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Over the next four years, tax reform, done right, could be a cure for much of what ails the economy. Higher taxes, raised progressively, could encourage growth by helping to pay for long-neglected public investment in education, infrastructure and basic research. More revenue would also reduce budget deficits, helping to put the nation’s finances on a stable path. Greater progressivity would reduce rising income inequality, and with it, inequality of opportunity that is both an economic and social scourge.

The big obstacle to comprehensive tax reform is the persistent Republican myth that spending cuts alone can achieve economic and budget goals. That notion was sounded rejected by voters during the election. Yet it still has adherents among many Republicans, which will make it that much harder for Congress to grapple with the bigger and more complex issue at the heart of tax reform: how to pay for government in the 21st century.

The main problem is that the current tax code is incapable of raising the revenue needed to pay for the goods and services of government. Over the last four years, federal revenue as a share of the economy has fallen to its lowest level in nearly 60 years, a result of the recession, the weak recovery and a decade’s worth of serial tax cuts. Even with deep spending cuts, the chronic revenue shortfall is expected to continue, swelling the federal debt — unless taxes go up. To stabilize the debt over the next 10 years while financing more investment would require at least $1.5 trillion to $2 trillion in new revenue, above what could be raised by letting the top income tax rate revert to its pre-Bush-era level of 39.6 percent.

A logical way to help raise the additional needed revenue would be to tax capital gains at the same rates as ordinary income. Capital gains on assets held for more than a year before selling are taxed at about the lowest rate in the code, currently 15 percent and expected to rise to 20 percent in 2013. That is an indefensible giveaway to the richest Americans. Research shows that the tax breaks do not add to economic growth but do contribute to inequality. Currently, the top 1 percent of taxpayers receive more than 70 percent of all capital gains, while the bottom 80 percent receive only 6 percent.

Another sensible approach is to cap deductions at 28 percent, or to convert deductions, which disproportionately benefit high-bracket taxpayers, to tax credits, which would provide the same benefit to all taxpayers, regardless of tax bracket. President Obama must also pursue other revenue raisers, including a restoration of the estate tax, higher tax rates or surcharges on multimillion-dollar incomes, and higher corporate taxes, including an end to the deferral of tax for American companies that stash their earnings abroad.

All that would only be a start, because the new revenue would only slow the growth of the debt in the near term. After 10 years, the pressures of an aging population and health care costs would cause the debt to accelerate again.

With that in mind, Mr. Obama would be wise to instruct the Treasury Department to start work on tax reform now, exploring carbon taxes, both to raise revenue and to protect the environment; a value-added tax, coupled with provisions to protect lower-income taxpayers from higher prices, to tax consumption and encourage saving; and a financial transactions tax, to ensure that the financial sector, whose profits have substantially outpaced those of nonfinancial corporations, pay a fair share.

Not all of the proposed new taxes would gain support, but all deserve to be part of the debate. Controlling the terms of that debate, and then advancing from debate to action, could well be the toughest challenge of Mr. Obama’s second term and, if met, his defining economic legacy.

Why the Economy Needs Tax Reform,
NYT,
29.12.2012,
http://www.nytimes.com/2012/12/30/
opinion/sunday/why-the-economy-needs-tax-reform.html

Race to the Bottom

December 5, 2012

The New York Times

Competition among states and cities to lure businesses in hopes of creating jobs is not new, but it has become more fierce in recent years. An investigation by The Times found that state and local governments are giving out $80 billion a year in tax breaks and other subsidies in a foolhardy, shortsighted race to attract companies. That money could go a long way to improving education, transportation and other public services that would have a far better shot at promoting real economic growth.

Instead, with these giveaways, politicians and officials are trying to pick winners and losers, almost exclusively to the benefit of big corporations (aided by highly paid lobbyists) at the expense of small businesses. Though they promise that the subsidies are smart investments, far too often the jobs either don’t materialize or are short-lived, leaving the communities no better off.

The three-part series by Louise Story described how in places like Texas and Ohio, state and local governments have lavished millions of dollars in tax breaks on corporate giants like Samsung and the Big Three automakers — even as they faced budget deficits and were forced to cut spending on critical services. The tax revenues forgone in this giveaway frenzy should concern Congress deeply. After all, federal funds account for one-fifth of state and local budgets.

In one particularly egregious example in Pontiac, Mich., the State of Michigan gave $14 million in tax credits and a state pension fund guaranteed $18 million in bonds to a movie studio that created just 12 permanent jobs. In Texas, Amazon.com, the online retailer, received tax abatements, sales tax exemptions and other benefits totaling $277 million to open a warehouse that promises to employ 2,500 people. Those benefits were granted after the retailer closed another warehouse because of a dispute with the government involving sales taxes.

Many governments don’t know the full value of the subsidies they hand out in the form of tax refunds, rebates, loans, grants and more. And they don’t know if the jobs created would have been created anyway. The fact is, numerous studies show that such incentives result in only a small increase in jobs and that any gains usually come at the expense of other cities and states.

Local governments would be much better off investing tax dollars in education and public works that would deliver long-term benefits to both businesses and workers. California, for instance, is among the least generous of the larger states in doling out tax breaks. It gave out just $112 per capita compared with $759 in Texas, $672 in Michigan, and $210 in New York. Its experience leaves no doubt that investments made in public institutions like the University of California system can remain critically important to economic growth decades later.

The senseless race to give away billions in subsidies is, of course, hard to stop when elected leaders think a pledge of potential jobs might help in their next election. But even when attracting businesses is a legitimate goal, it has to be done in ways that are fair and transparent.

The trouble with targeted incentives is that they are little more than transfers of wealth to a handful of powerful corporations from all other taxpayers, including other businesses. If the problem is excessive tax burdens on businesses in general, then the solution is broad tax reform that also benefits small business owners, who are more likely to stick around if the regional economy weakens and who are unlikely to hopscotch around the country in search of a bigger tax break.

Race to the Bottom, NYT, 5.12.2012,
https://www.nytimes.com/2012/12/06/
opinion/race-to-the-bottom.html

How to Get Business to Pay Its Share

May 3, 2012
The New York Times
By ALEX MARSHALL

JAMES MADISON never played with an iPhone, but he might have had something to say about the news last weekend about Apple. Over the last few years, the company has avoided paying billions of dollars in state and federal taxes by routing profits through subsidiaries based in tax havens from Reno, Nev., to the Caribbean.

This is a common practice among major American businesses, and back in 1787, Madison saw it coming. Someday, he warned, companies could grow so large they “would pass beyond the authority of a single state, and would do business in other states.” To make sure the companies remained accountable to government, he said the federal government should “grant charters of incorporation in cases where the public good may require them, and the authority of a single state may be incompetent.”

In other words, a National Companies Act.

Such an act would create a common corporate architecture for all American companies doing business across state lines and internationally. It would establish not only uniform tax policies but also national standards for the structure of corporate boards, the power of chief executives, the relations of management with workers and shareholders and the interaction of American companies with other nations. National companies would have to abide by national rules, and the option of shopping around for the most favorable laws or tax policies simply wouldn’t exist.

It’s an idea that has been proposed and pursued many times, particularly during the early 1900s, when companies like Standard Oil, which was a collection of companies incorporated in various states and assembled into a national “trust,” were becoming increasingly powerful. Theodore Roosevelt, William Howard Taft, Woodrow Wilson and, later, Franklin D. Roosevelt all supported the creation of a national companies law, but the measures were consistently opposed by the business community and eventually defeated.

Today, however, considering how much effort and money American companies expend on keeping a competitive advantage by figuring out which loopholes to exploit from the bewildering array of rules now in effect, they might not entirely oppose reform. In an era of global competition, it could help to have a clear set of standards. It’s certainly what other nations have. In Germany, for example, national legislation established rules for the structure of corporate boards. Britain’s Parliament establishes how a corporation can be created and what its rights and responsibilities are.

Legally, there is little doubt that the United States Congress could impose similar rules under the Commerce Clause of the Constitution. Although the states have traditionally been the main arena for corporate rules, the federal government has long created national corporations, from the First Bank of the United States in 1791 to the Corporation for Public Broadcasting in 1967. Congress could use this same power to require that companies doing business across state lines have national corporate charters, which would subject them to federal rules. Alternatively, it could simply set rules for corporate organization and conduct that would apply to all interstate companies of a certain size.

Passing a National Companies Act won’t be easy. Companies would hire lobbyists to push for favorable rules. And some states with particularly easy incorporation terms, like Delaware, might resist. Around 60 percent of Fortune 500 companies are incorporated in Delaware, and the state earns a great deal in fees and tax revenues as a result.

But the Apple controversy shows that the nation is ready for reform. While the company is a symbol of private enterprise, its existence is made possible by a charter that some government writes and grants. It should serve public as well as private ends — and pay its rightful share in taxes — or it should not exist at all.

Alex Marshall is a senior fellow

at the Regional Plan Association,

an urban research and advocacy group,

and the author of the forthcoming book

“The Surprising Design of Market Economies.”

    How to Get Business to Pay Its Share, NYT, 3.5.2012,
    http://www.nytimes.com/2012/05/04/opinion/
    solving-the-corporate-tax-code-puzzle.html

Antipoverty Tax Program

Offers Relief,

Though Often Temporary

April 17, 2012

The New York Times

By SABRINA TAVERNISE

DURHAM, N.C. — Karen Spain spent several long months before receiving her tax refund this year in a state of suspended panic. The rent was three months late. Her car’s brakes were shot. And she could no longer afford to pay her electricity bill.

So when the refund finally arrived — a $7,200 cash infusion that was about a third of what she earned all last year as an assistant manager at an auto parts store — it brought a certain measure of relief, both financial and psychological. That did not last long.

“Did we celebrate?” said Ms. Spain, a 49-year-old mother of two. “No. We maintain, that’s all we do. We are just trying to keep our heads above water.”

It is tax time, the season when the country’s largest antipoverty program, the earned income tax credit, plows billions of dollars into mailboxes and bank accounts of low-income working Americans like Ms. Spain. It is the most important financial moment of the year for many people in the bottom half of the wage bracket, a time to pay off old bills, make car repairs, buy children clothes and maybe make a big purchase like a refrigerator or a TV.

As incomes among the country’s lowest wage earners continue to stagnate, the credit has played a critical role in smoothing the hard edges of an unforgiving labor market for the country’s most vulnerable workers and helping stem the tide of income inequality that has been rising among Americans in recent decades.

Nearly one in five filers now receive the credit — about 28 million returns in the 2010 tax year, the most recent year figures are available — representing the highest percentage since the program began in the 1970s, according to the Brookings Institution.

The effect has been significant. The Center on Budget and Policy Priorities, a research group based in Washington, estimates the credit lifted about six million Americans out of poverty last year.

“We find clear evidence that the E.I.T.C. has significantly reduced poverty rates and income inequality,” said Raj Chetty, an economist at Harvard who has studied the subsidy’s effect across cities. “The program is pulling up the lower end of the income distribution.”

The credit also seems to have an important psychological side effect: It makes people feel middle class.

“You get this feeling of, ‘Hey, I’m like them now,’ “ said Wesley Rouse, 27, a property manager in Durham.

But the boost is often temporary. Many people who receive the credit fall back into poverty over the course of the year, caught in the same cycle of low-wage work and reliance on credit that put them there in the first place.

One problem is the form the credit takes. The refund can pay as much as 40 percent of a family’s annual income at once, a windfall that many experts are now arguing should be changed by paying the refund in installments over the year.

“It’s feast or famine,” said Mae Watson Grote, director of the Financial Clinic, a New York-based group that teaches financial planning to low-income New Yorkers. “It’s very hard to manage when it’s a windfall.”

That cycle has the natural force of a tide at National Pawn, a shop in a working-class area of north Raleigh.

“We’re all cleaned out,” said Sundeep Joshi, the store’s manager, waving his hand toward empty shelves, reflecting a whirlwind of recent purchases. But people will start to bring things back to sell as their budgets get squeezed, he said. By July, the back room is usually packed with pawned items. “That’s the story every year,” he said.

Kathryn Edin, a professor of public policy at Harvard whose coming book, “It’s Not Like I’m Poor: How Working Families Make Ends Meet in a Post-Welfare World,” finds that recipients spent the subsidy overwhelmingly on bills and current expenses. Less than 10 percent of the money paid out was saved, she found. “The E.I.T.C. is one of the best social policies we’ve ever devised, but it does not solve the fundamental problem that you still can’t live on your wages,” she said.

For Ms. Spain, the subsidy was a lifeline. Together with other tax credits, it pushed her family income up to about $27,000, above the federal poverty threshold of $22,800 for a family of four in 2011. (Her husband, an unemployed cook, did not earn much income.)

But the money went fast. Rent ate up a third. Then came brakes and a new bumper for her 1998 Honda Civic. She paid the overdue electricity bill, reactivated her car insurance and bought some new clothes for her two girls, ages 8 and 9.

“You get these large sums, but you have to repair things, and pay back rent, and you owe on all your bills,” Ms. Spain said. “I’m not at the point where I can put $500 aside and just let it sit there and grow.”

That economic vulnerability has spawned an industry of lenders who hawk short-term loans at exorbitant rates to tide people over until tax time, said Peter Skillern, executive director of Reinvestment Partners, a nonprofit organization in Durham that helps low-income families file their taxes. The practice, known as “refund anticipation lending,” was effectively banned by federal regulators this month, but low-income filers still face an abundance of rip-off schemes and high tax preparation fees, he said.

“It’s ‘What can I get today versus what’s coming tomorrow,’ “ said Brenda Dozier, a payroll specialist who said her sister has relied on refund anticipation loans. “I tell people, ‘You made it this far, just hold on.’ “

Ms. Spain said she paid a company $550 to do her taxes last year so she could get them — and the refund — back fast, an expenditure she now regrets.

The credit may not permanently change people’s circumstances, but researchers are finding evidence that many who receive it do not do so for very long. One recent study found that 60 percent of those who got the benefit stopped claiming it after two years. That is because people’s finances tend to be fluid, moving them in and out of the program, said John Horowitz, an economist at Ball State University in Indiana, one of the authors of the study, which examined tax records from 1989 to 2006. One in two American families with children received the credit at least once during that period, he said.

Ms. Spain yearns for a time when she will no longer be eligible for the credit because she is earning more money. She remembers wistfully her former job at Nortel that paid $85,000 a year and the feeling of going to a restaurant or a movie without worrying about her budget.

“Someday we’ll wait and file in April,” she said. “And if we need money before then, we’ll just go to the bank.”

Antipoverty Tax Program Offers Relief, Though Often Temporary,
NYT, 17.4.2012,
http://www.nytimes.com/2012/04/17/
us/antipoverty-tax-program-offers-relief-though-temporary.html

Reform and Corporate Taxes

February 22, 2012

The New York Times

The corporate tax system is a mess. The United States has one of the highest corporate tax rates in the world, but too many businesses still don’t contribute their fair share of revenue, in large part because of numerous loopholes, subsidies and other opportunities for tax avoidance. While some industries and companies pay little or no tax because they qualify for generous breaks or have really good lawyers, others are taxed heavily.

There is no doubt that a system that is more competitive, more efficient — the current mind-numbing complexity makes planning far too difficult — and more fair would be a plus for the economy. President Obama’s framework for business tax reform, released on Wednesday, is a welcome start for a much-needed debate on comprehensive tax reform. But we already have two big concerns.

While the administration insists that business tax reform should not add to the deficit, the country needs to raise more revenue to care for an aging population, rebuild infrastructure, improve education and tackle the deficit. Corporations, which benefit from all of those, should, as a matter of necessity and fairness, pay more.

Our other concern is that like all tax reform, the potential for gaming the process is ever present and unless it is vigilantly managed could actually reduce revenue and add to the deficit.

Take the framework’s central reform: reducing the top corporate rate from 35 percent to 28 percent, while at the same time doing away with loopholes and subsidies. In theory, it is a sound approach, which would reduce complexity while bringing the rate in line with that of other advanced nations without busting the budget. But, even if they made it past the lobbyists, the specific loophole closers in Mr. Obama’s new framework — including ending subsidies for oil and gas exploration, corporate jets and private equity partners — are far too small to make up for dropping the top rate.

As for the big money subsidies that would have to be cut or ended to pay for a lower rate — including less generous depreciation and reduced deductibility of interest on corporate debt — the White House merely presents them as part of a menu of options for “consideration.”

The framework’s call for a minimum corporate tax on the foreign earnings of American companies is a step in the right direction. Under current law, various tax provisions and tactics allow companies to reduce or defer taxes by shifting ever more production and profits overseas. But the idea is blunted by the framework’s failure to say what the minimum tax rate should be.

Nor does the framework broach other reforms like taxing foreign profits when they are earned rather than when they are repatriated to the United States — that could ultimately be more effective in getting multinationals to pay more.

Even with its shortcomings, Mr. Obama’s proposal presents a needed contrast to the Republicans’ approach to corporate taxes. Last year, Dave Camp, the chairman of the House Ways and Means Committee, proposed a top corporate rate of 25 percent without saying how he would pay for the tax cut. Mitt Romney has done somewhat better, calling for a 25 percent rate to be coupled with “broadening” the corporate tax base, which generally means closing loopholes. But he has yet to say which tax breaks he would end.

Serious reform requires specific proposals, tough trade-offs and hard numbers attached. Without all of those, this effort could too easily be hijacked by powerful corporations and their high-paid lobbyists.

Reform and Corporate Taxes,
NYT,
22.2.2012,
http://www.nytimes.com/2012/02/23/
opinion/reform-and-corporate-taxes.html

Things to Tax

November 27, 2011

The New York Times

By PAUL KRUGMAN

The supercommittee was a superdud — and we should be glad. Nonetheless, at some point we’ll have to rein in budget deficits. And when we do, here’s a thought: How about making increased revenue an important part of the deal?

And I don’t just mean a return to Clinton-era tax rates. Why should 1990s taxes be considered the outer limit of revenue collection? Think about it: The long-run budget outlook has darkened, which means that some hard choices must be made. Why should those choices only involve spending cuts? Why not also push some taxes above their levels in the 1990s?

Let me suggest two areas in which it would make a lot of sense to raise taxes in earnest, not just return them to pre-Bush levels: taxes on very high incomes and taxes on financial transactions.

About those high incomes: In my last column I suggested that the very rich, who have had huge income gains over the last 30 years, should pay more in taxes. I got many responses from readers, with a common theme being that this was silly, that even confiscatory taxes on the wealthy couldn’t possibly raise enough money to matter.

Folks, you’re living in the past. Once upon a time America was a middle-class nation, in which the super-elite’s income was no big deal. But that was another country.

The I.R.S. reports that in 2007, that is, before the economic crisis, the top 0.1 percent of taxpayers — roughly speaking, people with annual incomes over $2 million — had a combined income of more than a trillion dollars. That’s a lot of money, and it wouldn’t be hard to devise taxes that would raise a significant amount of revenue from those super-high-income individuals.

For example, a recent report by the nonpartisan Tax Policy Center points out that before 1980 very-high-income individuals fell into tax brackets well above the 35 percent top rate that applies today. According to the center’s analysis, restoring those high-income brackets would have raised $78 billion in 2007, or more than half a percent of G.D.P. I’ve extrapolated that number using Congressional Budget Office projections, and what I get for the next decade is that high-income taxation could shave more than $1 trillion off the deficit.

It’s instructive to compare that estimate with the savings from the kinds of proposals that are actually circulating in Washington these days. Consider, for example, proposals to raise the age of Medicare eligibility to 67, dealing a major blow to millions of Americans. How much money would that save?

Well, none from the point of view of the nation as a whole, since we would be pushing seniors out of Medicare and into private insurance, which has substantially higher costs. True, it would reduce federal spending — but not by much. The budget office estimates that outlays would fall by only $125 billion over the next decade, as the age increase phased in. And even when fully phased in, this partial dismantling of Medicare would reduce the deficit only about a third as much as could be achieved with higher taxes on the very rich.

So raising taxes on the very rich could make a serious contribution to deficit reduction. Don’t believe anyone who claims otherwise.

And then there’s the idea of taxing financial transactions, which have exploded in recent decades. The economic value of all this trading is dubious at best. In fact, there’s considerable evidence suggesting that too much trading is going on. Still, nobody is proposing a punitive tax. On the table, instead, are proposals like the one recently made by Senator Tom Harkin and Representative Peter DeFazio for a tiny fee on financial transactions.

And here’s the thing: Because there are so many transactions, such a fee could yield several hundred billion dollars in revenue over the next decade. Again, this compares favorably with the savings from many of the harsh spending cuts being proposed in the name of fiscal responsibility.

But wouldn’t such a tax hurt economic growth? As I said, the evidence suggests not — if anything, it suggests that to the extent that taxing financial transactions reduces the volume of wheeling and dealing, that would be a good thing.

And it’s instructive, too, to note that some countries already have financial transactions taxes — and that among those who do are Hong Kong and Singapore. If some conservative starts claiming that such taxes are an unwarranted government intrusion, you might want to ask him why such taxes are imposed by the two countries that score highest on the Heritage Foundation’s Index of Economic Freedom.

Now, the tax ideas I’ve just mentioned wouldn’t be enough, by themselves, to fix our deficit. But the same is true of proposals for spending cuts. The point I’m making here isn’t that taxes are all we need; it is that they could and should be a significant part of the solution.

Things to Tax,
NYT,
27.11.2011,
http://www.nytimes.com/2011/11/28/opinion/krugman-things-to-tax.html

Putting Millionaires Before Jobs

November 3, 2011

The New York Times

There’s nothing partisan about a road or a bridge or an airport; Democrats and Republicans have voted to spend billions on them for decades and long supported rebuilding plans in their own states. On Thursday, though, when President Obama’s plan to spend $60 billion on infrastructure repairs came up for a vote in the Senate, not a single Republican agreed to break the party’s filibuster.

That’s because the bill would pay for itself with a 0.7 percent surtax on people making more than $1 million. That would affect about 345,000 taxpayers, according to Citizens for Tax Justice, adding an average of $13,457 to their annual tax bills. Protecting that elite group — and hewing to their rigid antitax vows — was more important to Senate Republicans than the thousands of construction jobs the bill would have helped create, or the millions of people who would have used the rebuilt roads, bridges and airports.

Senate Republicans filibustered the president’s full jobs act last month for the same reasons. And they have vowed to block the individual pieces of that bill that Democrats are now bringing to the floor. Senate Democrats have also accused them of opposing any good idea that might put people back to work and rev the economy a bit before next year’s presidential election.

There is no question that the infrastructure bill would be good for the flagging economy — and good for the country’s future development. It would directly spend $50 billion on roads, bridges, airports and mass transit systems, and it would then provide another $10 billion to an infrastructure bank to encourage private-sector investment in big public works projects.

Senator Kay Bailey Hutchison, a Republican of Texas, co-sponsored an infrastructure-bank bill in March, and other Republicans have supported similar efforts over the years. But the Republicans’ determination to stick to an antitax pledge clearly trumps even their own good ideas.

A competing Republican bill, which also failed on Thursday, was cobbled together in an attempt to make it appear as if the party has equally valid ideas on job creation and rebuilding. It would have extended the existing highway and public transportation financing for two years, paying for it with a $40 billion cut to other domestic programs. Republican senators also threw in a provision that would block the Environmental Protection Agency from issuing new clean air rules. Only in the fevered dreams of corporate polluters could that help create jobs.

Mitch McConnell, the Senate Republican leader, bitterly accused Democrats of designing their infrastructure bill to fail by paying for it with a millionaire’s tax, as if his party’s intransigence was so indomitable that daring to challenge it is somehow underhanded.

The only good news is that the Democrats aren’t going to stop. There are many more jobs bills to come, including extension of unemployment insurance and the payroll-tax cut. If Republicans are so proud of blocking all progress, they will have to keep doing it over and over again, testing the patience of American voters.

Putting Millionaires Before Jobs,
NYT,
3.11.2011,
http://www.nytimes.com/2011/11/04/
opinion/the-senate-puts-millionaires-before-jobs.html

Related > Anglonautes > Vocapedia

taxes > tax avoidance, tax evasion

economy, money, taxes,

housing market, shopping,

jobs, unemployment,

unions, retirement,

debt, poverty, hunger,

homelessness

banks > off-shore banking

underground economy

industry, energy, commodities