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Michelle Singletary: Should Olympic medal winners get a tax break? - Press Herald

Google IRS Federal Income Tax - Sun, 2016-08-21 01:03

Michelle Singletary: Should Olympic medal winners get a tax break?
Press Herald
When those who win get bonuses for their medals, the income is subject to U.S. income tax. The U.S. Olympic Committee ... The federal or state governments that have income taxes are never going to miss the few thousand dollars they might get from ...

and more »
Categories: Tax news

Tax refund fraud an increasingly sophisticated crime - Pittsburgh Post-Gazette

Google IRS Federal Income Tax - Sat, 2016-08-20 21:09

Tax refund fraud an increasingly sophisticated crime
Pittsburgh Post-Gazette
Federal prosecutors say he and three cohorts filed bogus tax returns in the names of UPMC employees, then used the refunds to buy electronics to ship to Florida and then Venezuela for resale. Mr. Llanes was .... The credit union investigated and turned ...

Categories: Tax news

Unfair estate tax? Albom thinks so. Many readers disagree. - Detroit Free Press

Google IRS Federal Income Tax - Sat, 2016-08-20 20:07

Detroit Free Press

Unfair estate tax? Albom thinks so. Many readers disagree.
Detroit Free Press
This will simplify the work for taxpayers and the IRS, and protect low income people ... However, there is no federal tax on estates less than $5.4 million, which if invested will handsomely take care of any children of the decedent for the rest of ...

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Categories: Tax news

Social Security: Benefits consultants rare, but can be found - Arizona Daily Star

Google IRS Federal Income Tax - Sat, 2016-08-20 18:10

Arizona Daily Star

Social Security: Benefits consultants rare, but can be found
Arizona Daily Star
And the second big change was the advent of the Supplemental Security Income program in the mid-1970s. SSI is a federal welfare program (funded out of general tax revenues, not Social Security taxes) that pays a very small monthly stipend to poor older ...

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Categories: Tax news

Guidelines to charitable giving - The State Journal-Register

Google IRS Federal Income Tax - Sat, 2016-08-20 17:18

The State Journal-Register

Guidelines to charitable giving
The State Journal-Register
In the coming months, many people in our area will have the opportunity to participate in United Way's annual campaign, the State and University Employees Combined Appeal or the Combined Federal Campaign. At United Way, we understand how important it ...

Categories: Tax news

NeNe Leakes reportedly owes more than $800000 to the IRS - My Fox Boston

Google IRS Federal Income Tax - Sat, 2016-08-20 10:14

My Fox Boston

NeNe Leakes reportedly owes more than $800000 to the IRS
My Fox Boston
The Daily Mail reported that the IRS filed the tax lien last month for $824,366.01 in Gwinnett County federal court in Lawrenceville, Georgia. The taxes cover ... And given the tax total, she easily generated more than $1 million in income that year ...

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Categories: Tax news

Germantown Business Owner Sentenced For Failing To Pay ... - Local Memphis

Google IRS Federal Income Tax - Fri, 2016-08-19 12:28

wreg.com

Germantown Business Owner Sentenced For Failing To Pay ...
Local Memphis
A Germantown man has been sentenced to one year in prison and ordered to pay more than $10 million in restitution for failing to pay employment taxes to the ...
Germantown business owner sentenced to prison | FOX13FOX13 Memphis
Germantown business owner sentenced for failing to pay taxes ...wreg.com

all 4 news articles »
Categories: Tax news

Lunch Links: Pairing Trump Tax Breaks Together Ill-advised; Carbon Tax an Issue in Vermont Governor's Race; Soft Serve in Many Splendid Tax Forms

Tax Foundation - Fri, 2016-08-19 08:15

Today is August 19, which is evidently National Soft Ice Cream Day. I fondly remember getting soft serve with my grandparents and after every dorm meal in college, but it also pops up over and over in state tax decisions. Why? Most states choose to exempt groceries from their sales tax but seek to continue to apply the tax to non-“necessity” food like prepared food or candy, and drawing that line has proven harder than one might expect. Selling a box of ice cream bars is nontaxable groceries, but selling a soft-serve ice cream cone is taxable food for immediate consumption. New York has four pages deciding soft serve is taxable restaurant food; Wisconsin says soft serve is taxable because it’s in a cup; Virginia concludes the sale of prepackaged ice cream is taxable even though it’s not softserve; and Ohio exempts the purchase of a soft-serve ice cream machine (but not an ice cream scoop). Everyone likes a sales tax exemption for stuff they buy, but the upside of a low sales tax on all purchases is you avoid nonsensical rules like these.

Here are some interesting links I came across:

State Tax Revenue Slowdown: State taxes on average are growing 2.3 percent over last year, so while tax revenues are above the peak of the 2007 boom, they’re down from the 5.2 percent growth in 2015. Low oil prices are impacting severance taxes, smoking declines are impacting cigarette taxes, and higher fuel efficiency is impacting the gas tax. (The Hill)

Trump Controversially Pairs Two Tax Breaks: “The Republican presidential nominee appears poised to combine two policies that House Republicans—and tax analysts from both parties—say shouldn’t be paired: letting businesses deduct interest, and allowing expensing, or immediate write-offs, for investments in equipment and buildings. Current law requires businesses to spread those deductions over multiple years. The result would provide negative tax rates for investments financed with debt, creating incentives for companies to pursue projects that wouldn’t make sense economically without the tax benefits.” (The Wall Street Journal)

Senate Dems Push Tax Return Disclosure Bill: Senators Ron Wyden (D-OR) and Chris Murphy (D-CT) said they’ll soon push a bill that would direct the IRS to release tax returns of presidential candidates who decline to do so voluntarily. (Roll Call)

Would Estate Tax Repeal Create a Monarchy in America? My colleague Scott Greenberg responds to some overblown claims. (Tax Foundation)

Vermont Carbon Tax a Governor’s Race Issue: The interestingly close Vermont governor’s race has the carbon tax as an issue dividing the Republican and Democratic candidates. The Republican Party is out with an ad attacking Democrats on the issue. (YouTube)

Alabama Sales Tax Holiday and Tax Foundation Spoilsports: I missed this one from a few weeks ago: “Alabama parents, meet the fine folks of the Tax Foundation, a nonprofit group that started militating for saner tax policy way back in 1937. One presumes its members know a thing or two about Quixotic fights.” Alabama economist Dr. Semoon adds: “Overall, sales tax holidays do not increase sales because the same products will have to be purchased anyway, with or without tax holidays. They simply lower tax revenues and cause tax rates to go up.” (AL.com)

Maine Governor to Push Tax Swap: Gov. LePage (R) “said his next budget will strongly lower the state’s income tax and raise the sales tax.” (Kennebec Journal)

Categories: Tax news

Repealing the Estate Tax Would Not “Create a Permanent Aristocracy Overnight”

Tax Foundation - Thu, 2016-08-18 14:30

There’s a lot of misinformation about tax policy floating around online. Usually, the Tax Foundation can’t take the time to correct every erroneous claim about federal taxes that we run across on the internet. But it’s a slow August day, Congress is out of session, and I just came across an article on AlterNet titled, “Monarchy in America? One of Trump's Tax Proposals Would Create a Permanent Aristocracy Overnight.”

The article, by RJ Eskow, is about Trump’s proposal to repeal the federal estate tax. Over the last few days, Trump has faced a great deal of criticism for this proposal – but none so hyperbolic as the claim that eliminating the estate tax would create a “permanent aristocracy” in America.[1]

In fact, the estate tax is a small, relatively inconsequential piece of the federal tax system. Eliminating the estate tax would lower taxes on the wealthiest Americans – but not by much. Even if the estate tax were repealed, the federal tax system would still remain highly progressive.

The first mistake in the AlterNet article is the claim that “our tax system already favors the wealthy in many different ways.” Frankly, this just isn’t the case. According to the latest estimates for 2016 from the Department of the Treasury, the top 0.1 percent of taxpayers will pay 39.2 percent of their income in federal taxes. Meanwhile, the bottom 90 percent of taxpayers will pay 14.1 percent of their income in federal taxes this year.

Now, the Treasury statistics may overstate the case a bit: the Treasury assumes that the corporate income tax falls almost completely on high income Americans. However, there’s reason to believe that the corporate income tax falls largely on workers. So, I’ve taken the liberty of adjusting the Treasury statistics to assume that the corporate income tax falls on every income group equally. Even with these more modest assumptions, the federal tax system is still extremely progressive:

No matter how you spin it, the federal tax system simply does not favor the wealthy. And the federal tax system would not suddenly start favoring the wealthy if we repealed the estate tax:

Using the same data from Treasury, I’ve graphed how much each income group would pay in taxes in 2016 if the estate tax didn’t exist. The change is underwhelming. Under this scenario, instead of paying 31.9 percent of their income in taxes, the 0.1 percent richest American households would pay a tax rate of 31.2 percent. In other words, even if the estate tax were fully repealed tomorrow, high-income taxpayers would still shoulder the vast majority of the U.S. tax burden.

Supporters of the estate tax argue that the tax helps lessen the concentration of wealth in the United States. That’s a fine argument, and people should keep on making it. But claiming that estate tax repeal would create a “permanent aristocracy” is pure misinformation, and is not useful for a productive tax policy debate.

[1] To clarify, the headline text might have originated with an AlterNet editor, rather than with RJ Eskow. Either way, somebody is very wrong about the federal estate tax.

 

Categories: Tax news

Lunch Links: Americans Not Falling for Sales Tax Holidays; Estate Tax Battle Heats Up; Alabama Discussing Gas Tax

Tax Foundation - Thu, 2016-08-18 08:15

Today is August 18, the date in 1988 when George H.W. Bush said “Read my lips: no new taxes” to the Republican National Convention when accepting the presidential nomination. The pledge got a lot of attention, and even more in 1990 when Bush decided to agree to significant tax increases as part of a budget deal. The subsequent loss of trust arguably impacted Bush’s 1992 re-election effort.

Here are some interesting links I came across:

Estate Tax Battle Between Clinton and Trump: In a Cleveland speech, Hillary Clinton said Donald Trump’s plan to repeal the federal estate tax would benefit his own family, while her plan to raise it would allow a number of spending priorities. (The Wall Street Journal)

Taxing CEOs: My colleague Alex Durante reviews the literature on what the “optimal” (most revenue in the least distortive manner) tax rate on CEOs is. A new Carnegie Mellon study estimates it’s somewhere between 30.1 percent and 40.2 percent, encompassing the current 39.6 percent top tax rate. (Tax Foundation)

A Twenty-First Century Tax Code for Nebraska: More coverage of our new report from the Lincoln Journal-Star, KLKN-TV, and the Omaha World-Herald.

Americans Less Interested in Sales Tax Holidays: A Rasmussen Reports poll finds that 44 percent of Americans say they are more likely to buy things during a sales tax holiday, the lowest saying yes to that question since Rasmussen started asking it in 2010. 38 percent say a sales tax holiday makes no difference in their decisions. Sales tax holidays are politically expedient but poor tax policy. (Rasmussen Reports / Tax Foundation)

Alabama Discusses Gas Tax Increase: A 6 cent per gallon increase will be heard today by the House Transportation Committee. (Decatur Daily)

Kansas Governor Pushes Medicaid Federal Aid Boost: Gov. Brownback (R) says he’ll ask the legislature to increase a health provider tax, that in turn will leverage more federal funds because the feds give Kansas $1.28 for each dollar the state spends on Medicaid. States tend to do this (taxing health care to leverage more federal aid) in times of severe fiscal stress. (Wichita Eagle / Kansas City Star)

New York Combining Property Tax Rebate Checks: For efficiency reasons, taxpayers who haven’t yet gotten a 2015 check under $50 will have it combined with the ones that go out this fall. (Watertown Daily Times)

Categories: Tax news

Judge extends federal prisoner's sentence after guilty plea for IRS ... - KY3

Google IRS Federal Income Tax - Wed, 2016-08-17 15:07

KY3

Judge extends federal prisoner's sentence after guilty plea for IRS ...
KY3
SPRINGFIELD, Mo. - An inmate in the Christian County Jail in Ozark was sentenced in federal court on Wednesday for his role in a conspiracy to file fraudulent ...

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Categories: Tax news

IRS Finalizes Rules for Taxes on Foreign Federal Contractors - Accounting Today

Google IRS Federal Income Tax - Wed, 2016-08-17 11:36

IRS Finalizes Rules for Taxes on Foreign Federal Contractors
Accounting Today
The document also contains final regulations under section 6114, with respect to foreign persons claiming an exemption from the 2 percent tax under an income tax treaty. The regulations took effect Aug. 17, 2016. Section 301 of the James Zadroga 9/11 ...

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Categories: Tax news

How Much Should We Tax CEOs?

Tax Foundation - Wed, 2016-08-17 10:30

Many politicians have called for raising tax rates on top earners to combat income inequality. Both Sen. Bernie Sanders (I-VT) and Democratic presidential nominee Hillary Clinton have in particular expressed concerns about executive compensation, repeating a commonly cited but misleading statistic about CEO pay. This poses an interesting question: How much should we tax CEOs? In a new American Economic Review paper, Carnegie Mellon economists find that depending on a variety of assumptions, the optimal tax rate on CEOs varies from as low as 13.4% to as high as 40.2%. These results are substantially smaller than what has previously been reported in the optimal tax literature, and suggest that increasing taxes on corporate executives may be unwise.

When economists discuss “optimal taxation,” they are referring to taxes that raise revenues while reducing economic distortions in the economy to a minimum. Taxes generate “deadweight losses,” which are productive economic activities that would have occurred had the tax not be imposed. Some economists such as Peter Diamond and Emmanuel Saez have found small deadweight losses from taxing top earners, such as CEOs, and suggest that their theoretical model implies that the optimal tax rate on these earners could be as high as 73%. The current federal marginal income tax rate for top earners is 39.6%, which approaches the mid-40s when accounting for state marginal income tax rates.  

However, these Carnegie Mellon economists explain that the Diamond-Saez model ignores how talented CEOs generate positive spillovers for others. For instance, an exceptionally talented CEO will increase the profits of the firm, some of which will be distributed to shareholders and some of which will be distributed to workers. Of course, it is also possible that corporate executives engage in rent-seeking. They may exert their bargaining power to extract resources from the firm to the detriment of workers and shareholders. The authors argue that their assumption of positive spillovers is more consistent with the economic literature than this Piketty-Saez model, which assumes CEOs generate only negative spillovers.

Executive compensation is not only a factor of managerial talent, but also the size of the firm. The authors assume that some firms are larger than others for reasons other than the talent of its managers. Some firms for example may require a large pool of assets in order to provide their products or services.  The size of the firm will therefore partly determine the structure of compensation packages that are offered to corporate executives, which can include salaries, bonuses, and stock options.

The authors restrict their analysis to CEOs with reported incomes greater than $500,000. They find that depending on the “marginal social value” the government assigns to firm profits, the optimal tax rate on CE0s varies considerably. According to the model, a government that is moderately concerned about firm profits because of the positive spillovers should set marginal tax rates between 30.1% and 40.2%, roughly within the range of where current rates are for top earners. While further research is needed in this area, this paper provides convincing evidence that we should be cautious about raising tax rates on corporate executives beyond current levels.  

Categories: Tax news

Lunch Links: Nebraska Tax Reform Options; FAQ on Oregon Measure 97; Olympics Tax Break

Tax Foundation - Wed, 2016-08-17 09:15

Today is August 17, Davy Crockett’s 230th birthday. Before he moved to Texas, Crockett was a congressman representing Tennessee, and there’s a story of him opposing an appropriation of relief money and instead proposing that each member of Congress contribute a week’s pay for the effort (and none do). The bill and Crockett’s opposition are true, though the details are probably fictional.

Here are some interesting links I came across:

A Twenty-First Century Tax Code for Nebraska: Our new report, coming nearly 50 years after Nebraska last overhauled its tax system, reviews its weaknesses (high rate sticker shock, substantial targeted incentives, narrow sales tax) and suggests options for change. The Omaha World-Herald covers the release, which occurs today at an event in Lincoln. (Tax Foundation / Omaha World-Herald)

Tax Policy Center Joins Criticism of Olympic Tax Break: Howard Gleckman: “[T]ake a closer look and you see this for what it really is: A way for politicians to use the tax code to make it appear they are supporting deserving Olympians when they really are not. In reality, much of this shameless subsidy would help professional athletes who need it the least, and do almost nothing for the true amateurs who are desperate for financial support.” (Tax Policy Center)

FAQ on Oregon Measure 97: The Oregonian breaks it down. Would Measure 97 be the largest tax increase in Oregon history? By dollar amount, yes. By other measures, unknown. Would businesses pass the tax on to consumers? Probably. Would the tax cause layoffs? No, but fewer jobs would be added. (The Oregonian)

Florida Court Rejects Challenge to Tax Credit Scholarships: A three-judge panel ruled that the state teachers’ union did not have legal standing to challenge a program providing private-school scholarships to 90,000 low-income students. (Redefined)

David Brunori on Tax Preparer Regulation: Brunori says it’s a solution in search of a problem. (Tax Analysts)

Categories: Tax news

One Way OECD Countries Address Corporate Tax Avoidance

Tax Foundation - Tue, 2016-08-16 09:45

Corporate tax avoidance has become a serious area of focus for the OECD. In 2013, the organization started the Base Erosion and Profit Shifting (BEPS) initiative, advising countries to adopt policies to prevent shifting of pre-tax corporate income to low-tax jurisdictions.  Most countries have had regulations to prevent earnings stripping for decades, but it has only become a pressing policy issue in the recent years.

There are many ways corporations are able to legally shift income to decrease their overall tax burden. One such method that the OECD believes is a significant source of avoidance is the ability to deduct interest from pre-tax income in a high-tax country and pay the interest to a subsidiary in a low-tax country. In order to prevent interest stripping, countries have adopted different interest deduction limitations – rules that deal with the way a firm is financed, putting restrictions on interest payments. There are three approaches to interest deductibility rules that the OECD countries have implemented:

1.Arm’s Length Principle

All countries in the OECD apply this principle to any related-party transactions. A transaction performed at an arm’s length is a transaction between two affiliated companies where the seller receives a market price for the service it provides, as if the buyer is not related to the seller. Firms have an incentive to overstate their deductible expenses in high-tax countries to transfer them over to low-tax countries. Interest rates are, in a way, prices as well. Therefore, some countries extend the arm’s length principle to interest and scrutinize debt payments between affiliated companies to make sure the interest charged is within the range of what a third party, like a bank, would charge.

2.Debt-Equity Ratio

The arm’s length principle requires a lot of auditing and scrutiny by a third party. A simpler approach is to use a debt-to-equity ratio threshold to limit interest deductibility instead. For example, a country may limit a company’s foreign debt-to-equity ratio at 4:1, and anything past that ratio will be taxed. Therefore, a company that takes on too much debt would not be able to deduct as much interest as it otherwise would have.

The problem with this regulation is clear: these ratios are quite arbitrary and may distort economic activity, as some industries tend to take on more debt than others due to the nature of their work. It comes with an advantage, however – companies know exactly what is expected of them to make sure their interest payments are deductible. Administrative costs of scrutiny are much lower as well.

3.Earnings Stripping Approach

In the last eight years, some European countries have abolished the debt-equity rules and have transitioned over to a new system – the earnings stripping approach. This policy targets interest expensing overall, limiting it as a certain percentage of pre-tax operating income (EBITDA). Suppose the expense is capped at 30% of EBITDA. A company with the pre-tax income of $1,000 would only be able to deduct $300 for interest from that income, as anything above $300 would be subject to tax.

It is clear why the rule is called the way it is, as it is putting a cap on the amount of money that can be deducted from pre-tax income, thus targeting the correct transaction. However, this regulation tends to take into account all debt payments, including bank loans or corporate bonds. As a result, this rule may be the most economically distortive of the three.

 

 

Each method has its own advantages and disadvantages. As we can see above, the OECD as a whole has not settled on a single rule, as the 35 countries in the organization are almost perfectly split among the three. Some countries combine two of the three – mostly as a transition period towards the earnings stripping approach, giving businesses flexibility and a smooth transition.  The earnings stripping approach is a new concept and may be implemented by more countries in the future, but even this regulation is by no means perfect.

Categories: Tax news

Addressing Poor Arguments Against the Interest Deduction

Tax Foundation - Tue, 2016-08-16 09:15

The tax reform proposal recently released by the House Republicans would be strongly pro-growth and greatly reduce income tax biases against saving and investment. The only major provision that would be inconsistent with a purely neutral tax is the elimination of the deductibility of business interest as a partial “pay-for.” (Please see the Tax Foundation analysis of the proposal at: http://taxfoundation.org/article/details-and-analysis-2016-house-republican-tax-reform-plan.)

There are two consistent ways to treat interest in an economically optimal tax system, one that does not discriminate against saving and investment. Either the interest should be deducted by the borrower and taxed to the lender; or the interest should not deductible by the borrower and not taxable income for the lender. In either case, a portion of the returns on an investment that is financed with borrowed money is subject to one layer of tax, paid by either the borrower or the lender but not both. Taxing the interest portion of the investment return on the borrower’s tax form by disallowing the deduction, and taxing it again when the lender receives it, is double taxation. This is akin to the double tax imposed on dividends or retained earnings of Schedule C-corporations (where, in addition to the corporate tax, the shareholders are taxed when the dividends are paid, or taxed later as retained earnings raise share prices and the shareholders take the resulting capital gains). This double taxation of C-corporations is one of the biases in the income tax against saving and investment.

Removing the deductibility of interest is sometimes advocated on two grounds. One is that is equalizes the tax treatment of debt-financed and equity-financed investment, eliminating a perceived distortion favoring “too much debt.”  The other is that, if a tax plan allows full and immediate deduction of the cost of plant and equipment, and also allows the interest deduction, it seems to create a negative tax rate for the borrowing firm. Both rationales are in error.

Treating all sources of financing alike?

Businesses can be split into two groups for tax purposes: those whose returns on equity are taxed twice, and those whose returns on equity are taxed once. Earnings of schedule C-corporations are taxed twice, once at the corporate level, and again when the shareholders receive dividends or take capital gains. This double tax applies to equity-financed investment. By contrast, there is only one layer of tax on equity returns of other types of businesses, including Schedule S-corporations, partnerships, and proprietorships, which are collectively referred to as “pass-through” businesses. Their income is taxed once, when it reaches the owners; there is no second layer of tax at the business level. For both sectors, there is only one layer of tax on the portion of returns on debt financed investment that is passed through to lenders as taxable interest.

Removing the deduction for interest would eliminate the distinction between debt and equity finance for C-corporations. However, it would introduce a new distortion between debt financing and financing with a business’s own income for the entire pass-through sector. That sector currently generates half of all business income. Elimination of the interest deduction would be an enormous new distortion impeding capital formation. It would raise the cost of capital for the affected businesses, reduce returns to the owners, and discourage capital formation.

The fear that the current difference in taxation between debt and equity encourages “too much debt” is overblown. It applies only to the C-corporation sector, and firms’ ability to add debt is limited. As a corporation becomes more highly leveraged (adds more debt), lenders regard the firm as a riskier borrower, and raise the interest rate they charge the firm. The business refrains from adding new debt when the higher charges on the debt service exceed the cost of obtaining funds by issuing new equity. The problem is self-limiting, and of little economic consequence.

The real difficulty with the tax treatment of businesses is the added layer of corporate tax. Leveling the playing field in a pro-growth manner can be done by eliminating the tax at the corporate level or the shareholder level, resulting in one tax on corporate returns, not two. It should not be done by subjecting debt-financed investment to two layers of tax. Equalize down, not up. In that vein, the majority staff of the Senate Finance Committee is developing a proposal to allow corporations a deduction for dividends.

Negative tax rate argument.

Some critics of full and immediate expensing of the cost of capital equipment and buildings argue that it creates a subsidy in the case of an investment financed with borrowed money. They assert that it is necessary to deny businesses a deduction for interest expense if the business is permitted to immediately expense their capital outlays. In a blog post, Howard Gleckman of the Tax Policy Center made this argument, stating: “When a firm can expense its capital costs, the tax rate on that investment is zero. If the business can also deduct interest, it is paying a negative tax on that equipment – effectively receiving an investment subsidy from the government.”

The argument goes: “All profits are eventually competed away, so businesses only earn returns on their assets that are barely equal in value to the cost of the assets. Therefore, if a firm gets to deduct the full cost of the assets on its tax return, it will have zero reportable taxable income over the life of the investments, and pay no tax. That is OK if it buys the asset with its own (after-tax) money. But if it borrows money to buy the asset, and gets to deduct the interest, it will have a negative tax on the projects due to the interest deduction. So if we let the business deduct the entire cost of buying the asset, we should deny the business a deduction for the interest it pays on the borrowed money.”

There are glaring errors with this analysis.

The initial premise is wrong. Not all profits are competed away. Assuming that all profit is competed away is an unrealistic over-simplification popular among academics to facilitate their analysis.  (An unfortunate habit in the profession, leading to many jokes. For example: An economist and a sailor are stranded on a desert island with a case of canned goods. “How can we get at the food?” asks the sailor. “Simple,” says the economist. “Assume a can opener.”)

In the real world, assets normally earn more than they cost in order to cover risk and to reward innovation. Expensing the cost of an asset does not wipe out taxable income, nor send taxes or tax rates to zero.[1] There are several reasons why.

Producers with a particular edge will always earn out-sized profits (called “quasi-rents). The best agricultural land will always out-earn inferior plots. The best business locations will always generate higher rents that inferior locales.

In addition, innovation always keeps a large number of businesses ahead of the competition. A new and better product will yield unusually high returns until the competition can catch up. This is true in general, but is particularly obvious in the case of a patentable innovation. Patents issued to encourage innovation (the rationale explicitly set out for them in the Constitution) ensure that a significant net return on assets will always exist somewhere in the system. Even without patents, as long as innovation continues, some businesses will out-earn others.

Also, no rational business would borrow to buy an asset if there were no return left over after paying the bank or the bondholder. Profits can get pretty low in some industries, but the need to cover the basic time value of money, plus some reward for the work of managing the enterprise, plus a significant cushion for risk requires there to be some prospect of net income as the norm. The business takes the risk of not recovering the cost of the asset. A recession, a better product newly invented by a competitor, or a change in the buying habits of the public can wipe out any return to the investor. The investor must expect to be earning a net profit on the asset, even after paying the bank. On no account would a firm borrow to buy an asset expected to yield nothing more than the purchase price, because it would end up losing money on the interest. Only in the rarefied risk-free, effort-free world of the ivory tower could such an outcome be taken seriously.

The claim that the deduction of the interest payment by the borrowing business (in addition to the cost of the asset) creates too much of a deduction and creates a negative tax is wrong. It ignores the tax paid by the lender. It looks at only one side of the coin, as it were.

Where there is a borrower, there is also a lender. The lender is in league with the borrower to finance the purchase of the asset. The lender receives some of the return on the asset in the form of interest and pays tax on that portion. The borrower pays tax on the rest. None of the return on the asset is just dropped into oblivion. It is true that borrower deducts the interest payment, but the interest then becomes taxable income to the lender. Unless we stop taxing interest received by banks and bondholders, the deduction by the borrower does not reduce the tax base nor short-change the Treasury.

But what if the lender does not owe tax? Some interest is collected in tax deferred pensions and other types of retirement plans, and is not taxed immediately, but the government collects the tax at a later date, on an even larger amount of accumulated earnings as the reinvested savings build up and are paid out. Some small fraction of interest goes to tax exempt charities and colleges, but the decision not to tax those entities was made by the government, presumably for some good social policy reason, and it is those entities that are being subsidized, not the borrowers. Also, these donation-dependent entities have limited flexibility to alter their saving; they can only save what they are given, and the charities are required to distribute most of it each year. They cannot suddenly increase their investments, and therefore are not the marginal lenders who can step up with additional money to fund the growth of the capital stock.

Bottom line: growth is funded by taxable lenders or shareholders, and interest deducted by a borrowing business is taxable to those interest recipients. The interest rates in the credit markets are set by the marginal lenders, who are taxable, and who demand sufficient interest to cover the tax on the income. That some non-marginal lenders are tax exempt is no excuse for not allowing a business to deduct its tax-inclusive interest costs when it has to borrow at interest rates that are set in the taxable portion of the credit market.

For all these reasons, the argument that expensing produces negative tax rates on investment and constitutes a subsidy in the presence of interest deductions is flat wrong. There is no good reason to eliminate interest deductions to permit expensing. Expensing is a key element of any tax system which seeks to put all economic activity on a level playing field. Not expensing creates a tax distortion against saving and investment in favor of consumption. Not expensing understates costs and overstates profits from employing physical capital. Not expensing reduces labor productivity and reduces wages and employment. These are the tax distortions that matter. Adopting expensing and retaining the current tax treatment of interest would correct them.


[1] Assets generally earn at least a bare bones return, greater than zero, and often much more. Anything over the “bare bones” return is called “economic profit,” and it is that which economists often claim is competed away, eventually. But zero “economic profit” still leaves the bare bones return to be taxed. Expensing would offset much of the tax on a bare bones return on depreciable physical capital, but it would not protect returns to risk, land, intellectual property, or the many other sources of returns to a business.

 

Categories: Tax news

Lunch Links: Olympics Tax Carveout Moves Forward; Cato Ranks the 50 States; Land Tax Idea in UK

Tax Foundation - Tue, 2016-08-16 08:30

Today is August 16, the date in 1954 when a complete overhaul of the Internal Revenue Code was adopted. A number of loopholes were tackled and ambiguous sections made clearer. Pushed by congressional leaders, the revision occurred after two years of hearings, testimony, and public comments. President Eisenhower made it a key element of his 1954 State of the Union address, and most of the reorganization remains with us today despite an overhaul in 1986.

Here are some interesting links I came across:

Olympic Tax Break Moves Forward in Congress: Sen. Chuck Schumer (D-NY) says it’s unfair for people who work hard and achieve victory to then be taxed on what they’ve earned—if they’re Olympic athletes. The U.S. Olympic Committee provides prizes for U.S. medal winners ($25,000 for gold; $15,000 for silver; $10,000 for bronze) and right now it’s taxed like any other income. The Senate has approved a bill to create a new tax exemption for this income, and the House is expected to act on it in September. (Senator Schumer / Wall Street Journal) Cato Institute Ranks the 50 States: Cato says New Hampshire and Alaska are the best for freedom lovers; New York and California, not so much. (Cato Institute / Tax Foundation) Education Spending by State: Governing tallies it up. (Governing) Lowest Unemployment in America: CNBC reports that the lowest unemployment is in Provo, Utah and Omaha, Nebraska. Nebraska ranks well on a number of indices but has a medium-high tax burden. (CNBC) UK Land Tax Idea: A 25-year-old duke inheriting 500 acres in central London has sparked a call for a land tax. (Guardian) Another Pennsylvania Vapor Shop to Close Due to Tax: Fifth Avenue Vapor in New Kensington blames the new 40 percent tax on e-cigarettes that goes into effect on October 1. (UpGruv)
Categories: Tax news

Cato Institute Ranks the 50 States

Tax Foundation - Tue, 2016-08-16 06:15

The Cato Institute this week released Freedom in the 50 States, a report that ranks the states on three areas:

Fiscal policy: taxes, government employment, spending, debt, and fiscal decentralization Regulatory policy: liability system, property rights, health insurance, and labor market Personal freedom: a variety of categories including incarceration rates, marriage laws, education, guns, and alcohol

Overall, Cato puts New Hampshire, Alaska, Oklahoma, Indiana, and South Dakota as the most free; at the other end of the list are New York, California, Hawaii, New Jersey, and Maryland.

The fiscal policy metric is more than just taxes, of course, but taxes are evidently a strong factor for that area. The top three states for fiscal policy are New Hampshire, Tennessee, and South Dakota, all of which rank highly in our State Business Tax Climate Index. The bottom three states are New York, Hawaii, and Illinois.

  Overall Fiscal
Policy Regulatory
Policy Personal
Freedom New Hampshire 1 1 29 9 Alaska 2 11 18 7 Oklahoma 3 5 10 30 Indiana 4 26 2 6 South Dakota 5 3 7 46 Tennessee 6 2 13 42 Idaho 7 8 1 45 Florida 8 4 19 36 Iowa 9 30 5 12 Arizona 10 16 20 14 Colorado 11 22 25 2 Nevada 12 25 22 3 North Dakota 13 15 6 35 Wyoming 14 21 3 32 South Carolina 15 23 12 19 Kansas 16 33 4 24 Montana 17 7 30 21 Missouri 18 9 24 28 North Carolina 19 17 26 13 Utah 20 20 9 33 Virginia 21 12 23 34 Georgia 22 14 14 43 Alabama 23 6 16 48 Michigan 24 18 15 38 Nebraska 25 32 8 40 Pennsylvania 26 13 37 23 Wisconsin 27 37 17 25 Texas 28 10 27 49 Arkansas 29 27 21 41 New Mexico 30 42 38 1 Delaware 31 29 33 31 Washington 32 35 43 5 Massachusetts 33 36 39 11 Louisiana 34 19 35 39 Ohio 35 24 31 44 Mississippi 36 41 11 47 Oregon 37 39 36 18 Minnesota 38 45 34 8 West Virginia 39 31 42 22 Vermont 40 47 32 10 Kentucky 41 28 28 50 Maine 42 43 44 4 Rhode Island 43 38 45 17 Illinois 44 48 40 20 Connecticut 45 44 46 15 Maryland 46 34 49 26 New Jersey 47 40 47 27 Hawaii 48 49 41 37 California 49 46 48 16 New York 50 50 50 29

The report is by William Ruger and Jason Sorens, and is an updated version of a similar study they used to do for the Mercatus Center. 

Categories: Tax news

The Corporate Income Tax is Most Harmful for Growth and Wages

Tax Foundation - Mon, 2016-08-15 09:30

One of the biggest debates in economics has been the question of who bears the real economic burden of corporate taxes: shareholders through lower returns, consumers through higher prices, or workers through lower wages. In an essay (here) in today’s Wall Street Journal, economist Kevin A. Hassett and Aparna Mathur review the growing empirical evidence showing that workers bear the true economic burden of the corporate income tax through reduced wages.

Since the U.S. not only levies the highest corporate income tax rate in the industrialized world at 35 percent, but has also suffered a decade of stagnant wages, the lesson for American lawmakers is quite simple, say Hassett and Mathur. “These studies and others convincingly demonstrate that higher wages are relatively easy to stimulate for a nation. One need only cut corporate tax rates.”  

The evidence shows that the corporate income tax is not only harmful for workers’ wages, it is harmful for overall economic growth. In a landmark 2008 study Tax and Economic Growth, economists at the Organization for Economic Cooperation and Development (OECD) determined that the corporate income tax is the most harmful tax for economic growth. Personal income taxes were found to be second-most harmful for growth, followed by consumption taxes, with property taxes found to be the least harmful for growth.

This formulation of “tax harm” makes sense if we consider that the burden of any tax tends to fall on the least mobile factor in the economy. When it comes to corporate taxes, capital is extremely mobile but people aren’t. For example, it is relatively easy for a company to move its operations from Dublin, Ohio, to Dublin, Ireland, to take advantage of that country’s 12.5 percent corporate tax rate. But it is much more difficult for a worker to move his family thousands of miles to follow that job. Thus, the burden of that tax-motivated movement of capital falls on the shoulders of those workers whose jobs may be impacted.

The study also found that statutory corporate tax rates have a negative effect on firms that are in the “process of catching up with the productivity performance of the best practice firms.” This suggests that “lowering statutory corporate tax rates can lead to particularly large productivity gains in firms that are dynamic and profitable, i.e. those that can make the largest contribution to GDP growth.”[1]

The final recommendation of the OECD study is that if countries want to enhance their economic growth they would do well to move from income taxes – especially corporate income taxes – toward less distortive taxes such as consumption-based taxes. The key to creating a growth-oriented corporate income tax system is to impose a reasonably low tax rate with few exemptions.

The GOP “Blueprint” recently released by House Ways and Means Chairman Kevin Brady (R-TX) and House Speaker Paul Ryan  (R-WI) would move the U.S. tax code strongly in the direction of what OECD economists recommend. The Blueprint overhauls the corporate tax system, changing it into what is known as a “destination-based cash-flow tax.”

As Kyle Pomerleau and Stephen Entin explained on these pages last June (here), there are five basic components of this shift to a new corporate tax code:

The corporate tax rate would be lowered to 20 percent. Businesses would no longer need to depreciate capital investments. Instead, they will be able to fully write off, or expense them, in the way in which they purchased them. The system would be changed from our current worldwide system to a territorial form of taxation. Businesses would no longer need to pay tax to the IRS on profits they earn overseas. Businesses would no longer be able to deduct interest as a business expense. The corporate tax would be “border adjusted.”

According to the Tax Foundation’s Taxes and Growth Model, the GOP plan would significantly cut the cost of capital, which would lead to 9.1 percent higher GDP over the long term, 7.7 percent higher wages, and an additional 1.7 million full-time equivalent jobs.

Hassett and Mathur conclude their essay with the dire prediction that “wage growth will continue to be disappointing as long as the U.S. has the world’s highest corporate tax rate. Denying the need for lower corporate tax rates may be effective populism, but it is causing real harm to American workers.”


[1] “Tax and Economic Growth,” Economics Department Working Paper No. 620, July 11, 2008.  Organization for Economic Cooperation and Development. p. 9.  https://www.oecd.org/tax/tax-policy/41000592.pdf

 

 

Categories: Tax news

Croatia candidates battle over tax cuts ahead of September polls

Yahoo Tax - Fri, 2016-08-12 15:44

By Igor Ilic ZAGREB (Reuters) - The top two contenders in Croatia's general election battled on Friday over who would be best placed to cut taxes and boost growth, in a televised debate that put the economy at the forefront of a ballot that might not end a political deadlock. A reduced tax burden will be compensated by stronger growth while being careful not to threaten financial stability," said Zoran Milanovic, leader of Croatia's biggest opposition party the Social Democrats (SDP). The conservative HDZ party's income tax cut promises were going too far and would take much-needed money away from municipal authorities, he said, adding: "Those who plan such a high non-taxable level on salaries simply don't know how the budget is structured and planned." HDZ new leader Andrej Plenkovic retorted that his party planned a much-needed overhaul of the tax system.


Categories: Tax news
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