Tax Foundation - Tax Foundation's "Tax Policy Blog"

President Obama Obtains Resignation of IRS Acting Commissioner; Takes Effect in June

Wed, 15 May 2013 19:00:00 -0400

President Obama just announced at a press conference that he has directed Treasury Secretary Jack Lew to demand the resignation of the Acting IRS Commissioner, Steven Miller. CNN then obtained Miller's resignation letter, which indicates that the resignation will not take effect until early June:

May 15, 2013

The internal message to IRS Employees from Acting IRS Commissioner Steven T. Miller

Dear Colleagues,

It is with regret that I will be departing from the IRS as my acting assignment ends in early June. This has been an incredibly difficult time for the IRS given the events of the past few days, and there is a strong and immediate need to restore public trust in the nation's tax agency. I believe the Service will benefit from having a new Acting Commissioner in place during this challenging period. As I wrap up my time at the IRS, I will be focused on an orderly transition.

While I recognize that much work needs to be done to restore faith in the IRS, I don't want anyone to lose sight of the fact that the IRS is comprised of incredibly dedicated and hard-working public servants. During my 25-year IRS career, I am profoundly proud to have worked alongside you and to be part of an institution that has worked hard to support the nation. I have strong confidence in the IRS leadership team to continue the important work of our agency.

I want to thank everyone for all of their support and friendship during my career in government service. And I especially want to thank each and every one of you for your continued commitment to the nation's taxpayers.

Steve

I'm surprised: when the President tells you to leave, it doesn't usually mean in three or four weeks. More about the IRS scandal here.

Minnesota Budget Deal Includes $2 Billion Tax Hike

Wed, 15 May 2013 18:30:00 -0400

In a press conference this weekend, Minnesota lawmakers announced an overview of their budget agreement. Though some details remain unspecified, the major tax provisions are disappointing.

Here’s what we do know. The overall plan includes $2 billion in additional tax revenues over the next biennium—specifically a hike on taxes paid by higher-income taxpayers and smokers. Governor Mark Dayton’s (D) original budget, introduced earlier this year, contained both of these provisions. The tax increases are a way to fill a projected budget deficit of $627 million and fund additional spending.

The budget adds another income tax bracket on single filers earning $150,000 or more annually. The state’s top rate will now be 9.85 percent, making it the fourth highest top rate in the country. Politicians are spinning this as only affecting the “top 2 percent,” but that misses the point.

Pushing more of the tax burden onto a smaller, wealthier group is poor policy, not because I care about rich people more (an absurd and inaccurate, but unfortunately common, assertion), but because those incomes are volatile. Income tax revenues that derive a large share of receipts from the wealthiest are unstable, and there’s a lot of research to back that up (a few examples can be found here and here). This point is exacerbated by the fact that lawmakers might also throw in an additional temporary income tax surcharge on those earning $500,000 or more.

Tobacco taxes will also rise, but the exact magnitude of the tax increase is yet to be determined. This is another bad policy move. I find it concerning that lawmakers want to push more of the tax burden onto a group of shrinking, politically unpopular people. Research shows that cigarette taxes do in fact decrease consumption. As the pool of tobacco-users shrinks over time, that revenue source will dry up, leaving the state right back where it started. Cigarette tax hikes are also counter to many progressive goals—that is, they tend to hit the poor hardest.

Wednesday Links: Taxes on Hipsters and the IRS Scandal Continues

Wed, 15 May 2013 18:00:00 -0400

The FBI has opened an investigation into the targeting of conservative groups by the IRS. The inspector general delivered the entire report to Congress on Tuesday and the IRS released a statement in response.

An article in the Atlantic examines how a Pigovian tax on hipsters might play out, referencing a poll that shows 27 percent of Americans would support such a tax. The conclusion to such a plan (no matter how you feel about hipsters): hipsters will adapt their behavior, as people do in response all taxes.

A New York Federal reserve study shows that about 80 percent of people cut spending in response to the decrease in personal income from the expiration of the payroll tax holiday. Only 2 percent increased their debt due to the decreased take home pay, according to the study.

Advocates in Connecticut want the state legislature to raise its cigarette tax by 95 cents a pack. This would increase the tax to $4.35 a pack. We have plenty of research on cigarette taxes and why they might not get the revenue they would like.

On the topic of small business tax reform, Bloomberg BusinessWeek points out that there isn’t really a clear definition of what constitutes a small business. In the current code, small business classification has nothing to do with the numbers of employees or amount of revenue, but with how the company is organized. Most companies in the U.S. are organized as a pass-through (partnership, sole proprietorship, s-corp) instead of a traditional corporation (c-corp). This is one reason why many call for parity between the individual and corporate rate through the reform process.

Weekly Map: Who Itemizes?

Wed, 15 May 2013 17:30:00 -0400

This week's map shows the percentage of federal tax returns in each state claiming Schedule A itemized deductions, the biggest of which are for charitable contributions, state and local taxes, and mortgage interest. Because every taxpayer is able to claim a minimum standard deduction (currently $5,950 for single filers and $12,200 for joint filers) these deductions only provide a benefit if they add up to be more; they therefore benefit mainly higher-income taxpayers, and wealthier states have a higher percentage of itemizers.

Click on the map to enlarge it.

View previous maps here.

Missouri Legislators Pass First Income Tax Cut in Over 90 Years

Wed, 15 May 2013 16:30:00 -0400

Passing both sides of the General Assembly by a wide margin, new tax legislation would make some major changes to the state code over the next decade and cost $700 million annually when fully phased-in. The plan would:

lower the individual income tax top rate from 6 percent to 5.5 percent over ten years and reduce the number of brackets from ten to nine (the rate would go down an additional one-half percentage point if Congress enacts the Marketplace Fairness Act), reduce the corporate income tax rate from 6.25 percent to 3.25 over the next decade, enact a 50 percent business pass-through income deduction between 2014 to 2018, and increase the personal income tax deduction for low-income individuals in 2014.

Unfortunately, this doesn’t get at the real problem with the Missouri individual income tax: it’s incredibly complicated. There are no less than ten brackets and the top rate kicks in at only $9,000. We’ve suggested earlier that the state could easily change the system for the better by simply flattening the brackets:

Missouri’s rather absurd income tax brackets…are a relic of 1931, when $9,000 was a lot of money (equivalent to $136,000 today). Missouri might be better off junking everything but that top rate, since most taxpayers are probably in the top bracket anyway.

Isn’t it time for the state to bring its code in line with the current economy, rather than one that’s more than 80 years old?

Further, isn’t a ten year phase-in period a little bit long? Governor Jay Nixon (D) has expressed concern over the state’s ability to fund public services with less revenue. Though I fully support responsible tax changes that don’t cut a state’s revenue stream short, reducing the individual rates one-twentieth of a percentage point (three-tenths for the corporate income tax) each year for a decade is moving at a glacial pace. The bill even dictates that rate cuts are contingent upon revenue increase requirements, meaning that funding shortfalls aren’t possible.

I don’t think the Governor has any reason to worry. In fact, he should push for a less underwhelming individual income tax reform.

BOLO: Inspector General Report Finds IRS Engaged in Inappropriate Review Activity

Wed, 15 May 2013 11:30:00 -0400

Last week, the IRS shocked me by dropping its claim that it could read taxpayers' e-mails without getting a warrant. They had lost a court case but had seemed determined to fight it out, so while I was happy about the victory, it was a surprising and sudden change of heart.

As we now know, they were clearing the decks for a late Friday revelation: Tea Party and conservative organizations were subject to intentional delays and unnecessary information demands as they sought 501(c)(4) tax-exempt status. They apologized and promised that changes had been made.

The full report from the Inspector General came out yesterday, and the findings are scathing. From April 2010 to December 2011, the IRS shunted all targeted applications to one employee, creating an enormous backlog. A memo was distributed ("BOLO"=Be On the Lookout) to flag applications with "Tea Party," "Patriots," "9/12," issues on government spending or debt or taxes, educating the American public to "make America a better place to live," and constitutional education efforts. In early 2012, additional specialists had been added but they began demanding absurd amounts of information to process applications, setting a 2 or 3 week deadline. Slate's Dave Weigel obtained one information demand letter from the IRS to the Hawaii Tea Party dated January 26, 2012:

1) You are a membership organization. Provide details regarding all dues and benefits.

2) Provide actual financial information for 2009, 2010 and 2011. Include details regarding each item listed.

3) Provide copies of your monthly newsetters since October of 2010.

4) You will sell merchandise. Provide a list of all merchandise you will sell, your cost and the sale price.

5) Provide details regarding your relationship with the Leadership Institute. Provide copies of their training material.

6) Provide details regarding your relationship with Dylan Nonaka. Provide copies of the training material used by Dylan Nonaka.

7) Provide details regarding all other training you have received. Provide copies of the training material.

8) Have you added or replaced any board members, officers, or key employees since October of 2010? If yes, submit the following information: (a) Provide a resume for each. (b) Indicate the number of hours per month each individual has provided or is providing services to you. (c) Provide a description of all the services each individual provides or has provided to you. (d) Indicate the total compensation provided to each individual. (e) Indicate if any of your current or former officers, directors, and key employees are related to each other (include family and business relationships) and describe the nature of the relationship.

[...]

11) Provide minutes of all board meetings since October of 2010.

[...]

25) Have any candidates for public office spoken at a function of the organization other than a candidate forum? If yes, provide the following: a) The names of the candidates; (b) The functions at which they spoke; (c) Any materials distributed or published with regard to their appearance at the event; (d) Any video or audio recordings of the event; (e) A transcript of any speeches given by the candidate(s).

And so on. (It looks like that particular one did not demand donor information, but the Inspector General found that others routinely demanded lists of donors, contributions, and use of the money. The IRS demanded one group provide lists of books read by members of the organization; they snarkily sent a copy of the Constitution.) By February 2012, after some organizations began complaining to the media about IRS harassment, the IRS stopped demanding more information and instead granted 60 day extensions to satisfy existing information requests. From May 2012 to December 2012, the IRS began approving applications, telling a number of the organizations that they no longer needed to respond to the information requests. All told, the average organization was approved in 238 days, but the average targeted group took 574 days to get approval.

While there are tax-exempt organizations out there that perhaps don't deserve that status, many of the IRS's questions were unnecessary toward such an inquiry, and in any event, the one-sided scrutiny was evidently designed to be harassing and delaying rather than true investigatory work. It also wasn't one or two renegade employees, and indeed, the current Acting IRS Commissioner is the head of the Exempt Organizations division. The IRS has apologized, but as Jon Stewart noted, the IRS rarely accepts an apology from a taxpayer accused of wrongdoing. They should be held to the same standard.

Inspector General report:

AIG aduit of IRS abuses by Dave Weigel

IRS Letter to Tea Party Hawaii:

Hawaii Irs Response by Dave Weigel

Does income taxation create disincentives that impede growth?

Wed, 15 May 2013 09:30:00 -0400

Last week, I took part in a debate on the future of North Carolina tax reform with Jared Bernstein (if you missed it, you can watch it here). In my most recent Fiscal Fact, released today, I follow up on my conclusions from the discussion. Today, I wanted to introduce the first point of disagreement between Mr. Bernstein and I: that income taxation will not impede economic growth.

Economically speaking, income taxes are the worst types of taxes because they alter individuals' decisions to work and to invest. This is especially true for those with high graduated rates. An age-old adage notes that “when you tax something, you get less of it.” The last thing we want to do is discourage those things that add productive value to the economy.

A common counterargument to this idea is that encouraging consumption alone can push the economy forward. Consumption, though an integral part of our complex economy, is the byproduct of growth, not the driver. A recent Forbes article articulates this point much more eloquently than I: Consumer demand does not necessarily translate into increased employment. That’s because “consumers” don’t employ people. Businesses do. Since new hires are a risky and costly investment with unknown future returns, employers must rely on their expectations about the future and weigh those decision very carefully...Where do these “consumers” get their money to spend? Before we can consume, we need to produce and earn a paycheck. And paychecks have to flow to productive—that is, value-creating—behavior...Our various demands as consumers are enabled by our supply as workers/producers for others...Consumption is the goal, but it is production that is the means...Increasing consumption is a result of…growth, never the cause of it.

Higher tax liability makes it less profitable than it would be otherwise for individuals to work or businesses to expand their production. As a result, people will engage in less of these activities than they would have otherwise and the economy produces less overall.

Income taxes result in larger “deadweight loss,” a fancy term economists use to demonstrate the fact that tax revenues removed from the economy aren’t the only cost of taxation. In other words, “deadweight loss” is the loss in benefit from the reduced number of productive activities as a result of the tax. An accountant that is hired to help a business navigate and comply with the complicated tax code is one less productive laborer. Those resources could be used more effectively elsewhere.

To minimize this loss, taxes on income need to be as small and as simply structured as possible, and they need to minimize a person’s disincentive to produce. The solution here is flatter, lower income tax rates applied to a broad, neutral base.

Critics of tax reform are misunderstanding my argument entirely. I’m not selling any “snake oil” asserting that any and all tax cuts will lead to instant growth. What I am arguing, however, is that the ultimate goal of tax reform should be creating an atmosphere where business can thrive and economic growth is possible, while still generating revenue for the government to pursue its priorities. Growth won’t be instant, but a continued, consistent commitment to a system that won’t discourage the very things that will move North Carolina’s economy forward will most definitely benefit the state in the long-run.

Be sure to take a look at the full report here!

Tuesday Links: The IRS Controversy and Other Things

Tue, 14 May 2013 12:45:00 -0400

Some worry the IRS scandal will divert resources away from the comprehensive tax reform discussion. But both Chairman Camp and Chairman Baucus seem dedicated to reform, unveiling their new website and joint twitter account last week.

France is considering a tax on smartphones to help fund their cultural programs.

Australia hopes to cover for its $17 billion deficit by cracking down on tax evaders. If the experience of Greece is an indicator, the push won’t do much to fill Australia’s treasury. So far they have only be able to collect 19 million euros worth of the estimated 13 billion euros the government says its 1,500 biggest tax debtors owe.

Vice President Biden suggested a new sin tax on violent video games, stating “there’s no legal reason why they couldn’t” tax those companies. Legality of the tax aside, taxes shouldn’t micromanage individuals’ choices.

Time points out that maybe not all of the groups currently tax exempt should be. Currently, oraganization like the NFL and PGA receive tax-exempt status - something that Republican Senator Tom Coburn has taken an interest in eliminating.

Indiana Approves Income Tax Reduction

Tue, 14 May 2013 10:30:00 -0400

Indiana Governor Mike Pence (R) last week signed into law the state’s 2014-15 two-year budget. The approved budget keeps spending increases below inflation and cuts the state’s single-rate income tax, the corporate income tax, and eliminates the inheritance tax:

	Current	2014	2015	2016	2017
Individual Income Tax	3.4%	3.4%	3.3%	3.3%	3.23%
Corporate Income Tax	7.5%	7.0%	6.5%	6.5%	6.5%
Inheritance Tax	Repealed, retroactive to Jan. 1, 2013	Repealed	Repealed	Repealed	Repealed

The corporate tax reduction preserves one enacted in 2011, but the others are new. Indiana’s well-structured income tax – broad-based and low-rate – gets ever closer to Pennsylvania’s lowest-in-the-country rate of 3.07 percent. (Pence had initially sought a larger reduction but ultimately negotiated these rates with legislative leaders.) The inheritance tax was being phased out by 2022, and the budget accelerates that to, well, now.

Another Year, another Obamacare Tax

Mon, 13 May 2013 14:15:00 -0400

This year it was the medical excise tax, next year it will be the “annual fee on health insurance.”

Last week, the Subcommittee on Health and Technology held a hearing to discuss the next tax to go into effect to fund Obamacare: the “annual fee” (tax) on health insurance. In the first year, this tax will total $8 billion, apportioned among health insurance companies based on their net premiums. The total cost of this tax will then grow to more than $14 billion in 2018, after which it will be set to grow indefinitely, indexed to the growth of healthcare premiums.

Prior to the hearing they released a memo discussing the new tax’s possible effects on small business and the economy.

The memo highlights research on the downsides of the tax:

Both the JCT and CBO estimate that a vast majority of the tax will be passed on the consumers. Specifically, the JCT estimated that getting rid of this tax would save families $350 to $400 on their premium in 2016.

Even more, since there is an exemption for those who self-insure—most commonly large employers—the majority of this tax will fall on small businesses. According to a study by the Nation Federation of Independent Business Research Foundation, the increased premiums on businesses “could reduce private sector employment by 146,000 to 262,000 in 2022, with a majority of those losses falling in the small business sector.”

Another study found that the insurance fee will increase premiums by 1.9 percent to 2.3 percent in the first year of this tax and a projected annual growth of premiums of 1.8 percent after that. This translates to an additional $2,794 for individuals and $5,140 for families over the next ten years. Even more, the study said that some small businesses could see dramatic premium increases.

However, testimony from CBPP argues that combined with all the other provisions in Obamacare, the effect of the tax will be negligible to employers. In their testimony, they cite the CBO which claims that that Obamacare’s effect on premium prices will be between a 1 percent increase and a 2 percent decrease.

This assumes, of course, that the highly complex structure of Obamacare created all the right incentives and all those incentives line up correctly and lead to lower health insurance costs, mitigating all negative effects of this tax. With all the implementation issues and political issues Obamacare faces, this seems like a dream rather than a reality.

It is more likely that Obamacare won’t work perfectly: the fee will raise premiums and there will be some negative effect on employment. If this is the case, the effects of this new fee on premiums seem to contradict the purpose of Obamacare, which was meant to reduce the cost of healthcare, not increase it.