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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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Per-Mile Fees Would Drive Up Transportation Costs
Posted By: Michael Tasselmyer - 12/26/13

In a recent edition of The Taxpayer's Tab, we here at National Taxpayers Union Foundation highlighted a bill offered by Congressman Tom Graves (R-GA) and Senator Mike Lee (R-UT) that would phase out federal control of certain roads and other infrastructure in order to transfer that authority to the states. The Transportation Empowerment Act was introduced in the wake of warnings from the Congressional Budget Office that the Highway Trust Fund, which finances the construction and maintenance of most of those transportation projects, is in poor fiscal condition.

Among the recommendations for keeping the Fund solvent? A nearly 83 percent increase in the federal gas tax, up to 33.3 cents from its current level of 18 cents.

That particular suggestion came from the office of Congressman Earl Blumenauer (D-OR), who also recently introduced H.R. 3638, the Road Usage Fee Pilot Program Act of 2013. Rep. Blumenauer’s bill would authorize $35 million to study how a mileage-based fee program might be implemented in place of the gas tax.

The Congressman has called for similar studies before. In January, NTUF highlighted legislation that Blumenauer introduced in the 112th Congress that would have authorized nearly $155 million for review of the same scenario.

A per-mile fee would likely be instituted in one of three ways:

  • A GPS-based system would use satellite technology to track the total mileage a registered vehicle travels during a pre-determined period of time. That information would then be sent to a central database, where bills would then be processed and sent to drivers.
  • A "pay-at-the-pump" system would also rely on wireless tracking systems to log drivers' travels, but the fee would instead be charged at gas stations across the country whenever drivers decide to fill up.
  • A prepaid system would require drivers to buy "mileage licenses," authorizing their use of public roads for a certain period of time or total mileage before requiring renewal.

Aside from the obvious privacy concerns and challenges of implementation and administration (especially from a financial and logistical standpoint), these proposals all have one thing in common: they would increase the cost of driving significantly.

The Government Accountability Office recently modeled the effect of a (seemingly modest) 0.9 to 2.2 cent per mile tax on the typical American driver. They found that the average driver would pay between $108 and $248 per year under that system, compared to the $96 they pay now – an increase of at least 12.5 percent.

Current funding for federal transportation infrastructure, under the MAP-21 Act, expires at the end of 2014.

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(AUDIO) Taxpayers Get Raw Deal - Speaking of Taxpayers
Posted By: Dan Barrett - 12/16/13

NTU Foundation's Demian Brady and NTU's Brandon Arnold both offer insight on why the numbers don't add up and what to do as the bill heads to the Senate. Plus the Outrage of the Week! 

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Report on America’s “Broken” Tax System Shows Cracks of Its Own
Posted By: Pete Sepp - 12/12/13

Many voices, on various points of the political spectrum, concur that America’s corporate tax system is afflicted with a high rate, mind-numbing complexity, and heavy compliance burdens. Yet, the Center for Effective Government recently came out with a report attempting to demonstrate that there is no correlation between lower corporate tax rates and job creation. And while practically everyone agrees with the first line of the report’s Executive Summary – “The American corporate tax system is badly broken” – that’s not a good reason to buy all of its other conclusions.

The report states that, “Our examination of the evidence found no relationship between cutting tax rates on corporate profits and job growth.” And therein lies one major problem – the “evidence” itself.  As with a recent report from the Government Accountability Office, which we critiqued here, using a sample over a small window of time to calculate effective tax rates does not give a complete picture.

The time period used in the report – 2008 to 2012 – was one of abysmal job creation across the entire economy due to the severity of the Great Recession. Furthermore, corporations have demonstrated time and again how profits and losses fluctuate over several years based on expenditures such as research and development. So tying low job growth during a recession to tax rates over a short time period can’t possibly tell the whole story.

Connecting higher corporate taxes directly to increased job creation, without taking into account other factors – such as a given company’s industrial sector – is also tricky. It’s important to adjust for other reasons why tax rates may have been lower or higher (higher capital expenditures for which deductions apply) or why job creation may have increased or decreased (strength of an industry).

Although the report does acknowledge some need to overhaul the tax system, the agenda is clear in its data presentations, which purport to show why businesses must contribute more of the “revenue needed to invest in modernizing the transportation, information, communications, and energy infrastructure.”  In current budget lingo, “invest” is often code for “spend a whole lot more.” Furthermore, as my colleagues at the Tax Foundation ably pointed out, the study utilized “apples to oranges” comparisons of corporate profits and corporate taxes to paint a distorted picture.

Also tellingly, the study’s introduction notes that had businesses paid the 35 percent tax rate on all of their profits, “total corporate tax receipts would have been $630 billion (rather than the $242 billion they actually paid), and the deficit would have been reduced by nearly a third.” Of course, the same could be said for individuals: after all, if only America’s families would just cough up more at the regular statutory tax rates, instead of taking those pesky write-offs for things like mortgage interest, charitable contributions, or state and local tax payments, why the Treasury could be flush with surpluses.

The bottom line is that country after country continues to lower their corporate tax rates and simplify their taxpaying procedures, and they are doing this for a reason – to attract business and create job growth. Meanwhile, the U.S. tax system, with the worst rate in the industrialized world, continues to be a laggard in pursuing tax reform. Here’s hoping policymakers stop pointing fingers and start pointing the tax law in a better direction. 

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'Tis The Season... For More Taxes
Posted By: Michael Tasselmyer - 12/06/13

Holiday shoppers will already be hit with a number of taxes on the presents they put under the tree this Christmas season. But if Congress has its way, they could be facing an additional tax on the tree itself.

A provision in the latest farm bill would institute a 15 cent tax on the sale of Christmas trees, which would fund a Christmas Tree Promotion Board, dedicated to encouraging tree sales and "enhanc[ing] the image of Christmas trees and the Christmas tree industry in the United States." The proposal is not a new one; in fact, NTUF has covered it twice before: once in 2011, and again earlier this year.

Although many were under the impression that the tax originated within the Obama administration, the Christmas tree industry itself pursued the fee through a regulatory process established by Congressional Republicans. The Federal Agriculture Improvement and Reform Act of 1996 enacted "checkoff" programs, which support within the agricultural industry functions similar to those seen in traditional labor unions. Checkoff funds for beef, dairy, eggs, and other products are funded by producers of those goods; the money is then used to promote and market their products, as well as conduct research on the industry's behalf. There are currently 19 different "checkoff" funds, for products as varied as processed raspberries, hass avocados, popcorn, and even softwood lumber.

Legislation was introduced earlier in the 113th Congress to establish a new "checkoff" fund for concrete masonry, as covered in the Taxpayer's Tab.

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