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Census Data Shows Tax Revenue Recovery following Recession

Tax Foundation - Thu, 2014-06-12 06:45

Last Thursday, the Census Bureau released its annual report on state government tax collections, showing that state government revenues from taxes increased 6.1 percent between 2012 and 2013. This marks the third consecutive year that collections have increased since the recession – for a total 18.6 percent increase in nominal terms since 2009.

(from Census Bureau report)

Despite claims of state revenue shortages since the recession, steadily increasing revenues have nearly pushed total state collections back to pre-recession levels. After adjusting for inflation, the difference between collections at the peak of the bubble and current collections is only about 2 percent.

The Census survey classifies collections using five broad categories, which can be seen in the figure below. Revenue from sales taxes and gross receipts taxes make up over 46 percent of the total tax base at $309 billion, followed by income taxes with nearly 42 percent. License, property, and other taxes account for the final 11.8 percent of total collections. While property taxes are typically levied by local governments (and you can find Census data on local tax collections here), 36 states levy some sort of statewide property tax, which make up 1.6 percent of total collections.  

(from Census Bureau report)

While total state revenues dropped in 2009, collections from property and license taxes increased by 2.5 percent and 0.16 percent respectively. "Other" taxes increased by 24.6 percent. However, because these three tax categories only make up about 10 percent of total state collections, their stability has little impact on the stability of total tax revenues for states.

The sales tax is typically more insulated from fluctuations in the economy.  Since 2007, the standard deviation of year-to-year percent change for income taxes was 8.9 percent compared to sales taxes at only 3.8 percent. This relative stability was confirmed during the recession: between 2008 and 2009, sales tax collections only decreased 4.5 percent, compared to an 11.5 percent drop in revenues from individual income taxes and a 21.2 percent drop in revenue from corporate income taxes.   (Authors' graph)   See more of our work on post-recession collections here.   Follow Scott on Twitter.
Categories: Tax news

Why the IRS Thinks California Chrome is Different

Tax Foundation - Thu, 2014-06-12 06:30

The race horse, California Chrome, recently in the news for his attempt at the Triple Crown, may be different than other horses according to the IRS, and it all has to do with the complicated depreciation system in the U.S.

The tax code has different guidelines on how all horses are to be treated depending on the age, dates of service, and type of horse. Horses are capital assets and tax law requires that all capital assets must be depreciated for tax purposes.

When a firm purchases a new piece of equipment or building (or horse), the investment is not immediately taken out of revenue, but instead deducted in stages, over time. The deduction of the cost of capital over time is called depreciation. The time over which an asset is depreciated is determined by the IRS and Congress.

So how does the tax code see horses like California Chrome?

There are five different asset classes just for horses. According to the IRS, a young race horse and an old horse are different assets, but both had “useful lives” of three years until December 2013 when the tax extenders package expired. At that time, a young race horses’ useful life was extended by four years. Other horses that are neither young race horses, nor normal old horses have useful lives of seven years.

One can observe other seemingly arbitrary asset lives throughout the IRS’s guidelines. What do nuclear fuel assemblies, telephone equipment, and an office chair have in common? The IRS has determined they all have useful lives of five years.

This is a major problem with using depreciation in the tax code. The government is placed in the awkward position of defining asset lives for almost any capital asset you can imagine, despite the fact that an assets’ useful life depends on maintenance, frequency of use, and any number of other factors. The results of trying to simulate this through depreciation policy makes for a regime that is seemingly arbitrary.

Not only do depreciation schedules make little sense in terms of useful lives, they make even less economic sense. Any time a firm is required to depreciate an asset, the assets’ after tax return is diminished because the write off loses value over time. Furthermore, during the depreciation period, the firm is essentially providing an interest free loan to the government by paying the taxes on income before the assets’ cost is full deducted from their balance sheet.

In an ideal world, capital assets could be written off immediately--“expensed.”

If instituted for all assets, full expensing would increase wages, boost the capital stock, and grow the economy. That’s a triple crown that we would all like to win.

Categories: Tax news

IRS: Brothers with Atlanta tax business claimed $1M in fraudulent returns - Atlanta Business Chronicle

Google IRS Federal Income Tax - Thu, 2014-06-12 01:59

IRS: Brothers with Atlanta tax business claimed $1M in fraudulent returns
Atlanta Business Chronicle
Brothers Frederick Jenkins and Willie Jenkins, who own Global Tax Service LLC,. a tax preparation business with multiple locations throughout the Atlanta area and in other states, have been arraigned on federal charges that they conspired to prepare ...

and more »
Categories: Tax news

Watchdog: We're grading IRS PPACA data - LifeHealthPro

Google IRS Federal Income Tax - Wed, 2014-06-11 15:05


Watchdog: We're grading IRS PPACA data
The investigators creating that report are looking at the accuracy of the IRS family size information, the IRS income information, and the IRS health premium tax credit eligibility calculations flowing to the U.S. Department of Health and Human ...

Categories: Tax news

Likely “Solutions” to Highway Trust Fund Shortfall Violate Sound Tax Policy and User-Pays Principle

Tax Foundation - Wed, 2014-06-11 13:15

Congress appears deadlocked over how to plug a $100 billion shortfall in the Highway Trust Fund over the next six years. Some members are looking for a short-term funding solution that would keep the fund from going broke in late July or early August, while others are looking for long-term solutions that would put the trust fund on a sound financial footing through 2020.

Unfortunately, many of the leading proposals to fix the trust fund crisis either violate the principles of sound tax policy or they violate the user-pays intent of federal trust funds.

Bad Tax Policy: Taxing Multinationals to Pay for Roads

A number of the Senate proposals being floated would close the gap in the Highway Trust Fund with revenues extracted from U.S. multinational corporations. While some of these ideas are just bad tax policy and should not be considered anyway, any proposed changes to our international tax rules should only be considered within the context of making the U.S. more competitive—not putting a finger in the dike of a domestic trust fund.

One proposal being considered is a temporary tax holiday on any foreign profits that U.S. companies repatriate from overseas. Similar to the 2004 tax holiday, companies could shield from U.S. tax 85% of the profits they repatriate. According to the Joint Committee on Taxation, this proposal would raise about $20 billion in new revenues in 2014 and 2015, but loose a total of $96 billion over ten years.

One can understand the attractiveness of a policy that seemingly has twin benefits of raising short-term cash for the trust fund and unlocking more than $2 trillion in foreign profits trapped abroad. But, using a tax holiday to plug a hole in the trust fund is simply a gimmick and does nothing to make the U.S. tax system more competitive with our major trading partners. The only way lawmakers should consider another repatriation measure—whether it is voluntary or involuntary (such as a “deemed” repatriation)—is within the context of comprehensive international tax reform.

The same case could be made for another proposal that would use the revenues generated from changing the tax rules governing corporate “inversions” to save the trust fund. At best, this proposal amounts to demagoguery, but more importantly, such proposals avoid dealing with the structural issues that are making this country less competitive—such as our high corporate tax rate and worldwide tax system.

Another ill-considered proposal would deny U.S. companies a tax deduction for their interest costs on any domestic borrowing that was done to “avoid” repatriating foreign profits. Because of the high toll charge (35%) that companies have to pay on any profits brought back to the U.S., many prefer to leave their foreign earnings overseas and borrow money domestically to fund expansion or pay dividends. Critics object to this practice because companies can deduct the cost of borrowing domestically which lowers their U.S. tax bill and avoids the tax incurred when bringing their cash back home.

Advocates of this policy believe that penalizing companies by denying their interest deduction will force them to repatriate their foreign earnings. Supposedly, this will benefit the Treasury in two ways: raise revenues because of the denied tax deduction and with the taxes paid on the forced repatriations.  

This measure is not only punitive, but it is bad tax policy. The reason the tax code allows businesses to deduct their borrowing costs is (1) because it is a legitimate business expense (like the cost of advertising and employee salaries), and (2) because the lender is being taxed on those interest payments as income. To deny the deduction of interest effectively double-taxes lending and raises the cost of capital.

Violating the User-Pays Principle

Beyond the violations of good tax policy, the bigger issue here is the integrity of the user-pays model of federal trust funds. The underlying idea of federal trust funds—such as the Highway Trust Fund, Social Security, Medicare, or even the Federal Sport Fishing Account of the Aquatic Resources Trust Fund—is that users pay taxes into the trust fund and derive some benefit in the future.

The sanctity of this pact between taxpayers and the government breaks down if unrelated revenues are used to pay for those benefits. Thus, it makes no more sense to tax multinational firms in order to fix the nation’s highways than it does to uses those taxes to plug shortfalls in funding for Medicare, Social Security, or state sport fishing programs. Such policies violate the user-financing intent of all federal trust funds.

In a similar fashion, the House proposal to shore up the Highway Trust Fund gap with the savings from suspending the delivery of mail on Saturdays is also a gimmick and misuse of those savings. There is no rationale for denying postal customers a service to fund a short-term shortfall benefiting drivers.

Lawmakers are chasing down two mistaken avenues to rescue the Highway Trust Fund from red ink—raising taxes on U.S. companies, who already face the highest corporate tax rate in the developed world, and postal customers, who may already be receiving poor service. Both of these paths violate the spirit and intent of the user-pays principle underlying the trust fund.



Categories: Tax news

Higher Marginal Tax Rates Won’t Improve the World

Tax Foundation - Wed, 2014-06-11 13:00

The New York Times’ The Upshot uses Dave Chappelle’s recent appearance on the “Late Show with David Letterman” as an opportunity to discuss the need for high top marginal tax rates.

From The Upshot:

"'So I look at it like this,” Mr. Chappelle said. “I’m at a restaurant with my wife. It’s a nice restaurant. We’re eating dinner. I look across the room and I say: ‘You see this guy, over here across the room? He has $100 million. And we’re eating the same entree. So, O.K., fine, I don’t have the $50 million or whatever it was, but say I have $10 million in the bank.’ The difference in lifestyle is minuscule.'

That’s a reason advocates of higher marginal income tax rates on the highest earners would argue there is little loss of human welfare by enacting very high rates on the highest income brackets. The difference in quality of life between “very wealthy” and “extraordinary wealthy” is not that great, which should make it a relatively painless way to raise tax revenue."

The Upshot and Dave Chappelle, while possibly correct in his illustration of diminishing marginal utility of wealth, miss the point. It’s not about the streaks that wealthy people buy and it’s not entirely about the incentives to make more money; it’s about the alternative uses of money.

In a world with high marginal tax rates, the government collects additional money from Dave Chappelle and his restaurant companion and put it to its own purposes, whether that is a government housing program or national defense. The question is: what is the alternative?

When a government levies high marginal tax rates, the man worth $100 million has less money in his own pocket. Instead, if the government didn’t levy the tax, what does the man do with the money? Sure, maybe he buys a couple Ferraris or goes out to a lot of nice dinners or rents the most expensive penthouse in New York City.

But as Dave Chappelle points out for us, that’s not what he does. “The difference in lifestyle is minuscule,” he said.

So what do Dave Chappelle and the $100 million man do with their money?

In the worst case scenario, they take the money and put it in a savings account. But despite popular belief, that money doesn’t just sit there. The bank takes that money and it lends it to a person who wants to start a business or a couple who want to buy their first house.

Think of the scene from It’s a Wonderful Life when everyone crowds into George Bailey’s building and loan office to retrieve their money during the run on the bank:

“You're thinking of this place all wrong. As if I had the money back in a safe. The money's not here. Your money's in Joe's house...right next to yours. And in the Kennedy house, and Mrs. Macklin's house, and a hundred others. Why, you're lending them the money to build, and then, they're going to pay it back to you as best they can.”

Money not taxed and simply saved still contributes to a productive society. But there are even better cases than the man with $100 million putting his money in the bank. And they are even more likely to happen.

Instead of opening a savings account, let’s say the man with $100 million dollars invests his money in a company, say through the stock market. The company then uses that money to build a new factory and fill it with machines that build computers. That investment has the potential to not only provide work for hundreds of people, but also make it so more people are able to buy computers so they can call explore the world through the internet or correspond with their grandkids away at college.

Money allows us to do things. It allows us to investment in tools that make life easier and make life better. When we let money be, it can do good things--it can help people live fulfilling lives. It can help us build computers and phones and houses and cars.

The Upshot and Dave Chappelle may be right that for someone with a $100 million that next dollar might not means as much as the first dollar. But that money doesn’t sit collecting dust. It is invested in the broader economy.  It is “in Joe's house...right next to yours. And in the Kennedy house, and Mrs. Macklin's house, and a hundred others.”

Categories: Tax news

A Basic Lesson on the U.S.’s Corporate Income Tax System

Tax Foundation - Wed, 2014-06-11 09:30

This week, Americans for Tax Fairness, released a report on how much they believe the U.S. government would lose in revenue over 5 years if Walgreens were to merge with a Swiss company and move their headquarters to Switzerland.

The report claims that the deal would save Walgreens $4 billion in taxes over five years it would have to pay to the U.S. government, but it worries that Walgreens “would continue to take full advantage of all the benefits it gets from operating in America, where almost all of its $72 billion in annual sales and nearly $2.5 billion in profit are generated.”

This concern is based on a misunderstanding of how the U.S. corporate income tax system works and how an inversion would affect Walgreens.

Under current law, corporations that are based in the United States pay the 35 percent corporate tax rate on their profits earned in the United States and earned overseas. Profits that U.S. corporations earn in the U.S. are taxed by the U.S. government in the year in which it was earned.

Overseas income is treated a little differently. First, the income is taxed by the foreign country in which it earned its profits. Those profits are taxed again by the U.S. government when those profits are brought back (repatriated) to the United States. Corporations can defer this additional tax indefinitely as long as that income is reinvested in ongoing overseas business activity.

For Walgreens, the expected tax savings comes from the treatment of overseas income, not its domestic income. Any income it earns in the United States as a Swiss company would continue to be taxed at the 35 percent U.S. corporate income tax rate. The inversion would only allow Walgreens to freely move its after-tax foreign profits throughout the world without triggering the additional ATF-estimated $4 billion tax charge by the U.S. government.

This estimated tax savings for Walgreens assumes that they were ever going to bring those earnings back to the United States at all. Walgreens could instead choose to build their international operations.

Either way, ATF does not have to worry; Walgreens will continue to pay the U.S. corporate income tax of 35 percent on its $2.5 billion in annual profit earned in the United States. It will also continue to pay its “fair share” to other countries in which it earns money as well.

More on the U.S.’s world-wide corporate tax system: here

Categories: Tax news

Illinois May Face Confusing Non-Binding Tax Referendum

Tax Foundation - Wed, 2014-06-11 07:15

Back in April, I wrote that progressive tax proposals in Illinois had “stalled.” Failing to reach the vote threshold needed to get a constitutional amendment on the ballot for this November, it was widely assumed that progressive tax plans were probably over for this session. However, advocates of a progressive tax took a different tact, and instead introduced a non-binding referendum (HB3816) on Speaker Madigan’s (D) millionaire tax proposal. This referendum didn’t require a 2/3 majority to pass, since it is non-binding. The bill has since passed both the Senate and the House and been sent to the Governor to be signed. Governor Quinn (D) is expected to sign it soon.

The text of the ballot question is as follows:

Should the Illinois Constitution be amended to require that each school district receive additional revenue, based on their number of students, from an additional 3% tax on income greater than one million dollars?

As can be readily seen from the ballot question, any results will be of very little use to policymakers. The structure of the question leaves unclear exactly what is being asked: is it asking voters to endorse a new tax, given that the revenues are distributed to schools? Or is it asking voters to endorse the revenue distribution proposed, given a new tax? Or is it asking two separate questions about revenue distribution and taxes?

The ambiguity in the question is vitally important. Even voters who oppose a new tax hike might vote yes if they favor the distribution method. To put it more clearly, the question can reasonably be read as asking: “If we hypothetically had a new tax, would you want the revenues to go to each school district based on the number of students?”

For voters who read the question that way, a “yes” vote could still include opposition to the tax increase, while a “no” vote could still include support for the tax increase.

The same ambiguity exists if you focus on taxes. The question can be read as asking: “If we hypothetically had to distribute revenues in this specific way, would you accept a new tax?” Voters who vote “yes” may not support the distribution method proposed, and vice versa.

Thus, it’s a good thing this question is non-binding, because, if it were binding, it’s not even clear what policy voters are being asked about. As it is, the question is basically just a formalized opinion poll, and not a particularly well-structured or useful one as that. It has as much legal weight as any other opinion poll, but a far less well-worded question.

Read more on Illinois here.

Read more on millionaires taxes here.

Follow Lyman on Twitter.

Categories: Tax news

IRS Approves List of Taxpayer Rights

Tax Foundation - Wed, 2014-06-11 06:30

This is big. The Taxpayer Bill of Rights may initially strike you as a meaningless gimmick. But Nina Olson, the National Taxpayer Advocate, has been pressing for it since 2007. She explains that taxpayers often don’t know what rights they have before the IRS, and the IRS is often ignorant of the rights taxpayers have before them. My own addition is that much as requiring police to know and inform arrestees of “Miranda” warnings has increased awareness of those rights, so too will this. People can invoke rights better when they know what they are.

Your rights in front of the IRS are:


The Right to Be Informed

Taxpayers have the right to know what they need to do to comply with the tax laws. They are entitled to clear explanations of the laws and IRS procedures in all tax forms, instructions, publications, notices, and correspondence. They have the right to be informed of IRS decisions about their tax accounts and to receive clear explanations of the outcomes.

The Right to Quality Service

Taxpayers have the right to receive prompt, courteous, and professional assistance in their dealings with the IRS, to be spoken to in a way they can easily understand, to receive clear and easily understandable communications from the IRS, and to speak to a supervisor about inadequate service.

The Right to Pay No More than the Correct Amount of Tax

Taxpayers have the right to pay only the amount of tax legally due, including interest and penalties, and to have the IRS apply all tax payments properly.

The Right to Challenge the IRS’s Position and Be Heard

Taxpayers have the right to raise objections and provide additional documentation in response to formal IRS actions or proposed actions, to expect that the IRS will consider their timely objections and documentation promptly and fairly, and to receive a response if the IRS does not agree with their position. 

The Right to Appeal an IRS Decision in an Independent Forum

Taxpayers are entitled to a fair and impartial administrative appeal of most IRS decisions, including many penalties, and have the right to receive a written response regarding the Office of Appeals’ decision. Taxpayers generally have the right to take their cases to court.

The Right to Finality

Taxpayers have the right to know the maximum amount of time they have to challenge the IRS’s position as well as the maximum amount of time the IRS has to audit a particular tax year or collect a tax debt. Taxpayers have the right to know when the IRS has finished an audit. 

The Right to Privacy

Taxpayers have the right to expect that any IRS inquiry, examination, or enforcement action will comply with the law and be no more intrusive than necessary, and will respect all due process rights, including search and seizure protections and will provide, where applicable, a collection due process hearing.

The Right to Confidentiality

Taxpayers have the right to expect that any information they provide to the IRS will not be disclosed unless authorized by the taxpayer or by law. Taxpayers have the right to expect appropriate action will be taken against employees, return preparers, and others who wrongfully use or disclose taxpayer return information.

The Right to Retain Representation

Taxpayers have the right to retain an authorized representative of their choice to represent them in their dealings with the IRS. Taxpayers have the right to seek assistance from a Low Income Taxpayer Clinic if they cannot afford representation.

The Right to a Fair and Just Tax System, Including Access to the Taxpayer Advocate Service

Taxpayers have the right to expect the tax system to consider facts and circumstances that might affect their underlying liabilities, ability to pay, or ability to provide information timely. Taxpayers have the right to receive assistance from the Taxpayer Advocate Service if they are experiencing financial difficulty or if the IRS has not resolved their tax issues properly and timely through its normal channels.

More details here. Huge congratulations to Ms. Olson, who has tirelessly worked to make the IRS responsive and better to taxpayers. And kudos to the IRS, for finally adopting these basic guarantees.

Categories: Tax news

Bailout Act Includes Tax Breaks for the Little Guy - Tax Matters - Wed, 2008-10-08 12:27
The unpopular Fed bailout act does offer some nice tax breaks.
Categories: Tax news

A Smart Tax Move for Short-Term Investors - Tax Matters - Wed, 2008-10-01 11:30
Reduce the tax hit on short-term bets by investing in broad-based equity index options.
Categories: Tax news

Refundable AMT Credit Could Mean Cash Back for You - Tax Matters - Wed, 2008-09-24 09:49
If you exercised incentive stock options and got socked by the AMT, here's some relief.
Categories: Tax news

Borrowing From Your IRA - Tax Matters - Thu, 2008-09-18 08:16
It can be a source for an interest-free short-term loan -- or a bad idea if you do it wrong.
Categories: Tax news

Why Our @*$! Tax Code Is So Confusing - Tax Matters - Wed, 2008-09-10 08:30
I'm a CPA and our stupid tax code even drives me nuts. Politicians, are you listening?
Categories: Tax news

Which Cars Qualify for Alternative Fuel Credit? - Tax Matters - Thu, 2008-09-04 06:34
Here's a list of which vehicles still qualify for the juicy tax credit of up to $3,000.
Categories: Tax news

IRAs Are Better Than Ever as Retirement Tool - Tax Matters - Wed, 2008-08-27 07:03
More folks are eligible -- and the contribution limits are higher. So get on this.
Categories: Tax news

Late Payments of Estimated Taxes Can Be Smart Move - Tax Matters - Wed, 2008-08-20 10:27
If you pay estimated taxes, delaying your payments is remarkably painless.
Categories: Tax news

A Sneaky New Twist on the Wash-Sale Rules - Tax Matters - Thu, 2008-08-07 07:16
The IRS says IRA and other transactions can now trigger the dreaded wash-sale rule.
Categories: Tax news

3 Brand-New Tax Changes You Need to Know About - Tax Matters - Tue, 2008-08-05 11:00
New legislation has changes that will affect many homeowners.
Categories: Tax news
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