tax news

WASHINGTON (AP) — The Internal Revenue Service is apologizing for what it acknowledges was "inappropriate" targeting of conservative political groups during the 2012 election to see if they were violating their tax-exempt status.

WASHINGTON (AP) — The Internal Revenue Service inappropriately flagged conservative political groups for additional reviews during the 2012 election to see if they were violating their tax-exempt status, a top IRS official said Friday.

Can a tax cut pay for itself? Most economists would probably agree that the answer is generally “rarely, but usually not.” However, this question is often mixed up with a different one – “can reforms that lose revenue on a static basis pay for themselves?” It’s incredibly important to realize that the second question is distinct from the first, and that the answer can easily be “yes.” Tax reform is not a matter of raising or lowering a single tax - it’s a combination of tax cuts and tax hikes, and the swapping of particular sources of revenue for others. Since the economic effects of different taxes differ, reforms that are scored as a static revenue loss (and thus be popularly thought of as a “tax cut”) can easily raise revenue when their economic effects are accounted for. The people who completely dismiss the idea that a tax cut can pay for itself are usually on solid ground when considering a single tax only, but it’s wrong to extend this skepticism to any tax reform that shows a static revenue loss.

It is true that with any tax, there is a point where a high enough rate causes sufficient economic damage that further rate increases reduce revenue rather than raise it. For example, an income tax rate of 100% would raise no revenue because there’d then be no reason for anyone to work or invest, and consequently no income to tax. This idea can be expressed graphically as the controversial “Laffer curve,” but the basic concept isn’t disputed – for any tax, there exists a revenue-maximizing rate beyond which further rate increases are counterproductive. The dispute between left-leaning economists and right-leaning economists is therefore not so much over whether the Laffer curve exists (it does) but what shape it has.

To illustrate this, consider three hypothetical taxes. Revenue estimates for each are presented below, with the (tax-inclusive) rate ranging from 0% to 100%. The orange dotted line is the “static” revenue estimate that assumes no Laffer-type effects – that is, no changes to the economy resulting from the tax. The blue line is the revenue that is actually raised once these effects are accounted for:

Tax A is a good tax – that is, one that causes minimal economic damage. Consequently, the static revenue estimate and the dynamic revenue estimate are more or less the same until rates get prohibitively high. Left-leaning economists probably imagine most taxes to look something like this; those who lean right are not as optimistic. Tax B is an okay tax – it causes relatively little economic damage at low rates but the effects start to add up at higher rates; the revenue maximizing rate is about 45%, and beyond 70%, the tax is so damaging to the economy that more revenue would be raised by simply not levying the tax at all (because revenue from other taxes is also depressed by the damaging tax.) Tax C is a terrible tax – even at low rates, the damage it causes is bad enough to cause total tax revenue to go down.

Most taxes aren’t so bad as Tax C – it’s an exceptional case. That’s why skepticism is warranted when somebody claims that a tax cut will pay for itself. However, consider a more realistic (but still somewhat simplified) scenario. A government levies two taxes – one looks like Tax A and the other looks like Tax B, both at rates of 20%. A tax reform bill comes along that lowers Tax B from 20% to 10%, and raises Tax A from 20% to 30%. Government analysts perform a static revenue analysis and find that cutting Tax B loses $500 billion dollars, and raising tax A brings in $400 billion dollars. That’s a deficit of $100 billion, and the bill’s opponents argue that such a huge “tax cut” is irresponsible. “But wait!” says a renegade economist. Her dynamic analysis shows that while raising tax A does indeed bring in $400 billion dollars, cutting Tax B has some dynamic economic benefits – certainly not nearly enough that the cut “pays for itself,” but enough that it loses only $400 billion instead of $500 billion in revenue. The static $100 billion deficit has disappeared.

At this point, the economist would likely be ridiculed as a crank who believes that tax cuts always pay for themselves. But this is unfair – it’s a distortion of what was actually said. She never argued that cutting Tax B alone pays for itself – that would indeed be an extraordinary claim deserving of considerable scrutiny. Rather, she merely argued that cutting Tax B isn’t quite as expensive as the static analysis would suggest, and that’s enough to make the entire bill revenue-neutral.

It’s one thing to laugh off claims that cutting a single tax pays for itself – it’s quite another to dismiss similar claims about a comprehensive tax reform bill. As long as there is a differential between the dynamic effects of the tax cuts vs. the tax increases, it’s quite plausible that the static score shows a deficit increase and the dynamic score shows a reduction. This isn’t the same thing as saying a tax cut pays for itself, and it shouldn’t be treated as such.

By Tom Bergin LONDON (Reuters) - A panel of UK lawmakers will next week grill representatives from Google Inc and its auditor, Ernst & Young, following a Reuters report that highlighted inconsistencies in Google's statements about its UK activities. The Public Accounts Committee (PAC) said on its website that the representatives would testify on May 16. Google has attracted the ire of British lawmakers for the way it pays almost no income tax on billions of dollars of UK sales each year. ...

I just ran across an excellent video by the the North Carolina Association of Certified Public Accountants (NCACPA) about tax reform efforts in the Tar Heel State. It's worth checking out:

Follow Scott Drenkard on Twitter @ScottDrenkard.

Last February, the Ways and Means Committee ranking members announced the formation of 11 “working groups” that would focus on different areas of tax reform. Their goal was to  “to review current law in its designated area, research relevant issues, and compile related feedback from stakeholders, academics and think tanks, practitioners, the general public, and colleagues in the House of Representatives.”

Earlier this week, the Joint Committee on Taxation released a report outlining the feedback that these working groups received (starting on page 490).

Underscoring the political challenges to tax reform, a range of conflicting suggestions was given to these different working groups.

A good example of the range of policy choices surrounding tax reform are the suggestions given to the Working Group on Debt, Equity and Capital regarding the tax rate of dividends and capital gains.

Groups suggested the following regarding both:

Capital Gains:

·         Retaining low rates on capital gains;

·         Retaining the present-law tax rate on capital gains

·         Taxing capital gains at a maximum 28 percent

Dividends:

·         Providing low tax rates on dividend income;

·         Retaining the present-law statutory top rate on qualified dividends paid by C corporations;

·         Treating dividends as ordinary income subject to the top individual tax rate;

As you can see, some want these taxes lowered, some want them kept the same, while some want them to be increased. I want to focus on the two specific suggestions to raise taxes on capital gains and dividends. What would these changes theoretically look like compared to the OECD average tax rates on dividend and capital gains income?

For capital gains, the current law is already out-of-step with international standards. After the fiscal cliff, combined state and federal capital gains rates increased from 19.1 percent to 28 percent. This is more than 10 percentage points higher than the international average. One suggestion, of course, is to tax capital gains at the rate at the 1986 rate of 28 percent. This would push America’s average combined federal and state capital gains rate to more than 35 percent, more than double the international average.

As for dividend taxation, the United States used to have a rate lower than the international average, but after the fiscal cliff deal the average rate increased to over 28 percent. Again, one of the suggestions above is to treat dividends as ordinary income. This would push the tax rate on dividends to more than twice as high as the OECD average to the top marginal combined state, local and federal income tax rate of 47.9 percent.

Internationally, our capital gains and dividend tax rates are too high already. For the past 3 decades, countries throughout the world have been lowering their individual capital gains and dividends tax rates. Following these suggestions and raising these tax rates would be a bad idea and in total opposition to current international trends. These trends reflecting the realization that lowering your tax burden on saving spurs investment, increases a country’s economic competitiveness and spurs economic growth. Raising these taxes would put America further at risk for losing its competitive edge.

This week's map looks at state excise tax rates on beer.

Click on the map to enlarge it.

View previous maps here.

Sometimes, researchers get so caught up in trying to prove their point that they lose sight of what their research actually tells them. Such is the case of the new study by Heritage Foundation researchers Robert Rector and Jason Richwine Ph.D. The Fiscal Cost of Unlawful Immigrants and Amnesty to U.S. Taxpayers.

The study purports to show the long-term cost of allowing 3.5 million non-legal immigrant households (totaling roughly 11 million people) to become citizens and, thus, eligible for the panoply of government benefits over their remaining lifetimes. What the study really shows is that the social cost of having millions of under-educated, non-immigrant households is many times greater than the cost of “unlawful” immigrants and that the people bearing that cost are those with a college education.

In recent days, there have been many valid critiques of the methodology that Rector and Richwine used to calculate the $6.3 trillion, 51 year cost of an amnesty plan. I agree with many of these criticisms and won’t pile on here. However, I will say that these critics were so quick to condemn Rector and Richwine, that they too missed the elephant in the room.

The value in the Heritage study is that it adds to a solid body of research on what we call “fiscal accounting.” That is, measuring how much people pay in total taxes compared to the amount of total spending benefits they get from government. This is the first step in measuring the total amount of redistribution that occurs from both taxes and spending policies. The Tax Foundation published one of the first of such studies in 1967, and updated this work in 2006 and 2009.

The Heritage study reconfirms what previous studies have found, that the majority of American households receive far more in total benefits from government than they pay in all types of taxes. Indeed, Heritage found that, on average, all American households received $31,584 in government benefits and services (excluding national defense and interest on the national debt) and paid $30,426 in total taxes (federal, state, and local). Thus, the “typical” U.S. household was a net recipient of $1,158 in government benefits and services.

However, unlike most fiscal accounting studies, Rector and Richwine present their results by educational attainment rather than by income bands. In the table below (drawn from page 12 in their report), we can see the fiscal accounting for non-immigrant households at various levels of educational attainment.

There are nearly three times as many non-immigrant households without a high school degree (10 million ) than non-legal households (3.5 million) and they receive an average of $36,053 more in government benefits and services than they pay in taxes. This amounts to $363.5 billion in total net fiscal subsidies to “under-educated” households. Over just the next 20 years, these households (presuming their status doesn’t change) will “cost” the government $7.2 trillion – more than the 51 year cost of Rector and Richwine’s non-legal immigrants.

The fiscal “cost” of high school educated non-immigrant households is even great because there are 31 million of them. These households get an average of $14,642 more each year in government spending than they pay in taxes. The total cost of these households each year is $455.4 billion, or $9.1 trillion if their status doesn’t change (an unlikely assumption, but the same one Heritage authors made).

Non-Immigrant Households

Number of Households

Annual Fiscal Deficit/Payment Per Household

Annual Net Gain/Loss for All These Households ($Billions)

20 Year Gain/Loss ($Billions)

Without a High School Degree

10,083,618

$ (36,053)

$ (363.5)

$ (7,271)

With a High School Degree

31,099,306

$ (14,642)

$ (455.4)

$ (9,107)

With Some College

30,986,396

$ (5,722)

$ (177.3)

$ (3,546)

Total

$ (996.2)

$ (19,924)

College Degree or More

31,857,640

$ 30,255

$ 963.9

$ 19,277

Source: Rector & Richwine page 12

When we add in the fiscal subsidy to households with some college, we get a total annual cost of nearly $1 trillion ($996.2 billion) for all of these “under-educated” groups and a 20 year cost of nearly $20 trillion.

Who pays for all of these benefits and services? It appears that college educated households are the only Americans who, on average, pay more in total taxes than they get in total government benefits. Their net payment, $963.9 billion. Over 20 years, this would amount to $19.2 trillion.

Ironically, Rector and Richwine’s data shows that college educated immigrants also contribute more in taxes than they get back in government benefits and services.

So the real lesson from this study that was lost by both the authors and critics alike is that education matters more than immigration status. People with less than a college degree – be they native born or immigrants – will draw more in government benefits and services than they pay in taxes of all kinds. And the fiscal cost of those under-educated households is being borne by college educated workers – native and immigrant – to the tune of $1 trillion per year.

And I thought my student loans were expensive.

Last month we reported that the ACLU had discovered a frightening find: the IRS enforcement handbook asserted that the agency did not need warrants before reading taxpayers' e-mails. The official guidance asserted that taxpayers have no expectation of privacy when e-mails are stored on servers, so the IRS could just demand them from Internet Service Providers (ISPs). This assertion was despite the fact that a federal appeals court had held that the IRS in fact must abide by the Fourth Amendment and get a warrant.

The IRS has now backed down. In a policy statement released yesterday (PDF), the IRS concedes that the Fourth Amendment applies to it and that it will obtain a search warrant before demanding e-mails from Internet Service Providers.

This is a victory for taxpayers - although one that shouldn't have been necessary - but congrats to everyone who helped the IRS see the error of its ways!

By Dena Aubin NEW YORK (Reuters) - Large U.S. companies boosted their offshore earnings by 15 percent last year to a record $1.9 trillion, avoiding hefty tax bills by keeping the profits abroad, according to a new report. The overseas earnings stockpile has climbed by 70 percent over the past five years, said research firm Audit Analytics. Data in its report covers the Russell 3000 index of the largest U.S. corporations. U.S.-based multinationals do not have to pay U.S. corporate income tax on foreign earnings as long as the earnings do not enter the United States. ...