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Bill Clinton Calls for a Territorial Tax System

Tax Foundation - Fri, 2014-09-26 13:00

At the Clinton Global Initiative meeting earlier this week, former President Bill Clinton called for a lower corporate tax rate, saying that the average corporate tax rate across the OECD (25.3 percent) provides a good target for where our corporate tax rate should be. But in his talk—which included discussion of corporate inversions—he also outlined the argument for a move to a territorial tax system. From his talk (emphasis added):

“Meanwhile I think the treasury secretary Jack Lew and people in charge of tax collection have a duty to collect as much revenue as they can from companies, particularly that earn it in America. But nothing that has been done will prevent the treasury from collecting taxes – wherever these companies can set up shop in Palau if they want to. They will still have to pay the American tax rate on the money they earn in America. And we have to come to terms with the fact that everyone else in the world has stopped taxing on the difference between what their companies earn in a different country and at home. So we normally think of Norway, Sweden, Denmark, Finland as very socially liberal, unifying countries that they would always have higher taxes than we do. They do as a percentage of GDP but don't tax the overseas earnings of their own companies. So we need tax reform.” 

As the former president lays out in the comments above, a territorial tax system would only tax U.S. corporations on income they earn in the United States. All foreign income would be taxed at foreign tax rates and not be subject to the U.S. tax.

This is different treatment than the current system of worldwide taxation. Under a worldwide tax system, U.S. corporations must pay U.S. corporate taxes on foreign income when that income is brought back to the United States. This creates a “lock-out” effect where U.S. corporations reinvestment or hold income overseas to avoid the additional tax.

If the U.S. were to shift to a territorial tax system, as Clinton suggests, the U.S. would join the vast majority of OECD countries. Currently 28 of the 34 OECD countries operate under some form of territorial tax systems.

Categories: Tax news

New York Considers Special Property Surcharge for Nonresidents

Tax Foundation - Fri, 2014-09-26 07:30

New York Mayor Bill de Blasio is considering a proposal that would place a property tax surcharge on residences that are worth $5 million or more and owned by non-New Yorkers, according to the Wall Street Journal. The surcharge was proposed by the Fiscal Policy Institute, an independent research and nonprofit organization located in New York.

The tax surcharge would be added to the property owner’s tax liability, starting at 0.5 percent for a property's value greater than $5 million and increasing to 4 percent for properties greater than $25 million. The surcharge would be based on the market value of the properties rather than the assessed value, which makes the surcharge more burdensome than other property taxes.

Under the current property tax structure, property taxes are paid based on assessed value rather than market value.  In New York City this is 6 percent or 45 percent of market value, depending on property type, giving current New York City effective rates ranging from 1 to 5 percent of home values.

The proposed surcharge will not value property based on assessed value, so while 0.5% to 4% sounds small compared to the 19.157% property tax already levied on some properties, the effective rate is quite large. Added to the current property tax, the proposed surcharge could up to double the property tax burden on effected properties.

While the angst of billionaires and their penthouses might not elicit the most public sympathy, such damaging taxes can negatively impact economic growth. High tax rates can decrease demand for luxury properties that generate significant economic activity. Rich potential owners may readily find that Boston or London are more to their liking. But the most likely result of such a tax would be to drive down purchases by out-of-state individuals and create more condo leasing through New York-based holding companies (much like how high income individuals lease or own “shares” of private jets). So property taxes would still not increase.

As we have written in the past, New York has struggled to increase its number of millionaires in comparison with the rest of the country, lagging behind the national average. The state already sharply increases tax rates on incomes over $1 million and even institutes an “income recapture” provision to raise rates on lower income brackets, thus it’s unclear why the state would add still more punitive taxes to its repertoire.

Additionally, if New York City did implement a special surcharge targeting out-of-state property owners, it could open the city to constitutional challenges. The US Constitution was instituted precisely to prevent such beggar-thy-neighbor policies that discriminate against people in other states, and it has several provisions that restrict such actions. Not least among them are the privileges and immunities clause (which has been interpreted to offer a “right to reside” which could prohibit such discriminatory taxes), the interstate commerce clause (asset purchases across state lines can be considered interstate commerce), or even possibly the equal protection clause.  

Simply put, a high tax directly aimed at a narrow base (only 1,556 properties satisfy the criterion in NYC) contradicts the principles of sound tax policy. If the city needed to raise revenue, a broadened base and lowered rates would be far less destructive and also promote growth, which in turn brings more revenue.

Read more on New York here.

Read more on property taxes here.

Read more on millionaire taxes here.

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Categories: Tax news

Governor Corbett Approves $2 Philadelphia School District Cigarette Tax

Tax Foundation - Fri, 2014-09-26 07:00

Pennsylvania Governor Tom Corbett (R) signed a bill this week allowing Philadelphia’s school district to raise cigarette taxes by $2. This comes after Pennsylvania considered several different cigarette tax increase proposals. The statewide cigarette tax rate is $1.60, near the middle of the pack nationwide. Adding $2 on top of that is an enormous tax wedge, one of the largest such local cigarette taxes in the nation. The tax increase is projected to yield between $55 and $90 million in new revenues, to close an $80 million funding gap. Unfortunately, not only is this unsound tax policy, but the main effect will probably be to boost black- and gray-market trade in cigarettes. The real winners here aren’t school officials, but cigarette sellers just outside of Philadelphia.

Using cigarette taxes to fund education is problematic. Whatever social costs cigarette smoking may have, surely the way to compensate those costs is to spend money raised on tobacco education and tobacco-related health spending? Spending the money on education makes a vital social service financially dependent on an extremely volatile (and declining) revenue stream. Indeed, as we wrote about a previous plan to expand preschool using cigarette taxes, cigarettes and preschoolers just don’t go together.

Does anyone really want to tell their children that their school was only possible because other people were smoking? And when the state’s schools are dependent on cigarette sales, how can state tobacco education efforts not have a conflict of interests? While it might be politically expedient to isolate a small unpopular group (smokers) to pay for a service to a popular group (students), education is a broadly accessible core public service—so we should pay for it with broad-based taxes with reliable revenue streams, like property taxes.

Aside from these concerns, a high tax rate in a small geographic area creates ripe opportunities for illicit trade. Independent research has previously found that illicit trafficking of cigarettes has relatively little impact on smoking in Philadelphia, but has a huge impact in higher-taxed areas like New York City and Washington, DC. If taxes increase in Philadelphia, smuggling could too. Research we published by the Mackinac Center for Public Policy likewise shows relatively little net smuggling from Pennsylvania, while, in New York, smuggled cigarettes account for over 50 percent of cigarette consumption.

If Pennsylvania raises its taxes, incentives to smuggle will more than double. Smugglers could purchase cigarettes just outside of Philadelphia, and bring them in for sale within the city, reaping large profits over a very short distance. These revenues can often flow to organized crime, or lead to other incidents of violence. Thus revenues may prove to be less than expected, while the costs of a tax increase (in terms of increased illicit trade) may be higher than expected. As long as it’s easy and lucrative to smuggle cigarettes, raising taxes on them will have a primary effect of subsidizing smugglers. Some of those smugglers may come from other states, such as Virginia, so Pennsylvania may actually lose some state sales to out-of-state purchases.

We wrote previously that signing a cigarette tax increase would break the governor’s promise not to raise taxes in Pennsylvania. At the time, it looked like he might at least get a trade out of it, swapping pension reforms for a new tax. But this week, the law was signed without such a trade.

In sum, this huge local cigarette tax hike to pay for education creates an unfortunate link between tobacco sales and the education of children, confusing the state’s own message about tobacco usage. The revenues will likely be unstable in the future, subjecting schools to frequent budget shortfalls. Even if revenues do not disappoint too much, smuggling will almost certainly increase, fueling black-market revenues, and potentially even criminal organizations. The combination of these features, in addition to more fundamental problems with high excise taxes on a politically vulnerable population like smokers, makes Governor Corbett’s cigarette tax hike a textbook case of unsound tax policy.

Read more on Pennsylvania.

Read more on cigarette taxes.

Follow Lyman on Twitter.

Categories: Tax news

IRS makes tax suggestions for PDFs - Tundra Drums

Google IRS Federal Income Tax - Thu, 2014-09-25 15:26

IRS makes tax suggestions for PDFs
Tundra Drums
The Internal Revenue Service reminds Alaskans that the Alaska Permanent Fund Dividend is taxable income for both adults and children, and must be reported on a Federal income tax return. Be sure to set aside enough to cover your tax bill, or consider ...

Categories: Tax news

IRS: Investment Fund Managers are Subject to Self-Employment Tax - JD Supra (press release)

Google IRS Federal Income Tax - Thu, 2014-09-25 14:57

JD Supra (press release)

IRS: Investment Fund Managers are Subject to Self-Employment Tax
JD Supra (press release)
The Internal Revenue Code ("IRC") provides consistent tax compliance rules for wages earned by an employee, which are taxed under the Federal Insurance Contribution Act ("FICA"), and earnings from self-employment, which are taxed under the ...

Categories: Tax news

Republicans greet Holder departure with sharp criticism

Yahoo Tax - Thu, 2014-09-25 14:36
By Gabriel Debenedetti WASHINGTON (Reuters) - Seizing on news that Attorney General Eric Holder plans to step down, Republican lawmakers piled criticism on him over the Internal Revenue Service scandal, his handling of a gun-running probe known as "Fast and Furious," and a host of other issues. Holder has clashed for years with Republicans, who see the attorney general and close confidant of President Barack Obama as a partisan warrior who has failed to enforce the law in an even-handed manner. ...
Categories: Tax news

Always Be Careful with IRS Income Data

Tax Foundation - Thu, 2014-09-25 14:15

The chart below has been going around the web this week. It is from an analysis by Pavlina Tcherneva of Bard College that used Piketty and Saez IRS data to show that in non-recessionary periods from 1949 to 2012, the share of total income growth has increasingly accrued to the top 10 percent, while the bottom 90 percent’s share has declined.

While this does reflect the general decline in wage growth in the last few decades, there are issues with this data. People reading this chart should keep in mind the major limits to IRS income data, and that this analysis does not account for any declines in income during recessions.

Income at the Top Is Highly Pro-Cyclical

One issue with this chart is that it only looks at boom times, so it doesn’t account for any losses during recessions that could temper, or offset, much of this trend.

The top 10 percent have a much greater share of capital income. Capital income is notoriously volatile over short periods of time. During booms, capital income for an individual could be large, but during recessions, losses could be just as big as the prior year’s gains. Wage income, in contrast, is much more stable and would grow more evenly year-over-year and not suffer the same amount of losses when the economy goes sour.

The following chart shows that while the incomes of the top 1 percent undoubtedly grow swiftly in boom times, they suffer greatly during recessions. Other income groups have a much milder trajectory.

IRS income Data Is Not Very Good Measure of Income

A serious flaw with IRS data is that it is collected in order to raise tax revenue. Consequently, it is not very well suited for other types of analyses. The chief problem is that income that is not taxed by the U.S. government is not tracked by the IRS at all. This could drastically bias an analysis, especially one that looks at incomes. There are two major issues with the data: one deals with health insurance compensation and the other with how capital income is taxed, or often never taxed.

The first is employer-provided health insurance. When an employer compensates workers for their labor, it usually does so with a mix of salary and fringe benefits. One of the most significant fringe benefits is employer provided health insurance, because it is not taxable as ordinary income. As a result, employers have an incentive to compensate workers with generous health insurance plans. This tax exclusion is the largest tax expenditure in the income tax code, costing the government more than $196 billion every year. This is hundreds of billions of dollars of income—mostly going to the bottom 90 percent—that this data does not account for every single year.

The second issue is how the tax code treats capital income. This effects both the top 10 percent and the bottom 90 percent. The U.S. tax code only accounts for capital income (capital gains, specifically) when it is realized. This means that someone may have been accumulating capital gains for 40 years in an investment portfolio, but the IRS only sees the final (sometimes massive) realization. Suppose an individual invested in stock. Each year, the gains were small, but in the 41st year, he realized all of the past years’ gains and earned $1 million in income. IRS data would show that this taxpayer was a millionaire one year (and part of the 1 percent). This is especially important in boom times, given that stock market gains are much greater and could exaggerate income gains of the top earners.

Middle-class taxpayers also have a significant amount of capital income, but it remains hidden from the IRS because it is not taxable. 401(k)s and IRAs are all considered non-taxable. As a result, not a single penny of this income is ever accounted for by the IRS. This is significant for this analysis, given that this wealth and income totaled nearly $19 trillion in 2013. This undoubtedly biases the incomes of the bottom 90 percent downward by leaving out a significant chunk of income.

Wage Growth Is Slow, but It Doesn’t Need to Be

This isn’t to say that wage income hasn’t been subpar in recent years. The economy in general is still struggling to pick up steam, suffering from low levels of investment and low labor force participation. Middle-income earners are worse off because of it. But this doesn’t need to be the case.

Structural reforms that boost investment and bring people back to the work force could go a long way in increasing wages. 

Categories: Tax news

Apportioning the Future

Tax Foundation - Thu, 2014-09-25 13:45

The OECD’s base erosion and profit shifting (BEPS) initiative promises an integrated, streamlined tax system across the OECD. The initiative, which should be completed in September of 2015, will provide guidelines for member countries to follow when implementing domestic tax policy or negotiating a tax treaty. The initiative is intended to reduce double non-taxation of corporate profits, which in turn should reduce conflict between tax authorities.   

One of the major concerns is how intra-firm transactions are priced, which is also known as transfer pricing. It’s a concern because firms can shift profits from a high tax jurisdiction to a low tax jurisdiction by charging its subsidiaries fees for goods and services.

Say that a parent firm in Ireland has a subsidiary in France, which earned €20 million in profit after paying its local expenses. The French subsidiary would have to pay €6.6 million in corporate taxes, a third of its profit, to the French tax authorities. But first, the Irish parent firm sends a bill to the French subsidiary for services in the amount of €10 million, which reduces the French subsidiary’s profit to $10 million. If the cost of providing these services were zero, the Irish parent firm pays $1.25 million, the Irish tax of 12.5 percent of the profit, to the Irish tax authorities and the French subsidiary pays €3.33 million to the French tax authorities, a tax reduction of €2 million.

To prevent such profit shifting, tax authorities have established an “arm’s length” standard for pricing intra-firm transaction. That is, firms must price intra-firm goods and services as if they were a transaction between two unrelated firms. In practice, this means finding at least two similar transactions by unrelated firms and using those prices as an approximation.

The problem arises when the goods or services have no equivalent in the economy. The royalties from a new drug patent has never been in the economy before and is therefore difficult to price. In these cases, the tax authorities may rely on a defined formula for apportioning the amount of profit that belong to each entity.      

The OECD BEPS preliminary recommendations released in early September have set off a debate on whether the arm’s length principle should be replaced with a formulary apportionment approach, which is commonly used in China and India.

Proponents of formulary apportionment argue that it would provide more certainty for firms and reduce compliance costs. Moreover, they argue it reduces the incentive for firms to game the system by manipulating the definition of what is considered a similar transaction. Opponent of the formulary apportionment approach warn that removing the arm’s length standard could introduce a host of unintended consequences. In other words, removing decades of established legal precedence, administrative experience, and compliance infrastructure could expose firms to a multitude of new cost with a rather unknown benefit.

Although the debates are primarily over application, there is a more profound difference between the arm’s length standard and the formulary apportionment approach. It is true that firms spend a considerable amount of resources determining a market equivalents for a good or service, and it is likely that some firms have bent the truth to reduce their tax burden. But the arm’s length standard allows the tax code to change as the international economic system evolves by adjusting prices as markets develop. The adaptive efficiency of the arm’s length standard has allowed tax authorities to adjust to rapid globalization over the past three decades without major incident.

If a formulary apportionment approach was to be implemented, formulas for apportionment would need to be updated every couple of years to account for changes in the economic climate, such as new categories of goods and services. These formula adjustments will most likely be contentious as each tax authority attempts to garner more tax revenues for their jurisdiction.

The OECD admits that it is unlikely all member countries would implement a formulary apportionment approach due to a lack of international consensus and possible systemic problems, but they are considering a formulary apportionment for particular categories of good and services. Implementing such rules may have short-term advantages but at what cost to long-term international stability? In some instances, it’s best to ignore the short-term inefficiencies to enjoy long-term benefits.

Categories: Tax news

Taking Away the NFL’s Tax-Exempt Status Doesn’t Do Anything

Tax Foundation - Thu, 2014-09-25 10:15

It has not been a good month for professional football. A recent spate of domestic violence incidents has called the moral leadership of the National Football League into question. In addition, concerns about the Washington Redskins’ team name remain a steady source of bad press.

In this climate, some members of Congress, upset over the NFL’s recent moral failures, have turned to the tax code for ways to express their feelings. (And of course, what better way is there to communicate our feelings about violence and treatment of ethnic minorities than tax legislation?)

Specifically, calls have renewed for the NFL to lose its tax-exempt status. The NFL is, under current law, a 501(c)(6) organization. That is a designation in the Internal Revenue Code that includes most guild-like organizations. As the IRS states:

IRC 501(c)(6) provides for exemption of business leagues, chambers of commerce, real estate boards, boards of trade, and professional football leagues (whether or not administering a pension fund for football players), which are not organized for profit and no part of the net earnings of which inures to the benefit of any private shareholder or individual.

Some of the members of Congress have played up the amount of the NFL's earnings. From the press release for Senator Maria Cantwell’s bill, which concerns itself with the Redskins’ team name:

“American taxpayers should not be forced to subsidize a $9 billion league that promotes a dictionary-defined racial slur,” said Cantwell, a member of the Senate Committee on Indian Affairs. “It’s time to end the special tax breaks for the National Football League.”

Here’s the problem with ending the “special tax breaks” for the NFL: it doesn’t do anything. It’s ineffective. It’s null. It’s a completely toothless strategy – as toothless as any game plan the Buccaneers have drawn up lately.

What Senator Cantwell did is a fallacy of equivocation - where the same word is used for two distinct concepts, and one treats those distinct concepts interchangeably. When the Senator speaks of a $9 billion league, the "NFL" is understood as an umbrella term to describe NFL league office, plus the 32 teams, plus some smaller organizations. When her bill strips non-profit status, though, it strips it from a specific legal entity: the league office only. "The NFL" as broadly imagined is a $9 billion league, but the actual legal entity that Senator Cantwell is trying to tax is not.

$9 billion is the money earned by the teams – which retain all of the actual profits from tickets and TV deals, and are taxable. The IRS has been correctly counting this money and taxing it for decades.

The NFL league office, on the other hand, spends approximately all of its money, mostly on payroll, which is taxed just like it would be anywhere else. The net income, after expenses, of the organization is tax free. But that doesn't really matter, because it has no net income to tax. By virtue of its design as a 501(c)(6), “no part of the net earnings inures to the benefit of any private shareholder or individual.” Making it a taxable entity would do approximately nothing.

If Congress is really interested in ending subsidies for the NFL in the federal tax code, its time would better be spent considering the use of tax-exempt municipal bonds to build team stadiums. This gives football teams a better form of financing than other, less-privileged businesses.

Categories: Tax news

California Triples Film Tax Credit

Tax Foundation - Thu, 2014-09-25 07:00

Despite questions about the effectiveness of film tax credits, California recently passed AB 1839 , which expands the state’s film credit program to $330 million from its current $100 million. The bill also included provisions changing the way the credit is awarded. As we reported several months ago, the California Legislative Analyst’s Office (LAO) issued a report about the effectiveness of film tax credits, highlighting that the program does not “pay for itself” as advertised.

The California Legislative Analyst’s Office pointed out that from 2004 to 2012, California’s total share of US film and television post-production jobs has declined to 61 percent from 65 percent. As other states around the country create larger and larger film tax credits to spur production, policymakers’ concerns about Hollywood’s declining role in film and television production is understandable.  

This concern led members of California’s state legislature to propose AB 1839, which was originally rumored to be worth $400 million in tax credits before being reduced to $330 million. In a state that is home to nearly two-thirds of the film and television industry, it can be hard to say no.

While the new law replaces the “first come, first serve” reward policy with a competition-based system, the concerns about the credit’s effectiveness remain. As we have previously written, film tax credits create favoritism for a politically-connected industry and ultimately lose public money.

As we argued in a 2010 special report, while the imagery of getting the state’s unemployed back in the workforce is nice, film tax credits don’t really accomplish that goal. In fact, most film production jobs are filled by a few select people with specialized skills, most of whom were probably not unemployed beforehand.

Numerous studies have shown that the public cost of these jobs are not covered by increasing revenues. When considering the return on investment (ROI) of the credits, Michigan discovered they were distributing over $100,000 for every full-time equivalent position created by film credits. Indeed, many independent studies have found film tax credits generate less than 30 cents for every $1 of spending (accounting even for movie-induced tourism, increased business to non-film businesses, and other indirect effects).

Even if California’s new “competitive and accountable” system could generate an above average ROI of 50 cents per $1, the state will still realize a loss of over $150 million annually. This is, unfortunately, not a one-time expenditure, but rather yearly spending through the tax code. If California taxpayers really want to support the movie industry, they could cut film companies a check through the spending side of the budget, and thereby at least be transparent. For those taxpayers who are not special effects experts, hair and makeup artists, or video editors, the full burden of these expenditures must be carried long after the final cut.

Rather than leaving taxpayers as collateral damage of ineffective film credits, California could look to the tax code for broad-based solutions. The state has some of the highest income tax rates and the eighth worst state and local tax burden in the country, factors that drive individuals and businesses elsewhere. In fact, from 2000 to 2010, California had a net loss of $29.4 billion in personal income, which is certainly at least influenced by the state’s tax climate.

California lawmakers may be trying to write a feel good family hit all of their own; however, only tax reform sound can generate the growth and prosperity needed to put individuals back to work. AB 1839, instead, reads more like Richard Benjamin’s The Money Pit.

Read more on California here.

Read more on film tax credits here.

Follow Josh on Twitter 

Categories: Tax news

New York State to Build Solar Cell Factory for Elon Musk-Owned Firm

Tax Foundation - Thu, 2014-09-25 06:30

Yesterday, New York Governor Cuomo’s (D) office announced that SolarCity, a major solar cell producer partially owned by Elon Musk, would make a $5 billion investment to operate a “gigafactory” in upstate New York. This comes on the heels of another Musk-owned firm, Tesla, announcing a $1.3 billion incentive deal to build a battery-producing “gigafactory” in Nevada. The New York deal involves three major components:

$750 million in spending by New York to build facilities and purchase equipment for SolarCity Unspecified tax incentives through the Startup New York tax-free zone in which the “gigafactory” will be located $1 per year plus utility costs which SolarCity will pay to operate the facilities New York paid to build

If SolarCity fails to produce as many jobs as expected, they will owe $41 million a year for 10 years.

Tax incentives are often wasteful and un-transparent, offering huge benefits to select firms, and pushing tax burdens off onto others. New York, with its high tax rates (and one of the worst State Business Tax Climate Index scores in the nation, although recent reforms will improve it somewhat) rather explicitly uses taxes on some firms (especially downstate) to subsidize other firms (especially upstate and around university campuses).

But the SolarCity deal is exceptional even for New York. The state has committed to actually building a facility for a large, private corporation using public money. The firm is in an industry, solar cells, which is highly volatile, and which has seen spectacular failures of public investments in the past, like Solyndra. SolarCity’s deal is such that it could get all the incentives, break its employment promises, and still net hundreds of millions, or billions, of dollars in incentives.

Startup NY gives companies tax-free status for 10 years. In Nevada, a low-tax state, tax-free status for 10 years for a similarly-sized investment meant $1.3 billion in incentives. New York, a much higher-tax state, is almost certainly offering at least as much in tax breaks through Startup NY, possibly much more. Thus, this proposal is almost certainly worth in excess of $1 billion, possibly much, much more.

Moreover, even once the facility is build, SolarCity will use it for free. New York could rent facilities out to other companies, but instead they’re giving the farm (or the robotic solar cell factory, as the case may be) away to one firm. With free property usage, the size of the deal is still larger than the $750 million (plus Startup NY incentives) estimated, but it’s extremely difficult to come up with a precise number.

The reality is that there are costs to having SolarCity locate in New York. The workers will consume local public services, their children will attend schools, trucks going in and out of the factory will put wear and tear on roads, and, like all businesses, SolarCity will consume other miscellaneous government services. Yet the firm will not only pay nothing, but a large part of its capital costs will be paid by the state. It is difficult to see where New York (and especially localities) will get the revenue to pay for all the new spending that will be required. Most likely, somebody else will see higher taxes.

As of now, no public statement has been made providing a complete cost estimate, an economic impact assessment, or a report addressing new revenue needs. For a deal this big, these are all basic transparency questions necessary to ensure that the state gets a good deal, taxpayers aren’t misled, and to ensure that all economic development and policymaking is kept above-board. But, as none of these reports appear to have been provided, in the case of these SolarCity incentives, a little more sunlight could go a long way.

Read more on New York here.

Read more on tax incentives here.

Follow Lyman on Twitter.

Categories: Tax news

'Jersey Shore's' Mike 'The Situation' Sorrentino pleads not guilty to federal ... - The Star-Ledger

Google IRS Federal Income Tax - Wed, 2014-09-24 18:43

The Star-Ledger

'Jersey Shore's' Mike 'The Situation' Sorrentino pleads not guilty to federal ...
The Star-Ledger
The law is absolutely clear: telling the truth to the IRS is not optional." The pair conspired to fail to pay federal taxes on income generated by two companies controlled by the brothers: MPS Entertainment, LLC and Situation Nation Inc., Fishman said.
IRS smushes 'The Situation,' brother for tax evasion on $8.9M of incomeCliffviewpilot.com
'Jersey Shore' star Mike (The Situation) Sorrentino, brother indicted on ...New York Daily News
Jersey Shore's Mike 'The Situation' Sorrentino Indicted For $8.9 Million Tax ...Forbes
NorthJersey.com -McClatchy Washington Bureau -WXIA-TV
all 387 news articles »
Categories: Tax news

Tax Inversions are the Canary in the Coal Mine

Tax Foundation - Wed, 2014-09-24 17:15

In old mining tunnels, the workers would often bring a caged bird with them. The bird would function not only as a pet, but also as an advance warning of dangerous carbon monoxide. If the bird – more sensitive to changes in air quality – fell ill, it was a sign that the tunnel was also dangerous for the miners.

Corporate inversions are also a sign. While corporate inversions are actually not costly to the treasury up front, they are a signal that doing business as a U.S.-domiciled corporation is becoming prohibitively difficult. U.S. businesses face increasingly arcane international tax rules designed to preserve an outdated system that most countries no longer use.

It is costly to restructure an organization. It’s costly to uproot practices that grew organically with the business, and it’s costly to artificially graft two companies together. Shareholders would greatly prefer not to expend value on all of this administrative nonsense.

Corporations have been inverting only because the U.S. worldwide system of corporate taxation is actually worse administrative nonsense than the costs described above. The whole system is based on a fundamentally unserious idea that the United States should tax economic activity that happens beyond its borders. Of the 34 OECD countries, 28 of them have abandoned worldwide taxation and moved to the superior territorial system.

When taxpayers flee a poor tax system, it is tempting to look at only those taxpayers leave. For example, the French “Millionaire Tax” resulted in several prominent Frenchmen threatening to leave the country last year. But, as with the French tax, it’s not just about the people who respond directly. It’s also about the indirect responses. An American company might simply avoid expanding to the U.K. in the first place, because it can’t compete with the British companies. Not because it’s less valuable or less talented – but because it has to pay both British taxes and U.S. taxes, while the British company is not similarly encumbered.

These unseen effects may be much larger than the seen ones. Inversions are just the visible sign of a much greater sickness.

Categories: Tax news

IRS, Justice indict Jersey Shore star “The Situation” - McClatchy Washington Bureau

Google IRS Federal Income Tax - Wed, 2014-09-24 15:13

Forbes

IRS, Justice indict Jersey Shore star “The Situation”
McClatchy Washington Bureau
Reporters gather around Mike "The Situation" Sorrentino as he leaves the MLK Jr. Federal Courthouse in Newark, N.J., after a court appearance, Wednesday, Sept. 24, 2014. (AP Photo/Julio Cortez). JULIO CORTEZ — AP ...
Here's 'The Situation': Jersey Shore's Mike Sorrentino Indicted On Tax Fraud ...Forbes
DOJ Calls Jersey Shore Star A 'B Television Personality' In Mocking Press ...Daily Caller
'Jersey Shore' star Sorrentino hit with tax countsDaily News - Galveston County
Greenfield Daily Reporter
all 387 news articles »
Categories: Tax news

New Study Finds Bonus Depreciation Boosts Investment

Tax Foundation - Wed, 2014-09-24 14:45

U.S. business investment has been severely depressed for many years, and, as a share of GDP, it remains well below that found in most developed countries. Investment is an important driver of productivity and, as a result, workers’ wages. It is therefore not a stretch to connect the protracted investment slump with the similarly protracted slump in wages.

As a result, many economists have called for immediate expensing or accelerated depreciation to speed up write-offs of investment. Accelerated depreciation for equipment and software is known as bonus depreciation, and it has been in place on a temporary basis off-and-on for about 12 years. Bonus depreciation expired at the end of last year and Congress has been debating whether to extend it again on a temporary basis or extend it permanently.

One question is to what degree bonus depreciation, as implemented in the past, actually boosted investment? We found in simulations that if it were extended on a permanent basis it would grow the capital stock by over 3 percent. We also found evidence that over the last 12 years it boosted investment in equipment and software, but a proper analysis would control for all the other major things happening in the economy.

A new study does just that, and it finds that bonus depreciation has provided a huge boost to investment, i.e. without it the U.S. economy would have been in much worse shape.

The authors are Eric Zwick, of the University of Chicago, and James Mahon, of Harvard, and they conclude that “bonus depreciation raised eligible investment by 17.3 percent on average between 2001 and 2004 and 29.5 percent between 2008 and 2010.” This is more than double the effect that previous studies have found, which the authors attribute to the fact that previous studies excluded the effects on small and medium-sized firms.

The authors find small and medium-sized firms are especially responsive to bonus depreciation in part because they are liquidity constrained, i.e. they don’t have sufficient access to capital markets or cash on hand to otherwise make these profitable investments.

This is a very thorough analysis that provides compelling evidence that bonus depreciation works. It confirms that accelerated depreciation and expensing have powerful effects on investment.

Follow William McBride on Twitter

Categories: Tax news

Bill Clinton: “We Need to Reform the Tax System”

Tax Foundation - Wed, 2014-09-24 12:30

At the Clinton Global Initiative meeting this week, former President Bill Clinton called for corporate tax reform as a “practical economic” need.

In the interview on corporate taxes, he likened the corporate tax system to a leaky boat and offered general support for moves to stop corporate inversions, but stated that “the best discouragement [of corporate inversions] is to reform taxes.”

"We're bailing water out of a leaky boat,” Clinton said. “And the only two things you can plug the leaks in that boat: Either we undertake corporate tax reform, or every other country in the world says, 'We are wrong and we’ll go back to the way we used to do it.'"

Clinton recounted that in the early 1990s when he raised the corporate tax rate from 34 to 35 percent he told his advisors that we can raise the corporate tax rate, but “don’t go above the average rate of OECD countries…That average rate was 35 percent and we hit it. Now, only Japanese companies…pay about what our companies do. We have the highest overall corporate tax rates in the world.”

Today, the corporate tax rate across the OECD sits at about 25 percent—10 percent below our federal corporate tax rate and nearly 15 percent below our federal and state average combined tax rate.

Since Clinton raised the corporate tax rate in 1993, every OECD country except the U.S., France, Hungary, and Chile has lower its corporate tax rate (though Hungary and Chile, remain below the OECD average at 19 and 20 percent, respectively).  

To bring the overall U.S. corporate tax rate down to the OECD average of around 25 percent, the federal tax rate would need to drop to about 20 percent before adding in the average corporate tax rate across the states.

Clinton has discussed the need to reform corporate taxes in the past, which we covered here and here

Categories: Tax news

Jersey Shore's Mike 'The Situation' Sorrentino Indicted For $8.9 Million Tax ... - Forbes

Google IRS Federal Income Tax - Wed, 2014-09-24 11:42

Forbes

Jersey Shore's Mike 'The Situation' Sorrentino Indicted For $8.9 Million Tax ...
Forbes
The brothers allegedly conspired to fail to pay federal taxes on income generated by two companies they controlled, MPS Entertainment, LLC and Situation Nation, Inc. U.S. Attorney Paul J. Fishman said. “The brothers allegedly also claimed costly ...
IRS, Justice indict Jersey Shore star “The Situation”McClatchy Washington Bureau
Federal Grand Jury Indicts Mike 'The Situation' Sorrentino And His Brother ...Radar Online
Mike 'The Situation' Sorrentino Charged with Tax Fraud ConspiracyPeople Magazine
WLS-TV -Daily News - Galveston County
all 387 news articles »
Categories: Tax news

IRS smushes 'The Situation,' brother for tax evasion on $8.9M of income - Cliffviewpilot.com

Google IRS Federal Income Tax - Wed, 2014-09-24 09:57

The Star-Ledger

IRS smushes 'The Situation,' brother for tax evasion on $8.9M of income
Cliffviewpilot.com
YOU READ IT HERE FIRST: TV personality Michael “The Situation” Sorrentino and his brother were to surrender to IRS agents today to face charges of ducking taxes on $8.9 million in income from promotional gigs while claiming pricey clothing, high-end ...
'Jersey Shore's' Mike 'The Situation' Sorrentino pleads not guilty to federal ...The Star-Ledger
'Jersey Shore' star Mike (The Situation) Sorrentino, brother indicted on ...New York Daily News
Jersey Shore's Mike 'The Situation' Sorrentino Indicted For $8.9 Million Tax ...Forbes
McClatchy Washington Bureau -Radar Online -NorthJersey.com
all 387 news articles »
Categories: Tax news

Which States Have the Most Progressive Income Taxes?

Tax Foundation - Wed, 2014-09-24 08:30

Yesterday, we presented data showing that the United States’ tax code is among the most progressive in the OECD when we compare Federal-level taxes, and an average value for state taxes. However, state income tax structures within the United States have just as much variation, in terms of progressivity, as OECD nations' income tax structures. We find that, using the same measure for the states as was used for the OECD, New York and California have tax codes more progressive than any OECD nation, even France or Portugal. Meanwhile, on the other end of the spectrum, 31 states have income taxes that would rank alongside the three least progressive income tax codes in the OECD. Five US states have income tax codes that are more progressive than the US federal tax code.

Progressivity and Top Marginal Rates of State Income Taxes, 2014 State Rank Multiple of Average Earnings at which the Top State Income Tax Rate Applies Rank Difference Between Top Income Tax Rate and Marginal Rate on $25,000 of Taxable Income Top State Individual Income Tax Rate

California

2

18.93

1

9.3%

13.3%

New Jersey

4

9.49

2

7.2%

8.97%

Vermont

5

9.42

3

5.4%

8.95%

Hawaii

11

4.48

4

3.4%

11%

District of Columbia

10

4.59

5

3.0%

8.95%

Minnesota

13

3.43

6

2.8%

9.85%

Iowa

17

1.74

7

2.5%

8.98%

West Virginia

18

1.65

8

2.5%

6.5%

New York

1

19.00

9

2.4%

8.82%

Rhode Island

14

3.02

10

2.2%

5.99%

Ohio

7

4.87

11

2.2%

5.392%

North Dakota

3

9.79

12

2.0%

3.22%

Louisiana

19

1.38

12

2.0%

6%

Nebraska

22

0.88

14

1.8%

6.84%

Connecticut

8

4.85

15

1.7%

6.7%

Arizona

12

3.54

16

1.7%

4.54%

Delaware

20

1.28

17

1.4%

6.6%

Wisconsin

6

5.93

18

1.4%

7.65%

Arkansas

21

0.98

19

1.0%

7%

Maryland

9

4.83

20

1.0%

5.75%

Oregon

15

2.77

21

0.9%

9.9%

Kentucky

16

1.96

22

0.2%

6%

Maine

23

0.75

23

0.0%

7.95%

New Mexico

24

0.63

23

0.0%

4.9%

South Carolina

25

0.63

23

0.0%

7%

Montana

26

0.59

23

0.0%

6.9%

Idaho

27

0.53

23

0.0%

7.4%

Mississippi

28

0.51

23

0.0%

5%

Kansas

29

0.49

23

0.0%

4.8%

Virginia

30

0.42

23

0.0%

5.75%

Missouri

31

0.41

23

0.0%

6%

Oklahoma

32

0.39

23

0.0%

5.25%

Georgia

33

0.31

23

0.0%

6%

North Carolina

34

0.18

23

0.0%

5.8%

Alabama

35

0.17

23

0.0%

5%

Michigan

36

0.09

23

0.0%

4.25%

Massachusetts

37

0.08

23

0.0%

5.2%

Utah

38

0.07

23

0.0%

5%

New Hampshire

39

0.05

23

0.0%

5%

Illinois

40

0.04

23

0.0%

5%

Tennessee

41

0.03

23

0.0%

6%

Indiana

42

0.02

23

0.0%

3.4%

Colorado

43

0.00

23

0.0%

4.63%

Pennsylvania

43

0.00

23

0.0%

3.07%

Alaska

50

No Income Tax

50

No Income Tax

0%

Florida

50

No Income Tax

50

No Income Tax

0%

Nevada

50

No Income Tax

50

No Income Tax

0%

South Dakota

50

No Income Tax

50

No Income Tax

0%

Texas

50

No Income Tax

50

No Income Tax

0%

Washington

50

No Income Tax

50

No Income Tax

0%

Wyoming

50

No Income Tax

50

No Income Tax

0%

 

* Income reflects May 2013 Bureau of Labor Statistics average earnings

* Tax rate and bracket information taken from here.

 

For a tax to be progressive, the average tax rate paid by an individual increases as their income increases. A flat tax, on the other hand, gives all taxpayers the same average tax rate regardless of income, while a regressive income tax would give taxpayers lower average tax rates as their incomes increase.

There are many ways to measure tax progressivity, especially when comparing effective rates. There is debate about what income measure should be used as a base, which deductions should be included in the comparison, and many other factors. At the state level, even very progressive tax systems can appear otherwise because of interactions with federal tax policies that redefine taxable income for states or allow deductions of state taxes, while state policies that allow federal taxes to be deducted also have major effects. Furthermore, many states offer a variety of credits and deductions that alter tax burdens, making the tax code more or less progressive.

Moreover, some states have a top rate that kicks in at a high threshold, but which isn’t very different from lower rates. Thus, a second way to measure tax progressivity is to measure the difference between top marginal tax rates, and some lower tax rate. The above table also shows the gap between the top marginal tax rate and the marginal tax rate on $25,000 of taxable income.

As can be seen, the list is similar, but not identical. Twenty-one states and the District of Columbia have progressive rate structures that rise after $25,000. California, New Jersey, and Vermont have the most progressive rate structures by a wide margin.

Policymakers may believe that more progressive rate structures will reduce inequality, however, there is relatively little evidence of this. In fact, states with more progressive tax codes have higher inequality, on average, than states with flat or no income taxes. Academic research by Raj Chetty and Emmanuel Saez (of Piketty and Saez fame) found that the progressivity of a state’s income tax had no significant correlation with upward mobility (though greater reliance on property taxes to fund local government apparently did increase economic mobility). Thus, policymakers may be adopting high tax rates that do real economic harm while doing little to encourage equality and upward mobility.

Read more on inequality here.

Read more on income taxes here.

Follow Lyman on Twitter.

 

Categories: Tax news

Obama Administration Targets Corporate Inversions with Regulation Changes

Tax Foundation - Wed, 2014-09-24 07:30

The Obama Administration announced this week that it would clamp down on corporate inversions by altering existing regulations dictating the treatment of foreign earnings and foreign controlled corporations.

These rule changes will seek to reduce the incentive for a company to invert by reducing its financial benefit.

These rule changes will undoubtedly reduce the incentive to invert. However, the rule changes are equivalent to giving a patient with pneumonia cough syrup: it treats the symptom, not the disease. The real problem of inversions is the uncompetitive nature of our tax code. Even more, a true reform that would move to a territorial system would make these rule changes unnecessary and would make inversions a non-issue.

What These Rule Changes Do

These rule changes have a few specific goals:

(1) Make it more difficult to invert

The first set of rule changes make it harder to invert in the first place. Under Section 7874, a U.S. corporation can invert (become a foreign corporation) when the foreign corporation owns at least 21 percent of the new combined foreign corporation. The rule change would disregard certain passive assets in this calculation. This means that it will be harder for a foreign company to reach the 21 percent threshold.

As part of this, Treasury will also make it harder for a corporation to meet the above threshold by preventing them from paying out large dividends in advance of an inversion to reduce its size. These dividend payments will be disregarded before applying the 21 percent ownership test.

(2) Prevent “Hopscotching” or transfers of property

The second change redefines certain transactions between an inverted firm and another foreign firm to be taxable under U.S. law.

Under current law, the United States taxes any foreign corporate income that is repatriated (brought back) to the United States as a dividend payment. For example, if a U.S. corporation earns $100 in a foreign country and then moves that money back to the United States, it triggers a U.S. tax liability. However, if that income remains outside of the United States and is reinvested in ongoing activities, tax is deferred.

In order to prevent possible circumvention of U.S. tax liability, the U.S. also deems payments for stocks or loans to the parent company as repatriated income. For example, a foreign subsidiary may purchase $100 of stock from the U.S. parent. $100 goes to the U.S. parent and the U.S. treats that as a taxable dividend.

When the U.S. parent inverts and becomes a foreign company, it no longer has to worry about the rule dictating loans and stock purchases because the income remains outside of the United States. It goes from one foreign country to another foreign country, never triggering U.S. tax liability.

This rule change will make these foreign-to-foreign transactions taxable as if they were dividends paid from a foreign corporation to a U.S. corporate parent.

(3) Prevent “de-controlling”

As stated, the income of foreign controlled corporations are taxable once it is paid to the parent corporation in the form of a dividend. However, if the corporation is not deemed “controlled” it is not liable as it is not considered part of a U.S. corporation.

When a corporation inverts and creates a foreign parent, it is possible for the U.S. corporation to transfer ownership of the foreign controlled corporation to the new foreign parent. At this point, the foreign corporation is no longer controlled and thus no longer liable for U.S. taxes on its income.

This rule change will prevent this. A transferred controlled foreign corporation would still be considered controlled by a U.S. corporation for tax purposes.

The Rule Changes do Not Address the Fundamental Problems with the Tax Code

None of the above rule changes address the underlying incentives to invert. The real problem is the U.S.’s worldwide corporate income tax system and its high corporate income tax rate.

As global operations become an increasingly important aspect of business, multinational corporations are under increasing pressure to lower their overall tax burden. There are two specific problems with the current U.S. corporate income tax that corporations are attempting to overcome through re-incorporation transactions:

The United States corporate income tax rate, 35 percent (39.1 percent combined with state rates) on corporate income, is relatively high by international standards. The U.S. corporate income tax rate is the highest rate among the 34 countries of the Organization for Economic Cooperation and Development (OECD). The fact that inversions have been accelerating reflects the fact that the U.S. is actually falling farther behind as time as gone on.

 

The second reason, is that the United States taxes domestic companies on their world-wide income, while most other countries tax their domestic companies only on domestically-earned income. This means that U.S. companies face a marginal tax rate of at least 35 percent on every dollar earned whether earned domestically or abroad, while their competitors do not.

Rule Changes are not Compatible with Fundamental Tax Reform

These rule changes not only fail to address the real issue with the U.S. tax code, they move our tax system in the wrong direction. Any fundamental tax reform that would improve the U.S. tax code would move to a territorial tax system. This system would exempt the foreign earnings of U.S. corporations from U.S. taxes. No longer would the Treasury need to concern itself with inversions, or when or how foreign earnings were brought back into the United States.

Read more about inversions here

Categories: Tax news
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