Category Archives: Taxation

Issues in a Tax Reform Limited to Corporations and Businesses

Source: Jane G. Gravelle, Congressional Research Service, CRS Report, R44220, October 8, 2015

Some tax proposals have focused on broadening the tax base and lowering the rates of both individual and corporate income taxes. In some cases, these proposals have advanced a revenue-neutral tax reform. In other instances, they have proposed revenue increases. …. Given the challenges of adopting a broad income tax reform, some proposals have focused on business-only tax reform. …. This report discusses issues and options that might be considered in a business-only tax reform, including the approach of the Administration’s reform as well as other potential options to consider. It first outlines how firms operate as incorporated or unincorporated businesses for tax purposes and discusses the share of assets
and income in the unincorporated sector. The next section examines corporate tax expenditures and the extent to which those tax expenditures affect pass-through firms. The final section discusses a number of options and issues that might be considered for business-only tax reform. ….

Financial Transactions Taxes: In Brief

Source: Mark P. Keightley, Congressional Research Service, CRS Report, R42078, October 22, 2015

Since the financial crisis and the ensuing 2008-2009 Great Recession, the idea of imposing a tax on financial transactions has appeared somewhat frequently in policy debates At its most basic level, a financial transaction tax (FTT) is a tax imposed on the buyer or seller of a security at the time a financial transaction occurs. An FTT can be applied across the board to all financial transactions, or only those involving specific types of securities (for example, stocks, options, and futures, but not bonds). Similarly, an FTT can be applied to the transactions of all traders, or selectively to only certain types, such as those made by institutional traders but not individual investors.

While an FTT can come in many different forms, three justifications are commonly offered for imposing such a tax: (1) it would reduce financial market volatility by reducing speculation, (2) it would generate a significant amount of revenue and (3) it would help pay for recent and future federal assistance to the institutions that are viewed by some as the source of the financial instability (aka, “Wall Street”). This report briefly discusses the concept of an FTT in a historical and international context, summarizes recent FTT proposals, examines the tax’s effect on financial market volatility and speculation, and analyzes the revenue potential.

Opponents of the tax also generally offer a number of objections. First, it is argued that the tax will introduce distortions into the marketplace as well as raise the cost of capital for businesses looking to finance investment. Second, if raising revenue is the objective it is not clear that an FTT is the best of all available options. And third, regulators may be better suited to increase transparency and reduce volatility using the set of tools at their disposal, which may more directly target improving the function of financial markets if the current financial environment is viewed to have problems.

The Effect of Base-Broadening Measures on Labor Supply and Investment: Considerations for Tax Reform

Source: Jane G. Gravelle, Donald J. Marples, Congressional Research Service, CRS Report, R44242, October 22, 2015

One source of interest in a tax reform that broadens the base and lowers the rate is the potential increase in growth, as labor supply and investment respond to lower marginal tax rates. Yet, studies of a signature reform in the past, the Tax Reform Act of 1986, found little effect on growth. The act was revenue and distributionally neutral, which is a goal of some recent tax reform proposals. One reason advanced for the limited effects on growth is that the effects of provisions that broaden the base to finance lower statutory rates increase effective marginal tax rates for some taxpayers.

This report shows how options to broaden the tax base by placing limitations on itemized deductions can potentially work counter to the growth effects of reducing marginal tax rates, primarily through reducing labor supply. It also shows how these effects —along with other base-broadening provisions, such as slowing depreciation— limit the effects on investment and savings and can eventually reduce
the size of the capital stock in the economy. The effects on labor supply and the capital stock are considered in turn.

To examine the potential effects of base broadening on effective tax rates facing labor, the analysis examines provisions to eliminate itemized deductions for state and local taxes, for charitable contributions, and for both. It also examines provisions to eliminate itemized deductions altogether or to impose dollar caps ($17,000 and $25,000). …..

The Diffusion of State Tax Incentives for Business

Source: Stephanie Leiser, Public Finance Review, Published online before print October 26, 2015
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From the abstract:
Tax competition scholars are increasingly recognizing that states compete with each other not only by manipulating tax rates but also by adopting tax incentives. However, there is a comparative lack of empirical literature exploring why states adopt different types of tax incentives. This article draws on the literatures on tax competition and policy diffusion to develop hypotheses about what factors motivate states to adopt business tax incentives, paying particular attention to the influence of other adopting states. It uses event history analysis methods to test hypotheses regarding the adoption of four state tax incentive policies: investment tax credits, apportionment formula changes, research and development tax credits, and job creation tax credits. Regression results show that factors that influence adoption decisions are largely inconsistent across the four incentive types. However, analyses of duration dependence find evidence consistent with the idea that states are “racing to the bottom.”

Shortchanging Small Business: How Big Businesses Dominate State Economic Development Incentives

Source: Greg LeRoy, Carolyn Fryberger, Kasia Tarczynska, Thomas Cafcas, Elizabeth Bird and Philip Mattera, Good Jobs First, October 2015

From the press release:
Governors and state legislators routinely praise small businesses for their contributions to economic growth and job creation, but states actually give big businesses the dominant share of their economic development incentive awards. An analysis of more than 4,200 economic development incentive awards in 14 states finds that large companies receive dominant shares: 70 percent of the deals and 90 percent of the dollars. The deals, worth more than $3.2 billion, were granted by programs that are facially accessible to both small and large companies. More than 500 other state incentive programs were disqualified for analysis because they have barriers to entry that exclude small businesses and favor big businesses. …. The 14 states where the awards were analyzed are Florida, Indiana, Kansas, Kentucky, Louisiana, Missouri, North Carolina, New Mexico, Nevada, New York, Pennsylvania, Vermont, Virginia and Wisconsin. …..

Ready to Bargain: The Effect of Fiscal Stress on Supermajority Requirements to Raise Taxes

Source: Ellen Seljan, Public Budgeting & Finance, Vol. 35 Issue 3, Fall 2015
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From the abstract:
This paper analyzes the interaction effect between fiscal stress and supermajority requirements to raise taxes. I hypothesize that fiscal stress nullifies the effects of supermajority requirements, making states with and without supermajority requirements equally likely to raise taxes during these periods. This conclusion was drawn from a theory on how fiscal stress affects the legislative bargaining environment. The hypothesis was tested using data from 49 states from 1980 to 2010, and the results confirmed expectations. This research contributes to a growing literature that suggests that the effect of institutions cannot be analyzed without considering the context of the political environmen

A Theory of Top Income Taxation and Social Insurance

Source: Francisco M. Gonzalez, The Economic Journal, Vol. 125 Issue 587, September 2015
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From the abstract:
The development of the welfare state in the Western economies between 1930 and 1990 coincided with a puzzling pattern in the taxation of top incomes. Effective tax rates at the top increased sharply during the 1930s and 1940s, but then gradually decreased, even as social transfers continued rising. We propose a new theory of the development of the welfare state to explain these facts. Our main insight is that social insurance and top income taxation are substitutes for averting social conflict. Our detailed arguments build on the policy histories of the US, UK and Sweden.

Overlapping Local Government Debt and the Fiscal Common

Source: Robert A. Greer, Public Finance Review, Vol. 43 no. 6, November 2015
(subscription required)

From the abstract:
In a complex federalist system, the interactions across levels of government have important fiscal implications. Municipal debt has become increasingly important as local governments turn to tax-backed bonds as a significant source of funds. In a system of local governments that have overlapping borders, fiscal interactions become a factor in issuing debt. In this system, debt acts as a fiscal common resource similar to traditional common-pool resources. Specifically, vertical externalities are created with multiple levels of governments issuing bonds backed by the same tax base. Empirical results show that on average an increase in the total amount of debt issued by subcounty governments increases the true interest cost paid by county governments on tax-backed debt. Furthermore, increasing the number of overlapping governments also increases the interest costs for county debt. These findings show support for analyzing debt capacity as a fiscal common resource and have implications for debt management strategies.

Offshore Shell Games 2015 – The Use of Offshore Tax Havens by Fortune 500 Companies

Source: Robert S. McIntyre, Richard Phillips, Phineas Baxandall, U.S. PIRG and Citizens for Tax Justice, 2015

From the summary:
U.S.-based multinational corporations are allowed to play by a different set of rules than small and domestic businesses or individuals when it comes to the tax code. Rather than paying their full share, many multinational corporations use accounting tricks to pretend for tax purposes that a substantial portion of their profits are generated in offshore tax havens, countries with minimal or no taxes where a company’s presence may be as little as a mailbox. Multinational corporations’ use of tax havens allows them to avoid an estimated $90 billion in federal income taxes each year.