Category Archives: Taxation

STAMP is an Unsound Tool for Gauging the Economic Impact of Taxes

Source: Institute on Taxation and Economic Policy, May 2014

From the Citizens for Tax Justice summary:
When anti-tax groups working in the states need a data point to help them argue in favor of their newest tax cutting idea, they often look to the Beacon Hill Institute (BHI). BHI is housed in the economics department at Suffolk University, but its mission is more ideological than academic: providing research to voters and policymakers that promotes a “limited government” and “free market” perspective. The cornerstone of BHI’s research is a computerized economic model it calls the State Tax Analysis Modeling Program (STAMP).

To a casual observer, STAMP may appear to be a rigorous model worthy of consideration. But new research from the Institute on Taxation and Economic Policy (ITEP) explains in great detail the myriad ways in which STAMP is rigged to portray tax cuts as hugely beneficial to state economies, and tax increases as an inefficient drag on economic growth.

The broad ways in which STAMP fails to accurately gauge the impact of taxes on state economies include:
– STAMP underestimates the economic importance public service such as education and infrastructure to both the short- and long-term health of state economies.
– STAMP assumes that workers, consumers, and businesses are hypersensitive to tax changes, causing private sector economic activity to boom (or bust) as a result of modest changes in after-tax incomes and prices.
– STAMP depicts tax changes as having an instantaneous impact on the economy, even when that impact involves long-run issues such as migration, property value changes, and business formation.
– STAMP assumes a simplistic, perfectly efficient marketplace where everybody who wants a job already has one. This assumption simplifies the math behind the model, but is a poor reflection of the economy that actually exists today.

ITEP’s report also describes a number of instances where STAMP’s findings have been contradicted by academic researchers and state revenue officials. In one particularly implausible analysis, for example, STAMP actually found that cutting Rhode Island’s sales tax rate by more than half would not only benefit the state’s economy—it would actually raise $61 million in tax revenue.

In another analysis, STAMP predicated that roughly 40,000 jobs would be created by a tax cut enacted in Kansas. Since that analysis was released, Kansas’ economy has underperformed and the state actually saw its credit rating downgraded because of slow economic growth and lagging tax revenues….

Dozens of Companies Admit Using Tax Havens – Hundreds More Likely Do the Same, Avoiding $550 Billion in U.S. Taxes

Source: Citizens for Tax Justice, May 19, 2014

From the summary:
American Fortune 500 corporations are likely saving about $550 billion by holding nearly $2 trillion of “permanently reinvested” profits offshore. Twenty-eight of these corporations reveal that they have paid an income tax rate of 10 percent or less to the governments of the countries where these profits are officially held, indicating that most of these profits are likely in offshore tax havens.

While congressional hearings over the past few years have focused attention on the tax avoidance strategies of technology corporations like Apple and Microsoft, this report shows that a diverse array of companies are using offshore tax havens, including U.S. Steel, the pharmaceutical giant Eli Lilly, the apparel manufacturer Nike, the supermarket chain Safeway, the financial firm American Express, and banking giants Bank of America and Wells Fargo.
Related:
Download the Company by Company PRE Data (XLS)

State Tax Revenue Grows, but a Full Recovery Eludes 26 States

Source: Pew Charitable Trusts, May 19, 2014

Nationally, total state tax revenue has recovered from its plunge during the Great Recession, thanks to factors such as North Dakota’s oil boom and tax increases in Illinois, California, and elsewhere. But the recovery is uneven. Tax collections in 26 states had not fully rebounded by the final quarter of 2013, after adjusting for inflation.

A 50-state ranking shows that tax receipts in five states were more than 15 percent below their previous adjusted peak level: Alaska (-59.9 percent), Wyoming (-27.6), Florida (-20.2), New Mexico (-17.9), and Louisiana (-15.2). Where tax revenue remains below its previous peak, policymakers are more likely to face tough tradeoffs in balancing state bud

The Problem of Corporate Inversions: The Right and Wrong Approaches for Congress

Source: Citizens for Tax Justice, Fact Sheet, May 14, 2014

Background:
Corporate “inversion,” in which an American corporation reincorporates itself as a “foreign” company to avoid U.S. taxes, is in the news again. In 2004, Congress enacted a bipartisan law to prevent inversions, but a gaping loophole allows corporations to skirt this law by acquiring a foreign company.

This is what the pharmaceutical giant Pfizer hopes to do if its bid to acquire AstraZeneca, a U.K. company, is successful. A group of hedge funds that own stock in Walgreen Co. want the company to acquire a larger stake in Switzerland-based Alliance Boots for the same reason.

Taxes and Inequality

Source: Leonard E. BurmanUrban Institute (UI), March 2014

From the abstract:
This paper reviews historical trends in economic inequality and tax policy’s role in reducing it. It documents the various reasons why income inequality continues to rise, paying particular attention to the interplay between regressive and progressive federal and state taxes. The report also considers the trade-off between the social welfare gains that a more equal distribution of incomes would provide, and the economic costs of using the tax system to reduce inequality, highlighting the fact that income inequality reflects an amalgam of factors. The optimal policy response reflects that complexity.

Curtailing the Subsidy War Within the United States

Source: Edward Alden and Rebecca Strauss, Council on Foreign Relations, Policy Innovation Memorandum no. 45, May 2014

From the summary:
Each year, U.S. state and local governments spend tens of billions of dollars to lure or retain business investment. The subsidies waste scarce taxpayer dollars that could better be used to strengthen public services such as education and infrastructure, or to lower overall tax burdens to create a more favorable investment climate. No state wants to dole out such subsidies, but most fear losing jobs to competing states if they refuse. States should take steps to curb subsidies, beginning with greater disclosure and cost-benefit analyses, and building up to a multistate agreement that creates strong disincentives for continuing subsidies. Existing international arrangements provide models and tools for achieving this….

….Rarely do the benefits of these subsidies exceed the costs. In highly mobile industries, like film production, the subsidies do lure business from other states, but any job creation is short-term and film crews are usually imported. In many other industries, subsidies have less influence on location decisions; manufacturers, in particular, require local networks of suppliers and employees with specialized training. Local governments usually lack the sophistication to negotiate successfully with big companies, so they end up subsidizing businesses that would have invested in the state regardless. Public money is wasted that could have gone to lower the overall corporate tax rate or to more productive investments like education and infrastructure—assets that matter more for most business location decisions than one-off tax breaks…..

Federal Minimum Wage, Tax-Transfer Earnings Supplements, and Poverty

Source: Gene Falk, Thomas Gabe, David H. Bradley, Congressional Research Service, CRS Report, R43409, February 28, 2014

Pending before Congress is legislation (S. 1737 and H.R. 1010) that would raise the federal minimum wage from its current $7.25 per hour to, ultimately, $10.10 per hour. The minimum wage would be adjusted for inflation thereafter. Whether the minimum wage or alternative policies, namely government-funded earnings supplements such as the Earned Income Tax Credit (EITC), are more effective in addressing poverty has been long debated. … The impact of an increase in the minimum wage on the well-being of minimum wage workers depends in great part on whether the wage increase would cause a loss in employment. Some economic studies have found that increases in minimum wages cause job loss; other economic studies have found no such job loss. A previous consensus that increasing the minimum wage reduces employment, at least among teenagers, has been challenged by numerous recent studies suggesting little or no dis-employment effects of minimum wage increases. However, the debate over the employment effects of the minimum wage is likely to continue. There are also some considerations to expanding government-funded earnings supplements, such as the EITC, child tax credit, and SNAP. Expanding these earnings supplements would result in costs to the federal budget. In addition, these programs too might affect the labor market, albeit in ways different from a minimum wage increase. Research has provided evidence that the EITC has increased the number of workers in the labor market. Through the operation of supply and demand, this could suppress wage rates. Since all workers do not qualify for earnings supplements through the EITC, the child tax credit, or SNAP, lower-wage workers who do not receive them might be harmed economically. There has been some recent attention to considering minimum wage policies and earnings supplements as complementary, rather than alternative, policies. ….

State Employment Trends: Does a Low Tax/Right-to-Work/Low Minimum Wage Regime Correlate to Growth?

Source: Menzie Chinn, Econbrowser, April 21, 2014

It’s interesting how “pro-business” policies do not appear to be conducive to rapid employment growth. Employment in Governor Walker’s Wisconsin, as in Governor Brownback’s Kansas, has lagged behind that of the United States (and behind that of Governor Dayton’s Minnesota and Governor Brown’s California). …

Payroll Taxes, Mythology, and Fairness

Source: Linda Sugin, Fordham Law Legal Studies Research Paper No. 2416471, March 26, 2014

From the abstract:
As the 2012 fiscal cliff approached, Congress and President Obama bickered over the top marginal income tax rate that would apply to a tiny sliver of the population, while allowing payroll taxes to quietly rise for all working Americans. Though most Americans pay more payroll tax than income tax, academic and public debates rarely mention it. The combined effect of the payroll tax and the income tax produce dramatically heavier tax liabilities on labor compared to capital, producing substantial horizontal and vertical inequity in the tax system. This article argues that a fair tax system demands just overall burdens, and that the current combination of income taxes and payroll taxes imposes too heavy a relative burden on wage earners. It scrutinizes the payroll tax to debunk myths that artificially link payroll taxes to retirement security, and argues that these myths have lulled workers into accepting substantial and regressive tax burdens. Freed from the analytical limitations of an insurance label and a private-savings paradigm, policymakers can be better guided by fundamental principles of fairness. By refuting justifications for taxing capital income more lightly than labor income, and offering fairness arguments for taxing work less than investment, the article makes a case for equalizing the tax burdens on labor and capital income. Social Security’s outlays constitute one-fifth of total federal spending, and this article maintains that it should be financed by a fair tax.