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Puerto Rico Introduces a VAT; Is the U.S. Next?

Tax Foundation - Fri, 2015-02-20 17:45

Puerto Rico introduced a bill in the Commonwealth’s House of Representatives yesterday to implement a Value Added Tax (VAT) while eliminating or reducing several other taxes. Given the economic and political integration between Puerto Rico and the United States, the bill could provides a test case for the viability of a VAT in the United States.

After almost a decade of negative average growth, representatives hope to stimulate the Puerto Rican economy through tax reform. They call for the removal of the Patente Nacional, a gross receipts tax, which is particularly damaging to economic activity. The exemption for personal income tax is slated to increase to US$40,000 for individuals, reducing the effective personal tax rate to around 21%. Corporation receive a lower tax of 25% as well.  

To make up for the lost tax revenue, a 16% VAT is introduced in two stages. In the first stage, starting April 1st, the current sales and use tax system (SUT) is increased from 7% to 16%, and a mechanism for reporting along the value chain is implemented. In the second stage, starting December 31st, the SUT is eliminated, and the 16% VAT is fully implemented with a long list of exempt goods and services.  

In addition to the VAT, capital gains and dividends tax rates are increased to 30%, eliminating their special treatment.

Several other exemptions are eliminated as well. The tax exemption on the sale of a primary residence is eliminated. The mortgage interest deduction is spared, but essential reduced by half.

Although it seems likely that the bill will pass, the Puerto Rican government still has the task of educating the public on the new taxes. The Treasury Secretary, Juan Zaragoza, has even launched a website explaining the new provisions.

The list of changes to Puerto Rico’s tax code seems like a laundry list of desired reforms to the U.S. tax code. As such, Puerto Rico has just become a laboratory for future U.S. tax reform. U.S. Policymakers are likely to keep a close watch on the experiences of Puerto Rico as they search for ways to improve the U.S. economy.    

Categories: Tax news

What Pennsylvania Can Do on Tax Reform this Session

Tax Foundation - Fri, 2015-02-20 10:00

On Wednesday, I was invited to present to the Pennsylvania House Majority Policy Committee as they conducted a hearing in York, Pennsylvania about the business climate in the state. A video of the event will be linked here soon, and I've pasted the text from my handout below, and linked to a PDF of the handout below that.

Introduction

Since 1937, the Tax Foundation has monitored tax policy at the federal, state, and local levels. We have produced the Facts & Figures handbook since 1941, we calculate Tax Freedom Day each year, and we rank the states in our popular State Business Tax Climate Index.

Below, I will walk through our findings on Pennsylvania’s tax policy in a national context, making note of recent legislative efforts and recommending policy reforms for consideration.

How Much Are We Paying?

Our State-Local Tax Burdens report is a ranking that measures how much is being paid by taxpayers in each state. Pennsylvania ranks as a high-burden state: in fiscal year 2011, taxpayers paid 10.3 percent of their income in state and local taxes, 10th highest in the nation.

How Well Are Taxes Structured?

Our State Business Tax Climate Index measures the quality of each state’s tax code, comparing states on more than one hundred variables that rank the code’s simplicity, neutrality, and competitiveness. In 2015, Pennsylvania ranked toward the bottom of the pack, at 34th best in the country.

Pennsylvania’s Tax System is a Mixed Bag

Breaking apart the component tax types that we measure in our Index, we can get a better idea of which parts of Pennsylvania’s code are well-structured, and which parts need improvement (Table 1). The state’s corporate income tax, for example, has the second highest rate in the country, at 9.99 percent. When added to the federal corporate tax, Pennsylvania corporations face a top marginal rate of 44.99 percent. When tax base elements are included, the corporate tax structure ranks 46th nationally.

Table 1: State Business Tax Climate Index Component Tax Scores, 2015

 

Rank

Overall

34th

Corporate

46th

Individual

17th

Sales

24th

Unemployment Insurance

50th

Property

42nd

 

Property taxes in Pennsylvania also rank poorly. While property tax collections are a moderate $1,305 per capita (26th highest nationally), the state levies many taxes on accumulated wealth that don’t exist in other states: the inheritance tax tops out at 15 percent, and the capital stock tax was supposed to phase out by 2014, but the phase out has been extended.

By contrast, the individual income tax in Pennsylvania is one of the better-structured systems in the United States. The 3.07 percent rate is the same across the board, and has been consistent for many years. Local income tax rates can add on a substantial burden though, with the rate in Harrisburg tolling an additional 2 percent, and the rate in Philadelphia reaching 3.928 percent.

Finally, the state levies some of the highest unemployment insurance taxes in the country, and our ranking shows the total structure as being the worst nationally.

Making Pennsylvania Competitive

Pennsylvania’s corporate tax rate is one of the most striking features of the tax system, and should be the prime focus of legislators in the next session. The 9.99 percent rate puts Pennsylvania companies at a disadvantage nationally and globally.

According to the academic literature, corporate taxes are the most harmful taxes to economic growth, but they are a smaller part of the revenue toolkit than is often understood. In fiscal year 2011, for example, state corporate income taxes brought in just 4.1 percent of state-local tax collections. Cutting the corporate rate, then, is a relatively high bang-for-your-buck proposition, because it does not cost a lot of revenue. The capital stock tax also increases the cost of doing business in the state, and the delay in its phase out is a poor stopgap measure for additional revenue.

Finally, the inheritance tax has seen various exclusions for different types of family businesses in the past few years, notably for farmers. The trend in states today is away from estate and inheritance taxes: in just the last two years, Indiana and North Carolina have repealed theirs, and Maryland, Minnesota, New York, Rhode Island, and the District of Columbia have all increased their exemptions. Pennsylvania should consider full repeal of its inheritance tax, as it only made up 2.9 percent of general fund revenue in fiscal year 2012.

Categories: Tax news

A Cut in the Corporate Tax Rate Would Provide a Significant Boost to the Economy

Tax Foundation - Thu, 2015-02-19 14:00

A cut in the corporate tax rate would have large effects on GDP, but minimal effects on total federal revenue in the long run. The large boost to the size of the economy from a corporate tax cut comes from a lower cost of capital.

The corporate tax rate is, in effect, a tax on corporate investment; a high corporate tax rate discourages investment, whereas a low corporate tax rate encourages investment. Additionally, the competitive nature of the global economy corporate taxes makes for strong responses to tax changes as corporate investment moves to countries with more competitive tax systems. The increase in investment from a corporate tax rate cut would lead to higher wages, more jobs, and a larger economy.

For example, if the corporate income tax were eliminated, the size of the economy would grow by 6.1 percent in the long run. This would lead to more jobs and higher wages. The additional growth would leave total federal revenue virtually unchanged in the long-run, though the government would likely lose revenue as the economy adjusts. In the long run, the loss of corporate tax revenue due to cutting the corporate tax rate is recouped through the combination of increased economic growth and the distribution of the untaxed money to taxpaying individuals.

Conversely, an increase in the federal corporate tax rate to 40 percent or 45 percent would be bad for the economy and government revenues.

Categories: Tax news

Printed IRS income tax instructions are in short supply this year - Muncie Star Press

Google IRS Federal Income Tax - Thu, 2015-02-19 11:42

Muncie Star Press

Printed IRS income tax instructions are in short supply this year
Muncie Star Press
WASHINGTON – The Muncie Public Library used to distribute hundreds, if not thousands, of federal tax forms and instruction booklets to patrons who file their own taxes. This year, however, the IRS has significantly cut back how much printed material it ...
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Categories: Tax news

The Dual Tax Burden of S Corporations

Tax Foundation - Thu, 2015-02-19 10:30

For this week's tax map, we're continuing our series on pass-through businesses. For the first map of the series, check out our two previous maps here, here, and here.

The fasted growing type of pass-through business is the S corporation. S corporations are domestic corporations treated as a pass-through business, meaning that their income is passed directly to their owners who pay taxes on that income. These businesses are only allowed to have 100 shareholders, their shareholders must be U.S. citizens, and they cannot be owned by other businesses.

As with other pass-through business owners, S-corporation owners face the similar marginal tax rates as individual wages earners. However, how much owners pay in taxes can differ based on how much they participate in the business.

An active shareholder of an S-Corporation participates in the day-to-day activity of the business while a passive shareholder does not.

All owners of S-corporations need to pay federal individual income taxes (top marginal rate of 39.6), state and local income taxes (from 0 percent to 13.3 percent), and are hit with the Pease limitation on itemized deductions, which adds an additional 1.18 percent marginal tax rate.

The difference in how each type of owner is taxed is in how the payroll tax (the tax that funds Social Security and Medicare) and ACA Net Investment Income Tax affects them.

Active shareholders generally receive two types of income from their S-corporations: wage income and a profit distribution. The wage income is subject to the payroll tax, which is 15.3 percent on the first $117,000, 2.9 percent on the next $83,000 and 3.8 percent on all income over $200,000. The profit distribution is not subject to the payroll tax. So if an owner receives $200,000 and half of it is wage income, they need to pay $15,300 in payroll taxes (15.3 percent of $100,000), the rest is exempt from the payroll tax.

Given the fact that there is a significant incentive to distribute as much profit as possible and pay as little wage as possible, the IRS sets guidelines for businesses. Businesses need to pay a reasonable salary to their active owners.

Top marginal tax rates for active shareholders then vary based on whether the last dollar is profit or wage. The following map shows the top marginal tax rate in each state for an active shareholder, assuming that their last dollar earned was a profit.

Passive shareholders do not pay any payroll tax on their income since they do not draw a wage from the business. Instead, they are liable for the ACA’s Net Investment Income Tax of 3.8 percent, which only hits income over $200,000 ($250,000 for married filing jointly).

As a result, passive shareholders can face higher top marginal tax rates than active shareholders.

For more information on pass-through businesses see our paper: “An Overview of Pass-through Businesses in the United States.”

Categories: Tax news

As CEOs seek tax cuts, senator slams corporate tax haven use

Yahoo Tax - Wed, 2015-02-18 14:52

By David Lawder WASHINGTON (Reuters) - Senator Bernie Sanders lashed out on Wednesday at widespread use of offshore tax havens by U.S. companies, and the liberal independent targeted a group that represents CEOs of big corporations and wants corporate taxes lowered. Sanders, top opposition member on the U.S. Senate Budget Committee, released a report decrying what he called "legalized tax fraud." It showed that 111 of the 201 member companies of the Business Roundtable are sheltering more than $1 trillion in profits overseas, where they are not subject to U.S. taxes. Using the Cayman Islands, Bermuda and other tax havens, these companies have saved more than $280 billion in tax liabilities, Sanders concluded in the report. The senator from Vermont delivered his broadside a day ahead of a media event the Business Roundtable scheduled at its Washington office.


Categories: Tax news

NYC and state sue UPS for illegally shipping cigarettes

Yahoo Tax - Wed, 2015-02-18 11:21

By Karen Freifeld NEW YORK (Reuters) - New York City and New York state sued United Parcel Service Inc. on Wednesday, seeking over $180 million in damages and penalties against the shipping company for allegedly delivering nearly 700,000 cartons of untaxed cigarettes across the state. The lawsuit, filed in U.S. District Court in Manhattan, accuses UPS of cheating the state and city of $29.7 million and $4.7 million, respectively, in tax revenue, according to a statement from New York Attorney General Eric Schneiderman. The deliveries mostly originated from smoke shops on Indian reservations in New York state and were shipped to unlicensed wholesalers and retailers as well as residences in New York and nationwide, according to the lawsuit. The deliveries, which violated both federal and state laws, were made despite a 2005 agreement between UPS and the state in which the company agreed to stop cigarette shipments to individual consumers and unlicensed dealers, Schneiderman said.


Categories: Tax news

Divers discover huge hoard of gold coins off Israeli coast

Yahoo Tax - Wed, 2015-02-18 10:52

By Ori Lewis CAESAREA, Israel (Reuters) - Scuba divers have discovered a rare haul of gleaming 1,000-year-old gold coins inscribed in Arabic on the sea bed off Israel, a find archaeologists say may shed light on Muslim rule in that age. The treasure, which was probably exposed during recent winter storms, is thought to have sunk in a shipwreck near the ancient Roman port of Caesarea in the eastern Mediterranean. "(This is) a great treasure from a (vessel) that was probably taking the hoard, possibly tax revenue, to Cairo but sank in Caesarea harbor," Jacob Sharvit of the Israel Antiquities Authority told Reuters during a visit to the site. Such coins have been found before in the region, but this batch was the largest hoard ever found in Israel, Sharvit said.


Categories: Tax news

IRS ruling permits inclusion of “friendly PCs” in consolidated federal income ... - Lexology (registration)

Google IRS Federal Income Tax - Wed, 2015-02-18 10:19

IRS ruling permits inclusion of “friendly PCs” in consolidated federal income ...
Lexology (registration)
On December 19, 2014, the Internal Revenue Service (“IRS”) issued a private letter ruling (the “Ruling”) allowing corporations that manage physician practices through a so-called “friendly physician” arrangement to treat the physician practices as ...

Categories: Tax news

Do You Need To File A Tax Return in 2015? - Huffington Post

Google IRS Federal Income Tax - Tue, 2015-02-17 07:18

Huffington Post

Do You Need To File A Tax Return in 2015?
Huffington Post
To get a detailed breakdown on federal filing requirements, along with information on taxable and nontaxable income, call the IRS at 800-829-3676 and ask them to mail you a free copy of the "Tax Guide for Seniors" (publication 554). Special Requirements
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Categories: Tax news

IRS Ruling Permits Inclusion of “Friendly PCs” in Consolidated Federal Income ... - JD Supra (press release)

Google IRS Federal Income Tax - Sun, 2015-02-15 11:11

IRS Ruling Permits Inclusion of “Friendly PCs” in Consolidated Federal Income ...
JD Supra (press release)
Under the arrangement, a parent corporation (“Parent”) owned several subsidiaries that together constituted a consolidated federal tax group (the “Parent Group”). A subsidiary of Parent had entered into various agreements with two professional ...

Categories: Tax news

Savvy Senior: Do you need to file a tax return in 2015? - CapitalGazette.com

Google IRS Federal Income Tax - Sat, 2015-02-14 21:23

Valley News

Savvy Senior: Do you need to file a tax return in 2015?
CapitalGazette.com
Dear Retiree, Whether or not you are required to file a federal income tax return this year will depend on how much you earned (gross income) — and the source of that income — as well as your filing status and your age. Your gross ... To get a ...
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Categories: Tax news

U.S. agency fixes problem hampering Obamacare applications

Yahoo Tax - Sat, 2015-02-14 19:11

A day before the open enrollment deadline for private health coverage under Obamacare, some consumers were unable to submit applications because of "intermittent issues" with income verification, the U.S. Health and Human Services Department said on Saturday. It said in a statement that it had worked with the Internal Revenue Service to fix the problem. The department said consumers who were affected should log into their account on the HealthCare.gov website and click on their 2015 application to finish it and complete their enrollment for coverage. The department said anyone who was unable to submit an application because their income could not be verified due to this or any other technical problem will receive an extension for enrollment.


Categories: Tax news

IRS Ruling Permits Inclusion of “Friendly PCs” in Consolidated Federal Income ... - The National Law Review

Google IRS Federal Income Tax - Fri, 2015-02-13 15:30

IRS Ruling Permits Inclusion of “Friendly PCs” in Consolidated Federal Income ...
The National Law Review
Under the arrangement, a parent corporation (“Parent”) owned several subsidiaries that together constituted a consolidated federal tax group (the “Parent Group”). A subsidiary of Parent had entered into various agreements with two professional ...

Categories: Tax news

Brazil’s President Raises Taxes but Fails to Deliver Promised Spending Cuts

Tax Foundation - Fri, 2015-02-13 12:45

Brazil’s president, Dilma Rousseff, has implemented new taxes to stymie the country’s growing deficit. The taxes include a R$0.22 (US$0.07) per liter excise tax on gasoline and diesel fuel, a 1.5% tax increase on personal loans (a total of 3%), a 2.5% tax increase of the Pis/Cofins (types of social contributions) on imports (a total of 11.75%), and an increase in airport taxes by an average of 14.25%. The tax increases were expected to generate around R$21 billion (US$8 billion) in revenue for the government.

The tax increases along with R$22.7 billion (US$8.4 billion) in spending cuts where projected to move the government from a primary deficit of 0.6% of GDP to a surplus of 1.2% of GDP, but the Brazilian government is unlikely to realize the surplus, which has unsettled bond markets.

Although the new taxes are generating more revenue, the promised spending cuts have failed to materialize. The president has pushed to implement the cuts, but Brazilian lawmakers responded by passing a bill to block the austerity. Moreover, the Chamber of Deputies, the lower house of the Brazilian congress, has passed a bill limiting the president’s ability to eliminate or postpone special projects through executive order.

The mixture of an increased tax burden along with continued deficit spending is a recipe from economic trouble. Sprinkle in low oil prices, which has delayed several major Petrobras projects, and inflation above the Brazilian Central Bank’s target, which has pushed up interest rates; and the Brazilian consumer has almost completely disappeared. As such, it is unlikely that the government will meet the revenue estimates, even with the additional taxes.   

The Brazilian president only has herself to blame for Brazil’s economic woes. As the incumbent president, she used tax cuts and spending programs to influence the elections this last year. It may have won her the presidency, but it caused the government to move from a primary surplus of 1.6% of GDP in 2013 to a deficit. With the presidency firmly in hand and economic concerns on the horizon, President Rousseff switched her policies to austerity.     

Only time will tell how far Brazil will slide into economic downturn. As Brazil suffer the consequences of President Rousseff’s spending spree, the voters of Brazil can contemplate if the benefits were worth the costs. For all democratic countries, Brazil’s last election is a warning. If the voters don’t punish politicians for manipulating the economy through taxes and spends, then it is the voters who will ultimately suffer the consequences.  

Categories: Tax news

IRS Free File 101 - How to File your Taxes for Free - Fox Business

Google IRS Federal Income Tax - Fri, 2015-02-13 08:39

Fox Business

IRS Free File 101 - How to File your Taxes for Free
Fox Business
Formed in 2003, IRS Free File is the product of a partnership between the Internal Revenue Service and a group of fourteen online tax software suppliers that form the Free File Alliance – including such familiar names as TurboTax, TaxSlayer, H&R Block ...
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Categories: Tax news

Powerball winnings in Puerto Rico, exempt from federal tax? Nobody knows - Fox News Latino

Google IRS Federal Income Tax - Thu, 2015-02-12 12:42

ABC News

Powerball winnings in Puerto Rico, exempt from federal tax? Nobody knows
Fox News Latino
IRS officials did not immediately respond to calls seeking comment. Puerto Rico's tax code exempts Puerto Ricans from paying federal taxes on local income. The island has the discretion to set the local tax. This peculiarity has been a magnet for U.S. ...
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Categories: Tax news

Greece suffers 1 billion euro tax revenue shortfall in January

Yahoo Tax - Thu, 2015-02-12 08:08
Greece's tax revenues slumped 23 percent below target in January as citizens held off on paying taxes before a snap election, marking a setback for the new left-wing government as it seeks a deal with European partners to avert a financial crisis. Finance ministry data showed tax revenues were 3.49 billion euros in January, about 1 billion euros below the target of 4.54 billion set under Greece's latest budget. January's dive in revenues was largely driven by Greeks holding off before the vote in the belief that a government led by the radical Syriza party would abolish some unpopular measures such as the ENFIA property tax. "There are tax obligations that have been delayed and we are sure that we will collect them in the coming months," Deputy Finance Minister Dimitris Mardas told Reuters.
Categories: Tax news

TurboTax Fraud May Impact Federal Returns Too, FBI Investigating - Forbes

Google IRS Federal Income Tax - Thu, 2015-02-12 00:16

Forbes

TurboTax Fraud May Impact Federal Returns Too, FBI Investigating
Forbes
But all indications were that this was just a state tax problem, not a federal one. Not any more. Although details are sketchy, the ... that their federal refund may be in jeopardy. Taxpayers interviewed about the fraudulent tax filings said their IRS ...
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Categories: Tax news

China Internet censorship hurts European businesses: survey

Yahoo Tax - Wed, 2015-02-11 23:52

China's Internet restrictions are hurting European businesses operating in the country, a lobby group said on Thursday, as controls over access to overseas websites are tightened under President Xi Jinping. Authorities have in recent months increased restrictions on virtual private networks (VPNs), used to circumvent China's vast censorship apparatus known as the Great Firewall which blocks websites such YouTube and Facebook. The European Union Chamber of Commerce in China said the restrictions amount to an "Internet tax", adding that 86 percent of respondents to an internal survey said they had a "negative effect" on business, a 15 percent increase compared to June. "Restricted access to key Internet tools is not merely an unfortunate inconvenience for individuals -- it is an increasingly onerous cost of doing business here that many companies are finding harder to bear," said Jorg Wuttke, president of the chamber which has around 1,800 members.


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