.
On the first day of the 114th Congress, 60 senators introduced a bill that would approve construction of the Keystone Pipeline. Lawmakers in the House will likely take up the issue on Friday. President Obama, however, didn't share the same enthusiasm, threatening to veto the bill if it arrived on his desk.
Regardless of your opinion on the Keystone Pipeline, there is no doubt that the project would have state and local tax impacts, during both initial construction and post-construction operations. A report published by the U.S. Department of State in January of 2014 outlined the environmental impact of the project and other associated issues—including the estimated state and local taxes collected as a result of the project. The "report" is actually an expansive environmental impact assessment tome with 8 chapters and 26 appendices contained in 95 PDFs. Tax information is included in the Executive Summary and Chapter 4, Section 10.
Here's a brief overview of the tax-related nuggets in the report. Note that here we only include state and local tax-related concerns. We do not include a discussion of the impact on state and local public services during construction or operations of the pipeline. We also do not include "connected actions" (smaller projects associated with Keystone Pipeline construction).
Which state coffers would this impact?
Pipeline construction would originate on the northern border of Montana, continue southeast through Montana, South Dakota, and Nebraska, and terminate on the southern border of Nebraska (shared with Kansas). (Note that the original plan would have picked back up again in Oklahoma and continue all the way to the Gulf Coast, but this southern segment was eliminated.) Some construction on pump stations near existing pipelines in Kansas would also be required. (See the Executive Summary for more information on these details.)
What types of taxes would be paid during construction?
The State Department outlines the construction impact on local property taxes, state and local sales taxes, and certain state and local excise taxes.
Property taxes in impacted states would increase as a result of the eight construction camps that would be built by the construction company to accommodate the influx of workers needed during construction. There would be four in Montana, three in South Dakota, and one in Nebraska.
According to the analysis, property taxes collected during construction would amount to just under $4 million and would be spread out over seven counties in the three impacted states. More specifically,
During construction of the proposed Project, situs taxing entities [locations containing proposed Project facilities within their legal boundaries] such as county governments, school districts, and special districts would be able to assess and tax the taxable property of the eight construction camps.
Property tax collection estimates during Keystone construction are shown in the regional map below (click to enlarge).
The report makes note of the important caveat that the estimates were derived using methods that “necessarily stylize and simplify the values and calculations that state and local governments would take to value and tax real property in actual practice." True of most models, but important to acknowledge.
Construction camps would also likely generate sales tax and excise tax revenue in these states. For example,
[O]ther revenues generated by the proposed Project during construction would be sales/use and fuel taxes levied on goods and services purchased during the construction period. This would include, for example, taxes from construction materials and construction worker spending in the local economy for basic living expenses such as food, housing, gasoline, and entertainment. This type of tax revenue would last only as long as the seasonal construction was in progress, or for up to 2 years.
These construction sales and excise tax estimates are shown in the regional map below (click to enlarge). For details on what’s included in these estimates, see here.
What types of taxes would be paid during operations (post-construction)? And how much?
The State Department estimated that once construction is complete and full operations begin, a total of $55.6 million in property taxes would be collected each year by local governments containing pipeline and pipeline facilities. In particular, these would be "levied on proposed Project facilities by county governments, school districts, and other taxing entities in situs counties."
The report provides a chart breaking down the estimated property taxes that would be collected annually in Montana, South Dakota, and Nebraska once the pipeline was fully operating. We've put together a regional map comparing the three states, which is below (click to enlarge).
Montana local governments would collect the most in property taxes ($26.0 million), followed by those in South Dakota ($17.9 million) and finally those in Nebraska ($11.8 million). Again, there's an important caveat (which the report again smartly points out): that property tax revenues would vary from year to year due to a number of factors. Further, Nebraska has a personal property depreciation allowance, meaning that property tax collections in Nebraska will likely decrease over time. Additionally, the model uses general trends to generate estimates.
The current federal top marginal capital gains tax rate in the United States is 23.8 percent (a 20 percent income tax rate plus the 3.8 percent net investment tax from Obamacare). Additionally, states tax capital gains, leading to an average marginal rate around 28.7 percent.
Compared to other industrialized nations, this is a high tax rate. The average across the OECD in 2014 was approximately 18.2 percent (22.9 percent weighted by GDP). 9 countries don’t even tax long-term capital gains. Having a capital gains tax rate this high negatively impacts the economy. It leads to reduced saving, reduced investment, and a smaller capital stock, which adversely affects both the return on capital and workers’ wages.
On top of these issues there is a less-discussed problem with capital gains taxation in the United States: the U.S. does not adjust capital gains for inflation. The result is that an individual will pay tax on his income plus any capital gain that results simply from price-level increases.
For instance, suppose an individual purchased an average stock valued at $7.51 in 1980 and sells this stock in 2013 for $100. As a result, he realized a capital gain of $92.49 and must pay the 23.8 percent tax of $22.01 on this nominal gain. However, since there was inflation during this period, the real gain was actually only $78.79. This implies that the taxpayer paid an effective rate of 27.9 percent on the real gain.
The amount of tax you pay due solely to inflation varies year to year depending on the real vs. inflation gains.
What you’ll notice is that gains realized from stock purchases in some years yield a tax bill entirely from inflation. This means individuals are paying taxes while earning no income.
Suppose you purchased a stock for 89.18 in 2000 and it grew at the same rate of the S&P 500 on average. In 2013, you sold the stock after it has increase in value to $100. Due to your long-term capital gain of $10.82, you need to pay the 23.8 percent tax to the IRS of $2.57.
However, after adjusting for inflation, your $10.80 gain was actually a $4.88 loss. The IRS does not care. You will still end up paying the $2.57 tax. So you will owe tax on a real loss, resulting in an infinite effective tax rate.
The capital gains tax is more damaging than other taxes because of the bias it creates towards consumption over savings and investment. By applying the tax on a nominal basis, many further detrimental effects are caused, including an average effective rate on real capital gains that exceeds the top personal income tax rate, despite the preferential statutory rate capital gains receive. In certain situations, taxpayers face an infinite rate on real capital gains when the tax is solely due to inflation. While repealing this tax would be the preferable option, inflation indexing would be an improvement that would link the tax to real increases in income rather than increases in inflation.
The new House-passed rule to require so-called dynamic scoring of substantive tax legislation has brought criticism from many quarters of Washington—lawmakers, pundits, and think tank types. Bloomberg quotes Representative Louise Slaughter of New York as saying that the new rule “cooks the books” in favor of Republican policies.
But accounting for the economic effects of tax policy is not new—economists have been modeling fiscal policy for decades—nor is it particularly a conservative or “Republican” idea. Indeed, the Kennedy administration was an early and forceful advocate of accounting for the dynamic effects of tax changes on the economy and on federal tax revenues.
Main Planks of the Kennedy Tax Cut Plan
President Kennedy unveiled his major tax cut plan on January 24, 1963 in an effort to jumpstart the economy and to “increase job and investment opportunities.” The tax plan was actually Kennedy’s second tax plan in two years; the previous year’s plan was aimed at stimulating new business investment by accelerating the depreciation schedules for capital expenses and enacting an investment tax credit.
The 1963 plan was even more ambitious. The main planks of the plan were: (1) a substantial cut in individual tax rates (the top tax rate was to be reduced to from 91% to 65%); (2) a reduction in the corporate tax rate from 52% to 47%; and, (3) a revision in the treatment of capital gains. These cuts were to be offset by base broadening within the individual tax system and a shift in the timing of corporate tax collections.
Kennedy’s “Supply-Side” Case for Tax Cuts
According to Kennedy’s message to Congress outlining the plan, the package was intended to boost demand to augment the supply-side investment incentives enacted the year before.
“Despite the improvements resulting from last year’s depreciation reform and investment credit…our tax system still siphons out of the private economy too large a share of personal and business purchasing power and reduces the incentive for risk, investment, and effort—thereby aborting our recoveries and shifting our national growth rate.” (p. 294)
Whatever the demand-side motivations for the plan, both Kennedy and his Treasury Secretary Douglas Dillon used numerous supply-side arguments to sell the plan to Congress and it is clear that they employed some manner of what could be called “dynamic” scoring in the revenue and deficit projections.
Kennedy: Lower Tax Rates Deliver Higher Revenues
In his testimony before the Ways and Means Committee, Dillon told the members that the plan’s lower tax rates would not only boost GDP, but the higher economic growth would, in turn, boost federal tax revenues.
“We confidently expect that the lower rate structure we propose will soon yield more revenues from an enlarged economy than would be the case if we continue with our present repressive tax structure…In other words, paradoxical as it may seem, the desired goal of a balanced budget can be reached more rapidly with tax reduction and reform than with our present tax system.” (p. 311)
Indeed, Dillon was echoing his boss’s own predictions to Congress. Kennedy’s message predicted that: “Within a few years of the enactment of this program, Federal revenues will be larger than if present tax rates continue to prevail…As the economy climbs toward full employment, a substantial part of the increased tax revenue thereby generated will be applied toward a reduction in the Federal deficit.” (p. 296)
Not only would the tax cut plan boost Washington’s finances, said Kennedy, but it would also provide a boost to the coffers of state and local governments.
“State and local governments, hard pressed by a considerably faster rise in expenditures and indebtedness than that experienced at the Federal level, will also gain additional revenues without increasing their own tax rates as national income and production expand.” (p. 295)
The Gains to the Economy Were Worth The Losses to the Treasury
However, Dillon explained that the revenue payoff would not be immediate, but would occur once the economy gathered steam.
“While a temporary revenue loss will be incurred at the outset, the stimulating effects of tax reduction and reform on the economy will give rise to subsequent revenue gains, and in the longer run the revenue producing powers of our tax structure will be raised substantially.” (p. 332)
Kennedy went on to say that the gains to economy would be worth whatever losses were incurred by the U.S. Treasury:
“Total output and economic growth will be stepped up by an amount several times as great as the tax cut itself. Total incomes will rise—billions of dollars more will be earned each year in profits and wages. Investment and productivity improvements will be spurred by more intensive use of our present productive potential; and the added incentives to risk taking will speed the modernization of American industry.” (p. 294)
“Feedback” From Higher Growth Reduces Effect on the Deficit
Kennedy made it very clear that once the ‘‘’feed back’ in revenues from [the plan’s] economic stimulus” was accounted for, the tax plan would add less to the deficit than would otherwise be expected.
Like today, Kennedy’s team faced many doubters who thought that the prospects of higher revenues due to economic growth were too good to be true. Indeed, even Tax Foundation economists worried that “much reliance is placed on increases in revenue due to growth in the economy as a result of these tax changes.”
In his testimony before Congress, Dillon responded to these concerns directly with the empirical evidence they had at the time:
“That this conclusion is not merely wishful thinking is clearly demonstrated by what happened following our last major peacetime tax reduction. Under the 1954 tax program taxes were reduced by $7.4 billion. Budget receipts of $64.4 billion in fiscal year 1954 dropped to $60.2 billion in fiscal 1955, but by fiscal year 1956 budget receipts had attained a level of $67.9 billion, $3.5 billion more than had been realized in the year prior to the tax reduction.” (p. 311)
Dynamic scoring or dynamic analysis is not a new technology invented by today’s Republicans to ram through tax cuts that some worry will “bust the budget.” Economists have been estimating the effects of tax changes on the economy for decades and were certainly using these techniques to support the Kennedy administration’s pro-growth tax cuts.
Today, we have better technology and empirical evidence than what guided Kennedy’s economists, and members of Congress deserve to have the benefit of these advances.
 Annual Report of the Secretary of the Treasury on the State of the Finances, For the Fiscal Year Ended June 30, 1963. Exhibit 18—Message from the President, January 24, 1963, relative to a revision of our tax structure. p. 294.
 All the following page references refer to the Annual Report of the Secretary of the Treasury 1963.
 “Tax Reduction and Reform: A Summary of President Kennedy’s Tax Proposals,” Tax Foundation Special Report, February 11, 1963, p. 2.
Suppose a community wants to build a bridge across a river to connect to the neighboring community. Undoubtedly, the bridge will make the commute better for many people in both the towns. However, the project is estimated to cost $200 million, a pretty high price for the communities. Is the project worth it?
In order to determine this, the two communities utilize a cost-benefit analysis. They estimate the benefits of the project: reduced commute time, easier transportation of goods, and increased economic activity. They then compare the benefits to the costs: the $200 million price tag, possible adverse changes to traffic patterns, and environmental impact. If the benefits exceed the costs, they will decide to build the bridge, otherwise they may scrap or modify the project.
It is important in the process of determining the costs and the benefits of a project to have all the information possible in order to make the best decision. Suppose the city didn’t account for how the construction would affect the river’s fish, thus harming fisherman and the local economy. If they had this information beforehand, they likely would have spent a little more time protecting the river from the bridge’s construction debris.
If the city doesn’t fully account for the costs of the project in its analysis, it could end up building a bridge that has a net negative impact on the communities. Having full information helps avoid some unintended consequences of policy.
This is the idea behind using dynamic scoring for tax proposals. Dynamic scoring, in addition to static or conventional scoring, adds more information to the discussion over tax policy so policymakers can make better decisions.
Suppose the government wants to fund a $1 billion infrastructure project that would yield economic benefits. However, the cost of this project is the taxes needed to fund the project. Our current tax scorers at JCT would be able to give a long list of taxes that could be increased by $1 billion: corporate income, capital gains, payroll taxes, excise, or income taxes.
However, the JCT analysis is missing a key piece of information that dynamic scoring could provide: the differing costs of these taxes in terms of their effect on the economy. Due to economic responses, a static $1 billion in corporate income taxes costs more than static $1 billion in payroll taxes.
A dynamic analysis may tell us that the negative effects of an increase in the corporate income tax may negate some or all the potential benefits of an infrastructure project. With that information, policymakers may decide to use a payroll tax increase as a funding mechanism instead because it would be less detrimental to the economy. Dynamic scoring simply gives policymakers more information about the potential costs associated with funding this project.
Any dynamic analysis is subject to assumptions. However, this isn’t a very good reason not to use it. Analyzing the trade-offs in any government project requires making assumptions that need to be justified whether you are evaluating infrastructure spending or an increase (or decrease) in taxes. Taxpayers would be justified in being upset if their government did not use all the available information in evaluating the costs and benefits of any policy change. Dynamic scoring gives us the kind of information on the tradeoffs in tax policy that we demand for so many other government projects.
The latest critique of dynamic scoring comes from Edward D. Kleinbard, former staff director of Congress’s Joint Committee on Taxation (JCT). In a recent opinion piece in the New York Times, Kleinbard argues that dynamic scoring is impractical because “dynamic modeling relies on many simplifying assumptions…and different models’ predicted feedback effects vary wildly, depending on the values selected for those uncertain assumptions.” The resulting uncertainty increases the “risk of a political thumb on the scale.
Kleinbard’s charge against dynamic scoring rings a bit hollow considering that the JCT performed dynamic analysis of two major pieces of legislation during his tenure on the committee. The first analysis showed that temporary tax cuts were not a panacea, had limited effect on boosting long-term economic growth, and fell far short of paying for themselves. The second dynamic analysis provided an early warning of the potential damage that Obamacare’s tax hikes could have on the economy. Our economy might be better off today had lawmakers paid heed to these JCT studies.
JCT’s Dynamic Analysis of Temporary Tax Cuts
The JCT’s macroeconomic analysis of the “American Recovery and Reinvestment Tax Act of 2009” provided lawmakers with some valuable insights into the limited value of temporary tax cuts. For individuals, the bill included the “’making work pay’ tax credit of 6.2 percent of earnings up to $500 per single filers and $1,000 for joint filers.” For businesses, the bill included a one-year bonus depreciation and allowed for a five-year carryback on net operating losses.
Using their Macroeconomic Equilibrium Growth (MEG) model, JCT determined that the net economic effect of these temporary tax cuts were, not surprisingly, temporary.
“At the peak of the stimulus effect, in the fourth quarter of 2010, consumption is increased by .8 percent, real Gross Domestic Product (“GDP”) is increased by 0.5 percent, and employment by .6 percent relative to what they would have been without the tax stimulus. The growth effects of the stimulus decline quickly once most of the tax changes have expired….”
The model also showed that the resulting growth from the tax cut did generate a “revenue feedback of 12 percent, relative to the cost of the tax provisions as estimated using conventional revenue analysis,” but well short of paying for themselves.
While JCT ran these simulations using different assumptions, none of these results are in the least surprising or subject to debate among economists—temporary tax cuts have little impact on long-term economic growth.
JCT”s Dynamic Analysis of the First Draft of Obamacare
Lawmakers should have paid even closer attention to JCT’s dynamic modeling of “America’s Affordable Health Choices Act of 2009,” otherwise known as the House-passed version of Obamacare. While many of the specifics of this first draft of the Affordable Care Act would change by the time the final bill reached President Obama’s desk, the House bill contained all the basic elements of the final plan—a host of revenue raisers to fund subsidies for the uninsured.
The tax increases totaled $790 billion tax hike over ten years, including: a surtax on high-income taxpayers; taxes on individuals who failed to purchase insurance on their own; and, taxes on employers who failed to insure their employees. The subsidies, which totaled $840 billion over ten years, included an “affordability credit” to help families with incomes below 400 percent of the poverty rate purchase insurance through the new health insurance exchanges.
JCT economists ran three simulations of the major components of the bill using two assumptions of the response of the Federal Reserve to the policy changes; First, assuming an active Fed in response to any demand shocks and, second, assuming a neutral Fed, or no response to demand changes.
Below are two tables showing the economic effects of the tax and subsidy provisions. Table 1 shows that the tax increases alone would have reduced GDP by as much as 1.5 percent, lowered the capital stock and employment, and actually reduced federal receipts because of the lower growth.
Table 2 shows that the tax subsidies would have only modestly moderated the negative economic effects of the tax hikes. All the major economic indicators—GDP, the capital stock, employment, and federal receipts—are still lower than what the level of the economy would have been under current law (i.e. without the health care law). The third simulation (not shown here), included the bill’s changes to Medicare and Medicaid. The results are largely the same as the first two simulations except for some residual effects of the higher deficits resulting from the increased entitlement spending.
Table 1. Effects of Revenue Provisions Percent Change
Relative to Projected Present Law Levels
Fed Counters Demand Response (Percent)
No Fed Reaction (Percent)
Real Producers' Capital Stock
Labor Force Participation
Change in Long-term Interest Rates (basis points)
Receipts feedback (percent change in receipts due to change in GDP)
Table 2. Effects of Tax Provisions and Exchange Subsidies
Percent Change Relative to Projected Present Law Levels
Fed Counters Demand Response (Percent)
No Fed Reaction (Percent)
Real Producers' Capital Stock
Labor Force Participation
Change in Long-term Interest Rates (basis points)
Receipts feedback (perent change in receipts due to change in GDP)
While Kleinbard makes a big deal out of the assumptions that modelers must make and the debate over how interest rates may or may not respond to policy changes, this is a red herring. Despite the different assumptions that JCT economists used in their simulations, the results all pointed in the same direction—negative. As the results of these dynamic analyses showed, the magnitude of the estimated effects of the policies may differ, but the signs of the estimates are all the same. And that is the most critical information that lawmakers need to know to enact good tax policy and don’t get with conventional scoring.
In his conclusion, Kleinbard loses any remaining impartiality by calling dynamic scoring a “Trojan horse” delivered by “political factions convinced that tax cuts are the panacea for all economic ills.”
This is where he is most wrong. Dynamic scoring is not a plot to cut taxes without paying for them, rather it is an important tool for raising the tax IQ of members of Congress so that they understand the different effects that various tax increases or tax cuts have on the economy. The ultimate goal is to enact tax policies that improve the lives of all Americans, which won’t happen if we continue to protect Washington’s status quo.
St. George Daily Spectrum
Tax season nears — are you ready?
St. George Daily Spectrum
Tax season in 2014 was delayed after the government shutdown for 16 days, causing most tax filing to be delayed by two weeks; 2013 was also delayed to the end of January because of changes in laws, which caused the IRS to postpone filing while ... “The ...
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