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Obama's Attack of the Imaginary "Outsourcing Tax Break" Could Have Real Consequences
Posted By:  - 01/25/12

Like many I watched the State of the Union last night. I’ve also read it. And reread it. But for the life of me I still can’t figure out what President Obama was talking about when he said, “It is time to stop rewarding businesses that ship job oversees.”

I wasn’t the only one left confused.

“The truth is that not even Mitt Romney’s tax accountant could get him a tax write off for moving jobs to Bangalore. So what I the name of Warren Buffet’s secretary could Obama possibly mean,” wrote Shikha Dalmia of Reason.

And it’s not as if this was just a one-liner that some young speechwriter through in there just to play up the populist angle. Obama repeated it over, and over, and over.

“Right now, companies get tax breaks for moving jobs and profits overseas.”

“If you’re a business that wants to outsource jobs, you shouldn’t get a tax deduction for doing it.”

“No American company should be able to avoid paying its fair share of taxes by moving jobs and profits overseas.”

“It is time to stop rewarding businesses that ship jobs overseas.”

Unfortunately for Obama saying something a bunch of times doesn’t make it true. The fact is, no such tax break exists. Indeed, the only thing that I can think of that Obama may be referring to isn’t a tax break at all, it’s a clumsy attempt to prevent America’s corporate tax code from being worse than it already is (which is pretty bad).

Currently, the United States is one of the few remaining nations to use a “worldwide” system that taxes business income earned outside national borders. The U.S. also has the distinction of having the second highest (soon to be the highest) corporate tax rate among OECD nations, and ranks and embarrassing 124th out of 183 countries worldwide in total tax rate faced by a typical corporation.

Those two facts mean that a U.S. based company that earns income in say, France, would pay the French rate, then turn right around and pay the U.S. rate on top of it. Not exactly a formula for success. To try and alleviate the burden, Washington came up with an overly complicated system by which we maintain our “worldwide” scheme but allow companies to only pay the difference between the U.S. rate and the tax they’ve already paid as well as delay that tax payment until they bring the money back to the U.S. (repatriate it).

This creates the odd incentive for businesses to leave their cash overseas rather than bring it home to invest, hire, or heck, even hand out in dividends.

It’s a complicated, mish-mash of a system that is ill-suited for the global marketplace. President Obama is right to cheerlead for its reform. But reform shouldn’t mean making it even more complicated and even more uncompetitive.

Sadly, that’s exactly what Obama sounds like he wants to do. Rather than reform the system to lower the rate and eliminate loopholes, President Obama wants to create more loopholes for certain favored industries (“high-tech manufacturing”) while enacting a de facto tax hike on multinational firms. This is no way to encourage firms to bring their profits back to our shores, it’s a strategy that incentivizes companies to move off our shores altogether!

Hopefully, Obama will read, and reread, this post until he figures that out.

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Obama's Disastrous Idea to Create a Corporate AMT
Posted By:  - 01/24/12

“From now on, every multinational company should have to pay a basic minimum tax. And every penny should go towards lowering taxes for companies that choose to stay here and hire here.” – President Obama’s 2012 State of the Union

 

Sound familiar? That’s because individuals already have a similar sounding plan in the Alternative Minimum Tax or AMT. The AMT was put in place to ensure that the taxes of the highest-income taxpayers never fell below a threshold level. Obama would use the term “fair.” At the time of its passage in 1969 it was aimed at 21 of the nation’s wealthiest individuals. Now it hits more than 4 million taxpayers each year.

 

The problem is that Congress failed to tie the AMT to inflation, meaning that every year Congress must enact a “patch” lest many middle-income families be faced with higher taxes. If that sounds like a debacle that’s because it is. Which makes President Obama’s call for a similar scheme on the corporate side of the code seem all the more ludicrous. We need to be simplifying not complicating. Apparently President Obama has never taken a look at our annual tax complexity study, which can be found HERE.  

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Obama's Plans Would Hinder, Not Help, American Manufacturing
Posted By:  - 01/24/12

“So we have a huge opportunity, at this moment, to bring manufacturing back. But we have to seize it. Tonight, my message to business leaders is simple: Ask yourselves what you can do to bring jobs back to your country, and your country will do everything we can to help you succeed.” – Obama’s 2012 State of the Union

President Obama is not wrong that America has an opportunity to grow its manufacturing base, but if we follow his prescription of higher taxes (especially on investment), empowering unions, and more regulation than it will be a lost opportunity.

But don’t take our word for it. Here’s the National Association of Manufacturer’s recent letter to President Obama following the announcement of the so-called American Jobs Act – a plan eerily similar to the vague outline laid out in his State of the Union:

“President Obama’s call for tax increases on small businesses, individuals and investors is a poison pill for our economy. The bottom line is that manufacturers need policies that enable them to hire more workers, make capital investments and expand their businesses. More than 70 percent of manufacturers operate as S-corporations and pay income tax at the individual rate, so higher taxes on these job creators would be a devastating blow. The President’s proposal is short-sighted; we should not attempt to solve our nation’s fiscal ills on the backs of businesses striving to expand and add jobs.”

 

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Lower Taxes and Regulatory Reform Top Job Council's Recommendations. Will Obama Listen?
Posted By:  - 01/18/12

If there is one thing President Obama has proved great at it is convening councils. If there’s a second thing, it’s finding ways to work around their recommendations.

So it goes with President Obama’s Council on Jobs and Competitiveness the group that succeeded the Economic Recovery Advisory Board in their mission to come up with policy solutions to guide the economy back to recovery. Hoping to avoid the Bowles-Simpson fate of being talked about in the nicest of terms only to be completely ignored by Obama, the Council has released its third report covering myriad ways the government can help spur job growth.

To nobody’s surprise two of the biggest hindrances listed by the Council were the United States’ high corporate tax rate and its immense regulatory burden

“At 39.2 percent, Americans statutory corporate tax rate – including taxes at the federal and state and local levels – is substantially higher than the average for other advanced nations,” the report states. “In addition, while the United States has long been a model for other nations when it comes to the sophistication of our regulatory process, in recent years we’ve slipped on some global rankings of business-friendliness, and such nations as Australia have outpaced us with impressive regulatory streamlinings credited with boosting economic growth.”

Fortunately the House has passed legislation to address each of these issues. The “Jobs Through Growth Act” would cut the corporate tax rate to 25 percent, largely by eliminating loopholes, and move us toward a territorial tax system on par with the rest of the world. Moreover, the House has passed the Regulatory Flexibility Improvements Act and the Regulations from the Executive in Need of Scrutiny (REINS) Act, which together would make the regulatory process more transparent and accountable and less of a burden on the economy.

Unfortunately, President Obama shows little indication that he is willing to get behind any of these solutions. Instead, Obama offered a thinly veiled attempt to shift the blame when none of the Council’s recommendations are followed through.

“I want you to know that obviously this year is an election year, and so getting Congress focused on some of these issues may be difficult,” the President said in introducing the report.

Translation: “I’m not going to do any of this.” Which kind of defeats the purpose of a jobs council doesn’t it? It’s a rhetorical question, but don’t tell Obama, no doubt he would convene a council to study the effectiveness of the job council’s findings.

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The Payroll Tax Deal
Posted By: Andrew Moylan - 12/22/11

So, good news/bad news. The good news is it sounds like we have a deal to extend the lower payroll tax in order to prevent a substantial tax increase from hitting folks in the midst of a very difficult economy. The bad news is it's only good for two months (for now). The House will pass a two-month extension of the payroll tax (with one language tweak to fix the glitch I blogged about recently) and Democratic Leadership will name conferees for the year-long version in order to negotiate a final bill. In essence, the two-month patch gives some breathing room for negotiators to hammer out a bill fcovering the rest of 2012.

Lots of liberal media-types are protraying it as a big "cave" by House Republicans, which is a bit puzzling to me. Yes, House Republicans are now agreeing to pass a two-month extension that they (rightly!) pointed out was not good long-term tax policy, but Senate and House Democrats are pledging to stop their obstruction of the conference committee process for the year-long extension at the same time. So really, both sides are giving some ground here. The result is a two-month reprieve and, hopefully, a speedy resolution on a year-long product that maintains lower payroll taxes, trims spending, and maintains job-creating provisions like expediting the Keystone XL pipeline.

For taxpayers, the real test will be when Congress returns in the new year and begins work on the longer-term bill. Nobody can really call this deal "victory" until we have secured a legitimate year-long extension of lower payroll taxes coupled with spending reductions. I hope that Harry Reid, Nancy Pelosi, and their appointments are going to be productive participants in the conference process so that they can join House Republicans as the only Members of Congress to pass a full-year payroll tax extension early next year.

 

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Who's Right on Payroll Tax Fight? The House is Closer
Posted By: Andrew Moylan - 12/21/11

In the ongoing saga of the payroll tax, there's now a fight between the House and Senate approaches to the problem. The House passed a year-long extension of the reduced payroll tax and coupled it with several other good things (expediting a decision to approve the Keystone XL energy pipeline, full expensing of certain assets for businesses) and, unfortunately, some not-so-great things as well (a further extension of extraordinarily long-term unemployment benefits, though in transitioning from a 99-week to a 59-week duration the bill did return substantially closer to the 26 weeks that prevailed pre-recession).

Of even more concern to us was the fact that bill text was available for little more than a day before voting occurred, in direct contravention to House Republicans' pledge to give 72 hours to review all legislation. All told, it wasn't the greatest piece of legislation ever drafted, but it was enough to garner NTU's qualified support because it would have prevented a substantial tax increase in the middle of a difficult economic recovery while advancing the cause of job-creating efforts like Keystone XL.

As is its custom these days, the Senate did not take up and pass the House bill. Instead, they crafted their own two-month extension of the bill thus ensuring another battle over the payroll tax early in the new year. It passed Saturday morning, and right away Speaker Boehner and other House Republicans began saying they could not support this short-term patch. To compound the issue, payroll experts have said that the Senate bill is unworkable anyway. In short, a tweak in the Senate version would essentially create a two-bracket payroll tax (as opposed to the single, flat rate that exists today) which payroll processors claim that their systems cannot accommodate.

NTU's preferred solution to the problem would be to pass a single piece of legislation that extends the reduced payroll tax rate and pairs it with substantial spending reductions to ensure that there is no deficit impact. Heck, we even gave Congress a trillion-dollar head start on identifying the low-hanging fruit of wasteful spending. Neither bill adhered to our preference, but who got closer? Which approach is better for taxpayers?

The answer is the House version. Congress' recent practice of passing short-term extensions on just about everything (the "doc fix," the AMT, the yearly package of "tax extenders," continuing resolutions to fund the government, etc) is quickly becoming more than just tiresome and unfortunate. It's becoming a real threat to taxpayers. Everyone in Washington has known for the entirety of 2011 that the reduced payroll tax rate would expire at the end of the year. We had an entire year to craft a bill that would prevent a tax increase and reduce spending, but only now, a few days before Christmas and just ten days before the end of the year, is Congress even dealing with the issue. The time has come to stop budgeting in fits and starts.

Taxpayers deserve better than this, and businesses and employers all across the country deserve to know what tax system they'll have to comply with in a week and a half. Both chambers of Congress should return to Washington and hammer out a solution, whether through a conference committee or a negotiated solution that prevents a tax hike, cuts spending, and moves the ball forward on job creation.

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Nanny State Program Faces the Ax
Posted By: Andrew Moylan - 12/15/11

An impossibly ridiculous program that has wasted millions of your tax dollars funding nanny state campaigns to pester you about health might finally be at death's door. The "Prevention and Public Health Fund" (which I warned about more than a year and a half ago when it had a different name and piles of cash from the "stimulus" bill) looks to finally face the ax at the hands of the House of Representatives when it votes tomorrow on the massive $1 trillion "megabus" appropriations bill.

H.R. 3671, the Consolidated Appropriations Act, takes aim at the PPHF and its funding of state- and local-level campaigns for higher taxes and stricter regulation on everything from soda to tobacco products. Though they are of course justified in the name of "public health," the PPHF-funded efforts have spent millions of hard-earned taxpayer dollars in support of a host of policies that raise costs and restrict availability for perfectly legal products while nagging people to exercise more and eat their Brussels sprouts. Kudos to House appropriators (you won't hear me saying that very often) for seeing fit to include language in the megabus to put an end to this insanity.

The "slippery slope" argument that is so frequently deployed in Washington isn't always accurate, but the PPHF is perhaps the best example that it not only exists but is even steeper and more slippery than we could have imagined. Decades ago when the anti-tobacco crusade really began in earnest, many limited-government advocates warned that it would only be a matter of time before government began trying to tax into extinction and restrict other products with which they were displeased. Those warnings are proving prescient now that many states and localities are fighting battles not just against so-called "sin" products like tobacco or alcohol, but on fatty foods, sugar-sweetened drinks, even SALT for God's sake! But the PPHF really takes the cake (as long as cake is still legal, that is) because in many cases, those dollars are handed out to lobbyists and PR firms to run glitzy ad campaigns to snuff out whatever products or behaviors Big Brother doesn't like. Tax dollars funding lobbyists who fight to raise your taxes! It's a spiral of stupidity.

Thankfully, House Leadership has seen that insanity for what it is and targeted it in the appropriations bill. Here's hoping that, whatever happens with the end-of-the-year appropriations fight, common sense prevails and the PPHF gets what it deserves: elimination. After all, if Congress can't cut a program this egregious, what can they cut?

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Why is President Obama Threatening a Bi-Partisan, Job-Creating, Payroll Tax-Cutting, Unemployment Insurance-Extending Bill?
Posted By: Douglas Kellogg - 12/14/11

The President has been going to the mat pressuring Congress to extend the current payroll tax rate reductions, allow unemployment insurance to be collected beyond the current 99-week limit, and of course has paid much lip service to ‘creating jobs’. So the House-passed “Middle Class Tax Relief & Job Creation Act” should be a perfect Christmas present for President Obama.

The National Taxpayers Union supports this bill despite its imperfections because (among other things) it avoids a tax increase, will eventually help to reform unemployment insurance (a topic NTU recently addressed), and will give the green light to the Keystone XL pipeline – an initiative that is practically guaranteed to create THOUSANDS of American jobs.

A slam-dunk right? President Obama wants to help put folks back to work, and is in favor of all that! Nope. The President has threatened to veto the bill and Sen. Reid (D-NV) is on the march to prevent that scenario from having to play out.

The alternatives preferred by the President would extend the payroll tax reductions and unemployment insurance while pursuing tax hikes on politically convenient targets in the name of ‘paying for’ the new spending and defunding of Social Security and Medicare. Once again the President and his Senate allies seem to be putting their job-killing moves in writing, even as they devote  their airtime to claim interest in job creation.

If the President and Harry Reid truly desired what they claim, they would be thankful to help enact legislation that has so much potential to put Americans back to work, extends the benefits they want, and essentially asks them to compromise on reducing spending to offset any revenue loss, rather than further crippling job creators.

Perhaps with more concerned citizens voicing their support for this bill, minds can be changed. It’s high time Senate leaders and President Obama put aside their vendetta against specific industries and high-income earners and helped put Americans back to work.

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Repatriation a Win-Win for Taxpayers, Washington
Posted By:  - 12/08/11

Recent reports indicate that Speaker of the House John Boehner and House Majority Leader Eric Cantor are debating whether to include a repatriation holiday in the legislative package to extend the payroll tax cut and jobless benefits.

Politico reports:

They’ve also been on opposite sides on the issue of repatriation — corporations bringing foreign profits back to the U.S. at lower tax rates. Cantor has been vocal in his support for the process, it’s a favorite of K Street and roughly a quarter of the Republican Conference has signed a letter supporting the idea.

But Boehner is staunchly opposed to tacking it onto the year-end agreement — the optics would be terrible, he thinks, since the Congressional Budget Offices says it adds tens of billions of dollars to the budget. Suddenly, a bill that cuts money would become one that adds to the deficit.

NTU has long been an advocate of fundamental corporate tax reform – lowering the rate and instituting a territorial system. But repatriation – temporarily reducing the tax rate on foreign earnings - is a positive interim step that would bring investment back to our shores and provide a shot in the arm to our ailing economy. Indeed, a recent examination by former CBO Director Douglas Holtz-Eakin on behalf of the Chamber of Commerce found that repatriation could raise GDP by $360 billion over two years and add 2.9 million new jobs to the economy.  

But taxpayers wouldn’t be the only ones to benefit by opening a temporary repatriation window. A August study by former Clinton advisor, Dr. Robert Shapiro, has found that repatriation could provide a significant boost to the U.S. Treasury as well. His research found that contrary to the “terrible optics” that Rep. Boehner mentioned, repatriation would produce revenue gains of $8.7 billion over 10 years, compared to the Joint Committee on Taxation’s estimate of a 10-year cost of $78.7 billion.

It’s a win-win for taxpayers and Washington, for the job-focused and deficit-hawks, and for Republicans and Democrats alike. Now is not the moment for intra-party squabbling. It’s time to provide businesses with some relief from our uncompetitive tax rates by including repatriation in any year-end extenders package that House Republicans send to the Senate.

 

For more information check out some of NTU's recent work on the issue HERE and HERE.

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The Power of Spending Addiction in Illinois
Posted By: Brent Mead -

Illinois seems to have a default answer to all budget and spending decisions: Put it on the taxpayer’s tab. That is the only conclusion I can draw after reading that another local government in the Land of Lincoln wants to raise alcohol taxes rather than cut spending. Following on the heels of Cook County’s decision to massively increase taxes on alcohol, the Elgin City Council is pushing for a three percent hike. Astute readers of maps might note that portions of Elgin cross into Cook County so some lucky residents will get to pay both taxes!

The full proposal laid out earlier this week is to close the city’s budget deficit by raising the sales tax .5 percent to 1.25, impose a new leaf collection fee, and raise refuse fees in addition to the aforementioned alcohol tax. The City Council is pushing this scheme to avoid cutting government handouts to various non-profit associations. The sales tax is estimated to cost consumers $1.7 million in higher taxes per year, raising the alcohol tax will cost up to $1 million per year, and the city does not provide revenue estimates on the leaf or refuse fees.

As a matter of perspective, Elgin currently operates on a $268.7 million annual budget. The supposed impetus for these fee and tax increases is to close a $4.5 million deficit. The quick math shows that the deficit is roughly 1.5 percent of spending. Rather than continuing the Illinois tradition of nickel and diming every last cent from taxpayers the city could look to cut back just a little bit. For every dollar currently spent by departments, the deficit would be non-existent if they cut back to a measly $.98.

Furthermore, the use of sin taxes -- small, targeted excise taxes on goods such as cigarettes and alcohol -- are among the most politically expedient yet economically counterproductive policy prescriptions for revenue-hungry lawmakers. Officials at all levels of government find such taxes alluring because opposition tends to be weaker, since only a relatively small percentage of the population uses the good or service in question.

Notwithstanding any moral arguments for or against smoking, drinking, or gaming, Elgin should know the downsides of these taxes better than most. In fact, one of the drivers of the current deficit is an overreliance on the Grand Victoria Riverboat to sustain high local spending levels. Yet the City now wants to supplement the declining gaming revenues with an additional tax on alcohol. What needs to happen is for Elgin to go cold turkey on sin taxes.

As NTU has pointed out in the past, Elgin's experience is the logical progression of these taxes. Our study found that of the 35 tobacco tax hikes on the state level between 2004 and 2006, 22 were followed up with subsequent tax increases. Quoting directly from the City’s website;

However, Elgin’s primary street improvement funding source, the Grand Victoria Riverboat is becoming a less reliable revenue generator. To address this imbalance, the city’s proposed budget includes a half-cent increase in sales tax, taking it from .75% to 1.25%. Sales tax provides a way to diversify revenue streams without placing the burden solely on Elgin residents, as sales tax is paid by non-residents shopping in Elgin.  

Arguments for exporting the local tax burdens aside, the City is demonstrating precisely what NTU has warned about time and again. Sin taxes, whether they be gaming, tobacco or alcohol, inevitably lead to higher taxes on everyone at some point. The root cause of the problem is an addiction to spending. Shifting the burden onto politically convenient targets does not cure the disease.

 

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