tax news

AP - Students entering college this fall have lived their whole lives in a digital world — where GPS has always been available, phones have always had caller ID and tax returns could always be filed online.

AFP - The United States is likely to slip into recession in the coming months as the cushioning impact of sharp interest rate cuts and tax rebates wears out, UBS bank economists said Tuesday.

The Mississippi Tax Study Commission has released its draft report of recommendations. I react to the good and not-so-good in the report in this just-released report, Fiscal Fact No. 139: The Right Prescription for Mississippi.

Previous posts on Mississippi's tax study commission:

• Mississippi Tax Study Commission Should Consider Bold Steps, August 19, 2008
• Economic Growth Requires Bold Steps: Mississippi Should Consider Tax Reform Recommendations, by Joseph Henchman, July 18, 2008
• MS Raises Hotel Tax, Exempts Legislators, by Joseph Henchman, April 15, 2008
• Tax Foundation Helps Advance Mississippi Tax Reform, by Joseph Henchman, April 4, 2008
• Mississippi Tax Study Commission Recap, by Tonya Barr, April 3, 2008
• An Opportunity to Improve Mississippi’s Tax Climate, by Joseph Henchman and Tonya Barr, April 3, 2008
• Peavey Peeved in Mississippi?, by Tonya Barr, March 21, 2008

In short, the answer is yes, according to Peter Ferrara writing in today's Wall Street Journal. Is Ferrara right? For the most part, yes.

Barack Obama is mainly using his tax plan to redistribute income via higher marginal rates on those at the top to finance lump-sum transfers for those at the bottom. It's just that these lump-sum transfers are administered by the IRS via a 1040 as opposed to some other government agency that requires you to fill out a form. Using the IRS as a means of redistribution as opposed to traditional spending programs can be done for various reasons, most notably political given that it's easier to insert a provision into a tax bill than expand a government spending program. Such was the argument put forth by Stanley Surrey when he had Treasury first estimate a tax expenditures budget, as it has done for nearly 40 years now.

Many conservatives in the blogosphere will likely jump on this op-ed, but they themselves (and the candidates they support) have backed many of these types of provisions over the years, including the child tax credit (and its doubling). Whether it is refundable or not, it doesn't really matter from an economist's perspective. Why is that? Suppose that instead of a progressive tax system, we had a flat tax of 30 percent on all income. But then the government set up a Department of Redistribution that wrote checks to everybody, based upon income levels and various other factors (family size, education, housing status, etc.), and thereby achieved the same distributional end as the progressive tax system. Is there any difference in principle (ignoring administrative/political issues) between these two government methods of redistribution? No.

Just as Obama's tax credits are like writing welfare checks to low-and-middle income families at the expense of high income families, many of the various deductions and credits already in the individual income tax are no different than having the government write checks to families, many of which are actually high-income. This is why fiscal incidence analysis, although difficult, is necessary to perform true distributional analyses.

If McCain supporters want to point out Obama's support for what most policy experts on the left and right would consider undeserved welfare, they should attack his support for the welfare given to rich farmers every year, something McCain has consistently opposed.

When people hear the phrase "corporate taxes," they tend to tune out if they don't own a business, assuming that corporate taxes don't affect them. However, all Americans should be concerned about the impact of corporate taxes, not only on business owners but also on prices, shareholders, international competitiveness, and workers' wages.

Today the Tax Foundation launched its CompeteUSA campaign to raise the public's awareness of America's high business tax rates and how those taxes have a "real-wallet" impact on our competitiveness, wages, and living standards.

As part of this look at the "real-wallet" impact of business taxes, the CompeteUSA campaign will also talk about how the American worker shoulders a disproportionate amount of the corporate tax, and the fact that the poorest 20 percent of households pay more in corporate income taxes each year than they pay in individual income taxes. In fact, corporate taxes were 6.3 percent of low-income households' tax bills last year compared to just 4 percent for individual income taxes.

The U.S.'s high corporate tax rates were also the focus of an editorial in the Wall Street Journal last Friday entitled "America the Uncompetitive," which pointed out that "every month that goes by without tax reform, America is a relatively less attractive place to do business."

Tax Foundation President Scott Hodge noted at the CompeteUSA kickoff:

20 years ago, the U.S. led the world in cutting the corporate tax rate to make our economy more conducive to job creation.  Since then, almost every other industrialized country has cut its corporate tax while the United States has stood still, and as a result, the U.S. corporate tax rate is now 50% higher than the OECD average.

The CompeteUSA webpage contains data, studies, blog posts, commentaries, podcasts, offers for free publications, a video, and even a corporate tax IQ quiz.

Click here to view the page.  Click here for the news release.

The Mississippi Tax Study Commission will soon vote on recommendations for improving the state's tax system. The best tax system is one with low rates on a broad base, treating all taxpayers equally while minimizing economic distortions. When I testified before the Commission, I expressed the hope that it will work toward such a tax system, which would make Mississippi a more powerful economic performer.

Repealing corporate franchise and inventory taxes would attract more investment, while reducing a hefty cost borne by even unprofitable businesses. Businesses could then make decisions on economic factors, not tax liability concerns. Repeal would eliminate these distortions without the complexity of more tax credits.

Eliminating Mississippi's sales taxes on machinery would improve the state's business tax climate. Only 14 other states have this tax, and businesses are known to avoid states with it. Such taxes on business inputs are hidden taxes, since they are passed on to consumers in the price of goods.

The Commission should also be careful about urging increased cigarette taxes. The poor bear a disproportionate share of such "sin" taxes, and they inequitably shift the burden of paying for government to a small group of people. Hefty taxes designed to reduce an activity should also not be relied on for revenue.

I commend Governor Barbour and the Commission for taking a comprehensive look at Mississippi's tax system. I hope that the Commission considers proposals that can provide Magnolia State residents with a simple, neutral, transparent, and stable tax system.

Previous Reports and Blog Posts on Mississippi:

• Economic Growth Requires Bold Steps: Mississippi Should Consider Tax Reform Recommendations, by Joseph Henchman, July 18, 2008
• MS Raises Hotel Tax, Exempts Legislators, by Joseph Henchman, April 15, 2008
• Tax Foundation Helps Advance Mississippi Tax Reform, by Joseph Henchman, April 4, 2008
• Mississippi Tax Study Commission Recap, by Tonya Barr, April 3, 2008
• An Opportunity to Improve Mississippi’s Tax Climate, by Joseph Henchman and Tonya Barr, April 3, 2008
• Peavey Peeved in Mississippi?, by Tonya Barr, March 21, 2008

Reuters - Retailer Lowe's Cos reported a higher-than-expected quarterly profit on Monday as U.S. consumers spent tax rebate checks on spring projects, but it forecast third-quarter results below Wall Street estimates.

In a new Tax Foundation Fiscal Fact, Robert Carroll, the Foundation's Vice President for Economic Policy, examines tax relief proposals from Sen. John McCain and Sen. Barack Obama. With the economy as one of the top issues among the American electorate this presidential election cycle, both candidates have been using the issues of health care, gas prices, and housing devaluation, among others, to preface their economic proposals. But Carroll explains that the candidates have significantly different tax policies that address these issues:

Both candidates purport to address some key areas of economic insecurity to the average American: health care, energy costs, college costs, housing devaluation, and low and/or stagnant wages, to name a few. But the candidates differ dramatically in their use of tax policy to address these issues. Senator Obama has included a set of carefully targeted tax proposals that narrowly aim benefits to specific types of taxpayers, while Senator McCain provides broad tax relief with benefits that are indirect. In both cases, tax relief is provided to the vast majority of the electorate.

Read the Tax Foundation Fiscal Fact.  Read the news release. More on the presidential candidates' tax plan.