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High-Frequency Trading and the "Transaction Tax"
Posted By: Michael Tasselmyer - 04/11/14

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.

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New Report on State and Local Tax Burdens
Posted By: Lee Schalk - 04/04/14

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:

  • During the 2011 fiscal year, state-local tax burdens as a share of state incomes decreased on average. This trend was largely driven by the growth of income in all states.
  • In 2011, the residents of New York, New Jersey, and Connecticut had the highest state-local tax burdens as a share of income in the nation. In these states, residents have forgone over 11.9 percent of income due to state and local taxes.
  • Residents of Wyoming paid the lowest percentage of income in 2011 at just 6.9 percent. They replaced Alaska, which had previously been the least-taxed for multiple decades, as the lowest-burdened state in the nation. After Wyoming and Alaska, the next lowest-taxed states were South Dakota, Texas, and Louisiana.
  • State-local tax burdens are very close to one another and slight changes in taxes or income can translate to seemingly dramatic shifts in rank. For example, the twenty mid-ranked states, ranging from Oregon (16th) to Georgia (35th), only differ in burden by just over one percentage point.
  • On average, taxpayers pay more to their own state and local governments (73 percent of total burden). Taxes paid within states of residence decreased on average in 2011, while taxes paid to other states increased, leading to a slight decrease in total burden. Some states deviated from these national trends, however.

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.

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Taxpayers Claim Big Win in Fight Against IRS Free Speech Silencing Rule
Posted By: Nan Swift - 04/04/14

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:

  1. Take Action and urge your Senators to support S. 2011, the “Stop Targeting of Political Beliefs by the IRS Act of 2014” – this would impose a statutorial one-year delay of the proposed rule.
  2. Give generously to ensure we have the tools and resources we need to stop the IRS’s bullying of grassroots organizations.

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April Fool’s Day Still Real Anniversary of Highest Corporate Tax Rate
Posted By: Brandon Arnold - 04/01/14

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.

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Falling Behind on Corporate Income Tax is No Laughing Matter
Posted By: Pete Sepp - 04/01/14

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)

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Internet Sales Tax Supporters’ Fantasies Cannot Quell Concerns as Alternatives Take Center Stage
Posted By: Douglas Kellogg - 03/13/14

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.”

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The I.R.S. Proposes One Rule to Silence Us All
Posted By: Douglas Kellogg - 02/20/14

“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.

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Conversation Hearts Might Bring Mixed Feelings for Taxpayers this Valentine’s Day
Posted By: Douglas Kellogg - 02/14/14

hearts

It’s Valentine’s Day! Love is in the air, but taxpayers may not be feeling it after a year of reckless spending policies and more big government. Yet, as we pass around the “conversation hearts” this year, some of the fuzzy feelings they express might remind taxpayers of a few positives, though others could spark different emotions…

You Rock!

A number of states have cut taxes, or are looking to do so! Sure the federal government has broken taxpayers’ hearts this year, but states like North Carolina have cut taxes, and others like Wisconsin, Nebraska, and even New York are seeking tax reform.

Hug Me

Hold on to your free Internet and dynamic e-commerce tonight. Big retailers and uncompetitive, high-tax, states are trying to tear this love apart – but don’t give up, it’s worth fighting for!

Be Mine

The Balanced Budget Amendment (BBA) movement has continued to make progress through the states, as now Ohio’s recent passage of an Article V referendum makes 20 states who are on board with a convention to pass a BBA. Since the federal government is apparently not interested, taxpayers’ will have to walk a different road to reach this fiscal soul mate.

Miss You

The list of things taxpayers might be longing for could potentially go on for eternity. Some of the most notable lost loves could be lower federal tax rates (on income, and payroll taxes), a more stable dollar and lower Consumer Price Index, non-government controlled healthcare and not being forced by the government to buy something, and jobs.

UR Cool or UR Hot

Depending on where you live, energy might be warming you up or keeping you cool, either way the growth of domestic energy production has been a good thing for taxpayers. So far, punitive taxes sought by the President and others have not stopped this party – however, this electric partner could be powered down if Congress flips the wrong switch.

Taxpayers may have loved and lost, but hope is still alive for the hopeless romantics who won’t give up on a brighter fiscal future!

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Speaking of Taxpayers, Jan. 17: Trillion-Dollar "Omnibus"; Taxpayer Advocate Hammers IRS
Posted By: Douglas Kellogg - 01/20/14

Subscribe to NTU's podcast via iTunes!

Taxpayer's Protection Alliance's Michi Iljazi joins the podcast to breakdown what is in the massive, trillion-dollar, omnibus bill, and the Taxpayer Advocate's new report on all the areas the IRS needs work (it's a long report). Plus, the Outrage of the Week!

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Video: House Ways and Means Committee’s Tax Reform Goals
Posted By: Dan Barrett - 01/15/14

Today, the committee in charge of the Tax Code released a video on how the system doesn’t work and how they plan to fix it. The Republican-led body presents three solutions:

  1. Make the Tax Code simpler and fairer: “By getting rid of all the junk in the income Tax Code, we could shrink it by 25 percent”
  2. Make the Tax Code more efficient: “By getting rid of special interest handouts and lower tax rates across the board”
  3. Make the Tax Code more accountable to taxpayers: “Whenever a tax loophole gets closed, let’s make sure that money goes back to the people who are paying the taxes in the first place and not to pay for more Washington spending”

Though these are lofty goals for Congress, it's clear from recent legislation like the 2012 American Taxpayer Relief Act that making a meaningful impact on our Tax Code will require extensive reform. Almost everyone agrees that the system is “too complex, too confusing, and too costly” and that is precisely why having a plan makes sense. Still, identifying the problem is just the first step towards fixing it. U.S. businesses -- big and small -- deserve, a fair, effective, and efficient Tax Code and Washington is in the prime position to fix it.

Here’s hoping that Congress can come together to relieve all taxpayers of the dread and stress of the current Tax Code (a system that has been changed “4,400 times over ten years” by both parties).

For more information on how complex our tax system is, check out NTU’s 2013 Tax Complexity study, which will be updated later this year. NTU Foundation also surveyed folks which tax system the U.S. should change to during our annual Milton Friedman Legacy Day event.

How would you change the Tax Code? Streamline the current system? Completely replace it? Leave a comment down below!

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