Taxes

Tax Day 2016: Charts to Explain our Tax System

Today is Tax Day! Our partners at Fix the Debt have republished their annual chartbook to explain federal taxes – including who pays them, what they pay for, and how they are collected. In addition, they look at the $1 trillion plus amount of tax expenditures in the tax code and how the revenue raised fits into the federal budget. We've highlighted a few of the charts below.

The Obama Administration Moves on Business Tax Changes

The topic of tax reform made the news on Monday as the Obama Administration simultaneously took regulatory steps to further limit corporate inversions and released an update to its 2012 Framework for Business Tax Reform. The inversion regulations make it more difficult for companies to move their headquarters abroad, while the tax proposal offers the Administration's views on an area that has potential for bipartisan compromise. 

For companies with a tax residence in the United States, the federal government currently taxes the active income they earn abroad when it is repatriated to the U.S., and taxes passive (financial income) in the year it is earned. An inversion involves a large U.S. company acquiring a smaller foreign company and then moving its tax residence abroad to avoid taxation. Current anti-inversion rules consider a business a U.S. company for tax purposes if at least 80 percent of it is owned by U.S. shareholders, thus when inverting, companies will work to ensure that there is at least 20 percent foreign ownership in the resulting company. Rules issued by the Obama Administration in 2014 and last year limit the ability of companies to game the 80 percent threshold and limit the ability of inverted companies to repatriate income tax-free.

The rules released this week take additional steps to discourage inversions. The first rule restricts a foreign company from gaming the 80 percent shareholder rule by acquiring multiple U.S. companies in quick succession; specifically, the rule disregards a foreign company's acquisition of any U.S. stock in the past three years from the threshold calculation. Presumably, this rule targets recently inverted companies that use their increasingly larger size to quickly invert larger U.S. companies.

The second rule addresses "earnings stripping," a technique inverted companies use to lower federal tax obligations by having the U.S. company borrow from a related foreign company and pay tax-deductible interest payments to the related company. The rules related to earnings stripping would consider any debt-related distribution to the foreign company non-deductible stock, as long as the debt is not associated with actual business investment in the U.S.  The rule would also allow the IRS to treat a debt instrument as part-debt and part-equity if appropriate.

The accompanying Framework for Business Tax Reform notes that current tax regulations are inadequate to wholly address the issue of inversions, and the President's budget proposes further policies to lower the U.S. shareholder threshold to 50 percent as well as limit interest deductions. The Framework also acknowledges other issues with business taxation beyond inversions like the high statutory tax rate; distortions among industries, debt and equity, and types of business organizations; a narrow tax base; and complexity.

Two Committees Roll Out Mandatory Savings Package

Last week, two House Committees, Ways and Means and Energy and Commerce, released a package of bills that would reduce mandatory spending. The bills, which mostly contain policies included in a 2012 sequester replacement bill, would save a combined $123 billion over ten years. The Energy and Commerce legislation will be marked up next today, and the Ways and Means Committee may act as soon as this week.

The W&M package contains three separate bills. The first would require taxpayers claiming the refundable portion of the child tax credit to provide a Social Security number, which would save $4.8 billion over two years. The second bill requires taxpayers to repay any overpayments of health insurance subsidies; current law limits repayments to $300-$1,250 for singles and $600-$2,500 for married couples who make below 400 percent of the poverty line. This policy would save $8.7 billion over two years. The third bill would eliminate the Social Services Block Grant, which would save $3 billion over two years.

The Energy and Commerce package is one bill with five different policies:

  • Limiting Medicaid eligibility for lottery winners by counting winnings as income beyond the month they win.
  • Eliminating enhanced Medicaid matching for prisoners.
  • Reducing the Medicaid provider tax threshold, which limits how much revenue states can raise from providers to finance their Medicaid program, from 6 percent to 5.5 percent.
  • Eliminating the increased matching rate for the Childrens' Health Insurance Program (CHIP) contained in the Affordable Care Act
  • Eliminating the Prevention and Public Health Fund

Event: Scoring the 2016 Presidential Tax Plans

Update: The event is now over, and a recording of the video will be available soon.

CBO's Analysis of the Distribution of Taxes

In an appearance on C-SPAN this morning, CRFB president Maya MacGuineas referenced a Congressional Budget Office (CBO) analysis that shows that high earners do not pay a particularly high percent of their income in taxes but do pay a large share of taxes.

What's New in the President's FY 2017 Budget

The final budget of the Obama Presidency continues a mix of long-standing policies (including a few that have been in all eight budgets) and policies that are finding their way into the budget for the first time. With regards to new policies, some were previewed during the State of the Union address last month, while others have been laid out in the weeks since then. Here's a rundown of some of the major new proposals in the President's budget.

Business Tax Reform

In his past three budgets, President Obama had proposed a revenue-neutral reserve fund for business tax reform, which included several corporate tax changes amounting to a net tax increase that would offset a reduction in the corporate tax rate to 28 percent. This year, the President has largely maintained the policies that were included in the reserve fund but is now dedicating the $549 billion of revenue to deficit reduction to pay for the business tax cuts in last year's tax deal.

Clean Transportation Investments

The President's budget includes several proposals to tackle climate change, the most ambitious being a $312 billion over ten years clean transportation investment plan. The proposal includes $200 billion for transportation projects including subways, buses, rail, and the TIGER grant program (part of this funding reflects a previous budget proposal to increase surface transportation spending by $116 billion). Another $100 billion would go to state and local governments for clean infrastructure projects. Finally, $20 billion would go to clean transportation research for things like self-driving cars, electric vehicle charging stations, and clean energy airplanes. These policies would be paid for with another new policy in the President's budget: a $10.25 per barrel oil tax. This tax comes on top of a pre-existing policy to reinstate Superfund taxes, which include a 9.7 cent per barrel oil tax.

Medicare Advantage Competitive Bidding

Explaining Clinton's Taxes on the Wealthy

Democratic presidential candidate and former Secretary of State Hillary Clinton has proposed several new taxes that would raise taxes on the wealthy by between $400 billion and $500 billion to pay for new investments helping the middle-class.

2015’s Fiscal Follies and Reasons for Hope

It’s the end of the year and like so many organizations, CRFB wanted to share with you our top 10 list: a look back at Congress’s 10 top fiscal achievements of 2015.

The problem is, we couldn’t. Even pooling the creative minds of our entire staff, we could not produce 10 solid Congressional actions that reduced the national debt or deficit, or were a clear step toward a responsible federal budget.

Compiling a list of the year’s 10 greatest fiscal follies was a lot easier, so we are delighted to share that with you now. 

The Fiscal Irresponsibility of the Tax Deal in 6 Charts

It's no surprise that a deficit-financed tax cut deal costing $830 billion after interest would be bad for the budget. We've been describing the emerging deal in various blogs over the last month, but below are the most important charts, updated for the actual numbers from the announced deal.

The Deal Would Add More Than $2 Trillion to the Debt Over 20 Years

The Joint Committee on Taxation has scored the deal as costing $680 billion over ten years, which would rise to $830 billion if interest costs are included. Although 20-year estimates are inherently uncertain and imprecise, we estimate that the costs grow over time to exceed $2 trillion over 20 years.

The Deal Squanders Recent Deficit Reduction

Although lawmakers have been adding to the debt repeatedly for the past few years, the $680 billion tax deal is easily the largest step backwards and is comparable in magnitude to the deficit reduction lawmakers enacted between 2011 and 2013. The deal easily swamps the net savings from the 2013 Ryan-Murray agreement, almost equals the revenue raised in the fiscal cliff agreement, amounts to three-quarters of the sequester savings, and is more than two-thirds of the savings from the Budget Control Act spending caps.

Negotiated Tax Deal Would Cost $680 Billion

Lawmakers have announced a negotiated package of business and individual tax breaks costing about $680 billion over ten years. After interest, we project the cost at about $830 billion over ten years. The package is split between two bills, one extending most of the tax breaks, and the omnibus bill providing discretionary spending for the rest of the fiscal year.

The deal largely focuses on reviving tax breaks that expired at the end of 2014, making some permanent and extending others for either two or five years. However, it also permanently extends three refundable tax credit expansions that would have expired in 2017, originally enacted in the 2009 stimulus bill. The bill also pauses or delays three taxes from the Affordable Care Act, opening the door to further delays or possible repeal of the taxes, undermining the health care law's deficit-reduction and cost-control efforts. Specifically, it would pause the medical device tax for 2016 and 2017, pause the health insurance tax for 2017, and delay implementation of the so-called "Cadillac tax" for two years while subsequently making the tax deductible against a company's corporate income tax (and tasking a study of how the tax's thresholds are indexed). If these three taxes are subsequently repealed, it would cost a combined $257 billion over ten years:

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