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The Ted Cruz economy: Reality-checking his talking points - CNNMoney

Google IRS Federal Income Tax - Mon, 2015-03-23 12:42

Dallas Morning News

The Ted Cruz economy: Reality-checking his talking points
CNNMoney
Under the current tax system, many low-income Americans don't pay much, if anything, in federal income taxes. Moving to a flat tax could mean their income taxes would rise. As for the IRS, it's unclear how Cruz would collect taxes without the agency.
Cruz targets conservatives as he starts White House runConcord Monitor

all 3,458 news articles »
Categories: Tax news

IRS has $28.7 million unclaimed refunds for Washington taxpayers - KING5.com

Google IRS Federal Income Tax - Mon, 2015-03-23 12:36

KING5.com

IRS has $28.7 million unclaimed refunds for Washington taxpayers
KING5.com
The IRS says they have $28.7 million waiting to be refunded by Washington state taxpayers who didn't file for federal income tax for 2011. To collect the money, these taxpayers need to file a 2011 tax return with the IRS no later than Wednesday, April ...
Learn a Few IRS Workarounds: Some Income Comes Tax-FreeAccountingweb.com
Julie Jason: A 2011 tax refund could be yours, but you need to fileAlbany Times Union
Tax Secrets: Tax-free wealth; no IRS problemsNaples Daily News
TheNewsTribune.com -Pueblo Chieftain
all 403 news articles »
Categories: Tax news

Julie Jason: A 2011 tax refund could be yours, but you need to file - Albany Times Union

Google IRS Federal Income Tax - Sun, 2015-03-22 07:57

Chicago Daily Herald

Julie Jason: A 2011 tax refund could be yours, but you need to file
Albany Times Union
"Time is running out for people who didn't file a 2011 federal income-tax return to claim their refund," said IRS Commissioner John Koskinen. "People could be missing out on a substantial refund, especially students or part-time workers. Some people ...
Tax Refunds: Why Smaller is BetterDeposit Accounts (blog)
Cash-strapped Americans increasingly turning to tax refund advances, costly ...Fox News Latino
More cash-strapped Americans turn to tax refund advancesChicago Daily Herald

all 182 news articles »
Categories: Tax news

Nationwide IRS phone scam dialing eastern Iowans - kwwl.com

Google IRS Federal Income Tax - Sat, 2015-03-21 17:39

kwwl.com

Nationwide IRS phone scam dialing eastern Iowans
kwwl.com
In fact [my wife and I] did not have and state income tax or federal income tax debt. The IRS says it will never initiate contact with a taxpayer by phone, email or text message. They say they will never call about taxes owed without first mailing a ...
Midland Police warn residents of income tax time scamsMidland Daily News
IRS calling? Feds say it's a scamWKMG Orlando

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Categories: Tax news

Does the IRS Owe You Money, NORTH HOLLYWOOD-TOLUCA LAKE? More ... - Patch.com

Google IRS Federal Income Tax - Sat, 2015-03-21 11:13

Does the IRS Owe You Money, NORTH HOLLYWOOD-TOLUCA LAKE? More ...
Patch.com
The IRS this week is urging taxpayers who didn't file federal income tax returns in 2011 to do so by April 15– or up to $1 billion that's estimated to be owed to a million taxpayers will not be paid out. “Time is running out for people who didn't file ...

and more »
Categories: Tax news

More than 19000 Oklahomans who didn't file 2011 federal income tax returns ... - Tulsa World

Google IRS Federal Income Tax - Fri, 2015-03-20 12:48

More than 19000 Oklahomans who didn't file 2011 federal income tax returns ...
Tulsa World
In all, federal income tax refunds totaling more than $1 billion await an estimated 1 million taxpayers who did not file a 2011 federal income tax return, the IRS reported. To collect the money, they have until April 15, 2015, to file a 2011 tax return ...

and more »
Categories: Tax news

More than 19000 Oklahomans who didn't file 2011 federal income tax returns ... - Tulsa World

Google IRS Federal Income Tax - Fri, 2015-03-20 12:48

More than 19000 Oklahomans who didn't file 2011 federal income tax returns ...
Tulsa World
In all, federal income tax refunds totaling more than $1 billion await an estimated 1 million taxpayers who did not file a 2011 federal income tax return, the IRS reported. To collect the money, they have until April 15, 2015, to file a 2011 tax return ...

and more »
Categories: Tax news

IRS gives some Obamacare customers a tax break - CNBC

Google IRS Federal Income Tax - Fri, 2015-03-20 11:16

CNBC

IRS gives some Obamacare customers a tax break
CNBC
... their income tax returns partly based on incorrect information related to their health plan subsidies will not have to file amended returns and won't be pursued for additional tax payments based on the corrected forms by the Internal Revenue ...
HealthCare.gov still fixing tax-form blunderWashington Times
IRS offers some Obamacare customers a tax splitChronicle Bulletin

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Categories: Tax news

Letter: Tax cuts… who actually benefits? - Asheville Citizen-Times

Google IRS Federal Income Tax - Fri, 2015-03-20 10:45

Letter: Tax cuts… who actually benefits?
Asheville Citizen-Times
Even if employers deducted federal income taxes from their paychecks, these families are probably eligible to get that money refunded. In fact, they may be eligible for an additional “earned income tax credit” of up to $6,143 for 2014. The IRS urges ...

Categories: Tax news

10 Remaining States Provide Tax Filing Guidance to Same-Sex Married Taxpayers

Tax Foundation - Fri, 2015-03-20 07:45

After the IRS decision to allow gay and lesbian married couples to file joint federal tax returns, we noted that a number of states would have to provide guidance because they require two contradictory things: (1) if you file a joint federal return, you must file a joint state return, and (2) same-sex married couples cannot file jointly. Nearly all states that have a state income tax reference the federal tax code at some point to minimize taxpayers’ calculation, record keeping, and compliance burdens. Thirty states and the District of Columbia start with federal adjusted gross income, 6 states start with federal taxable income, and only 5 states do not reference the federal tax code at all.

In the 2014 filing season, we successfully communicated with officials in the 22 states where this was an issue, urging them to provide clarifying guidance to same-sex couple taxpayers. We also urged states not to “decouple” from the federal tax system as a measure of defiance, as doing so would impose huge compliance costs on nearly all state taxpayers and would be disproportionate since other viable options are available. These other options, which all the states adopted, include allowing joint filing, providing a worksheet to allocate income and deductions from the joint federal return to two single state returns, instructing taxpayers to prepare “pro forma” or dummy single federal tax returns to use for state filing, or instructing taxpayers to divide their deductions in half or by their income ratio.

This year, because many more states this year recognize same-sex marriage, the number of states that present this dilemma to taxpayers has dwindled to 10 states. (The legality of same-sex marriage in Alabama, Kansas, and Missouri is currently legally complicated, so we include these three states in our list.) Consequently, revenue officials in these states have a responsibility to provide guidance of some kind to taxpayers. Here is the current guidance provided to taxpayers in those ten states:

Alabama: This is the tricky one. A federal court legalized same-sex marriage and licenses were issued for a time, but the state supreme court has issued a conflicting order, causing uncertainty. Last year, Alabama taxpayers were instructed to apportion federal tax onto two single returns, using the ratio of each taxpayer’s federal AGI to the couple’s federal AGI. However, that guidance has been removed from the Alabama Department of Revenue website. There is no guidance in the individual income tax instruction booklet nor on the Department’s website. We reached out to the Department of Revenue, who explained that the guidance from last year is still valid, and that they “took it down because it was generating more questions than it was answering.” [Archived version of Alabama Department of Revenue guidance from 2014] Georgia: Same-sex taxpayers must complete pro forma federal single returns and use that information for the state returns. [Georgia Department of Revenue] Kansas: While Kansas jurisdictions are issuing marriage licenses, the state government does not recognize same-sex marriage. Same-sex taxpayers must allocate income to two single returns using a state-provided worksheet (Kansas Allocation of Income Worksheet). [Kansas Department of Revenue] Kentucky: Same-sex taxpayers must complete pro forma federal single returns and use that information for the state returns. [Kentucky Department of Revenue] Louisiana: Same-sex taxpayers must complete pro forma federal single returns and use that information for the state returns. [Louisiana Department of Revenue] Michigan: Same-sex taxpayers must complete pro forma federal single returns and use that information for the state returns. [Michigan Department of Treasury] Missouri: Same-sex couples may file jointly. [Office of the Governor of Missouri] Nebraska: Same-sex taxpayers must complete pro forma federal single returns and use that information for the state returns. [Nebraska Department of Revenue] North Dakota: Same-sex taxpayers must allocate income to two single returns using a state-provided schedule (ND-1S). [North Dakota State Tax Commissioner] Ohio: Same-sex taxpayers must allocate income to two single returns using a state-provided schedule (Schedule IT S). [Ohio Department of Taxation]

Additionally, 5 other states do not recognize same-sex marriage but either have no income tax (South Dakota and Texas) or do not require taxpayers to follow federal rules when filing (Arkansas, Mississippi, Tennessee).

In the remaining 35 states and the District of Columbia, the state currently recognizes same-sex marriage and couples are able to file joint state tax returns (if the state has an income tax, that is). The states where same-sex marriage is currently legal are Alaska, Arizona, California, Colorado, Connecticut, Delaware, Florida, Hawaii, Idaho, Illinois, Indiana, Iowa, Maine, Maryland, Massachusetts, Minnesota, Montana, Nevada, New Hampshire, New Jersey, New Mexico, New York, North Carolina, Oklahoma, Oregon, Pennsylvania, Rhode Island, South Carolina, Utah, Vermont, Virginia, Washington, West Virginia, Wisconsin, Wyoming, and the District of Columbia.

While tax administration is not at the forefront of those advocating for or against same-sex marriage, it is of crucial importance to taxpayers who need to file their taxes in a way that conforms to state law. In these ten states where state law directs taxpayers to do two contradictory things, it is incumbent on tax and revenue officials to provide guidance on resolving that contradiction. We acknowledge this may put tax administrators in awkward positions with respect to their state’s public policy, but the options outlined here address compliance issues without violating state statutory or constitutional provisions on same-sex marriage. We further acknowledge the hard work of tax administrators in every state in providing exactly that guidance to their taxpayers.

Categories: Tax news

Iowa Considers Alternative Maximum Tax

Tax Foundation - Thu, 2015-03-19 11:45

Right now, Iowa’s income tax has nine different brackets, with rates ranging from 0.36 percent (in the first $1,539 of taxable income) to 8.98 percent (on all income above $69,255), and that’s not going away—but if some legislators get their way, taxpayers might have an alternative.

House Study Bill 215 revives a concept considered in 2013 and 2014: an alternative maximum tax, or, as it’s termed in the bill language, an “alternative base cumulative income tax.” The basic idea is that each year, taxpayers get to choose between (1) paying under the current graduated income tax structure, claiming any credits, deductions, or exemptions for which they are eligible; or (2) paying a flat 5 percent rate on all taxable income while foregoing most income subtractions.

Those making the election for a flat rate would still be able to subtract the standard deduction ($6,235 for an individual), plus interest and dividends from federal securities, and federal pension income, but would forego other subtractions. In exchange, they could pay a flat 5 percent rate. Since they would be paying a lower rate, those making this election would also pay 122 percent of the school district-levied surtax rate for their district.

This alternative tax structure functions as an alternative maximum tax: informed taxpayers would select the option yielding the lower tax burden, which, for many taxpayers, would be the alternative base cumulative income tax. The state’s tax credits greatly advantage farmers, low-income families with children, and those harnessing alternative energy sources, but for other taxpayers, foregoing most income tax credits and deductions would not be a substantial loss.

The one wrinkle is federal tax deductibility. Iowa is one of a small number of states that allow a deduction for federal income taxes paid, which can certainly be significant. However, I crunched the numbers on a variety of scenarios, and conservatively estimate that taxpayers with more than $40,000 in taxable income would almost always be better off paying the alternative tax—unless, again, they fall into tax-advantaged categories as farmers, low-income families with children, and the like.

It is not, however, a sure thing. Some high income taxpayers might fare better under the traditional rate structure if they combine that federal deductibility with, say, sizable deductions for charitable contributions. And some low middle-income families might qualify for enough assistance through the tax code to make the standard approach worth their while. This adds complexity to the system, as taxpayers would want to calculate their tax burden both ways.

Iowa’s top tax rate of 8.98 percent is anomalously high, and its rate structure is steeply progressive, with seven different rates falling on the first $31,000 of income (nine rates in all). Among neighboring states, only Minnesota has a higher top tax rate; Illinois, Missouri, Nebraska, South Dakota (which foregoes an income tax entirely), and Wisconsin all offer lower top rates. A lower flat rate on a broader base would be good tax policy and make Iowa more competitive. As an alternative rather than a replacement, though, it does add a degree of complexity.

The 5 percent flat rate proposal is intended as a tax cut, not as a revenue neutral alternative. A similar proposal in 2013, which would have adopted a flat rate of 4.5 percent, would have resulted in an estimated reduction of $396.5 million in income tax liability in tax year 2013, and $469.9 million by 2017. At a 5 percent rate, the reduction in revenue by tax year 2017 might be expected to be in the neighborhood of $410 million, about twice the amount of the increased revenue associated with a recent gas tax hike.

Alternative maximum taxes are rare but not unknown. Rhode Island adopted an alternative flat income tax structure from 2006 – 2011 which culminated in lower overall rates and the elimination of the state’s top brackets. That bill included phased-in reductions in the flat rate, whereas the legislation pending in Iowa sets the rate at 5.0 percent in perpetuity, but like the Rhode Island bill, this Iowa proposal draws upon elements of good tax policy. Ideally, though, Iowa would look at ways to reduce its high income tax burden without making taxpayers calculate their tax burden twice.

More about Iowa here. Our writeup of the 2013 proposal can be found here.

Categories: Tax news

Austria Announces Tax Reform

Tax Foundation - Thu, 2015-03-19 07:15

According to Tax-News, Austria has announced a proposal to reform its income tax paired with adjustments to its property tax and value-added tax.

The income tax reforms would make their income tax system slightly more progressive. The bottom marginal tax rate (which is on income between $11,721 and $26,639) would drop from 36.5 percent to 25 percent. The top statutory tax rate (which applies to income over $63,934) would increase from 50 percent to 55 percent.

The effective marginal tax rates on income would not be as high. In Austria, the payroll taxes an individual earns can be deducted from taxable income.

Austria is also considering an increase in their dividend income tax rate, which currently sits at 25 percent.

The proposal would also increase the “reduced” VAT rate from 10 percent to 13 percent. The special reduced rate applies to goods such as food, books, passenger transportation, and “cultural events.” This will bring the reduced rate closer to its main VAT rate of 20 percent.

The property tax will also be raised. Austria currently raises very little (0.23 percent of GDP) from its real property tax. The United States raises about 2.81 percent of GDP from property taxes.

To learn more about Austria see how it compares to other industrialized nations, see the International Tax Competitiveness Index.

Categories: Tax news

North Richland Hills man gets 3-year prison term for defrauding IRS for $1 million - Dallas Morning News (blog)

Google IRS Federal Income Tax - Thu, 2015-03-19 07:12

Dallas Morning News (blog)

North Richland Hills man gets 3-year prison term for defrauding IRS for $1 million
Dallas Morning News (blog)
A North Richland Hills man was sentenced to three years in federal prison Wednesday after admitting he filed false income tax returns to the IRS. Michael Lloyd Moody, 32, was indicted in March 2013 on 16 counts of aiding and assisting in the ...
Tarrant tax preparer headed to prison for creating false returnsFort Worth Star Telegram

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Categories: Tax news

How to Get the Premium Tax Credit From the Affordable Care Act

Yahoo Tax - Thu, 2015-03-19 03:55
If you bought into the Affordable Care Act, you may end up paying some money back when filing your tax return.
Categories: Tax news

Who can garnish an income tax refund? - Logan Daily News

Google IRS Federal Income Tax - Wed, 2015-03-18 22:08

Houston Chronicle

Who can garnish an income tax refund?
Logan Daily News
Before any other federal or state agency can garnish your tax refund, you must be current on your federal income tax payments. This is because the outstanding taxes you owe to the IRS must always be paid first. For example, if you owe taxes for a prior ...
Deadline nears for getting 2011 income tax refunds; Texans owed more than ...Houston Chronicle
Two Women Indicted in Tax Refund ScamABC6OnYourSide.com
Fast Tax Refunds: Minus The FeesIsland Gazette
Patch.com -KMOV.com -LA Daily News
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Categories: Tax news

Please Don't Mail Your Tax Returns to the Tax Foundation

Tax Foundation - Wed, 2015-03-18 21:15

Someone mailed us their tax returns and documents today. We quickly sent it back to that individual, as we neither process tax returns nor assist individuals with tax planning or preparation. Tax documents contain a lot of private information and everyone should be very careful about to whom they send this information. Here's where to file your federal tax returns.

We are here for taxpayers but we are unable to assist individuals with tax planning or preparation. Our staff includes scholars who study tax policy and data, not tax preparation professionals.  If your question involves tax policy or data, we will do our best to assist you, but if you have a question about your own taxes, e.g. which deductions to take or whether your employer withheld the correct amount from your paycheck, please contact an accountant, tax attorney, tax preparation service, or the IRS. The IRS will answer questions about federal tax returns, forms, and refunds. (Please see this page of contact information on the IRS website.)  If you have a question about your state or local tax payments, forms, refunds, etc., please contact your state's department of revenue. (See the list of state revenue department websites here—scroll to "State Departments of Revenue Websites.")

Categories: Tax news

Deadline nears for getting 2011 income tax refunds - Houston Chronicle

Google IRS Federal Income Tax - Wed, 2015-03-18 20:12

Houston Chronicle

Deadline nears for getting 2011 income tax refunds
Houston Chronicle
The average Texas refund amount is $743, the IRS said. The refunds mainly are due because the income earners did not file tax returns in 2012 on their 2011 income. "Time is running out for people who didn't file a 2011 federal income tax return to ...
Who can garnish an income tax refund?Logan Daily News
Free tax help at more than 150 sites in South FloridaSun Sentinel
Letter: Tax cuts… who actually benefits?Asheville Citizen-Times
Fox News -Patch.com -The Cheat Sheet
all 55 news articles »
Categories: Tax news

Key Assumptions in Dynamic Scoring

Tax Foundation - Wed, 2015-03-18 11:15

A recent New York Times article by Josh Barro has questioned the Tax Foundation’s TAG model forecast of the economic gains to be expected for the Lee-Rubio tax reform plan. We show an eventual increase in the GDP of about 15 percent.  We assume this would occur over about a decade, during which the yearly growth rate would average about 1.45 percent over the baseline. By the end of the period, we expect federal revenues to match what they would be under current law, and a little bit more. Not all of the features of the Lee-Rubio plan would add to the growth (such as he enhanced child credit), but the major reductions in the taxation of capital income would so. The results are comparable to those of several other models for major changes in the corporate tax rate, of a shift from taxing income to taxing consumption, allowing for the differences in the degree of the tax reduction in the different experiments.[1]

Barro questions the magnitude of the response, doubting that the “elasticity” (responsiveness) of the physical capital stock (the quantities of plant, equipment, residential and commercial real estate, etc.) to changes in the rate of return could be as high as our model assumes (an “infinite” supply elasticity in the long run). He also suggests that impediments to trade or capital flows in an “imperfectly” open economy would lead to incomplete adjustments that would fall short of the model’s predictions that returns would be driven back down to a long run “normal” rate. Further, he is concerned we may not be giving enough weight to the effects of tax and deficit changes on interest rates, and to the role of borrowing to finance investment.  Some of the comments reported in the piece question whether the concept of an open economy can apply to a nation as large as the United States, whose actions may be large enough to alter world market conditions. On a slightly different topic, some of the sources he quotes seem to be questioning the availability of saving to finance the predicted expansion, and how long it might take.

These criticisms provide us with a great opportunity to discuss the assumptions in our model and their grounding in the historical evidence.  

The Evidence behind the Assumptions in Our Taxes and Growth Model

Why does the Taxes and Growth model assume capital formation is so responsive to after-tax rates of return? We base that crucial assumption on a reading of the historical evidence regarding the flexibility of saving and investment and the stability of returns over time. Saving and investment have proven to be highly flexible over time. The tendency for investment to seek out above normal returns, and to expand until the returns on capital are driven back to their normal level, is a basic tenet of neoclassical analysis, and is a common trait of any neoclassical model of the economy. Professor John H. Cochrane of the University of Chicago Booth School of Business recently wrote us that “About the most basic conclusion of a neoclassical growth model is that in the end the after tax rate of return is the same. Sure, it happens faster if you’re open internationally, but the same mechanism happens through saving.”  

The After-Tax Return Is Stable in the Long Run

The issue is how changes in taxation affect the returns on physical capital, and how that affects the growth of physical plant, equipment, and structures, and its location, here or abroad. Taxes affect capital formation because capital expands or contracts to keep the returns to capital within narrow bounds. Abnormal returns following a tax reduction or discovery of a new technology or the invention of a desirable new product are rapidly competed away. The stock of capital expands until its returns are driven back to normal levels. That requires only a finite and plausible expansion of the capital stock.[2]  Data from the Commerce Department’s Bureau of Economic Affairs reveals great stability, decade-by-decade, in after-tax real returns on real capital in the United State over the better part of a century.[3] In most years, non-financial corporations have seen after-tax returns of between 4 percent and 8 percent since 1960. After subtracting shareholder taxes, the returns would be somewhat lower, primarily in the 2 percent to 5 percent range, centered a bit over 3 percent. When returns are in the upper portion of the ranges, capital expands unusually rapidly. When returns are lower, capital formation lags. These responses confine returns to a narrow band around this apparent “marginal rate of time preference” which is part of both human nature and economic theory. 

The Economy Adjusts Fairly Quickly to Tax Changes

The return to a normal rate of return is not instantaneous. One cannot suddenly double the rate of construction, or place huge orders for new equipment that might strain the capacity of the machine tool industry, and expect a huge increase in the supply of buildings and machines overnight. Supply curves are somewhat inelastic in the short run. In the long run, however, the supply of physical capital is far more elastic. Over several years, buildings, infrastructure, and machinery can be ramped up without any significant increase in unit costs. Our model is a long run model, looking out to the ultimate adjustment in the capital stock after the economy has had time to respond to the additional demand for capital. 

In fact, the adjustment periods are fairly short. The capital goods industries are fairly nimble, and imports can satisfy part of the demand. Proof is to be seen in the historical record. The bulge in returns after the 1962-63 Kennedy tax cuts wore off by 1969. The bulge in returns following the Reagan cuts, the Clinton capital gains rate reduction, and the 2003 Bush tax cut wore off within a few years. We have built this nimble response into our model, but adding a few years to the adjustment path would not change the ultimate gain in capital and wages. Other models that have nothing with which to anchor their predicted capital formation are at odds with history and economic theory, and are largely adrift.

The U.S. Has a Relatively Open Economy

Barriers to trade may mean that the economy is not “perfectly” open, but that would affect only the speed of the adjustment, not its ultimate outcome. A higher after-tax return to capital in the United States would still lead to more investment that would fully compete away the abnormally high earnings. The capital stock would grow, and returns would be driven down to normal due to competition among U.S. businesses, even if we were the only country in the world. Failure to achieve that outcome would require investors to leave ready money on the table forever. The adjustment is sped up because there are multiple possible sites for locating a plant, such that global growth can shift toward the U.S. It would be sped up more in the complete absence of trade barriers, but it is certainly not prevented by the modest remaining trade barriers in place today.

International Capital Flows Provide Money to Finance Public Deficits

Another attribute of an open economy is access to global saving and financial capital. This dampens concerns that a temporary budget deficit resulting from a tax reduction might affect interest rates and slow the increase in capital formation. Some economic models that are driven by spending flows instead of rates of return and adjustments to the stock of capital place too much importance on the effect of tax and deficit changes on interest rates, and on the role borrowing to finance investment. 

Our model is open to international capital flows, including financial flows as well as those involving direct foreign investment in plant, equipment, and other property. All that means is that any adjustments to changes in the rate of return to investment in the United States can occur quickly by tapping into the global savings pool or by redirecting savings flows, instead of more slowly by relying only on changes in our own saving rates. The Barro piece quotes public finance figures asserting that the United States is so large that its budget affects world interest rates; that we are price setters in the credit markets instead of price takers, and that this restricts our access to world saving, discourages investment, and dampens any growth effects from better treatment of capital. The claim is that open markets and elastic capital flows only occur for small economies, but cannot work for an economy the size of the United States.

The international economy and how economists think about it have changed a great deal since the 1950s. Foremost among the changes in economic thinking has been the realization that capital flows, not exchange rates and trade in physical goods and services, dominate the scene. In that context, the U.S. is as dominated by the global market as are much smaller nations. We are no longer the colossus we once were—shortly after World War II and the Korean War—when we dwarfed the rest of the free world economy. The global economy is now much larger and more integrated than it was sixty years ago. We are much less dominant in these markets than we once were. The economic literature is clear on this point. U.S. deficits in the ranges seen since the end of WWII has had little effect on global or U.S. interest rates, a matter of a few basis points at most. Any effect they may have had has surely been swamped by changes in Federal Reserve policy.[4]

For example, following the housing bond collapse, about $2 trillion in federal government stimulus spending, resulting in massive deficits, was funded easily even as interest rates on U.S. government debt fell to ridiculously low levels. This was partly due to an activist Federal Reserve, and partly due to international capital flows into the safe haven of U.S. government debt. This was true even though the spending was largely wasteful and did little to enhance productive capacity in the United States. The lower interest rates and enhanced bank reserves had little impact on business investment, as businesses had little need or desire to borrow to fund additional private investment. There will be no problem financing the government tax and deficit changes in the ranges being discussed in connection with tax reform, especially if the reforms are focused on enhancing the productive capacity of the U.S. economy.

Money Is Available for Private Investment through Retained Earnings, Foreign Investment, and Increased Saving

As for financing additional private sector investment, even in the presence of transitory increases in the government deficit, history is clear. Financial market and saving constraints are not the issue for expanding private sector investment. The only obstacle to expanding the quantity of real plant, equipment, and buildings is the time needed to plan the investment, obtain permits, and then build the machines or structures.

Saving available to the United States can be increased five ways: by Americans consuming less and saving more; by individuals reducing leisure and working harder to earn additional money to save, by retaining more business income for reinvestment instead of paying larger dividends or other distributions to owners when new investment opportunities arise; by lending less U.S. saving abroad, including  repatriating foreign U.S. holdings (smaller capital outflow); or by attracting more foreign savings (larger capital inflow).

Most business investment is funded by retained earnings, a business’s own money. That is the largest source of saving in the economy. Relatively little business financing comes from the credit markets. When business taxes are cut to lower the cost of machinery by, say, 3 percent, due to lower tax liabilities, then the tax savings alone are enough to increase the amount of capital employed by about 3 percent without any outside money. As the stock of capital expands, and the economy grows over the next several years as a result, additional earnings become available for further expansion of capital beyond the initial 3 percent. We do not need outside funding to pay for the added business investment.

Other saving, including outside money channeled through the credit markets, is needed to cover the near term rise in the government deficit. There is plenty of saving in the world to do that. The amount of new domestic and global saving is flexible, and accumulated past saving is highly mobile across borders. Leading economists of the last 50 years, such as Milton Friedman, Gary Becker, Robert Barro, Harry Johnson, and Robert Mundell (three of them Nobel laureates), have emphasized the flexibility of domestic saving and international capital flows in response to changes in taxation and returns on investment.

Capital Is Mobile

It is not the size of the economy that determines the openness of its credit markets and how much interest rates might move if borrowing rises; it is the size of the capital flows needed to accommodate borrowing requirements relative to the stock of world financial assets. Capital flows run in the trillions of dollars a year, and could go much higher. Even these flow amounts pale in comparison to the stock of financial assets, which run into the hundreds of trillions of dollars; they dwarf any remotely possible financing needs from U.S. tax reform, transitory budget deficits, recessions, or even a financial panic such as occurred in the 2008-2012 era. They are orders of magnitude larger than the amounts needed to facilitate the expansion subsequent to a corporate rate cut and the end to double taxation of saving in the United States.

Economic history tells us that it takes only minor changes in interest rates to trigger massive amounts of capital flows. Examples abound over the last two hundred years.

As one example, the U.S. reduced tax rates in 1981, and began to restore the stability of the U.S. dollar by ending the 1970s inflation. Annual lending by U.S. banks to foreign borrowers dropped by $100 billion (over 80 percent!) between 1982 and 1984, funding the tax cuts and a revival of U.S. business investment by keeping more of our saving at home, even as interest rates began a decade’s decline. Instead of lending as much to Latin America, Europe, and Asia as before, the banks lent more here at home. Later, increased foreign investment in the United States contributed further to the expansion.

For an earlier example, when the pound was the world currency, and the British Empire spanned a fourth of the planet, the Bank of England maintained the parity of the pound and the level of its gold and currency reserves with the tiniest of interest rate tweaks. That systems lasted a century from the end of the Napoleonic Wars until World War One.

Adam Smith eloquently described the mobility of capital in the Wealth of Nations in 1776. He noted that investors were citizens of the world and that they could take their activities anywhere if they were abused in their home country.[5]

Markets demonstrate every day that capital is highly mobile. Foreign exchange markets are well known to be the most responsive markets in the world, shifting trillions of dollars in value from one currency to another on the thinnest of price changes with the speed of electrons. The bond markets are not far behind. The government had no trouble issuing new bonds to fund its trillion-dollar-plus stimulus plan, even as interest rates on government debt plunged to record low post-WWII levels, abetted by a bond-buying spree by the Federal Reserve.  But none of this has much to do with the rate at which computers, machine tools, buildings, airplanes, railroads, and harbors can be expanded.

Labor Responds Less than Capital

Barro states correctly that our model’s labor response to tax cuts and higher wages is at the top end of the range reported by the Congressional Budget Office. A CBO survey of the literature offers a range of 0.1 to 0.3 for the “labor supply substitution elasticity.”[6] The Joint Committee on Taxation’s MEG model assumed 0.15 to 0.2 in its work on the Congressman Dave Camp’s tax reform plan in 2014 (similar to the middle of the CBO’s range). Our assumption is reasonable and within the mainstream; it is less than half the response numbers found by means of cross-country comparisons by Nobel Laureate Ed Prescott. Moreover, using a labor supply elasticity of 0.2 would not materially change our results.[7] The bulk of the growth in our model comes from changes in capital formation. If we were to lower our labor response to 0.2, we would only reduce our 15 percent growth forecast for Lee-Rubio to 14.15 percent.

Constructive Criticism Is Welcome

Our model data are derived from the economic data supplied by the Department of Commerce, the public use tax sample from the Internal Revenue Service for the individual income tax, and the tax rates and depreciation schedules in current law. These furnish us with the quantities of capital and labor that determine GDP, and the resulting wages and other sources of income, by means of a typical textbook Cobb-Douglas production function, solved in the usual manner.[8] We have more detailed capital stock data and can generate a more detailed calculation of the cost of capital than most other models can manage. We believe our model offers a reasonable link between tax policy changes and the likely outcome for economic activity, based on historical observations. Its equations and approach are described with some considerable transparency in a number of our publications.[9] Constructive, informed criticism is always welcome.


[1] William McBride, Critics of Rubio-Lee Tax Reform Are Way Off the Mark, Real Clear Markets (Mar. 12, 2015), http://www.realclearmarkets.com/articles/2015/03/12/critics_of_rubio-lee_tax_reform_are_way_off_the_mark_101575.html.

[2] The term “infinite elasticity” merely means that the quantity increases with, ultimately, a zero change in the ultimate return. Dividing by zero makes the idea sound scary, but that is only semantics.

[3] See Chart 1 from Andrew W. Hodge, Robert J. Corea, Benjamin J. Hobbs, and Bonnie A. Retus, Returns for Domestic Nonfinancial Business, Survey of Current Business, Bureau of Economic Analysis (Jun. 2013), https://www.bea.gov/scb/pdf/2013/06%20June/0613_returns_for_nonfinancial_business.pdf.

[4] See note 1.

[5] According to Adam Smith, ‘The proprietor of stock is properly a citizen of the world, and is not necessarily attached to any particular country. He would be apt to abandon the country in which he was exposed to a vexatious inquisition, in order to be assessed to a burdensome tax, and would remove his stock to some other country where he could either carry on his business, or enjoy his fortune more at his ease. By removing his stock he would put an end to all the industry which it had maintained in the country which he left. Stock cultivates land; stock employs labor. A tax which tended to drive away stock from any particular country would so far tend to dry up every source of revenue both to the sovereign and to the society.” See Chapter 2 from Adam Smith, An Inquiry into the Nature And Causes of the Wealth of Nations (1776).

[6] See Robert McClelland and Shannon Mok, A Review of Recent Research on Labor Supply Elasticities, Congressional Budget Office (Oct. 2012), http://www.cbo.gov/sites/default/files/10-25-2012-Recent_Research_on_Labor_Supply_Elasticities.pdf.

[7] Our higher elasticity would dampen the labor response of higher income workers in the Lee-Rubio bill.

[8] Invented in part by professor, later Senator (D-IL), Paul Douglas.

[9] See Michael Schuyler, The Taxes and Growth Model—A Brief Overview, Tax Foundation Fiscal Fact No. 429 (May 6, 2014), http://taxfoundation.org/article/taxes-and-growth-model-brief-overview; Tax Foundation, The Tax Foundation Small Comparative Statics Model of the U.S. Economy, http://taxfoundation.org/tax-foundation-small-comparative-statics-model-us-economy.

 

Categories: Tax news

A Response to Josh Barro on Dynamic Scoring

Tax Foundation - Tue, 2015-03-17 13:45

In a column on TheUpshot, Josh Barro claims that our analysis of the Rubio-Lee tax reform plan is “too aggressive” and that he spoke with ten public finance economists who agree. Much of his criticism hinges on a quote by Laurence Kotlikoff, who felt the need to clarify his quotes by commenting on the article that our model “may be closer to correct than [Barro’s] column suggests.”

Our model produces results that the economic literature and data say we should expect. Our model uses the most up to date IRS data to calculate detailed tax burdens on work and investment. It plugs the effect of the tax changes into a standard Cobb-Douglas production function, which has been part of mainstream economics for 70 years.

The Rubio-Lee plan presents a complete overhaul of the tax code and moves us toward a consumption tax base while cutting taxes by $4 trillion over a ten year period on a static basis. Our analysis finds that this reform would increase investment by 49 percent, boost the size of the economy by 15 percent, and lift wages by 13 percent. These changes would not happen overnight; we assume it would take roughly ten years for the economy to adjust to the tax changes. At the end of this adjustment period, the economy would be 15 percent larger (equivalent to average additional growth of 1.44 percent each year over the adjustment period).

This result is in line with analysis done by other mainstream economists for similar tax changes. In a previous response to William Gale of the left of center Tax Policy Center, we wrote about a previous study by Alan Auerbach and Kotlikoff that estimates the effects of a proportional consumption tax, which would replace the federal individual and corporate income taxes with a wage tax and a business cash-flow tax. The study finds this revenue-neutral proportional consumption tax would eventually raise GDP by 9.4 percent.

However, the Rubio-Lee plan is not revenue-neutral, but a tax cut of $414 billion per year. Such a tax cut would raise GDP by about 6.6 percent, according to empirical estimates by leading economists such as Christina Romer, former chair of President Obama's Council of Economic Advisors. Add that to the Auerbach-Kotlikoff 9.4 percent estimate of a revenue-neutral tax reform and you get 16 percent growth in GDP—more than our 15 percent estimate of the Rubio-Lee plan.

Other examples place the results of our model in the same range as the handful of economists who do this work. In a 2014 column in the New York Times, Kotlikoff found that eliminating the corporate income tax and raising the income tax an equal amount would result in growth of 8 to 10 percent. Our model shows that eliminating the corporate tax without a revenue offset would boost GDP by about 6 percent—slightly below Kotlikoff’s estimate. In our 2014 analysis of the tax reform proposal presented by then-Chairman Dave Camp, we came in at the bottom end of the range presented by Joint Committee on Taxation, the official tax scorers for Congress. Their models estimated a range of between 0.1 percent growth and 1.6 percent growth. Our model estimated 0.2 percent growth.

This is not to say that our model is perfect—no model is perfect—but it aims to reflect reality. Furthermore, we continually improve our model to bring it as close to reality as possible. And we want the best and brightest of the academic community to be a part of that process.

We welcome an academic debate about the assumptions in our model and how the economic literature says they should change. We are transparent with the equations and assumptions that drive our model and we look forward to a debate about facts, not out-of-context quotes and one-sided reporting.

Categories: Tax news

Cash-strapped Palestinian gov't adopts emergency budget

Yahoo Tax - Tue, 2015-03-17 08:11
Gripped by financial crisis, the Palestinian government said on Tuesday it was putting an emergency budget in place for 2015 due to the absence of pledged international aid and Israel withholding its tax revenues. "The general budget law for 2015 comes amid complicated and tough conditions, as the treasury is suffering a choking financial crisis," a Palestinian cabinet statement said. Israel said in January it was freezing $127 million of monthly Palestinian tax revenue that it collects on behalf of the Palestinian Authority (PA), in protest at the Palestinians' decision to apply for membership of the International Criminal Court and pursue war crime charges against Israel.
Categories: Tax news
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