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"A Taxing Trend", & Tax Day Aftermath - Speaking of Taxpayers, April 18
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Pete & Doug examine NTU's study of tax complexity, "A Taxing Trend", which found a $224 billion cost due to 6.1 billion hours lost in complying with the tax code; as well as IRS online monitoring, and what to look for next year. Plus, the Outrage of the Week!0 Comments | Post a Comment | Sign up for NTU Action Alerts
“Man is a creature that can get used to anything.”
That’s Dostoyevsky, thought he’s not the only person to express that sentiment.
After another tax season, as the federal government vacuums up record revenues while the economy sputters, that seems to be the appropriate theme. Though one might add, “especially if he cannot see or understand it.”
Last year I wrote on a few topics related to Tax Day and NTU’s study of tax complexity: A Taxing Trend. Unfortunately, from the challenges faced by overseas taxpayers, and the spike in the cost of tax complexity in the ‘10s, to the IRS tracking of your digital footprint, nothing has really changed.
There are more stories about the IRS’ monitoring of social media presences, overseas taxpayers still have to deal with FATCA, and we still lost north of $200 billion to tax complexity.
Though for the cost of tax complexity, that is quite noteworthy… This year the hour cost of tax complexity seems to have come down a bit, and, while that has brought the dollar cost down ever so slightly, that second figure has not come down much.
In fact, it is still in the stratosphere at $224 billion this past year. The charts illustrate how the dollar cost of tax complexity is, at best, very slow to react to the hour burden - and with more Obamacare measures still being implemented the dip may be short-lived.
The story is a familiar one as our tax code remains a huge burden, and the agency enforcing it looks for more ways to track your every move, but perhaps it’s not that much of a problem?
It might seem anathema to consider such a question, yet, the Associated Press asked whether filing taxes was truly difficult in a recent poll, headline: “Most Americans Say Filing Taxes Easy.”
How could something that is costing the economy 6.1 billion hours be “easy”? How could it take the average taxpayer 15 hours and $280 out of pocket to get it done? Maybe we just aren’t that bright.
Well the AP found that 58 percent of respondents thought filing a tax return was easy. Sad to say, that relief you’re feeling will be short lived.
The poll’s other findings undermine their own lead finding. First of all, they peg the number of taxpayers using assistance of some type (from Turbo Tax to an accountant) at 91 percent!
That’s right, practically everyone gets help with their taxes, and then claims filing them is “easy.” Something is amiss…
This is like saying changing your oil is easy because you take your car to Jiffy Lube. By this logic I have no problem flying a plane, just look how many times I’ve flown on airplanes! One could go on and on.
AP also needles simplicity by asking: “Would you be willing to pay more in federal taxes if the process of filling out a tax return were easier, or not?”
Of course only 7 percent of respondents said yes. It is very disappointing this loaded question was asked, as if paying more is somehow a feature of simplifying the tax code.
Maybe if they had told them how much they are losing just due to tax complexity those polled would have had some math to do.
This poll does show that the convenience tax filing products have brought to the table is now obscuring the true pain of complying with the tax code for almost everyone. We are all glad to have this arduous process made easier on us, but when you combine this situation with the real cost of tax complexity as shown by A Taxing Trend, you have the worst possible situation: A complex tax code that costs our economy billions, and remains hidden from view.
Similar to how automatic withholding and deficit spending can obfuscate what you pay in taxes, when everyone has help filing their taxes, the inefficiencies and burdens of the system are not clear to individuals.0 Comments | Post a Comment | Sign up for NTU Action Alerts
If you’re following HBO’s Game of Thrones, winter’s always coming. The problem for taxpayers is that our winter comes every year in mid-April and it’s increasingly becoming a game with only losers. Around this time of year, I hear from citizens and even policy experts not only complaining about their tax burden but wondering why the system itself is in such dire straits. There are many reasons (NTUF recently laid out some of the problems and solutions in The Taxpayer’s Tab -- seriously, if you’re not subscribed to the Tab, you’re missing out) but some Americans see no hope for our graduated progressive-income tax system and are looking to completely replace it.
One such reform was pointed out to me by Tom, whom I met at NTU and Foundation’s CPAC 2014 booth. His idea is to streamline America’s tax system in a way similar to what the Founding Fathers originally created. I later found a short description of what Tom calls the Neutral Tax on his website:
[The Neutral Tax] eliminates all federal taxes on citizens and businesses (including federal income, payroll, personal income, unemployment, corporate, gift, estate, capital gains, alternative minimum, self-employment, gasoline, etc.) and replaces them with a singular flat tax on the gross revenue of each state government (including all local taxes & fees.)
In short, the new system would transfer the requirement of collecting federal revenues from individuals, households, businesses, and corporations to state governments. State governments tend to be more efficient in costs and accountability when collecting taxes because they are made up of much smaller jurisdictions than the entire country. Dealing with a smaller pool of people means lower operating and enforcement costs. Though there are still horror stories coming out of state Departments of Revenue, taxpayers are better able to walk down the street or travel to their state capitol to dispute their tax burden compared to traveling all the way to Washington, D.C. and/or dealing with examiners of a large and oftentimes cumbersome agency, such as the Internal Revenue Service (IRS).
The new system would take the responsibility of collecting taxes away from the federal government, leaving the states to decide the methods and parameters to tax citizens. Bringing the notion that states are laboratories for democracy into play, governments could choose to merely expand existing systems or choose to reform to collect the necessary funds. The goal is to allow states to have the freedom to reform their systems without having to also conform to the federal income tax-based framework. For example, today, taxpayers in Florida (and six other states) don’t pay state income taxes (and generally pay higher sales or use taxes) but still must pay federal income taxes. This system makes having a comparatively more efficient sales tax system less advantageous because people are a part of two systems. Having a Neutral Tax system might increase efficiencies by decreasing compliance costs for households and businesses. Of course, the tax system that states would adopt is all dependent on the Governor and state legislators.
With the basic concept out of the way, let’s delve down into what a Neutral Tax system might look like, how it would affect taxpayers, and how it might change the federal budget.
Calculating the Neutral Tax: As it appears in Tom’s document, the Neutral Tax would be revenue-neutral, meaning that the system would collect the same amount of revenue as before the fundamental reform. At the federal level, tax rates would be set at zero. Each state would calculate the state, local, and federal tax makeup of its citizens to determine how much it would need to increase its own collections to offset the federal income tax repeal.
For 2014, total projected federal revenue ($3.0 trillion) is divided by total tax revenue ($5.7 trillion – federal, state, and local total) to reveal that 52.6 percent of taxes paid go to the federal government. To be compliant in the new system, state revenue departments would need to increase average collections by 52.6 percent, which would not change the taxpayer’s tax burden (just the method of collection). It would be up to the Department of the Treasury and Congress to determine what percentage of the tax mix would go to federal accounts.
The Neutral Tax & Taxpayers: At least initially, taxpayers would likely not see a change in their tax burden. States would have the freedom to decide how to collect revenues and how much to collect, which would also leave it to state officials to decide who collects taxes. For example, it’s possible that one state could adopt a more progressive income tax while its neighbor could have a Fair Tax system.
The policy document also notes that “it cannot be argued The Neutral Tax inherently falls more heavily on one group or another. It will be up the states to determine how they modify their existing tax/fee structures to collect the additional federal tax… .”
A Different Federal Budget: Even with the same amount of revenue coming in, the Neutral Tax would not necessarily lead to similar spending levels. Enacting the new system would mean refundable tax credits would no longer be in effect. These credits are payments given to households in excess of their tax liability and are counted by both the Congressional Budget Office and NTUF’s BillTally project as spending, not revenues. Without these credits, federal spending would be reduced by $86.4 billion if the Neutral Tax was enacted this year. This line of reasoning is also found in our scores of the flat tax and Fair Tax proposals.
I took a similar view of the Neutral Tax as with the Fair Tax with respect to the IRS. With the elimination of most of the Tax Code, the IRS would be significantly downsized. The agency is approved to spend $12.1 billion this year, which would be counted as savings if the Neutral Tax is passed and the IRS is eliminated. BUT, a couple of further details: The IRS would need a multi-year wind-down to finalize remaining tax cases and to transfer data and authority to a smaller entity, comparable to the Treasury’s Alcohol and Tobacco Tax and Trade Bureau. They spend $96 million last year (page 1070 of the Budget Appendix) on operations and so I would credit that figure against the total IRS deauthorization.
Much like other fundamental tax reform measures, this proposal also has a slim chance of passing a divided and pro-establishment Congress. In this proposed system, as with other reforms, the decision making power of how much to tax Americans rests with Congress and the Treasury Department. This then relies on individuals, local taxpayer associations, and national organizations to push for changes in the overall rate. It is difficult to tell if taxpayers would organize to keep rates low or if we could face a situation similar to today where rates are often times arbitrarily increased. However, it is good to keep the ideas coming for taxpayers to consider how best to fund the government in challenging economic times. Thanks to Tom for stopping by our CPAC booth and helping me add another alternative to the growing list of reforms!
Have an opinion of the Neutral Tax or another tax reform? Let us know in the comments.0 Comments | Post a Comment | Sign up for NTU Action Alerts
When most of us think of trading on the floor of the New York Stock Exchange, images of traders frantically running across the room as they take orders over the phone come to mind. Many Americans also trade at home, relying on internet services or financial advisors to relay the latest information on the stocks and funds that they're interested in.
However, there is growing concern that automated "high-frequency trading", which utilizes computer algorithms and software to make split-second decisions as trading conditions change in real-time, might give some traders an unfair advantage over others. The problem stems from the idea of marginal profit -- that is, even very small profits on minor trades can accumulate into larger ones so long as the trader conducts enough transactions. Software and computer algorithms are already capable of trading at exponentially higher speeds than the every-day financier, yet some firms spend hundreds of millions of dollars to cut down on communication time even further in order to get their hands on a stock first, then immediately resell it at a marginally higher price.
Author Michael Lewis has chronicled the debate in a recent book and several media appearances. The issue has gotten the attention of some lawmakers on Capitol Hill, too, who are pushing a national transaction tax in response. That tax would be levied on every financial transaction that investors make, which, according to Congressman Keith Ellison (D-MN), could serve as a deterrent for firms who are supposedly gaming the system by conducting thousands of small transactions at a time and rely on the very small marginal profits made on each one.
Ellison's idea -- which he has dubbed the "Inclusive Prosperity Act" -- attempts to counteract the effect of "Wall Street speculation" that "is currently subject to zero sales tax on its trillions of dollars of annual transactions- while consumers regularly pay sales taxes even on daily necessities." It has been proposed before in previous sessions of Congress.
NTUF featured an even broader transaction tax proposal in a 2012 edition of The Taxpayer’s Tab. Congressman Chaka Fattah's (D-PA) Debt Free America Act proposed to eliminate the personal income tax, virtually all tax credits, and the Alternative Minimum Tax and replace them with a one-percent fee on each and every cash, credit, debit, and stock or bond transaction. While it's unknown whether the bill would have any administrative costs associated with tracking every financial transaction Americans make, Rep. Fattah claims that his legislation will generate enough revenue to pay down the national debt in just ten years. Variations on that proposal include a 0.35 percent tax on all transactions, which proponents argue would simplify the current tax system and expand the revenue base.
Since our feature on Rep. Fattah's legislation, NTUF has offered a preview of other tax reform proposals -- including the Fair Tax and a flat tax -- that have been proposed in Congress. You can read our analysis here.0 Comments | Post a Comment | Sign up for NTU Action Alerts
The good folks at the Tax Foundation have released another eye-opening report with their Annual State-Local Tax Burden Rankings, which “estimates the combined state and local tax burden shouldered by the residents of each state.”
Not surprisingly, New York placed first, with taxpayers shelling out 12.6 percent of their income to pay for state and local taxes, while Wyoming replaced Alaska at number 50 with a burden of 6.9 percent.
Other key findings, according to the Tax Foundation:
The report serves as an excellent reminder for taxpayers to continue the push for tax reform and decreased spending at state and local levels of government. For more from the Tax Foundation or to read the entire report, click here.0 Comments | Post a Comment | Sign up for NTU Action Alerts
Taxpayers Claim Big Win in Fight Against IRS Free Speech Silencing Rule
NTU members deserve a pat on the back for their hard work in the on-going fight against IRS-overreach. For months, NTU and other grassroots organizations (categorized under section 501(c)(4) of the Tax Code) have been engaged in an uphill battle against an oppressive new IRS rule proposal that would significantly restrict our ability to educate citizens and hold elected officials accountable. Thanks to your help however, this silencing of free speech has been thwarted...for now.
After concerned citizens filed an overwhelming number of comments with the IRS to oppose the rule – thousands of which came from NTU members – IRS Commissioner Koskinen announced yesterday that the rule will not be finalized this year. So, it’s clear that taxpayers have won the first round.
According to Koskinen:
During the comment period, which ended in February, we received more than 150,000 comments. That’s a record for an IRS rulemaking comment period. In fact, if you take all the comments on all Treasury and IRS draft proposals over the last seven years and double that number, you come close to the number of comments we are now beginning to review and analyze.
It’s going to take us a while to sort through all those comments, hold a public hearing, possibly repropose a draft regulation and get more public comments. This means that it is unlikely we will be able to complete this process before the end of the year.
As you can see from Koskinen’s comments, this fight is far from over. Largely developed behind closed doors, the new ruling would have constituted a profound infringement of the First Amendment rights of NTU and each of our members. It would have made it difficult – if not impossible – for NTU to hold elected officials accountable for their actions and ensure that the voice of the taxpayer is heard in the nation’s capitol. It should come then as no surprise that imposing this rule was a major priority for the Obama Administration to finalize ahead of 2014 Congressional elections. (Click here for more background information).
It’s important that we use the time we have to keep up the pressure on our legislators to oppose this terrible rule!
Here’s how you can help:
April Fool’s Day Still Real Anniversary of Highest Corporate Tax Rate
Happy April Fools’ Day! Today marks the 2nd anniversary of the United States having the highest corporate tax rate in the industrialized world – a foolish policy situation that continues to plague our economy.
Last year, I analyzed this dubious occasion in an op-ed for the Washington Times. Sadly, virtually nothing has changed since then. The rate remains far too high. And even after all loopholes, credits and deductions are accounted for, our average effective rate is among the world’s highest. This has put American businesses at a huge competitive disadvantage when compared to international rivals.
A few weeks ago, House Ways & Means Chairman Dave Camp (R-MI) introduced a tax reform draft that would significantly alter the existing Tax Code. While NTU has several concerns about the plan, it represents a promising step toward fundamental tax reform. One of its most encouraging pro-growth provisions would flatten the corporate rate structure and move to a single rate of 25 percent – significantly lower than the current 35 percent rate. Such a change would create 391,000 full time jobs, according to the Tax Foundation.
Let’s hope that Camp’s proposal builds momentum for the passage of a new Tax Code that is simpler, fairer, and less burdensome than the current one. Otherwise, we’ll be “celebrating” on April Fools’ Day again next year.1 Comments | Post a Comment | Sign up for NTU Action Alerts
Falling Behind on Corporate Income Tax is No Laughing Matter
There’s an old saying that goes, “Fool me once, shame on you, fool me twice, shame on me.” But when it comes to our tax system, the shame is a one-way street leading to our nation’s capital. Today is the second anniversary of the U.S.’s dubious distinction of having the highest combined corporate tax rate (39.1 percent) in the industrialized world. And guess who bears the burden of this cruel joke? Workers, investors, and taxpayers… everyone.
On April 1, 2012, Japan finally implemented a reform plan that lowered its corporate tax rates and simplified its tax base. “Finally” is an apt choice of words, since most developed countries had been taking such steps for years. Since 1985, for example, the simple average corporate tax rate for OECD nations has fallen from a high of close to 50 percent down to roughly 25 percent.
When was the last time the U.S. took bold steps to slash its corporate tax rate? Hint: You needed a Walkman to listen to music, a paper map to find directions, and a landline to make phone calls. The year was 1986. Today, nearly three decades later, advances in technology allow us to listen to music, navigate, and communicate all on one device. Our tax code, on the other hand, has made no such advances.
If this seems ironic for the model of capitalism, that’s because it is. There is no good reason for the U.S. to voluntarily place itself at such a competitive disadvantage. Our 39.1 percent corporate tax rate is a disincentive to domestic investment and job creation. And while some high-taxers dismiss this benchmark because it fails to account for the “effective” burden after deductions and credits, this too is a misnomer. Even by that measurement, the U.S. is still a serious laggard.
Even as we fall behind, other countries are making moves to attract American businesses with more desirable tax rates – not just Japan, but other competitors such as Canada and the United Kingdom. Still, the burden of paying taxes is not the only problem afflicting our businesses – it’s the burden of complying with taxes. As NTU’s most recent “Taxing Trend” analysis of systemic complexity reported from a PwC analysis, the U.S. ranked an underwhelming 63rd out of 185 countries surveyed for the time to fill out all the necessary business tax forms associated with a medium-sized manufacturer (“1” being the easiest to deal with).
Fortunately, some Members of Congress are starting to get serious about overhauling our nation’s personal and business tax systems. The House Ways and Means Committee’s recent tax reform discussion draft may need work in several areas, but it has helped to advance a much-needed dialogue.
The House Majority’s 10-Year Budget Resolution, introduced today, goes even further. While it does not endorse a specific plan, it calls for a wide-ranging debate over comprehensive tax reform that could include not only the Chairman’s draft but other worthy proposals to replace the code with a flat tax or consumption tax.
A day like this is a good one to remind Washington it’s time to stop fooling around with tax reform and get to work. Our lawmakers need to take action now before another three decades – and many more of our competitors – pass us by.
(Picture source: Mercatus Center, Veronique de Rugy, http://mercatus.org/publication/corporate-income-tax-rates-oecd)1 Comments | Post a Comment | Sign up for NTU Action Alerts
Yesterday’s House Judiciary Committee hearing about alternatives to the Marketplace Fairness Act’s (MFA’s) brand of Internet sales tax mandate offered several options that Congress could focus on, the best of which would be “origin sourcing” – yet, the most imperative statements remain the prudent warnings about the risks posed by MFA, and the need for the House to avoid this legislation first and foremost.
Indeed, the hearing was more of a referendum on MFA than anything, and for good reason since MFA represents such a dangerous departure from traditional taxpayer protections and interstate competition. National Taxpayers Union (NTU) submitted comments to the Committee arguing against MFA and providing observations on other policy avenues, and late last year commissioned a poll with the R Street Institute finding at minimum 57 percent of respondents opposed MFA (the level of opposition rose when they were presented with “pros and cons” of the proposal).
Those testifying in favor of MFA, or nominally a Streamlined Sales and Use Tax Agreement (SSUTA), joined some of the lawmakers on the Committee in making many misguided points. The most oft-repeated of them warrant a response:
1) “Leveling the Playing Field.” We heard multiple times that “leveling the playing field” or protecting brick and mortar establishments was the major motivation behind an MFA-type policy.
Yet, the number of brick and mortar stores that do not also sell their wares online is smaller than ever; as of 2010 they represented 38 percent of online sales. Online sales and storefront sales have both similarities and differences in their business models, so “leveling the playing field” in the way MFA does could carelessly plow under job creation and other activity that benefits the economy – and, indirectly, benefits government coffers.
Nonetheless, it is possible for sellers to participate in both kinds of retailing. Government cannot turn back the technological tide, and it cannot be valid to simply note change as a reason for panicked action.
2) The Massive Compliance Burden for Small Business. There still was no answer to the compliance burden question. Despite repeated attempts at creative explanations by several panelists -- Mr. Kranz, Mr. Crosby, and Mr. Moschella -- the main response to the threat of being subject to the rules (and audits) of nearly 10,000 taxing jurisdictions seemed to be “software.”
A 2006 PricewaterhouseCoopers study demonstrated that small businesses with sales between $1 million and $10 million still face enormous costs that would threaten profitability, causing significant harm to interstate commerce and the economy during an especially fragile time.
Even more striking, a coalition of “e-tailers” wrote lawmakers warning that MFA could cost the signatories some 220,000 jobs.
Mr. Crosby expressed faith that Congress could craft a bill combined with software that would alleviate any problems. But, unless Congress somehow took on legal liability for any failure of this software, businesses will be on the hook for any mistakes the software makes, after the cost of implementing it into their existing systems.
The significance of this part of the MFA equation cannot be understated. Has there ever been a time Congress has so succinctly prescribed a particular tool to business to deal with a law? The occasions are quite rare. If passed into law, will their advice and words of comfort mean anything for the first small business to be visited by California auditors? Would these words survive litigation?
3) Overblown Attacks on Origin Sourcing. As one might expect, pro-Internet Sales Tax panelists targeted “origin sourcing”, which would apply our current “physical presence” sales tax standards to online sales.
Where MFA would effectively have you be the property of your home state no matter where you shopped, “origin sourcing” represents the familiar situation of paying sales taxes wherever you buy something.
During the hearing Mr. Kranz in particular described “origin sourcing” as turning our tax system on its head. How using a current actual or de facto standard in many states for traditional retail could be described as turning anything on its head is not clear. Most importantly however, “origin sourcing” is the only current solution that actually represents “fairness.” It would place brick-and-mortar and online sellers under the same rules whereas MFA would only put online sellers at the mercy of out-of-state auditors.
We also heard points brought up from an Art Laffer study that made great leaps in logic by assuming states would take all their new revenue from MFA and attribute it toward tax cuts. NTU Executive Vice President Pete Sepp took these points apart previously in a piece on ntu.org.
Another common theme centered on the revenue states could rake in with such a scheme – but as noted in NTU’s testimony, these assumptions are based upon a highly-flawed methodology developed by the University of Tennessee that overstates the likely amount of revenue at stake.
While few conclusions could be drawn from the hearing, what is clear is that while experts and Committee members continue to labor under serious misapprehensions as to how the MFA will affect businesses and taxpayers alike, it is prudent for the Committee to not to rush to an MFA mark-up but to continue exploring solutions to what is a complex problem. Representative Collins (R-GA) put it best when he cautioned that implementing a framework for internet sales tax might be “closing one Pandora’s box and opening another.”0 Comments | Post a Comment | Sign up for NTU Action Alerts
“IRS Reg-134417-13” – it is hard to conceptualize how something tracked by this innocuous looking and thoroughly bureaucratic series of numbers could silence thousands, if not millions, of American voices. But that is the effect bureaucracy has, isn’t it? It turns drastic government overreach into mundane, procedural, and overly worded actions. This proposed rule would cripple the ability of non-profit groups to exercise speech.
It wasn’t enough to unfairly go after Tea Party groups that were applying for non-profit status. The investigation into exactly what went on in that case is still ongoing, but now the IRS has the hubris to pursue existing groups, Tea Party and otherwise – hey, just in case anybody got through!
The list of those affected expands far and wide. Not only are massive numbers of conservative, free-market, and similar organizations opposed (like National Taxpayers Union, Heritage Action, etc.), the American Civil Liberties Union (ACLU) is concerned with the danger of the proposed rule change. Even groups that are involved in simple voter registration drives would be affected.
NTU now has a petition up so you can lend your voice to that chorus of opposition, click HERE.
If the IRS’s targeting of applicants for tax-exempt status was a smart bomb that gave the impression (perhaps correctly) of some political motive behind it, this proposed rule change would look a lot like the carpet bombing equivalent… Sure, there seems to be a general area they are focusing on, but the damage would spread far and wide.
One thing the rule would specifically do is put an organization’s non-profit status at risk should they make any public comment that simply references a candidate (or even just a party in some circumstances) for any office 30 days out of a primary election, or 60 days out of a general election.
The terms the I.R.S. would be looking for as violations have potential to be interpreted very broadly, leaving a lot of power in the hands of the judge – in this case the I.R.S.
A wild potential example could be: if a group has a position on a tax issue on their site permanently, say abolishing a sales tax, and urges citizens to contact public officials in support of doing so. Now, a candidate for such and such is running and has this issue in his platform. If it’s 61 days before Election Day, everything’s fine, if it’s day 59, that could potentially mean the end of that group’s non-profit status.
Because the issue itself can be viewed as characterizing the candidate, and a website is “public communication”, the new I.R.S. rule could very well be taken this far. There could be even more surprising potential applications for this rule, a very unpleasant thought.
Why is this even a concern for the I.R.S., when the Federal Election Commission polices these things, is a very good question brought up by Center for Competitive Politics.
Whatever motivations are behind these power plays may remain shrouded, but their free speech-crushing results and absence of logic should be enough for the growing, bipartisan, opposition to stand on.0 Comments | Post a Comment | Sign up for NTU Action Alerts