tax burden

Economix Blog: A Note on the ‘Reagan ’80s’

December 1, 2012 by NewsMaker Leave a Comment

Some readers of The New York Times – the version printed on trees – have noted that a headline on the front page of Friday’s paper emphasizes a different aspect of our analysis of tax trends than the accompanying chart. The headline says, “Complaints Aside, Most Face Lower Tax Burden Than in the Reagan ‘80s,” while the chart compares tax rates in 1980 and 2010. And as Greg Mankiw notes, President Ronald Reagan took office in 1981.

Both headline and chart are accurate, but there is an interesting difference.

We focused on a comparison with 1980 to capture the full extent of the changes since Reagan opened an era of cuts in federal taxation. As the article says:

Most Americans in 2010 paid far less in total taxes — federal, state and local — than they would have paid 30 years ago. According to an analysis by The New York Times, the combination of all income taxes, sales taxes and property taxes took a smaller share of their income than it took from households with the same inflation-adjusted income in 1980.

It is also true – and important — that reductions in federal taxation continued after Reagan left office. Indeed, those cuts have been large enough to outpace increases in state and local taxation. As the article also says, “Tax rates at most income levels were lower in 2010 than at any point during the 1980s.”

The difference between the two time frames is that while upper-income households have seen the largest percentage decline in the overall period since 1980, the rest of the population has seen the largest percentage declines in the years since Reagan’s presidency.

You can see these trends by income group, and year by year, in our interactive graphic.

For households making less than $25,000, taxes increased during the 1980s, then declined starting in the mid-1990s as both parties backed the expansion of government payments like the earned income tax credit.

Middle-income households did get a tax cut in 1981, but its value was steadily eroded by rising state and local taxes. Their taxes also began a fresh decline in the mid-1990s that continued unabated through 2010.

Upper-income households got the largest cuts in the 1980s, the largest increases in the 1990s, and the largest cuts in the 2000s.

There’s an important caveat to the front-page headline: For many upper-income households, average tax rates in 2010 were higher than at the ‘80s nadir — particularly the top income bracket, which includes 1 percent of households.

But average tax rates increased sharply for upper-income households in recent years not because of changes in tax policy but because a smaller share of earnings for those households came from investments, which are taxed at lower rates.

In 2007, before the recession, most upper-income households also paid a smaller share of income in taxes than comparable households during the “Reagan ’80s.”

Article source: http://economix.blogs.nytimes.com/2012/11/30/a-note-on-the-reagan-80s/?partner=rss&emc=rss

Filed Under: Economy News Tagged With: greg mankiw, income group, tax burden

DealBook: The Winners and Losers Under Romney’s Tax Plan

November 1, 2012 by NewsMaker Leave a Comment

Eric Gay/Associated PressThe Republican presidential candidate Mitt Romney has indicated that his plan is revenue neutral.

Tax reform always has its winners and losers. Mitt Romney’s proposed plan to lower tax rates and limit deductions is no different, but it takes some digging to sort it out.

Mr. Romney has indicated that the plan is revenue-neutral, raising as much revenue as current law. He has also said it is “distributionally neutral” — meaning that the rich, middle class and poor would all continue to bear the same aggregate tax burden as they do now.

The idea seems to be that lowering tax rates would spur economic growth, and the reduction in revenue from lowering rates would be at least partly offset by increased revenue through limitations on deductions, credits and exclusions.

In recent weeks, the focus has been on whether the math “works” in the sense of whether cutting deductions for the wealthy would actually generate enough revenue to finance the proposed rate cuts. The implication, based on a study by the Tax Policy Center, is that in order to remain revenue-neutral, the middle class would have to share the pain of limited deductions. That would effectively shift the tax burden from the rich to the middle class and violate the stated goal of distribution neutrality.

What has been missing from the conversation is a discussion of who wins and loses if, as Mr. Romney insists, the plan sticks to its goal of distribution neutrality.

Standard Deduction

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Distribution neutrality is a funny concept. Even if the plan is distributionally neutral, there still must be winners and losers. After all, if everyone paid exactly the same amount in taxes as before, then tax reform would not be reform: it would be the same as no change at all in the tax code.

Some people will pay a lot more and some will pay a lot less, even if the rich, middle class and poor each continue to pay the same amount in the aggregate. The fairness of the plan will depend on how finely calibrated each group is defined. Economists often group taxpayers by income quintiles, but a definition this broad places both middle-class homeowners and billionaires in the same group, even though ability to pay varies greatly.

Who are the likely winners and losers under the Romney plan? Most of the action will occur within this top quintile of taxpayers. These households make at least $100,000, and they make about $250,000 on average, before tax. In the aggregate, they pay most of the federal income tax burden.

Assume, as Mr. Romney suggested in one debate, that deductions, in total, would be limited to $25,000. The winners would be those who would enjoy the lower rates but do not take a lot of deductions. Their tax burden would shift onto heavy users of deductions.

And who is that? Let’s focus on three important tax breaks: the mortgage interest deduction, the charitable deduction and the deduction for state and local taxes. The pain would be concentrated in areas with a high cost of living like New York, New Jersey, Connecticut and California, where home prices and state and local taxes are high.

The mortgage interest deduction, under current law, is capped at a million dollars of mortgage debt. Under the Romney plan, even homeowners with a mortgage of $500,000 would quickly fill their “bucket” of deductions. Limiting the mortgage interest deduction is good tax policy, but it will also depress home prices at the high end and lead to substantial opposition from the real estate industry.

Now consider the charitable deduction. Under current law, the deduction is limited to 50 percent of one’s adjusted gross income — a limitation few people run up against. If total deductions are limited to $25,000, however, many people will use up that amount through the mortgage interest deduction, removing the tax incentive to donate.

Finally, consider the state and local tax deduction. The state and local tax deduction is an indirect subsidy to high-tax states like New York, New Jersey and California.

Allowing state and local taxes to be deducted from the federal return reduces the political pressure to keep state and local taxes low. Similarly, the exclusion of municipal bond interest, another tax break that is on the table, mainly benefits state and local governments, while investors pay an implicit tax in the form of accepting a lower interest rate.

The point is not to defend these tax breaks. Rather, it’s to emphasize that tax reform is easy to talk about and hard to do. For every unsympathetic group like insurance companies or oil and gas multinationals, there’s a charity like the Red Cross or the Salvation Army. And one voter’s loophole is another’s livelihood.

Even in advance of the election results, lobbyists are getting ready for action. The Chronicle of Philanthropy reports that some large nonprofits sent letters to President Obama and Mr. Romney last week urging them to maintain the charitable tax deduction as is. This grouping of nonprofits also announced “a gathering on Dec. 4 and 5 to bring hundreds of its members to Washington to tell members of Congress that any tax changes that led to decline in private giving would devastate nonprofits and the people they serve.”

From an academic perspective, there is much to like in the Romney plan, with its broader base and lower rates. But it is not a win for everyone. And history shows that those who would be made worse off have great success in persuading Congress to maintain the status quo.

Victor Fleischer is a professor at the University of Colorado Law School, where he teaches partnership tax, tax policy and deals. Twitter: @vicfleischer

Article source: http://dealbook.nytimes.com/2012/10/31/the-winners-and-losers-under-romneys-tax-plan/?partner=rss&emc=rss

Filed Under: Business News Tagged With: exclusions, math, tax burden

News Analysis: Why Americans Think the Tax Rate’s High, and Why They’re Wrong

January 20, 2012 by NewsMaker Leave a Comment

The truth is that most households probably pay a lower rate than Mr. Romney. It is impossible to know for sure, given that he has yet to release his tax return. What is clear, though, is that a large majority of American households — about two out of three — pays less than 15 percent of income to the federal government, through either income taxes or payroll taxes.

This disconnect between what we pay and what we think we pay is nothing less than one of the country’s biggest economic problems.

Many Americans see themselves as struggling under the weight of a heavy tax burden (partly for the understandable reason that wage growth has been so weak). Yet taxes in the United States are quite low today, compared with past years or those in other countries. Most important, American taxes are not sufficient to pay for the programs that many people want, like Medicare, Social Security, road construction and education subsidies.

What does this combination create? An enormous long-term budget deficit.

Together, all federal taxes equaled 14.4 percent of the nation’s economic output last year, the lowest level since 1950. Add state and local taxes, and the share nearly doubles, to about 27 percent, according to the Tax Policy Center in Washington — still lower than at almost any other point in the last 40 years.

As the economy recovers and incomes rise, tax payments will increase somewhat. But they will not keep pace with projected spending, in the form of Medicare, Medicaid and Social Security. And total taxes at current rates would still make up a smaller share of the economy than in virtually any other rich country — not just European nations but also Australia, Canada, Israel and New Zealand.

Obviously, tax increases are not the only way to solve the deficit. Spending cuts can, too. But so far, at least, many voters seem to prefer small, symbolic cuts, like those to foreign aid. Substantial cuts — be they the changes to Medicare that President Obama included in his health care bill or the Medicare overhaul that Republicans prefer — tend to be politically unpopular.

Since the late 1970s, just before the modern tax-cutting push began, total federal tax rates have fallen for every income group. The payroll tax has risen, but declines in the income tax have more than made up for those increases. Nearly half the population now pays no federal income tax.

All told, most households pay less than 15 percent of their income to the federal government because of tax breaks, like the exclusion for health insurance, and because marginal rates apply to only a small part of a taxpayer’s income. On the first $70,000 of a couple’s taxable income, the total federal income tax rate is only 13.8 percent.

That said, taxes have fallen the most for the very affluent. Mr. Romney and his father — George W. Romney, the former automobile executive, Michigan governor and presidential candidate — do a nice job of illustrating the change.

The elder Mr. Romney, who died in 1995, paid an average federal tax rate of 37 percent in the 12 years for which he released his tax returns, according to an analysis by Joseph J. Thorndike, a columnist for Tax Notes magazine. Mitt Romney’s tax rate has been far lower, thanks mostly to the decline in taxes on stocks and other investments. The top marginal tax rate on ordinary income has also fallen sharply.

And George Romney paid a lower tax rate than most affluent Americans in the 1950s and ’60s, mainly because of deductions for his large donations to the Mormon Church. Then, a typical household near the very top of the income distribution would have paid almost 50 percent of its income in direct federal taxes, research by the economists Emmanuel Saez and Thomas Piketty has shown.

In recent years, that number has been below 30 percent.

Besides the drop in tax rates, affluent households have benefited disproportionately from tax breaks and deductions. The mortgage interest deduction, widely considered a middle-class benefit, actually saves a typical middle-income household only about $200 a year, because so many families claim the standard deduction, rather than itemized ones. The average family in the top 1 percent saves more than $5,000 from the mortgage deduction.

Such breaks are probably one reason that so many people feel as if their own taxes are such a burden: they have a sense, and not incorrectly, that others are benefiting from tax breaks unavailable to them. “If we had a simpler tax code,” said Roberton Williams of the Tax Policy Center, “people might be more accepting of what they pay.”

The group for which tax rates have fallen the least is the upper middle class: those households earning between about $75,000 and $300,000 a year. Their tax rates have declined over the past few decades, but only by a couple of percentage points.

Of course, many of the people who talk publicly about taxes — economists, policy experts, journalists — happen to fall into this group, which may be yet another reason that the public debate does not always match reality.

Article source: http://feeds.nytimes.com/click.phdo?i=03786b85cd6c8008d9c35986ce220105

Filed Under: Economy News Tagged With: american households, medicare, tax burden

Bucks Blog: Where Do You Rank Among the 99 (or 1) Percent?

October 19, 2011 by NewsMaker Leave a Comment

Getty ImagesProtesters in Los Angeles.

Updated 12:14 p.m. to switch $846.4 trillion to billion. This is an error of the Kiplinger tool, and we’ve informed them of the miscalculation.

The persistent Occupy Wall Street movement has taken on the debate over rising income inequality, with its notion of 99 percent of the population being exploited by a wealthy 1 percent.

Doesn’t that make you a little bit curious, about where your income — and tax burden — places you, in comparison to the rest of your fellow citizens?

Kiplinger has a calculator feature that lets you enter your adjusted gross income (that’s Line 37 from your Form 1040 tax return, or Line 4 on the 1040EZ), and shows you where you fall.

To find out where you rank, try the tool.

I plugged in a hypothetical income of $50,000, and got this report:

So where do you rank, and were you surprised by the number?

Article source: http://feeds.nytimes.com/click.phdo?i=6c71770e88659ac8ec5ce0310cb2c767

Filed Under: Your Money Tagged With: population, tax burden, trillion

Where Pay for Chief Executives Tops the Company Tax Burden

August 31, 2011 by NewsMaker Leave a Comment

The companies — which include household names like eBay, Boeing, General Electric and Verizon — averaged $1.9 billion each in profits, according to the study by the Institute for Policy Studies, a liberal-leaning research group. But a variety of shelters, loopholes and tax reduction strategies allowed the companies to average more than $400 million each in tax benefits — which can be taken as a refund or used as write-off against earnings in future years.

The chief executives of those companies were paid an average of more than $16 million a year, the study found, a figure substantially higher than the $10.8 million average for all companies in the Standard Poor’s 500-stock index.

The financial data in the report was taken from the companies’ regulatory filings, which can differ from what is actually filed on a corporate tax return. Even in a year when a company claims an overall tax benefit, it may pay some cash taxes while accumulating credits that can be redeemed in future years. For instance, General Electric reported a federal tax benefit of more than $3 billion in 2010, but company officials said they still expected to pay a small amount of cash taxes.

The authors of the study, which examined the regulatory filings of the 100 companies with the best-paid chief executives, said that their findings suggested that current United States policy was rewarding tax avoidance rather than innovation.

“We have no evidence that C.E.O.’s are fashioning, with their executive leadership, more effective and efficient enterprises,” the study concluded. “On the other hand, ample evidence suggests that C.E.O.’s and their corporations are expending considerably more energy on avoiding taxes than perhaps ever before — at a time when the federal government desperately needs more revenue to maintain basic services for the American people.”

The study comes at a time when business leaders have been lobbying for a cut in corporate taxes and Congress and the Obama administration are considering an overhaul of the tax code to reduce the federal budget deficit.

Many business leaders say that the top corporate statutory rate of 35 percent, which is higher than any country except Japan, is hobbling the economy and making it difficult for domestic companies to compete with overseas rivals. A coalition led by high-technology companies and pharmaceutical manufacturers have been pushing for a “repatriation holiday,” which would let them bring as much as $1 trillion in foreign profits back to the United States at substantially reduced rates.

But the Obama administration has said it will consider lowering the corporate rate only if Congress agrees to eliminate enough loopholes and tax subsidies to pay for any drop in revenue. Many policy experts estimate that the United States could lower its corporate rate to the high 20s if it eliminated the maze of tax breaks that favor specific industries and investors.

The report found, however, that many of the nation’s largest and highly profitable companies paid far less than the statutory rate.

Verizon, which earned $11.9 billion in pretax United States profits, received a federal tax refund of $705 million. The company’s chief executive, Ivan Seidenberg, meanwhile, received $18.1 million in compensation. The online retailer eBay reported pretax profits of $848 million and received a $113 million federal refund. John Donahoe, eBay’s chief executive, collected a compensation package worth $12.4 million, the study said.

Verizon officials disputed the report. Robert Varretoni, a company spokesman , said that the $18 million in compensation for Mr. Seidenberg was a target, which will only be paid in full if the company stock rises when his bonus is fully vested in three years. Mr. Varretoni also said it was misleading of the report to cite Verizon’s tax benefit without noting that the company also incurred billions of dollars in deferred taxes which “will be paid over time.”

“The fact is, Verizon fully complies with all tax laws and pays its fair share of taxes,” Mr. Varretoni said.

Chaz Bickers, a Boeing spokesman, said that the company’s taxes have declined in recent years because it has made huge investments in United States manufacturing.

Mr. Bickers said that the company also paid hundreds of millions in cash taxes and incurred an additional $1 billion in deferred taxes that it will pay at some date in the future.

“We pay our taxes and we have added 5,000 more U.S. manufacturing jobs that were incentivized by tax benefits,” he said.While the accounting strategies used to lower taxes varied from company to company, the report found that 18 of the 25 corporations had offshore subsidiaries, which can be used to shelter income.

To discourage companies from gaming the tax system, the report called for tighter rules on offshore tax havens and new restrictions on write-offs for executive compensation.

“Instead of sharing responsibility for addressing our nation’s fiscal challenges,” said Chuck Collins, a senior scholar at the institute who co-wrote the study, “corporations are rewarding C.E.O.’s for aggressive tax avoidance.”

Article source: http://feeds.nytimes.com/click.phdo?i=08d4cdd4d0f4702891dea301f3338c37

Filed Under: Business News Tagged With: chief executives, household names, tax burden