The Center's work on 'Businesses' Issues

House Budget Chair’s Priority: Tax Cuts for Well-to-Do

March 18, 2015 at 12:25 pm

While imposing harsh budget cuts on the most vulnerable Americans, House Budget Committee Chairman Tom Price’s budget plan also appears to reflect a continuing drive to cut taxes for the nation’s highest-income people.

Unlike past years’ House budgets, this plan doesn’t specify a top tax-rate target of 25 percent.  It claims, more generally, that it “substantially lowers tax rates for individuals.”  Still, other details of the plan clearly indicate tax priorities that favor high-income households:

  • Repealing all health reform revenue changes. The Price plan would eliminate all health reform-related taxes and tax credits.  A significant share of the revenues that health reform will raise over the next decade come from its 3.8 percent Medicare surtax on the unearned income of high-income filers and its 0.9 percent Medicare surtax on high wage and salary income.  Repealing these surtaxes would be highly regressive; only filers with incomes over $250,000 for a married couple (and over $200,000 for single filers) pay them.  Moreover, the 3.8 percent surtax applies only to unearned income such as capital gains and dividends, which is highly concentrated at the top.  In 2012, the richest 400 filers received about $1 of every $9 of such income, according to IRS data.
  • Eliminating the Alternative Minimum Tax (AMT). The plan would eliminate the AMT, which is designed to ensure that higher-income people pay at least some base level of tax.

We estimate that repealing health reform and the AMT would likely reduce revenues by more than $1 trillion over ten years, based on Tax Policy Center (TPC) and Congressional Budget Office estimates.  While it’s intended to be revenue neutral compared to current law, Chairman Price’s budget proposes no specific offsets to pay for these provisions (or for the tax-rate cuts it calls for in general terms, which tend to be very costly).

Repealing the AMT and health reform’s high-income provisions would provide a windfall at the top while doing little for middle-class households.  Based on a TPC distributional analysis of the AMT and of health reform’s high-income provisions in 2015, we estimate that repealing these provisions would:

  • Cut taxes by roughly $50,000 on average for people with incomes exceeding $1 million a year, but by less than $10 on average for those making $50,000 to $75,000, and by essentially nothing on average for those earning less than $50,000.
  • Raise after-tax incomes by 2.5 percent on average for households with incomes exceeding $1 million a year, but by less than 0.01 percent for those with incomes between $50,000 and $75,000.

Accounting for eliminating health reform’s premium tax credits and other revenue provisions wouldn’t alter the conclusion: the specific tax proposals identified in the Price plan would direct large tax cuts to high-income earners and little to low- and middle-income filers.

While the tax component of Chairman Price’s plan is less detailed than the tax proposals in past years’ House budgets, the information it provides strongly indicates that the plan would juxtapose deep spending cuts primarily hitting low- and middle-income people with tax changes likely to heavily favor people at the top of the income scale.

Lee-Rubio Tax Plan Heavily Tilted Toward Top, Contrary to Tax Foundation Claims

March 11, 2015 at 4:22 pm

The Tax Foundation (TF) took issue with our post explaining that the new tax plan from Senators Mike Lee (R-CO) and Marco Rubio (R-FL) would give the highest-income people a large windfall while leaving many low-income working families behind.  TF argues that the plan “actually produces the largest increase in after-tax income for the lowest income earners, not the highest.”  Count me as a skeptic.  Let’s take a closer look at the plan’s effects at the bottom and top of the income scale.

First, the bottom.  TF claims the bottom 10 percent of households would see a 44 percent increase in after-tax income under Lee-Rubio (before counting TF’s large and unrealistic estimate of the plan’s impact on economic growth).  But a look at the main provisions potentially affecting low-income families doesn’t support this.

  • Lee-Rubio creates a new $2,500 Child Tax Credit to complement the current child credit. TF says the new credit “cuts taxes for most taxpayers.” But it would exclude many working-poor families.  The new credit is refundable only up to the sum of total income and payroll taxes after applying all other credits, such as the Earned Income Tax Credit (EITC) and existing Child Tax Credit.  After these credits, most low-income working families will have no net federal income and payroll tax liability and consequently won’t qualify for the new CTC.  In other words, its design excludes most low-income working families.
  • Lee-Rubio also replaces the standard deduction and personal exemption with a new tax credit (and eliminates the head of household filing status). TF states that this credit would be “fully refundable,” though the Lee-Rubio document itself doesn’t say one way or the other.  Let’s assume it is; if so, the new credit would benefit many low-income families.  Yet a substantial number of other low-income families would lose from this change, because the new credit would replace other current provisions that are worth more for them.  To return to the example family we used in our previous post, a mother with two children working full time at the minimum wage would lose $25 in 2018 from this change.  Some low-income workers would lose substantially more than this amount, while other low-income workers could get a significant boost from this change, assuming the credit is indeed fully refundable.
  • More importantly, Lee-Rubio would let a key provision of the current Child Tax Credit expire after 2017, causing millions of low-income working families to lose all or part of their credit.  The provision in question — under which the Child Tax Credit begins to phase in as family earnings rise above $3,000, rather than being unavailable until family earnings reach nearly $15,000 — is currently in effect through 2017; it needs to be made permanent. Ron Haskins, who as a senior Republican congressional staffer was a lead architect of the 1996 welfare law and later served as an adviser to President George W. Bush before joining the Brookings Institution, urged in recent congressional testimony that this provision be made permanent.  Haskins called it “an important part of the work-based safety net” and noted that if it’s allowed to expire after 2017, “working families with children will lose billions of dollars and a substantial amount of work incentive.”  He observed that this “is one policy that both encourages work and attacks inequality directly by boosting the income of low-income workers.”  Yet Lee-Rubio lets the provision end after 2017.

    If the provision expires, the full-time minimum-wage mother with two children whom we discussed above would lose her existing $1,725 CTC in 2018.  Many other low-income workers would lose under the plan as well.  Failing to extend the improvements in the CTC and EITC scheduled to expire at the end of 2017 would cast millions of people into or deeper into poverty.

Now let’s turn to the top end of the income scale.

Lee-Rubio cuts the top income tax rate to 35 percent and eliminates the alternative minimum tax, both of which represent large tax cuts that would heavily benefit high-income households.  Lee-Rubio also includes some tax increases on high-income filers by cutting back many deductions.  But both of these sets of changes were part of a tax plan that Senator Lee introduced in 2014 and the Tax Policy Center (TPC) analyzed.  TPC found that while the curtailment of deductions would, by itself, increase high-income households’ tax burdens, the net effect of the proposal overall would be a large tax cut for those at the top of the income scale.

Moreover, Lee-Rubio appears to tilt even more heavily to the top than last year’s Lee plan.  It does so by:  1) eliminating taxes on capital gains and dividends, which are highly concentrated at the top; 2) eliminating the estate tax; and 3) cutting corporate and business taxes.

By eliminating taxes on capital gains and dividends, the plan would make the single largest source of income for the wealthiest people in the country tax free.  By eliminating the estate tax, which now applies only to the estates of the wealthiest 0.15 percent of people who die, the plan would allow vast sums that the wealthiest Americans have amassed to be passed on to their heirs and heiresses tax free as well.

The plan also would cut the tax rate on domestic corporate profits to 25 percent, cut taxes on the partnership income of very high-income households from 39.6 percent to 25 percent, and cut corporate taxes on profits that U.S. companies earn overseas to zero.  The plan does cut back various corporate tax breaks.  But overall, it is likely to reduce corporate and business taxes significantly.  And since ownership of businesses and corporate stock is highly concentrated among high-income individuals, this would add to the tax cuts they receive.

As Howard Gleckman of the Tax Policy Center noted a few days ago, last year’s Lee plan would add $2.4 trillion to the debt over ten years and give almost one-third of its costly tax cuts to the top 1 percent of households.  Gleckman added that the new Lee-Rubio version of the plan “would surely be even more expensive.”

The bottom line is that those at the top would be the big winners even as many low-income working families lost ground.

Lee-Rubio Tax Plan: Huge New Windfall at the Top, Lost Child Credits at the Bottom

March 4, 2015 at 5:06 pm

The new tax plan from Senators Mike Lee (R-UT) and Marco Rubio (R-FL) builds on Senator Lee’s 2014 plan and creates something that’s even more tilted — outrageously so — in favor of the country’s highest-income people and likely much more fiscally irresponsible.  And, like last year’s plan, it not only excludes most working-poor families from its new child tax credit but allows much of their existing child credit to disappear after 2017.

Last year’s plan lost $2.4 trillion of revenue over the first decade and gave its largest tax cuts, both in dollars and as a share of after-tax income, to people making more than $1 million a year, the Urban-Brookings Tax Policy Center found.

The new plan essentially takes the old plan (which set tax rates of 15 and 35 percent and eliminated many deductions as well as the individual and corporate alternative minimum taxes) and adds more tax cuts for those at the top.  To understand their impact, it’s helpful to grab a copy of the IRS’s tax information on the country’s richest 400 filers:

  • Eliminating taxes on capital gains and dividends. The plan would do away with taxes on capital gains and dividends, even though they are already taxed at lower rates than wages and salaries.  And the benefit would flow overwhelmingly to those with the highest incomes.  In 2012, more than 10 percent of capital gains went to the top 400 filers, who collected an average of $230 million apiece (or $92 billion total).  This tax cut would also encourage wealthy people to use tax schemes to convert ordinary income into this newly tax-free income.
  • Cutting taxes on “pass-through” businesses. The plan would tax all partnerships and S corporations, whose earnings are “passed through” to owners and taxed at the individual rather than corporate level, at a special 25 percent rate.  Like capital gains and dividends, pass-through income is heavily concentrated at the top:  the top 400 filers had $18 billion of it in 2012, an average of $84 million apiece.  With this tax cut, the tax rate on pass-through income would be ten percentage points lower than a family with taxable income of $160,000 would pay on its salary.

As the IRS document shows, capitals gains/dividends and pass-through income are the two largest sources of income for the top 400 filers, as well as for the rest of the top 0.1 percent.  The Lee-Rubio plan targets these income sources for breathtaking windfalls.

At the same time, it targets working-poor families very differently.  Right now, many working-poor families receive some or all of the $1,000 Child Tax Credit thanks to a key provision created in 2009.  But this provision will expire at the end of 2017 unless policymakers extend it, causing millions of low-income working families to lose all or part of their credit.  The Lee-Rubio plan would allow this critical provision to expire.

Consider a mother with two children who works full time, year round at the minimum wage in a nursing home and receives a Child Tax Credit of $1,750.  The Lee-Rubio plan would let her credit disappear in 2018.  It also would exclude her — and millions of other working-poor people — from its new child credit, which wouldn’t be fully refundable.

The big losers under the Lee-Rubio plan, therefore, would be the working-poor people who feed and bathe the elderly, care for preschoolers, clean offices, and perform other essential tasks.  The big winners would be the country’s highest-income 400 filers, at a cost of much higher deficits.

Timing Gimmick Alert on Corporate Tax Reform

March 3, 2015 at 3:38 pm

As we’ve explained, timing gimmicks pose a threat to fiscally responsible corporate tax reform.  A recent comment by Dr. Laura Tyson, a University of California, Berkeley professor and an adviser to a coalition of American businesses that favor comprehensive corporate tax reform, illustrates the point.  Testifying before the Senate Finance Committee, she responded to a question by noting that one possible use of one-time revenues from a tax on multinationals’ current stock of overseas profits could be to “pay for” a permanent cut in corporate tax rates.  That’s a way for corporate tax reform to increase the deficit over the long term.

Multinationals have about $2 trillion in profits stashed offshore to avoid U.S. tax; they don’t owe tax on them until they declare them “repatriated” to the United States.  Any enacted corporate tax reform will likely include a mandatory, one-time transition tax on those existing foreign profits to wipe the slate of those deferred tax liabilities.  (Future overseas profits would be treated differently.)

Such a transition tax could raise significant revenues.  The President’s proposed transition tax of 14 percent, for example, would raise $268 billion over 2016-2025.  Companies would have six years to pay the tax, but since the tax wouldn’t apply to future overseas profits, it wouldn’t raise any revenues after the sixth year.

That’s the problem with suggestions that revenues from a transition tax could be used to help “finance” a lower corporate rate.  In reality, those one-off revenues can’t pay for any permanent tax cuts because the revenues disappear after six years.  The result would be a reform package that’s revenue neutral within the ten-year budget window but expands deficits by large and growing amounts in future decades.

Indeed, if the $268 billion from the President’s transition tax went to finance a corporate rate cut so that the combined policy would be revenue-neutral in the first decade, such a policy combination would add more than $300 billion to deficits in the second decade (see graph).

To avoid a long-run increase in deficits, the President’s budget devotes the one-time revenues from the transition tax to one-time infrastructure investments.

At a time when critical investments face continued cuts in the name of deficit reduction, it would be inequitable for the corporate sector not only to avoid contributing to deficit reduction but to receive permanent, deficit-increasing tax cuts.

A Double Standard on Tax Compliance

February 13, 2015 at 1:23 pm

House Ways and Means Committee Chairman Paul Ryan suggested recently that Congress should expand the Earned Income Tax Credit (EITC) for childless adults and non-custodial parents and fully offset the cost by reducing EITC overpayments.  But he and other House Republicans voted today to permanently extend an expensive small-business tax break without offsetting the cost, such as by requiring any improved compliance in that part of the tax code — where the rates of error and loss to the Treasury far outstrip those for the EITC.  The IRS estimates that a stunning 56 percent of business income that individual returns should have reported went unreported in 2006, the latest year for which these data are available.

These developments highlight an egregious double standard in how lawmakers view tax compliance, depending on whether low-income working families or small businesses are at issue.

During a Ways and Means Committee hearing, Ryan praised the EITC’s proven effectiveness in promoting work and reducing poverty and alluded to his proposal to expand the tiny EITC for childless workers — the lone group that the federal tax code actually taxes into (or deeper into) poverty and a group that needs the EITC’s pro-work income boost and incentives.  Ryan’s proposal to expand the childless workers’ EITC is nearly identical to one from the President, which would seem to make it ripe for bipartisan legislative action.

But Chairman Ryan seemed to suggest the need to generate offsetting savings within the EITC to pay, on a dollar-for-dollar basis, for the EITC change.  To be sure, Congress can and should take important steps to reduce EITC errors, including:  1) providing the IRS more adequate funding for enforcement; 2) giving the IRS the authority to regulate paid tax preparers to ensure they meet basic competency standards (a majority of EITC errors occur on commercially prepared returns); and 3) enacting a battery of measures the Treasury has proposed to reduce EITC errors.  Yet Congress has cut IRS enforcement funding heavily since 2010.  It also has failed to approve the Administration’s request to empower the IRS to take steps to significantly reduce errors by commercial tax preparers.

Further, the Joint Tax Committee is understandably cautious about “scoring” various measures to reduce errors on tax returns, whether they concern the EITC or other parts of the tax code.  The combined scored savings from all known legislative proposals to lower EITC errors fall well short of the costs of expanding the EITC for childless workers.  This raises a concern that lawmakers could propose measures to cut the EITC for honest low-income working families and misleadingly promote them as cutting “fraud, waste and abuse” when that’s not what they would do.  Sadly, some members of Congress have done just that in the past.

The small-business legislation that the House approved today would make permanent a generous tax break (known as “Section 179” expensing) for certain small-business investments.  Business income on individual tax returns is, by far, the largest source of tax non-compliance with, as noted above, an estimated 56 percent of this income unreported in 2006.  This resulted in an estimated tax gap of $122 billion, more than four times the gap due to all individual income tax credits (including the EITC).

A dollar is a dollar, whether it’s spent subsidizing small businesses or supplementing the wages of a low-wage worker striving to get a toehold in the economy.  Policymakers should work to improve compliance throughout the tax code.  And they should stop applying double standards to the effort.