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Why we don’t need corporate tax "overhaul":

by Linda Beale

Why we don’t need corporate tax “overhaul”

GOP poormouthing on behalf of rich corporate allies(Part I in a series) These days, one hears a great deal from politicians on the right about how a corporate tax “overhaul” is needed because our taxes are “too complex” and/or “too anti-competitive” or because our tax rates are “too high”. The same GOP politicians who whine and whimper about how huge the deficit is, and accuse President Obama of driving our country to ruin with the deficit are willing to lower the tax burden paid by highly profitable corporations considerably (thus increasing the deficit and adding to regressivity of the tax system)–so long as they are appeasing their multinational constituency, the huge corporations who are the new providers of campaign funds and the new decisionmakers in elections–even though the corporate entities have no vote. Claims of revenue neutrality are generally little more than PR cover for corporate giveaways.

Just a couple of examples from a recent Bloomberg piece:

  • Republican Senator Robert Portman says he will unveil a new proposal soon that will cut taxes for multinational companies’ repatriated offshore profits–i.e., a permanent tax holiday for multinationalsm as a first step towards a very MNE favorable move to a territorial tax system–that will remedy “an inefficient and complex maze of tax preferences”. See, e.g., Kathleen Hunter, Portman Corporate Tax Plan to Include Low Repatriation Rate, Bloomberg.com (Feb. 1, 2012). Portman claims this huge tax cut for the high and mighty MNEs (and their managers/owners) is needed because they “pay[] a very steep tax bill if and when they choose to bring their money home.” Ludicrous. There is a very generous foreign tax credit provision that allows many MNEs to reduce their taxes to near zero anyway. Further, the deferral they are allowed on active business income gives them the time value of money benefit. Most of what foreign corporations want to do is allow their taxes on non-US income to reduce their taxes on US income–which is a kind of subsidy for offshoring that costs US jobs. And of course, as I’ve noted in earlier posts on tax holidays and proposals for a territorial system to replace a worldwide system, corporations hold more money overseas when they think there is a good chance that their buddies (or “bought pols”?) will give them the tax break they have been lobbying for–so these proposals encourage corporations to engage in the activity that these proposals say they are addressing, thus giving them more ammunition to get the change they want. Portman, of course, says he wants to “streamline” the corporate tax and lower the rate to 25%. We have a statutory rate of 35% now and most corporations that pay taxes (which are not by any means all of the corporations that make significant profits) pay less than 25%. If we lower the statutory rate to 25%, it is quite likely that most corporations that actually end up paying taxes will be a smaller number than with the 35% rate and at a much lower rate–probably around 10-15% instead of 20-25%. Of course, what the result will be–as it was in the 1986 tax reform that lowered rates for ordinary income and ended a number of problematic tax preferences such as the capital gains preferential rate–is that the lower rates will stay, and all of the loopy tax preferences (and more) will be reenacted within a couple of years under heavy lobbying for the same by the corporations that benefit from this round.
  • Dave Camp, Michigan Republicans and Chair of the House Ways and Means Committee, wants to exempt 95% of overseas profits.

Is there merit in this drumbeat of (lobbyist-induced) calls for “corporate tax overhaul legislation”? The simple answer is no.

On Complexity:

Most complexity in the code is there for one of two reasons.

The most likely reason for complexity is the creation of tax preferences heavily lobbied for by corporate lobbyists. One example is the so-called “domestic production activity deduction” that lowers the tax rate by 9% for most industries (even ones that don’t really produce anything) and 6% for natural resource extractive industries. There are tax breaks on top of tax breaks for the resource industries, of course, that get numerous special benefits throughout the Code, while joining in various coalitions that lobby AGAINST even extraordinarily modest support for green industries (such as reasonably low cost loans for solar power).

The second main source of complexity is the clear need for specific anti-abuse provisions to undo the harm done when corporations use what can most charitably be called aggressive and inventive interpretations of Code provisions–often ones that are hyper-literal in nature (the kind of analysis that allowed the Bush Treasury to redefine what “exchange” means in the reorganization provisions in order to allow taxpayers to manipulate the allocation of consideration to create a hitherto unrecognizable tax loss in the reorg transaction) or turn the Code’s clear textual provision on its head (look at the briefs for the defendant–or for that matter the lousy statutory interpretation in the district court opinions– in the Black & Decker contingent liability shelter case, where Black & Decker argued for application of a provision in section 357(c) (which says explicitly that it applies only where paragraph one of that provision applies) in a context where paragraph one did not apply).

As a result of the contingent liability shelters, Congress added various Code provisions, including section 358(h) (having to do with the basis for corporate assets in transactions with significant liabilities) and section 357(d) (having to do with calculating the amount of liability assumed).
Complexity, in other words, is not an evil in itself. Sophisticated taxpayers aren’t harmed by complexity, and in fact complexity is needed to provide sufficient detail to prevent sophisticated taxpayers (with the help of their tax advisers) from cheating. There is generally less complexity in provisions that are relevant for unsophisticated taxpayers, though it is more clearly an obstacle to good tax compliance behavior there.

On Competitiveness:

Competitiveness is used so frequently that it seems doubtful that anybody really knows what they mean by it. If one company destroys a union and is able to pay their workers lower wages as a result, then a company that produces a similar product will claim that “competitiveness” requires that they be allowed to do the same. Of course, another approach would be for the company that retains an active union, and continues to provide pension and health care benefits could lobby Congress to enact stronger laws protecting worker rights to pension and health care benefits. In other words, competitiveness is consistently used as an argunent, when it comes to corporations, for taking away benefits to workers, communities, states and the nation for the benefit of the corporations.

Competitiveness could just as easily be used to argue for maintaining programs, procedures and benefits for workers, communities, states and the nation by considering what would be necessary to buttress the system that supports those benefit levels. And in fact that view of competition–that we are competing globally to create both profitable companies AND a secure and well-paid workforce that can support a healthy economy that can in turn support a quality of life in all dimensions–would lead to different decisions not only about taxation but also about anti-trust, excise taxes, trade treaties, environmental protection, and many regulatory projects.

Furthermore, competitiveness is often used as an argument in the abstract when the main competitors are both US based companies. There, the argument for reducing taxes to enhance competitiveness is at its weakest, but few competitiveness arguments reveal just how the competititon is playing out even on a globalized playing field.

On Rate Structures:

The 1986 tax reform act is a frequent reference these days when people talk about amending the Code generally and specifically about amending the corporate tax provisions. But the context for that act’s passage was quite different. Individuals were taxed at rates that were reasonably progressive–with a top rate at 70% (though the brackets could probably have been better defined to differentiate among top income recipients). Further, the 1954 Code had built up a plethora of tax preferences (especially useful to the rich) and the Congress had realized that the preferential capital gains rate was wreaking havoc on sensible provisions because of the arbitrage opportunities it created. Thus, there was room for “base broadening” (removing ill-advised preferences spread throughout the 1954 Code) as a means of paying for “rate lowering” (lowering the fairly high rates about half, without costing the fisc because of the higher amount of income on which those rates would be charged).

We are not in the same situation today. We have very high deficits because of an economic crisis caused by two interwoven problems–(i) the lax regulatory oversight of 40 years of Reaganism, which permitted the financialization of the economy and led to excessive incomes for people at the top (managers and owners, hedge fund and equity fund managers, and speculators generally) and excessive debt for banks and especially people not at the top (because of their stagnant or reduced incomes in the face of growing costs, caused in part by the relaxation of regulations and anti-trust activity coupled with the anti-union attitudees and activity); and (ii) the success of a radical right-wing fringe in characterizing government and business as having adverse interests and progressive programs supporting social well being (from Social Security to Medicare to Medicaid to (modest) heatlh care reforms intended to reign in the cost of medical care to unemployment benefits to efforts to reign in contracts of adhesion in the consumer credit markets) as “unmerited” “entitlements or costly and anti-competitive regulation of businesses that counters the “free market” that will ensure “growth and jobs”.

The result of the rhetoric is a citizenry that is ignorant of the actual income distribution, tax burdens, and impact of government spending on jobs and the health of the economy. The result of the 40-year “reaganomics” effort from the right to cut regulations, cut taxes, privatize and militarize is that this is no context for rate reduction but in fact a context in which those who can afford to do so–for sure those individuals and households in the top two quintiles of the income distribution that comprise the upper middle class and the upper class and all profit-making corporations–should be paying taxes at HIGHER rates, not lower rates.

It should be noted that President Obama–who is at best a middle of the roader on tax issues–also is said to plan to propose an “overhaul of the U.S. corporate tax system” in connection with his budget plan for FY 2013 that involves lowering rates and base broadening. See Steven Sloan, Obama said to propose corporate tax overhaul next month, Businessweek.com (Feb. 2, 2012). Again–lowering the rate is a bad idea. Lowering the rate without base broadening is a stupid idea. But the kind of base broadening that is included, if such a proposal eventually passes, matters an awful lot. The problem is that if Obama proposes such a reform, the GOP won’t support it unless the “base broadening” is essentially inconsequential and can be undone easily later or affects only little guys and not the big-monied lobbyists. Thus this looks like another of those initiatives from the White House that play into the right’s agenda and do little to advance any progressive idea.

originally published at ataxingmatter

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Obama’s State of the Union vs Romney’s Tax Returns

by Linda Beale

Obama’s State of the Union vs Romney’s Tax Returns

Obama took the high ground in his state of the union address, where he pointedly noted the importance of applying fair tax rules to ensure that millionaires pay taxes at rates more similar to those paid by secretaries and firefighters. He wants a 30% rate on those with incomes of a million or more.

We can either settle for a country where a shrinking number of people do really well, while a growing number of Americans barely get by,” Obama said in his address to a joint session of Congress. “Or we can restore an economy where everyone gets a fair shot, everyone does their fair share and everyone plays by the same set of rules.” STeven Sloan, Obama Says High-Earners Should Pay at least 30% of Income as Tax, Bloomberg.com, Jan 24, 2011.

That would mean that Romney wouldn’t enjoy the exceptionally low rate of tax he had in 2010 after Congress enacted Obama’s suggested reforms. Romney released his tax returns on Tuesday. See this handy link on the New York Times at which the 2010 and 2011 returns and accompanying documents are available, including links showing where Romney earned his $528,871 in speaking fees, etc.. Romney paid only 13.9% on $21.6 million of income, benefitting enormously from the low preferential capital gains rate of 15% that he paid on his returns from his investment of capital. Romney benefitted, too, from investments in the Cayman Islands, a well-known tax haven. And he is still earning “carried interest” from Bain Capital to the tune of multiple millions a year–that’s a share of the profits of a partnership he managed, treated as though it were a return on an investment of capital though it is paid for services. Romney is most definitely one of the 1%–actually in an even more rarefied class cluster of the top 0.006% of multimillionaires with lots of very low taxed income. See Kevin McCoy, Romney tax returns show he’s no average multipmillionaire, USA Today (Jan. 24, 2011) (noting that only 8274 returns out of 140 million filed had income of $10 million or more in 2009); Lori Montgomery et al, Mitt Romney’s Tax Returns shed some light on his investment wealth, Washington Post (Jan. 24, 2012); Nicholas Confessore, Romney’s Tax Returns Show $21.6 Million Income in ’10, New York Times (Jan. 24, 2012).

As the Times story puts it:

What Mr. Romney’s returns illustrated, instead, was the array of perfectly ordinary ways in which the United States tax code confers advantages on the rich, allowing Mr. Romney to amass wealth under rules very different from those faced by most Americans who take home a paycheck.

Obama’s proposals sound reasonable. But I’d extend the basic concepts to the corporate tax. Every corporation that is making book profits of more than some amount ($5 million? $10 million) ought to be held to a similar minimum tax rate on those book profits.

Funny, that is what the original Alternative Minimum Tax (for individuals, and one for corporations) was supposed to achieve–to ensure that everybody paid at least a reasonable rate on their income, even if they could cumulate lots of preferences like mortgage interest deductions, state income taxes, property taxes, and similar deductions. Over time, the AMT has eroded–too many exceptions made, too many taxpayer friendly amendments, and then the Bush tax cut bills that lowered rates so that the AMT rates aren’t really working well as a “broader base but lower rate” tax that ensures that even high-flying income recipients pay a more reasonable tax rate on their income.
http://ataxingmatter.blogs.com/tax/2012/01/obamas-state-of-the-union-vs-romneys-tax-returns.htm

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Gingrich’s 2010 Tax Return: what it does (and doesn’t) tell us

by Linda Beale

Gingrich’s 2010 Tax Return: what it does (and doesn’t) tell us

In last Thursday’s debate, Newt Gingrich released his 2010 Gingrich Foundation tax return and the Gingrich Joint Tax return. See Kim Dixon & Marcus Stern, Gingrich tax return out, but much remains unseen, Reuters (Jan. 20, 2012); Paul West, Gingrich tax return details sources of income, alimony payment, L.A. Times (Jan. 19, 2012); Jon Ward, Newt Gingrich Releases His Tax Returns, Huffington Post (Jan. 19, 2012; updated Jan. 20, 2012) (the Gingrich press release, with links to both returns, is also accessible from a link at bottom of this brief article).

The private foundation’s return lists Callista Gingrich (presumably in her role as President) as having custody of the books at the Foundation’s address in Washington. It lists Newt Gingrich as the only manager who contributed more than 2% of the contributions received during the year, and another form (Schedule B) lists Gingrich Holdings as the contributor of $152,609. Callista Gingrich is listed as the president (with zero compensation) and Newt Gingrich as a board member (with no compensation). A treasurer is listed with $1800 of compensation, a secretary with no compensation, and two other uncompensated board memberes.


 The Foundation supported the following organizations with a total of $120,000: Mount Vernon Association, Basilica of the National Shrine, Shiloh Point Elementary in Cumming GA, Amerivan Museum of Natural History in New York, The Washington Opera, The Atlanta Ballet, A Learning Foundation inAtlanta, the Arthritis Foundation, Mount Paran Christian School in Kennesaw GA, the Walker School in Marietta GA, Luther College in Decorah IA, Susan Chambers Dance in Sugar Hill GA, Breast Cancer Research in New York, and Alzheimer’s Association in Washington.
The joint tax return shows income in 2010 of more than $3 million, with about $450,000 in compensation income and about $2.5 million of Schedule E income through his S corporations Gingrich Holdings inc and Lubbers Agency Inc. and partnerships Draper Fisher Jurvetson Fund VIII and FLC XXXII Partnership LP. (He apparently restructured these businesses before entering into the Republican nomination contest, perhaps foreseeing better than Mitt Romney did that voters might react to the very idea of a giant holding company through which one receives one wealth.) The Salaries and Wages report shows that $450,000 in compensation income arising as follows: 252,500 in wages to Newt from Gingrich Holdings, Inc., and to Callista 5918 from National Shrine and 191,827 from Gingrich Productions, Inc. According to the Reuters story, Gingrich’s earlier disclosure said the Gingrich Holding income was mostly a distributive share (the tax term for a pass-through payment from an entity taxed as a partnership) from Gingrich Productions. His Schedule SE shows only 847 of self-employment taxes in connection with the various schedule C, K-1 etc. income, while Callista’s shows 268.

Also revealed on the tax return are the following: $41,625 in speaking and board of director fees (showed as business income on line 12), $6,853 in rental income, $26,655 in taxable interest, $11,892 in ordinary dividends (not eligible for the 15% net capital gain rate), $5,990 in qualified dividends (eligible for the 15% net capital gain rate), $4,184 in net short-term capital gains and $32,133 net long term capital losses and $33,124 of taxable refunds, credits or offsets for state and local income taxes The couple claimed a total itemized deduction of $215,095. They made $81,133 in contributions to various charities and paid $122,844 in state and local income taxes, $11,656 in real property taxes, and $2,422 in personal property taxes, as well as 8505 in tax preparation fees. They also enjoyed $10,754 of tax-exempt interest (not part of their taxable income). The Gingrich couple paid almost a million in taxes, giving them an effective tax rate on the 3.1 million of income of around 31%.

  • Re those net short term capital gains: Gingrich bought and sold shares in Campbell Soup in 2010 (losing 74), bought shares in Celgene Corp in 2009 and sold them in 2010 (making 2591), sold in 2010 shares in American Funds Capital bought at various times, for a 346 gain, and similarly sold shares in Nuveen High Yield fo a 1225 gain.
  • Re those net long term capital losses: Gingrich sold shares bought at various times of Martek Bioscience, American Funds capital, Ishares Trust s&P smallcap 600 and Ishares Trust Russell 1000 Value, which combined with the long-term totals from Schedule D-1 of 1.023 million (from sales of various funds and closing out of $600,000 worth of CDs) yielded an aggregate of 1.257 million with a claimed loss of $35,636. Using his capital gain distribution from Schedule D-1 of 1018, that left a net LTCL of 32,541.

There are several things worth noting about Gingrich’s release of the couple’s tax information.
1) this is only a single year’s return–2010. George Romney, Mitt’s father, famously began the more transparent information sharing about presidential candidates by releasing 12 years’ of his own tax returns. Gingrich should follow that example, even if Mitt isn’t sure he will. Multi-year returns are necessary for tax experts to even begin to pierce the veil of tax secrecy by seeing trends and patterns in types of income. One year of returns tells you very little. Gingrich should release returns back to his volatile period in Congress and his scuffle with the ethics inquiry, and should release returns relating to the period when he earned what he calls “consulting” fees based on his being a “historian” for Freddie Mac (see item 3).

2) we don’t have tax returns for Gingrich Holdings or Gingrich Productions, or even the informative financial statements that publicly traded companies are required to provide. Those privately held corporations are therefore able to function as “blockers” to maintain a good deal of secrecy about Gingrich’s own income even with the release of his return. Back before Nixon, corporate tax returns were public information and were not kept secret by the Service. We should go back to that, because corporations, whether publicly traded or held privately, are benefitting from the public trust and the state’s willingness to allow them to form. There seems to be little justification for maintaining any business entity returns as confidential documents, with some redaction allowed to maintain trade secrets. But until we do, we won’t know anything more than what Gingrich tells us (or reporters can get “deep throat” sources to divulge).

3) Gingrich’s return labels him a “consultant” but we know very little about his client list or his activities for his clients. We know he worked for Freddie Mac: he claims he wasn’t a lobbyist but that is a hard one to swallow whole. It is difficult to imagine Freddie Mac paying the consummate politician as though he were a mere historian doing historical research but it is very easy to imagine Freddie Mac paying a well-connected lobbyist, shoes that Gingrich’s role as House Speaker ensures that he would have fit into easily. We know that he worked as a “consultant” during the passage of the Medicare Part D prescription drug provision. Again, that sounds more like lobbying than “consulting”. The problem is that Washington has written weasel rules for lawmakers who “consult” so that they can claim they are not “technically” a lobbyist, as Gingrich is doing. But voters should want to see what kinds of reports he provided on the Medicare and Freddie Mac issues, as Romney is insisting. Otherwise, he is just hiding behind the very thin curtain of the fuzzy line between obvious lobbying and “not required to register-wink/wink lobbying”.

4) Congressmen pay themselves nice little pensions even while the GOP is making an ideology out of its desire to cut private pension benefits for unionized workers (in the name of ‘saving’ business but really in the name of passing along even higher profits to managers and owners) and its intention of “reforming” Social Security (meaning leaving beneficiaries who depend on this system that they’ve paid into all their lives with less money than they should be able to have). Gingrich’s return reports more than $76,000 in 2010 from his Congressional pension.

originally published at ataxingmatter

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Romney to release tax returns Tuesday (finally)

by Linda Beale

Romney to release tax returns Tuesday (finally)

Romney’s bitter loss to Newt Gingrich in the Republican primary in South Carolina demonstrated that playing the patrician elite above the fray has its limits as a campaign strategy. Romney’s strategists had apparently thought that they could get away with not releasing tax returns–at least not any except his 2011 ones (maybe) when filed–but they hadn’t counted on vicious attacks from the GOP right that questions his vulture capital millions and his top1% effective tax rate.

That’s what happens when there is a campaigner who thinks that earning $370,000 from speeches given to meaningless conventions of some trade or another is “just a little money”, while admitting that the money he still earns from the vulture fund where he oversaw takeovers of companies (and layoffs of employees and offshoring of work) manages to be taxed at a preferential rate of merely 15%.


So after the loss to Gingrich (an odd man to try to claim a populist mantle when he had a $500,000 line of credit at Tiffany’s and disposes of old wives the way most people dispose of old socks), Romney has now announced that he will release returns plus an estimate of his 2011 taxes due. See Michael Shear, Romney to Release Tax Returns on Tuesday, The Caucus, New York Times (Jan. 22, 2012).

One does wonder why it will be Tuesday when they are released. Why not today? or six months ago? Will they be redacted? Will the accompanying schedules that show his income coming through tax haven “companies” located in the law offices that house 18,000 others in the Caymans be there? Questions that we will have fun examining on Tuesday, anyway.

Oh, and Mitch Daniels, current governor of Indiana and Bush assistant who helped preside over the real growth of the federal deficit as Bush pushed through huge tax cuts while increasing federal spending (especially on preemptive wars), will give the GOP response to the State of the Union message. The Tea Party has picked Herman CAin–the author of the infamous 9-9-9 plan who wanted to shift the tax burden brutally onto the backs of the working poor. The GOP seems to have tax cuts for the rich accompanied by increasing burdens for the poor in its blood, doesn’t it
.
originally published at ataxingmatter

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Romney Reveals His Tax Rate Is ‘Probably Closer to 15 Percent

by Linda Beale

Romney Reveals His Tax Rate Is ‘Probably Closer to 15 Percent

Source for this article:  Emily Friedman, Romney Reveals His Tax Rate Is ‘Probably Closer to 15 Percent'”, ABC News, Jan. 17, 2012.

At a press conference following the GOP debate last night, GOP presumed favored candidate Mitt Romney acknowledged for the first time that his effective tax rate is around 15%.  That’s a lot lower rate than middle class taxpayers typically pay. 
Romney isn’t releasing his full return–at least not yet.  He says maybe he’ll release just the 2011 return in April.  But not any back returns. (That’d tell us more about his gains at Bain Capital than he probably wants us to know.)
What are his sources of income?  Romney acknowledges that during the last 10 years, his income comes “overwhelmingly” from some investments made in the past.  Other sources include a “little bit” from his book and “not very much” from speaker fees.  (“Not very much” is obviously a relative term.  Romney’s financial disclosure report released in August indicated that he was paid more than $370,000 in speaker fees for that filing period.  That’s considerably more than any middle class taxpayer makes—but doesn’t amount to “very much” for Romney, who is worth somewhere around $250 million or so.)

So for 10 years, Romney admits, he hasn’t labored much, but has nonetheless made considerable investment income that gets preferentially taxed.  That of course is a core problem with the preferential rate for capital income–it merely makes the festering wound of hugely unequal distribution of income (and wealth) worse.  The preferential rate is, essentially, a tax policy favoring redistribution upwards.  The rich get to pay a lower tax rate on their income than their secretaries, and their income is especially protected by other policies as well (like the weakening of unions from Reagan on, privatization of public activities from Reagan on, lax enforcement of anti-trust rules, lax enforcement of banking regulations, etc.).
At least Romney recognizes that the rich don’t need (and the economy wouldn’t benefit from) even more favorable tax breaks for rich people’s favored kind of income.  He noted that “the speaker’s plan to eliminate the capital gains tax for high income individuals–capital gains, interest and dividdnds–would not only be a very expensive provision in terms of having to fill an even larger budget hold but that would provide for people of very high income a possibility of no tax at all. … I just don’t think that’s the right course.”  (But he does want to lower corporate tax rates, which–under the theory that corporate taxes are borne by corporate owners–would be just another form of preferential taxation for rich people who own most of the corporate stock.)

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Offshored Assets still in IRS cross-hairs but new disclosure program available

by Linda Beale

Offshored Assets still in IRS cross-hairs but new disclosure program available

As most who follow the issues are aware, the IRS has been focusing for some time on the foreign bank accounts of US taxpayers.  The big break came when the IRS was able to get some data from UBS, including information about particular bankers and mechanisms that US taxpayers were using to sequester significant amounts abroad to avoid paying US taxes on the income.   This has allowed the IRS to pursue leads and draw connections from bankers to accounts to taxpayers, and to pursue criminal prosecutions for international tax evasion in some cases.

There have been two “voluntary programs” for declaring offshore accounts and avoiding potential criminal prosecution with the payment of a set penalty–the first in 2009 and the second in 2011.  The penalty in the second program was stiffer than the penalty in the first program, so that those who delayed had to pony up more to get clear.   The programs have been enormously successful, bringing in more than $4.4 billion dollars, according to an IRS release announcing a reopening of the offshore voluntary disclosure program.  See IR-2012-5.

Under the new program, some taxpayers may be eligible for the 5 or 12.5% penalties but the stiffest penalty will be higher than under earlier versions: 27.5% of the highest aggregate balance in foreign bank accounts during the 8 years prior to disclosure, up from 25% in  the 2011 program.  In addition, of course, participants have to file returns and pay back taxes and interest for the preceding 8 years, and pay any accuracy-related penalties due.

originally published at ataxingmatter

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Romney’s Tax Plan Helps the 1%, Hurts the Bottom 40%

by Linda Beale

Romney’s Tax Plan Helps the 1%, Hurts the Bottom 40%

In spite of having to suffer some closer view of his Bain Capital time–during which the self-proclaimed “job creator” businessman did a lot of job cutting and destruction of going concerns so that his investors could make more money, Romney continues on his well-financed cruise to the GOP nomination.

It’s perhaps an appropriate time to bring out the Urban Institute/Tax Policy Center’s analysis of the Romney 59-point tax plan. They have produced a table (T12-0004) showing “Mitt Romney’s Tax Plan Baseline: Current Policy Distribution of Federal Tax Change by Cash Income Percentile, 2015.” The table looks at individual and corporate income, payroll (Medicare and Social Security) and estate taxes to determine the change in the total federal taxes for the various quintiles under Romney.

Who would have federal tax increases under Romney? Not the rich who have captured more and more of the income over the last decades. Treating corporate shareholders as the payers of the corporate income tax, the table shows that the top one percent would get an average federal tax cut of $86,535 under Romney’s plan, while the top one-tenth of one percent would get an average tax cut of $432,940.

But guess what, the bottom two quintiles–made up of the poorest Americans who are struggling to make ends meet and who can be pushed off kilter by a single illness or other unexpected expenditure–will be the ONLY ones in the distribution who will pay more federal taxes under Romney’s plan than under the current policy baseline. About 18% in that lowest quintile will pay almost a thousand more in taxes. About 13% in the lowest quintile will pay about $125 less in taxes. Similarly, in the second lowest quintile, about 18% will pay almost a thousand more; however, at least for this quintile about a third will pay almost $500 less, so that the overall increase averaged across these groups is less.

This is an unacceptable result. The New York Times recently reported on various studies on inequality and a survey that shows that more and more people, across the spectrum of ideologies, ages, gender and other lines, now consider the conflict between rich and non-rich as important. Survey Finds Rising Perception of Class Tension, New York Times, Jan. 11, 2012.

The demographics were surprising, experts said. While blacks were still more likely than whites to see serious conflicts between rich and poor, the share of whites who held that view increased by 22 percentage points, more than triple the increase among blacks. The share of blacks and Hispanics who held the view grew by single digits.

What is more, people at the upper middle of the income ladder were most likely to see conflict. Seventy-one percent of those who earned from $40,000 to $75,000 said there were strong conflicts between rich and poor, up from 47 percent in 2009. The lowest income bracket, less than $20,000, changed the least.

The reason the rich are getting richer is because the country has followed policies, essentially since Reagan, that favor the rich–from deregulation to relaxation of anti-trust to reduction in tax burdens to privatization to deunionization. To add further rich-friendly policies to our tax code at this point should not be countenanced.

originally published at ataxingmattera>

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Italy now backs a financial transactions tax

by Linda Beale

Italy now backs a financial transactions tax

Germany and France are already on board in support of a financial transactions tax, and one outcome of the meeting of Italy’s new leadership with Chancelor Merkel is that Italy is on board. See AP, Italy Backs Financial Transactions Tax, New York Times, Jan 11, 2012.

A financial transaction tax has several advantages especially relevant in this post-financial crisis period. It raises additional revenues in very small increments on financial trades. That is not likely to have a negative impact on trades, but is likely to raise much needed revenues for starving educational systems, transportation systems and other important government programs.

Further, to the extent it does act as a disincentive to financial transactions, that, too, accomplishes a public good. The financial transaction tax is really a variety of the so-called ‘sin taxes’ that provide revenue when the purchase behavior continues and a social benefit when it ceases. Finance has become too large a part of the economy, and much of what passes as financial activity, as we saw in the 2007-08 financial crisis, was really ‘phantom’ activity–trading at several times removed from the productive economy that gives people (other than bankers).

It remains to be seen whether the US can pull its dysfunctional government together enough to make reasonable decisions about such options as a financial transactions tax. First, we have far too many far too well paid and far too well connected lobbyists roaming the halls of Congress and influencing votes in favor of the big financial institutions’ perspectives. Second, the far right’s emphasis on a version of “free markets” that fails to understand nuances of externalities, biases and framing issues leaves no room for recognition of the many negative aspects of unregulated marketplaces. Third, the Republican party members in Congress have been engaged in obstructionist behavior that leaves little room for any reasonable compromises or even consideration of the justness of a position–they are engaged in election gamesmanship with Supreme Court and other federal court judge nominations at stake, along with an objective of taking broad-stroked deregulatory action across federal agencies, from the EPA to Energy to Education to the IRS. All of these trends bode ill for the US to get its act together and set in place provisions that will further rein in the finance excesses.

But if Italy can make progress in this regard, surely we can…..

originally published at ataxingmatter

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IRS proposes new innocent spouse procedures

by Linda Beale

IRS proposes new innocent spouse procedures

In a press release IR 2012-3 (Jan. 5, 2012), the IRS has issued Notice 2012-8 announcing a new revenue procedure updating Rev. Proc. 2003-61. The IRS describes the effect of the procedure as follows.

This proposed update to Rev. Proc. 2003-61 addresses the criteria used in making innocent spouse relief determinations for section 6015(f) equitable relief cases and revises the factors for granting equitable relief. The factors have been revised to ensure that requests for innocent spouse relief are granted under section 6015(f) when the facts and circumstances warrant and that, when appropriate, requests are granted in the initial stage of the administrative process.

The IRS indicates that it will now take into account the other spouse’s abuse and financial control in making determinations for innocent spouse relief.

Review of the innocent spouse program demonstrated that when a requesting spouse has been abused by the nonrequesting spouse, the requesting spouse may not have been able to challenge the treatment of any items on the joint return, question the payment of the taxes reported as due on the joint return, or challenge the nonrequesting spouse’s assurance regarding the payment of the taxes. Review of the program also highlighted that lack of financial control may have a similar impact on the requesting spouse’s ability to satisfy joint tax liabilities.

For example, the proposed Rev. Proc. indicates that a nonrequesting spouse’s abuse of the requesting spouse may outweigh the fact that the requesting spouse had knowledge of likely noncompliance and that the requesting spouse’s subsequent compliance is a factor that may weigh in favor of relief.

The proposed revenue procedure also provides for certain streamlined case determinations; new guidance on the potential impact of economic hardship; and the weight to be accorded to certain factual circumstances in determining equitable relief.

These appear to be noteworthy and appropriate changes. It is a problem when legal procedures fail to recognize the way that physical and psychological abuse can limit options for individuals. This is particularly true in the case of abused spouses, who may not be allowed to question financial statements or tax returns before being forced to sign them by the abusing spouse.

originally published atataxingmatter

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CRS reports on repatriation tax holiday impact

by Linda Beale

CRS reports on repatriation tax holiday impact

Shortly before the Christmas holiday, CRS released a report by Donald Marples and Jane Gravelle on the possibility of a second repatriation tax holiday for multinational corporations. Download Marples and Gravelle. tax cuts on repatriation earnings as economic stimulus. an economic analysis. 122011.c

The holiday has been pushed by various commentators who support reducing corporate taxation based on the argument that lower tax, and repatriated earnings, will result in greater investment in domestic business expansion and more US jobs.

Our experience with the 2004 repatriation holiday was not impressive. Much of the repatriated funds were diverted to share buybacks and not used to increase investments or increase jobs. IN fact, many companies that repatriated the most money engaged in heavy firings of workers. Hewlett Packard was notable, with large layoffs accompanying significant repatriated cash.

To repeat that experiment at a time when US companies have even more cash socked away in the US and abroad would merely reward those companies that decided to bet on (and lobby heavily for) a second repatriation holiday that would amount to a huge cut in their taxes–like having the best of a territorial tax system at the same time that they get all the benefits (foreign tax credits, active financing exception, etc.) of the current worldwide tax regime.

The CRS report doesn’t suggest that another repatriation holiday would be a sure-fire economic growth engine. In fact, it notes that it can be counterexpansionary if money is used to address cash-flow problems or to pay out to shareholders.

Viewed in the current debate on how to most efficiently stimulate the economy, economic theory suggests that the simulative effect of a temporary tax cut for repatriations may be offset, or more than offset, by exchange rate adjustments that would reduce net exports.

In addition, how businesses use repatriated earnings will impact the stimulative or contractionary effect of a tax cut for repatriations. For example, repatriated earnings will have a larger stimulative effect, or smaller contractionary effect, the greater the degree to which they are used to increase current investment. A smaller stimulative effect or a larger contractionary effect will result, in contrast, if more of the repatriated earnings are used to shore up “cash-flow” issues or pay dividends.

A repatriation tax holiday is not a good idea. it wasn’t a good idea in 2004. It is not a good idea now. There is no reason to give multinational corporations a tax break to bring money back to this country. They’re cash rich as it is and can make investments if they want to.

originally published at ataxingmatter

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