Tax policy

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The President's tax reform report

What follows is a report of the President’s Economic Recovery Advisory Board (PERAB) on options for changes in the current tax system to achieve three broad goals: simplifying the tax system, improving taxpayer compliance with existing tax laws, and reforming the corporate tax system.

The Board was asked to consider various options for achieving these goals but was asked to exclude options that would raise taxes for families with incomes less than $250,000 a year. We interpreted this mandate not to mean that every option we considered must avoid a tax increase on such families, but rather that the options taken together should be revenue neutral for each income class with annual incomes less than $250,000.

A similar principle of revenue neutrality was used in the 1986 tax reform legislation in which changes that raised revenue were combined with cuts in personal income tax rates. The specific changes we considered can either raise or lower revenue. We realize that revenue neutrality by income class might result in increases or decreases in tax liability for subgroups or individual taxpayers within each income class – that is, revenue neutrality might result in “winners” and “losers.” We hope that the Administration and the Congress will select changes that are desirable on their merits and not worry about the distributional effects of each of them individually.

The entire package of options selected should be evaluated by the Treasury or the Joint Committee on Taxation (JCT) to see what impact it has on tax liability by income class. If, as seems likely, the package raises taxes for some income groups and lowers them for others, this could be offset by adjustments to the standard deduction, tax rates or other provisions. Of course, even if the rates are adjusted to be revenue neutral in each income class, there will be individual taxpayers who gain and lose. We did not try to hold all taxpayers harmless in the options we evaluated, and we were not asked to do so by the President. It would be impossible to do so without substantial costs in terms of lost revenues.

The Board gathered information from business leaders, policy makers, academics, individual citizens, labor leaders, and many others. Our findings are the result of months of input from many people, and we thank them for their advice. In addition, over the years there have been many reports on tax reform options by both government agencies and private entities. There has also been substantial academic research on these issues. We have benefited greatly from studying these previous reports and materials.

The Board was not asked to recommend a major overarching tax reform, such as the 1986 tax reform, the tax plans proposed by the 2005 Tax Reform Panel, or proposals for introducing a value added tax in addition to or in lieu of the current income tax system. We received many suggestions for broad tax reform, and some members of the PERAB believe that such reform will be an essential component of a strategy to reduce the long-term deficit of the federal government. But consistent with our limited mandate, we did not evaluate competing proposals for overarching tax reform in this report.

Finally, it is important to emphasize at the outset that the PERAB is an outside advisory panel and is not part of the Obama Administration. We have heard the views of experts in the government in the same way that we have heard the views of outside experts and interest groups. We have attempted to distill these views in this report to provide an overview of the advantages and disadvantages of tax reform options that achieve the three goals of our mandate: tax simplification, greater tax compliance, and corporate tax reform. Our report is meant to provide helpful advice to the Administration as it considers options for tax reform in the future. The report does not represent Administration policy.

Treasury Secretary proposes higher taxes on top 2%

'... We believe the best way to do that is by allowing the tax rate for the top 2 percent to go back to levels seen at the end of the 1990s, a time of remarkable growth and economic strength.

There are some who suggest that we should hold the tax cuts for the middle class hostage, until Congress extends the tax cuts for the top 2 percent – and permanently repeals the estate tax too.

That would be a mistake.

If the middle class tax cuts are not extended, Americans will face a sharp increase in taxes and a sharp fall in disposable income.

This would be irresponsible and it would be unfair, especially with America still suffering through the effects of what we learned last week was the worst recession in post-war history.

That would only slow our recovery.

Others have suggested we delay, by extending all Bush tax cuts temporarily, for a year or two.

But the world is likely to view any temporary extension of the income tax cuts for the top two percent as a prelude to a long term or permanent extension. That would hurt economic recovery by undermining confidence that we are prepared to make a commitment today to bring down our future deficits.

Fiscal discipline requires hard choices and we must be prepared to make them.

The President has proposed to terminate or reduce government programs we do not need and cannot afford. He has proposed to freeze non-security, discretionary spending, which will by 2014 bring such spending to its lowest share of the economy since the 1960s.

This will require difficult choices and even painful cuts in government programs – an effort we have undertaken in our past two budgets and an effort that Secretary Gates, in particular, has been leading at the Department of Defense.

In the context of those efforts, asking the top earners in our society to forgo an extension of recent tax cuts must be part of the compact that restores fiscal responsibility in Washington.

Now, some on the other side of the aisle insist on extending the tax cuts for the top 2 percent of Americans as a condition for extending the middle class tax cuts.

But permanently extending the tax cuts for the top 2 percent would require us to borrow over $700 billion dollars more over the next decade, adding significantly to an already unsustainable level of debt.

That would be a mistake. Who would benefit from that mistake?

Only the top 2 percent of Americans, who earn on average $800,000 per year.

Some, who have argued against stimulus, now say that extending the tax cut for the top 2 percent is just the form of stimulus that the economy needs. But, as analysts from the Congressional Budget Office to Goldman Sachs recently concluded, extending tax cuts for the top 2 percent would be among the least effective forms of stimulus.

That is because the top 2 percent are the least likely to spend those tax cuts, certainly not in comparison to the 98 percent of Americans who make less than $250,000 per year. While they would surely welcome an extended tax cuts, it's not likely to change their spending habits.

Extending the tax cuts for the top 2 percent even for one year would require the United States to borrow an additional $30 billion dollars. The top 2 percent would save most of that increase in after-tax income..."

Key U.S. Democrat backs keeping tax cuts for rich

  • Lower tax rates for all expire at year end
  • Some division among Democrats as to impact
  • Former Treasury Secretary Rubin weighs in (Adds comments from Rubin, other details)

A fiscally conservative Democrat who chairs the U.S. Senate's budget committee on Wednesday said he supports extending all of the tax cuts that expire this year, including for the wealthy.

"The general rule of thumb would be you'd not want to do tax changes, tax increases ... until the recovery is on more solid ground," Senator Kent Conrad said in an interview with reporters outside the Senate chambers, adding he did not believe the recovery has come yet.

Conrad's comments are sympathetic with Republican arguments against raising taxes amid a fledgling economic recovery. They frame a debate gaining steam over whether stimulus to bolster the economy's recovery, or deficit reduction, should be the top policy priority.

Other Democrats are still sensitive to budget worries.

Senate Finance Committee Chairman Max Baucus, another fiscally conservative Democrat, earlier this month questioned whether the country could afford to extend the tax cuts for the wealthier groups, citing the yawning budget deficit.

Lawmakers are mulling the renewal of tax cuts enacted in 2001 and 2003 under former president George W. Bush that expire at the end of this year. President Barack Obama and his Democratic allies in Congress want to extend the lower rates for individuals earning less than $200,000 or couples making less than $250,000.

About two to three percent of Americans fit into the upper income categories.

The federal government has run deficits for several years, with the 2010 budget expected to come in more than $1 trillion in the red. The issue has stalled several spending bills in Congress, including extension of unemployment insurance now being debated in the Senate.

Conrad said that it will be tough to extend the top tax cuts, given worries about the deficit and because under budget rules, lawmakers must find offsetting revenue to pay for the lower rates for wealthier Americans.

Wealthy private equity managers strive to keep low tax rate

Who could be opposed to closing a tax loophole that allows hedge-fund and private equity managers to treat their earnings as capital gains -- and pay a rate of only 15 percent rather than the 35 percent applied to ordinary income?

Answer: Some of the nation's most prominent and wealthiest private asset managers, such as Paul Allen and Henry Kravis, who, along with hordes of lobbyists, are determined to keep the loophole wide open.

The House has already tried three times to close it only to have the Senate cave in because of campaign donations from these and other financiers who benefit from it.

But the measure will be brought up again in the next few weeks, and this time the result could be different. Few senators want to be overtly seen as favoring Wall Street. And tax revenues are needed to help pay for extensions of popular tax cuts, such as the college tax credit that reduces college costs for tens of thousands of poor and middle class families. Closing this particular loophole would net some $20 billion.

It's not as if these investment fund managers are worth a $20 billion subsidy. Nonetheless they argue that if they have to pay at the normal rate they'll be discouraged from investing in innovative companies and start-ups. But if such investments are worthwhile they shouldn't need to be subsidized. Besides, in the years leading up to the crash of 2008, hedge-fund and private equity fund managers weren't exactly models of public service. Many speculated in ways that destabilized the whole financial system.

Nor are these fund managers especially deserving, as compared to poor and middle-class families that need a tax break to send their kids to college. Nor are they particularly needy. Last year, the 25 most successful hedge-fund managers earned a billion dollars each. One of them earned 4 billion dollars. (Paul Allen's personal yacht holds two luxury submarines and a helicopter. Henry Kravis is one of the wealthiest people in the world.)

Several of these private investment fund managers, by the way, have taken a lead in the national drive to cut the federal budget deficit. The senior chairman and co-founder of the Blackstone Group, one of the largest private equity funds, is Peter G. Peterson, who never tires of telling the nation it faces economic ruin if deficits aren't brought under control. Curiously, I have not heard Peterson advocate closing this tax loophole as one way to further the cause of fiscal responsibility.

Closing tax loopholes for billionaires may seem like a no-brainer, especially at a time when the nation is cutting back spending on the middle class -- slashing budgets that fund child care, public schools, and public universities. Tens of thousands of teachers are getting pink slips.

But you can expect a huge fight.

There is also a moral issue here. Call me old fashioned but I just think it's wrong that a single hedge fund manager earns a billion dollars, when a billion dollars would pay the salaries of about 20,000 teachers.

Volcker says deficits could lead to new VAT tax

White House adviser Paul Volcker said the United States may need to consider raising taxes to control deficits.

He also said a European-style value-added tax could gain support.

The former chairman of the Federal Reserve who is an outside adviser to President Barack Obama, said the value-added tax "was not as toxic an idea" as it has been in the past, according to a Reuters report.

Volcker made the remarks at a New York Historical Society event Tuesday night. Volcker also suggested that a carbon or energy-related tax may become necessary to bring the budget back into check.

Volcker acknowledged that the ideas weren't popular but that the outlook on entitlement spending and budget deficits were grim without some changes.

"If at the end of the day we need to raise taxes, we should raise taxes," he said.

As Republicans pounced on Volcker's remarks, a White House official emphasized that the administration has approved tax cuts on middle-class families since taking office, and that he is pursuing additional tax cuts.

"The president has passed historic tax cuts for middle-class families and continues to push for more tax cuts," a White House official told The Hill. "The president is not proposing to cut the deficit at the expense of middle-class families."

Republicans went on the attack against the possible tax quickly on Wednesday, with the National Republican Congressional Committee releasing several quotes of Obama administration officials pledging not to raise taxes on the middle class.

Speaker Nancy Pelosi (D-Calif.) has previously suggested that something like the value-added tax, along with other possible revenue-raising measures, should be considered "on the table."

A value-added tax would be an additional tax added by retailers on goods and services and would be paid equally by all income levels.

The biggest question is on which products. In Britain, certain types of food, clothing and other products are exempt from the tax. If Congress goes ahead with a VAT it would have to determine what to include or exempt, potentially mucking up the waters for retailers.

GE pays no taxes after bailout

General Electric got bailed out by American taxpayers.

Specifically, it was given $139 billion in FDIC guarantees and support by the Federal Reserve for it's commercial paper (see this).

So you'd think that GE would return the favor by paying American taxes, right?

Wrong. GE paid no U.S. taxes for 2009.

As CNN points out:

GE had plenty of earnings last year -- just not in the United States. For tax purposes, the company's U.S. operations lost $408 million, while its international businesses netted a $10.8 billion profit. Unfortunately, GE is not alone.

U.S. wealthy lack loopholes to offset Obama’s taxes

"...In 2011, income tax rates for the highest earners will go to 39.6 percent, up from 35 percent, and the capital gains tax will rise to 20 percent from 15 percent, unless Congress acts. The increases aren’t likely to be overturned by Congress, said Chuck Marr, director of federal tax policy at the Washington- based Center on Budget and Policy Priorities.

The capital gains tax will rise to 23.8 percent in 2013, to help pay for health-care reform signed by President Barack Obama March 23. That’s because the legislation applies a 3.8 percent Medicare tax on unearned income such as realized capital gains, dividends, interest, rents and royalties. The health-care bill also increases the employee’s share of the Medicare payroll tax levied on wages by 0.9 percentage points to 2.35 percent in 2013.

Both increases related to the health-care legislation will apply to about 1 million individuals who earn more than $200,000 annually and about 4 million couples who file jointly and make more than $250,000.

“No loopholes stick out,” said John Olivieri, a partner in the private clients group at the law firm White & Case in New York. “But you can take advantage of opportunities to reduce or eliminate the tax on investment returns.”

Preferential tax treatment for derivatives traders unlikely to end

The Obama administration’s proposal to end preferential tax treatment for derivatives traders — a move that critics say would raise the cost of trading — faces steep hurdles if it is ever to become law.

Among the obstacles standing in the way of the administration’s plan to increase taxes for derivatives professionals: a political stalemate in Congress, an influential lobby on Capitol Hill and the fact that the plan is not included in any financial reform legislation.

“I don’t think this has much of a chance at all — this is a very strong lobby and prior efforts have been roundly rejected,” said Anne Mathias, an analyst at Concept Capital.

The proposal would eliminate the treatment of booked profits for options market makers and futures professionals as capital gains, and instead subject them to much steeper ordinary income tax rates. The tax breaks were implemented when market makers were first required to mark their positions at year-end and pay taxes on booked profits.

The tax provision allows 60 percent of profits to be treated as long-term capital gains and the rest as short-term. That means that market makers pay a blended capital gains/ordinary tax rate of 23 percent of their income instead of up to 35 percent in 2010, or 39.6 percent as of 2011 if the proposal makes it into law.

Market makers are regulated firms that add liquidity on exchanges, taking the opposite side of customers’ buy and sell orders.

In the 2011 budget plan, the proposal would raise $2.6 billion over a decade. The president’s budget is just a blueprint; the Congress actually makes decisions about what is included.

The administration says the tax change is needed because “there is no reason to treat dealers in commodities, commodities derivatives dealers, dealers in securities and dealers in options differently from dealers in other types of property,” according to a summary of the proposal.

Critics of the proposal, including market-making firms and exchanges, argue that higher taxes would hurt the quality of the options markets and drive up costs for customers.

“With these higher taxes, (option) market makers would have to widen their bid/ask spreads to compensate for the loss in net income. Since the spread is wider, the cost will be passed on to the retail and institutional customers,” said Scott Morris, president of Morris Consulting LLC, a firm that works with the options industry.

The industry was pleased when a tax bill introduced by bipartisan senators last week did not contain it.

“From our perspective that is a positive thing. But any time there is a tax bill there is an opportunity to include this,” said Susan Milligan, senior vice president of government relations for the Options Clearing Corp (OCC), the world’s largest derivatives clearing organization by contract volume and open interest.

IN VOGUE, EASY TARGET?

Proposals to tax those working in the financial industry and the institutions themselves are in vogue in Washington.

“The idea that someone is perceived as getting away with something – that is what gets them excited in Washington,” said Roger Lorence, a tax attorney at Sadis Goldberg.

One perennial Wall Street tax issue is to eliminate the tax treatment enjoyed by hedge fund and private equity fund managers.

That proposal has more steam, with a bill passed in the U.S. House of Representatives several times, in addition to backing from Obama. But like more and more things in Washington these days, the idea hits a roadblock in the Senate.

Plans to alter the 60/40 rule are not included in any legislation in financial reform proposals circulating on Capitol Hill, nor does it appear to have any major lawmaker as a sponsor.

The OCC, an opponent of the proposed change in taxation for derivatives professionals, has its backers.

“We have support from several members of the (tax-writing) House Ways and Means Committee both on the Republican and Democratic side,” OCC’s Milligan said.

The use of the "Research Tax Credit"

"Large corporations have dominated the use of the research credit, with 549 corporations with receipts of $1 billion or more claiming over half of the $6 billion of net credit in 2005 (the latest year available). In 2005, the credit reduced the after-tax price of additional qualified research by an estimated 6.4 to 7.3 percent. This percentage measures the incentive intended to stimulate additional research.

The incentive to do new research (the marginal incentive) provided by the credit could be improved. Based on analysis of historical data and simulations using the corporate panel, GAO identified significant disparities in the incentives provided to different taxpayers with some taxpayers receiving no credit and others eligible for credits up to 13 percent of their incremental spending. Further, a substantial portion of credit dollars is a windfall for taxpayers, earned for spending they would have done anyway, instead of being used to support potentially beneficial new research. An important cause of this problem is that the base for the regular version of the credit is determined by research spending dating back to the 1980s. Taxpayers now have an “alternative simplified credit” option, but it provides larger windfalls to some taxpayers and lower incentives for new research. Problems with the credit’s design could be reduced by eliminating the regular credit and modifying the base of the alternative simplified credit to reduce windfalls.

Credit claims have been contentious, with disputes between IRS and taxpayers over what qualifies as research expenses and how to document expenses. Insufficient guidance has led to disputes over the definitions of internal use software, depreciable property, indirect supervision, and the start of commercial production. Also disputed is the documentation needed to support a claim, especially in cases affected by changes in the law years after expenses were recorded. Such disputes leave taxpayers uncertain about the amount of credit to be received, reducing the incentive.

Australia's future tax system

Australia plans to impose 40% tax on resource profits

Australia will impose a 40 percent tax on the profits of resource companies like BHP Billiton Ltd. and Rio Tinto Group to pay for infrastructure, retirement and company levy changes as part of the broadest overhaul of its tax system since the Second World War.

The government, commenting on Treasury Secretary Ken Henry’s 10-year tax plan, said the tax would start in 2012 and raise A$12 billion ($11.1 billion) in the first two years. The move to better tap into the nation’s mining boom, fueled by commodities demand from China and India, comes as Prime Minister Kevin Rudd prepares for an election later this year.

“This will use super profits on resources owned by all Australians,” Rudd told reporters in Canberra, saying he’s prepared for a backlash to the measures. “This will help convert Australia’s strong economic position today into enduring prosperity.”

The changes set up a potential clash between Rudd and resources companies that make up 9 percent of the economy and last week warned that a 40 percent levy and double taxation with state royalties would threaten $108 billion worth of planned investment.

“If implemented, these proposals seriously threaten Australia’s competitiveness, jeopardize future investments and will adversely impact the future wealth and standard of living of all Australians,” BHP’s Chief Executive Officer Marius Kloppers said in an e-mailed statement today. The company’s effective tax rate will increase to 57 percent from 2013 from 43 percent now on its Australian earnings, it said.

Taxation Arrangements] Australian Government, December 21, 2010

Australia to increase employer retirement contributions

May 2, 2010 - 3:39PM The federal government has promised average workers an extra $100,000 in retirement savings so long as its proposed resources tax gets up to pay for it.

Labor will increase the compulsory superannuation contribution employers have to cough up from 9 to 12 per cent from July 2013 to July 2019.

In the first two years the super guarantee (SG) will rise by 0.25 percentage points annually. Then it will increase by 0.5 percentage points a year.

The long lag time will allow employers ‘‘to take increases in SG contributions into account when negotiating future wage agreements’’, the Rudd government says.

Treasurer Wayne Swan said the reforms will boost the retirement incomes of 8.4 million Australians.

A 30-year-old on an average income will retire with an additional $108,000, he said.

A woman of the same age who has ‘‘an interrupted work pattern’’ for family or other reasons will pocket an extra $78,000 in super.

But there’s a catch. The Treasurer said the super changes were ‘‘dependent’’ on the successful implementation of a new ‘‘Resources Super Profits tax’’ which will target the earnings of mining companies.

Three other changes to super were announced on Sunday.

First, workers aged 70 to 74 will be eligible for compulsory super for the first time from July 2013. Currently employers don’t have to make a contribution for workers aged 70 and over.

The government estimates this change will benefit 33,000 people and help meet the challenge of an ageing population by encouraging older Australians to stay in the work force.

Second, low-income earners essentially won’t have their compulsory super contributions taxed.

The commonwealth will pay people earning up to $37,000 up to $500 annually to match the 15 per cent tax levied on their concessional contributions. The payments start in 2013/14.

Third, Australians aged over 50 with super balances below $500,000 will be allowed to continue to ‘‘catch up’’ on contributions by kicking in $50,000 a year extra.

This measure was due to expire in July 2012 but is now being ‘‘extended permanently’’.

Treasury Secretary Ken Henry’s report, which was released this afternoon, recommends concessions on super contributions should be distributed more equitably ‘‘by including employer superannuation contributions in an individual’s income and taxing them at marginal rates’’.

A uniform refundable offset would then be provided up to a cap and ‘‘the tax on superannuation contributions within the fund should be abolished’’.

The changes the government did announce will cost the commonwealth $2.4 billion over the next four years. Mr Swan said the changes were ‘‘the biggest reforms to superannuation since the introduction of compulsory superannuation in 1992’’.

‘‘Over the next 10 years, $85 billion will be added to Australia’s pool of superannuation savings,’’ the Treasurer said. ‘‘The government is determined to boost Australia’s retirement savings so that whenever the mining boom ends, Australians have got something real and enduring to show for it.’’

Pocket Guide to the Australian taxation system

Australia's Tax System Compared with the OECD

The analysis in this section combines the tax systems of all levels of government — national, state and local. Comparisons are provided with the tax systems of other OECD economies.

Tax burden

Australia’s tax-to-GDP ratio is low by international standards. In 2007 (Australia’s 2007-08 financial year), the latest year for which comparable international data are available, Australia had the equal eighth lowest tax burden of the OECD countries (Chart 1) and has typically ranked in the bottom third of countries since 1965.

  • In 2007, Australia’s tax-to-GDP ratio was 30.8 per cent — below the OECD average of 35.8 per cent.
  • Chart 2 shows Australia’s taxes by level of government over time. Over the period shown in Chart 2, the Australian Government’s total taxation revenue as a percentage of GDP averaged 23.3 per cent.

References


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