The Center's work on 'Other Issues' Issues


IRS Commissioner Confirms House-Passed Cuts to IRS Budget Could Be “Catastrophic”

August 25, 2014 at 3:48 pm

IRS Commissioner John Koskinen said, according to Tax Notes, that the effects of House-passed IRS budget cuts would be “very serious if not catastrophic” to the agency’s ability to collect revenue and provide taxpayer services, adding: “I no longer want people to think that if we get less money it doesn’t make any difference.  It makes a big difference on taxpayers, on tax preparers, on tax compliance, on tax enforcement.”

As we have written, the House bill would cut IRS funding by $1.5 billion in 2015, including a $1.2 billion reduction in the agency’s enforcement budget, relative to 2014 funding.  The enforcement budget is crucial to the IRS’ ability to collect revenue and pursue tax cheats.  As Commissioner Koskinen affirms, reducing the IRS enforcement budget actually increases the deficit because it prevents the agency from thwarting tax fraud, evasion, and other illegal behavior, thus reducing federal revenue:

Congress is starving our revenue-generating operation. If voluntary compliance with the tax code drops by 1 percent, it costs the U.S. government $30 billion per year.  The IRS annual budget is only $11 billion per year.

And the House cuts would come on top of years of IRS budget cuts that have already weakened enforcement and harmed taxpayer services.  Funding for the IRS fell by 14 percent (after accounting for inflation) between 2010 and 2014 (see chart).  These cuts forced the agency to reduce its workforce by over 10,000 employees and have led directly to a significant decline in the quality of taxpayer services.

For example, millions of taxpayers depend on IRS assistance over the telephone, yet in 2013, a typical caller to the IRS waited on hold for about 18 minutes for an IRS representative, and about 40 percent of calls were never answered.  This is a sharp decline from 2010, when the IRS answered three-quarters of calls and had an average wait time of just under 11 minutes.

Commissioner Koskinen was frank about the impact of continued cuts:

You cannot continue to reduce our resources and ask us to do more things.  The blind belief in Congress that they can continue to cut funding and we will just become more efficient is not the case.  We are becoming more efficient but there is a limit.  Eventually the effects will show up.  We are no longer going to pretend that cutting funding makes no difference.

Policymakers must give the IRS the resources it needs to fulfill its tax-collecting mission and provide the services taxpayers depend on.  The first step is for the Senate and the President to reject the reckless House cuts.

Kleinbard: “Competitiveness” Argument for Moving Firms’ Headquarters Overseas Is a Canard

August 12, 2014 at 10:10 am

The claim that many U.S. companies are moving their headquarters overseas because U.S. corporate tax rates make them uncompetitive is “largely fact-free,” USC law professor and former Joint Tax Committee staff director Edward Kleinbard concludes in a new paper.

While many firms and their lobbyists highlight the 35 percent top U.S. corporate rate, that’s not what companies actually pay, Kleinbard explains.  The effective tax rate that U.S. multinationals face on their worldwide income — that is, the share of this income that they pay in taxes — is well below this statutory rate.  A big reason is that multinationals report vast amounts of their income as coming from tax havens where they pay little or no tax, even if they have few staff and do little business there.

Kleinbard also explains that the 2004 repatriation tax holiday, which allowed multinationals to bring profits held overseas back to the United States at a temporary, vastly reduced tax rate, gave them a big incentive to stockpile billions more in tax havens and await another tax holiday.  These large stashes of profits in tax havens are an important reason — Kleinbard thinks the key reason — why many companies are considering moving their headquarters overseas.  By “inverting,” these companies can basically declare their own, permanent tax holiday and avoid ever paying U.S. taxes on foreign-held profits.  And once inverted, they can use legal avoidance schemes to effectively get those profits to their U.S. shareholders.

In other words, multinationals are already using tax havens to achieve zero or extremely low tax rates.  Firms considering inversions are searching not for a “competitive” tax rate but a zero tax rate by ensuring that those profits remain “stateless” — that is, taxed nowhere at all. (Echoing a famous line from Mae West, Kleinbard’s paper is titled “‘Competitiveness’ Has Nothing to Do With It.”)

Kleinbard’s solution has three parts:

  1. Make it harder for a U.S. multinational to invert.
  2. Prevent companies that do invert from effectively distributing their “foreign profits” to U.S. shareholders without paying U.S. tax.
  3. Make it harder for all U.S. multinationals to claim that U.S.-earned profits were actually earned in tax havens and low-tax countries.

House GOP Follows Ryan Anti-Poverty Plan With Pro-Poverty Legislation

July 25, 2014 at 11:12 am

House Budget Committee Chairman Paul Ryan (R-WI) extolled the anti-poverty effects of the Earned Income Tax Credit (EITC) and, in his new poverty proposal, wisely proposed expanding it for childless adults (including non-custodial parents).  The praise that Chairman Ryan correctly gave the EITC also applies to the refundable portion of the Child Tax Credit (CTC).  Both of these essential tax credits encourage work, expand opportunity, and reduce poverty.

Today, however, House Republicans are considering on the House floor permanent CTC legislation — a bill for which Rep. Ryan voted as a Ways and Means Committee member — that would lead to more poverty, not less.  The bill permanently alters the CTC by extending it higher up the income scale so that more families with six-figure incomes can benefit from it, while failing to make permanent a key CTC improvement from 2009 for working-poor and near-poor families that’s slated to expire at the end of 2017.  Census data show that letting the CTC improvement for low-income working families expire after 2017 would push 12 million people — including 6 million children — into or deeper into poverty (see chart).

As we have explained, the House bill raises the income levels at which the CTC begins to phase out and indexes those thresholds to inflation.  Couples with two children making between $150,000 and $205,000 would become newly eligible for the credit; a family making $160,000, for example, would receive a new tax cut of $2,200 in 2018.  But because the bill fails to make permanent the 2009 reduction in the CTC’s earnings threshold after 2017, a single mother with two children who works full time throughout the year at the minimum wage and earns $14,500 would lose her entire CTC of $1,725 in 2018.

The bill also indexes the current maximum credit of $1,000 per child to inflation, but that would not help most working families with low or moderate incomes because it benefits only those with incomes high enough to receive the maximum credit.  If the credit’s $3,000 earnings threshold (the level of family earnings at which the credit starts to phase in) is allowed to expire at the end of 2017, the threshold will nearly quintuple — and families making less than about $14,500 will lose their CTC altogether.  In addition, many working families with incomes somewhat above $14,500 will have their CTC cut substantially and no longer receive the maximum credit, making the inflation adjustment meaningless for them.  Under the House bill, indexing would not benefit a family with two children in 2018 until the family has earnings of at least $28,050 — nearly double full-time work at the minimum wage.

Chairman Ryan’s colleagues should consider the poverty-fighting effects of tax credits such as the CTC for low-income working families.  Then they should reverse course and put these families’ needs first, rather than last.

Plug the Inversion Loophole Now

July 22, 2014 at 2:53 pm

The New York Times’ latest “Room for Debate” feature asks how the United States can stop corporations from moving their headquarters overseas — known as corporate “inversions” — to avoid taxes.  In my contribution, I explain that inversions are a high-profile part of the problem that multinationals’ profits aren’t taxed anywhere, because tax rules let companies claim they earned the profits in in zero- or low-tax havens.

I point out that Pfizer — whose inversion plans made recent headlines — could keep billions in profits permanently untaxed by inverting.  Ed Kleinbard, USC law professor and former staff director for Congress’ Joint Committee on Taxation, explains in detail in a new Wall Street Journal piece how companies can lower their tax bills through an inversion.

In the Times, I recommend swift, targeted anti-inversion legislation:

Slashing U.S. corporate taxes won’t solve an inversions problem created by profits that already aren’t taxed. Instead, U.S. policymakers should first swiftly enact targeted anti-inversion legislation to protect the U.S. tax base.

That’s why Senate Finance Committee Chair Ron Wyden should be applauded for his pledge today (during a Senate Finance Committee hearing on inversions and international tax reform) to immediately try to stop U.S. firms from incorporating overseas for tax purposes.  “Let’s work together to immediately cool down the inversion fever … The inversion loophole needs to be plugged now,” Wyden said.

Then, any eventual corporate tax reform could raise revenue by eliminating inefficient business tax breaks for both domestic and foreign profits and reducing opportunities and incentives for corporations to engage in international tax avoidance, and level the playing field between domestic and multinational companies, as we’ve previously explained.

Click here to read the full “Room for Debate” piece.

House Should Reject Backwards Child Tax Credit Bill

July 18, 2014 at 2:11 pm

The full House next week will consider the Ways and Means Committee’s recently passed Child Tax Credit (CTC) bill.  A recent Tax Policy Center (TPC) analysis confirms our previous critical assessments of the proposal, finding that it would make many relatively affluent people better off while making low-income working families poorer.

As we explained, the bill makes three main policy decisions that, taken together, constitute poor policy:

  1. It extends the Child Tax Credit higher up the income scale — on a permanent basis — so more families with six-figure incomes will benefit.  The bill raises the income levels at which the CTC begins to phase out.  (It also indexes those thresholds to inflation.)  Couples with two children making between $150,000 and $205,000 would become newly eligible for the credit; a family making $150,000 a year would receive a new tax cut of $2,200 in 2018. 
  2. It fails to make permanent a key CTC provision for working-poor families that will expire in 2017 unless Congress acts.  The provision, which was enacted in 2009, made more working-poor families eligible for the CTC and enlarged it for other working-poor families who had been receiving only a partial credit, by phasing in the credit as a family’s earnings rose above $3,000.  If this low-income provision expires on schedule — as the Ways and Means bill allows — a single mother with two children who works full time throughout the year at the minimum wage and earns $14,500 would lose $1,725 in 2018, as her CTC would be eliminated. 
  3. It indexes the current maximum credit of $1,000 per child to inflation.  This provision benefits only those with incomes high enough to receive the maximum credit.  If the low-income provision is allowed to expire in 2017, millions of working-poor families would either lose their CTC altogether or have their CTC cut and no longer receive the maximum credit, which would make the inflation adjustment meaningless for them.  Under the bill, indexing wouldn’t benefit a family with two children in 2018 until it has earnings of at least $28,050 — nearly double what full-time minimum-wage work pays an individual, as we have explained. 

TPC’s analysis illustrates how the combined effects of these policy decisions harm low-income families while benefiting many with higher incomes.  As the first chart below shows, families with children that have incomes between $100,000 and $200,000 would gain, on average, nearly $550 apiece in 2018, while families with incomes below $40,000 would lose, on average.

The Ways and Means bill’s effects on households’ after-tax incomes are also striking.  As the next chart below shows, households earning less than $20,000 in 2018 would face, on average, a drop in their after-tax income of more than 3 percent while those with incomes between $100,000 and $200,000 would get a boost in their after-tax earnings.

TPC’s analysis underscores the downsides of the Ways and Means bill for low-income working families.  These are parents who work for low or modest wages as cashiers, waitresses, home health aides, and day laborers; they clean office buildings or perform other low-paid work.  Policymakers should reverse course and put these families’ needs first, rather than last, when the full House considers the bill.