Category Archives: Taxation

Why American Workers Pay Twice as Much in Taxes as Wealthy Investors

Source: Ben Steverman, Bloomberg, September 12, 2017

What’s best for the country? What’s fair? And will either matter when Congress takes up tax reform this fall? ….

…. Let’s say you and I are neighbors. You’re an emergency room doctor, and I don’t work, thanks to a pile of money my grandparents left me.

You spend your days and nights stitching up gunshot wounds and helping children survive asthma attacks. I’ve gotten really good at World of Warcraft, winning EBay auctions, and frying shishito peppers to just the right crispiness.

Let’s also say we both report $300,000 in income to the Internal Revenue Service this year. Who pays more in taxes?

You do, by a lot. You owe the IRS about $38,500 more, assuming each of us pays the maximum with no special deductions. I also have more flexibility to lower my burden with tax planning strategies and other tricks, and I get to skip about $24,000 in payroll taxes that you and your employer must fork over each year. ….

…. By taxing investors less, some economists argue, you give taxpayers more of an incentive to save. The more savings in the economy, the more capital that companies and entrepreneurs can invest in ways that expand the economy and make workers more productive. Everyone, including workers, wins, according to this theory.

But there are potential negative consequences to such a policy. By lowering taxes on investors, you shift more of the tax burden to well-paid workers. This may give highly skilled and creative people a disincentive to work hard or improve their skills so they can earn more money, while also giving children of wealthy parents another reason not to work at all. ….

A symposium on business tax reform

Source: Alan Auerbach, Martin Feldstein, Gita Gopinath, and James Hines, Brookings Papers on Economic Activity (BPEA), September 7, 2017

The U.S. corporate tax rate is one of the highest in the world and much has been made about the prospects of corporate tax reform in 2017. Both House Republicans and President Trump have released their visions of changes to corporate taxes. But what would these proposals mean for the economy? Are they targeting the aspects of the tax code that need changing?

At the Fall 2017 Brookings Papers on Economic Activity conference, leading tax policy experts discussed these issues among others, including:

Alan Auerbach, of the University of California, Berkeley, attempts to demystify the Destination-Based Cash-Flow Tax (DBCFT), which he says is poorly understood by many in government, the business community, and economics.

Martin Feldstein, of Harvard University, argues the coming year offers the opportunity to fix problems of the corporate tax system that accumulated over many decades and suggests five areas for improvement.

Gita Gopinath, of Harvard University, examines the macroeconomic effects of a border-adjustment tax and looks at whether its possible for a border adjustment tax to be revenue neutral.

James Hines, of the University of Michigan, looks at the U.S. corporate tax rate, which is the highest among OECD countries, and finds that despite significant deductions and exclusions, the rate places high burdens on U.S. businesses.

Corporate Tax Cuts Boost CEO Pay, Not Jobs – 24th Annual Executive Excess

Source: Sarah Anderson, Sam Pizzigati, Institute for Policy Studies, August 30, 2017

From the summary:
House Speaker Paul Ryan is proposing to cut the statutory federal corporate tax rate from 35 to 20 percent. President Trump wants to slash the rate even further, to just 15 percent. Their core argument? Lowering the tax burden will lead to more and better jobs. To investigate this claim, this report is the first to analyze the job creation records of the 92 publicly held U.S. corporations that reported a U.S. profit every year from 2008 through 2015 and paid less than 20 percent of these earnings in federal income tax. Did these reduced tax rates actually lead to greater employment within the 92 firms? The data we have compiled give a definitive — and sobering — answer.

Nearly Half of Trump ’s Proposed Tax Cuts Go to People Making More than $1 Million Annually

Source: Institute on Taxation and Economic Policy (ITEP), August 2017

From the summary:
A tiny fraction of the U.S. population (one-half of one percent) earns more than $1 million annually. But in 2018 this elite group would receive 48.8 percent of the tax cuts proposed by the Trump administration. A much larger group, 44.6 percent of Americans, earn less than $45,000, but would receive just 4.4 percent of the tax cuts.

The first group, the millionaires, would receive an average tax cut of more than $217,000 in 2018, equal to 7 percent of their income. The second group, those making less than $45,000, would receive an average tax cut of just $230, equal to less than one percent of their income….
Trump’s $4.8 Trillion Tax Proposals Would Not Benefit All States or Taxpayers Equally
Source: Institute on Taxation and Economic Policy (ITEP), July 2017

Trump’s $4.8 Trillion Tax Proposals Would Not Benefit All States or Taxpayers Equally

Source: Matthew Gardner, Steve Wamhoff, Institute on Taxation and Economic Policy, July 20, 2017

From the summary:
The broadly outlined tax proposals released by the Trump administration would not benefit all taxpayers equally and they would not benefit all states equally either. Several states would receive a share of the total resulting tax cuts that is less than their share of the U.S. population. Of the dozen states receiving the least by this measure, seven are in the South. The others are New Mexico, Oregon, Maine, Idaho and Hawaii.  

As the state-specific versions of this report explain, taxpayers within each state do not benefit equally from the Trump tax proposals either. Nationally, the richest one percent of taxpayers in America, who all will have an income of at least $599,300 in 2018, would receive 61.4 percent of the tax cuts that result from Trump’s proposals.

The figures in this report have been calculated by the Institute on Taxation and Economic Policy (ITEP) based on the broad principles for tax reform released by the Trump administration on April 26 and based on subsequent statements of administration officials. Because the principles and statements left many unanswered questions, the estimates required some assumptions, which are spelled out in this report. Based on what is known now about these proposals, ITEP estimates that together they would reduce total federal revenue by at least $4.8 trillion over ten years. The costs could be much higher, as explained further on.
State-by-State Data

The Impact of Eliminating the State and Local Tax Deduction

Source: prepared by the Government Finance Officers Association, 2017

From the abstract:
Congress and the Trump Administration are considering the elimination of the deduction for state and local taxes (SALT). If repealed, almost 30 percent of taxpayers in every state and in all income brackets would be affected. Eliminating the deduction would result in state and local government tax increases and would also disrupt the housing market, particularly for middle income home ownership.

Since the adoption of federal income tax in 1913, there has been respect for the independence of state and local government tax structures. State and local governments rely on the stability of their tax structures to provide essential public services.

Because the elimination of state and local tax deductions would affect every region of the country and every income group, ICMA, along with the Government Finance Officers Association, National Governors Association, United States Conference of Mayors, Council of State Governments, National Conference of State Legislatures, National League of Cities, National Association of Counties, and National Association of State Budget Officers have produced The Impact of Eliminating the State and Local Tax Deduction. It includes tables that show the SALT deduction by state and Congressional district as well as the effects it would have on individuals by adjusted gross income.

Shortfalls on States’ April Tax Returns: Trump Effect, Weak Economy, or Both?

Source: Donald J. Boyd and Lucy Dadayan, Rockefeller Institute of Government, By the Numbers, July 2017

From the press release:
….[T]he Rockefeller Institute of Government released a new special report entitled, “Shortfalls on States’ April Tax Returns: Trump Effect, Weak Economy, or Both?” examining the April 2017 tax receipts for 41 states with broad-based income taxes.

The report found that:
• This April, total state income tax revenue was down 4 percent compared to the previous year.

• The lower total state tax revenue from this April was driven by declines of 7.3 percent in final returns and 4.3 percent in estimated payments, more than offsetting 5.3 percent growth in withholding tax collections.

• April income tax revenue fell in 24 of 41 states. The declines were largest in the New England and Mid-Atlantic states, followed by Southern states. April revenue was up in the Great Lakes and Rocky Mountain states.

• Although many states had forecasted declines in April and May, they were worse than expected. Nineteen out of 21 states that publish monthly cash flow forecasts fell short in April and May. The median shortfall was 6.4 percent in the months of April and May.

Given the incomplete data picture, the reason for the revenue shortfalls in the states is unknown at this time. Strong indications point to a “Trump Effect,” i.e., individuals shifting income out of 2016 in the hope of benefiting from promised cuts in federal tax rates the president proposed during the campaign. If this is the case, state income tax revenue would grow more strongly next year.

However, the income tax revenue shortfall felt in the states could also reflect weakness in last year’s economy that has not yet made its way into published data —- a harbinger of more trouble to come. If this is the case, states would need to further revise their assessments of current economic conditions and revenue projections downward. Or, this year’s revenue shortfalls could be a combination of both, further complicating projected state revenue across the country.

More complete data will present a clearer picture of the underlying issues driving the revenue shortfalls. The Rockefeller Institute will be putting out future reports as more data become available.

Special Issue: Reforming State and Local Tax Systems

Source: Public Finance Review, Volume: 45, Number: 4, July 2017
(subscription required)

From the introduction:
State tax reform is fundamentally different than federal tax reform. States are continually modifying their taxes to meet revenue challenges and to cope with the changing structure of the national and regional economy. Most state tax reforms are modest affairs and not major rewrites of the tax codes. Reforms must consider the existing institutional structure of the state, state economic policies, and current state politics. Nonetheless, there are some common themes in reforms across the states, including an expansion of the sales tax base to include services and a broadening of the base for income taxation.

Articles include:
What Drives State Tax Reforms?
James Alm, Trey Dronyk-Trosper, Steven M. Sheffrin

State tax reform is fundamentally different than federal tax reform. States are continually modifying their taxes to meet revenue challenges and to cope with the changing structure of the national and regional economy. Most state tax reforms are modest affairs and not major rewrites of the tax codes. Reforms must consider the existing institutional structure of the state, state economic policies, and current state politics. Nonetheless, there are some common themes in reforms across the states, including an expansion of the sales tax base to include services and a broadening of the base for income taxation.

Personal Income Tax Revenue Growth and Volatility: Lessons and Insights from Utah Tax Reform

Gary C. Cornia, R. Bruce Johnson, Ray D. Nelson

In order to reduce the volatility of the personal income tax in Utah, review and reform efforts recommended a simple flat tax that disallowed all deductions or exemptions. Among the reasons for the recommended flat tax was the argument that it would result in a more stable year-over-year tax revenue stream. This was especially important for education financing. The tax system that was finally adopted retained exemptions and deductions through a tax credit. Using a series of simulations based on twenty-one years of tax returns, we establish that by retaining exemptions and deductions, tax reform efforts failed to appreciably reduce the volatility of personal income tax revenues. These simulations also show that the initially proposed flat income tax with no exemptions or deductions would have decreased volatility at the cost of reducing the growth rate. This study contributes insights, caveats, methodology, and potential alternatives for future individual income tax reforms by focusing on the growth and volatility of three different tax systems.

Reducing Property Taxes on Homeowners: An Analysis Using Computable General Equilibrium and Microsimulation Models
Andrew Feltenstein, Mark Rider, David L. Sjoquist, John V. Winters

We consider a proposal that reduces by half the taxes on homesteaded properties and replaces the lost revenue by increasing the base and rate of the state sales tax. We develop a computable general equilibrium (CGE) model and a microsimulation model (MSM) to analyze the economic and welfare effects of such a proposal if adopted in Georgia. The results from the CGE model suggest that the proposed reforms have a substantial negative effect in percentage terms on Georgia’s economy. The MSM suggests that such a policy has no effect on the distribution of consumption by income class but increases the percentage of owner-occupied housing relative to rental housing by 20 percent in the aggregate.

Does Perception of Gas Tax Paid Influence Support for Funding Highway Improvements?
Ronald C. Fisher, Robert W. Wassmer

The issue for this research is whether perception of the rate and amount of fuel taxes paid by an individual influences his or her support for funding highway improvements from any source of revenue. A survey of likely California and Michigan voters demonstrates that they often overestimate the rate of their state’s gasoline excise tax and the subsequent amount they are likely to pay for this tax in a month. Regression analyses show that voter misperceptions concerning the magnitude of state fuel taxes affect their views regarding an increase in funding to support highway investment proposals. A reasonable policy implication is that the adoption of proposals to generate additional funds for highway investment is more likely if accompanied by a campaign identifying the existing rate of the state’s gasoline excise tax and the relatively small amount of this tax paid by the state’s typical driver.

State Export Promotion and Firm-level Employment
Andrew J. Cassey, Spencer Cohen

Most US states have export promotion programs, but it is unknown if these programs create long-term employment, which is often the policy’s stated goal. We merge administrative export promotion and employment data from Washington State to test the effect of firm-level export promotion on firm-level employment using the differences-in-differences estimator. We believe we are the first to have US state data at this level of detail. We find firm participation in an export assistance program increases firm-level employment fleetingly, but not in subsequent periods. Thus, we do not find a statistically significant impact to long-term employment from program participation.

Protecting the Vulnerable or Ripe for Reform? State Income Tax Breaks for the Elderly—Then and Now
Ben Brewer, Karen Smith Conway, Jonathan C. Rork

State governments have a long history of providing income tax relief to their elderly constituents. Our research investigates the current distributional and revenue effects of these tax breaks, as well as the economic status of the elderly, and explores how these measures have changed since 1990. Using data from the 1990 Integrated Public Use Microdata Series and the 2013 American Community Survey, combined with the TAXSIM calculator, we calculate current state income tax liabilities and revenues and simulate the effects of removing all age-related tax breaks. Our analyses reveal that the economic well-being of the elderly has grown substantially relative to the nonelderly and that state tax breaks primarily benefit the middle- and upper-income elderly. Revenue costs of these tax breaks have also grown substantially, and their modest and mixed effects on income equality, measured by changes in the Gini, cast doubt on equity as a justification.