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Ryan Ellis
Tax Policy Director Americans for Tax Reform 1920 L St., NW Ste. 200 Washington, DC 20036 202-785-0266
rellis@atr.org
Pardon Brevity--Am on a Blackberry
Significant items for shareholders:
More tomorrow on energy, health care, and more.
Hat tip to James Pethokoukis at the Capital Commerce blog.
1) The United States has the second-highest corporate tax rate in the world, just shy of 40 percent when you combine state and federal taxes.
2) The U.S corporate tax rate is 50 percent higher than the average for Organization for Economic Coordination and Development member states.
3) Japan, the country with the highest corporate tax rate, is thinking about cutting its rate.
4) Some 70 percent of the corporate tax burden is borne by workers in the form of lower wages and fewer high-paying jobs.
5) China just cut its corporate tax rate from 33 percent to 25 percent.
6) Fewer than 4 percent of large U.S companies paid no corporate income tax in 2005, according to a recent study.
7) A new OECD study found that corporate taxes are the most damaging kind of tax.
8) Corporate taxes lead to double taxation. Profits are taxed a first time at the company level and then again as dividends.
9) OECD data shows that nine of the 30 OECD member nations, including Canada, Germany, New Zealand, Spain, the United Kingdom, Italy, Switzerland, the Czech Republic, and Iceland, have lower corporate tax rates in 2008 than they did in 2007.
10) In 2007, 20 non-OECD countries, including Israel, Bulgaria, and Turkey, cut their corporate income taxes.
11) The OECD has found that corporate taxes are most onerous for dynamic, high-growth companies that are challenging more established firms.
12) The OECD recommends that countries move away from corporate and personal income taxes toward consumption taxes.
13) An EU study of 50,000 companies found that a 1 percent increase in marginal corporate income tax rates leads to a 0.92 percent decrease in real wages.
14) It's bipartisan. Among people who have called either for a reduction in or elimination of corporate taxes are John McCain, Charlie Rangel, Jimmy Carter, Ronald Reagan, Milton Friedman, Lester Thurow.
15) It's a hidden tax: Even workers get hit by it, but they don't know it because they don't directly pay the tax.
16) Some 30 percent of the corporate tax burden is borne by shareholders.
17) Many companies pay more in accountants' fees to file their taxes than they do in taxes.
18) For every dollar the government collects in revenue, the corporate tax may actually cost the government $1 in revenue through slower economic growth.
19) Eliminating corporate taxes would help offset the burden of environmental taxes from cap-and-auction plans.
20) Next year, 2009, will be the 100th anniversary of the U.S. corporate tax. What better time to eliminate it?
Stay tuned for updates on this during the week. I'm monitoring the tax section in particular, and will report on any developments.
Good article by James Pethokloukis in US News and World Report on Obama's cap gains flip-flopping. The ASA chronicle on this can be found here. Here's a snippett from the US News article:
...we might conclude that by waiting until right before the Democratic National Convention to reveal that he is going with the lower [i.e., hiking the rate from 15 percent to 20 percent instead of 28 percent] cap gains rate (as well as a smaller proposed increase in payroll taxes) means Obama is tacking to the center for the general. That's a place where voters care more about taxes than in the Democratic primaries and might better understand that raising taxes when the economy is weak is right out of the "How to Turn a Downturn into a Depression" handbook. So Obama moves to the center, but voters might wonder if a Pelosi/Reid-led Congress will let him stay there if he occupies the White House in 2009.
Today must be inflation day in the blogosphere.
The WSJ has a bizarre article about monetizing the national debt through inflating the money supply.
Another WSJ article talks about how inflation is affecting real wages.
Finally, Carpe Diem has a whole series of posts on inflation.
CBO yesterday came out with their updated analysis of the Social Security system's demise (cash flow deficit 2019, system blows up in 2049). Of course, the fact that younger workers get an annual real rate of return of 1% or less on their FICA taxes is the much bigger deal.
In a related vein, Glenn Hubbard makes the obvious point that raising taxes to "pay for" these entitlement programs will wreck the economy:
Simple arithmetic suggests that with this much more of GDP eaten up by the two programs, all federal taxes on average would have to be raised by more than 50% to make up the shortfall. Research by economists Eric Engen of the Federal Reserve Board and Jonathan Skinner of Dartmouth suggests that such a tax increase would reduce long-term GDP growth by about a full percentage point. This is no small matter: Think of it as reversing all of the gains in our long-term growth rate from the productivity boom of the past 15 years.
Three quick items of interest as we slog through the summer again today:
A couple of noteworthy articles today in the news:
Paul Howard has a good overview of some of the problems facing our health care system in NRO. His take on the tax treatment is interesting:
Imagine charging low-income Americans more for health insurance. Outraged yet? We already do that. The tax deduction for employer-provided health insurance favors higher-income workers, who get a bigger deduction and are more likely to work at firms that offer insurance. Low-income Americans working at jobs that don’t offer insurance end up paying much more for their insurance out of pocket — if they can even afford it. The tax penalty against individually purchased health insurance (30 percent or more, depending on income) is regressive and unfair.
A tax deduction or tax credit for everyone who purchases their own health plans would be much more equitable, giving millions of uninsured access to insurance. A risk-adjusted voucher for our poorest, sickest patients (think cancer) would allow them to buy into insurance markets and encourage insurers to seek them out. Employers, unions, and other civic groups could act as buying clubs for their members — helping them navigate the system and find the best values.
Also, a bizarre article by Thomas Frank in the WSJ, where he laments that the new Friedman Institute at the University of Chicago will advocate...get this...free market public policy. I'm shocked! This snippet below explains the very rational behavior of the donors:
"When you think about the big battle between socialism and free markets," mused Edward Snyder, dean of Chicago's Graduate School of Business, in a Bloomberg interview, Friedman "led the charge on behalf of the University of Chicago. There are a lot of people who will give back because of his name and effort and legacy."
Kudos to AT&T for defending consumer-driven health care (which they offer to employees) in general and health savings accounts (HSAs) in particular:
The emergence of consumer-driven health care plans, and the health savings accounts available to participants in these plans, could play a key role in reining in runaway health care costs while expanding preventive care options.
Health savings accounts are an important corollary to consumer-driven health care plans. With a health savings account, the employee gets a tax break to fund medical expenses.
We believe that our plan is paying off in several ways. Our employees are taking a closer look at managing their health, and we're keeping a cap on our health care costs. We hope our experience can serve as a positive guide for other companies considering this path for their employees.
Peter Ferrara has a good analysis of the Obama tax increase plan in the WSJ today. Here's a snippet:
Barack Obama's tax plan is the opposite of supply-side economics. He proposes to raise marginal rates for just about every federal tax. He also proposes a raft of tax credits that taxpayers can receive if they engage in various government-specified activities...The latest Congressional Budget Office data shows the bottom 40% of income earners already pays no income taxes. Indeed, they receive a net payment from the federal income tax system -- meaning from the taxpayers -- equal to 3.8% of all federal income taxes, because of the refundable tax credits under current law. The middle 20% of income earners, the true middle class, pays 4.4% of federal income taxes...Overall, the bottom 60% of income earners pay less than 1% of federal income taxes on net. When "tax credits" primarily go to this group in the form of checks from the government (rather than a reduction in their tax burden) it is simply an abuse of the language to call the spending a tax cut...Consequently, to say, as the campaign does say, that the candidate's tax plan is a tax cut on net -- and that it would limit taxes to 18.2% of GDP -- is grossly misleading. The Obama tax plan would sharply increase real taxes. It also would come nowhere near to paying for the massive increases in federal spending he has proposed, including the spending that is disguised in the form of refundable tax credits.
ASA today, along with sixteen other free market organizations, released a letter calling on the Department of Labor to stop unions from engaging in terrorist tactics at company shareholder meetings. Here's a snippett:
Unions often invest in businesses using their general funds, empowering them to introduce shareholder resolutions. To gain support for these resolutions, they routinely exercise influence over a much larger pool of shares held in their pension funds. Most pension funds delegate proxy voting authority to investment managers.
A couple of good reads I wanted to recommend this morning, both from the new-look Washington Times:
Today is the 72nd birthday of Social Security. For shareholders, it's a bittersweet day. While we're happy that our older relatives are getting taken care of, we resent paying into a system which will likely leave us with pennies on the dollar.
Imagine paying 12.4% of your wages and self-employment income (up to about $100,000 of such income) into a system that won't be there for you when you retire. Imagine the opportunity cost of what could be done with that $12,400 or so in annual contributions. That's like doubling your 401(k) savings.
So, happy birthday, Social Security. But do you have to eat our lunch with your cake?
I'll give the Obama people credit for honesty. They've come out with specifics on their shareholder tax hike. Austin Goolsbee and Jason Furman have an op-ed in the WSJ. The Obama campaign website has a new section. Here are the details:
Wearing my ATR hat, I got a letter to the editor printed in the Washington Post today. Here's the link and the content:
Howard Kurtz wrote an analysis ["McCain Paints Obama as a Tax Hound," Aug. 9] that dismissed claims, made in a campaign ad for Sen. John McCain, that Sen. Barack Obama would raise taxes on small business.
According to the latest Internal Revenue Service data, $706 billion of pass-through business income was reported in 2006. Of this, two-thirds was earned in households making more than $250,000 -- households on which Obama has said he will raise taxes.
If raising the tax rate on two-thirds of small-business income isn't a tax hike on small business, what is?
The tax rate on two-thirds of small-business income would skyrocket under the Obama plan. The current tax rate on this income is 37.9 percent. The Obama plan, thanks to uncapping the Social Security tax base, would shoot this small-business rate all the way up to a Carter-level 54.9 percent.
RYAN ELLIS
Tax Policy Director
Americans for Tax Reform
You might have seen the latest budget deficit numbers which show a $100 billion budget deficit in July. The most interesting snippet of the story is the following, though:
Year-to-date outlays were $2.47 trillion, up 8% over the same period, and revenues were $2.09 trillion, 1% lower...
So revenues are basically flat (down one percent, which is pretty darned impressive given the economic environment). The problem isn't there. The problem is that the government continues to spend at a rate well in excess of inflation, population growth, wages, GDP--whatever.
It's the spending, stupid.
You might have heard about the GAO study that came out yesterday which said that 23% of large U.S. corporations paid no income tax from 2001 to today. A few thoughts on this:
The Democrats have leaked their draft tax plank. Tax Prof Blog has it up. Here's some relevant portions:
For families making more than $250,000, we’ll ask them to give back a portion of the Bush tax cuts to invest in health care and other key priorities
Translation: If you make more than $250,000, your top marginal tax rate will rise to 36% or 39.6%. Your capital gains rate will rise from 15% to 20% (or 28%). Your dividends rate will rise from 15% to 39.6%
We recognize that Social Security is not in crisis and we should do everything we can to strengthen this vital program, including asking those making over $250,000 to pay a bit more
Translation: If you make more than $250,000, your top marginal tax rate on wage and self employment income will rise to 51.3% or 54.9%, depending on your bracket. You're probably paying 35.9% or 37.9% today, so good luck with that.
Roth CPA has a good story on how Chicagoans are no longer buying bottled water at the same levels as before. Is this a newfound love for tap water? People addicted to Diet Coke?
Nope--it's taxes.
Maybe hometown boy Obama ought to think about this when he's considering hiking the capital gains tax to 28% and the dividends tax to 40%.
Maryland this year doubled its cigarette tax from $1 to $2 a pack. So tax revenues doubled as people sheepishly ignored incentives, right?
If you said, "wrong," you must have half a brain.
In fact, cigarette sales are down 25% in Maryland. Hmm...if you change tax rates, people change behavior. They might seek out other jurisdictions. They may even stop producing the activity that generates the tax.
If some of that sounds familiar, it should be--it's called the Laffer Curve.
Austin Goolsbee of the Obama campaign said yesterday that new regulations (and, therefore, more costs that reduce capital for shareholders) are actually good for Wall Street. If you believe that, you also might believe that Obama's 28% capital gains rate and 40% dividends rate will be great for your portfolio.
According to a new study by Information Strategies, Inc., the number of HSA covered lives will double from 6 million in January 2008 to 12 million in January 2009.
That would represent a market penetration of about 7% (the market being defined as under-65 private health insurance enrollment). Put another way, by January of next year 1 out of 14 people in America with private health insurance coverage will have an HSA.
Comparison data from January 2008 can be found at AHIP.
Some interesting nuggets from the latest Deloitte 401(k) survey:
In short, the Pension Protection Act is doing its job. As auto-enrollment becomes the norm, plan participation rates should approach 90% or so.
You've read it before, but it bears repeating (this time by Jack Kemp):
Then you should definitely vote for Obama.
I had a chance today to attend the American Spectator/ATR Conservative Newsmaker breakfast on the House side. We heard from Congressmen Mike Pence (R-IN) and others.
Later, all the bloggers and a couple of hundred tourists packed the House floor to hear a dozen Congressmen give speeches about bringing the House back in session to vote on H.R. 6566, the "American Energy Act."
Meanwhile, the WSJ lampoons the "Gang of Ten" (including 5 GOP senators) for pushing a left-wing energy bill.
The headline today is that initial unemployment claims hit a six-year high of 455,000. In the USA Today coverage, though, this little nuggett is buried:
The latest snapshot of layoff filings is worse than analysts expected. Economists were expecting claims to drop to around 430,000.
The new layoff figures were distorted by an outreach program to notify people that they could qualify for additional benefits under a new law.
When people went to state claims offices to apply for extended unemployment benefits, state officials discovered that some were eligible — but had not filed — for their initial unemployment benefits, a Labor Department analyst said. That accounted for some of last week's increase, he said.
So, if you fund more unemployment benefits, you get more people claiming them. Hardly a surprise. This report seems to indicate that about 25,000 people are now on the unemployment rolls who otherwise would be finding a job. Further evidence that the whole concept of "umemployment insurance" is dubious at best and stupid at worst.
There's an interesting piece in SmartMoney on the Department of Labor's 401(k) fee disclosure rules getting rolled out.
My hunch is that this is something industry insiders, politicians, and the financial press care about more than your typical 401(k) investor. How can the auto-provisions of the Pension Protection Act be so necessary (since they assume a general neglect in retirement planning), and at the same time there be so many people clamoring to see an annual fee statement?
The answer is that the two worldviews are mutually incompatible. Furthermore, we know the PPA worldview is the correct one. According to internal Fidelity research obtained by ASA, low-income worker participation in 401(k) plans goes from 60% to 90% when auto-features are introduced.
So what's the interest of those wanting to increase disclosure? For the politicians, a lot has to do with the big lie that defined benefit pensions are cheaper and more safe than defined contribution pensions. For many reasons, this is false. But there you have it.
Larry Kudlow has a good analysis of the "guerrilla Congress" and "drill now":
As Sen. John McCain and the Republican leadership nationalize the drill, drill, drill message, the Republican party might conceivably be riding a summer political rally. The question of offshore drilling, along with expanded domestic energy production, has suddenly become the biggest political and economic wedge issue of this election. Is there a Republican tsunami in the making?
Richard Rahn has a piece on why a tax increase isn't necessary to solve our fiscal challenges:
Even though income tax rates by the end of the Reagan administration (1988) were less than half the rates of 1968, tax revenue as a percentage of GDP was actually a bit higher. Budget deficits have averaged about 3 percent of GDP for the last 40 years, and the government debt as a percentage of GDP (approximately 37 percent) is close to its historical average for the last half-century. As the numbers show, those who say disaster is upon us and we must increase taxes are just plain wrong!
I'm presenting this morning at the Wednesday Meeting on a joint letter ASA is organizing to be sent to the Department of Labor. It has to do with unions hijacking the pension funds they manage in order to play political games. Needless to say, this doesn't help the people dependent on these pensions, and the shenanigans hurt overall shareholder wealth for the rest of us.
If you belong to an organization that can sign onto this letter, please let me know.
Text after the jump.
Continue reading "Presenting at Wednesday Meeting
On "Shareholder Terrorism" Union Tactics" »
John Goodman of NCPA has come out with a new idea: the "universal health savings account (HSA)." The concept is to combine the best features of the flexible spending account (FSA), health savings account (HSA), and health reimbursement arrangement (HRA). Each has upsides and downsides:
The "universal HSA" would be portable, be able to accumulate assets (as current HSAs can), but could be paired with any type of health insurance plan (not just a high-deductible one).
There's a tension between those who want to use HSAs as the carrot to get people to adopt the stick of the high deductibe on the one hand, and those who want to allow almost anyone to have an HSA (besides Goodman, the "large HSA" idea at Cato comes to mind). Honest disagreement, but interesting nonetheless.
The American Academy of Actuaries yesterday came out in support of raising the Social Security normal retirement age up from 67 to as high as 70.
While this may help shore up "the system," it makes Social Security a worse deal for younger workers. A median-income 25 year old today can expect a real rate of return on their Social Security taxes of less than 1% annually. Workers and children younger than that can actually expect a negative rate of return.
Raising the retirement age will worsen this rate of return for younger workers, pushing more of them deeper into negative territory. They'd literally be better off putting their FICA taxes underneath a mattress.
A couple of commendable posts to read today:
Here's Michael Boskin's take (subscription required). After crunching the numbers his way, he comes up with a labor tax rate of 62.3%, and an investment tax rate of 58%. Both of these are inclusive of the 10.3% California income tax.
Obama has released an ad calling for a new "windfall profits tax" on oil companies. He'd use the money to give a gasoline welfare check of $1000 to everyone.
Not sure why people accuse him of being a demagogue (insert sarcasm font here).
What he and his supporters fail to see is that taxing oil companies means (according to CBO) that wages will go down to pay for $0.60 on the new tax dollar, and capital gains and dividends will go down to pay $0.40 on the tax dollar. People might get their $1000, but it will come at the expense of their paycheck and their 401(k).
In a good news/bad news thing, the Department of Labor today announced that the unemployment rate ticked up from 5.5% to 5.7%.
The bad news is that the higher rate (and the July shedding of 51,000 jobs) is a continuing sign of economic weakness.
The good news is that this is still an historically low rate (anything under 6% is considered good). Also, the unemployment rate going up is usually a lagging indicator of economic weakness--meaning we might be almost out of the woods.
Obama today called for a tax increase on energy companies. Since corporations don't pay income taxes--people do--this is actually a tax increase on shareholders and company employees. A good rule of thumb is that 60% of every corporate tax hike results in lower wages, and 40% results in lower capital gains and dividends.
Also, how exactly does this help decrease gas prices?
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