"Tax Facts." By James D. Agresti. Just Facts, October 15, 2012. Revised 4/5/13. http://www.justfacts.com/taxes.asp

» This research contains detailed facts about taxes. For basic facts, click here. » Click on the footnote numbers for meticulous documentation of each fact. » Quick click to: • Overview • Distribution of the Tax Burden • Individual Income Taxes • Social Insurance Taxes • Corporate Income Taxes • Capital gains, dividends, and interest • Preferences • Alternative Minimum Tax • Bracket Creep • Compliance • Economic Effects • Excise and Sales Taxes • Property Taxes • Estate and Gift Taxes • Hidden Taxes • Politics

 

Overview

* A "tax" is defined by the Collins English Dictionary as a "compulsory financial contribution imposed by a government to raise revenue…."[1]

* In 2011, federal, state and local governments collected a combined total of $3.77 trillion in taxes or an average of $31,774 for every household in the U.S.[2]

* Between 1929 and 2011, the portion of the U.S. economy collected in federal, state and local taxes has ranged from 10% to 29%, with the median being 25% and the average 24%. In 2011, the figure was 25%:

[3]

* In federal fiscal year 2011 (October 1, 2010 to September 30, 2011), the federal government collected $2.30 trillion in revenues, which were comprised of 47% individual income taxes, 36% social insurance taxes, 8% corporate income taxes, 3% excise taxes, 1% custom duties, 0.3% estate and gift taxes, and 4% miscellaneous receipts.[4]

* In 2011, state and local governments collected $1.38 trillion in taxes, which were comprised of 33% sales taxes, 32% property taxes, 21% individual income taxes, 3% corporate income taxes, and 1% social insurance taxes.[5]

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* Per the U.S. Government Accountability Office, when government spends more than it collects in revenues, the resulting debt is "borne by tomorrow's workers and taxpayers." This burden can manifest in the form of higher taxes, reduced government benefits, decreased economic growth, inflation, or combinations of such results.[6] [7] [8] [9]

* Since 2009, government spending at all levels has been consuming more of the nation's economy than ever recorded in the history of the U.S., including World War II. In 2011, the gap between federal, state and local government revenues and spending was $1.34 trillion or an average of $11,286 for every household in the U.S.:

[10]

* In addition to government debts, explicit and implicit government obligations such as public employee pensions and Social Security/Medicare benefits also constitute a burden on future taxpayers.[11]

* At the close of the federal government's 2012 fiscal year, the federal government had $67.7 trillion in debts, liabilities, and unfinanced obligations for current Social Security and Medicare participants. This equates to $215,311 for every person living in the U.S. or $559,331 per household.[12]

 

Distribution of the Tax Burden

* Tax burdens are shaped by a combination of public laws and market forces. Lawmakers dictate who must remit taxes, but the final burden is determined by how people alter their actions in response to these taxes.[13] [14] [15] Per the textbook Public Finance:

* Per the director of the Congressional Budget Office (CBO):

* To calculate tax burdens, CBO uses the following assumptions/simplifications:

• "Households generally bear the economic cost, or burden, of the taxes that they pay themselves, such as individual income taxes and employees' share of payroll taxes."[18] [19]

• "[T]he economic cost of excise taxes falls on households according to their consumption of taxed goods (such as tobacco and alcohol)."[20] [21] [22]

• "In the judgment of CBO and most economists, the employers' share of payroll taxes is passed on to employees in the form of lower wages."[23] [24] [25] [26] [27]

• "Far less consensus exists about how to allocate corporate income taxes," but CBO estimates that 75% is borne by owners/stockholders, and 25% falls on workers.[28] [29] [30]

* Per CBO data, the effective federal tax burdens for various income groups are as follows:

* Data from the graphs above:

* Per CBO data, the effective federal tax rates for various income groups have varied over time as follows:

* CBO does not include state and local taxes in its analysis of effective tax rates "because of the difficulty of estimating them for individual households."[34] Just Facts has not found a reliable analysis of the distribution of state and local taxes (details in footnote).[35]

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* The overall federal tax burden is progressive, which means that overall tax rates generally rise with income, but this is not the case for all types of federal taxes. Excise taxes, for example, fall more heavily on lower-income households.[36] [37] CBO's breakdown of effective federal tax rates is as follows:

[40]

* In a 2005 New York Times article, reporter David Cay Johnston wrote that "the 400 taxpayers with the highest incomes … now pay income, Medicare and Social Security taxes amounting to virtually the same percentage of their incomes as people making $50,000 to $75,000."[41] This article failed to account for the burden of corporate income taxes, which fall more heavily on upper-income households.[42]

* In a 2012 Fox News article entitled "Republicans dispute Obama's 'fair share' claims, say top earners already pay enough," reporter Jim Angle wrote that "the top 1 percent of earners take home 16.9 percent of the nation's total income, but pay 36.7 percent of the nation's income taxes."[43] This article failed to account for the burden of social insurance taxes, which fall more heavily on lower-income households.[44]

* In two columns published by the New York Times in 2012, James B. Stewart, a Pulitzer Prize-winning professor of journalism at Columbia University,[45] wrote:

* Both of these columns failed to account for the burden of corporate income taxes, which fall more heavily on upper-income households.[48]

* Based upon Mitt Romney's 2010 federal tax return, the following organizations published articles claiming that Romney pays a lower federal tax rate than most Americans: PolitiFact, FactCheck.org, CBS News, and Agence France-Presse.[49] [50] [51] [52] All of these articles failed to account for the burden of corporate income taxes, which fall more heavily on upper-income households.[53] Both PolitiFact and FactCheck.org also:

• used the same primary source (a single-page report published by the Tax Policy Center) to determine a middle-class tax burden while ignoring the following data in the report: the top-earning 0.1% of taxpayers paid 10.7% of their income in corporate income taxes versus 0.6% for the middle-class.[54] [55] [56]

• included the burden of employer payroll taxes in their calculation of a middle-class tax burden, although these taxes (like corporate income taxes) are not remitted by employees but by employers.[57] [58] [59]

• determined a middle-class tax burden by using adjusted gross income as the denominator for their calculation,[60] [61] [62] even though the source they cite (the Tax Policy Center) states that adjusted gross income

* Just Facts and two CPAs from Ceterus (a nationwide accounting firm) conducted analyses of Romney's 2010 federal tax return that accounted for all measurable sources of income and federal taxes. The analyses found:

• "The complexities of the U.S. tax code make it practically impossible to determine Romney's exact tax burden."

• Based upon simplifying estimates and CBO's methodology for allocating the burden of corporate income taxes, Romney's federal tax burden was 23.3%, which is about twice that of CBO's latest (2009) estimate for middle-income Americans.

• Based upon simplifying estimates and a wide range of academic opinions about the burden of corporate income taxes, Romney's tax burden was 18.3% to 26.0%, which is 1.6 to 2.3 times higher than CBO's latest (2009) estimate for middle-income Americans.[65] [66]

* An Excel spreadsheet detailing the calculations of Romney's tax burden is available here.

* In August 2011, the New York Times published an op-ed by billionaire investor Warren Buffett, who wrote:

* Buffett's tax rate comparison fails to account for the burden of corporate income taxes, which fall more heavily on upper-income households (see above).

* Buffett's tax rate comparison uses "taxable income" as the denominator for his tax burden calculations. Per the book Federal Taxation, using "taxable income" to calculate tax burdens is a "bit misleading" and says "little about the true impact of a tax on the taxpayer."[68] Per a Congressional Research Service report on the "Buffett Rule":

* In September 2011 (the month after the Times published Buffett's op-ed), the Obama administration released a budget plan calling for tax reform that would:

* Per CBO's latest (2009) estimates of federal tax burdens, households in the middle 20% of the U.S. income distribution paid an effective tax rate of 11.1%, as compared to 28.9% for the top 1% of income earners.[71]

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* In 2009, 19,551 individuals with incomes over $200,000 paid no federal individual income taxes (this does not include corporate income taxes). In 61% of these cases, the primary reason was because they had earned interest from tax-exempt bonds issued by state and local governments.[72] These bonds are called "municipal bonds" or "munis," and they are a principal means by which wealthy investors limit their federal income taxes.[73] [74]

* Per the CBO:

* Per the IRS:

 

Individual Income Taxes

* In 2011, income taxes paid by individuals (as opposed to corporations) comprised 47% of the taxes collected by the federal government.[78]

* Federal individual income taxes are typically allocated to the general fund of the U.S. Treasury, which means that these taxes are not earmarked for specific programs and can be used for any legitimate purpose of government.[79] [80]

* Federal individual income tax liabilities are calculated in the following manner:

1) Determine gross income Taxpayers tally their gross income, which by law, includes "income from whatever source derived" with several exceptions, such as interest from tax-free municipal bonds, life insurance death payments, and employer-provided benefits such as health insurance and pension contributions (more detail in footnotes).[81] [82] [83] [84]

2) Determine adjusted gross income Gross income is then reduced by certain deductions to arrive at an adjusted gross income (AGI). These deductions include items such as interest on student loans, business expenses, and alimony payments (more detail in footnotes).[85] [86]

3) Determine taxable income Adjusted gross income is then reduced by certain deductions to arrive at a taxable income. These deductions can be standard deductions based upon the number of family members that a taxpayer supports, or they can be itemized deductions such as state and local income taxes, home mortgage interest, and charitable contributions. Many of these deductions phase out for taxpayers with higher incomes and thus don't benefit these individuals (more detail in footnotes).[87] [88] [89]

4) Determine preliminary tax liability Taxable income is then multiplied by graduated rates that rise with income to determine a preliminary tax liability. There are four different sets of rates that apply to the following categories of tax filers: single individuals, heads of household, married filing jointly, and married filing separately.[90] For example, in 2012, the tax rates for single individuals were:

• 10% on their first $8,700 in taxable income,

• plus 15% on the next $26,650 in taxable income,

• plus 25% on the next $50,300,

• plus 28% on the next $93,000,

• plus 33% on the next $209,700,

• plus 35% on all income thereafter (more detail in footnotes).[91]

5) Determine regular tax liability Preliminary tax liability is then reduced by certain tax credits that decrease taxes on a dollar-for-dollar basis to determine a regular tax liability. Some of the most commonly used tax credits are the child tax credit, education tax credit, and earned-income tax credit. Some tax credits are refundable, and low-income households with tax credits that exceed their income tax liabilities receive the difference as cash payments from the federal government. Many of these tax credits phase out for taxpayers with higher incomes and thus don't benefit these individuals.[92] [93] [94] [95] [96]

6) Determine alternative minimum tax liability After regular income tax liability is calculated, tax filers must determine if their alternative minimum tax liability exceeds their regular income tax liability, and if it does, pay the higher of the two liabilities (for more detail, see alternative minimum tax).

* Federal individual income taxes also include taxes on capital gains and dividends,[97] which are addressed below.

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* When the modern federal individual income tax was instituted in 1913,[98] the bottom tax rate was 1%, and the top rate was 7%. Since then, the bottom rate has been as high as 23% (in 1944-1945), and the top rate has been as high as 94% (in 1944-1945).[99] [100] In 2012, the bottom rate was 15%, and the top rate was 35%.[101]

[102]

* From 1950-2011, the top federal individual income tax rate varied from 92% (in 1952-1953) to 28% (in 1988-1990), and income tax receipts (as a portion of gross domestic product) varied from 5.9% (in 1950) to 10.0% (in 2000). Over this period, these lower and higher income tax rates often do not correspond with lower and higher income tax collections:

[103]

* In 2011, individual income taxes comprised 21% of the taxes collected by state and local governments.[104]

* As of January 1, 2012, the states have individual income tax rates that vary from a top rate of 11% in Hawaii to 0% in seven states that don't have such a tax (Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming).[105]

* In 2011, 4,943 counties, cities, townships, and school districts in 17 states levied individual income taxes (more detail in footnote).[106]

* In 2009, the portion of state and local tax collections that were comprised of individual income taxes varied from a high of 41.4% in Oregon, to a median of 23.5% in Colorado and Iowa, to a low of 0% in Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming.[107]

Social Insurance Taxes

* Social insurance taxes, which are also known as "payroll taxes" or "employment taxes," are taxes that are levied specifically for Social Security, Medicare hospital insurance, unemployment insurance, and several smaller healthcare and income security programs.[108] [109] [110] [111]

* In 2011, social insurance taxes comprised 36% of the taxes collected by the federal government and 1% of the taxes collected by state and local governments.[112] [113]

* Employees and employers both pay social insurance taxes, but payroll taxes levied on employers are predominately borne by employees in the form of reduced wages."[114] [115] [116] [117] [118] (For more detail, see distribution of the tax burden).

* For all income groups except the top quintile (20%) of income earners, the burden of social insurance taxes is greater than the burden of individual income taxes.[119]

* In 2011, 99% of federal social insurance taxes were levied for three programs: Social Security, Medicare hospital insurance, and unemployment insurance.[120]

* Government began collecting social insurance taxes for unemployment insurance in 1936, Social Security in 1937, and Medicare hospital insurance in 1966. Combined payroll taxes for these programs have ranged from 0.2% of gross domestic product (GDP) in 1936 to 6.7% in 1998-2001:

[121]

* In 2011, Social Security payroll taxes accounted for 69% of federal social insurance taxes.[122]

* Social Security's baseline payroll tax rate (employee and employer combined) is 12.4%. In 2010 and 2011, the 111th and 112th Congresses and Democratic President Barack Obama passed three laws that temporarily decreased this tax during 2011 and 2012 by two percentage points (from 12.4% to 10.4%). These laws require that monies equivalent to the decreased payroll taxes be transferred to the Social Security program from the general fund of the U.S. Treasury, which is funded by individual income taxes, corporate income taxes, some excise taxes, and other miscellaneous taxes.[123] [124] [125] [126] [127] [128] [129]

* Social Security payroll taxes are restricted to a "taxable maximum" or "wage threshold." Earnings above the threshold are not subject to this tax. In 2012, the threshold was $110,100.[130] Since 1982, the taxable maximum has been annually indexed roughly based upon average worker compensation levels.[131] [132] [133] [134] [135] [136] [137]

* At the outset of the Social Security program, the federal government published an informational pamphlet that stated the following about the program's taxes:

* Accounting for inflation, the figures above equate to a maximum tax collection of $1,655 per person in 2010 dollars.[139] In 2010, the maximum payroll tax collection per person was $13,243 or eight times the promised maximum.[140] This figure does not include other taxes that are now levied to fund Social Security, such as the tax on Social Security benefits.

* Social Security benefits are generally related to the amount of Social Security payroll taxes paid by workers over the course of their lifetimes.[141] For workers who earned average wages and retired at the age of 65 in 1980, it took 2.8 years of receiving old-age benefits to recover the value of their payroll taxes (including interest). For workers who retired in 2003, it will take 17.4 years. For workers who will retire in 2020, it will take 21.6 years.[142] This assumes Social Security will have enough money to pay scheduled benefits for this entire period, which it is not projected to have.[143]

* For comprehensive facts about Social Security's taxes, benefits, and financial status, visit Just Facts' research on Social Security.

* Medicare hospital insurance, which is also known as Medicare "Part A," provides coverage for hospital inpatient services, skilled nursing facility care (not custodial care[144]), and hospice care.[145]

* In 2011, Medicare hospital insurance payroll taxes accounted for 23% of federal social insurance taxes.[146]

* To qualify for premium-free Medicare hospital insurance, individuals or their spouses must work while paying Medicare's payroll tax for at least ten years.[147]

* Medicare's baseline payroll tax rate is 2.9% of workers' wages (employer and employee combined).[148] [149]

* Medicare's payroll tax was previously limited by a wage threshold that generally increased as the national average wage increased. Earnings above this threshold were not subject to the tax. In 1993, this threshold was $135,000 per year.[150] [151] That year, Congress and Democratic President Bill Clinton passed a law that removed the threshold, thus making all earnings subject to Medicare payroll taxes.[152] The bill passed with 85% of Democrats voting for it and 100% of Republicans voting against it.[153]

* Starting in 2013, the 2010 Affordable Care Act (a.k.a Obamacare) levies an additional 0.9% Medicare payroll tax on earnings above $200,000 for singles and $250,000 for couples.[154] [155]

* For comprehensive facts about Medicare's taxes, benefits, and financial status, visit Just Facts' research on Medicare.

* In 2011, unemployment insurance payroll taxes accounted for 7% of federal social insurance taxes.[156] [157]

 

Corporate Income Taxes

* Corporate income taxes are typically levied on "C corporations," which are business entities that are fully separated by law from their owners' personal finances. Most major and public corporations are structured in this manner. Business entities can also be structured in other ways, such as "S corporations," partnerships, and sole proprietorships. In these cases, tax law combines business incomes with owners' personal incomes. These types of businesses are sometimes called "passthrough entities," and they are subject to personal income taxes instead of corporate income taxes.[158] [159] [160]

* In 2011, corporate income taxes comprised 8% of the taxes collected by the federal government and 3% of the taxes collected by state and local governments.[161] [162]

* The burden of corporate income taxes falls upon: (1) business owners in the form of decreased profits, (2) workers in the form of reduced wages, and (3) possibly consumers in the form of higher prices.[163] [164]

* The Congressional Budget Office (CBO) estimates that 75% of corporate income taxes are borne by owners/stockholders and 25% are borne by workers.[165] Other creditable sources estimate that owners/stockholders bear anywhere from 33% to 100% of this tax burden.[166] (For more detail, see tax distribution.)

* Per the IRS and the Congressional Research Service, U.S. tax law imposes a "double tax" on corporate profits. This is because the "profit of a corporation is taxed to the corporation when earned," but shareholders cannot actually receive these profits without also paying capital gain or dividend taxes on them.[167] [168] (For more detail, see cappital gains, dividends, and interest).

* In basic terms, federal corporate income taxes are levied on profits, which are calculated by adding income from business operations and the sale of company stock minus:

• employee wages and benefits,

• consumable resources used for producing products, delivering services or marketing,

• interest paid on debts,

• contributions to charities,

• state and local taxes, and

• depreciation, which is "an allowance for declines in the value of a firm's tangible assets, such as machines, equipment, and structures." Per the Congressional Research Service:

* Federal corporate income tax rates rise with income, and in 2012, the rates were 15%, 25%, 34%, and 35%. Since most corporate taxable income is earned by large corporations, most of it is taxable at the 34% and 35% rates.[171] [172]

* In 2009 (latest IRS data), the federal corporate income tax rate for active corporations averaged 35% before tax credits. After tax credits were applied, the average effective rate was 23%. Out of 20 major business sectors, effective rates averaged as low as 16% for mining and 17% for manufacturing—to as high as 33% for health care and social assistance and 34% for educational services.[173] (For more detail, see tax preferences).

* In 2009, the portion of state and local tax collections that were comprised of corporate income taxes varied from a high of 9.9% in Alaska and New Hampshire—to a median of 2.8% in Maryland, North Carolina, Oklahoma and Utah—to a low of 0% in Nevada, Texas, Washington and Wyoming.[174]

 

Capital gains, dividends, and interest

* A "capital gain" is an increase in the price of a financial asset between when it is purchased and when it is sold.[175] [176] Financial assets that are subject to capital gain taxes include items such as company stocks, real estate, collectibles, and precious metals (more details in footnote).[177]

* A "dividend" is a company profit that is distributed to shareholders.[178] [179]

* "Interest income" is money earned from "certain bank accounts or from lending money to someone else."[180]

* Per the Encyclopedia of Taxation and Tax Policy (as confirmed by the IRS, Congressional Research Service, and U.S. Joint Committee on Taxation):

* Taxes on dividends and capital gains are classified by the federal government as individual income taxes, but the tax rates are generally lower, which mitigates some of the double taxation. The lower tax rates on capital gains only apply to assets that are owned for a year or longer. Assets that are owned for less than a year are considered "short-term capital gains" and are taxed at ordinary income tax rates.[187] [188] [189] [190]

* In 2012, the maximum tax rate on most dividends and capital gains is 15%. This rate applies to income that would otherwise be subject to the 25% and above income tax brackets (for example, taxable income above $70,700 for married couples filing jointly). For income below this level, the dividend and capital gains tax rate is 0%.[191] [192]

* The 0% and 15% dividend and capital gains tax rates are due to expire at the end of 2012. Barring legislative changes, dividend tax rates will increase to regular income tax rates ranging from 15% to 39.6%. For capital gains, the 0% rate will increase to 10%, and the 15% rate will increase to 20%.[193] [194]

* Interest income, such as that from bank accounts and personal loans, is not considered a capital gain or a dividend, and it is generally subject to regular income tax rates.[195] [196]

* Starting in 2013, under the Affordable Care Act (a.k.a. Obamacare), income earned from interest, dividends and capital gains is subject to an additional 3.8% tax for singles with income above $200,000 and couples with income above $250,000.[197] [198] [199]

* Taxes on interest income, dividends, and capital gains are not offset for inflation, and investors must pay taxes on gains that are due to inflation (a.k.a "phantom gains").[200] [201] For example, if a $1,000 investment yields a 4% return over the course of a year while inflation is at 3% and the tax rate is at 25%, the effective tax rate is 100%:

• $1,000 investment × .04 return = $40 nominal profit (i.e., not adjusted for inflation[202])

• $40 nominal profit × .25 tax rate = $10 tax bill

• $1,000 investment × .03 inflation = $30 lost to inflation

• $40 nominal profit - $10 tax bill - $30 loss due to inflation = $0 real profit[203]

* With capital gains (but not dividends or interest income), some effects of inflation are alleviated because taxes on capital gains don't need to be paid until an asset is sold. This allows an asset to grow in value without losing some gains to taxes each year.[204] [205] [206]

* In 2010 (latest CBO data), 4.9% of federal individual income tax receipts came from capital gain taxes.[207]

* In 2011, 4.7% of gross income earned by individuals came from capital gains, 2.4% came from dividends, and 2.3% came from interest income.[208]

* In 2011/2012, state and local taxes on capital gains ranged from as low as 0% in Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington and Wyoming—to as high as 7.5% in Hawaii, 6.7% in California, and 6.4% in Oregon.[209] [210] [211]

 

Preferences

* Tax preferences, which are also called tax expenditures, are defined by federal law as "revenue losses attributable to provisions of the federal tax laws which allow a special exclusion, exemption, or deduction from gross income or which provide a special credit, a preferential rate of tax, or a deferral of tax liability."[212]

* Per the U.S. Joint Committee on Taxation, tax preferences are "usually … designed to encourage certain kinds of economic behavior as an alternative to employing direct expenditures or loan programs to achieve the same or similar objectives."[213]

* Tax preferences fall into five broad categories:

• Credits, which "reduce a taxpayer's liability dollar for dollar."

• Deductions, which "reduce the amount of income subject to tax."

• Deferrals, which "allow taxpayers to postpone the date at which income gets taxed."

• Exclusions and exemptions, which "allow certain types of income to avoid taxation entirely."

• Preferential rates, which "tax certain types of income at lower levels."[214]

* Per Donald B. Marron, director of the Tax Policy Center and former acting director of the Congressional Budget Office:

* Examples of unambiguous tax preferences include the deduction for home mortgage interest,[218] [219] business credits for renewable energy,[220] credits for paid child care,[221] the exemption for interest earned on state and local government bonds,[222] [223] the deduction for charitable contributions,[224] credits for education,[225] and exclusions for employer-provided benefits such as pensions and health insurance.[226] [227]

* Some tax credits are refundable, and low-income households with tax credits that exceed their income tax liabilities receive the difference as cash payments from the federal government.[228] [229] [230] [231] Due to refundable tax credits, in 2009 the lowest-earning 20% of U.S. households paid an effective income tax rate of -9.3%, amounting to an average payment from the federal government of $2,185 per household.[232] [233]

* Starting in 2014, the Affordable Care Act (a.k.a. Obamacare) provides refundable tax credits for individuals who purchase health insurance with incomes up to 400% of federal poverty guidelines (for example, $76,360 for a family of three in 2012, $92,200 for a family of four, or $108,040 for a family of five). The U.S. Department of Health and Human Services has projected that 25 million people will be receiving these credits in 2019.[234] [235] [236] The tax credits will be based upon income, and the Congressional Budget Office projects that the average subsidy will be $4,610 per enrollee when the program begins in 2014.[237] [238] [239] [240]

* Many tax preferences have the same effects as government spending. For example, if the government were to repeal the child tax credit and instead send checks to certain households with children, the effective result would be equivalent.[241] [242] [243] [244]

* With regard to such preferences, a 2010 report by the IRS's Taxpayer Advocate Service states that the "IRS no longer is just a revenue collection agency but is also a benefits administrator."[245]

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* In 1986, the 99th Congress passed and Republican President Ronald Reagan signed a tax reform law that eliminated many tax preferences while reducing the top personal income tax bracket from 50% to 28% and reducing the top corporate income tax bracket from 46% to 34%.[246] In the next year, the average effective federal tax rate for the top 20% of income earners increased by 2.0 percentage points, while the rates for all other income groups dropped by less than one percentage point. In the next five years, the tax rate for the top 20% stayed higher than before the law was enacted, while the rates for all other income groups stayed about the same or lower:

* The 1986 tax reform kept in place some of the more widely used tax preferences, such as the deduction for home-mortgage interest.[248] In 25 years since this reform was passed, various congresses and presidents have enacted at least 150 provisions into law that the Joint Committee on Taxation classifies as tax preferences. Examples of such include:

• the enhanced oil recovery credit,

• a credit for cost of providing access for disabled individuals,

• tax incentives for businesses in empowerment zones, enterprise communities, and rural development investment areas,

• accelerated depreciation for property on Indian reservations,

• HOPE and Lifetime Learning credits for tuition for post-secondary education,

• the welfare-to-work tax credit,

• a deduction for film and television production costs,

• a tax credit for expenditures for maintaining railroad tracks,

• a tax credit for biodiesel blenders, and

• a charitable deduction for certain expenses incurred in carrying out sanctioned whaling activities.[249]

_

* The primary beneficiaries of tax preferences are sometimes not the individuals who claim them. For example, the exemption for interest earned on state and local government bonds primarily benefits the governments that issue the bonds instead of the investors who buy them. This is because governments can sell tax-exempt bonds with lower interest rates than comparable taxable bonds, and investors will still buy these bonds as long as their after-tax profits are equivalent or greater. Hence, this tax exemption allows governments to issue bonds at lower interest rates, which lowers their costs of financing.[250] [251] Per the Internal Revenue Service:

* In 2009, out of 20 major business sectors, the corporate income tax rate averaged from as low as 16% for mining and 17% for manufacturing—to as high as 34% for educational services and 33% for health care and social assistance. These differences are primarily due to tax preferences.[253]

* During the U.S. Constitutional Convention, James Madison, who would later become known as the Father of the Constitution for his central role in its formation, stated that all civilized societies are "divided into different Sects, Factions, and interests," and "where a majority are united by a common interest or passion, the rights of the minority are in danger." He then listed some "unjust laws" that were due to majorities taking advantage of minorities, such as those that sanctioned slavery and those that imposed "a disproportion of taxes" on certain types of properties.[254] [255] [256]

 

Alternative Minimum Tax

* The alternative minimum tax (AMT) is a form of federal income tax that is imposed on top of the standard income tax. The AMT disallows certain tax preferences and thereby increases the income taxes that some individuals must pay.[257] [258] [259] [260]

* Per the Congressional Budget Office (CBO):

* The AMT has a greater impact on taxpayers with large families, high medical bills, and high state and local taxes.[262]

* Since 2001, various congresses and presidents have partially alleviated the inflationary impact of the AMT by enacting temporary changes in the law. The most recent of these changes expired at the end of 2011 and has not been renewed as of October 2012.[263] [264] [265] [266]

* Between 1983 and 1998, the portion of taxpayers liable for the AMT never rose above 1%. In June 2012, CBO projected that if current law is not changed, 11% of taxpayers will be liable for the AMT in 2013, and this figure will steadily rise to more than 50% by 2037. CBO also projected that the AMT will impose taxes equal to 3.4% of all income taxes in 2013, and this figure will rise to 12% by 2037:

* The origins of the AMT can be traced to a January 1969 speech given by Treasury Secretary Joseph Barr, in which he stated that "there is going to be a taxpayer revolt over the income taxes in this country unless we move in this area." Barr criticized the use of "loopholes and gimmicks" by the wealthy and pointed out that "in the year 1967, there were 155 tax returns in this country with incomes of over $200,000 a year and 21 returns with incomes over a million dollars for the year on which the 'taxpayers' paid the U.S. Government not 1 cent of income taxes…."[269] [270]

* Barr's speech spurred a public uproar, and in August of 1969, Life magazine published a house editorial noting that Congress was considering a "minimum tax" to address "the scandal under which 155 individuals with incomes over $200,000 were in 1967 able to pay no income tax at all."[271] [272]

* In December of 1969, Congress passed and the president signed the first minimum tax law. The legislative report echoed Barr's speech and stated, "It should not have been possible for 154 individuals with adjusted gross incomes of $200,000 or more to pay no Federal income tax on 1966 income."[273] [274]

* Over the ensuing three decades, Congress made at least 18 changes to this tax.[275] The legislative report for the changes passed in 1982 echoed Barr's speech again, stating that the changes have "one overriding objective: no taxpayer with substantial economic income should be able to avoid all tax liability by using exclusions, deductions, and credits."[276]

* The 155 tax returns cited by Barr amounted to 0.0002% of taxable returns in 1967.[277] Adjusted for inflation, $200,000 in 1967 is equivalent to $1.3 million in 2009.[278] In 2009, the AMT levied additional taxes on 4.7% of taxable returns,[279] including:

• 202,836 returns with adjusted gross incomes below $100,000.

• 895,000 returns with adjusted gross incomes from $100,000 – $200,000.

• 2,385,000 returns with adjusted gross incomes from $200,000 – $500,000.

• 292,146 returns with adjusted gross incomes from $500,000 – $1 million.

• 52,053 returns with adjusted gross incomes above $1 million.[280]

* In 2009, 19,551 individuals with incomes over $200,000 paid no federal individual income taxes (this does not include corporate income taxes). In 61% of these cases, their primary tax preference was interest earned from tax-exempt bonds issued by state and local governments.[281] These bonds are called "municipal bonds" or "munis," and they are a principal means by which wealthy individuals limit their federal income taxes.[282] [283]

* When Congress was considering the first minimum tax in 1969, the editors of Life wrote that the proposed law has "some dubious side effects" because "among the tax shelters this reform goes after is the interest on tax-exempt bonds, on the sale of which our hard-pressed state and local governments depend for financing their public works."[284]

* Currently, under federal tax law, the definition of "gross income" excludes interest from tax-exempt munis, and hence, income from these bonds is not subject to the alternative minimum tax.[285] [286] [287]

* Per the CBO:

* Per the IRS:

 

Bracket Creep

* Per the Congressional Budget Office (CBO), "Most parameters of the tax code are not indexed for real income growth, and some are not indexed for inflation." Thus, if tax laws remain unchanged, "average tax rates increase over time…."[291] This is referred to as "bracket creep."

* CBO projected in 2012 that if current laws remain unchanged, "a married couple with two children earning the median income" will see their income and payroll taxes rise from 14% of their income in 2012 to 24% over the next 25 years, which is a 71% increase.[292]

* Over the past 40 years, federal revenues have averaged 17.9% of the nation's gross domestic product (GDP). In 2012, CBO projected that if current laws remain unchanged, federal revenues will grow to 45% above this long-term average over the next 40 years and will continue to increase thereafter:

[293]

* Examples of tax laws that are not indexed for inflation or wage growth include:

• the alternative minimum tax.

• the taxes on Social Security benefits, which apply to single beneficiaries with incomes of more than $25,000 per year and couples with incomes of more than $32,000 per year.[294] These taxes currently affect 30% of all Social Security benefits and are projected to affect 50% of these benefits by 2037.[295]

• the estate tax exemption, which is projected to fall in real terms from $1 million in 2013 to $600,000 by 2037.[296]

• excise taxes. In this case, the lack of indexing generally decreases the burden of these taxes over time.[297]

• the following provisions of the 2010 Affordable Care Act (a.k.a Obamacare):

- a 0.9% Medicare payroll tax on earnings above $200,00 for singles and $250,00 for couples.[298] [299]

- a 3.8% tax on income from investments imposed on singles with income above $200,00 and couples with income above $250,000.[300] [301] [302]

- a 40% tax on health insurance plans with values in excess of $10,200 per year for individuals or $27,500 for families.[303] [304]

* Examples of tax laws that are indexed for inflation (but not for wage growth) include:

• income tax brackets, exemptions, and deductions. In this case, the lack of wage indexing has a greater impact on lower-income taxpayers.[305]

• the earned-income tax credit eligibility thresholds. As these lose value relative to income over time, the portion of taxpayers who receive the credit is projected to fall from 16% in 2012 to 11% in 2037.[306]

* In a 2012 commentary published in Rolling Stone, Jared Bernstein, a former economic advisor to President Obama and a senior fellow with the Center on Budget and Policy Priorities, wrote that "it is well within our means" to reduce the national debt by following the "broad outlines" of "current law." He advocated that we take this path without revealing that under current law, federal taxes will progressively consume a greater share of the U.S. economy due to bracket creep, rising to 21% higher than the average of the past 40 years by 2025, 40% higher by 2045, 56% higher by 2065, and 66% higher by 2085.[307] [308] [309]

* In a 2011 Washington Post column, Ezra Klein wrote that the "current law" scenario is "a pretty good plan" that contains "a balanced mix of revenues, through returning tax rates to Clinton-era levels and implementing the taxes in the Affordable Care Act…." He went on to say that this scenario has "three crucial elements" without revealing that under current law, federal taxes will progressively consume a greater share of the U.S. economy due to bracket creep.[310] [311]

 

Compliance

 

└ Complexity

* Per the Congressional Budget Office:

* The federal tax code is approximately 8,000 pages when printed on 8.5×11 inch paper in size 12 font. This page count includes supplementary materials that do not have the force of law (such as indexes and records of repealed amendments), but these materials are often needed to understand the law.[313] [314] [315]

* Per the IRS, "Federal tax regulations … pick up where the Internal Revenue Code (IRC) leaves off by providing the official interpretation of the IRC by the U.S. Department of the Treasury."[316] When printed on 6×9 inch paper in size 8 font, current federal tax regulations are approximately 14,000 pages. This does not include obsolete provisions or indexes.[317] [318]

* U.S. taxpayers (including businesses) spend roughly 6.1 billion hours per year complying with the requirements of federal tax law. This amounts to 50 hours per household or the labor equivalent of more than three million full-time workers. Per the IRS's Taxpayer Advocate, these figures do not include "millions of additional hours that taxpayers must spend when they are required to respond to IRS notices or audits."[319] [320]

* The IRS's Taxpayer Advocate estimates that in 2008, the cost of complying with federal income tax laws was $163 billion or 11% of income tax receipts. Other estimates for this figure run as high as 22%.[321]

* In 2006, General Electric filed the nation's longest federal tax return, which was about 24,000 pages long.[322]

* In the federal government's 2011 fiscal year, the IRS spent $12.4 billion and employed 104,403 people, including seasonal and part-time workers.[323]

* Per the IRS's Taxpayer Advocate:

* A 2012 IRS study found that in 2006, the difference between what was legally due in taxes and what was actually paid amounted to a "tax gap" of $385 billion, which equates to a noncompliance rate of 14.5%.[325] [326]

* Per the IRS's Taxpayer Advocate, the tax gap represents an effective tax on most taxpayers "to subsidize noncompliance by others."[327] Adjusted for inflation into 2012 dollars, the 2006 tax gap was an average of $3,846 for every household in the U.S.[328]

* Per the IRS's Taxpayer Advocate:

* In instances where income was reported to the IRS by third parties (such as employers), the noncompliance rate was about 1% in 2006. In instances where income was not subject to reporting, the noncompliance rate was 56%.[330]

* Some tax credits are refundable, and low-income households with tax credits that exceed their income tax liabilities receive the difference as cash payments from the federal government.[331] [332] [333] Per the Treasury Department's Inspector General for Tax Administration, "the risk of fraud for these types of claims is significant."[334]

* Two of the costliest and most frequently claimed refundable tax credits are the earned income tax credit and the child tax credit.[335] [336]

* In 2011, the IRS improperly paid $15.2 billion in earned income tax credits, amounting to an improper payment rate of 23.5%.[337] [338] These improper payments were greater than the budget of the IRS.[339] [340]

* Federal law generally prohibits illegal immigrants from earning income in the U.S., but the law also requires them to file tax returns if they do earn income. Federal law also prohibits illegal immigrants from receiving most federal benefits, but the IRS has concluded that this restriction does not apply to refundable child tax credits. In 2010, the IRS paid out $4.2 billion in refundable child tax credits to 2.3 million tax filers who were not legally authorized to work in the United States.[341] [342]

* In 2010, 72% of the tax returns filed by illegal immigrants and foreign investors received cash payments from the IRS for child tax credits. Among the U.S. citizens and foreigners legally working the U.S., 14% of tax filers received cash payments from the IRS for child tax credits.[343]

* In May 2011, Republican Congressman Sam Johnson sponsored a bill that would restrict illegal immigrants from obtaining refundable child tax credits.[344] [345] The bill was cosponsored by 100 Republicans and 1 Democrat. It was never voted upon.[346] [347]

* In October 2011, Republican Congressman Larry Bucshon sponsored a bill that would restrict illegal immigrants from obtaining refundable child tax credits.[348] [349] The bill was cosponsored by 2 Republicans and 1 Democrat. It was never voted upon.[350] [351]

* In April 2012, WTHR, an NBC News affiliate in Indiana, aired a report by investigative journalist Bob Segall about illegal immigrants who were fraudulently obtaining child tax credits by claiming credit for children who live in Mexico. The IRS responded to the report by stating that the agency "has procedures in place specifically for the evaluation of questionable credit claims early in the processing stream and prior to issuance of a refund."[352]

* In the wake of the WTHR news report, 11 current and former IRS employees contacted WHTR and made statements such as the following:

• "I just saw your report and there's something I need to tell you. I see this stuff every day and there isn't anything I can do about it."

• "Most of these documents are fraudulent and there's absolutely no system here to catch it."

• "We don't have the resources to follow up on much and we're not allowed to flag problems."

• "We get applications from Mexico, Honduras, China, Japan, Bulgaria, all over the world. … I guarantee 90% of them are phony. We see the same signatures hundreds of times. We see the same docs photocopied and attached to different applications. It's the same person, same photo, same address. I've seen the same birth certificate twelve times now in the past day."[353]

* Two months later, the Treasury Department's Inspector General for Tax Administration published an audit of the IRS department that handles tax returns for illegal immigrants and foreign investors. Since these individuals are ineligible to receive Social Security Numbers, the IRS issues them ITINs (Individual Taxpayer Identification Numbers).[354] The audit found:

• The IRS had issued 9,909 ITINS to 9,522 people allegedly living at a single address in Tulsa, Oklahoma (more examples in footnote).[355]

• The IRS had mailed 23,994 ITIN refunds totaling $46,378,040 to a single address in Atlanta, Georgia (more examples in footnote).[356]

• The IRS had deposited 2,706 ITIN refunds totaling $7,319,518 into a single bank account (more examples in footnote).[357]

• In 2010, the IRS had eliminated a process used to detect fraud in ITIN applications.[358]

• "The environment created by [IRS] management discourages tax examiners from identifying questionable ITIN applications."[359]

• "The payment of federal funds through this tax benefit appears to provide an additional incentive for aliens to enter, reside, and work in the United States without authorization, which contradicts federal law and policy to remove such incentives."[360]

* With regard to fraudulent tax refunds obtained through identity theft, IRS Inspector General J. Russell George stated: "Once the money is out the door, it is almost impossible to get it back."[361]

* In May 2012, Republican Congressman Paul Ryan sponsored a wide-ranging bill with a provision that would restrict illegal immigrants from obtaining refundable child tax credits.[362] [363] The bill passed the House of Representatives with 93% of Republicans voting for it and 100% of Democrats voting against it. As of September 2012, the Senate has not voted upon it.[364]

 

Economic Effects

* Examples of the types of decisions that are affected by taxes include:

• whether or not to work.[365]

• how long to hold investments.[366]

• whether or not to get married.[367]

• how much to save.[368]

• whether or not to buy a house.[369]

• whether to be self-employed or work for somebody else.[370]

• how to finance a business.[371]

* Among different measures of taxes, marginal tax rates—which are "the rates that taxpayers pay on the next dollar of income that is earned"—typically have the greatest impact on people's financial decisions. This is because when people are deciding whether or not to take effort or risk to earn more income, they typically consider how much money they will take home after taxes. The marginal tax rate informs such decisions because it determines how much of this added income will be taken in taxes.[372] [373]

* Per the U.S. Joint Committee on Taxation, the negative economic effects of taxes can be minimized while collecting the same amount of tax revenue when there is "a broad base of taxation in order to keep marginal tax rates as low as possible…."[374]

* Marginal tax rates are generally higher than average tax rates because much income is not subject to taxation (due to tax preferences) and because income tax brackets rise with income.[375] [376] For example, a household with $65,000 in annual income will typically pay about $7,000 in federal taxes, which amounts to an effective tax rate of 11%.[377] However, if the members of this household earn another $10,000, they will typically pay a marginal tax rate of over 35% on this added income (10.4% in Social Security payroll taxes + 2.9% in Medicare payroll taxes + 25% in individual income taxes + corporate income taxes + excise taxes).[378]

* Marginal tax rates can have differing effects on people depending upon their circumstances and mindsets.[379] Per the Congressional Budget Office (CBO):

* There is disagreement among economists about the quantitative effects of marginal tax rates, but there is broad agreement that:

• Higher marginal tax rates on workers mostly reduce their "incentive to work," and this effect is stronger on those who are not already working than those who are working but considering working more.[381] [382]

• The "efficiency loss from taxation increases as the marginal tax rate increases. That is, a one percentage point increase in a marginal tax rate from 40 percent to 41 percent creates a greater efficiency loss per dollar of additional tax revenue than a one percentage point increase in a marginal tax rate from 20 percent to 21 percent."[383]

• Higher "marginal tax rates may encourage taxpayers to seek compensation in the form of tax free fringe benefits rather than taxable compensation and to engage in other tax avoidance activities, including deductible expenses or deductible consumption, or even illegal tax evasion. Such distortions in consumption represent an efficiency loss to the economy."[384]

• Higher marginal tax rates on investors and savers mostly reduce their incentive to invest and save, but there is much dispute over the strength of this effect, and a few studies have concluded that higher marginal tax rates encourage investing and saving.[385] [386]

* With regard to the effects of marginal tax rate on investments and savings, the Congressional Budget Office and Joint Committee on Taxation have stated:

• "[M]ore saving implies more investment, a larger capital stock, and greater output and income."[387]

• "If saving is reduced by its treatment under the income tax, future productivity and income is lost to society."[388]

• "A small change in the growth of productivity can, over a long period, have a larger effect on GDP than most recessions do" because "the shortfall from a recession is generally temporary, whereas a change in the long-term rate of productivity growth reduces output by an ever-increasing amount."[389]

* In addition to marginal tax rates, other aspects of tax laws with economic effects include provisions such as the following:

• Corporate income taxes that are sometimes higher in the U.S. than in other countries can incentivize corporations to relocate overseas.[390]

• The combination of the following two provisions of U.S. tax law incentivizes corporations to raise money by going into debt: (1) the corporate income tax deduction for interest on debt, and (2) the taxation of money raised through selling corporate shares.[391] [392] [393]

 

Excise and Sales Taxes

* Excise taxes are imposed on specific goods and services, whereas sales taxes are imposed on wide arrays of goods and services.[394] [395]

* In addition to raising revenue, excise taxes are sometimes imposed to discourage or penalize certain activities.[396] [397] Per the U.S. Joint Committee On Taxation:

* In 2010, the 111th Congress and President Obama enacted several new types of excise taxes on items such as medical devices, indoor tanning services, and high-cost health plans. These taxes, which were enacted in the Affordable Care Act (a.k.a. Obamacare), become effective between 2010 and 2018.[399] [400]

* In 2011, excise taxes comprised 3% of the taxes collected by the federal government.[401]

* In 2009, state and local excise taxes ranged from a low of $255 per person in Idaho to a high of $848 per person in Nevada. The nationwide average was $467 per person.[402]

* Excise taxes are remitted by businesses that manufacture, import, or sell the goods and services that are taxed.[403] [404]

* The economic burden of excise taxes primarily falls on retail customers in the form of higher prices. Per the Congressional Budget Office:

* Sales taxes are typically remitted by retailers and shown on purchase receipts, but the burden of these taxes falls on both consumers and retailers to varying degrees, depending upon the product or service.[409] [410] [411]

* No states impose a sales tax on prescription drugs, and most states don't impose a sales tax on food.[412]

* In 2011, sales taxes comprised 33% of the taxes collected by state and local governments.[413]

* In 2009, the portion of state and local tax collections that were comprised of sales taxes varied from a high of 46.4% in Tennessee, to a median of 23.9% in South Carolina, to a low of 0% in Delaware, Montana, New Hampshire and Oregon.[414]

 

Property Taxes

* Property taxes are annual levies on properties based upon their appraised value. Per The Oxford Companion to American Law, property taxes were levied

* Local governments generally typically do not levy property taxes on colleges, hospitals, and other nonprofit organizations, but these organizations sometimes make "payments in lieu of taxes" or "PILOTs" to local governments. Such payments are generally lower than property taxes.[416]

* In addition to property taxes on real estate, some states levy taxes on personal property such as automobiles, boats, and aircraft.[417]

* In 2011, property taxes comprised 32% of the taxes collected by state and local governments.[418]

* In 2009, the portion of state and local tax collections that were comprised of property taxes varied from a high of 64% in New Hampshire, to a median of 31% in Wyoming, to a low of 17% in Arkansas.[419]

* In 2009, state and local property taxes ranged from a low of $503 per person (not per household) in Alaska to a high of $2,663 per person in New Jersey. The nationwide average was $1,388 per person.[420]

* Economists generally fall into three different camps regarding who bears the burden of property taxes, but all three groups agree that property taxes on owner-occupied housing are mostly borne by homeowners, and property taxes on land (but not necessarily housing located on the land) are mostly borne by landowners. There is much disagreement over commercial and industrial properties.[421]

Estate and Gift Taxes

NOTE: The federal estate tax (a.k.a the death tax) has changed almost every year from 2002 to 2012, and barring new legislation, further changes will take effect in 2013. Due to the complexity of this issue, its state of flux, and research time constraints, Just Facts will comprehensively address this issue in future expansions of this research.

* Per the Congressional Research Service, the federal estate tax is "imposed when property is transferred at death," and the federal gift tax "operates alongside the estate tax to prevent individuals from avoiding the estate tax by transferring property to heirs before dying."[422]

* The modern federal estate tax was first enacted in 1916, and per the IRS, it "was to serve the dual purposes of producing revenue and redistributing wealth."[423]

* In 2011, estate and gift taxes comprised 0.3% of the taxes collected by the federal government.[424]

Hidden Taxes

* Hidden taxes are those that are not apparent to the individuals who ultimately pay them. Per the director of the Congressional Budget Office (CBO):

* Examples of hidden taxes include:

• excise taxes on items such as gasoline and wine, which are remitted by businesses but are primarily borne by retail customers in the form of higher prices.[426] [427] [428] For example, retail consumers pay an average of 39.3 cents in federal and state excise taxes per gallon of gasoline, but these taxes do not appear on their purchase receipts.[429]

• employer payroll taxes, which are remitted by employers but are primarily borne by employees in the form of lower wages.[430] [431] [432] For example, middle-income households lose about 4.2% of their income to federal employer payroll taxes, but these taxes do not appear on employees' paychecks or tax returns.[433]

• corporate income taxes, which are remitted by corporations but are primarily borne by stockholders and employees in the form of lower profits and wages.[434] [435] [436] For example, the top 1% of income earners lose about 5.2% of their income to federal corporate income taxes, but these taxes do not appear on their paychecks or tax returns.[437]

* Governments also enact laws and regulations that do not collect tax revenue but impose the costs of government policies on the private sector. These are functional hidden taxes, and examples of such include:

• a federal law that requires most hospitals with emergency departments to provide an "examination" and "stabilizing treatment" for anyone who comes to such a facility and requests care for an emergency medical condition or childbirth, regardless of their ability to pay and immigration status.[438]

• state and federal mandates that require health insurers to enroll all applicants regardless of preexisting conditions, thus increasing the cost of health insurance and forcing existing health insurance customers to subsidize the healthcare of those who do not purchase insurance until after contracting serious illnesses.[439]

• state mandates that require electric utility companies to obtain certain amounts of their electricity from alternative energy sources that are more expensive than traditional sources, thus increasing the cost of electricity.[440]

 

Politics

* The U.S. Constitution vests Congress with the powers to tax, spend, and pay the debts of the federal government. Legislation to carry out these functions must either be:

• passed by majorities in both houses of Congress and approved by the President; or

• passed by majorities in both houses of Congress, vetoed by the President, and then passed by two-thirds of both houses of Congress; or

• passed by majorities in both houses of Congress and left unaddressed by the President for ten days.[441]

* Per the Congressional Budget Office (CBO), "Most parameters of the tax code are not indexed for real income growth, and some are not indexed for inflation." Thus, if tax laws remain unchanged, "average tax rates increase over time" (for more detail, see bracket creep).[442]

* In federal fiscal year 2000 (October 1, 1999 to September 30, 2000), the federal government collected revenues equal to 21% of the nation's gross domestic product (GDP), the highest level in the history of the United States.[443] In 2000, the stock market "dot.com" bubble burst,[444] [445] [446] the NASDAQ lost 39% of its value,[447] and profits for nonfinancial corporations fell by 18%.[448] [449] [450] In the first quarter of 2001, the nation's GDP contracted and a recession began.[451] [452]

* On January 20, 2001, Republican President George W. Bush entered office,[453] and in June 2001, Bush signed his first major economic proposal.[454] This consisted of a bill with various tax cuts that Congress and Bush accelerated and expanded upon in 2002 and 2003. These laws:

• cut tax rates on incomes, estates, capital gains and dividends,

• increased the child tax credit (which is also a form of spending),

• raised the exemption amount for the alternative minimum tax, and

• increased certain corporate income tax deductions (details in footnotes).[455] [456]

* Collectively, the tax cuts in these laws are known as the "Bush tax cuts." The 2001 bill passed with 100% of Republicans voting for it and 90% of Democrats voting against it.[457] The 2002 bill passed with 100% of Republicans and 95% of Democrats voting for it.[458] The 2003 bill passed with 99% of Republicans voting for it and 96% of Democrats voting against it.[459] In order to avert Democratic filibusters in the Senate, Republicans used a procedural rule that required them to sunset many of the tax cuts at the end of 2010 (details in footnotes).[460] [461] [462] [463] [464]

* The combination of the 2001 recession in conjunction with the Bush tax cuts caused federal revenues to decline to 17.6% of GDP in fiscal year 2002, 16.2% in 2003, and 16.1% in 2004, which is 10.3% below the historical average of the past 40 years.[465] [466]

* With the Bush tax cuts in place and annual economic growth averaging 3.0% above the rate of inflation from 2003 through 2006,[467] [468] federal revenues rose to 17.3% of GDP in fiscal year 2005, 18.2% in 2006, and 18.5% in 2007, which is 3.1% above the historical average of the past 40 years.[469]

* In 2007, the housing bubble burst, and "banks began reporting large losses resulting from declines in the market value of mortgages and other assets."[470] The nation entered a recession in the last quarter of 2007,[471] and unemployment increased from 5.0% at the outset of 2008 to 9.9% at the end of 2009.[472]

* In February 2008, Congress passed and Bush signed an economic "stimulus" bill that provided two temporary tax credits (which are also a form of spending) and two temporary tax benefits for corporations.[473]

* On January 20, 2009, Democratic President Barack Obama entered office,[474] and in February 2009, Congress passed and Obama signed his first major economic proposal.[475] This consisted of an economic stimulus bill that among other provisions:

• created or expanded four temporary tax credits,

• created a temporary tax exclusion for unemployment benefits,

• created a temporary sales tax deduction for new car purchases, and

• instituted four business tax benefits and a business tax increase.[476]

* This Obama stimulus bill passed with 98% of Democrats voting for it and 99% of Republicans voting against it.[477]

* The combination of the 2007-2009 recession in conjunction with the tax provisions of the stimulus bills caused federal revenues to decline to 17.6% of GDP in fiscal year 2008, 15.1% in 2009, and 15.1% in 2010, which is 15.9% below the historical average of the past 40 years.[478] [479]

* In December 2010, Congress passed and Obama signed a bill that extended most of the Bush tax cuts and some of the tax cuts from the 2010 Obama stimulus bill through 2012. This law also decreased the Social Security payroll tax by two percentage points until the end of 2011.[480] [481] In 2011 and 2012, Congress and Obama extended the Social Security tax cut through the end of 2012.[482] [483]

* With annual economic growth averaging 2.1% above the rate of inflation from 2010 through 2011,[484] federal revenues slightly increased to 15.4% of GDP in fiscal year 2011, which is 14.2% below the historical average of the past 40 years.[485] [486]

_______

* Most of the Bush and Obama tax cuts are due to expire at the end of 2012. If Congress and the President do not renew them:

• Federal taxes will rise by $500 billion in 2013 or an average of about $3,500 per household.[487]

• CBO projects that federal revenues will be 18.7% of GDP in fiscal year 2013, 19.8% in 2014, and 20.4% in 2015, which is 13.7% above the historical average of the past 40 years.[488] [489] Beyond this, revenues will continually increase due to bracket creep.[490]

* If Congress and the President renew most of the Bush tax cuts and some of the Obama tax cuts (not including the Social Security payroll tax cut), CBO projects that federal revenues will be 16.7% of GDP in fiscal year 2013, 17.3% in 2014, and 17.9% in 2015, which is the same as the historical average of the past 40 years:

[491] [492]

* When Bush proposed tax cuts at the outset of his presidency Newsweek published a cover story that showed pictures of objects that people with various incomes could buy with money from the tax cuts. On the low end, Newsweek showed a bowl of pasta to signify "three weeks' worth of groceries" or $168 that a family of four with a gross income of $20,000 would save on an annual basis. On the high end, Newsweek showed a Lexus GS 430 to signify $47,114 that a married couple with an income of $1,000,000 would save on an annual basis.[493]

* Newsweek did not reveal what these families were currently paying in federal taxes or what they were receiving in cash and other benefits from the federal government. The family with a gross income of $20,000 was paying about $1,600 per year in taxes while receiving $16,000 from the government. In comparison, the family with an income of $1,000,000 was paying $325,000 in taxes and receiving $7,000 from the government.[494] [495]

* In a campaign speech given on September 12th, 2008, Barack Obama stated:

* About two weeks after taking office, Obama signed a law that more than doubled federal excise taxes on cigarettes, cigars, and other tobacco products.[497] [498] [499] The bill passed with 99% of Democrats voting for it and 77% of Republicans voting against it.[500] Per the Congressional Budget Office, "The effect of excise taxes, relative to income, is greatest for lower-income households, which tend to spend a greater proportion of their income on such goods as gasoline, alcohol, and tobacco, which are subject to excise taxes."[501]

* In 2010, the 111th Congress and President Obama passed two laws that are collectively known as the Affordable Care Act or "Obamacare." These bills passed with 79-89% of Democrats voting for them and 100% of Republicans voting against them.[502] [503] These laws impose or increase ten types of taxes, fees, and penalties (in addition to fines for not having health insurance).[504] The largest of these are:

• a 3.8% tax on income from investments (such as interest, dividends, and rent) imposed on singles with income above $200,00 and couples with income above $250,000. This begins in 2013.[505] [506]

• an added 0.9% Medicare payroll tax on earnings above $200,00 for singles and $250,00 for couples. This begins in 2013.[507] [508]

• a 40% excise tax imposed on high-cost health insurance plans. This begins in 2018.[509]

• an annual fee imposed on health insurance providers. This begins in 2014.[510]

• an annual fee imposed on manufacturers and importers of pharmaceuticals. This begins in 2010.[511]

• a 2.3% excise tax imposed on manufacturers and importers of certain medical devices. This begins in 2013.[512]

* Regarding tax preferences (which are also a form of spending), the Affordable Care Act provides refundable tax credits for individuals who purchase health insurance with incomes up to 400% of federal poverty guidelines (for example, $92,200 for a family of four).[513] [514] [515] The law also eliminates or reduces six other preferences while adding three others.[516] [517]

* The Affordable Care Act also imposes fines on large employers that don't provide full time-employees with health insurance that meets certain requirements,[518] and the law requires most Americans to carry some form of health insurance starting in 2014 or pay a monthly fine.[519] [520] During a September 2009 interview on ABC News, Obama was asked if such a fine constitutes a tax increase, and he replied, "I absolutely reject that notion."[521]

* In March 2012, the Obama administration's lawyer argued before the Supreme Court that the Affordable Care Act's fine for not buying health insurance was constitutional because it is "justifiable under [Congress'] tax power," it is "fair to read this as an exercise of the tax power," and the "Court has got an obligation to construe it as an exercise of the tax power, if it can be upheld on that basis."[522] The Supreme Court ruled that the fine is constitutional on the grounds that it is a tax.[523]

* Obama's budget proposal for 2013 contains 23 pages of tax-related provisions.[524] Some of his proposals are:

• Extend the Bush tax cuts except for couples with incomes over $250,000 and singles with income over $200,000.[525]

• Enact the "Buffett rule."[526]

• Enact, expand, or extend at least 15 different tax credits.[527]

* Per the Joint Committee on Taxation and Congressional Budget Office:

• "The complexity of the tax system partly results from tax expenditures [a.k.a preferences] that are designed to affect behavior by taxing some endeavors more or less than others. Those tax expenditures include tax exemptions for some activities, deductions for various preferred items, and credits for undertaking certain actions."[528]

• "Complexity also arises from efforts to achieve certain equity goals."[529] [530]

• "Policymakers are not concerned only with efficiency issues in designing a tax system, but are also concerned with establishing an 'equitable' tax code with respect to the distribution of the tax burden. Whether a tax system is viewed as equitable is in the eye of the beholder, and economic analysis cannot define an equitable tax."[531]

• "Economists have shown that the efficiency loss from taxation increases as the marginal tax rate increases."[532]

• "A less efficient allocation of labor and capital resources leaves society with a lower level of output of goods and services than it would otherwise enjoy in the absence of tax-system induced economic distortions."[533]

• "[M]any of the same aspects of the tax system that reduce economic efficiency also increase complexity."[534]

• "In general, the goals of equity and efficiency are in conflict. In order to keep rates low for efficiency reasons, the progressivity of the rate schedule should be minimized, but this conflicts with the desire to have more progressive rates for equity reasons."[535]

* Mitt Romney's economic plan contains ten pages outlining his tax policy,[536] and his website contains a two-page overview of the plan.[537] Some of his proposals are:

• Extend the Bush tax cuts for all taxpayers.[538]

• Cut marginal individual income tax rates by 20%.[539] [540]

• Eliminate individual income taxes on interest, dividends, and capital gains for taxpayers with incomes below $200,000.[541]

• Repeal the alternative minimum tax.[542]

• Eliminate the estate tax.[543]

• Reduce the marginal corporate income tax rate from 35% to 25%.[544] [545]

• Reduce the tax burden on the middle class.[546]

• Eliminate unspecified tax preferences to create a "broader tax base," thus restoring much of the tax revenues that will not be collected due to the provisions above.[547] [548]

* Per the Joint Committee on Taxation, the negative economic effects of taxes can be minimized while collecting the same amount of tax revenue when there is "a broad base of taxation in order to keep marginal tax rates as low as possible" (for more details, see economic effects).[549]

* In August 2012, the Tax Policy Center, a joint project of the Urban Institute and Brookings Institution, published an analysis of Romney's tax plan concluding that "any revenue-neutral individual income tax change that incorporates the features Governor Romney has proposed would provide large tax cuts to high-income households, and increase the tax burdens on middle- and/or lower-income taxpayers."[550]

* On the day the Tax Policy Center report was released, Obama cited it to claim that Romney intends to raise taxes on average Americans so the wealthiest can get a "big tax cut."[551] The Obama campaign then created an ad stating that Romney's plan "raises taxes on middle class families by up to $2,000 a year."[552]

* In calculating the effects of Romney's tax plan, the Tax Policy Center presumed:

• repealing the estate tax would be done in such a way that heirs could inherit appreciated investments (that the deceased had not sold) without paying any taxes on capital gains.[553] [554] [555] [556]

• repealing the tax exemption for municipal bonds was "off the table."[557]

• the plan would have no economic effects.[558] [559]

* After the points above were raised and others criticisms of the analysis were voiced, one of study's authors told the Washington Post that their analysis accurately reflects Romney's plan for tax reform. The Post summed up his statement by reporting, "Taxing interest on state and local bonds or on the value in life insurance policies, for example, would violate Romney's preference for preserving low taxes on savings and investment."[560]

* "Preserving low taxes on savings and investment" does not require that inherited investments be exempt from capital gains taxes.[561] Nor it does it require allowing interest on municipal bonds to be totally exempt from federal taxes. Note that the primary beneficiary of this tax preference is not savers and investors but state and local governments (see above).[562] [563]

* In 1986, the 99th Congress passed and Republican President Ronald Reagan signed a tax reform law that eliminated many tax preferences while reducing the top personal income tax bracket from 50% to 28% and reducing the top corporate income tax bracket from 46% to 34%.[564] In the next year, the average effective federal tax rate for the top 20% of income earners increased by 2.0 percentage points, while the rates for all other income groups dropped by less than one percentage point. In the next five years, the tax rate for the top 20% stayed higher than before the law was enacted, while the rates for all other income groups stayed about the same or lower:

* In 25 years since this reform was passed, various congresses and presidents have enacted at least 150 provisions into law that the Joint Committee on Taxation classifies as tax preferences.[566]

* Per the U.S. Government Accountability Office, when government spends more than it collects in revenues, the resultant debt is "borne by tomorrow's workers and taxpayers." This burden can manifest in the form of higher taxes, reduced government benefits, decreased economic growth, inflation, or combinations of such results.[567] [568] [569] [570]

* In addition to the actions of current congresses and presidents, other factors impacting the national debt include but are not limited to legislation passed by previous congresses and presidents,[571] economic cycles, terrorist attacks, natural disasters, demographics, and the actions of U.S. citizens and foreign governments.[572]

* During the 111th Congress (2009-2010), U.S. Representatives and Senators introduced 176 bills that would have reduced spending and 2,480 bills that would have raised spending.[573]

* The table below quantifies the costs and savings of these bills by political party. This data is provided by the National Taxpayers Union Foundation and represents the annual net fiscal effects of these bills averaged over periods of up to five years (omitting inflation).[574]

[575]

* Click here to look up any member of Congress and see the five-year annual costs and savings of the legislation he or she has sponsored or cosponsored.

* The table below quantifies the five-year annual net agendas of the political parties in previous congresses:

[576]

* In February 2001, Republican President George W. Bush stated:

* From the time that Congress enacted Bush's first major economic proposal (June 7, 2001[578]) until the time that he left office (January 20, 2009), the national debt rose from 55% of GDP to 76%, or an average of 2.8 percentage points per year.[579]

* During eight years in office, President Bush vetoed 12 bills, four of which were overridden by Congress and thus enacted without his approval.[580] These bills were projected by the Congressional Budget Office to increase the deficit by $26 billion during 2008-2022.[581]

* In February 2009, Democratic President Barack Obama stated:

* From the time that Congress enacted Obama's first major economic proposal (February 17, 2009[583]) until September 27, 2012, the national debt rose from 77% of GDP to 102%, or an average of 7.0 percentage points per year.[584]

* As of October 29, 2012, President Obama has vetoed two bills, none of which have been overridden by Congress and thus enacted without his approval.[585]

_______

* Without mentioning the role of Congress or any other factors that impact the national debt,[586] [587] PolitiFact, a Pulitzer Prize-winning project of the St. Petersburg Times "to help you find the truth in politics,"[588] wrote that the national debt increased by $5.73 trillion "under" George W. Bush whereas there were budget surpluses "at the end of the Clinton administration."[589]

* Below are the fluctuations in national debt organized by the tenures of recent presidents and congressional majorities:

[590]

 

Footnotes

[1] Entry: "tax." Collins English Dictionary – Complete and Unabridged. HarperCollins, 1991, 1994, 1998, 2000, 2003. http://www.thefreedictionary.com/tax

"1. (Government, Politics & Diplomacy) a compulsory financial contribution imposed by a government to raise revenue, levied on the income or property of persons or organizations, on the production costs or sales prices of goods and services, etc."

[2] Calculated with data from:

a) Dataset: "Table 3.1. Government Current Receipts and Expenditures (Billions of dollars)." U.S. Department of Commerce, Bureau of Economic Analysis. Last revised September 27, 2012. http://www.bea.gov/iTable/iTable.cfm?ReqID=9&step=1

"Current tax receipts [=] 2,863.5 … Taxes from the rest of the world [=] 15.9 … Contributions for government social insurance† [=] 923.8"

NOTE: † Contributions for government social insurance are a type of tax. ["A Primer on BEA's Government Accounts." By Bruce E. Baker and Pamela A. Kelly. U.S. Bureau of Economic Analysis, March 2008. http://www.bea.gov/scb/pdf/2008/03 March/0308_primer.pdf. Page 33: "Social insurance contributions. These finance the provision of certain social benefits to qualified persons. These contributions include contributions for social security, Medicare, unemployment insurance, and a number of smaller programs."]

b) Dataset: "Average Number of People per Household, by Race and Hispanic Origin, Marital Status, Age, and Education of Householder: 2011." U.S. Census Bureau, November 2011. http://www.census.gov/...

Total households = 118,682,000

CALCULATIONS:

$2,863.5 current tax receipts - $15.9 taxes from the rest of the world + $923.8 contributions for government social insurance† = $3,771 billion in federal, state and local taxes

$3,771,000,000,000 taxes / 118,682,000 households = $31,774 taxes/household

[3] Calculated with data from:

a) Dataset: "Table 3.1. Government Current Receipts and Expenditures." U.S. Department of Commerce, Bureau of Economic Analysis. Last revised September 27, 2012. http://www.bea.gov/iTable/iTable.cfm?ReqID=9&step=1

b) Dataset: "Table 1.1.5. Gross Domestic Product." U.S. Department of Commerce, Bureau of Economic Analysis. Last revised September 27, 2012. http://www.bea.gov/iTable/iTable.cfm?ReqID=9&step=1

NOTES:

- Taxes calculated by adding "Current tax receipts" with "Contributions for government social insurance," which are a type of tax. ["A Primer on BEA's Government Accounts." By Bruce E. Baker and Pamela A. Kelly. U.S. Bureau of Economic Analysis, March 2008. http://www.bea.gov/scb/pdf/2008/03 March/0308_primer.pdf. Page 33: "Social insurance contributions. These finance the provision of certain social benefits to qualified persons. These contributions include contributions for social security, Medicare, unemployment insurance, and a number of smaller programs."]

- An Excel file containing the data and calculations is available upon request.

[4] Calculated with data from the report: "The Budget and Economic Outlook: Fiscal Years 2012 to 2022." Congressional Budget Office, January 31, 2012. http://www.cbo.gov/publication/42905

Supplementary dataset: "Historical Budget Data—January 2012 Baseline." http://www.cbo.gov/...

"Table F-2. Revenues, by Major Source, Since 1972 (In Billions of Dollars)"

NOTE: An Excel file containing the data and calculations is available upon request.

[5] Calculated with data from the dataset: "Table 3.3. State and Local Government Current Receipts and Expenditures." U.S. Department of Commerce, Bureau of Economic Analysis. Last revised July 27, 2012. http://www.bea.gov/iTable/iTable.cfm?ReqID=9&step=1

NOTES:

- Taxes calculated by adding "Current tax receipts" with "Contributions for government social insurance," which are a type of tax. ["A Primer on BEA's Government Accounts." By Bruce E. Baker and Pamela A. Kelly. U.S. Bureau of Economic Analysis, March 2008. http://www.bea.gov/scb/pdf/2008/03 March/0308_primer.pdf. Page 33: "Social insurance contributions. These finance the provision of certain social benefits to qualified persons. These contributions include contributions for social security, Medicare, unemployment insurance, and a number of smaller programs."]

- An Excel file containing the data and calculations is available upon request.

[6] Report: "United States Federal Debt: Answers To Frequently Asked Questions, An Update." U.S. Congress, Government Accountability Office, August 12, 2004. http://www.gao.gov/assets/250/243712.pdf

Page 39:

Over the long term, the costs of federal borrowing will be borne by tomorrow's workers and taxpayers. Higher saving and investment in the nation's capital stock—factories, equipment, and technology—increase the nation's capacity to produce goods and services and generate higher income in the future. Increased economic capacity and rising incomes would allow future generations to more easily bear the burden of the federal government's debt. Persistent deficits and rising levels of debt, however, reduce funds available for private investment in the United States and abroad. Over time, lower productivity and GDP growth ultimately may reduce or slow the growth of the living standards of future generations.

Page 41:

GAO's long-term simulations show that absent policy actions aimed at deficit reduction, debt burdens of such magnitudes imply a substantial decline in national saving available to finance private investment in the nation's capital stock. The fiscal paths simulated are ultimately unsustainable and would inevitably result in declining GDP and future living standards. Even before such effects, these debt paths would likely result in rising inflation, higher interest rates, and the unwillingness of foreign investors to invest in a weakening American economy.

[7] Brief: "Federal Debt and the Risk of a Fiscal Crisis." Congressional Budget Office, July 27, 2010. http://www.cbo.gov/...

Page 1: "[I]f the payment of interest on the extra debt was financed by imposing higher marginal tax rates, those rates would discourage work and saving and further reduce output."

[8] Book: This Time is Different: Eight Centuries of Financial Folly. By Carmen M. Reinhart (University of Maryland) and Kenneth S. Rogoff (Harvard University). Princeton University Press, 2009.

Page 175: "[I]nflation has long been the weapon of choice in sovereign defaults on domestic debt and, where possible, on international debt."

[9] The consequences of unchecked government debt are addressed in greater detail in Just Facts' research on the national debt.

[10] Calculated with data from:

a) Dataset: "Table 3.1. Government Current Receipts and Expenditures." U.S. Department of Commerce, Bureau of Economic Analysis. Last revised September 27, 2012. http://www.bea.gov/iTable/iTable.cfm?ReqID=9&step=1

b) Dataset: "Table 1.1.5. Gross Domestic Product." U.S. Department of Commerce, Bureau of Economic Analysis. Last revised September 27, 2012. http://www.bea.gov/iTable/iTable.cfm?ReqID=9&step=1

c) Dataset: "Average Number of People per Household, by Race and Hispanic Origin, Marital Status, Age, and Education of Householder: 2011." U.S. Census Bureau, November 2011. http://www.census.gov/...

Total households = 118,682,000

NOTES:

- This dataset goes back to 1929. That federal revenues never exceeded 21% of GDP prior to 1929 is ascertained from a 2010 Congressional Budget Office report that (1) projected federal revenues (as a portion of GDP) in 2020 will exceed those in 2000 by one tenth of a percentage point, and (2) makes the following statement: "Revenues would also rise considerably under current law; by the 2020s, they would reach higher levels relative to the size of the economy than ever recorded in the nation's history." [Report: "The Long-Term Budget Outlook." Congressional Budget Office, June 2010 (Revised August 2010). http://www.cbo.gov/ftpdocs/115xx/doc11579/06-30-LTBO.pdf]

- An Excel file containing the data and calculations is available upon request.

[11] Report: "United States Federal Debt: Answers To Frequently Asked Questions, An Update." U.S. Congress, Government Accountability Office, August 12, 2004. http://www.gao.gov/assets/250/243712.pdf

Page 35: "Assuming no changes to currently projected benefits and revenues, Social Security and Medicare ultimately will pose an unsustainable burden on future taxpayers and would significantly reduce the nation's economic growth."

Page 65:

Debt held by the public is the largest explicit liability of the federal government. However, the federal government undertakes a wide range of programs, responsibilities, and activities that may explicitly or implicitly expose it to future spending. These "fiscal exposures"² vary widely as to source, extent of the government's legal obligation, likelihood of occurrence, and magnitude. Given this variety, it is useful to think of fiscal exposures as a spectrum extending from explicit liabilities to the implicit promises embedded in current policy or public expectations. (See table 2.) For example, the current liability figures for the U.S. government do not include the difference between scheduled and funded benefits in connection with the Social Security and Medicare programs.

Page 66:

Fiscal exposures represent significant commitments that ultimately have to be addressed. The burden of paying for these exposures may encumber future budgets and constrain fiscal flexibility. Not capturing the long-term costs of current decisions limits policymakers' ability to control the government's fiscal exposures at the time decisions are made. In addition, the lack of recognition of long-term fiscal exposures may make it difficult for policymakers and the public to adequately understand the government's overall performance and true financial condition.

[12] A detailed accounting of these debts, liabilities, and obligations is published in Just Facts' research on the national debt.

[13] Textbook: Public Finance (Second edition). By John E. Anderson. South-Western Cenage Learning, 2012. Page 398:

Economic incidence is concerned with how the burden of the tax is distributed among economic agents (producers, consumers, employees, and shareholders) as determined by market forces, not by the law. It is one thing to specify in law that the sales tax be collected and paid by Wal-Mart, for example, but it is quite another to determine how Wal-Mart then passes some portion of the tax burden along to its customers, workers, and owner-shareholders, depending on the economic forces at work in each of these market contexts. Economic incidence is the pattern of tax burden as it is distributed by supply and demand forces in each of these markets.

[14] Textbook: Macroeconomics: Private and Public Choice. By James D. Gwartney and others. South-Western Cenage Learning, 2005. Pages 95-98:

Economic analysis indicates that the actual burden of a tax—or more precisely, the split of the burden between buyers and sellers—does not depend on whether the tax is statutorily placed on the buyer or the seller. …

If the actual incidence of a tax is independent of its statutory assignment, what does determine the incidence? The answer: The incidence of a tax depends on the responsiveness of buyers and of sellers to a change in price. When buyers respond to even a small increase in price by leaving the market and buying other things, they will not be willing to accept a price that is much higher than it was prior to the tax. Similarly, if sellers respond to a small reduction in what they receive by shifting their goods and resources to other markets, or by going out of business, they will not be willing to accept a much smaller payment, net of tax. The burden of a tax—its incidence—tends to fall more heavily on whichever side of the market has the least attractive options elsewhere—the side of the market that is less sensitive to price changes, in other words.

[15] Textbook: Microeconomics. By N. Gregory Mankiw and Mark P. Taylor. Thompson Learning, 2006.

Page 122: "Politicians can decide whether a tax comes from a buyer's pocket or from the seller's, but they cannot legislate the true burden of a tax. Rather, tax incidence depends on the forces of supply and demand."

[16] Textbook: Public Finance (Second edition). By John E. Anderson. South-Western Cenage Learning, 2012. Page 397:

When we consider the burden of a tax, we must distinguish between the burden as it is specified in the tax law and the true economic burden. Statutory incidence refers to tax incidence required by legal statutes. Of course, it is not possible to specify true economic incidence in law, but that does not stop lawmakers from trying. Consider a simple example. The U.S. Social Security payroll tax requires that employers and employees split the tax, each paying one-half of the total. Hence, the statutory incidence of the tax is that half the tax falls on the employer and half falls on the employee. … But, the true economic incidence of the payroll tax is quite different. The employer has some ability to adjust the employee's wage and pass the employer's half of the tax on to the employee. In fact, the employee may bear the entire tax. Of course, the extent to which the employer can pass the tax on to the employee depends on the labor supply elasticity of the employee; that is, the willingness of the employee to accept a lower wage and supply the same, or nearly the same, quantity of labor.

NOTE: See also the next three footnotes.

[17] Letter from Congressional Budget Office Director Douglas W. Elmendorf to U.S. Senator Charles E. Grassley, March 4, 2010. http://grassley.senate.gov/...

Page 2:

The President proposes to assess an annual fee on liabilities of banks, thrifts, bank and thrift holding companies, brokers, and security dealers, as well as U.S. holding companies controlling such entities. …

… However, the ultimate cost of a tax or fee is not necessarily borne by the entity that writes the check to the government. The cost of the proposed fee would ultimately be borne to varying degrees by an institution's customers, employees, and investors, but the precise incidence among those groups is uncertain. Customers would probably absorb some of the cost in the form of higher borrowing rates and other charges, although competition from financial institutions not subject to the fee would limit the extent to which the cost could be passed through to borrowers. Employees might bear some of the cost by accepting some reduction in their compensation, including income from bonuses, if they did not have better employment opportunities available to them. Investors could bear some of the cost in the form of lower prices of their stock if the fee reduced the institution's future profits.

[18] Report: "Reducing the Deficit: Spending and Revenue Options." Congressional Budget Office, March 2011. http://cbo.gov/...

Page 133: "Households generally bear the economic cost, or burden, of the taxes that they pay themselves, such as individual income taxes and employees' share of payroll taxes. But households also bear the burden of the taxes paid by businesses."

[19] Report: "The Distribution of Household Income and Federal Taxes, 2008 and 2009." Congressional Budget Office, July 10, 2012. http://www.cbo.gov/...

Page 23: "In its analysis, CBO assumed that households bear the economic cost of the taxes they pay directly, such as individual income taxes and the employee's share of payroll taxes. CBO further assumed—as do most economists— that employers pass on their share of payroll taxes to employees by paying lower wages than they would otherwise pay. Therefore, CBO included the employer's share of payroll taxes in households' before-tax income and in households' taxes."

[20] Report: "The Distribution of Household Income and Federal Taxes, 2008 and 2009." Congressional Budget Office, July 10, 2012. http://www.cbo.gov/...

Pages 23-24: "CBO also assumed that the economic cost of excise taxes falls on households according to their consumption of taxed goods (such as tobacco and alcohol). Excise taxes on intermediate goods, which are paid by businesses, were attributed to households in proportion to their overall consumption. CBO assumed that each household spent the same amount on taxed goods as a similar household with comparable income is reported to spend in the Bureau of Labor Statistics' Consumer Expenditure Survey."

Page 9: "The effect of federal excise taxes, relative to income, is greatest for lower-income households, who tend to spend a large share of their income on such goods as gasoline, alcohol, and tobacco, which are subject to such taxes."

[21] "Testimony of the Staff of the Joint Committee On Taxation before the Joint Select Committee on Deficit Reduction." By Thomas A. Barthold. United States Congress, Joint Committee on Taxation, September 22, 2011. http://www.jct.gov/...

Pages 43-44: "Generally, excise taxes are taxes imposed on a per unit or ad valorem (i.e., percentage of price) basis on the production, importation, or sale of a specific good or service. Among the goods and services subject to U.S. excise taxes are motor fuels, alcoholic beverages, tobacco products, firearms, air and ship transportation, certain environmentally hazardous activities and products, coal, telephone communications, certain wagers, and vehicles lacking in fuel efficiency."

[22] Report: "Overview of the Federal Tax System." By David L. Brumbaugh and others. Congressional Research Service, March 10, 2005. http://www.policyarchive.org/handle/10207/bitstreams/2366.pdf

Page 10:

The burden of excise taxes is thought to fall on consumption and more heavily on individuals with lower incomes. The tax is believed to be usually passed on by producers to consumers in the form of higher prices. And because consumption is a higher proportion of income for lower-income persons than upper-income individuals, excise taxes are usually considered regressive. However, the incidence of excise taxes in particular cases depends on the market conditions, and how consumers and producers respond to price changes. Further, some economists have argued that consideration of the incidence of excise taxes over an individual's lifetime reduces their apparent regressivity.

[23] Report: "Reducing the Deficit: Spending and Revenue Options." Congressional Budget Office, March 2011. http://cbo.gov/...

Page 133: "In the judgment of CBO and most economists, the employers' share of payroll taxes is passed on to employees in the form of lower wages."

[24] Report: "Understanding the Tax Reform Debate: Background, Criteria, & Questions." Prepared under the direction of James R. White (Director, Strategic Issues, Tax Policy and Administration Issues). United States Government Accountability Office, September 2005. http://www.gao.gov/new.items/d051009sp.pdf

Page 68: "Payroll Taxes Often synonymous with social insurance taxes. However, in some cases the term "payroll taxes" may be used more generally to include all tax withholding. For the purposes of this report, payroll taxes are synonymous with social insurance taxes."

Page 69: "Social Insurance Taxes Tax payments to the federal government for Social Security, Medicare, and unemployment compensation. While employees and employers pay equal amounts in social insurance taxes, economists generally agree that employees bear the entire burden of social insurance taxes in the form of reduced wages."

[25] Report: "The Distribution of Household Income and Federal Taxes, 2008 and 2009." Congressional Budget Office, July 10, 2012. http://www.cbo.gov/...

Page 23: "CBO further assumed—as do most economists— that employers pass on their share of payroll taxes to employees by paying lower wages than they would otherwise pay. Therefore, CBO included the employer's share of payroll taxes in households' before-tax income and in households' taxes."

[26] "2010 Annual Report of the Board of Trustees of The Federal Old-Age and Survivors Insurance and Disability Insurance Trust Funds." Board of Trustees of the Federal OASDI Trust Funds, August 9, 2010. http://www.ssa.gov/OACT/TR/2010/tr2010.pdf

Page 33:

[U]nder these new laws, a combination of federal subsidies for individual insurance through the health benefit exchanges, penalties for being uninsured or not offering coverage, an excise tax on employer sponsored group health insurance cost, and anticipated competitive premiums from health benefit exchanges are expected to slow the rate of growth in the total cost of employer-sponsored group health insurance. Most of this cost reduction is assumed to result in an increase in the share of employee compensation that will be provided in wages that will be subject to the Social Security payroll tax.

NOTE: To summarize the above, because the cost of health insurance is part of employers' cost of compensating employees, if the cost of health insurance is decreased, "most" of the cost savings will be redirected to other forms of employee compensation such as salary. This is because employee compensation is generally driven by laws of supply of demand (with the notable exception of minimum wage laws). Likewise, because employer payroll taxes are a direct outcome of employers paying employees, most of this cost is redirected from other forms of employee compensation.

[27] Web page: "Current-Law Distribution of Taxes." Tax Policy Center (a joint project of the Urban Institute and Brookings Institution). Accessed August 25, 2012 at http://www.taxpolicycenter.org/taxtopics/currentdistribution.cfm

"A key insight from economics is that taxes are not always borne by the individual or business that writes the check to the IRS. Sometimes taxes are shifted. For example, most economists believe that the employer portion of payroll taxes translate into lower wages and are thus ultimately borne by workers."

[28] Report: "The Distribution of Household Income and Federal Taxes, 2008 and 2009." Congressional Budget Office, July 10, 2012. http://www.cbo.gov/...

Pages 16-18:

In previous reports, CBO allocated the entire economic burden of the corporate income tax to owners of capital in proportion to their capital income. CBO has reevaluated the research on that topic, and in this report it allocates 75 percent of the federal corporate income tax to capital income and 25 percent to labor income.

The incidence of the corporate income tax is uncertain. In the very short term, corporate shareholders are likely to bear most of the economic burden of the tax; but over the longer term, as capital markets adjust to bring the after-tax returns on different types of capital in line with each other, some portion of the economic burden of the tax is spread among owners of all types of capital. In addition, because the tax reduces capital investment in the United States, it reduces workers' productivity and wages relative to what they otherwise would be, meaning that at least some portion of the economic burden of the tax over the longer term falls on workers. That reduction in investment probably occurs in part through a reduction in U.S. saving and in part through decisions to invest more savings outside the United States (relative to what would occur in the absence of the U.S. corporate income tax); the larger the decline in saving or outflow of capital, the larger the share of the burden of the corporate income tax that is borne by workers.

CBO recently reviewed several studies that use so-called general-equilibrium models of the economy to determine the long-term incidence of the corporate income tax. The results of those studies are sensitive to assumptions about the values of several key parameters, such as the ease with which capital can move between countries. Using assumptions that reflect the central tendency of published estimates of the key parameters yields an estimate that about 60 percent of the corporate income tax is borne by owners of capital and 40 percent is borne by workers.⁸

However, standard general-equilibrium models exclude important features of the corporate income tax system that tend to increase the share of the corporate tax borne by corporate shareholders or by capital owners in general.⁹ For example, standard models generally assume that corporate profits represent the "normal" return on capital (that is, the return that could be obtained from making a risk-free investment). In fact, corporate profits partly represent returns on capital in excess of the normal return, for several reasons: Some corporations possess unique assets such as patents or trademarks; some choose riskier investments that have the potential to provide above-normal returns; and some produce goods or services that face little competition and thereby earn some degree of monopoly profits. Some estimates indicate that less than half of the corporate tax is a tax on the normal return on capital and that the remainder is a tax on such excess returns.¹⁰ Taxes on excess returns are probably borne by the owners of the capital that produced those excess returns. Standard models also generally fail to incorporate tax policies that affect corporate finances, such as the preferences afforded to corporate debt under the corporate income tax. Increases in the corporate tax will increase the subsidy afforded to domestic debt, increasing the relative return on debt-financed investment in the United States and drawing new investment from overseas, thus reducing the net amount of capital that flows out of the country. In addition, standard models generally do not account for corporate income taxes in other countries; those taxes also reduce the amount of capital that flows out of this country because of the U.S. corporate income tax.

Those factors imply that workers bear less of the burden of the corporate income tax than is estimated using standard general-equilibrium models, but quantifying the magnitude of the impact of the factors is difficult.

Page 24:

Far less consensus exists about how to allocate corporate income taxes (and taxes on capital income generally). In this analysis, CBO allocated 75 percent of the burden of corporate income taxes to owners of capital in proportion to their income from interest, dividends, adjusted capital gains, and rents. The agency used capital gains scaled to their long-term historical level given the size of the economy and the tax rate that applies to them rather than actual capital gains so as to smooth out large year-to-year variations in the total amount of gains realized. CBO allocated 25 percent of the burden of corporate income taxes to workers in proportion to their labor income.

[29] Report: "Reducing the Deficit: Spending and Revenue Options." Congressional Budget Office, March 2011. http://cbo.gov/...

Page 133: "In addition, households bear the burden of corporate income taxes, although the extent to which they do so as owners of capital, as workers, or as consumers is not clear."

[30] In May 2012, Just Facts conducted a search of academic literature to determine the range of scholarly opinion on this subject. The search found that estimates for the portion of corporate income taxes that are borne by owners of capital ranged from nearly 100% down to 33%. Here are two extremes:

a) Report: "An Analysis of the 'Buffett Rule'." By Thomas L. Hungerford. Congressional Research Service, October 7, 2011. http://www.fas.org/sgp/crs/misc/R42043.pdf

Page 4: "The evidence suggests that most or all of the burden of the corporate income tax falls on owners of capital."                                       

b) Working paper: "International Burdens of the Corporate Income Tax." By William C. Randolph. Congressional Budget Office, August, 2006. http://www.cbo.gov/...

Pages 51-52: "In the base case (Table 3), the model used in this study predicts that domestic labor bears 74 percent, domestic capital owners bear 33 percent, foreign capital owners bear 72 percent, foreign labor bears -71 percent, and the excess burden equals about 4 percent of the revenue."

[31] Constructed with data from:

a) Dataset: "The Distribution of Household Income and Federal Taxes, 2008 and 2009." Congressional Budget Office, July 10, 2012. http://www.cbo.gov/...

b) Report: "The Distribution of Household Income and Federal Taxes, 2008 and 2009." Congressional Budget Office, July 10, 2012. http://www.cbo.gov/...

Page 1: "This report shows average tax rates for various income categories for the four largest sources of federal revenue—individual income taxes, social insurance (or payroll) taxes, corporate income taxes, and excise taxes— and for the four taxes combined."†

† NOTES:

This does not include federal estate and gift taxes, customs duties, and other miscellaneous receipts, which amount to about 5% of federal taxes. [Report: "Data on the Distribution of Federal Taxes and Household Income." Congressional Budget Office, April 2009. Blog: "Issues to Consider for Distributional Analysis." CBO Director's Blog, December 11th, 2007. "In its analysis, CBO estimates effective tax rates for the four largest sources of federal revenues—individual income taxes, social insurance (payroll) taxes, corporate income taxes, and excise taxes—as well as the total effective rate for the four taxes combined. Those taxes account for over 95 percent of total federal revenues. The analysis does not include federal estate and gift taxes, customs duties, and other miscellaneous receipts."]

This latest CBO report on effective tax rates doesn't quantify the federal taxes not included in the analysis, but Just Facts has used data from another CBO report to calculate that is 4.7%. [Report: "The Budget and Economic Outlook: Fiscal Years 2012 to 2022." Congressional Budget Office, January 31, 2012. http://www.cbo.gov/.... Page 134: "Table F-2. Revenues, by Major Source, Since 1972 (In Billions of Dollars) … 2009 … Estate and Gift Taxes [=] 23.5 … Customs Duties [=] 22.5 Miscellaneous Receipts [=] 52.1 … Total [=] 2,105.0"

CALCULATION: (23.5 + 22.5 + 52.1) / 2,105.0 = 4.7%]

Page 9: "This report includes only federal taxes. CBO did not include state and local taxes in this analysis because of the difficulty of estimating them for individual households."

Page 2 (in pdf): "Before-tax income is the sum of market income and government transfers. Market income is composed of labor income, business income, capital gains, capital income (excluding capital gains), income received in retirement for past services, and other sources of income."

Page 24:

Government transfers consist of cash payments from Social Security, unemployment insurance, Supplemental Security Income, Temporary Assistance for Needy Families (and its predecessor, Aid to Families with Dependent Children), veterans' programs, workers' compensation, and state and local government assistance programs. They also include the value of in-kind benefits, such as Supplemental Nutrition Assistance Program vouchers (formerly known as food stamps), school lunches and breakfasts, housing assistance, energy assistance, and benefits provided by Medicare, Medicaid, and the Children's Health Insurance Program.

Page 18:

Health insurance provided though Medicare, Medicaid, and the Children's Health Insurance Program (CHIP) represents a significant and growing portion of government transfers. CBO assigned a higher value to that insurance for the estimates in this report than in previous analyses of the distribution of household income and federal taxes.

Receiving health insurance enhances the economic wellbeing of recipients, enabling them to obtain health care services at a reduced out-of-pocket cost and thereby to consume more health care without giving up other forms of consumption. Accordingly, CBO includes estimated values of health insurance—whether provided by an employer or the government—in its analyses of household income.

NOTE: An Excel file containing the data and calculations is available upon request.

[32] Constructed with data from:

a) Dataset: "The Distribution of Household Income and Federal Taxes, 2008 and 2009." Congressional Budget Office, July 10, 2012. http://www.cbo.gov/...

b) Report: "The Distribution of Household Income and Federal Taxes, 2008 and 2009." Congressional Budget Office, July 10, 2012. http://www.cbo.gov/...

Page 1: "This report shows average tax rates for various income categories for the four largest sources of federal revenue—individual income taxes, social insurance (or payroll) taxes, corporate income taxes, and excise taxes— and for the four taxes combined."†

† NOTES:

This does not include federal estate and gift taxes, customs duties, and other miscellaneous receipts, which amount to about 5% of federal taxes. [Report: "Data on the Distribution of Federal Taxes and Household Income." Congressional Budget Office, April 2009. Blog: "Issues to Consider for Distributional Analysis." CBO Director's Blog, December 11th, 2007. "In its analysis, CBO estimates effective tax rates for the four largest sources of federal revenues—individual income taxes, social insurance (payroll) taxes, corporate income taxes, and excise taxes—as well as the total effective rate for the four taxes combined. Those taxes account for over 95 percent of total federal revenues. The analysis does not include federal estate and gift taxes, customs duties, and other miscellaneous receipts."]

This latest CBO report on effective tax rates doesn't quantify the federal taxes not included in the analysis, but Just Facts has used data from another CBO report to calculate that is 4.7%. [Report: "The Budget and Economic Outlook: Fiscal Years 2012 to 2022." Congressional Budget Office, January 31, 2012. http://www.cbo.gov/.... Page 134: "Table F-2. Revenues, by Major Source, Since 1972 (In Billions of Dollars) … 2009 … Estate and Gift Taxes [=] 23.5 … Customs Duties [=] 22.5 Miscellaneous Receipts [=] 52.1 … Total [=] 2,105.0"

CALCULATION: (23.5 + 22.5 + 52.1) / 2,105.0 = 4.7%]

Page 9: "This report includes only federal taxes. CBO did not include state and local taxes in this analysis because of the difficulty of estimating them for individual households."

Page 2 (in pdf): "Before-tax income is the sum of market income and government transfers. Market income is composed of labor income, business income, capital gains, capital income (excluding capital gains), income received in retirement for past services, and other sources of income."

Page 24:

Government transfers consist of cash payments from Social Security, unemployment insurance, Supplemental Security Income, Temporary Assistance for Needy Families (and its predecessor, Aid to Families with Dependent Children), veterans' programs, workers' compensation, and state and local government assistance programs. They also include the value of in-kind benefits, such as Supplemental Nutrition Assistance Program vouchers (formerly known as food stamps), school lunches and breakfasts, housing assistance, energy assistance, and benefits provided by Medicare, Medicaid, and the Children's Health Insurance Program.

Page 18:

Health insurance provided though Medicare, Medicaid, and the Children's Health Insurance Program (CHIP) represents a significant and growing portion of government transfers. CBO assigned a higher value to that insurance for the estimates in this report than in previous analyses of the distribution of household income and federal taxes.

Receiving health insurance enhances the economic wellbeing of recipients, enabling them to obtain health care services at a reduced out-of-pocket cost and thereby to consume more health care without giving up other forms of consumption. Accordingly, CBO includes estimated values of health insurance—whether provided by an employer or the government—in its analyses of household income.

NOTE: An Excel file containing the data and calculations is available upon request.

[33] Constructed with data from:

a) Dataset: "The Distribution of Household Income and Federal Taxes, 2008 and 2009." Congressional Budget Office, July 10, 2012. http://www.cbo.gov/...

b) Report: "The Distribution of Household Income and Federal Taxes, 2008 and 2009." Congressional Budget Office, July 10, 2012. http://www.cbo.gov/...

Page 1: "This report shows average tax rates for various income categories for the four largest sources of federal revenue—individual income taxes, social insurance (or payroll) taxes, corporate income taxes, and excise taxes— and for the four taxes combined."†

† NOTES:

This does not include federal estate and gift taxes, customs duties, and other miscellaneous receipts, which amount to about 5% of federal taxes. [Report: "Data on the Distribution of Federal Taxes and Household Income." Congressional Budget Office, April 2009. Blog: "Issues to Consider for Distributional Analysis." CBO Director's Blog, December 11th, 2007. "In its analysis, CBO estimates effective tax rates for the four largest sources of federal revenues—individual income taxes, social insurance (payroll) taxes, corporate income taxes, and excise taxes—as well as the total effective rate for the four taxes combined. Those taxes account for over 95 percent of total federal revenues. The analysis does not include federal estate and gift taxes, customs duties, and other miscellaneous receipts."]

This latest CBO report on effective tax rates doesn't quantify the federal taxes not included in the analysis, but Just Facts has used data from another CBO report to calculate that is 4.7%. [Report: "The Budget and Economic Outlook: Fiscal Years 2012 to 2022." Congressional Budget Office, January 31, 2012. http://www.cbo.gov/.... Page 134: "Table F-2. Revenues, by Major Source, Since 1972 (In Billions of Dollars) … 2009 … Estate and Gift Taxes [=] 23.5 … Customs Duties [=] 22.5 Miscellaneous Receipts [=] 52.1 … Total [=] 2,105.0"

CALCULATION: (23.5 + 22.5 + 52.1) / 2,105.0 = 4.7%]

Page 9: "This report includes only federal taxes. CBO did not include state and local taxes in this analysis because of the difficulty of estimating them for individual households."

Page 2 (in pdf): "Before-tax income is the sum of market income and government transfers. Market income is composed of labor income, business income, capital gains, capital income (excluding capital gains), income received in retirement for past services, and other sources of income."

Page 24:

Government transfers consist of cash payments from Social Security, unemployment insurance, Supplemental Security Income, Temporary Assistance for Needy Families (and its predecessor, Aid to Families with Dependent Children), veterans' programs, workers' compensation, and state and local government assistance programs. They also include the value of in-kind benefits, such as Supplemental Nutrition Assistance Program vouchers (formerly known as food stamps), school lunches and breakfasts, housing assistance, energy assistance, and benefits provided by Medicare, Medicaid, and the Children's Health Insurance Program.

Page 18:

Health insurance provided though Medicare, Medicaid, and the Children's Health Insurance Program (CHIP) represents a significant and growing portion of government transfers. CBO assigned a higher value to that insurance for the estimates in this report than in previous analyses of the distribution of household income and federal taxes.

Receiving health insurance enhances the economic wellbeing of recipients, enabling them to obtain health care services at a reduced out-of-pocket cost and thereby to consume more health care without giving up other forms of consumption. Accordingly, CBO includes estimated values of health insurance—whether provided by an employer or the government—in its analyses of household income.

NOTE: An Excel file containing the data and calculations is available upon request.

[34] Report: "The Distribution of Household Income and Federal Taxes, 2008 and 2009." Congressional Budget Office, July 10, 2012. http://www.cbo.gov/...

Page 9: "This report includes only federal taxes. CBO did not include state and local taxes in this analysis because of the difficulty of estimating them for individual households."

[35] Just Facts has found very few numerical analyses of the distribution of state and local taxes, and all of them suffer from one or more major inadequacies. For example, the Institute on Taxation and Economic Policy (ITEP) conducted such an analysis for 2007 that excludes large portions of income for lower- and middle-class families, thus artificially inflating their tax burdens.

The report in question, "Who Pays? A Distributional Analysis of the Tax Systems in All 50 States," does not define "income" and refers readers to the organization's website for more details about methodology.† The website's document about methodology also does not define "income."‡ However, the report cites figures for family incomes in the lowest quintile of income distribution that are far below the figures provided by the CBO. For example, the report states that the lowest quintile of families in California had an average income of $13,200 in 2007, whereas CBO states that the lowest quintile of households nationwide had an average income of $23,900 that year.§ (Note that ITEP's income figures for the lowest quintiles in most of the other states are significantly lower than in California). The CBO report adjusts for inflation and was published in 2012, while the ITEP report does not state it adjusts for inflation. Hence, in the most extreme scenario, this effectively lowers the CBO's figure for the income of the lowest quintile from $23,900 to $21,630, which is still 64% higher than ITEP's figure.#

Just Facts contacted ITEP via email on 8/27/2012 and asked what measure of income was used in its analysis. Just Facts then followed up with a phone call later that day. ITEP failed to respond to both inquiries. Just Facts' research on tax distribution for the "Media" and "Buffett Rule" reveals how various organizations and individuals use narrow measures of income as the denominator to calculate effective tax burdens, which has the effect of artificially increasing tax rates, especially for lower- and middle-income households.

NOTES:

† Report: "Who Pays? A Distributional Analysis of the Tax Systems in All 50 States, Third Edition." By Carl Davis and others. Institute on Taxation & Economic Policy, November 2009. http://www.itepnet.org/whopays3.pdf

‡ Web page: "ITEP Tax Model Methodology." Institute on Taxation & Economic Policy. Accessed August 26, 2012 at http://ctj.org/ITEP/about/itep_tax_model_full.php

§ Dataset: "The Distribution of Household Income and Federal Taxes, 2008 and 2009." Congressional Budget Office, July 10, 2012. http://www.cbo.gov/...

Tab 3: "Household Income"

# "CPI Inflation Calculator." Bureau of Labor Statistics. Accessed August 26, 2012 at http://www.bls.gov/data/inflation_calculator.htm

"$23,900 in 2012 has the same buying power as $21,629.80 in 2007"

[36] Report: "The Distribution of Household Income and Federal Taxes, 2008 and 2009." Congressional Budget Office, July 10, 2012. http://www.cbo.gov/...

Page 9: "The effect of federal excise taxes, relative to income, is greatest for lower-income households, who tend to spend a large share of their income on such goods as gasoline, alcohol, and tobacco, which are subject to such taxes."

[37] Report: "Overview of the Federal Tax System." By David L. Brumbaugh and others. Congressional Research Service, March 10, 2005. http://www.policyarchive.org/handle/10207/bitstreams/2366.pdf

Page 10:

The burden of excise taxes is thought to fall on consumption and more heavily on individuals with lower incomes. The tax is believed to be usually passed on by producers to consumers in the form of higher prices. And because consumption is a higher proportion of income for lower-income persons than upper-income individuals, excise taxes are usually considered regressive. However, the incidence of excise taxes in particular cases depends on the market conditions, and how consumers and producers respond to price changes. Further, some economists have argued that consideration of the incidence of excise taxes over an individual's lifetime reduces their apparent regressivity.

[38] Report: "The Distribution of Household Income and Federal Taxes, 2008 and 2009." Congressional Budget Office, July 10, 2012. http://www.cbo.gov/...

Page 2 (in pdf): "Negative average tax rates result when refundable tax credits, such as the earned income and child tax credits, exceed the tax owed by people in an income group. (Refundable tax credits are not limited to the amount of income tax owed before they are applied.)"

[39] Report: "Overview of the Federal Tax System." By David L. Brumbaugh and others. Congressional Research Service, March 10, 2005. http://www.policyarchive.org/handle/10207/bitstreams/2366.pdf

Page 5: "If a tax credit is refundable and it exceeds tax liability, a taxpayer receives a payment from the government."

[40] Dataset: "The Distribution of Household Income and Federal Taxes, 2008 and 2009." Congressional Budget Office, July 10, 2012. http://www.cbo.gov/...

Tab 1: "Average Federal Tax Rates"

NOTE: This analysis does not include federal estate and gift taxes, customs duties, and other miscellaneous receipts, which amount to about 5% of federal taxes. [Report: "Data on the Distribution of Federal Taxes and Household Income." Congressional Budget Office, April 2009. Blog: "Issues to Consider for Distributional Analysis." CBO Director's Blog, December 11th, 2007. "In its analysis, CBO estimates effective tax rates for the four largest sources of federal revenues—individual income taxes, social insurance (payroll) taxes, corporate income taxes, and excise taxes—as well as the total effective rate for the four taxes combined. Those taxes account for over 95 percent of total federal revenues. The analysis does not include federal estate and gift taxes, customs duties, and other miscellaneous receipts. Nor does it include state and local taxes."]

[41] Article: "Class Matters: Richest Are Leaving Even the Rich Far Behind." By David Cay Johnston. New York Times, June 5, 2005. http://www.nytimes.com/2005/06/05/national/class/HYPER-FINAL.html

"Under the Bush tax cuts, the 400 taxpayers with the highest incomes - a minimum of $87 million in 2000, the last year for which the government will release such data - now pay income, Medicare and Social Security taxes amounting to virtually the same percentage of their incomes as people making $50,000 to $75,000."

NOTE: The author fails to account for corporate income taxes throughout the article.

[42] See Effective Federal Tax Burdens (2009).

[43] Article: "Republicans dispute Obama's 'fair share' claims, say top earners already pay enough." By Jim Angle. Fox News, July 12, 2012. http://www.foxnews.com/...

NOTE: The author fails to account for any federal taxes beyond income taxes throughout the article.

[44] See Effective Federal Tax Burdens (2009).

[45] Webpage: "James B. Stewart." New York Times. Accessed August 27, 2012 at http://topics.nytimes.com/...

James B. Stewart writes the "Common Sense" column for the Business Day section of The New York Times.

Mr. Stewart shared the Pulitzer Prize for explanatory reporting in 1988, when he was a reporter at The Wall Street Journal. He is a professor of business journalism at the Columbia University Graduate School of Journalism.

Trained as a lawyer, Mr. Stewart was previously the executive editor of American Lawyer magazine. He is a regular contributor to The New Yorker and is the author of numerous books, including "Den of Thieves," "Disneywar" and "Tangled Webs: How False Statements are Undermining America."

[46] Commentary: "In Superrich, Clues to What Might Be in Romney's Returns." By James B. Stewart. New York Times, August 10, 2012. http://www.nytimes.com/...

"What's abundantly clear, both from Mr. Romney's 2010 returns and from the returns of the top 400, is that at the very pinnacle of taxpayers, the United States has a regressive tax system. The top 400 earn more than 1 percent of all income in the United States, more than double their share in 1992. These 400 earned a total of $81 billion in 2009 — but paid an average tax rate of just 19.9 percent."

NOTE: The author fails to account for corporate income taxes throughout the piece.

[47] Commentary: "In One Man's Return, the Tax Code's Unfairness." By James B. Stewart. New York Times, April 20, 2012. http://www.nytimes.com/...

"This perverse outcome proves that what I'd already discovered about the ultrarich also holds true for people who are far from the million-dollar bracket: our tax code isn't progressive. It's not even flat. For people like me — and I assume there are millions of us — it's regressive. For many people, the more you make, the lower the rate you pay."

NOTE: The author fails to account for corporate income taxes throughout the piece.

[48] See Effective Federal Tax Burdens (2009).

[49] Article: "Barack Obama says most Americans pay a higher tax rate than Mitt Romney." PolitiFact. Accessed August 27, 2012 at http://www.politifact.com/...

A new ad from President Barack Obama's campaign continues the drumbeat that Mitt Romney is a privileged rich guy who isn't paying his fair share of taxes.

"You work hard, stretch every penny," a narrator says. "But chances are, you pay a higher tax rate than him: Mitt Romney made $20 million in 2010, but paid only 14 percent in taxes — probably less than you."

We wondered whether it's accurate to say that Romney "paid only 14 percent in taxes — probably less than you." …

So what happens when you add payroll taxes to income taxes? Obama's ad is accurate.

NOTE: PolitiFact fails to account for corporate income taxes throughout the article.

[50] Article: "Does Romney Pay a Lower Rate in Taxes Than You?" By Robert Farley. FactCheck.org, August 3, 2012. http://factcheck.org/...

"A new ad from the Obama campaign claims that Mitt Romney "paid only 14 percent in taxes—probably less than you." That depends. Romney paid a federal income tax rate that is higher than the income tax rate paid by 97 percent of tax filers. But if you include a combination of income taxes and payroll taxes — which make up the bulk of federal taxes for most taxpayers — the ad is accurate."

NOTE: The author fails to account for corporate income taxes throughout the article.

[51] Article: "Romney admits he pays lower tax rate than most Americans." By Sarah B. Boxer. CBS News, January 17, 2012. http://www.cbsnews.com/...

"Republican presidential front-runner Mitt Romney acknowledged Tuesday that he pays an income tax rate close to 15 percent, the same rate that billionaire investor Warren Buffett has decried as lower than that paid by most middle-class Americans."

NOTE: The author fails to account for corporate income taxes throughout the article. Also, Romney did not say he paid a lower tax rate than most Americans.

[52] Article: "Obama team signals nasty White House race." By Stephen Collinson. Agence France-Presse, April 10, 2012. http://www.google.com/hostednews/afp/...

"Romney, a former venture capitalist, paid a tax rate of just 13.9 percent in 2010, a far lower rate than the average American paid, as his fortune is mainly based on investment and not salaried income."

NOTE: The author fails to account for corporate income taxes throughout the article. Also, the article does not cite the tax rate paid by average Americans.

[53] See Effective Federal Tax Burdens (2009).

[54] Article: "Barack Obama says most Americans pay a higher tax rate than Mitt Romney." PolitiFact. Accessed August 27, 2012 at http://www.politifact.com/...

"Here are the average effective tax rates for Americans in different slices of the income spectrum, according to a study by the Urban Institute-Brookings Institution Tax Policy Center."

NOTE: In the sentence above, the word "study" is linked to the following url: http://www.taxpolicycenter.org/numbers/displayatab.cfm?Docid=3277

[55] Article: "Does Romney Pay a Lower Rate in Taxes Than You?" By Robert Farley. FactCheck.org, August 3, 2012. http://factcheck.org/...

"In February, the nonpartisan Tax Policy Center released an analysis that found that when you include income tax and payroll taxes paid both by the employee and employer, people in the middle 20 percent paid an effective rate of 15.5 percent."

NOTE: In the sentence above, the phrase "an analysis" is linked to the following url: http://www.taxpolicycenter.org/numbers/displayatab.cfm?Docid=3277

[56] Report: "T12-0018 - Baseline Tables: Effective Federal Tax Rates by Cash Income Percentile; Baseline: Current Law, 2011." Tax Policy Center, February 08, 2012. http://www.taxpolicycenter.org/numbers/displayatab.cfm?Docid=3277

"As a Percentage of Cash Income … Corporate Income Tax … Middle Quintile [=] 0.6 … Top 0.1 Percent [=] 10.7"

[57] Article: "Barack Obama says most Americans pay a higher tax rate than Mitt Romney." PolitiFact. Accessed August 27, 2012 at http://www.politifact.com/...

"Here's the breakdown when you include income taxes and both sides of the payroll tax (the parts paid for by employee and employer)"

[58] Article: "Does Romney Pay a Lower Rate in Taxes Than You?" By Robert Farley. FactCheck.org, August 3, 2012. http://factcheck.org/...

"In February, the nonpartisan Tax Policy Center released an analysis that found that when you include income tax and payroll taxes paid both by the employee and employer, people in the middle 20 percent paid an effective rate of 15.5 percent."

[59] Textbook: Public Finance (Second edition). By John E. Anderson. South-Western Cenage Learning, 2012.

Page 397: "The U.S. Social Security payroll tax requires that employers and employees split the tax, each paying one-half of the total. Hence, the statutory incidence of the tax is that half the tax falls on the employer and half falls on the employee."

[60] Report: "T12-0018 - Baseline Tables: Effective Federal Tax Rates by Cash Income Percentile; Baseline: Current Law, 2011." Tax Policy Center, February 08, 2012. http://www.taxpolicycenter.org/numbers/displayatab.cfm?Docid=3277

"As a Percentage of Adjusted Gross Income … Middle Quintile … Individual Income Tax [=] 4.1 … Payroll Tax ... Employee [=] 5.1 … Employer [=] 6.3"

NOTE: These figures add to 15.5%. The next two footnotes show that this is the figure used by PolitiFact and FactCheck.

[61] Article: "Barack Obama says most Americans pay a higher tax rate than Mitt Romney." PolitiFact. Accessed August 27, 2012 at http://www.politifact.com/...

"So what happens when you add payroll taxes to income taxes? Obama's ad is accurate. Here's the breakdown when you include income taxes and both sides of the payroll tax (the parts paid for by employee and employer): … Middle fifth: 15.5 percent"

[62] Article: "Does Romney Pay a Lower Rate in Taxes Than You?" By Robert Farley. FactCheck.org, August 3, 2012. http://factcheck.org/...

"In February, the nonpartisan Tax Policy Center released an analysis that found that when you include income tax and payroll taxes paid both by the employee and employer, people in the middle 20 percent paid an effective rate of 15.5 percent."

[63] Report: "T12-0018 - Baseline Tables: Effective Federal Tax Rates by Cash Income Percentile; Baseline: Current Law, 2011." Tax Policy Center, February 08, 2012. http://www.taxpolicycenter.org/numbers/displayatab.cfm?Docid=3277

"(1) For a description of cash income, see http://www.taxpolicycenter.org/TaxModel/income.cfm."

NOTE: The url above redirects to the webpage below.

[64] Webpage: "T12-0156 - Income Measure Used for Distributional Analysis by the Tax Policy Center." Tax Policy Center, July 12, 2012. http://www.taxpolicycenter.org/numbers/displayatab.cfm?DocID=3441

The purpose of an income qualifier is to reflect taxpayers' ability to pay tax. In the initial versions of the tax model, the Tax Policy Center (TPC) used adjusted gross income (AGI) as the income qualifier because resource limitations prevented us from developing a more comprehensive measure of income. AGI, however, is a very narrow measure of income. It excludes such items as untaxed social security and pension benefits, tax-exempt employee benefits, income earned within retirement accounts, and tax-exempt interest.

The measurement of income also matters importantly for the calculation and interpretation of effective tax rates (ETRs), the amount of taxes paid measured as a percentage of income. Narrow measures of income understate taxpayers' ability to pay taxes and overstate their ETRs. If omitted sources of income vary across households, ETRs do not accurately measure the distribution of tax burdens as a share of income, either within or across income groups.

[65] Article: "FactCheck abets false Obama claim about Romney's taxes." By James D. Agresti and Anna Harrington. Just Facts Daily, August 7, 2012. http://www.justfactsdaily.com/...

[66] Article: "Reporters wrong: Romney pays a far higher federal tax rate than most Americans." By James D. Agresti, Levi Morehouse, and Anna Harrington. Just Facts Daily, May 24, 2012. http://www.justfactsdaily.com/...

[67] Op-ed: "Stop Coddling the Super-Rich." By Warren E. Buffett. New York Times, August 14, 2011. http://www.nytimes.com/...

[68] Book: Federal Taxation (2012 edition). By James W. Pratt and William N. Kulsrud. Cenage Learning, 2012.

Page 1-8:

Average Tax Rates  The average rate is computed by dividing the taxpayer's tax liability by the tax base. For the income tax, the average tax rate is simply the tax divided by the taxable income (tax / taxable income). …

Average tax rates are a bit misleading in that they seem to suggest that all units of the tax base (e.g., all dollars of income) are treated equally. … While providing some insight about the overall rate structure, average rates say little about the true impact of a tax on the taxpayer. For this information, effective tax rates are the preferred statistic.

Effective Tax Rates  The effective tax rate is computed by dividing the tax by some broader measure other than the tax base, often some quantity reflecting taxpayer's ability to pay. For example, for the income tax, the effective rate tax rate is normally determined by dividing the tax by total economic income (tax / total economic income).

[69] Report: "An Analysis of the 'Buffett Rule'." By Thomas L. Hungerford. Congressional Research Service, October 7, 2011. http://www.fas.org/sgp/crs/misc/R42043.pdf

Page 3: "Taxable income is a fairly narrow measure of income and does not reflect all the resources available to the taxpayer or gage the taxpayer's ability to pay taxes. This is because personal exemptions and itemized deductions have been subtracted. This can artificially increase the effective average tax rate faced by a taxpayer."

NOTE: Instead of using taxable income for the denominator in in its calculation of tax rates, this report uses adjusted gross income,† which still undercounts income, though not as egregiously as taxable income. Per the Tax Policy Center, adjusted gross income is "a very narrow measure of income. It excludes such items as untaxed social security and pension benefits, tax-exempt employee benefits, income earned within retirement accounts, and tax-exempt interest. … Narrow measures of income understate taxpayers' ability to pay taxes and overstate their" effective tax rates. In 2012, the Tax Policy Center began using a "broadened measure of income" that "is similar to the measures currently employed by Treasury, the Joint Committee of Taxation, and the Congressional Budget Office…."‡

† Page 3: "Adjusted gross income (AGI) is a broader income measure that does not exclude personal exemptions and itemized deductions for charitable contributions, state taxes, and mortgage interest.¹¹ AGI is used for the analysis in calculating tax rates and determining income categories."

‡ Article: "Income Measure Used for Distributional Analysis by the Tax Policy Center." Tax Policy Center, July 12, 2012. http://www.taxpolicycenter.org/numbers/displayatab.cfm?DocID=3441

[70] Report: "Living Within Our Means and Investing in the Future: The President's Plan for Economic Growth and Deficit Reduction." White House Office of Management and Budget, September 2011. http://www.whitehouse.gov/...

Page 46:

PRINCIPLES FOR TAX REFORM …

5. Observe the Buffett Rule. No household making over $1 million annually should pay a smaller share of its income in taxes than middle-class families pay. As Warren Buffett has pointed out, his effective tax rate is lower than his secretary's. No household making over $1 million annually should pay a smaller share of its income in taxes than middle-class families pay. This rule will be achieved as part of an overall reform that increases the progressivity of the tax code.

[71] Report: "The Distribution of Household Income and Federal Taxes, 2008 and 2009." Congressional Budget Office, July 10, 2012. http://www.cbo.gov/...

Page 6: "Table 2. Distribution of Federal Taxes, by Income Group, 2007 to 2009 … All Federal Taxes … Average Federal Tax Rate (Percentage of before-tax income) … 2009 … Middle Quintile [=] 11.1 … Top 1 Percent [=] 28.9"

[72] Report: "High-Income Tax Returns for 2009." By Justin Bryan. IRS, Statistics of Income Bulletin, Spring 2012. http://www.irs.gov/pub/irs-soi/12insprbulhignincome.pdf

Page 6:

Two income concepts are used in this article to classify tax returns as high income: the statutory concept of adjusted gross income (AGI) and the expanded income concept.² Expanded income uses items reported on tax returns to obtain a more comprehensive measure of income than AGI. Specifically, expanded income is AGI plus tax-exempt interest, nontaxable Social Security benefits, the foreign-earned income exclusion, and items of "tax preference" for "alternative minimum tax" purposes; less unreimbursed employee business expenses, moving expenses, investment interest expense to the extent it does not exceed investment income, and miscellaneous itemized deductions not subject to the 2-percent-of-AGI floor.^{3, 4, 5}

Page 9:

Two tax concepts are used in this article to classify tax returns as taxable or nontaxable. The first concept, "U.S. income tax," is total Federal income tax liability (including the "alternative minimum tax" (AMT)), less all credits against income tax. Since the U.S. income tax applies to worldwide income, and since a credit (subject to certain limits) is allowed against U.S. income tax for income taxes paid to foreign governments, a return could be classified as nontaxable under this first concept even though income taxes had been paid to a foreign government. The second tax concept, "worldwide income tax," addresses this circumstance by adding to U.S. income tax the allowed foreign tax credit and foreign taxes paid on excluded foreign-earned income.^{7, 8} The sum of these two items is believed to be a reasonable proxy for foreign taxes actually paid.

Page 9: "For 2009, of the 3,975,288 tax returns with expanded income of $200,000 or more … 19,551 (0.492 percent) had no worldwide income tax liability."

Page 15: "Table 8 shows that, on returns without any worldwide tax and expanded income of $200,000 or more, the most important item in eliminating tax, on 61.1 percent of returns, was the exclusion for state and local government interest ('tax-exempt interest')."

Page 19: "[C]ertain income items from tax-preferred sources may be reduced because of their preferential treatment. An example is interest from tax-exempt State and local Government bonds."

[73] Web page: "Investor Bulletin: Municipal Bonds." U.S. Securities and Exchange Commission, June 16, 2012. http://www.sec.gov/investor/alerts/municipalbonds.htm

Municipal bonds (or "munis" for short) are debt securities issued by states, cities, counties and other governmental entities to fund day-to-day obligations and to finance capital projects such as building schools, highways or sewer systems. By purchasing municipal bonds, you are in effect lending money to the bond issuer in exchange for a promise of regular interest payments, usually semi-annually, and the return of the original investment, or "principal." A municipal bond's maturity date (the date when the issuer of the bond repays the principal) may be years in the future. Short-term bonds mature in one to three years, while long-term bonds won't mature for more than a decade.

Generally, the interest on municipal bonds is exempt from federal income tax. The interest may also be exempt from state and local taxes if you reside in the state where the bond is issued. Bond investors typically seek a steady stream of income payments and, compared to stock investors, may be more risk-averse and more focused on preserving, rather than increasing, wealth. Given the tax benefits, the interest rate for municipal bonds is usually lower than on taxable fixed-income securities such as corporate bonds.

[74] Report: "Who Benefits from Ending the Double Taxation of Dividends?" By Donald B. Marron. U.S. Congress, Joint Economic Committee, February 2003. http://www.jec.senate.gov/...

Pages 3-4: "Under current tax law, interest payments from most municipal bonds are exempt from federal taxes. This exemption is most valuable for individuals in the highest tax brackets, so most of these bonds are held by high income, high tax bracket investors. Indeed, ownership of tax-exempt municipal bonds may be even more skewed toward high income earners than is ownership of dividend paying stocks.⁵"

[75] Testimony: "Federal Support for State and Local Governments Through the Tax Code." By Frank Sammartino (Assistant Director for Tax Analysis). Congressional Budget Office, April 25, 2012. http://www.cbo.gov/...

Pages 3-4:

The federal government offers preferential tax treatment for bonds issued by state and local governments to finance governmental activities. Most tax-preferred bonds are used to finance schools, transportation infrastructure, utilities, and other capital-intensive projects. Although there are several ways in which the tax preference may be structured, in all cases state and local governments face lower borrowing costs than they would otherwise.

Types of Tax-Preferred Bonds

Borrowing by state and local governments benefits from several types of federal tax preferences. The most commonly used tax preference is the exclusion from federal income tax of interest paid on bonds issued to finance the activities of state and local governments. Such tax-exempt bonds—known as governmental bonds—enable state and local governments to borrow more cheaply than they could otherwise.

Another type of tax-exempt bond—qualified private activity bonds, or QPABs—is also issued by state and local governments. In contrast to governmental bonds, QPABs reduce the costs to the private sector of financing some projects that provide public benefits. Although the issuance of QPABs can be advantageous to state and local finances—for example, by encouraging the private sector to undertake projects whose public benefits would otherwise either have gone unrealized or required government investment to bring about—states and localities are not responsible for the interest and principal payments on such bonds. Consequently, QPABs are not the focus of this testimony (although the findings of some studies cited later in this section apply to them as well as to governmental bonds).⁶

[76] Report: "High-Income Tax Returns for 2009." By Justin Bryan. IRS, Statistics of Income Bulletin, Spring 2012. http://www.irs.gov/pub/irs-soi/12insprbulhignincome.pdf

Page 19:

However, certain income items from tax-preferred sources may be reduced because of their preferential treatment. An example is interest from tax-exempt State and local Government bonds. The interest rate on tax-exempt bonds is generally lower than the interest rate on taxable bonds of the same maturity and risk, with the difference approximately equal to the tax rate of the typical investor in tax-exempt bonds. Thus, investors in tax-exempt bonds are effectively paying a tax, referred to as an "implicit tax," and tax-exempt interest as reported is measured on an after-tax, rather than a pre-tax, basis.

[77] Report: "Who Benefits from Ending the Double Taxation of Dividends?" By Donald B. Marron. U.S. Congress, Joint Economic Committee, February 2003. http://www.jec.senate.gov/...

A static analysis – one that focuses solely on who pays taxes to the government – would suggest that the tax exemption [on munis] is a major boon for rich investors. After all, those investors get to earn tax-free interest on the bonds. The flaw in this reasoning is the fact that the interest rate that investors receive on tax-exempt debt is much lower than they could receive on comparable investments. Investors compete among themselves to get the best after-tax returns on their investments. This competition passes much of the benefit of tax exemption back to state and local governments in the form of lower interest rates, making it cheaper and easier to finance schools, roads, and other local projects.

Demonstrating this dynamic requires little effort beyond surfing to a financial web site and doing some simple arithmetic. At this writing, a leading web site reports that the average two-year municipal bond of highest quality yields 1.13 percent (i.e., an investor purchasing $10,000 of two-year municipal bonds would receive interest payments of $113 per year). At the same time, the average two-year Treasury yields 1.59 percent.

U.S. Treasuries are widely considered to be the safest investments in the world, yet they pay substantially more interest than do municipal bonds. Why? Because interest on municipal bonds is exempt from federal taxes.

[78] Calculated with data from the report: "The Budget and Economic Outlook: Fiscal Years 2012 to 2022." Congressional Budget Office, January 31, 2012. http://www.cbo.gov/publication/42905

Supplementary dataset: "Historical Budget Data—January 2012 Baseline." http://www.cbo.gov/...

"Table F-2. Revenues, by Major Source, Since 1972 (In Billions of Dollars) … 2011 … Individual Income Taxes [=] 1,091.5 … Total [=] 2,302.5"

CALCULATION: 1,091.5 / 2,302.5 = 47.4%

[79] The Encyclopedia of Taxation & Tax Policy. Edited by Joseph J. Cordes and others. Urban Institute Press, 2005.

Page 469: "Spending from the general fund is financed by general revenues, which include the individual and corporation income taxes, some excise taxes, estate and gift taxes, tariffs, and miscellaneous receipts."

[80] "Internal Revenue Manual." Internal Revenue Service. Accessed January 11, 2011 at http://www.irs.gov/irm/index.html

Part 1, Chapter 34, Section 1 (http://www.irs.gov/irm/part1/irm_01-034-001.html): "The main financing component of the Federal funds group is referred to as the General Fund, which is used to carry out the general purposes of Government rather than being restricted by law to a specific program and consists of all collections not earmarked by law to finance other funds."

[81] Report: "Federal Tax Treatment Of Individuals." U.S. Congress, Joint Committee on Taxation September 12, 2011.

https://www.jct.gov/...

Pages 3-4: "Sources of gross income for individual taxpayers in 2011 include: wages and salaries (70.8 percent); Social Security and pensions and individual retirement arrangements ("IRAs") (10.6 percent); business, farm and schedule E income (e.g., rents) (7.7 percent); capital gains (4.7 percent); dividend income (2.4 percent); interest income (2.3 percent); and other income (1.4 percent). … Different maximum marginal tax rates apply to different sources of income."

[82] Report: "Overview of the Federal Tax System as in Effect for 2012." Joint Committee on Taxation, February 24, 2012. https://www.jct.gov/publications.html?func=startdown&id=4400

Page 2:

A. Individual Income Tax

In general

A United States citizen or resident alien generally is subject to the U.S. individual income tax on his or her worldwide taxable income.⁵ Taxable income equals the taxpayer's total gross income less certain exclusions, exemptions, and deductions. Graduated tax rates are then applied to a taxpayer's taxable income to determine his or her individual income tax liability. A taxpayer may face additional liability if the alternative minimum tax applies. A taxpayer may reduce his or her income tax liability by any applicable tax credits.

Adjusted gross income

Under the Internal Revenue Code of 1986 (the "Code"), gross income means "income from whatever source derived" except for certain items specifically exempt or excluded by statute. Sources of income include compensation for services, interest, dividends, capital gains, rents, royalties, alimony and separate maintenance payments, annuities, income from life insurance and endowment contracts (other than certain death benefits), pensions, gross profits from a trade or business, income in respect of a decedent, and income from S corporations, partnerships,⁶ trusts or estates.⁷ Statutory exclusions from gross income include death benefits payable under a life insurance contract, interest on certain State and local bonds, employer-provided health insurance, employer-provided pension contributions, and certain other employer-provided benefits. …

⁵ Foreign tax credits generally are available against U.S. income tax imposed on foreign source income to the extent of foreign income taxes paid on that income. A nonresident alien generally is subject to the U.S. individual income tax only on income with a sufficient nexus to the United States.

⁶ In general, partnerships and S corporations are treated as pass-through entities for Federal income tax purposes. Thus, no Federal income tax is imposed at the entity level. Rather, income of such entities is passed through and taxed to the owners at the individual level.

⁷ In general, estates and most trusts pay tax on income at the entity level, unless the income is distributed or required to be distributed under governing law or under the terms of the governing instrument. Such entities determine their tax liability using a special tax rate schedule and are subject to the alternative minimum tax. Certain trusts, however, do not pay Federal income tax at the trust level. For example, certain trusts that distribute all income currently to beneficiaries are treated as pass-through or conduit entities (similar to a partnership). Other trusts are treated as being owned by grantors in whole or in part for tax purposes; in such cases, the grantors are taxed on the income of the trust.

[83] Form 9452: "Filing Assistance Program." Internal Revenue Service, 2011. http://www.irs.gov/pub/irs-pdf/f9452.pdf

"Computing Your Total Gross Income … Interest income (Do not include tax-exempt interest, such as from municipal bonds)"

[84] Report: "The Federal Revenue Effects Of Tax-Exempt And Direct-Pay Tax Credit Bond Provisions." Joint Committee On Taxation, July 16, 2012. https://www.jct.gov/publications.html?func=startdown&id=4470

Page 2:

Under present law, gross income does not include interest on State and local bonds. State and local bonds are classified generally as either governmental bonds or private activity bonds. Governmental bonds are bonds whose proceeds are primarily used to finance governmental functions or which are repaid with governmental funds. Private activity bonds are bonds in which the State or local government serves as a conduit providing financing to nongovernmental persons (e.g., private businesses or individuals). The exclusion from income for State and local bonds does not apply to private activity bonds, unless the bonds are issued for certain permitted purposes ("qualified private activity bonds") and other requirements are met.

[85] Report: "The Individual Alternative Minimum Tax." Congressional Budget Office, January 15, 2010. http://www.cbo.gov/...

Page 6: "Adjusted gross income is used to determine income tax liability. It is total income from taxable sources minus certain exempted amounts, such as contributions to deductible individual retirement accounts and interest on student loans."

[86] Report: "Overview of the Federal Tax System as in Effect for 2012." Joint Committee on Taxation, February 24, 2012. https://www.jct.gov/publications.html?func=startdown&id=4400

Page 2: "An individual's adjusted gross income ('AGI') is determined by subtracting certain 'above-the-line' deductions from gross income. These deductions include trade or business expenses, capital losses, and contributions to a tax-qualified retirement plan by a self-employed individual, contributions to individual retirement arrangements ('IRAs'), certain moving expenses, certain education-related expenses, and alimony payments."

[87] Report: "Overview of the Federal Tax System." By David L. Brumbaugh and others. Congressional Research Service, March 10, 2005. http://www.policyarchive.org/handle/10207/bitstreams/2366.pdf

Summary: "There are four individual income tax filing categories: married filing jointly, married filing separately, head of household, and single individual."

Page 1:

The tax base is further reduced by certain deductions. Taxpayers can take a standard deduction or they may itemize their deductions. The elderly and blind are allowed an additional standard deduction. Itemized deductions are allowed for home mortgage interest payments, state and local income taxes, state and local property taxes, charitable contributions, medical expenses in excess of 7.5% of AGI, and a few other items. As a temporary measure in 2005, state and local sales taxes can be deducted as an alternative to state and local income taxes.

The tax base is reduced further by subtracting personal and dependent exemptions. Personal exemptions are allowed for the taxpayer, his or her spouse, and each dependent. For taxpayers with high levels of AGI, the personal and dependent exemptions are phased out.

Page 3: "Personal exemptions and itemized deductions are limited for certain high-income taxpayers."

Page 4: "Many tax provisions are phased out as income increases, which has the effect of increasing marginal tax rates."

[88] Report: "Overview of the Federal Tax System as in Effect for 2012." Joint Committee on Taxation, February 24, 2012. https://www.jct.gov/publications.html?func=startdown&id=4400

Page 3:

Taxable income

To determine taxable income, an individual reduces AGI by any personal exemption deductions and either the applicable standard deduction or his or her itemized deductions. Personal exemptions generally are allowed for the taxpayer, his or her spouse, and any dependents. For 2012, the amount deductible for each personal exemption is $3,800. This amount is indexed annually for inflation. In tax years beginning after 2012, the personal exemption phase-out ("PEP") will reduce a taxpayer's personal exemption by two percent for each $2,500 by which the taxpayer's AGI exceeds a certain threshold. JCT staff estimates of the PEP thresholds in 2013 are $172,250 (single) and $258,350 (married filing jointly).

A taxpayer also may reduce AGI by the amount of the applicable standard deduction. The basic standard deduction varies depending upon a taxpayer's filing status. For 2012, the amount of the standard deduction is $5,950 for single individuals and married individuals filing separate returns, $8,500 for heads of households, and $11,900 for married individuals filing a joint return and surviving spouses. An additional standard deduction is allowed with respect to any individual who is elderly or blind.⁸ The amounts of the basic standard deduction and the additional standard deductions are indexed annually for inflation.

In lieu of taking the applicable standard deductions, an individual may elect to itemize deductions. The deductions that may be itemized include State and local income taxes (or, in lieu of income, sales taxes), real property and certain personal property taxes, home mortgage interest, charitable contributions, certain investment interest, medical expenses (in excess of 7.5 percent of AGI), casualty and theft losses (in excess of 10 percent of AGI and in excess of $100 per loss), and certain miscellaneous expenses (in excess of two percent of AGI). In tax years beginning after 2012, the total amount of itemized deductions allowed is reduced for taxpayers with incomes over a certain threshold amount, which is indexed annually for inflation. JCT staff estimates of these limitation thresholds in 2013 are $172,250 for both single taxpayers and those who are married filing jointly.

[89] Report: "Effective Marginal Tax Rates on Labor Income." Congressional Budget Office, 2005. http://www.cbo.gov/...

Page 8:

Similarly, with tax credits, taxpayers often gradually lose the ability to claim a credit as their income nears the upper limit of the specified range for the credit. In that case, an additional dollar of earnings still faces the statutory rate, but in addition, the credit that can be subtracted from tax liability is reduced at the rate of the credit phaseout. Those taxpayers face an effective marginal rate equal to the sum of their statutory rate and the credit phaseout rate.

A few tax benefits disappear immediately once a taxpayer reaches a certain income level rather than gradually phasing out over a range of income. Those "cliffs" can create very high effective marginal rates. For example, single taxpayers with income between $60,000 and $80,000 can deduct up to $2,000 of tuition from their income, but those with income above $80,000 cannot claim the deduction at all. Someone who earned an additional $1,000 that pushed income over that threshold would lose $2,000 in deductions, causing taxable income to rise by $3,000. The taxpayer would face an effective marginal rate three times his or her statutory rate: for instance, a taxpayer in the 25 percent bracket would face an effective marginal rate of 75 percent.

[90] Report: "Overview of the Federal Tax System." By David L. Brumbaugh and others. Congressional Research Service, March 10, 2005. http://www.policyarchive.org/handle/10207/bitstreams/2366.pdf

Summary: "There are four individual income tax filing categories: married filing jointly, married filing separately, head of household, and single individual."

[91] Report: "Overview of the Federal Tax System as in Effect for 2012." Joint Committee on Taxation, February 24, 2012. https://www.jct.gov/publications.html?func=startdown&id=4400

Pages 4-6:

To determine regular tax liability, a taxpayer generally must apply the tax rate schedules (or the tax tables) to his or her regular taxable income. The rate schedules are broken into several ranges of income, known as income brackets, and the marginal tax rate increases as a taxpayer's income increases. Separate rate schedules apply based on an individual's filing status. For 2012, the regular individual income tax rate schedules are as follows:

Table 1.–Federal Individual Income Tax Rates for 2012 …

An individual's marginal tax rate may be reduced by the allowance of a deduction equal to a percentage of income from certain domestic manufacturing activities.⁹

NOTE: The following information is derived from Table 1:

 

Single Individuals
Taxable Income		Rate	Differential from previous upper threshold
Lower Threshold	Upper Threshold
$0	$8,700	10%	-
$8,700	$35,350	15%	$26,650
$35,350	$85,650	25%	$50,300
$85,650	$178,650	28%	$93,000
$178,650	$388,350	33%	$209,700
$388,350	infinity	35%	infinity

 

Heads of Households
Taxable Income		Rate	Differential from previous upper threshold
Lower Threshold	Upper Threshold
$0	$12,400	10%	-
$12,400	$47,350	15%	$34,950
$47,350	$122,300	25%	$74,950
$122,300	$198,050	28%	$75,750
$198,050	$388,350	33%	$190,300
$388,350	infinity	35%	infinity

 

Married Individuals Filing Joint Returns and Surviving Spouses
Taxable Income		Rate	Differential from previous upper threshold
Lower Threshold	Upper Threshold
$0	$17,400	10%	-
$17,400	$70,700	15%	$53,300
$70,700	$142,700	25%	$72,000
$142,700	$217,450	28%	$74,750
$217,450	$388,350	33%	$170,900
$388,350	infinity	35%	infinity

 

Married Individuals Filing Separate Returns
Taxable Income		Rate	Differential from previous upper threshold
Lower Threshold	Upper Threshold
$0	$8,700	10%	-
$8,700	$35,350	15%	$26,650
$35,350	$71,350	25%	$36,000
$71,350	$108,725	28%	$37,375
$108,725	$194,175	33%	$85,450
$194,175	infinity	35%	infinity

[92] Report: "The Alternative Minimum Tax for Individuals: A Growing Burden." By Kurt Schuler. U.S. Congress, Joint Economic Committee. May, 2001.

Page 2: "A tax credit is a provision that allows a reduction in tax liability by a specific dollar amount, regardless of income. For example, a tax credit of $500 allows both taxpayers with income of $40,000 and those with income of $80,000 to reduce their taxes by $500, if they qualify for the credit."

[93] Report: "Overview of the Federal Tax System." By David L. Brumbaugh and others. Congressional Research Service, March 10, 2005. http://www.policyarchive.org/handle/10207/bitstreams/2366.pdf

Page 3: "Personal exemptions and itemized deductions are limited for certain high-income taxpayers."

Page 4: "Many tax provisions are phased out as income increases, which has the effect of increasing marginal tax rates."

Page 5: "If a tax credit is refundable and it exceeds tax liability, a taxpayer receives a payment from the government."

[94] Report: "Reducing the Deficit: Spending and Revenue Options." Congressional Budget Office, March 2011. http://cbo.gov/...

Page 135: "Similarly, refundable tax credits—such as the earned income tax credit and the child tax credit—provide cash assistance to low-income workers with children, but their eligibility rules are often difficult to administer."

[95] Report: "Overview of the Federal Tax System as in Effect for 2012." Joint Committee on Taxation, February 24, 2012. https://www.jct.gov/publications.html?func=startdown&id=4400

Page 7:

Credits against tax

The individual may reduce his or her tax liability by any available tax credits. Tax credits are allowed for certain business expenditures, certain foreign income taxes paid or accrued, certain education expenditures, certain dependent children and child care expenditures, and for certain elderly or disabled individuals. In addition, a refundable earned income tax credit ("EITC") is available to low-income workers who satisfy certain requirements. The amount of the EITC varies depending upon the taxpayer's earned income and whether the taxpayer has one, two, more than two, or no qualifying children. In 2012, the maximum EITC is $5,891 for taxpayers with more than two qualifying children, $5,236 for taxpayers with two qualifying children, $3,169 for taxpayers with one qualifying child, and $475 for taxpayers with no qualifying children. Credits allowed against the regular tax are not uniformly allowed against the alternative minimum tax (for 2011, nonrefundable personal credits are allowed to offset the AMT).

[96] "Testimony of the Staff of the Joint Committee On Taxation before the Joint Select Committee on Deficit Reduction." By Thomas A. Barthold. United States Congress, Joint Committee on Taxation, September 22, 2011. http://www.jct.gov/...

Page 20: "The two most widely used refundable credits are the earned income tax credit (the "EITC") and the child tax credit."

Page 22: "Nonrefundable personal credits include the foreign tax credit, child and dependent care credit, education credits, retirement savings contributions credit, child tax credit, residential energy efficient property credit, nonbusiness energy property credit, and expenses of elderly or disabled."

[97] Report: "Overview of the Federal Tax System as in Effect for 2012." Joint Committee on Taxation, February 24, 2012. https://www.jct.gov/publications.html?func=startdown&id=4400

Pages 2-3: "A. Individual Income Tax … Lower rates apply for long-term capital gains; those rates apply for both the regular tax and the alternative minimum tax."

[98] Report: "Statistics of Income Bulletin." Internal Revenue Service, Fall 1984. http://www.irs.gov/pub/irs-soi/84rpfallbul.pdf

Page 3: "Today's estate tax was instituted by the Revenue Act of 1916, 3 years after the inception of the modern income tax in 1913. No 1onger necessary strictly for wartime revenue, the estate tax was to serve the dual purposes of producing revenue and redistributing wealth."

[99] Webpage: "History of Federal Individual Income Bottom and Top Bracket Rates." National Taxpayers Union. Accessed August 29, 2012 at http://www.ntu.org/tax-basics/history-of-federal-individual-1.html

[100] Report: "U.S. Federal Individual Income Tax Rates History, 1913-2011 (Nominal and Inflation-Adjusted Brackets). Tax Foundation, September 09, 2011. http://taxfoundation.org/...

[101] Report: "Overview of the Federal Tax System as in Effect for 2012." Joint Committee on Taxation, February 24, 2012. https://www.jct.gov/publications.html?func=startdown&id=4400

Pages 4-6: Table 1.–Federal Individual Income Tax Rates for 2012"

[102] Constructed with data from the webpage: "History of Federal Individual Income Bottom and Top Bracket Rates." National Taxpayers Union. Accessed August 29, 2012 at http://www.ntu.org/tax-basics/history-of-federal-individual-1.html

[103] Constructed with data from:

a) Webpage: "History of Federal Individual Income Bottom and Top Bracket Rates." National Taxpayers Union. Accessed August 29, 2012 at http://www.ntu.org/tax-basics/history-of-federal-individual-1.html

b) Dataset: "Table 3.4. Personal Current Tax Receipts." U.S. Department of Commerce, Bureau of Economic Analysis. Last revised August 2, 2012. http://www.bea.gov/iTable/iTable.cfm?ReqID=9&step=1

c) Dataset: "Table 1.1.5. Gross Domestic Product." United States Department of Commerce, Bureau of Economic Analysis. Last revised August 29, 2012. http://www.bea.gov/iTable/iTable.cfm?ReqID=9&step=1

NOTE: An Excel file containing the data and calculations is available upon request.

[104] Calculated with data from the dataset: "Table 3.3. State and Local Government Current Receipts and Expenditures." U.S. Department of Commerce, Bureau of Economic Analysis. Last revised July 27, 2012. http://www.bea.gov/iTable/iTable.cfm?ReqID=9&step=1

NOTE: An Excel file containing the data and calculations is available upon request.

[105] Report: "Facts & Figures Handbook: How Does Your State Compare?" Edited by Scott Drenkard. Tax Foundation, February 15, 2012. http://taxfoundation.org/sites/taxfoundation.org/files/docs/ff2012.pdf

Table 11: "State Individual Income Tax Rates, as of January 1, 2012."

[106] Report: "Local Income Taxes: City- and County-Level Income and Wage Taxes Continue to Wane." By Joseph Henchman and Jason Sapia. Tax Foundation, August 31, 2011. http://taxfoundation.org/sites/taxfoundation.org/files/docs/ff280.pdf

"Most U.S. cities and counties do not impose a local income tax, but they are imposed by 4,943 jurisdictions in 17 states, encompassing over 23 million Americans. Varying from minute amounts in several states to an average 1.55 percent in Maryland (see Table 1), these taxes provide a long-standing and significant source of revenue to many cities in "Rust Belt" states in the northeastern United States."

[107] Report: "Facts & Figures Handbook: How Does Your State Compare?" Edited by Scott Drenkard. Tax Foundation, February 15, 2012. http://taxfoundation.org/sites/taxfoundation.org/files/docs/ff2012.pdf

"Table 8: Sources of State and Local Tax Revenue, Percentage of Total from Each Source, Fiscal Year 2009"

[108] Report: "Overview of the Federal Tax System as in Effect for 2012." U.S. Congress, Joint Committee on Taxation, February 24, 2012. https://www.jct.gov/publications.html?func=startdown&id=4400

Page 18: "Social Insurance taxes comprise old-age and survivors insurance, disability insurance, hospital insurance, railroad retirement, railroad social security equivalent account, employment insurance, employee share of Federal employees retirement, and certain non-Federal employees retirement."

[109] Report: "Understanding the Tax Reform Debate: Background, Criteria, & Questions." Prepared under the direction of James R. White (Director, Strategic Issues, Tax Policy and Administration Issues). United States Government Accountability Office, September 2005. http://www.gao.gov/new.items/d051009sp.pdf

Page 68: "Payroll Taxes Often synonymous with social insurance taxes. However, in some cases the term "payroll taxes" may be used more generally to include all tax withholding. For the purposes of this report, payroll taxes are synonymous with social insurance taxes."

[110] "Testimony of the Staff of the Joint Committee On Taxation before the Joint Select Committee on Deficit Reduction." United States Congress, Joint Committee on Taxation, September 22, 2011. http://www.jct.gov/...

Page 2: "The principal social insurance (employment) taxes are the Federal Insurance Contributions Act (FICA) and Self-Employment Contributions Act (SECA) taxes that fund the Social Security and Medicare systems."

[111] "2010 Financial Report of the United States Government." U.S. Department of the Treasury, December 21, 2010. http://www.fms.treas.gov/fr/10frusg/10frusg.pdf

Page 150: "Social Insurance The social insurance programs consisting of Social Security, Medicare, Railroad Retirement, and Black Lung were developed to provide income security and health care coverage to citizens under specific circumstances as a responsibility of the Government."

[112] Calculated with data from the report: "The Budget and Economic Outlook: Fiscal Years 2012 to 2022." Congressional Budget Office, January 31, 2012. http://www.cbo.gov/publication/42905

Supplementary dataset: "Historical Budget Data—January 2012 Baseline." http://www.cbo.gov/...

"Table F-2. Revenues, by Major Source, Since 1972 (In Billions of Dollars) … 2011 … Social Insurance Taxes [=] 818.8 … Total [=] 2,302.5"

CALCULATION: 818.8 / 2,302.5 = 35.6%

[113] Calculated with data from Table 3.3: "State and Local Government Current Receipts and Expenditures." United States Department of Commerce, Bureau of Economic Analysis. Last revised July 27, 2012. http://www.bea.gov/iTable/iTable.cfm?ReqID=9&step=1

NOTE: An Excel file containing the data and calculations is available upon request.

[114] Report: "Understanding the Tax Reform Debate: Background, Criteria, & Questions." Prepared under the direction of James R. White (Director, Strategic Issues, Tax Policy and Administration Issues). United States Government Accountability Office, September 2005. http://www.gao.gov/new.items/d051009sp.pdf

Page 68: "Payroll Taxes Often synonymous with social insurance taxes. However, in some cases the term "payroll taxes" may be used more generally to include all tax withholding. For the purposes of this report, payroll taxes are synonymous with social insurance taxes."

Page 69: "Social Insurance Taxes Tax payments to the federal government for Social Security, Medicare, and unemployment compensation. While employees and employers pay equal amounts in social insurance taxes, economists generally agree that employees bear the entire burden of social insurance taxes in the form of reduced wages."

[115] Report: "The Distribution of Household Income and Federal Taxes, 2008 and 2009." Congressional Budget Office, July 10, 2012. http://www.cbo.gov/...

Page 23: "CBO further assumed—as do most economists— that employers pass on their share of payroll taxes to employees by paying lower wages than they would otherwise pay. Therefore, CBO included the employer's share of payroll taxes in households' before-tax income and in households' taxes."

[116] Textbook: Public Finance (Second edition). By John E. Anderson. South-Western Cenage Learning, 2012. Page 397:

The U.S. Social Security payroll tax requires that employers and employees split the tax, each paying one-half of the total. Hence, the statutory incidence of the tax is that half the tax falls on the employer and half falls on the employee. … But, the true economic incidence of the payroll tax is quite different. The employer has some ability to adjust the employee's wage and pass the employer's half of the tax on to the employee. In fact, the employee may bear the entire tax. Of course, the extent to which the employer can pass the tax on to the employee depends on the labor supply elasticity of the employee; that is, the willingness of the employee to accept a lower wage and supply the same, or nearly the same, quantity of labor. Recent evidence in Gruber (1997), based on the Chilean payroll tax, for example, suggests that workers bear most of the burden of any increase in the tax rate.

[117] "2010 Annual Report of the Board of Trustees of The Federal Old-Age and Survivors Insurance and Disability Insurance Trust Funds." Board of Trustees of the Federal OASDI Trust Funds, August 9, 2010. http://www.ssa.gov/OACT/TR/2010/tr2010.pdf

Page 33:

[U]nder these new laws, a combination of federal subsidies for individual insurance through the health benefit exchanges, penalties for being uninsured or not offering coverage, an excise tax on employer sponsored group health insurance cost, and anticipated competitive premiums from health benefit exchanges are expected to slow the rate of growth in the total cost of employer-sponsored group health insurance. Most of this cost reduction is assumed to result in an increase in the share of employee compensation that will be provided in wages that will be subject to the Social Security payroll tax.

NOTE: To summarize the above, because the cost of health insurance is part of employers' cost of compensating employees, if the cost of health insurance is decreased, "most" of the cost savings will be redirected to other forms of employee compensation such as salary. This is because employee compensation is generally driven by laws of supply of demand (with the notable exception of minimum wage laws). Likewise, because employer payroll taxes are a direct outcome of employers paying employees, most of this cost is redirected from other forms of employee compensation.

[118] Web page: "Current-Law Distribution of Taxes." Tax Policy Center (a joint project of the Urban Institute and Brookings Institution). Accessed August 25, 2012 at http://www.taxpolicycenter.org/taxtopics/currentdistribution.cfm

"A key insight from economics is that taxes are not always borne by the individual or business that writes the check to the IRS. Sometimes taxes are shifted. For example, most economists believe that the employer portion of payroll taxes translate into lower wages and are thus ultimately borne by workers."

[119] Report: "Reducing the Deficit: Spending and Revenue Options." Congressional Budget Office, March 2011. http://www.cbo.gov/...

Page 134:

Much of the progressivity of the federal tax system derives from the largest source of revenues, the individual income tax, for which average tax rates rise with income. The next largest source of revenues, social insurance taxes, has average tax rates that vary little across most income groups—although the average rate is lower for higher-income households, because earnings above a certain threshold are not subject to the Social Security payroll tax and because earnings are a smaller portion of total income for that group. The average social insurance tax rate is higher than the average individual income tax rate for all income quintiles except the highest one (see Figure 4-4). The impact of corporate taxes on households also rises with household income—with the largest effect by far on the top quintile (under the assumption that the corporate tax reduces after-tax returns on capital). By contrast, the average excise tax rate falls as income rises.

[120] Calculated with data from the report: "The Budget and Economic Outlook: Fiscal Years 2012 to 2022." Congressional Budget Office, January 31, 2012. http://www.cbo.gov/...

Page 87: "Table 4-2. Social Insurance Tax Revenues Projected in CBO's Baseline (Billions of dollars) … Actual, 2011 … Social Security [=] 566 … Medicare [=] 188 … Unemployment Insurance [=] 56 … Railroad Retirement [=] 4… Other Retirement^a [=] 4 … Total [=] 819 … a. Consists primarily of federal employees' contributions to the Federal Employees Retirement System and the Civil Service Retirement System."

CALCULATION: ($566 + $188 + $56) / $819 = 98.9%

Page 87:

The two largest sources of social insurance tax receipts are payroll taxes for Social Security and for Part A of Medicare (the Hospital Insurance program). Much smaller sources are payroll taxes for unemployment insurance (most of which are imposed by states but produce amounts that are classified as federal revenues); employers' and employees' contributions to the Railroad Retirement System; and other contributions to federal retirement programs, mainly those made by federal employees (see Table 4-2). The premiums that Medicare enrollees pay for Part B (the Medical Insurance program) and Part D (prescription drug benefits) are voluntary payments and thus are not counted as tax revenues; rather, they are considered offsets to spending and appear on the spending side of the budget as offsetting receipts.

[121] Constructed with data from:

a) Dataset: "Table 3.6. Contributions for Government Social Insurance." United States Department of Commerce, Bureau of Economic Analysis. Last revised August 2, 2012. http://www.bea.gov/iTable/iTable.cfm?ReqID=9&step=1

b) Dataset: "Table 1.1.5. Gross Domestic Product." United States Department of Commerce, Bureau of Economic Analysis. Last revised August 29, 2012. http://www.bea.gov/iTable/iTable.cfm?ReqID=9&step=1

NOTE: An Excel file containing the data and calculations is available upon request.

[122] Calculated with data from the report: "The Budget and Economic Outlook: Fiscal Years 2012 to 2022." Congressional Budget Office, January 31, 2012. http://www.cbo.gov/...

Page 87: "Table 4-2. Social Insurance Tax Revenues Projected in CBO's Baseline (Billions of dollars) … Actual, 2011 … Social Security [=] 566 … Total [=] 819"

CALCULATION: $566 / $819 = 69.1%

[123] Public Law 111-312: "Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010." 111th U.S. Congress. Signed into law by Barack Obama on December 17, 2010. http://thomas.loc.gov/

Title VI, Section 601:

Temporary Employee Payroll Tax Cut.

(a) In General- Notwithstanding any other provision of law--

(1) with respect to any taxable year which begins in the payroll tax holiday period, the rate of tax under section 1401(a) of the Internal Revenue Code of 1986 shall be 10.40 percent, and

(2) with respect to remuneration received during the payroll tax holiday period, the rate of tax under 3101(a) of such Code shall be 4.2 percent (including for purposes of determining the applicable percentage under sections 3201(a) and 3211(a)(1) of such Code). …

(c) Payroll Tax Holiday Period- The term 'payroll tax holiday period' means calendar year 2011. …

(e) Transfers of Funds-

(1) TRANSFERS TO FEDERAL OLD-AGE AND SURVIVORS INSURANCE TRUST FUND- There are hereby appropriated to the Federal Old-Age and Survivors Trust Fund and the Federal Disability Insurance Trust Fund established under section 201 of the Social Security Act (42 U.S.C. 401) amounts equal to the reduction in revenues to the Treasury by reason of the application of subsection (a). Amounts appropriated by the preceding sentence shall be transferred from the general fund at such times and in such manner as to replicate to the extent possible the transfers which would have occurred to such Trust Fund had such amendments not been enacted. …

[124] Public Law 112-078: "Temporary Payroll Tax Cut Continuation Act of 2011." 111th U.S. Congress. Signed into law by Barack Obama on December 23, 2011. http://www.gpo.gov/...

SEC. 101. EXTENSION OF PAYROLL TAX HOLIDAY.

(a) IN GENERAL.—Subsection (c) of section 601 of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (26 U.S.C. 1401 note) is amended to read as follows: "(c) PAYROLL TAX HOLIDAY PERIOD.—The term 'payroll tax holiday period' means—

"(1) in the case of the tax described in subsection (a)(1), calendar years 2011 and 2012, and

"(2) in the case of the taxes described in subsection (a)(2), the period beginning January 1, 2011, and ending February 29, 2012.".

[125] Public Law 112-96: "Middle Class Tax Relief and Job Creation Act of 2012." 112th U.S. Congress. Signed into law by Barack Obama on February 22, 2012. http://www.gpo.gov/...

SEC. 1001. EXTENSION OF PAYROLL TAX REDUCTION.

(a) IN GENERAL.—Subsection (c) of section 601 of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (26 U.S.C. 1401 note) is amended to read as follows:

"(c) PAYROLL TAX HOLIDAY PERIOD.—The term 'payroll tax holiday period' means calendar years 2011 and 2012.".

[126] "Internal Revenue Manual." Internal Revenue Service. Accessed January 11, 2011 at http://www.irs.gov/irm/index.html

Part 1, Chapter 34, Section 1 (http://www.irs.gov/irm/part1/irm_01-034-001.html): "The main financing component of the Federal funds group is referred to as the General Fund, which is used to carry out the general purposes of Government rather than being restricted by law to a specific program and consists of all collections not earmarked by law to finance other funds."

[127] The Encyclopedia of Taxation & Tax Policy. Edited by Joseph J. Cordes and others. Urban Institute Press, 2005.

Page 469: "Spending from the general fund is financed by general revenues, which include the individual and corporation income taxes, some excise taxes, estate and gift taxes, tariffs, and miscellaneous receipts."

[128] Report: "Present Law and Background Information on Federal Excise Taxes." United States Congress, Joint Committee on Taxation, January 2011. http://www.jct.gov/...

Page 1: "Revenues from certain Federal excise taxes are dedicated to trust funds (e.g., the Highway Trust Fund) for designated expenditure programs, and revenues from other excise taxes (e.g., alcoholic beverages) go to the General Fund for general purpose expenditures."

[129] Report: "Overview of the Federal Tax System." By David L. Brumbaugh and others. Congressional Research Service, March 10, 2005. http://www.policyarchive.org/handle/10207/bitstreams/2366.pdf

Page 9: "Most federal excise taxes are paid into trust funds devoted to various federal activities rather than remaining in the federal budget's general fund. In FY2003, almost two-thirds (65%) of excise tax receipts went into trust funds. The largest amount went into the Highway Trust Fund, and consisted of highway motor fuels taxes (including the gasoline tax), retail sales taxes on tractors and heavy trucks and trailers, and an annual heavy vehicle use tax."

[130] Web page: "Contribution and Benefit Base." United States Social Security Administration, Office of the Chief Actuary. Last reviewed or modified March 8, 2012. http://www.ssa.gov/oact/cola/cbb.html

"Social Security's Old-Age, Survivors, and Disability Insurance (OASDI) program limits the amount of earnings subject to taxation for a given year. The same annual limit also applies when those earnings are used in a benefit computation. This limit changes each year with changes in the national average wage index. We call this annual limit the contribution and benefit base. For earnings in 2012, this base is $110,100."

[131] Report: "Summary of Major Changes in the Social Security Cash Benefits Program: 1935-1996." By Geoffrey Kollmann. Library of Congress, Congressional Research Service. Updated December 20, 1996. http://www.ssa.gov/history/pdf/crs9436.pdf

Pages 13-14: "1977 Amendments … After 1981, the base would be adjusted automatically to keep up with average wages as under the prior law."

[132] Actuarial Note: "Average Wages for Indexing Under the Social Security Act and the Automatic Determinations For 1979-81." By Eli N. Donkar. United States Social Security Administration, Office of the Chief Actuary, May 1981. http://www.ssa.gov/...

"The amended Act requires the use of an average wage for indexing described in various sections of the law as "the average of the total wages (as defined in regulations of the Secretary. . .)." Such general language leaves a wide range of possibilities for a definition of such a wage series."

[133] Web page: "Contribution and Benefit Base." United States Social Security Administration, Office of the Chief Actuary. Last reviewed or modified October 29, 2010. http://www.ssa.gov/oact/cola/cbb.html

"Social Security's Old-Age, Survivors, and Disability Insurance (OASDI) program limits the amount of earnings subject to taxation for a given year. … This limit generally increases each year with increases in the national average wage index. We call this annual limit the contribution and benefit base."

[134] Web page: "National Average Wage Index." United States Social Security Administration, Office of the Chief Actuary. Last reviewed or modified October 29, 2010. http://www.ssa.gov/oact/cola/AWI.html

We use the average wage indexing series to update several amounts that are important to the operation of Social Security's Old-Age, Survivors, and Disability Insurance (OASDI) program.

• OASDI contribution and benefit base (also known as the taxable maximum)…

[135] Web page: "Average Wage Index (AWI)." United States Social Security Administration, Office of the Chief Actuary. Last reviewed or modified October 29, 2010. http://www.ssa.gov/oact/cola/awidevelop.html

"We use the term 'wages' to refer to net compensation."

[136] Web page: "Definition of Net Compensation." United States Social Security Administration, Office of the Chief Actuary. Last reviewed or modified Friday Oct 29, 2010. http://www.ssa.gov/OACT/cola/netcomp.html

In keeping with the legal term "national average wage index," we often loosely refer to the basis for the index as average wages. To be more precise, however, the index is based on compensation (wages, tips, and the like) subject to Federal income taxes, as reported by employers on Form W-2.

Beginning with the AWI [average wage index] for 1991, compensation includes contributions to deferred compensation plans, but excludes certain distributions from plans where the distributions are included in the reported compensation subject to income taxes. We call the result of including contributions, and excluding certain distributions, net compensation.

[137] NOTE: As shown in the next four footnotes, Just Facts compared the percentage increases in all available years for (1) the taxable maximum (2) average worker compensation and (3) the Social Security Administration's "national average wage index." The latter two of these parameters concurred perfectly, but the tax threshold did not align with the others. Thus, we use the term "roughly." An Excel file containing the data and calculations is available upon request.

[138] "The 1936 Government Pamphlet on Social Security." United States Social Security Administration. http://www.ssa.gov/history/ssn/ssb36.html

[139] Calculated with data from: Web page: "CPI Inflation Calculator." United States Department of Labor, Bureau of Labor Statistics. Accessed December 28, 2010. http://www.bls.gov/data/inflation_calculator.htm

"The CPI inflation calculator uses the average Consumer Price Index for a given calendar year. This data represents changes in prices of all goods and services purchased for consumption by urban households. This index value has been calculated every year since 1913. For the current year, the latest monthly index value is used."

CALCULATIONS:

6% of $3,000 = $180 (Using the above-cited inflation calculator, $180 in 1949 is equivalent to $1,655 in 2010.)

[140] Calculated with data from the footnote above and:

a) Web page: "Social Security & Medicare Tax Rates." United States Social Security Administration, Office of the Chief Actuary. Last reviewed or modified Wednesday June 30, 2010. http://www.ssa.gov/oact/ProgData/taxRates.html

[The 2010 payroll tax rate is 12.4%.]

b) "2010 Annual Report of the Board of Trustees of The Federal Old-Age and Survivors Insurance and Disability Insurance Trust Funds." United States Social Security Administration, August 9, 2010. http://www.ssa.gov/OACT/TR/2010/tr2010.pdf

Page 180: "The payroll tax on earnings for the OASDI [Social Security] program applies to annual earnings up to a contribution and benefit base indexed to the average wage level. The base is $106,800 for 2010."

CALCULATIONS:

$106,800 × 12.4% = $13,243

$13,243 / $1,655 = 8.00

[141] Publication number 05-10070: "Your Retirement Benefit: How it is Figured." United States Social Security Administration, January 2010. http://www.socialsecurity.gov/pubs/10070.html

Many people wonder how their benefit is figured. Social Security benefits are based on your lifetime earnings. Your actual earnings are adjusted or "indexed" to account for changes in average wages since the year the earnings were received. Then Social Security calculates your average indexed monthly earnings during the 35 years in which you earned the most. We apply a formula to these earnings and arrive at your basic benefit, or "primary insurance amount" (PIA). This is how much you would receive at your full retirement age—65 or older, depending on your date of birth.

NOTE: The above statement is imprecise because it states that "benefits are based on your lifetime earnings," when in fact, benefits are based on lifetime taxable earnings, which may be lower than lifetime earnings due to the wage threshold.* Since lifetime taxable earnings are taxed at a flat rate,† lifetime taxable earnings are directly proportional to Social Security taxes paid.

* Web page: "Contribution and Benefit Base." United States Social Security Administration, Office of the Chief Actuary. Last reviewed or modified October 29, 2010. http://www.ssa.gov/oact/cola/cbb.html

"Social Security's Old-Age, Survivors, and Disability Insurance (OASDI) program limits the amount of earnings subject to taxation for a given year. The same annual limit also applies when those earnings are used in a benefit computation."

† Web page: "Social Security & Medicare Tax Rates." United States Social Security Administration, Office of the Chief Actuary. Last reviewed or modified Wednesday June 30, 2010. http://www.ssa.gov/oact/ProgData/taxRates.html

[142] Report: "Social Security Reform: Current Issues and Legislation." By Dawn Nuschler. Congressional Research Service, September 14, 2010. http://aging.senate.gov/crs/ss6.pdf

Pages 13-14:

Until recent years, Social Security recipients received more, often far more, than the value of the Social Security taxes they paid. However, because Social Security payroll tax rates have increased over the years and the full retirement age (the age at which unreduced benefits are first payable) is being increased gradually, it is becoming more apparent that Social Security will be less of a good deal for many future retirees. For example, for workers who earned average wages and retired in 1980 at the age of 65, it took 2.8 years to recover the value of the retirement portion of the combined employee and employer shares of their Social Security taxes plus interest. For their counterparts who retired at the age of 65 in 2003, it will take 17.4 years. For those retiring in 2020, it will take 21.6 years.

[143] The Social Security Trust Fund is projected to be depleted in 2033, after which, the program will be unable to pay full benefits. For more information, Just Facts' research on the financial status of Social Security.

[144] Booklet: "Medicare Coverage of Skilled Nursing Facility Care." Centers for Medicare and Medicaid Services, September 2007. http://www.medicare.gov/publications/pubs/pdf/10153.pdf

Page 1:

Skilled care is health care given when you need skilled nursing or rehabilitation staff to manage, observe, and evaluate your care. Examples of skilled care include intravenous injections and physical therapy. Medicare will only cover skilled care when you meet certain conditions (see page 13).

A Skilled Nursing Facility could be part of a nursing home or hospital. Medicare certifies these facilities if they have the staff and equipment to give skilled nursing care and/or skilled rehabilitation services, and other related health services.

Medicare doesn't cover custodial care if it is the only kind of care you need. Custodial care is care that helps you with usual daily activities like getting in and out of bed, eating, bathing, dressing, and using the bathroom. It may also include care that most people do themselves, like using eye drops, oxygen, and taking care of colostomy or bladder catheters. Custodial care is often given in a nursing facility. See page 20 for ways to get help paying for custodial care.

[145] Report: "Medicare Primer." By Patricia A. Davis. Congressional Research Service, July 1, 2010. http://aging.senate.gov/crs/medicare1.pdf

Page 1:

• Part A (Hospital Insurance, or HI) covers inpatient hospital services, skilled nursing care, and home health and hospice care. The HI trust fund is mainly funded by a dedicated payroll tax of 2.9% of earnings, shared equally between employers and workers.

• Part B (Supplementary Medical Insurance, or SMI) covers physician services, outpatient services, and some home health and preventive services. The SMI trust fund is funded through beneficiary premiums (set at 25% of estimated program costs for the aged) and general revenues (the remaining amount, approximately 75%).

• Part C (Medicare Advantage, or MA) is a private plan option for beneficiaries that covers all Part A and B services, except hospice. Individuals choosing to enroll in Part C must also enroll in Part B. Part C is funded through the HI and SMI trust funds.

• Part D covers prescription drug benefits. Funding is included in the SMI trust fund and is financed through beneficiary premiums (about 25.5%) and general revenues (about 74.5%).

[146] Calculated with data from the report: "The Budget and Economic Outlook: Fiscal Years 2012 to 2022." Congressional Budget Office, January 31, 2012. http://www.cbo.gov/...

Page 87: "Table 4-2. Social Insurance Tax Revenues Projected in CBO's Baseline (Billions of dollars) … Actual, 2011 … Medicare [=] 188 … Total [=] 819"

CALCULATION: $188 / $819 = 23.0%

[147] Report: "Medicare Primer." By Patricia A. Davis. Congressional Research Service, July 1, 2010. http://aging.senate.gov/crs/medicare1.pdf

Page 2:

Medicare was enacted in 1965 (P.L. 89-97) in response to the concern that only about half of the nation's seniors had health insurance, and most of those had coverage only for inpatient hospital costs. The new program, which became effective July 1, 1966, included Part A coverage for hospital and post-hospital services and Part B coverage for doctors and other medical services. As is the case for the Social Security program, Part A is financed by payroll taxes levied on current workers and their employers; persons must pay into the system for 40 calendar quarters to become entitled to premium-free benefits. Medicare Part B is voluntary, with a monthly premium required of beneficiaries who choose to enroll.

Page 4:

Most persons aged 65 or older are automatically entitled to premium-free Part A because they or their spouse paid Medicare payroll taxes for at least 40 quarters (10 years) on earnings covered by either the Social Security or the Railroad Retirement systems. Persons under age 65 who receive cash disability benefits from Social Security or the Railroad Retirement systems for at least 24 months are also entitled to Part A. …

Persons over age 65 who are not automatically entitled to Part A may obtain coverage by paying a monthly premium ($461 in 2010) or, for persons with at least 30 quarters of covered employment, a reduced monthly premium ($254 in 2010). In addition, disabled persons who lose their cash benefits solely because of higher earnings, and subsequently lose their extended Medicare coverage, may continue their Medicare enrollment by paying a premium, subject to limitations. Generally, enrollment in Medicare Part B is voluntary. All persons entitled to Part A (and persons over 65 not entitled to premium-free Part A) may enroll in Part B by paying a monthly premium. For established Part B enrollees, the 2010 monthly premium remains at $96.40.⁹ Beginning in 2007, some higher-income individuals started to pay higher premiums. (See the "Part B" section, below.)

[148] "2011 Annual Report of the Boards of Trustees of the Federal Hospital Insurance and Federal Supplementary Medical Insurance Trust Funds." United States Department of Health and Human Services, Centers for Medicare and Medicaid Services, May 13, 2011. https://www.cms.gov/reportstrustfunds/downloads/tr2011.pdf

Page 9:

For HI [Hospital Insurance, a.k.a Medicare Part A], the primary source of financing is the payroll tax on covered earnings. Employers and employees each pay 1.45 percent of wages, while self-employed workers pay 2.9 percent of their net income. Starting in 2013, high-income workers will pay an additional 0.9 percent tax on their earnings above an unindexed threshold ($200,000 for single taxpayers and $250,000 for married couples). Other HI revenue sources include a portion of the Federal income taxes that people pay on their Social Security benefits, as well as interest paid on the U. S. Treasury securities held in the HI trust fund.

[149] Report: "Reducing the Deficit: Spending and Revenue Options." Congressional Budget Office, March 2011. http://cbo.gov/...

Page 133: "Households generally bear the economic cost, or burden, of the taxes that they pay themselves, such as individual income taxes and employees' share of payroll taxes. But households also bear the burden of the taxes paid by businesses. In the judgment of CBO and most economists, the employers' share of payroll taxes is passed on to employees in the form of lower wages."

[150] Web page: "Contribution and Benefit Base." United States Social Security Administration, Office of the Chief Actuary. Last reviewed or modified October 29, 2010. http://www.ssa.gov/oact/cola/cbb.html

"For Medicare's Hospital Insurance (HI) program, the taxable maximum was the same as that for the OASDI [Social Security] program for 1966-1990. Separate HI taxable maximums of $125,000, $130,200, and $135,000 were applicable in 1991-93, respectively. After 1993, there has been no limitation on HI-taxable earnings."

[151] Web page: "Contribution and Benefit Base." United States Social Security Administration, Office of the Chief Actuary. Last reviewed or modified October 29, 2010. http://www.ssa.gov/oact/cola/cbb.html

"Social Security's Old-Age, Survivors, and Disability Insurance (OASDI) program limits the amount of earnings subject to taxation for a given year. … This limit generally increases each year with increases in the national average wage index."

[152] Web page: "History of SSA-related Legislation: 103rd Congress." United States Social Security Administration. Accessed October 31,2008 at http://www.socialsecurity.gov/legislation/history/103.htm

"PL 103-66 The Omnibus Budget Reconciliation Act of 1993 (enacted 8/10/93). Section 13207 repeals the limitation on the amount of earnings subject to the HI [Medicare Hospital Insurance] tax beginning in 1994."

[153] Calculated with data from:

a) Vote 406: "Omnibus Budget Reconciliation Act of 1993." U.S. House of Representatives, August 5, 1993. http://clerk.house.gov/evs/1993/roll406.xml

b) Vote 247: "Omnibus Budget Reconciliation Act of 1993." U.S. Senate, August 6, 1993. http://www.senate.gov/...

Combined vote totals from both House of Congress:

 

Party	Voted YES		Voted NO
Republican	0	0%	221	100%
Democrat	267	85%	47	15%
Independent	1	100%	0	0%

NOTE: Results do not include those not voting or those who voted "Present."

[154] "2011 Annual Report of the Boards of Trustees of the Federal Hospital Insurance and Federal Supplementary Medical Insurance Trust Funds." United States Department of Health and Human Services, Centers for Medicare and Medicaid Services, May 13, 2011. https://www.cms.gov/reportstrustfunds/downloads/tr2011.pdf

Page 9: "Starting in 2013, high-income workers will pay an additional 0.9 percent tax on their earnings above an unindexed threshold ($200,000 for single taxpayers and $250,000 for married couples)."

[155] Report: "Overview of the Federal Tax System as in Effect for 2012." U.S. Congress, Joint Committee on Taxation, February 24, 2012. https://www.jct.gov/publications.html?func=startdown&id=4400

Page 15:

Additional hospital insurance tax on certain high-income individuals

For remuneration received in taxable years beginning after December 31, 2012, the employee portion of the HI tax is increased by an additional tax of 0.9 percent on wages received in excess of a specific threshold amount.²² However, unlike the general 1.45 percent HI tax on wages, this additional tax is on the combined wages of the employee and the employee's spouse, in the case of a joint return. The threshold amount is $250,000 in the case of a joint return or surviving spouse, $125,000 in the case of a married individual filing a separate return, and $200,000 in any other case (unmarred individual or head of household).

The same additional HI tax applies to the HI portion of SECA tax on self-employment income in excess of the threshold amount. Thus, an additional tax of 0.9 percent is imposed on every self-employed individual on self-employment income in excess of the threshold amount.²³ 22 Sec, 3101(b), as amended by the Patient Protection and Affordable Care Act ("PPACA"), Pub. L. No. 111-148. 23 Sec.

²² Sec, 3101(b), as amended by the Patient Protection and Affordable Care Act ("PPACA"), Pub. L. No. 111-148.

²³ Sec. 1402(b).

[156] Calculated with data from the report: "The Budget and Economic Outlook: Fiscal Years 2012 to 2022." Congressional Budget Office, January 31, 2012. http://www.cbo.gov/...

Page 87: "Table 4-2. Social Insurance Tax Revenues Projected in CBO's Baseline (Billions of dollars) … Actual, 2011 … Unemployment Insurance [=] 56 … Total [=] 819 … Much smaller sources are payroll taxes for unemployment insurance (most of which are imposed by states but produce amounts that are classified as federal revenues)…."

CALCULATION: $56 / $819 = 6.8%

[157] Report: "Overview of the Federal Tax System as in Effect for 2012." U.S. Congress, Joint Committee on Taxation, February 24, 2012. https://www.jct.gov/publications.html?func=startdown&id=4400

Page 14:

In addition to FICA taxes, employers are subject to a Federal unemployment insurance payroll tax equal to 6 percent of the total wages of each employee (up to $7,000) on covered employment. Employers are eligible for a Federal credit equal to 5.4 percent for State unemployment taxes, yielding a 0.6 percent effective tax rate. Federal unemployment insurance payroll taxes are used to fund programs maintained by the States for the benefit of unemployed workers.

[158] Entry: "C Corporation." Farlex Financial Dictionary, 2012. http://financial-dictionary.thefreedictionary.com/C+Corporation

"A business that is legally completely separate from its owners. Most publicly-traded companies (and all major ones) fall under this classification. For United States tax purposes, C corporations are required to pay income taxes on their profits. The advantage to a C corporate structure is the fact that, unlike S corporations, there is no limit to the number of shareholders. A disadvantage is the fact that, because a C corporation is taxed itself and its individual shareholders are taxed on dividends, it is subject to double taxation."

[159] Report: "Overview of the Federal Tax System." By David L. Brumbaugh and others. Congressional Research Service, March 10, 2005. http://www.policyarchive.org/handle/10207/bitstreams/2366.pdf

Page 19:

Forms of Business Organization

The Internal Revenue Code recognizes several different forms of business organization; their tax treatment varies. The principal forms are C corporations, S corporations, partnerships, and sole proprietorships.

Apart from taxes, corporations are a legally defined form of business organization, with ownership stakes represented by shares that may or may not be publicly traded. Shareholders' liabilities are limited to their stake in the corporation. The Internal Revenue Code normally subjects corporate profits to the corporate income tax under its subchapter C; corporations subject to income tax are thus often referred to as "C corporations." As explained more fully above, in the report's section on the corporate income tax, the part of C corporation income generated by equity investment is subject to two layers of tax: the corporate income tax and the individual income tax. In contrast, corporations that qualify as "S corporations" are not subject to the corporate income tax. Instead, their net profits are passed on a pro rata basis through to the individual shareholders who are taxed on the profits under the individual income tax. …

Taxes aside, partnerships are like corporations in that they have multiple owners. In contrast to corporations, some partnerships convey a liability for debts that is not limited to partners' contributions to the enterprise. Partnerships are also less likely than corporations to be publicly traded, although some forms of partnerships ("master limited partnerships") are. Like S corporations, partnerships are not subject to the corporate income tax; partners are subject to their share of partnership earnings under the individual income tax.

Limited liability companies (LLCs) have some of the characteristics of both partnerships and corporations. Under IRS "check the box" regulations, LLCs can elect to be taxed either as corporations or as partnerships. Other specially defined business entities include real estate investment trusts (REITs), which are required to engage primarily in passive investment in real estate and securities. Qualifying REITs are permitted to deduct dividends they pay to shareholders, which effectively exempts REITs from the corporate income tax. Regulated investment companies (RICs), who invest primarily in securities and distribute most income, are also permitted to deduct dividends. The simplest forms of business organization are sole proprietorships. Sole proprietorships have only one owner; there is no legal distinction between the business and the business's owner. For tax purposes, business profits earned by a sole proprietor are taxed to the owner under the individual income tax. The corporate income tax does not apply.

For more information, see CRS Report RL31538, Passthrough Organizations Not Taxed as Corporations, by Jack H. Taylor.

[160] "Testimony of the Staff of the Joint Committee On Taxation before the Joint Select Committee on Deficit Reduction." By Thomas A. Barthold. United States Congress, Joint Committee on Taxation, September 22, 2011. http://www.jct.gov/...

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The preceding figures have showed the importance of the individual income tax and corporate income tax to the Federal tax system. However, it is important to recognize that not all businesses are organized as corporations and, consequently, the taxation of active business income occurs both for taxpayers that file Form 1120 (the corporate income tax return) and for taxpayer who file Form 1040 (the primary individual income tax return).

Businesses may be organized under a number of different legal forms. Owners of a business sometimes conduct their activities as sole proprietorships, which do not involve a legal entity separate from the owner. However, for a variety of business or other reasons, a business often is conducted through a separate legal entity. Common reasons to use a separate legal entity include the ability to pool the capital and other resources of multiple owners, the protection of limited liability accorded by State law to the owners of qualifying entities (but generally not to sole proprietors), and an improved ability to access capital markets for investment capital.

The tax consequences of using a separate entity depend on the type of entity through which the business is conducted. Partnerships, certain closely held corporations that elect to be taxed under subchapter S of the Code (referred to as "S corporations"),⁶ and limited liability companies that are treated as partnerships are treated for Federal income tax purposes as passthrough entities whose owners take into account the income (whether or not distributed) or loss of the entity on their own tax returns.

In contrast, the income of a C corporation⁷ is taxed directly at the corporate level. Shareholders are taxed on dividend distributions of the corporation's after-tax income. Shareholders are also taxed on any gain (including gain attributable to undistributed corporate income) on the disposition of their shares of stock of the corporation. Thus, the income of a C corporation may be subject to tax at both the corporate and shareholder levels.⁸

⁶ To be eligible to make an election under subchapter S a corporation must generally (1) be an eligible domestic corporation; (2) not have more than 100 shareholders (taking into account applicable attribution rules); (3) have as shareholders only individuals (other than nonresident aliens), estates, certain trusts and certain tax-exempt organizations; and (4) have only one class of stock.

⁷ A C corporation is a corporation that is subject to subchapter C of the Code, which provides rules for corporate and shareholder treatment of corporate distributions and adjustments. C corporations generally are subject to the corporate-level tax rate structure set forth in section 11 of the Code.

⁸ Business entities also include specialized corporations which are not subject to entity level tax, or which are allowed a deduction for distributions to shareholders, under the Federal income tax rules. Federal tax rules applicable to these entities generally require that they distribute substantially all their income and require that they meet other specified limitations on activities, assets, and types of income, for example. These types of entities include regulated investment companies (RICs) (mutual funds in common parlance), real estate investment trusts (REITs), real estate mortgage investment conduits (REMICs), and cooperatives. In addition, some business activities are conducted through tax-exempt entities, whether as activities subject to unrelated business income tax (UBIT), or as permitted under the Federal tax rules relating to tax-exempt organizations.

Page 33:

B. Overview of Business Entities Other Than Corporations

Significant business activity is conducted through entities other than corporations. Such business entities include passthrough entities such as partnerships (including limited liability companies ("LLCs")) and S corporations. For Federal income tax purposes, these passthrough entities generally are not subject to tax at the entity level. Rather, the owners − that is, partners or S corporation shareholders − are subject to tax on their shares of the entity's income, gain, loss, deduction, and credit, whether or not distributed.⁴⁷ The tax treatment of passthrough entities differs from the generally applicable entity level tax on income of C corporations. In addition, noncorporate business income is generated by sole proprietorships and farms.⁴⁸

Allowable deductions for businesses conducted in passthrough entity form are generally the same as allowable deductions for businesses conducted in corporate form. However, the calculation of these deductions is affected by the fact that they are taken into account for tax purposes by the partners or S corporation shareholders rather than by the partnership or S corporation at the entity level.

There are no limitations on the identity of a partner in a partnership under present law. Thus, a partner in a business conducted through a partnership (including an LLC taxable as a partnership) can generally be an individual, a corporation, or another partnership, for example. Permissible shareholders of S corporations are restricted to individuals (other than nonresident aliens), estates, certain trusts, and certain tax-exempt organizations, and may not exceed 100 in number (taking into account applicable attribution rules).

⁴⁷ Partners and S corporation shareholders who are individuals generally report this income on Schedule E.

⁴⁸ This income is generally reported by individuals on Schedules C and F.

[161] Calculated with data from the report: "The Budget and Economic Outlook: Fiscal Years 2012 to 2022." Congressional Budget Office, January 31, 2012. http://www.cbo.gov/publication/42905

Supplementary dataset: "Historical Budget Data—January 2012 Baseline." http://www.cbo.gov/...

"Table F-2. Revenues, by Major Source, Since 1972 (In Billions of Dollars) … 2011 … Corporate Income Taxes [=] 181.1 … Total [=] 2,302.5"

CALCULATION: 181.1 / 2,302.5 = 7.9%

[162] Calculated with data from Table 3.3: "State and Local Government Current Receipts and Expenditures." United States Department of Commerce, Bureau of Economic Analysis. Last revised July 27, 2012. http://www.bea.gov/iTable/iTable.cfm?ReqID=9&step=1

NOTE: An Excel file containing the data and calculations is available upon request.

[163] Letter from Congressional Budget Office Director Douglas W. Elmendorf to U.S. Senator Charles E. Grassley, March 4, 2010. http://grassley.senate.gov/...

Page 2:

The President proposes to assess an annual fee on liabilities of banks, thrifts, bank and thrift holding companies, brokers, and security dealers, as well as U.S. holding companies controlling such entities. …

… However, the ultimate cost of a tax or fee is not necessarily borne by the entity that writes the check to the government. The cost of the proposed fee would ultimately be borne to varying degrees by an institution's customers, employees, and investors, but the precise incidence among those groups is uncertain. Customers would probably absorb some of the cost in the form of higher borrowing rates and other charges, although competition from financial institutions not subject to the fee would limit the extent to which the cost could be passed through to borrowers. Employees might bear some of the cost by accepting some reduction in their compensation, including income from bonuses, if they did not have better employment opportunities available to them. Investors could bear some of the cost in the form of lower prices of their stock if the fee reduced the institution's future profits.

[164] Report: "Reducing the Deficit: Spending and Revenue Options." Congressional Budget Office, March 2011. http://cbo.gov/...

Page 133: "In addition, households bear the burden of corporate income taxes, although the extent to which they do so as owners of capital, as workers, or as consumers is not clear."

[165] Report: "The Distribution of Household Income and Federal Taxes, 2008 and 2009." Congressional Budget Office, July 10, 2012. http://www.cbo.gov/...

Pages 16-18:

In previous reports, CBO allocated the entire economic burden of the corporate income tax to owners of capital in proportion to their capital income. CBO has reevaluated the research on that topic, and in this report it allocates 75 percent of the federal corporate income tax to capital income and 25 percent to labor income.

The incidence of the corporate income tax is uncertain. In the very short term, corporate shareholders are likely to bear most of the economic burden of the tax; but over the longer term, as capital markets adjust to bring the after-tax returns on different types of capital in line with each other, some portion of the economic burden of the tax is spread among owners of all types of capital. In addition, because the tax reduces capital investment in the United States, it reduces workers' productivity and wages relative to what they otherwise would be, meaning that at least some portion of the economic burden of the tax over the longer term falls on workers. That reduction in investment probably occurs in part through a reduction in U.S. saving and in part through decisions to invest more savings outside the United States (relative to what would occur in the absence of the U.S. corporate income tax); the larger the decline in saving or outflow of capital, the larger the share of the burden of the corporate income tax that is borne by workers.

CBO recently reviewed several studies that use so-called general-equilibrium models of the economy to determine the long-term incidence of the corporate income tax. The results of those studies are sensitive to assumptions about the values of several key parameters, such as the ease with which capital can move between countries. Using assumptions that reflect the central tendency of published estimates of the key parameters yields an estimate that about 60 percent of the corporate income tax is borne by owners of capital and 40 percent is borne by workers.⁸

However, standard general-equilibrium models exclude important features of the corporate income tax system that tend to increase the share of the corporate tax borne by corporate shareholders or by capital owners in general.⁹ For example, standard models generally assume that corporate profits represent the "normal" return on capital (that is, the return that could be obtained from making a risk-free investment). In fact, corporate profits partly represent returns on capital in excess of the normal return, for several reasons: Some corporations possess unique assets such as patents or trademarks; some choose riskier investments that have the potential to provide above-normal returns; and some produce goods or services that face little competition and thereby earn some degree of monopoly profits. Some estimates indicate that less than half of the corporate tax is a tax on the normal return on capital and that the remainder is a tax on such excess returns.¹⁰ Taxes on excess returns are probably borne by the owners of the capital that produced those excess returns. Standard models also generally fail to incorporate tax policies that affect corporate finances, such as the preferences afforded to corporate debt under the corporate income tax. Increases in the corporate tax will increase the subsidy afforded to domestic debt, increasing the relative return on debt-financed investment in the United States and drawing new investment from overseas, thus reducing the net amount of capital that flows out of the country. In addition, standard models generally do not account for corporate income taxes in other countries; those taxes also reduce the amount of capital that flows out of this country because of the U.S. corporate income tax.

Those factors imply that workers bear less of the burden of the corporate income tax than is estimated using standard general-equilibrium models, but quantifying the magnitude of the impact of the factors is difficult.

Page 24:

Far less consensus exists about how to allocate corporate income taxes (and taxes on capital income generally). In this analysis, CBO allocated 75 percent of the burden of corporate income taxes to owners of capital in proportion to their income from interest, dividends, adjusted capital gains, and rents. The agency used capital gains scaled to their long-term historical level given the size of the economy and the tax rate that applies to them rather than actual capital gains so as to smooth out large year-to-year variations in the total amount of gains realized. CBO allocated 25 percent of the burden of corporate income taxes to workers in proportion to their labor income.

[166] In May 2012, Just Facts conducted a search of academic literature to determine the range of scholarly opinion on this subject. The search found that estimates for the portion of corporate income taxes that are borne by owners of capital ranged from nearly 100% down to 33%. Here are two extremes:

a) Report: "An Analysis of the 'Buffett Rule'." By Thomas L. Hungerford. Congressional Research Service, October 7, 2011. http://www.fas.org/sgp/crs/misc/R42043.pdf

Page 4: "The evidence suggests that most or all of the burden of the corporate income tax falls on owners of capital."                                       

b) Working paper: "International Burdens of the Corporate Income Tax." By William C. Randolph. Congressional Budget Office, August, 2006. http://www.cbo.gov/...

Pages 51-52: "In the base case (Table 3), the model used in this study predicts that domestic labor bears 74 percent, domestic capital owners bear 33 percent, foreign capital owners bear 72 percent, foreign labor bears -71 percent, and the excess burden equals about 4 percent of the revenue."

[167] Webpage: "Corporations." Internal Revenue Service, August 2, 2012. http://www.irs.gov/...

"The profit of a corporation is taxed to the corporation when earned, and then is taxed to the shareholders when distributed as dividends. This creates a double tax. The corporation does not get a tax deduction when it distributes dividends to shareholders. Shareholders cannot deduct any loss of the corporation."

[168] Report: "Overview of the Federal Tax System." By David L. Brumbaugh and others. Congressional Research Service, March 10, 2005. http://www.policyarchive.org/handle/10207/bitstreams/2366.pdf

Page 7: "Corporate equity profits are taxed twice, once at the corporate level and once under the individual income tax when they are received by stockholders as dividends or capital gains. … Further, corporations are not persons who can bear the burden of taxes, but merely legal entities through which individuals earn income. From this point of view it is misleading to compare the tax burden of a corporation with that of an individual."

[169] Report: "Overview of the Federal Tax System." By David L. Brumbaugh and others. Congressional Research Service, March 10, 2005. http://www.policyarchive.org/handle/10207/bitstreams/2366.pdf

Pages 6-7:

The base of the corporate income tax is net income, or profits, as defined by the tax code. In general this is gross revenue minus costs. Deductible costs include materials, interest, and wage payments. Another important deductible cost is depreciation — an allowance for declines in the value of a firm's tangible assets, such as machines, equipment, and structures.

In broad economic terms, the base of the corporate income tax is the return to equity capital, as follows. Wages are tax-deductible, so labor's contribution to corporate revenue is excluded from the corporate tax base. Income produced by corporate capital investment includes that produced by corporate investment of borrowed funds, and that produced by investment of equity, or funds provided by stockholders. Profits from debt-financed investment are paid out as interest, which is deductible; thus, the return to debt capital is excluded from the corporate tax base. Equity investments are financed by retained earnings and the sale of stock. The income equity investment generates is paid out as dividends and the capital gains that accrue as stock increases in value. Neither form of income is generally deductible. Thus, the base of the corporate income tax is the return to equity capital.

Page 18:

When a business purchases a tangible asset such as a machine or structure, it is not incurring a cost; it is simply exchanging one asset — for example, cash — for another. The full purchase price of an asset is therefore usually not tax deductible in the year the asset is bought. Assets do, however, decline in value as they age or become outmoded; this decline in value (depreciation) is a cost. And because assets gradually depreciate until they are worthless, the tax code permits firms gradually to deduct the full acquisition cost of an asset over a number of years.

The tax code contains a set of rules that govern the rate at which depreciation deductions can be claimed. The rules determine the tax depreciation rate by specifying a recovery period and a depreciation method for different types of assets. An asset's recovery period is the number of years over which deductions for the asset's full cost must be spread; the applicable depreciation method determines how depreciation deductions are distributed among the different years of the recovery period. The slowest method is straight-line, in which equal deductions are taken each year. Declining balance methods, in which a fixed fraction of the cost less prior depreciation is deducted, cause larger shares to be taken in earlier years.

Importantly, a tax deduction of a given dollar amount is worth more to a business the sooner it can be claimed; the sooner a tax deduction can be claimed, the sooner the tax savings it generates can be invested and earn a return. It follows that the tax rules governing when depreciation deductions can be claimed are quite important to businesses. If depreciation deductions can be claimed faster than an asset actually declines in value, a tax benefit exists; depreciation is said to be accelerated. If, on the other hand, depreciation deductions can be claimed more slowly than the corresponding asset actually depreciates, a tax penalty occurs. Only if depreciation deductions are claimed at the rate an asset actually depreciates do taxes confer neither a tax benefit nor a tax penalty.

[170] "Testimony of the Staff of the Joint Committee On Taxation before the Joint Select Committee on Deficit Reduction." By Thomas A. Barthold. United States Congress, Joint Committee on Taxation, September 22, 2011. http://www.jct.gov/...

Pages 26-28:

III. OVERVIEW OF THE CORPORATE INCOME TAX

A. Structure of the Corporate Income Tax …

In general

Corporations organized under the laws of any of the 50 States (and the District of Columbia) generally are subject to the U.S. corporate income tax on their worldwide taxable income.²⁹

The taxable income of a corporation generally is comprised of gross income less allowable deductions. Gross income generally is income derived from any source, including gross profit from the sale of goods and services to customers, rents, royalties, interest (other than interest from certain indebtedness issued by State and local governments), dividends, gains from the sale of business and investment assets, and other income.

Allowable deductions include ordinary and necessary business expenses, such as salaries, wages, contributions to profit-sharing and pension plans and other employee benefit programs, repairs, bad debts, taxes (other than Federal income taxes), contributions to charitable organizations (subject to an income limitation), advertising, interest expense, certain losses, selling expenses, and other expenses. Expenditures that produce benefits in future taxable years to a taxpayer's business or income-producing activities (such as the purchase of plant and equipment) generally are capitalized and recovered over time through depreciation, amortization or depletion allowances. A net operating loss incurred in one taxable year typically may be carried back two years or carried forward 20 years and allowed as a deduction in another taxable year. Deductions are also allowed for certain amounts despite the lack of a direct expenditure by the taxpayer. For example, a deduction is allowed for all or a portion of the amount of dividends received by a corporation from another corporation (provided certain ownership requirements are satisfied). Moreover, a deduction is allowed for a portion of the amount of income attributable to certain manufacturing activities.

The Code also specifies certain expenses that typically may not be deducted, such as expenses associated with earning tax-exempt income,³⁰ certain entertainment expenses, certain executive compensation in excess of $1,000,000 per year, a portion of the interest on certain high-yield debt obligations that resemble equity, and fines, penalties, bribes, kickbacks and illegal payments.

In contrast to the treatment of capital gains in the individual income tax, no separate rate structure exists for corporate capital gains. Thus, the maximum rate of tax on the net capital gains of a corporation is 35 percent. A corporation may not deduct the amount of capital losses in excess of capital gains for any taxable year. Disallowed capital losses may be carried back three years or carried forward five years. …

Alternative minimum tax

A corporation is subject to an alternative minimum tax which is payable, in addition to all other tax liabilities, to the extent that it exceeds the corporation's regular income tax liability. The tax is imposed at a flat rate of 20 percent on alternative minimum taxable income in excess of a $40,000 exemption amount.³¹ Credits that are allowed to offset a corporation's regular tax liability generally are not allowed to offset its minimum tax liability. If a corporation pays the alternative minimum tax, the amount of the tax paid is allowed as a credit against the regular tax in future years.

Alternative minimum taxable income is the corporation's taxable income increased by the corporation's tax preference items and adjusted by determining the tax treatment of certain items in a manner that negates the deferral of income resulting from the regular tax treatment of those items. Among the preferences and adjustments applicable to the corporate alternative minimum tax are accelerated depreciation on certain property, certain expenses and allowances related to oil and gas and mining exploration and development, certain amortization expenses related to pollution control facilities, net operating losses and certain tax-exempt interest income. In addition, corporate alternative minimum taxable income is increased by 75 percent of the amount by which the corporation's "adjusted current earnings" exceeds its alternative minimum taxable income (determined without regard to this adjustment). Adjusted current earnings generally are determined with reference to the rules that apply in determining a corporation's earnings and profits.

A corporation with average annual gross receipts of not more than $7.5 million is exempt from the alternative minimum tax.

²⁹ Foreign tax credits generally are available against U.S. income tax imposed on foreign source income to the extent of foreign income taxes paid on that income. A foreign corporation generally is subject to the U.S. corporate income tax only on income with a sufficient nexus to the United States.

³⁰ For example, the carrying costs of tax-exempt State and local obligations and the premiums on certain life insurance policies are not deductible.

³¹ The exemption amount is phased out for corporations with income above certain thresholds, and is completely phased out for corporations with alternative minimum taxable income of $310,000 or more.

[171] Report: "Overview of the Federal Tax System." By David L. Brumbaugh and others. Congressional Research Service, March 10, 2005. http://www.policyarchive.org/handle/10207/bitstreams/2366.pdf

Summary: "Corporate taxable income is subject to a set of graduated rates: 15%, 25%, 34%, and 35%, but most income is taxed at the top rate. The base is approximately earnings from equity investments."

Page 6:

Corporate taxable income is subject to a set of graduated rates: 15%, 25%, 34%, and 35%, with the lower rates applying to firms with lower taxable incomes. Since smaller firms tend to have smaller profits, small firms benefit more often from the 15% and 25% rates. And since the bulk of corporate income is earned by large firms, most corporate income is subject to either the 34% or 35% rate. The benefits of the lower rates are phased out, and during the phase out range, marginal tax rates are actually higher because an additional dollar of income not only has a direct tax rate but also reduces the benefit of lower rates.

[172] Report: "Overview of the Federal Tax System as in Effect for 2012." U.S. Congress, Joint Committee on Taxation, February 24, 2012. https://www.jct.gov/publications.html?func=startdown&id=4400

Page 10:

A corporation's regular income tax liability generally is determined by applying the following tax rate schedule to its taxable income.

Table 2.–Federal Corporate Income Tax Rates
If taxable income is:	Then the income tax rate is:
$0-$50,000	15 percent of taxable income
$50,001-$75,000	25 percent of taxable income
$75,001-$10,000,000	34 percent of taxable income
Over $10,000,000	35 percent of taxable income

The first two graduated rates described above are phased out for corporations with taxable income between $100,000 and $335,000. As a result, a corporation with taxable income between $335,000 and $10,000,000 effectively is subject to a flat tax rate of 34 percent. Also, the application of the 34-percent rate is gradually phased out for corporations with taxable income between $15,000,000 and $18,333,333, such that a corporation with taxable income of $18,333,333 or more effectively is subject to a flat rate of 35 percent.

[173] Calculated with data from the report: "2009 Statistics of Income: Corporation Income Tax Returns." Internal Revenue Service, 2012. http://www.irs.gov/pub/irs-soi/09coccr.pdf

Pages 19-38: "Table 1--Number of Returns, Selected Receipts, Cost of Goods Sold, Net Income, Deficit, Income Subject to Tax, Total Income Tax Before Credits, Selected Credits, Total Income Tax After Credits, Total Assets, Net Worth, Depreciable Assets, Depreciation Deduction, and Coefficients of Variation, by Minor Industry"

NOTE: An Excel file containing the data and calculations is available upon request.

[174] Report: "Facts & Figures Handbook: How Does Your State Compare?" Edited by Scott Drenkard. Tax Foundation, February 15, 2012. http://taxfoundation.org/sites/taxfoundation.org/files/docs/ff2012.pdf

"Table 8: Sources of State and Local Tax Revenue, Percentage of Total from Each Source, Fiscal Year 2009"

[175] Entry: "capital gain." Merriam-Webster's Collegiate Dictionary, Encyclopædia Britannica Ultimate Reference Suite 2004.

"the increase in value of an asset (as stock or real estate) between the time it is bought and the time it is sold"

[176] Entry: "capital gain." Collins English Dictionary. HarperCollins, 2003. http://www.thefreedictionary.com/capital+gain

"the amount by which the selling price of a financial asset exceeds its cost"

[177] Publication 544: "Sales and Other Dispositions of Assets, For use in preparing 2011 Returns." Internal Revenue Service, March 7, 2012. http://www.irs.gov/pub/irs-pdf/p544.pdf

Page 22:

Capital gain or loss.   Generally, you will have a capital gain or loss if you sell or exchange a capital asset. You also may have a capital gain if your section 1231 transactions result in a net gain. …

Capital Assets

Almost everything you own and use for personal purposes, pleasure, or investment is a capital asset. For exceptions, see Noncapital Assets, later.

The following items are examples of capital assets.

• Stocks and bonds.

• A home owned and occupied by you and your family.

• Timber grown on your home property or investment property, even if you make casual sales of the timber.

• Household furnishings.

• A car used for pleasure or commuting.

• Coin or stamp collections.

• Gems and jewelry.

• Gold, silver, and other metals.

Personal-use property.   Generally, property held for personal use is a capital asset. Gain from a sale or exchange of that property is a capital gain. Loss from the sale or exchange of that property is not deductible. You can deduct a loss relating to personal-use property only if it results from a casualty or theft.

Investment property.   Investment property (such as stocks and bonds) is a capital asset, and a gain or loss from its sale or exchange is a capital gain or loss. This treatment does not apply to property used to produce rental income. See Business assets, later, under Noncapital Assets.

Release of restriction on land.   Amounts you receive for the release of a restrictive covenant in a deed to land are treated as proceeds from the sale of a capital asset.

Noncapital Assets

A noncapital asset is property that is not a capital asset. The following kinds of property are not capital assets.

1. Stock in trade, inventory, and other property you hold mainly for sale to customers in your trade or business. Inventories are discussed in Publication 538, Accounting Periods and Methods. But, see the Tip below.

2. Accounts or notes receivable acquired in the ordinary course of a trade or business for services rendered or from the sale of any properties described in (1), above.

3. Depreciable property used in your trade or business or as rental property (including section 197 intangibles defined later), even if the property is fully depreciated (or amortized). Sales of this type of property are discussed in chapter 3.

4. Real property used in your trade or business or as rental property, even if the property is fully depreciated.

5. A copyright; a literary, musical, or artistic composition; a letter; a memorandum; or similar property (such as drafts of speeches, recordings, transcripts, manuscripts, drawings, or photographs):

a) Created by your personal efforts,

b) Prepared or produced for you (in the case of a letter, memorandum, or similar property), or

c) Received from a person who created the property or for whom the property was prepared under circumstances (for example, by gift) entitling you to the basis of the person who created the property, or for whom it was prepared or produced. …

6. U.S. Government publications you got from the government for free or for less than the normal sales price or that you acquired under circumstances entitling you to the basis of someone who got the publications for free or for less than the normal sales price.

7. Any commodities derivative financial instrument (discussed later) held by a commodities derivatives dealer unless it meets both of the following requirements.

a. It is established to the satisfaction of the IRS that the instrument has no connection to the activities of the dealer as a dealer.

b. The instrument is clearly identified in the dealer's records as meeting (a) by the end of the day on which it was acquired, originated, or entered into.

8. Any hedging transaction (defined later) that is clearly identified as a hedging transaction by the end of the day on which it was acquired, originated, or entered into.

9. Supplies of a type you regularly use or consume in the ordinary course of your trade or business.

[178] Entry: "dividend." World Book Encyclopedia Dictionary, 2007 Deluxe Edition.

"money earned as profit by a company and divided among the owners or stockholders of the company"

[179] Entry: "dividend." Collins English Dictionary. HarperCollins, 2003. http://www.thefreedictionary.com/dividend

Entry: "dividend." Collins English Dictionary. HarperCollins, 2003. http://www.thefreedictionary.com/dividend

"1. a. a distribution from the net profits of a company to its shareholders"

[180] Glossary: "Understanding Taxes Teacher Site." Internal Revenue Service, 2012. http://apps.irs.gov/app/understandingTaxes/teacher/glossary.jsp

"interest income  The income a person receives from certain bank accounts or from lending money to someone else."

[181] Article: "Dividends, double taxation of." By Joseph J. Cordes. Encyclopedia of Taxation and Tax Policy (Second edition). Edited by Joseph J. Cordes and others. Urban Institute Press, 2005. http://www.taxpolicycenter.org/UploadedPDF/1000523.pdf

Taxation that comes about in the U.S. tax system because corporate profits are taxed once by the corporate income tax and then again when these profits are distributed to shareholders.

Income that is earned by corporations in the United States is currently subject to two levels of tax. Corporate profits are subject to the corporate income tax. When these profits are distributed to the shareholders who own the corporations, these distributions are also included in the shareholders' taxable income.

[182] Webpage: "Corporations." Internal Revenue Service, August 2, 2012. http://www.irs.gov/...

"The profit of a corporation is taxed to the corporation when earned, and then is taxed to the shareholders when distributed as dividends. This creates a double tax. The corporation does not get a tax deduction when it distributes dividends to shareholders. Shareholders cannot deduct any loss of the corporation."

[183] "Testimony of the Staff of the Joint Committee On Taxation before the Joint Select Committee on Deficit Reduction." By Thomas A. Barthold. United States Congress, Joint Committee on Taxation, September 22, 2011. http://www.jct.gov/...

Page 28: "A distribution by a corporation to one of its shareholders generally is taxable as a dividend to the shareholder to the extent of the corporation's current or accumulated earnings and profits, and such a distribution is not a deductible expense of the corporation.³² Thus, the amount of a corporate dividend generally is taxed twice: once when the income is earned by the corporation and again when the dividend is distributed to the shareholder.³³"

[184] Article: "Capital gains taxation." By Gerald E. Auten (U.S. Treasury Department). Encyclopedia of Taxation and Tax Policy (Second Edition). Edited by Joseph J. Cordes and others. Urban Institute Press, 2005. http://www.taxpolicycenter.org/...

"In addition, the capital gains tax on corporate stock can be viewed as an aspect of the double taxation of corporate income that can raise both equity and efficiency concerns."

[185] Report: "Overview of the Federal Tax System." By David L. Brumbaugh and others. Congressional Research Service, March 10, 2005. http://www.policyarchive.org/handle/10207/bitstreams/2366.pdf

Page 7: "Corporate equity profits are taxed twice, once at the corporate level and once under the individual income tax when they are received by stockholders as dividends or capital gains. … Further, corporations are not persons who can bear the burden of taxes, but merely legal entities through which individuals earn income. From this point of view it is misleading to compare the tax burden of a corporation with that of an individual."

[186] "Testimony of the Staff of the Joint Committee On Taxation before the Joint Select Committee on Deficit Reduction." By Thomas A. Barthold. United States Congress, Joint Committee on Taxation, September 22, 2011. http://www.jct.gov/...

Page 8: "[T]he income of a C corporation⁷ is taxed directly at the corporate level. Shareholders are taxed on dividend distributions of the corporation's after-tax income. Shareholders are also taxed on any gain (including gain attributable to undistributed corporate income) on the disposition of their shares of stock of the corporation. Thus, the income of a C corporation may be subject to tax at both the corporate and shareholder levels.⁸"

[187] Report: "Overview of the Federal Tax System as in Effect for 2012." Joint Committee on Taxation, February 24, 2012. https://www.jct.gov/publications.html?func=startdown&id=4400

Pages 2-3: "A. Individual Income Tax … Lower rates apply for long-term capital gains; those rates apply for both the regular tax and the alternative minimum tax."

Page 7:

Special capital gains and dividends rates

In general, gain or loss reflected in the value of an asset is not recognized for income tax purposes until a taxpayer disposes of the asset. On the sale or exchange of a capital asset, any gain generally is included in income. Any net capital gain of an individual is taxed at maximum rates lower than the rates applicable to ordinary income. Net capital gain is the excess of the net long-term capital gain for the taxable year over the net short-term capital loss for the year. Gain or loss is treated as long-term if the asset is held for more than one year. …

A separate rate structure applies to capital gains and dividends. … Dividends are generally taxed at the same rate as capital gains.

[188] Report: "Federal Tax Treatment Of Individuals." U.S. Congress, Joint Committee on Taxation September 12, 2011.

https://www.jct.gov/...

Page 10: "Any net capital gain of an individual generally is taxed at rates lower than rates applicable to ordinary income."

[189] Report: "Overview of the Federal Tax System." By David L. Brumbaugh and others. Congressional Research Service, March 10, 2005. http://www.policyarchive.org/handle/10207/bitstreams/2366.pdf

Page 15: "Under current law, capital assets held longer than 12 months are considered long-term assets, while assets held 12 months or less are considered short-term assets. Capital gains on short-term assets are taxed at regular income tax rates."

[190] "Testimony of the Staff of the Joint Committee On Taxation before the Joint Select Committee on Deficit Reduction." By Thomas A. Barthold. United States Congress, Joint Committee on Taxation, September 22, 2011. http://www.jct.gov/...

Page 28:

Treatment of corporate distributions

The taxation of a corporation generally is separate and distinct from the taxation of its shareholders. A distribution by a corporation to one of its shareholders generally is taxable as a dividend to the shareholder to the extent of the corporation's current or accumulated earnings and profits, and such a distribution is not a deductible expense of the corporation.³² Thus, the amount of a corporate dividend generally is taxed twice: once when the income is earned by the corporation and again when the dividend is distributed to the shareholder.³³ Although subject to a second tax when distributed, shareholders in a corporation may benefit from deferral of this tax on undistributed corporate income (e.g., corporate income reinvested in the business). …

³² A distribution in excess of the earnings and profits of a corporation generally is a tax-free return of capital to the shareholder to the extent of the shareholder's adjusted basis (generally, cost) in the stock of the corporation; such distribution is a capital gain if in excess of basis. A distribution of property other than cash generally is treated as a taxable sale of such property by the corporation and is taken into account by the shareholder at the property's fair market value. A distribution of common stock of the corporation generally is not a taxable event to either the corporation or the shareholder.

³³ This double taxation is mitigated by a reduced maximum tax rate of 15 percent generally applicable to dividend income of individuals (prior to 2013). Note that amounts paid as interest to the debtholders of a corporation generally are subject to only one level of tax (at the recipient level) because the corporation generally is allowed a deduction for the amount of interest expense paid or accrued.

[191] Report: "Overview of the Federal Tax System as in Effect for 2012." Joint Committee on Taxation, February 24, 2012. https://www.jct.gov/publications.html?func=startdown&id=4400

Page 7: "A separate rate structure applies to capital gains and dividends. Under present law, for 2012, the maximum rate of tax on the adjusted net capital gain of an individual is 15 percent. In addition, any adjusted net capital gain otherwise taxed at a 10- or 15-percent rate is taxed at a zero-percent rate. These rates apply for purposes of both the regular tax and the alternative minimum tax. Dividends are generally taxed at the same rate as capital gains."

[192] Report: "Overview of the Federal Tax System as in Effect for 2012." Joint Committee on Taxation, February 24, 2012. https://www.jct.gov/publications.html?func=startdown&id=4400

Page 6: "Table 1.–Federal Individual Income Tax Rates for 2012"

NOTE: The following information is derived from Table 1:

 

Married Individuals Filing Joint Returns and Surviving Spouses
Taxable Income		Rate	Differential from previous upper threshold
Lower Threshold	Upper Threshold
$0	$17,400	10%	-
$17,400	$70,700	15%	$53,300
$70,700	$142,700	25%	$72,000
$142,700	$217,450	28%	$74,750
$217,450	$388,350	33%	$170,900
$388,350	infinity	35%	infinity

[193] Report: "Federal Tax Treatment Of Individuals." U.S. Congress, Joint Committee on Taxation September 12, 2011.

https://www.jct.gov/...

Page 12: "For taxable years beginning after December 31, 2012, the maximum rate of tax on the adjusted net capital gain of an individual is 20 percent. Any adjusted net capital gain which otherwise would be taxed at the 15-percent rate is taxed at a 10-percent rate."

Page 13: "For taxable years beginning after 2012, dividends received by an individual are taxed at ordinary income tax rates."

[194] Report: "The Budget and Economic Outlook: Fiscal Years 2012 to 2022." Congressional Budget Office, January 31, 2012. http://www.cbo.gov/publication/42905

Page 82:

The largest share of that projected 2.9 percentage-point increase in revenues through 2014—about 1.5 percentage points—results from the scheduled expiration at the end of calendar year 2012 of various provisions related to the individual income tax that were initially enacted in 2001, 2003, or 2009, as well as from the expiration of certain provisions related to the alternative minimum tax (AMT). Those expirations— which are projected to boost revenues by a total of $3.8 trillion over the fiscal year 2013–2022 period—will affect various parameters of the individual income tax:

• The 10 percent tax bracket will revert to 15 percent;

• Statutory tax rates for the four highest tax brackets will revert from 25, 28, 33, and 35 percent, respectively, to 28, 31, 36, and 39.6 percent; …

• The top tax rate of 15 percent on long-term capital gains realizations and dividends will return to the pre-2003 rates of 20 percent for capital gains and 39.6 percent for dividends;

[195] Publication 550: "Investment Income and Expenses (Including Capital Gains and Losses), For use in preparing 2011 Returns." Internal Revenue Service, January 17, 2012. http://www.irs.gov/pub/irs-pdf/p550.pdf

Page 6:

Taxable interest includes interest you receive from bank accounts, loans you make to others, and other sources. The following are some sources of taxable interest.

Dividends that are actually interest. Certain distributions commonly called dividends are actually interest. You must report as interest so-called "dividends" on deposits or on share accounts in:

• Cooperative banks,

• Credit unions,

• Domestic building and loan associations,

• Domestic savings and loan associations,

• Federal savings and loan associations, and

• Mutual savings banks.

The "dividends" will be shown as interest income on Form 1099-INT.

Money market funds.   Money market funds are offered by nonbank financial institutions such as mutual funds and stock brokerage houses, and pay dividends. Generally, amounts you receive from money market funds should be reported as dividends, not as interest.

Certificates of deposit and other deferred interest accounts.   If you open any of these accounts, interest may be paid at fixed intervals of 1 year or less during the term of the account. You generally must include this interest in your income when you actually receive it or are entitled to receive it without paying a substantial penalty. The same is true for accounts that mature in 1 year or less and pay interest in a single payment at maturity. If interest is deferred for more than 1 year, see Original Issue Discount (OID) , later.

Interest subject to penalty for early withdrawal.   If you withdraw funds from a deferred interest account before maturity, you may have to pay a penalty. You must report the total amount of interest paid or credited to your account during the year, without subtracting the penalty. See Penalty on early withdrawal of savings under How To Report Interest Income, later, for more information on how to report the interest and deduct the penalty.

Money borrowed to invest in certificate of deposit.   The interest you pay on money borrowed from a bank or savings institution to meet the minimum deposit required for a certificate of deposit from the institution and the interest you earn on the certificate are two separate items. You must report the total interest you earn on the certificate in your income. If you itemize deductions, you can deduct the interest you pay as investment interest, up to the amount of your net investment income. See Interest Expenses in chapter 3.

[196] Report: "Federal Tax Treatment Of Individuals." U.S. Congress, Joint Committee on Taxation September 12, 2011.

https://www.jct.gov/...

Page 30: "Interest income is currently taxed at a top marginal rate of 35 percent, rising to 39.6 percent in 2013."

[197] Report: "Prescription for change 'filled': Tax provisions in the Patient Protection and Affordable Care Act, Updated to reflect changes approved in the Reconciliation Act of 2010." By Clint Stretch and others. Deloitte, March 30, 2010. http://www.deloitte.com/...

Page 7:

The Act includes a proposal offered by President Obama for an unearned income Medicare contribution levied on income from interest, dividends, capital gains, annuities, royalties, and rents, other than such income that is derived in the ordinary course of a trade or business and not treated as a passive activity. The Act taxes this income at a rate of 3.8 percent (up from 2.9 percent in the president's plan). … These thresholds are set at $200,000 for singles and $250,000 for joint filers. …

The new unearned income Medicare contribution applies to taxable years beginning after December 31, 2012.

[198] "2011 Annual Report of the Boards of Trustees of the Federal Hospital Insurance and Federal Supplementary Medical Insurance Trust Funds." United States Department of Health and Human Services, Centers for Medicare and Medicaid Services, May 13, 2011. https://www.cms.gov/reportstrustfunds/downloads/tr2011.pdf

Page 20: "The ACA [Affordable Care Act] also specifies that individuals with incomes greater than $200,000 per year and couples above $250,000 will pay an additional "Medicare contribution" of 3.8 percent on some or all of their non-work income (such as investment earnings). However, the revenues from this tax are not allocated to the Medicare trust funds."

[199] Report: "Overview of the Federal Tax System as in Effect for 2012." Joint Committee on Taxation, February 24, 2012. https://www.jct.gov/publications.html?func=startdown&id=4400

Pages 7-8:

Tax on net investment income

For taxable years beginning after December 31, 2012, a tax is imposed on net investment income in the case of an individual, estate, or trust. In the case of an individual, the tax is 3.8 percent of the lesser of net investment income or the excess of modified adjusted gross income over the threshold amount.¹⁰ The threshold amount is $250,000 in the case of a joint return or surviving spouse, $125,000 in the case of a married individual filing a separate return, and $200,000 in any other case.

For purposes of the unearned income Medicare contribution tax, modified adjusted gross income is adjusted gross income increased by the amount excluded from income as foreign earned income under section 911(a)(1) (net of the deductions and exclusions disallowed with respect to the foreign earned income).

In the case of an estate or trust, the tax is 3.8 percent of the lesser of undistributed net investment income or the excess of adjusted gross income (as defined in section 67(e)) over the dollar amount at which the highest income tax bracket applicable to an estate or trust begins.¹¹

¹⁰ The tax is subject to the individual estimated tax provisions. The tax is not deductible in computing any tax imposed by subtitle A of the Internal Revenue Code (relating to income taxes).

¹¹ The tax does not apply to a nonresident alien or to a trust all the unexpired interests in which are devoted to charitable purposes. The tax also does not apply to a trust that is exempt from tax under section 501 or a charitable remainder trust exempt from tax under section 664.

[200] Article: "Capital gains taxation." By Gerald E. Auten (U.S. Treasury Department). NTA Encyclopedia of Taxation and Tax Policy (Second Edition). Edited by Joseph J. Cordes and others. Urban Institute Press, 2005. http://www.taxpolicycenter.org/...

Economic issues in capital gains taxation

Inflation

Taxing nominal gains raises the effective tax rate on real capital gains and can impose a tax in cases of real economic losses. Several studies have shown that a large percentage of reported capital gains reflect the effects of inflation, and that capital gains of lower- and middle-income taxpayers commonly represent not only nominal gains but real economic losses. Indexing the cost or basis of assets for changes in the price level has frequently been proposed to correct for inflation.

[201] Statement of U.S. Senator Connie Mack (Republican, Florida). Congressional Record, May 6, 1999. http://www.gpo.gov/...

Page S4830: "Indexing capital gains for inflation will end the Government's unfair practice of taxing people on phantom gains due to inflation."

[202] Book: Quantitative Investing for the Global Markets: Strategies, Tactics, and Advanced Analytical Techniques. Edited by Peter Carman. Fitzroy Dearborn Publishers, 1997.

Pages 25-25: "World stock and bond markets can be expected to continue to grow, although not at the explosive pace of the past few decades. Some of the past growth has been due to rises in nominal asset prices that merely compensate for inflation; such rises are likely to be at lower rates in the future. But we should be concerned not with nominal quantities but with real ones."

[203] Report: "Effects of Federal Tax Policy on Agriculture." By Ron Durst and James Monke. U.S. Department of Agriculture, Economic Research Service, Food and Rural Economics Division. April 2001. http://www.ers.usda.gov/media/584062/aer800_1_.pdf

Pages 37-38:

Land Prices and Ownership of Capital Assets

Farmland is a key asset because the supply of land available is relatively more limited than other farm assets. Low land prices facilitate entry into farming while high land prices make entry difficult. If a prospective farmer is unable to buy land or to arrange a rental agreement with a landlord, there is no way to enter land-based farming. Farmland historically has been a good tax investment during inflationary periods and has, therefore, been attractive to both farm and nonfarm investors. Its value as an inflationary hedge comes both from the deductibility of nominal interest payments on loans and the appreciation of land values on a tax-deferred basis.

Capital gains taxes are levied on nominal returns. Taxing both real and inflationary gains makes the effective tax rate on the real return (the capital gains tax divided by the real capital gain) nearly always greater than the marginal tax rate. If the real rate of return is low relative to inflation, then most of the nominal capital gain is due to inflation and the effective tax rate on the real return could exceed 100 percent.⁸ …

⁸ For example, after a 1-year period with 3-percent inflation and a 4-percent nominal capital gain, a 25-percent capital gains tax yields a 100-percent effective tax on the real return.

[204] Report: "Overview of the Federal Tax System as in Effect for 2012." Joint Committee on Taxation, February 24, 2012. https://www.jct.gov/publications.html?func=startdown&id=4400

Page 7: "In general, gain or loss reflected in the value of an asset is not recognized for income tax purposes until a taxpayer disposes of the asset. On the sale or exchange of a capital asset, any gain generally is included in income."

[205] Report: "Overview of the Federal Tax System." By David L. Brumbaugh and others. Congressional Research Service, March 10, 2005. http://www.policyarchive.org/handle/10207/bitstreams/2366.pdf

Page 17:

One perplexing problem associated with taxing income involves the issue of tax deferral. Ideally, a tax levied on income should be assessed when the income accrues to the taxpayer. However, as a result of many factors (some income is taxed when it is realized rather than when it accrues, there can be a mismatch between income and the expense of earning it, or the tax code specifically permits it), taxes are often deferred into the future. Since money has a time value (a dollar today is more valuable than a dollar in the future), tax deferral effectively lowers the tax rate on the income in question.

Illustrating the benefits of tax deferral is the case of income from capital gains in which the tax is assessed when the gain is realized rather than as it accrues. If a capital asset is acquired for $100 and appreciates at a rate of 10% per annum, by the end of the first year it has appreciated in value to $110 and by the end of the second year it is worth $121. Assuming a marginal tax rate of 15% (the top marginal tax rate on long-term capital gains), if the gain were realized at the end of the second year, then a tax of $3.15 ($21 times 15%) would be levied on the realized appreciation. The after-tax return would be $17.85.

In contrast is the case of a $100 investment in an interest-bearing account earning a 10% rate of return. At the end of the first year, the account would yield $10 in interest. Tax on the interest, assuming a 15% marginal income tax rate, would be $1.50, leaving $108.50 in the account. By the end of the second year, the account would yield $10.85 in interest. Tax on the second year's interest would be $1.63, leaving $117.72 in the account, for an after-tax return over the two-year period of $17.72.

It is apparent from the examples above that the investment in the asset yielding capital gains income earns a higher after-tax return than the comparable investment in an interest-bearing account. In essence, the reason for this result is simply that, for the asset producing a capital gain, the tax on the appreciation in the first year was deferred, with the deferred tax remaining in the account and earning interest. The benefits of tax deferral increase the longer an asset is held and tax can be deferred.

[206] Report: "Effects of Federal Tax Policy on Agriculture." By Ron Durst and James Monke. U.S. Department of Agriculture, Economic Research Service, Food and Rural Economics Division. April 2001. http://www.ers.usda.gov/media/584062/aer800_1_.pdf

Page 38:

Capital gains taxes are levied on nominal returns. Taxing both real and inflationary gains makes the effective tax rate on the real return (the capital gains tax divided by the real capital gain) nearly always greater than the marginal tax rate. … Longer holding periods help reduce the effective tax rate by compounding the real rate of return, but effective tax rates often remain high relative to the marginal tax rate. Although inflation also increases effective tax rates on interest and dividends, the effect on capital gains is often perceived to be greater because of the magnitude of capital sales and the proportion of the sale price that gains represent after long holding periods.

Effective tax rates always exceed the taxpayer's marginal bracket in an inflationary environment unless part of the nominal gain is excluded from taxation. If part of the gain is excluded, then the effective rate may drop below the taxpayer's marginal rate under certain combinations of holding periods and real rates of return. Since lowering capital gains tax rates below ordinary tax rates is effectively similar to providing an exclusion, current law helps to reduce the effect of taxing inflationary gains. For example, using a hypothetical 30-year holding period with 2-percent annual real capital appreciation, 4-percent inflation, and tax law from 1996, an individual in the 28-percent ordinary tax bracket faced effective capital gains tax rates on real returns of 52 percent. Under current law with the 20- percent capital gains tax rate (an effective exclusion of 29 percent), the effective tax rate in the scenario drops to 37 percent. Under pre-1986 tax law with the 60-percent exclusion, the scenario would result in a 21-percent effective tax rate on the real return.

Tax timing issues also benefit the investor who borrows. Deductible interest expenses reduce tax liability during the current year, while capital gains taxes are deferred until the asset is sold. Deferring capital gains taxes slightly increases the implicit after-tax rate of return. This increases with longer holding periods and can be especially important for those who intend to hold assets indefinitely.

Before the current policy of a maximum tax rate on capital gains, deferring capital gains until an asset was sold could create problems at the time of sale because unusually large gains may have pushed the taxpayer into a higher marginal tax bracket. In such cases, the potential for higher taxes may have been reduced somewhat by making land sales on the installment method or by selling the land in smaller parcels over time.

[207] Report: "The Budget and Economic Outlook: Fiscal Years 2012 to 2022." Congressional Budget Office, January 31, 2012. http://www.cbo.gov/publication/42905

Supplementary dataset: "Individual Income Tax Receipts and the Individual Tax Base—January 2012 Baseline." http://www.cbo.gov/...

Table: "Actual and Projected Capital Gains Realizations and Tax Receipts … Capital Gains Tax Receipts … (Percentage of individual income tax receipts)… Actual … 2010 [=] 4.9 … Projected 2011 [=] 5.9"

[208] Report: "Federal Tax Treatment Of Individuals." U.S. Congress, Joint Committee on Taxation September 12, 2011.

https://www.jct.gov/...

Pages 3-4: "Sources of gross income for individual taxpayers in 2011 include: wages and salaries (70.8 percent); Social Security and pensions and individual retirement arrangements ("IRAs") (10.6 percent); business, farm and schedule E income (e.g., rents) (7.7 percent); capital gains (4.7 percent); dividend income (2.4 percent); interest income (2.3 percent); and other income (1.4 percent). … Different maximum marginal tax rates apply to different sources of income."

[209] Report: "State and Federal Individual Capital Gains Tax Rates: How High Could They Go?" American Association for Capital Formation, March 1, 2012. http://accf.org/...

Page 2: "As shown in Table 1, nine states, including Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming, do not have a state capital gains tax rate."

Page 3: "Table 2. States With Highest Rates For Individual Capital Gains Taxes … 2012 law,

Top Fed rate: 15% … Hawaii 22.2% … California 21.7% … Oregon 21.4%"

NOTE: To arrive at the state capital gains tax rate, Just Facts subtracted 15% (the federal rate) from the figures given above.

[210] Report: "Capital Gains Taxation: Federal and State." By Nina Manzi and Joel Michael. Minnesota House of Representatives, Research Department, January 2012. http://www.house.leg.state.mn.us/hrd/pubs/ss/sscapgain.pdf

Page 2:

How do other states that impose an individual income tax treat capital gains income in tax year 2011?

• Eight states (Arkansas, Hawaii, Montana, New Mexico, North Dakota, South Carolina, Vermont, and Wisconsin) exclude a portion of long-term capital gains income, provide a lower rate, or allow a credit

• 32 states, including Minnesota, do not provide general preferential treatment for capital gains income; many provide limited special treatment for capital gains income

- 16 states and the District of Columbia have preferential treatment of long-term gains on a certain investments, such as in new business, property located in state, or low-income housing. Nearly all limit the preferential treatment to in-state investments.

- Seven states exclude gains on some or all federal, state and local bonds

- Three states allow exclusion of all or part of certain capital gains income under a more general exclusion for retirement income

[211] Report: "Individual Income Tax Provisions in the States." By Rick Olin. Wisconsin Legislative Fiscal Bureau, July, 2012. http://legis.wisconsin.gov/...

Pages 3-4:

A total of 12 states followed federal practice and taxed all capital gains and provided a $3,000 limit on losses. New Hampshire completely exempted capital gains from taxation and Tennessee taxed only the gains from selling mutual funds. Alabama and Pennsylvania taxed capital gains, but specified that all losses were deductible in the year incurred. In addition, Pennsylvania applied a separate state tax benefit rule with respect to unused losses, depreciation, and reduction of basis. Hawaii had a special alternative tax for capital gains. New Jersey did not permit any capital losses to be deducted from ordinary income. The remaining 26 states provided a variety of exclusions and deductions. For example, Wisconsin permitted exclusions for long- term gains of 100% of gains from the sale of a business to a family member and from the sale of qualifying small business stock, 60% from the sale of farm assets, and 30% from the sale of other assets. Wisconsin, as well as 12 other states, extended preferential treatment for some form of in-state investment. For more information on the treatment of capital gains by individual states, please refer to the attached outline of each state's income tax structure.

Interest/Dividends. All states are required by federal law to exempt from state tax interest income derived from U.S. obligations. The federal government, in turn, exempts from federal tax interest from state and municipal bonds.

Prior to 2003, taxable dividend income was subject to federal tax at the same rates as ordinary income. However, starting with dividends received in 2003, the lower maximum rates that apply to capital gains also apply to qualified dividend income. To qualify for the lower tax rates, certain holding periods apply. Qualified dividends include ordinary dividends received from most domestic corporations and from foreign corporations meeting certain requirements. The following are examples of payments that are not qualified dividends: capital gains distributions; dividends paid on deposits with mutual savings banks, credit unions, and similar financial institutions; and payments in lieu of dividends.

With the exception of interest from U.S. obligations and from state and municipal bonds (discussed below), most states followed federal practice in 2011 and taxed interest and dividend income. Two states, Michigan and Montana, provided limited deductions for taxpayers aged 65 or over. Massachusetts and Oklahoma provided limited exclusions for interest and/or dividends from various financial institutions. North Dakota exempts 30% of dividends subject to the lower federal tax rate. Kansas exempted certain venture capital dividends, Nebraska exempted dividend income from certain Nebraska corporations, and New Jersey exempted distributions from a New Jersey qualified investment fund. Finally, the two states with income taxes based solely on unearned income, New Hampshire and Tennessee, specifically excluded interest and dividend income earned from a number of specified sources.

[212] Report: "Estimates of Federal Tax Expenditures for Fiscal Years 2011-2015." Joint Committee on Taxation, January 17, 2012. https://www.jct.gov/publications.html?func=startdown&id=4385

Page 3:

Tax expenditures are defined under the Congressional Budget and Impoundment Control Act of 1974 (the "Budget Act") as "revenue losses attributable to provisions of the Federal tax laws which allow a special exclusion, exemption, or deduction from gross income or which provide a special credit, a preferential rate of tax, or a deferral of tax liability."⁴ Thus, tax expenditures include any reductions in income tax liabilities that result from special tax provisions or regulations that provide tax benefits to particular taxpayers. …

⁴ Congressional Budget and Impoundment Control Act of 1974 (Pub. L. No. 93-344), sec. 3(3). The Budget Act requires CBO and the Treasury to publish annually detailed lists of tax expenditures. The Joint Committee staff issued reports prior to the statutory obligation placed on the CBO and continued to do so thereafter. In light of this precedent and a subsequent statutory requirement that the CBO rely exclusively on Joint Committee staff estimates when considering the revenue effects of proposed legislation, the CBO has always relied on the Joint Committee staff for the production of its annual tax expenditure publication. See Pub. L. No. 99-177, sec. 273, codified at 2 U.S.C. 601(f).

[213] Report: "Estimates of Federal Tax Expenditures." Joint Committee on Taxation, March 14, 1978. https://www.jct.gov/publications.html?func=startdown&id=4443

Pages 1-2:

The concept of tax expenditures

Tax expenditure data are intended to show the cost to the Federal Government, in terms of revenues it has foregone, from tax provisions that either have been enacted as incentives for the private sector of the economy or have that effect even though initially having a different objective. The tax incentives usually are designed to encourage certain kinds of economic behavior as an alternative to employing direct expenditures or loan programs to achieve the same or similar objectives. These provisions take the form of exclusions, deductions, credits, preferential tax rates, or deferrals of tax liability. Tax expenditures also are analogous to uncontrolled expenditures made through individual entitlement programs because the taxpayer who can meet the criteria specified in the Internal Revenue Code may use the provision indefinitely without any further action by the Federal Government. This is possible because provisions in the Internal Revenue Code rarely have expiration dates that would require specific congressional action to continue the availability of the tax provision. For many provisions, the revenue loss is determined by the taxpayer's level of income and his tax rate bracket. From the viewpoint of the budget process, fiscal policy and the allocation of resources, uncontrollable outlays or receipts restrict the range of adjustments that can be made in public policy. One of the initial purposes of the enumeration of tax expenditures was to provide Congress with the information it would need to select between a tax or an outlay approach to accomplish a goal of public policy.

Pages 4-5:

Under the Joint Committee staff methodology, the normal structure of the individual income tax includes the following major components: one personal exemption for each taxpayer and one for each dependent, the standard deduction, the existing tax rate schedule, and deductions for investment and employee business expenses. Most other tax benefits to individual taxpayers are classified as exceptions to normal income tax law.

The Joint Committee staff views the personal exemptions and the standard deduction as defining the zero-rate bracket that is a part of normal tax law. An itemized deduction that is not necessary for the generation of income is classified as a tax expenditure, but only to the extent that it, when added to a taxpayer's other itemized deductions, exceeds the standard deduction.

[214] Article: "Spending in Disguise." Donald B. Marron (director of the Tax Policy Center and former acting director of the Congressional Budget Office). National Affairs, Summer 2011. http://www.nationalaffairs.com/...

[215] Article: "Spending in Disguise." Donald B. Marron (director of the Tax Policy Center and former acting director of the Congressional Budget Office). National Affairs, Summer 2011. http://www.nationalaffairs.com/...

Identifying preferences inevitably invites controversy, because it requires a benchmark notion of an idealized tax system against which any deviations are deemed preferences. Perhaps not surprisingly, tax experts differ on what kind of system represents the ideal benchmark. The Treasury, for instance, uses a comprehensive, progressive income tax as its benchmark, with a few adjustments to reflect the practical realities of administering the tax system. Other analysts believe a broad-based consumption tax would be a better benchmark. …

Although this disagreement reflects a fundamental debate about tax policy, it does not undermine the basic fact that tax preferences are enormous. Indeed, most provisions that are preferences relative to an income-tax-based system are also preferences relative to a system built around a consumption tax.

[216] Report: "Estimates of Federal Tax Expenditures." Joint Committee on Taxation, March 14, 1978. https://www.jct.gov/publications.html?func=startdown&id=4443

Page 2: "Estimates of tax expenditures are difficult to determine and are subject to important limitations."

[217] Report: "Estimates of Federal Tax Expenditures for Fiscal Years 2011-2015." Joint Committee on Taxation, January 17, 2012. https://www.jct.gov/publications.html?func=startdown&id=4385

Pages 7-8: "One of the most difficult issues in defining tax expenditures for business income relates to the tax treatment of capital costs. Under present law, capital costs may be recovered under a variety of alternative methods, depending upon the nature of the costs and the status of the taxpayer."

Page 23: "The Joint Committee staff and Treasury lists of tax expenditures differ in at least six respects."

[218] Paper: "How Big is The Federal Government?" By Donald Marron and Eric Toder. Urban Institute and Urban-Brookings Tax Policy Center, March 26, 2012. http://www.taxpolicycenter.org/...

Pages 7-8:

Unfortunately, it is not always straightforward to decide which provisions should be classified as spending substitutes and which are fundamental tax policy choices. We provide a few clear examples, while noting that it is sometimes hard to distinguish the two categories.

Clear Spending Substitutes. Clear spending substitutes are those tax expenditures that encourage selected activities or aid specific groups of taxpayers and could be replaced by similar programs delivered as direct outlays. Examples are renewable energy credits, the home mortgage interest deduction, the exclusion from tax of employer-provided health insurance and health benefits, and tuition tax credits. All these provisions subsidize identifiable activities (renewable energy, housing investment, health insurance, and college tuition), try to promote definable social goals (reduced greenhouse gas emissions, increased homeownership, broader health insurance coverage, and increased college attendance), and could be designed as outlays administered by program agencies (e.g., the Departments of Energy, Housing and Urban Development, Health and Human Services, and Education).

[219] "Testimony of the Staff of the Joint Committee On Taxation before the Joint Select Committee on Deficit Reduction." By Thomas A. Barthold. United States Congress, Joint Committee on Taxation, September 22, 2011. http://www.jct.gov/...

Page 37:

As noted above, one of the largest individual tax expenditure provisions is the deductibility of home mortgage interest expense by individuals. What does it mean to eliminate this tax expenditure? As of what date would mortgage interest no longer be deductible? Would the repeal apply to all existing mortgages or only to mortgages undertaken after the effective date? Either choice could be said to substantially eliminate the tax expenditure. These decisions will affect taxpayer's behavior regarding owning versus renting, the size of a home that they may choose to purchase, as well as the amount of debt they undertake and the choice of assets that they may retain in their portfolios. These decisions will affect the magnitude of revenues that redound to the Federal Treasury from the elimination of the tax expenditure and, as discussed below, these revenues will generally be less than the value of the estimated tax expenditure."

[220] "Testimony of the Staff of the Joint Committee On Taxation before the Joint Select Committee on Deficit Reduction." By Thomas A. Barthold. United States Congress, Joint Committee on Taxation, September 22, 2011. http://www.jct.gov/...

Pages 59-60:

The general business credit is the sum of various business credits determined under the [tax] Code. The component credits of the general business credit are listed below.

Table A-16.−Components of the General Business Credit for 2011* …

Energy credit (sec. 48) Credit for investing in certain solar, geothermal, fuel cell, and other energy property …

Advanced energy project credit (sec. 48C) Credit for investing in facilities that manufacture certain renewable power or other advanced energy equipment or products …

Renewable electricity production credit (sec. 45) Credit for producing power from wind, biomass, and other renewable resources …

Biodiesel fuels credit (sec. 40A) Credit for producing biodiesel …

Alternative fuel refueling property credit (sec. 30C) Credit for installing certain biofuel, electric, and alternative fuel refueling property …

* Excludes expired and phased-out credits.

[221] Report: "Overview of the Federal Tax System." By David L. Brumbaugh and others. Congressional Research Service, March 10, 2005. http://www.policyarchive.org/handle/10207/bitstreams/2366.pdf

Page 5: "Child and Dependent Care Credit. This credit is provided for the costs of paid care for dependents, mostly children. The maximum credit is 35% of costs up to $3,000 for one individual, $6,000 for two or more individuals. The rate is reduced when the taxpayer's adjusted gross income (AGI) exceeds $15,000, but is no less than 20%. The credit is nonrefundable."

[222] Web page: "Investor Bulletin: Municipal Bonds." U.S. Securities and Exchange Commission, June 16, 2012. http://www.sec.gov/investor/alerts/municipalbonds.htm

Generally, the interest on municipal bonds is exempt from federal income tax. The interest may also be exempt from state and local taxes if you reside in the state where the bond is issued. Bond investors typically seek a steady stream of income payments and, compared to stock investors, may be more risk-averse and more focused on preserving, rather than increasing, wealth. Given the tax benefits, the interest rate for municipal bonds is usually lower than on taxable fixed-income securities such as corporate bonds.

[223] Testimony: "Federal Support for State and Local Governments Through the Tax Code." By Frank Sammartino (Assistant Director for Tax Analysis). Congressional Budget Office, April 25, 2012. http://www.cbo.gov/...

Pages 3-4:

The federal government offers preferential tax treatment for bonds issued by state and local governments to finance governmental activities. Most tax-preferred bonds are used to finance schools, transportation infrastructure, utilities, and other capital-intensive projects. Although there are several ways in which the tax preference may be structured, in all cases state and local governments face lower borrowing costs than they would otherwise.

Types of Tax-Preferred Bonds

Borrowing by state and local governments benefits from several types of federal tax preferences. The most commonly used tax preference is the exclusion from federal income tax of interest paid on bonds issued to finance the activities of state and local governments. Such tax-exempt bonds—known as governmental bonds—enable state and local governments to borrow more cheaply than they could otherwise.

Another type of tax-exempt bond—qualified private activity bonds, or QPABs—is also issued by state and local governments. In contrast to governmental bonds, QPABs reduce the costs to the private sector of financing some projects that provide public benefits. Although the issuance of QPABs can be advantageous to state and local finances—for example, by encouraging the private sector to undertake projects whose public benefits would otherwise either have gone unrealized or required government investment to bring about—states and localities are not responsible for the interest and principal payments on such bonds. Consequently, QPABs are not the focus of this testimony (although the findings of some studies cited later in this section apply to them as well as to governmental bonds).⁶

[224] Report: "Overview of the Federal Tax System as in Effect for 2012." U.S. Congress, Joint Committee on Taxation, February 24, 2012. https://www.jct.gov/publications.html?func=startdown&id=4400

Page 3: "The deductions that may be itemized include … charitable contributions….

[225] Report: "Overview of the Federal Tax System." By David L. Brumbaugh and others. Congressional Research Service, March 10, 2005. http://www.policyarchive.org/handle/10207/bitstreams/2366.pdf

Page 5: "Hope and Lifetime Learning Credits (Education Credits). These credits, enacted in 1997, provide benefits for post-secondary education. A credit of 100% of a portion of tuition and 50% of an additional portion (varying by year) applies for the first two years of undergraduate tuition. There is also a lifetime learning credit of 20% that applies to all education and to a larger base. This credit is not refundable."

[226] "Testimony of the Staff of the Joint Committee On Taxation before the Joint Select Committee on Deficit Reduction." By Thomas A. Barthold. United States Congress, Joint Committee on Taxation, September 22, 2011. http://www.jct.gov/...

Page 37:

Another significant individual tax expenditure arises because pension benefits that accrue to individuals, either in defined contribution pension plans or in defined benefit pension plans, are not subject to the individual income tax. In the case of an employer's contribution to an individual's defined contribution pension plan, elimination of the tax expenditure could mean: counting the employer's specific dollar contribution as part of the individual's current taxable income. But the treatment of existing accounts is less clear. Would existing accounts still benefit from deferral of tax on earnings? It is even less clear what elimination of this tax expenditure means in the context of a defined benefit accrual. Often the accrual value attributable to any specific individual depends upon economic outcomes that are not currently known to either the employer or the employee.

[227] Report: "Estimates of Federal Tax Expenditures for Fiscal Years 2011-2015." Joint Committee on Taxation, January 17, 2012. https://www.jct.gov/publications.html?func=startdown&id=4385

Page 4:

All employee compensation is subject to tax unless the Code contains a specific exclusion for the income. Specific exclusions for employer-provided benefits include: coverage under accident and health plans,⁸ accident and disability insurance, group term life insurance, educational assistance, tuition reduction benefits, transportation benefits (parking, van pools, and transit passes), dependent care assistance, adoption assistance, meals and lodging furnished for the convenience of the employer, employee awards, and other miscellaneous fringe benefits (e.g., employee discounts, services provided to employees at no additional cost to employers, and de minimis fringe benefits). Each of these exclusions is classified as a tax expenditure in this report.

[228] Report: "The Alternative Minimum Tax for Individuals: A Growing Burden." By Kurt Schuler. U.S. Congress, Joint Economic Committee. May, 2001.

Page 2: "A tax credit is a provision that allows a reduction in tax liability by a specific dollar amount, regardless of income. For example, a tax credit of $500 allows both taxpayers with income of $40,000 and those with income of $80,000 to reduce their taxes by $500, if they qualify for the credit."

[229] Report: "Overview of the Federal Tax System." By David L. Brumbaugh and others. Congressional Research Service, March 10, 2005. http://www.policyarchive.org/handle/10207/bitstreams/2366.pdf

Page 5: "If a tax credit is refundable and it exceeds tax liability, a taxpayer receives a payment from the government."

[230] Report: "Reducing the Deficit: Spending and Revenue Options." Congressional Budget Office, March 2011. http://cbo.gov/...

Page 135: "Similarly, refundable tax credits—such as the earned income tax credit and the child tax credit—provide cash assistance to low-income workers with children, but their eligibility rules are often difficult to administer."

[231] Report: "Overview of the Federal Tax System as in Effect for 2012." Joint Committee on Taxation, February 24, 2012. https://www.jct.gov/publications.html?func=startdown&id=4400

Page 7:

The individual may reduce his or her tax liability by any available tax credits. … In addition, a refundable earned income tax credit ("EITC") is available to low-income workers who satisfy certain requirements. The amount of the EITC varies depending upon the taxpayer's earned income and whether the taxpayer has one, two, more than two, or no qualifying children. In 2012, the maximum EITC is $5,891 for taxpayers with more than two qualifying children, $5,236 for taxpayers with two qualifying children, $3,169 for taxpayers with one qualifying child, and $475 for taxpayers with no qualifying children.

[232] Calculated with data from the report: "The Distribution of Household Income and Federal Taxes, 2008 and 2009." Congressional Budget Office, July 10, 2012. http://www.cbo.gov/...

Page 2: "Negative average tax rates result when refundable tax credits, such as the earned income and child tax credits, exceed the tax owed by people in an income group. (Refundable tax credits are not limited to the amount of income tax owed before they are applied.)"

Page 3: "In 2009, the bottom quintile's average rate for the individual income tax was -9.3 percent—that is, refundable tax credits exceeded the income tax owed by that group (see Figure 3 on page 10). On average, households in the second quintile also received more in refundable credits than they paid in individual income taxes."

Page 4: "Table 1. Distribution of Before-Tax Income, by Income Group, 2007 to 2009 … With Households Ranked by Before-Tax Income … Average Income (2009 dollars) … Lowest Quintile [=] 23,500"

CALCULATION: $23,500 × 9.3% = $2,185

[233] "Testimony of the Staff of the Joint Committee On Taxation before the Joint Select Committee on Deficit Reduction." By Thomas A. Barthold. United States Congress, Joint Committee on Taxation, September 22, 2011. http://www.jct.gov/...

Page 20: "The two most widely used refundable credits are the earned income tax credit (the "EITC") and the child tax credit."

[234] Report: "Private Health Insurance Provisions in PPACA (P.L. 111-148)" By Hinda Chaikind and others. Congressional Research Service, April 15, 2010. http://bingaman.senate.gov/policy/crs_privhins.pdf

Summary: "[The Affordable Care Act] will enable and support states' creation by 2014 of "American Health Benefit Exchanges." … Based on income, certain individuals may qualify for a tax credit toward their [health insurance] premium costs and a subsidy for their cost-sharing; the credits and subsidies will be available only through an exchange."

[235] Report: "Estimated Financial Effects of the 'Patient Protection and Affordable Care Act,' as Amended." By Richard S. Foster. U.S. Department of Health & Human Services, Centers for Medicare and Medicaid Services, Office of the Actuary, April 22, 2010. https://www.cms.gov/...

Page 5: "The refundable premium tax credits in … [the Affordable Care Act] would limit the [health insurance] premiums paid by individuals with incomes up to 400 percent of the FPL [Federal Poverty Level] to a range of 2.0 to 9.5 percent of their income and would cost an estimated $451 billion through 2019. An estimated 25 million Exchange enrollees (79 percent) would receive these Federal premium subsidies."

NOTE: Although the statement above does not explicitly designate the year in which 25 million Exchange enrollees receive subsidies, the year can be deduced by data in Table 2 (on page 24 of the pdf file). For the year 2019, this table specifies 31.6 million Exchange enrollees. As explained above, "79 percent" of these would receive subsidies. Since 79% of 31.6 million equals 25.0 million, the year 2019 is implied above.

[236] Web page: "2012 HHS Poverty Guidelines." U.S. Department of Health & Human Services. Last revised February 9, 2012. http://aspe.hhs.gov/poverty/12poverty.shtml

"Persons in Family [=] 3 … 48 Contiguous States and D.C. [=] $19,090 … Alaska [=] $23,870 … Hawaii [=] $21,960"

CALCULATION: $18,530 × 400% = $76,360

"Persons in Family [=] 4 … 48 Contiguous States and D.C. [=] $23,050 … Alaska [=] $28,820 … Hawaii [=] $26,510"

CALCULATION: $23,050 × 400% = $92,200

"Persons in Family [=] 5 … 48 Contiguous States and D.C. [=] $27,010 … Alaska [=] $33,770 … Hawaii [=] $31,060"

CALCULATION: $27,010 × 400% = $108,040

[237] Report: "Private Health Insurance Provisions in PPACA (P.L. 111-148)" By Hinda Chaikind and others. Congressional Research Service, April 15, 2010. http://bingaman.senate.gov/policy/crs_privhins.pdf

Summary:

[The Affordable Care Act] ... will enable and support states' creation by 2014 of "American Health Benefit Exchanges." An exchange cannot be an insurer, but will provide eligible individuals and small businesses with access to insurers' plans in a comparable way. The exchange will consist of a selection of private plans as well as "multi-state qualified health plans," administered by the Office of Personnel Management. Individuals will only be eligible to enroll in an exchange plan if they are not enrolled in Medicare, Medicaid, or acceptable employer coverage as a full-time employee. Based on income, certain individuals may qualify for a tax credit toward their premium costs and a subsidy for their cost-sharing; the credits and subsidies will be available only through an exchange.

[238] Report: "Estimated Financial Effects of the 'Patient Protection and Affordable Care Act,' as Amended." By Richard S. Foster. U.S. Department of Health & Human Services, Centers for Medicare and Medicaid Services, Office of the Actuary, April 22, 2010. https://www.cms.gov/...

Page 5:

The refundable premium tax credits in section 1401 of the PPACA [the Patient Protection and Affordable Care Act] (as amended by section 1001 of the Reconciliation Act) would limit the [health insurance] premiums paid by individuals with incomes up to 400 percent of the FPL to a range of 2.0 to 9.5 percent of their income and would cost an estimated $451 billion through 2019. An estimated 25 million Exchange enrollees (79 percent) would receive these Federal premium subsidies. The cost-sharing credits would reimburse individuals and families with incomes up to 400 percent of the FPL for a portion of the amounts they pay out-of-pocket for health services, as specified in section 1402, as amended. These credits are estimated to cost $55 billion through 2019.

The PPACA establishes the Exchange premium subsidies during 2014-2018 in such a way that the reduced premiums payable by those with incomes below 400 percent of FPL would maintain the same share of total premiums over time. As a result, the Federal premium subsidies for a qualifying individual would grow at the same pace as per capita health care costs during this period. Because the cost-sharing assistance is based on a percentage of health care costs incurred by qualifying individuals and families, average Federal expenditures for this assistance would also increase at the same rate as per capita health care costs. After 2018, if the Federal cost of the premium and cost-sharing subsidies exceeded 0.504 percent of GDP, then the share of Exchange health insurance premiums paid by enrollees below 400 percent of the FPL would increase such that the Federal cost would stay at approximately 0.504 percent of GDP. We estimate that the subsidy costs in 2018 would represent about 0.518 percent of GDP, with the result that the enrollee share of the total premium would generally increase in 2019 and later.

NOTE: Although the statement above does not explicitly designate the year in which an "estimated 25 million Exchange enrollees … would receive these Federal premium subsidies," the year can be deduced by data in Table 2 (on page 24 of the pdf file). For the year 2019, this table specifies 31.6 million Exchange enrollees. As explained above, "79 percent" of these would receive subsidies. Since 79% of 31.6 million equals 25.0 million, the year 2019 is implied above.

[239] Web page: "2011 HHS Poverty Guidelines." U.S. Department of Health & Human Services. Last revised January 21, 2011. http://aspe.hhs.gov/poverty/11poverty.shtml

"Persons in Family [=] 3 … 48 Contiguous States and D.C. [=] $18,530 … Alaska [=] $23,160 … Hawaii [=] $21,320"

CALCULATION: $18,530 × 400% = $55,590

"Persons in Family [=] 4 … 48 Contiguous States and D.C. [=] $22,350 … Alaska [=] $27,940… Hawaii [=] $25,710"

CALCULATION: $22,350 × 400% = $89,400

"Persons in Family [=] 5 … 48 Contiguous States and D.C. [=] $26,170 … Alaska [=] $32,720 … Hawaii [=] $30,100"

CALCULATION: $26,170 × 400% = $104,680

[240] Report: "CBO's Analysis of the Major Health Care Legislation Enacted in March 2010." By Douglas W. Elmendorf. Congressional Budget Office, March 30, 2011. http://www.cbo.gov/...

Page 19: "Table 3 Continued. Estimated Effects of PPACA and the Reconciliation Act on Insurance Coverage (Millions of nonelderly people, by calendar year) 2014 … Average exchange subsidy per subsidized enrollee (Dollars) [=] $4,610"

[241] Article: "Spending in Disguise." Donald B. Marron (director of the Tax Policy Center and former acting director of the Congressional Budget Office). National Affairs, Summer 2011. http://www.nationalaffairs.com/...

"The rationale for viewing the preferences as expenditures, rather than mere tax breaks, was (and is) that their budgetary, economic, and distributional effects are often indistinguishable from those of spending programs."

[242] Paper: "How Big is The Federal Government?" By Donald Marron and Eric Toder. Urban Institute and Urban-Brookings Tax Policy Center, March 26, 2012. http://www.taxpolicycenter.org/...

Page 6:

Policymakers have long recognized that many social and economic goals can be pursued using tax preferences, not just government spending programs. Such preferences are recorded as revenue reductions, making the government appear smaller, but often have the same effects on income distribution and resource allocation as equivalent spending programs (Bradford 2003; Burman and Phaup 2011; Marron 2011). A complete measure of government size should treat these preferences as spending, not revenue reductions. Doing so raises measures of both spending and revenues, without affecting the deficit, and gives a different picture of the economic resources that the government directs.

[243] Working paper: "Tax Expenditures: The Size and Efficiency of Government, and Implications for Budget Reform." By Leonard E. Burman and Marvin Phaup. National Bureau of Economic Research, August 2011. http://www.nber.org/papers/w17268

Page 1: "Tax expenditures are not treated as spending at all, but as reductions in taxes. Their hidden nature has made tax expenditures irresistible to policymakers of both parties—many political or policy goals can be achieved through stealthy spending programs that are framed as tax cuts."

Page 23: "[T]he largest new construction program is not financed by cash expenditures overseen by the Department of Housing and Urban Development, but the low-income housing credit. One of the largest cash assistance programs for low-income families is the earned income tax credit. And so on. All of these programs could be carried out with cash expenditures…."

[244] "Testimony of the Staff of the Joint Committee On Taxation before the Joint Select Committee on Deficit Reduction." By Thomas A. Barthold. United States Congress, Joint Committee on Taxation, September 22, 2011. http://www.jct.gov/...

Pages 21-22:

Child tax credit.−For 2011, the child tax credit generally is $1,000 for each qualifying child.²² The credit is allowable against the regular tax and, for taxable years beginning before January 1, 2012, is allowed against the AMT.

The child tax credit is phased out for individuals with income over certain thresholds. The phase out rate is $50 for each $1,000 of modified AGI²³ (or a fraction thereof) in excess of the threshold. For married taxpayers filing joint returns, the threshold is $110,000. For taxpayers filing single or head of household returns, the threshold is $75,000. For married taxpayers filing separate returns, the threshold is $55,000. These thresholds are not indexed for inflation.

To the extent the child tax credit exceeds the taxpayer's tax liability, the taxpayer is eligible for a refundable credit (the additional child tax credit) equal to 15 percent of earned income in excess of a threshold dollar amount (the "earned income" formula). For 2011, the child tax credit is refundable up to the greater of: (1) 15 percent of the taxpayer's earned income in excess of $3,000; or (2) for families with three or more children, the amount by which the taxpayer's social security taxes exceed the taxpayer's earned income. …

²² A qualifying child is an individual for whom the taxpayer can claim a dependency exemption and who is a son or daughter of the taxpayer (or a descendant of either), a stepson or stepdaughter of the taxpayer, or an eligible foster child of the taxpayer.

[245] "2010 Annual Report to Congress." Internal Revenue Service, Taxpayer Advocate Service, December 31, 2010. http://www.taxpayeradvocate.irs.gov/...

Executive Summary: Preface & Highlights: "The Most Serious Problems Encountered by Taxpayers." http://www.taxpayeradvocate.irs.gov/...

Pages xi-xii:

The IRS should revise its approach to social programs and incentives administered through the Code.

Over the last decade, the Internal Revenue Code has become filled with special incentives and programs that benefit groups of individual and business taxpayers.²¹ These provisions are known as "tax expenditures."²² They can take many forms, including deductions, credits, or preferential tax rates. While some are easy for the IRS to administer – they are simply a matter of using information reported on the tax return and checking it against third party information reporting – others require information to which the IRS does not have access, thereby requiring it to do extensive and intrusive auditing in order to ensure compliance. Some of these provisions are designed to assist low income populations, which present socio-economic, education, mobility, and functional and language literacy challenges. When the tax administrator is tasked with delivering benefits to this population – and charged with ensuring compliance with the eligibility rules and guarding against fraud – the IRS's traditional revenue collection approach just doesn't work. Something different is needed – an approach that recognizes that the IRS no longer is just a revenue collection agency but is also a benefits administrator.

[246] Report: "General Explanation of the Tax Reform Act of 1986." Joint Committee on Taxation, May 4, 1987. http://www.jct.gov/jcs-10-87.pdf

Page 6:

The Tax Reform Act of 1986 (the "Act") represents one of the most comprehensive revisions of the Federal income tax system since its inception. …

… The prior-law tax system intruded at nearly every level of decision-making by businesses and consumers. The sharp reductions in individual and corporate tax rates provided by the Act and the elimination of many tax preferences will directly remove or lessen tax considerations in labor, investment, and consumption decisions. The Act enables businesses to compete on a more equal basis, and business success will be determined more by serving the changing needs of a dynamic economy and less by relying on subsidies provided by the tax code.

… Beginning in 1988, the Act establishes two individual income tax rates — 15 percent and 28 percent — to replace more than a dozen tax rates in each of the prior-law rate schedules, which extended up to 50 percent. Significant increases in the standard deduction and modifications to certain personal deductions provide further simplicity by greatly reducing the number of taxpayers who will itemize their deductions.

Page 273:

A principal objective of the Act was to reduce marginal tax rates on income earned by individuals and by corporations. Congress believed that lower tax rates promote economic growth by increasing the rate of return on investment. Lower tax rates also improve the allocation of resources within the economy by reducing the impact of tax considerations on business and investment decisions. In addition, lower tax rates promote compliance by reducing the potential gain from engaging in transactions designed to avoid or evade income tax. Under the Act, the maximum corporate rate is reduced from 46 percent to 34 percent.

Pages 1354-1358: "TableA-1.—Summary of Estimated Budget Effects of the Act (H.R. 3838), Fiscal Years 1987-1991) [Millions of dollars] … Grand total … 1987-91 [=] -257"

[247] Calculated with data from:

a) Dataset: "The Distribution of Household Income and Federal Taxes, 2008 and 2009." Congressional Budget Office, July 10, 2012. http://www.cbo.gov/...

b) Report: "The Distribution of Household Income and Federal Taxes, 2008 and 2009." Congressional Budget Office, July 10, 2012. http://www.cbo.gov/...

Page 1: "This report shows average tax rates for various income categories for the four largest sources of federal revenue—individual income taxes, social insurance (or payroll) taxes, corporate income taxes, and excise taxes— and for the four taxes combined."†

† NOTES:

This does not include federal estate and gift taxes, customs duties, and other miscellaneous receipts, which amount to about 5% of federal taxes. [Report: "Data on the Distribution of Federal Taxes and Household Income." Congressional Budget Office, April 2009. Blog: "Issues to Consider for Distributional Analysis." CBO Director's Blog, December 11th, 2007. "In its analysis, CBO estimates effective tax rates for the four largest sources of federal revenues—individual income taxes, social insurance (payroll) taxes, corporate income taxes, and excise taxes—as well as the total effective rate for the four taxes combined. Those taxes account for over 95 percent of total federal revenues. The analysis does not include federal estate and gift taxes, customs duties, and other miscellaneous receipts."]

This latest CBO report on effective tax rates doesn't quantify the federal taxes not included in the analysis, but Just Facts has used data from another CBO report to calculate that is 4.7%. [Report: "The Budget and Economic Outlook: Fiscal Years 2012 to 2022." Congressional Budget Office, January 31, 2012. http://www.cbo.gov/.... Page 134: "Table F-2. Revenues, by Major Source, Since 1972 (In Billions of Dollars) … 2009 … Estate and Gift Taxes [=] 23.5 … Customs Duties [=] 22.5 Miscellaneous Receipts [=] 52.1 … Total [=] 2,105.0"

CALCULATION: (23.5 + 22.5 + 52.1) / 2,105.0 = 4.7%]

NOTE: An Excel file containing the data and calculations is available upon request.

[248] Report: "General Explanation of the Tax Reform Act of 1986." Joint Committee on Taxation, May 4, 1987. http://www.jct.gov/jcs-10-87.pdf

Page 7: "The Act retains the most widely utilized itemized deductions, including deductions for home mortgage interest. State and local income taxes, real estate and personal property taxes, charitable contributions, casualty and theft losses, and medical expenses (above an increased floor). Other deductions that benefited a limited number of taxpayers, added complexity to tax filing, or were subject to abuse are restricted by the Act."

[249] "Testimony of the Staff of the Joint Committee On Taxation before the Joint Select Committee on Deficit Reduction." By Thomas A. Barthold. United States Congress, Joint Committee on Taxation, September 22, 2011. http://www.jct.gov/...

Pages 61-70:

E. New Tax Expenditures since the Tax Reform Act of 1986

The Tax Reform Act of 1986⁸⁰ "represents one of the most comprehensive revisions of the Federal income tax system since its inception."⁸¹ Among other considerations, Congress was concerned that erosion of the tax base required tax rates to be higher than otherwise would be necessary. With the elimination of various tax expenditures and other preferences and the enactment of other base-broadening provisions, the Act sharply reduced individual income tax rates. The Act retained some of the tax expenditures most widely utilized by individuals and business tax expenditures believed to be beneficial to the economy.

Numerous changes to the Code have been enacted in subsequent tax legislation. The information that follows provides a list of the new tax expenditures contained in legislation since the passage of the Tax Reform Act of 1986.⁸² Modifications and extensions of pre-existing tax expenditures are not listed. Items are grouped by the legislation by which they were created. Items that have since expired are shown in italics. …

NOTE: This list contains 151 tax preferences.

[250] Report: "Who Benefits from Ending the Double Taxation of Dividends?" By Donald B. Marron. U.S. Congress, Joint Economic Committee, February 2003. http://www.jec.senate.gov/...

A static analysis – one that focuses solely on who pays taxes to the government – would suggest that the tax exemption [on municipal bonds] is a major boon for rich investors. After all, those investors get to earn tax-free interest on the bonds. The flaw in this reasoning is the fact that the interest rate that investors receive on tax-exempt debt is much lower than they could receive on comparable investments. Investors compete among themselves to get the best after-tax returns on their investments. This competition passes much of the benefit of tax exemption back to state and local governments in the form of lower interest rates, making it cheaper and easier to finance schools, roads, and other local projects.

Demonstrating this dynamic requires little effort beyond surfing to a financial web site and doing some simple arithmetic. At this writing, a leading web site reports that the average two-year municipal bond of highest quality yields 1.13 percent (i.e., an investor purchasing $10,000 of two-year municipal bonds would receive interest payments of $113 per year). At the same time, the average two-year Treasury yields 1.59 percent.

U.S. Treasuries are widely considered to be the safest investments in the world, yet they pay substantially more interest than do municipal bonds. Why? Because interest on municipal bonds is exempt from federal taxes.

[251] Testimony: "Federal Support for State and Local Governments Through the Tax Code." By Frank Sammartino (Assistant Director for Tax Analysis). Congressional Budget Office, April 25, 2012. http://www.cbo.gov/...

Pages 3-4:

The federal government offers preferential tax treatment for bonds issued by state and local governments to finance governmental activities. Most tax-preferred bonds are used to finance schools, transportation infrastructure, utilities, and other capital-intensive projects. Although there are several ways in which the tax preference may be structured, in all cases state and local governments face lower borrowing costs than they would otherwise.

Types of Tax-Preferred Bonds

Borrowing by state and local governments benefits from several types of federal tax preferences. The most commonly used tax preference is the exclusion from federal income tax of interest paid on bonds issued to finance the activities of state and local governments. Such tax-exempt bonds—known as governmental bonds—enable state and local governments to borrow more cheaply than they could otherwise.

Another type of tax-exempt bond—qualified private activity bonds, or QPABs—is also issued by state and local governments. In contrast to governmental bonds, QPABs reduce the costs to the private sector of financing some projects that provide public benefits. Although the issuance of QPABs can be advantageous to state and local finances—for example, by encouraging the private sector to undertake projects whose public benefits would otherwise either have gone unrealized or required government investment to bring about—states and localities are not responsible for the interest and principal payments on such bonds. Consequently, QPABs are not the focus of this testimony (although the findings of some studies cited later in this section apply to them as well as to governmental bonds).⁶

[252] Report: "High-Income Tax Returns for 2009." By Justin Bryan. IRS, Statistics of Income Bulletin, Spring 2012. http://www.irs.gov/pub/irs-soi/12insprbulhignincome.pdf

Page 19:

However, certain income items from tax-preferred sources may be reduced because of their preferential treatment. An example is interest from tax-exempt State and local Government bonds. The interest rate on tax-exempt bonds is generally lower than the interest rate on taxable bonds of the same maturity and risk, with the difference approximately equal to the tax rate of the typical investor in tax-exempt bonds. Thus, investors in tax-exempt bonds are effectively paying a tax, referred to as an "implicit tax," and tax-exempt interest as reported is measured on an after-tax, rather than a pre-tax, basis.

[253] Calculated with data from the report: "2009 Statistics of Income: Corporation Income Tax Returns." Internal Revenue Service, 2012. http://www.irs.gov/pub/irs-soi/09coccr.pdf

Pages 19-38: "Table 1--Number of Returns, Selected Receipts, Cost of Goods Sold, Net Income, Deficit, Income Subject to Tax, Total Income Tax Before Credits, Selected Credits, Total Income Tax After Credits, Total Assets, Net Worth, Depreciable Assets, Depreciation Deduction, and Coefficients of Variation, by Minor Industry"

NOTES:

- That the cited differences in effective tax rates are primarily due to tax preferences can be ascertained by the fact that the effective tax rates before credits for each of these four market sectors (mining, manufacturing, educational services, and health care and social assistance) are all between 34% and 36%.

- An Excel file containing the data and calculations is available upon request.

[254] Book: The Bill of Rights and the States: The Colonial and Revolutionary Origins of American Liberties. Edited by Patrick T. Conley & John P. Kaminski. Madison House Publishers, 1992. Chapter: "The Bill of Rights: A Bibliographic Essay." By Gaspare J. Saladino. Page 484:

The best historical treatments of the legislative history of the Bill of Rights in the first federal Congress are … [six different works cited]. All agree that James Madison, against considerable odds, took the lead in the House of Representatives, and that without his efforts there probably would have been no Bill of Rights. Madison's amendments, a distillation of those from the state conventions (especially Virginia's) were, for the most part, those that the House eventually adopted.

[255] Article: "Madison, James." Contributor: Robert J. Brugger (Ph.D., Editor, Maryland Historical Magazine, Maryland Historical Society). World Book Encyclopedia, 2007 Deluxe Edition.

"Madison, James (1751-1836), the fourth president of the United States, is often called the Father of the Constitution. He played a leading role in the Constitutional Convention of 1787, where he helped design the checks and balances that operate among Congress, the president, and the Supreme Court. He also helped create the U.S. federal system, which divides power between the central government and the states."

[256] Book: The Debates in the Federal Convention of 1787, which framed Constitution of the United States of America, reported by James Madison, a delegate from the state of Virginia. Edited by Gaillard Hund and James Brown Scott. Oxford University Press, 1920. http://avalon.law.yale.edu/subject_menus/debcont.asp

June 6, 1787:

All civilized Societies would be divided into different sects, factions, & interests, as they happened to consist of rich & poor, debtors & creditors, the landed, the manufacturing, the commercial interests, the inhabitants of this district or that district, the followers of this political leader or that political leader, the disciples of this religious Sect or that religious Sect. In all cases where a majority are united by a common interest or passion, the rights of the minority are in danger. What motives are to restrain them? A prudent regard to the maxim that honesty is the best policy is found by experience to be as little regarded by bodies of men as by individuals. Respect for character is always diminished in proportion to the number among whom the blame or praise is to be divided. Conscience, the only remaining tie, is known to be inadequate in individuals: In large numbers, little is to be expected from it. Besides, Religion itself may become a motive to persecution & oppression. – These observations are verified by the Histories of every Country antient & modern. In Greece & Rome the rich & poor, the creditors & debtors, as well as the patricians & plebians alternately oppressed each other with equal unmercifulness. What a source of oppression was the relation between the parent cities of Rome, Athens & Carthage, & their respective provinces: the former possessing the power, & the latter being sufficiently distinguished to be separate objects of it? Why was America so justly apprehensive of Parliamentary injustice? Because G. Britain had a separate interest real or supposed, & if her authority had been admitted, could have pursued that interest at our expence. We have seen the mere distinction of colour made in the most enlightened period of time, a ground of the most oppressive dominion ever exercised by man over man. What has been the source of those unjust laws complained of among ourselves? Has it not been the real or supposed interest of the major number? Debtors have defrauded their creditors. The landed interest has borne hard on the mercantile interest. The Holders of one species of property have thrown a disproportion of taxes on the holders of another species. The lesson we are to draw from the whole is that where a majority are united by a common sentiment, and have an opportunity, the rights of the minor party become insecure. In a Republican Govt. the Majority if united have always an opportunity. The only remedy is to enlarge the sphere, & thereby divide the community into so great a number of interests & parties, that in the 1st. place a majority will not be likely at the same moment to have a common interest separate from that of the whole or of the minority; and in the 2d. place, that in case they shd. have such an interest, they may not be apt to unite in the pursuit of it. It was incumbent on us then to try this remedy, and with that view to frame a republican system on such a scale & in such a form as will controul all the evils wch. have been experienced.

[257] Report: "The Individual Alternative Minimum Tax." Congressional Budget Office, January 15, 2010. http://www.cbo.gov/...

Page 1:

The current version of the alternative tax, the alternative minimum tax (AMT), requires people to recalculate their taxes under rules that include in their taxable income certain types of income that are exempt from the regular income tax and that do not allow certain exemptions, deductions, and other preferences. (For details on the calculation of the AMT, see Box 1.) That second set of rules raises marginal tax rates (the tax on an additional dollar of income) for some taxpayers; modifies or limits various credits, deductions, and exclusions that apply to regular income taxes; and adds to the complexity of the tax system.

Page 2:

The alternative minimum tax (AMT) is defined as the addition to regular income taxes, equal to the amount, if any, by which AMT liability exceeds regular tax liability (after applying appropriate credits). Taxpayers who potentially owe the AMT must recalculate their taxable income as defined by the AMT, apply alternative tax rates, allow for credits and other factors, and compare the resulting tentative AMT liability against their regular tax liability. Even though the AMT is technically the excess of AMT over regular tax liability, taxpayers effectively calculate their taxes under two systems and pay the higher of the two liabilities.

[258] Report: "The Alternative Minimum Tax for Individuals: A Growing Burden." By Kurt Schuler. U.S. Congress, Joint Economic Committee. May, 2001. http://www.netadvisor.org/...

Page 1:

There are two AMTs, one for individuals and the other for corporations.¹ This report deals only with the AMT for individuals, which has more taxpayers and generates more tax revenue. …

… The goal of the AMT for individuals is to make everyone with significant income pay some federal income tax. The AMT has a lower top rate than the regular income tax but tries to catch more income in its net by defining taxable income (the tax base) more broadly. Compared to the regular income tax, the AMT has fewer "tax preferences"—deductions and other ways of reducing tax liability.

¹ In the tax code, AMT provisions for individuals and corporations are intermingled. The reason is that one target of the AMT is people who own businesses. They can treat themselves as salaried employees subject to the individual income tax or as stockholders subject to corporate taxes.

[259] Paper: "The Expanding Reach of the Individual Alternative Minimum Tax." By Leonard E. Burman, William G. Gale, and Jeffrey Rohaly. Tax Policy Center, Updated May 2005. http://www.urban.org/...

Page 4:

Because the alternative minimum tax does not allow exemptions for dependents or deductions for state taxes, it will impose particularly high burdens on taxpayers with children and those in high-tax states.⁶ Because the AMT exemption for couples is less than double the exemption for singles and because the tax brackets are not adjusted for marital status, the AMT imposes significant marriage penalties. In combination, these issues can raise AMT participation rates dramatically, as spelled out in table 2.

[260] Report: "Overview of the Federal Tax System as in Effect for 2012." Joint Committee on Taxation, February 24, 2012. https://www.jct.gov/publications.html?func=startdown&id=4400

Page 6:

Alternative minimum tax liability

An alternative minimum tax is imposed on an individual, estate, or trust in an amount by which the tentative minimum tax exceeds the regular income tax for the taxable year. The tentative minimum tax is the sum of (1) 26 percent of so much of the taxable excess as does not exceed $175,000 ($87,500 in the case of a married individual filing a separate return) and (2) 28 percent of the remaining taxable excess. The taxable excess is so much of the alternative minimum taxable income ("AMTI") as exceeds the exemption amount. The maximum tax rates on net capital gain and dividends used in computing the regular tax are used in computing the tentative minimum tax. AMTI is the taxpayer's taxable income increased by the taxpayer's tax preferences and adjusted by determining the tax treatment of certain items in a manner that negates the deferral of income resulting from the regular tax treatment of those items.

The exemption amounts are: (1) $45,000 ($74,450 in taxable years beginning in 2011) in the case of married individuals filing a joint return and surviving spouses; (2) $33,750 ($48,450 in taxable years beginning in 2011) in the case of other unmarried individuals; (3) $22,500 ($37,225 in taxable years beginning in 2011) in the case of married individuals filing separate returns; and (4) $22,500 in the case of an estate or trust. The exemption amounts are phased out by an amount equal to 25 percent of the amount by which the individual's AMTI exceeds (1) $150,000 in the case of married individuals filing a joint return and surviving spouses, (2) $112,500 in the case of other unmarried individuals, and (3) $75,000 in the case of married individuals filing separate returns or an estate or a trust. These amounts are not indexed for inflation.⁹

⁹ This deduction is described in more detail below in the summary of the tax rules applicable to corporations.

Page 7:

Among the preferences and adjustments applicable to the individual alternative minimum tax are accelerated depreciation on certain property used in a trade or business, circulation expenditures, research and experimental expenditures, certain expenses and allowances related to oil and gas and mining exploration and development, certain tax-exempt interest income, and a portion of the amount of gain excluded with respect to the sale or disposition of certain small business stock. In addition, personal exemptions, the standard deduction, and certain itemized deductions, such as State and local taxes and miscellaneous deductions, are not allowed to reduce AMTI.

[261] Report: "The Individual Alternative Minimum Tax." Congressional Budget Office, January 15, 2010. http://www.cbo.gov/...

Pages 3-4:

Inflation is the most important driver of the long-term growth in receipts from the AMT. Under the regular individual income tax, the tax rate brackets, exemptions, and certain deductions and credits are adjusted automatically to keep pace with inflation. By contrast, the exemption amounts and rate brackets used to calculate the AMT are not indexed. If income grows at the rate of inflation, regular tax liability also rises with inflation; AMT liability grows faster, however, because income is rising but the AMT's exemption amounts and rate brackets are not. Therefore, as prices rise over time, more and more taxpayers owe the alternative tax. The temporary increases in the AMT's exemption amounts enacted since 2001 have effectively indexed the AMT for inflation.

Page 5:

As the AMT expands, it will reach taxpayers with different characteristics than those affected by the AMT in the past. Many of the taxpayers previously subject to the alternative tax were the relatively small number of higher-income filers who tended to itemize their deductions and used tax preferences that are available to itemizers but disallowed under the alternative tax. In the years to come, however, many taxpayers with lower income will move onto the AMT because it disallows some widely used features of the regular tax, such as the personal exemption (which all taxpayers use) and the standard deduction (which roughly two-thirds of filers use). In 2001, only about 6 percent of the 1 million taxpayers affected by the AMT claimed the standard deduction on their regular tax return. That share is projected to rise to nearly one-third of the projected 27 million taxpayers who will owe the AMT in 2010.

[262] Report: "The Individual Alternative Minimum Tax." Congressional Budget Office, January 15, 2010. http://www.cbo.gov/...

Page 5: "The AMT tends to affect larger families and taxpayers with greater deductions for state and local taxes more than it affects other taxpayers."

Page 7:

The regular income tax allows a deduction for state and local taxes paid on income and property.¹¹ The deduction provides a considerable subsidy to residents in those jurisdictions because it decreases the net cost to taxpayers of paying deductible state and local taxes. By lowering the net cost of those taxes, the deduction allows state and local governments to impose higher taxes and provide more services than they otherwise could.

The deduction is disallowed under the AMT, so the AMT is more likely to affect taxpayers in higher-tax states, for whom the deduction is more valuable. In 2007, for example, 18 percent of taxpayers in New York (a high-tax state) with AGI between $100,000 and $200,000 paid the AMT, while fewer than 5 percent of taxpayers in the same income group in Florida (a state with no income tax) paid the alternative tax. By curtailing the use of the deduction, the AMT limits the implicit subsidy to state and local governments.

Page 8:

Exemptions for Dependents. The regular tax system offers benefits to larger families, allowing taxpayers to take child tax credits and personal exemptions for themselves and each of their qualifying dependents. Even though the AMT allows child tax credits, it replaces the personal exemptions with a single exemption amount based only on filing status, thereby reducing the tax benefit provided for larger families relative to smaller ones. For example, in 2006, married couples with three dependents and income between $100,000 and $200,000 were three times as likely to have AMT liability as couples with similar income and no dependents.

Other Tax Preferences. The AMT limits other regular income tax preferences, including deductions for medical expenses and for certain mortgage interest. The regular income tax allows taxpayers to deduct medical expenses in excess of 7.5 percent of AGI if they itemize their deductions, but the AMT limits the deduction to expenses exceeding 10 percent of AGI. As a result, the AMT reduces the amount of relief given to taxpayers with large medical expenses in a given year (although that limitation applies only to taxpayers subject to the AMT, who generally have higher income and may be in less need of relief). Similarly, although taxpayers may deduct mortgage interest paid to acquire, build, or improve a primary residence under both the regular and the alternative taxes, the AMT disallows the deduction for mortgage interest paid on secondary residences and interest paid on certain other mortgage debt.

[263] Report: "The Alternative Minimum Tax for Individuals: A Growing Burden." By Kurt Schuler. U.S. Congress, Joint Economic Committee. May, 2001. http://www.netadvisor.org/...

Page 7: "The most important features of the regular income tax (the tax brackets, standard deduction, exemptions for dependents, and so on) have been automatically indexed for inflation annually since 1985. The AMT is not indexed. Congress has periodically raised the exemption amounts for the AMT, but not fast enough to keep pace with inflation."

[264] Report: "The Individual Alternative Minimum Tax." Congressional Budget Office, January 15, 2010. http://www.cbo.gov/...

Page 9: "For most of the past decade, lawmakers have chosen to limit the number of taxpayers affected by the AMT by temporarily increasing the exemption amounts. Those amounts were initially increased by EGTRRA in 2001 and subsequently increased and extended for a year or two at a time, most recently by the American Recovery and Reinvestment Act of 2009 (ARRA). The 2009 AMT exemptions of $70,950 for married couples and $46,700 for unmarried filers revert in 2010 to the pre-2001 levels of $45,000 and $33,750, respectively."

[265] Report: "The 2012 Long-Term Budget Outlook." By Joyce Manchester and others. Congressional Budget Office, June 2012. http://cbo.gov/...

Page 82: "Since 2001, lawmakers have reduced the impact of the AMT by temporarily raising its exemption amounts. The most recent of those temporary adjustments expired at the end of 2011, however."

NOTE: Just Facts has tracked legislation to alleviate the inflationary impact of the AMT in 2012, and none has passed as of October 8, 2012.

[266] Report: "The Budget and Economic Outlook: Fiscal Years 2012 to 2022." Congressional Budget Office, January 31, 2012. http://www.cbo.gov/...

Page 1: "Provisions of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (Public Law 111-312, referred to in this report as the 2010 tax act) that limited the reach of the alternative minimum tax (AMT) expired on December 31, 2011."

[267] Report: "The 2012 Long-Term Budget Outlook." By Joyce Manchester and others. Congressional Budget Office, June 2012. http://cbo.gov/...

Page 85:

Just 3 percent of households paid the AMT in 2011—the last year in which temporarily higher exemption amounts were in effect under current law. However, in 2012—following the expiration of AMT relief at the end of 2011 but before the expiration at the end of 2012 of the income tax cuts extended by the 2010 tax act—the AMT will affect 18 percent of households, CBO estimates. In 2013, the share of households affected by the AMT is estimated to fall back partway, to 11 percent, because of the expiration of the income tax cuts extended by the 2010 tax act. In subsequent years, the share of households that owed more under the AMT than under the regular tax would gradually rise.

[268] Graph constructed with data from:

a) Report: "The Alternative Minimum Tax for Individuals: A Growing Burden." By Kurt Schuler. U.S. Congress, Joint Economic Committee. May, 2001. http://www.netadvisor.org/...

Page 3: "Table 1. Basic data and projections on the alternative minimum tax for individuals"

b) Report: "Individual Income Tax Rates and Shares, 2009." By Kyle Mudry. IRS, Statistics of Income Bulletin, Winter 2012. http://www.irs.gov/pub/irs-soi/12inwinbulratesshare.pdf

Page 20: "Figure A: Total Number of Returns, and Selected Income and Tax Items for Taxable Returns. [Money amounts are in billions of dollars, except where indicated]"

Page 29: "Figure F: Alternative Minimum Tax, Tax Years 1986–2009 [Tax rates are in percentages—money amounts are in thousands of dollars]"

c) Report: "The Budget and Economic Outlook: Fiscal Years 2012 to 2022." Congressional Budget Office, January 31, 2012. http://www.cbo.gov/publication/42905

- Supplementary dataset: "Effects of the Individual Alternative Minimum Tax Projected in CBO's January 2012 Baseline." http://www.cbo.gov/sites/default/files/cbofiles/attachments/AMT.xls

"2010 … AMT Receipts (Billions of dollars, by fiscal year) [=] 26.6 … Tax Returns Affected by the AMT (Millions, by calendar year) [=] 4.2"

-Supplementary dataset: "Historical Budget Data—January 2012 Baseline." http://www.cbo.gov/...

"Table F-2. Revenues, by Major Source, Since 1972 (In Billions of Dollars) … Individual Income Taxes … 2010 [=] 898.5"

CALCULATION: $26.6 billion in AMT receipts / $898.5 billion in total income taxes = 3.0%

d) Report: "Individual Income Tax Returns 2010." Internal Revenue Service, August 2012. http://www.irs.gov/pub/irs-soi/10inalcr.pdf

Page 35: "Basic Tables 2010 … Table 1.1 All Returns: Selected Income and Tax Items, by Size and Accumulated Size of Adjusted Gross Income … Taxable returns … Number of returns [=] 84,475,933"

CALCULATION: 4,200,000 tax returns affected by the AMT (per source "c" above) / 84,475,933 taxable returns = 5.0%

e) Dataset: "The 2012 Long-Term Budget Outlook." By Joyce Manchester and others. Congressional Budget Office, June 2012. http://cbo.gov/...

Figure 6-4: "Figure 6-4. Impact of the Alternative Minimum Tax on Individual Income Tax Liability Under CBO's Extended Baseline Scenario."

NOTES:

- Where possible, overlapping data points from the sources above were compared to make sure the sources' definitions and methodologies were compatible. The maximum differential in any value was 0.1 percentage point.

- An Excel file containing the data and calculations is available upon request.

[269] Report: "The Alternative Minimum Tax for Individuals: A Growing Burden." By Kurt Schuler. U.S. Congress, Joint Economic Committee. May, 2001. http://www.netadvisor.org/...

Pages 4-5:

The minimum income tax of 1969. The AMT has its roots in a minimum income tax enacted in 1969. Congress enacted the minimum tax following testimony by the Secretary of the Treasury that 155 people with adjusted gross income above $200,000 had paid no federal income tax on their 1967 tax returns. …

The minimum income tax was an "add-on" tax of 10 percent.¹² People had to pay a 10 percent tax on the amount to which their reductions of tax liability (tax preferences) exceeded $30,000. Unlike today's AMT, the add-on tax did not have rules for calculating taxable income that were separate from the rules for the regular income tax, nor did it have a separate list of reductions of tax liability.

[270] "Economic Report of the President: Hearings Before the Joint Economic Committee, Congress of the United States." Government Printing Office, January 17, 1969. Page 6:

[Testimony of Joseph Barr, Secretary of the Treasury] …

[T]here is going to be a taxpayer revolt over the income taxes in this country unless we move in this area. Now, the revolt is not going to come from the poor. They do not pay very much in taxes. The revolt is going to come from the middle class. It is going to come from those people with incomes from $7,000 to $20,000 who pay every nickel of taxes at the going rate. They do not have the loopholes and gimmicks to resort to, Mr. Chairman.

However, when these people see, as I see, that in the year 1967, there were 155 tax returns in this country with incomes of over $200,000 a year and 21 returns with incomes over a million dollars for the year on which the "taxpayers" paid the U.S. Government not 1 cent of income taxes, I think those people are going to say it is time to do something about it and I concur.

[271] Paper: "The Expanding Reach of the Individual Alternative Minimum Tax." By Leonard E. Burman, William G. Gale, and Jeffrey Rohaly. Tax Policy Center, Updated May 2005. http://www.urban.org/...

Page 1: "In January 1969, Treasury Secretary Joseph W. Barr informed Congress that 155 individual taxpayers with incomes exceeding $200,000 had paid no federal income tax in 1966. The news created a political firestorm. In 1969, members of Congress received more constituent letters about the 155 taxpayers than about the Vietnam war."

NOTE: Just Facts searched for and did not find a primary source to substantiate the claim that "members of Congress received more constituent letters about the 155 taxpayers than about the Vietnam war." It seems implausible that Congress kept records of how many letters each Congressman received on this or any other issue. Nonetheless, as evidenced by the next footnote, Barr's speech did lead to a public outcry.

[272] House editorial: "The Taxpayer and His Money: It Could Be Better Collected." Life, August 15, 1969. Page 30:

Congress is now considering the most drastic reform of the tax system since World War II. The House bill would lighten the burden on all classes of taxpayers, especially the lowest incomes, while offsetting most of this loss of needed revenue by plugging the most glaring "loopholes"—more properly known as tax preferences—now enjoyed by the rich and by certain industries. …

… Another proposed change with some dubious side effects is the so-called minimum tax, which is designed for the admirable purpose of curing the scandal under which 155 individuals with incomes over $200,000 were in 1967 able to pay no income tax at all.

[273] Report: "The Alternative Minimum Tax for Individuals: A Growing Burden." By Kurt Schuler. U.S. Congress, Joint Economic Committee. May, 2001.

Page 15:

Appendix. Legislative history of the AMT for individuals (major changes in italics)

Tax Reform Act of 1969 (P.L. 91-172) Introduced the "add-on" minimum income tax of 10% in excess of an exemption of $30,000.

[274] Report: "General Explanation of the Tax Reform Act of 1969, H.R. 13270, 91st Congress, Public Law 91-172." U.S. Congress, Joint Committee on Internal Revenue Taxation, December 3, 1970. https://www.jct.gov/publications.html?func=startdown&id=2406

Page 1:

The Tax Reform Act of 1969 (H.R. 13270) is a substantive and comprehensive reform of the income tax laws. As the House and Senate Committee Reports suggest, there was no prior tax reform bill of equal substantive scope.

The congressional consideration of this Act lasted eleven months and one day. The schedule of the various actions by the committees on the bill was as follows :

January 29, 1969 : Announcement by the House Committee on Ways and Means of its hearings on tax reform. …

December 22, 1969 : Approval of the Conference Report by both the House and Senate by votes of 381 to 2 and 71 to 6, respectively.

December 30, 1969 : Tax Reform Act of 1969 (Public Law 91-172) signed by the President.

From time to time, since the enactment of the present income tax over 50 years ago, various tax incentives or preferences have been added to the internal revenue laws. Increasingly in recent years, taxpayers with substantial incomes have found ways of gaining tax advantages from the provisions that were placed in the code primarily to aid limited segments of the economy. In fact, in many cases these taxpayers have found ways to pile one advantage on top of another. The House and Senate agreed that this was an intolerable situation. It should not have been possible for 154 individuals with adjusted gross incomes of $200,000 or more to pay no Federal income tax on 1966 income.

Page 5:

7. Minimum tax.—This tax, which applies to both individuals and corporations, supplements the action of the specific remedial provisions of the Act in curtailing tax preferences. It is computed by (1) totaling the amount of tax preferences received by the taxpayer (from the broad category of tax preferences specified in the Act), (2) subtracting from this total a $30,000 exemption and the amount of the taxpayer's regular Federal income tax for the year, and (3) applying a 10-percent tax rate to the remainder.

[275] Report: "The Alternative Minimum Tax for Individuals: A Growing Burden." By Kurt Schuler. U.S. Congress, Joint Economic Committee. May, 2001.

Page 15:

Appendix. Legislative history of the AMT for individuals (major changes in italics)

Tax Reform Act of 1969 (P.L. 91-172) Introduced the "add-on" minimum income tax of 10% in excess of an exemption of $30,000.

Excise, Estate, and Gift Tax Adjustment Act of 1970 (P.L. 91-614) Allowed deduction of the "unused regular tax carryover" from the base for the minimum tax.

Revenue Act of 1971 (P.L. 92-178) Imposed minor provisions regarding foreign income.

Tax Reform Act of 1976 (P.L. 94-455) Raised rate of minimum income tax to 15% and lowered exemption to $10,000 or half of regular taxes.

Tax Reduction and Simplification Act of 1977 (P.L. 95-30) Reduced minimum tax preference for intangible costs of drilling oil and gas wells.

Revenue Act of 1978 (P.L. 95-600) Introduced AMT alongside minimum income tax and moved certain itemized deductions and capital gains to AMT. AMT had graduated rates of 10%, 20%, and 25%, and an exemption of $20,000.

Economic Recovery Tax Act of 1981 (P.L. 97-34) Lowered AMT rates to correspond with reductions in rates of regular income tax.

Tax Equity and Fiscal Responsibility Act of 1982 (P.L. 97-248) Repealed "add-on" minimum tax. Made AMT rate a flat 20% of AMT income after exemptions of $30,000 for individuals and $40,000 for joint returns.

Deficit Reduction Act of 1984 (P.L. 98-369) Made minor changes concerning investment tax credit, intangible drilling costs, and other items.

Tax Reform Act of 1986 (P.L. 99-514) Raised AMT rate to 21%. Made high-income taxpayers subject to phase-out of exemptions. Increased number of tax preferences. Allowed an income tax credit for prior year AMT liability.

Revenue Act of 1987 (P.L. 100-203) Made technical corrections related to Tax Reform Act of 1986. Technical and Miscellaneous Revenue Act of 1988 (P.L. 100-647) Made technical corrections related to Tax Reform Act of 1986.

Omnibus Budget Reconciliation Act of 1989 (P.L. 101-239) Made further technical amendments.

Omnibus Budget Reconciliation Act of 1990 (P.L. 101-508) Raised AMT rate to 24%.

Energy Policy Act of 1992 (P.L. 102-486) Changes regarding intangible costs of drilling oil and gas wells.

Omnibus Reconciliation Act of 1993 (P.L. 103-66) Introduced graduated AMT rates of 26% and 28%. Increased exemption to $33,750 for individuals and $45,000 for joint returns. Changed rules about gains on stock of small businesses.

Taxpayer Relief Act of 1997 (P.L. 105-34) Changes regarding depreciation and farmers' installment sales.

Tax Technical Corrections Act of 1998 (P.L. 105-206) Adjusted AMT for new capital gains rates.

Tax Relief Extension Act of 1999 (P.L. 106-170) Changed rules about nonrefundable credits.

Note: There may have been a few other quite minor changes made by bills omitted from this list. The provisions of the AMT for corporations and for individuals are mixed together in the tax code, so many bills apply to both types of AMT.

[276] Report: "Present Law and Background Relating to the Individual Alternative Minimum Tax." U.S. Congress, Joint Committee on Taxation, June 25, 2007. http://www.jct.gov/x-38-07.pdf

Page 5:

The Tax Equity and Fiscal Responsibility Act of 1982 enacted the first comprehensive individual AMT.⁷ According to the legislative history of that Act, "the committee has amended the present minimum tax provisions applying to individuals with one overriding objective: no taxpayer with substantial economic income should be able to avoid all tax liability by using exclusions, deductions, and credits."⁸

The AMT provisions enacted in 1982 are the foundation for the present law individual AMT. Under the 1982 Act, in computing AMTI, the deduction for State and local taxes, the deduction for personal exemptions, the standard deduction, and the deduction for interest on home equity loans were not allowed. Incentive stock option gain was included in AMTI. These remain the principal preferences and adjustments under present law. A rate of 20 percent applied to AMTI in excess of an exemption amount of $40,000 ($30,000 for unmarried taxpayers). The exemption amounts were not indexed for inflation, even though the regular rates were scheduled to be indexed for inflation in future years. Nonrefundable credits (other than the foreign tax credit) were not allowed against the AMT.

The Tax Reform Act of 1986 largely retained the structure of the prior-law AMT, except that deferral preferences were properly adjusted over time and a minimum tax credit was added. …

⁸ Tax Equity and Fiscal Responsibility Act of 1982, S. Rpt. No. 97-494 Vol. 1, at 108 (July 12, 1982).

[277] Calculated with data from "Statistics of Income Bulletin, Volume 7, Number 4." Internal Revenue Service, Spring 1988. http://www.irs.gov/pub/irs-soi/88rpsprbul.pdf

Page 75: "Table 7.-Standard, Itemized, and Total Deductions Reported on Individual Income Tax Returns, Tax Years 1944-1986 [All figures are estimates based on samples-number of returns are in millions; money amounts are in billions of dollars] … Number of returns … 1967 [=] 71.7"

CALCULATION: 155 / 71,700,000 = 0.0002%

[278] "CPI Inflation Calculator." Bureau of Labor Statistics. Accessed August 15, 2012 at http://www.bls.gov/data/inflation_calculator.htm

"$200,000 in 1967 has the same buying power as $1,284,652.69 in 2009"

[279] Calculated with data from the report: "Individual Income Tax Rates and Shares, 2009." By Kyle Mudry. IRS, Statistics of Income Bulletin, Winter 2012. http://www.irs.gov/pub/irs-soi/12inwinbulratesshare.pdf

Page 20: "Figure A: Total Number of Returns, and Selected Income and Tax Items for Taxable Returns. [Money amounts are in billions of dollars, except where indicated] … Year 2009 … Number of taxable returns [=] 81,890,189"

Page 29: "Figure F: Alternative Minimum Tax, Tax Years 1986–2009 [Tax rates are in percentages—money amounts are in thousands of dollars] … Year 2009 … Number of AMT returns [=] 3,827,562"

CALCULATION: 3,827,562 / 81,890,189 = 4.7%

[280] Calculated with data from the report: "Individual Income Tax Returns, 2009." By Justin Bryan. IRS, Statistics of Income Bulletin, Fall 2011. http://www.irs.gov/pub/irs-soi/11infallbulincome.pdf

Page 34: "Table 2. All Returns: Tax Liability, Tax Credits, and Tax Payments, by Size of Adjusted Gross Income, Tax Year 2009 [All figures are estimates based on samples—money amounts are in thousands of dollars]"

NOTE: An Excel file containing the data and calculations is available upon request.

[281] Report: "High-Income Tax Returns for 2009." By Justin Bryan. IRS, Statistics of Income Bulletin, Spring 2012. http://www.irs.gov/pub/irs-soi/12insprbulhignincome.pdf

Page 6:

Two income concepts are used in this article to classify tax returns as high income: the statutory concept of adjusted gross income (AGI) and the expanded income concept.² Expanded income uses items reported on tax returns to obtain a more comprehensive measure of income than AGI. Specifically, expanded income is AGI plus tax-exempt interest, nontaxable Social Security benefits, the foreign-earned income exclusion, and items of "tax preference" for "alternative minimum tax" purposes; less unreimbursed employee business expenses, moving expenses, investment interest expense to the extent it does not exceed investment income, and miscellaneous itemized deductions not subject to the 2-percent-of-AGI floor.^{3, 4, 5}

Page 9:

Two tax concepts are used in this article to classify tax returns as taxable or nontaxable. The first concept, "U.S. income tax," is total Federal income tax liability (including the "alternative minimum tax" (AMT)), less all credits against income tax. Since the U.S. income tax applies to worldwide income, and since a credit (subject to certain limits) is allowed against U.S. income tax for income taxes paid to foreign governments, a return could be classified as nontaxable under this first concept even though income taxes had been paid to a foreign government. The second tax concept, "worldwide income tax," addresses this circumstance by adding to U.S. income tax the allowed foreign tax credit and foreign taxes paid on excluded foreign-earned income.^{7, 8} The sum of these two items is believed to be a reasonable proxy for foreign taxes actually paid.

Page 9: "For 2009, of the 3,975,288 tax returns with expanded income of $200,000 or more … 19,551 (0.492 percent) had no worldwide income tax liability."

Page 15: "Table 8 shows that, on returns without any worldwide tax and expanded income of $200,000 or more, the most important item in eliminating tax, on 61.1 percent of returns, was the exclusion for state and local government interest ('tax-exempt interest')."

Page 19: "[C]ertain income items from tax-preferred sources may be reduced because of their preferential treatment. An example is interest from tax-exempt State and local Government bonds."

[282] Web page: "Investor Bulletin: Municipal Bonds." U.S. Securities and Exchange Commission, June 16, 2012. http://www.sec.gov/investor/alerts/municipalbonds.htm

Municipal bonds (or "munis" for short) are debt securities issued by states, cities, counties and other governmental entities to fund day-to-day obligations and to finance capital projects such as building schools, highways or sewer systems. By purchasing municipal bonds, you are in effect lending money to the bond issuer in exchange for a promise of regular interest payments, usually semi-annually, and the return of the original investment, or "principal." A municipal bond's maturity date (the date when the issuer of the bond repays the principal) may be years in the future. Short-term bonds mature in one to three years, while long-term bonds won't mature for more than a decade.

Generally, the interest on municipal bonds is exempt from federal income tax. The interest may also be exempt from state and local taxes if you reside in the state where the bond is issued. Bond investors typically seek a steady stream of income payments and, compared to stock investors, may be more risk-averse and more focused on preserving, rather than increasing, wealth. Given the tax benefits, the interest rate for municipal bonds is usually lower than on taxable fixed-income securities such as corporate bonds.

[283] Report: "Who Benefits from Ending the Double Taxation of Dividends?" By Donald B. Marron. U.S. Congress, Joint Economic Committee, February 2003. http://www.jec.senate.gov/...

Pages 3-4: "Under current tax law, interest payments from most municipal bonds are exempt from federal taxes. This exemption is most valuable for individuals in the highest tax brackets, so most of these bonds are held by high income, high tax bracket investors. Indeed, ownership of tax-exempt municipal bonds may be even more skewed toward high income earners than is

ownership of dividend paying stocks.⁵"

[284] House editorial: "The Taxpayer and His Money: It Could Be Better Collected." Life, August 15, 1969.

Page 30: "Another proposed change with some dubious side effects is the so-called minimum tax, which is designed for the admirable purpose of curing the scandal under which 155 individuals with incomes over 200,000 were in 1967 able to pay no income tax at all. But among the tax shelters this reform goes after is the interest on tax-exempt bonds, on the sale of which our hard-pressed state and local governments depend for financing their public works."

[285] Form 9452: "Filing Assistance Program." Internal Revenue Service, 2011. http://www.irs.gov/pub/irs-pdf/f9452.pdf

"Computing Your Total Gross Income … Interest income (Do not include tax-exempt interest, such as from municipal bonds)"

[286] Report: "The Federal Revenue Effects Of Tax-Exempt And Direct-Pay Tax Credit Bond Provisions." Joint Committee On Taxation, July 16, 2012. https://www.jct.gov/publications.html?func=startdown&id=4470

Page 2:

Under present law, gross income does not include interest on State and local bonds. State and local bonds are classified generally as either governmental bonds or private activity bonds. Governmental bonds are bonds whose proceeds are primarily used to finance governmental functions or which are repaid with governmental funds. Private activity bonds are bonds in which the State or local government serves as a conduit providing financing to nongovernmental persons (e.g., private businesses or individuals). The exclusion from income for State and local bonds does not apply to private activity bonds, unless the bonds are issued for certain permitted purposes ("qualified private activity bonds") and other requirements are met. During the period 2001-2010, the average annual volume of new tax-exempt bonds issued by State and local governments was $340 billion and the average annual volume of tax-exempt notes (bonds with maturities of less than one year) issued by State and local governments was $60 billion. As of the fourth quarter of 2011, State and local governments had total tax-exempt security liabilities of nearly $3.0 trillion.⁴

[287] Report: "High-Income Tax Returns for 2009." By Justin Bryan. IRS, Statistics of Income Bulletin, Spring 2012. http://www.irs.gov/pub/irs-soi/12insprbulhignincome.pdf

Page 15: "Because they do not generate AMT adjustments or preferences, tax-exempt bond interest, itemized deductions for interest expense, miscellaneous itemized deductions not subject to the 2-percent-of-AGI floor, casualty or theft losses, and medical expenses (exceeding 10 percent of AGI) could, by themselves, produce nontaxability."

[288] Testimony: "Federal Support for State and Local Governments Through the Tax Code." By Frank Sammartino (Assistant Director for Tax Analysis). Congressional Budget Office, April 25, 2012. http://www.cbo.gov/...

Pages 3-4:

The federal government offers preferential tax treatment for bonds issued by state and local governments to finance governmental activities. Most tax-preferred bonds are used to finance schools, transportation infrastructure, utilities, and other capital-intensive projects. Although there are several ways in which the tax preference may be structured, in all cases state and local governments face lower borrowing costs than they would otherwise.

Types of Tax-Preferred Bonds

Borrowing by state and local governments benefits from several types of federal tax preferences. The most commonly used tax preference is the exclusion from federal income tax of interest paid on bonds issued to finance the activities of state and local governments. Such tax-exempt bonds—known as governmental bonds—enable state and local governments to borrow more cheaply than they could otherwise.

Another type of tax-exempt bond—qualified private activity bonds, or QPABs—is also issued by state and local governments. In contrast to governmental bonds, QPABs reduce the costs to the private sector of financing some projects that provide public benefits. Although the issuance of QPABs can be advantageous to state and local finances—for example, by encouraging the private sector to undertake projects whose public benefits would otherwise either have gone unrealized or required government investment to bring about—states and localities are not responsible for the interest and principal payments on such bonds. Consequently, QPABs are not the focus of this testimony (although the findings of some studies cited later in this section apply to them as well as to governmental bonds).⁶

[289] Report: "High-Income Tax Returns for 2009." By Justin Bryan. IRS, Statistics of Income Bulletin, Spring 2012. http://www.irs.gov/pub/irs-soi/12insprbulhignincome.pdf

Page 19:

However, certain income items from tax-preferred sources may be reduced because of their preferential treatment. An example is interest from tax-exempt State and local Government bonds. The interest rate on tax-exempt bonds is generally lower than the interest rate on taxable bonds of the same maturity and risk, with the difference approximately equal to the tax rate of the typical investor in tax-exempt bonds. Thus, investors in tax-exempt bonds are effectively paying a tax, referred to as an "implicit tax," and tax-exempt interest as reported is measured on an after-tax, rather than a pre-tax, basis.

[290] Report: "Who Benefits from Ending the Double Taxation of Dividends?" By Donald B. Marron. U.S. Congress, Joint Economic Committee, February 2003. http://www.jec.senate.gov/...

A static analysis – one that focuses solely on who pays taxes to the government – would suggest that the tax exemption [on munis] is a major boon for rich investors. After all, those investors get to earn tax-free interest on the bonds. The flaw in this reasoning is the fact that the interest rate that investors receive on tax-exempt debt is much lower than they could receive on comparable investments. Investors compete among themselves to get the best after-tax returns on their investments. This competition passes much of the benefit of tax exemption back to state and local governments in the form of lower interest rates, making it cheaper and easier to finance schools, roads, and other local projects.

Demonstrating this dynamic requires little effort beyond surfing to a financial web site and doing some simple arithmetic. At this writing, a leading web site reports that the average two-year municipal bond of highest quality yields 1.13 percent (i.e., an investor purchasing $10,000 of two-year municipal bonds would receive interest payments of $113 per year). At the same time, the average two-year Treasury yields 1.59 percent.

U.S. Treasuries are widely considered to be the safest investments in the world, yet they pay substantially more interest than do municipal bonds. Why? Because interest on municipal bonds is exempt from federal taxes.

[291] Report: "The 2012 Long-Term Budget Outlook." By Joyce Manchester and others. Congressional Budget Office, June 2012. http://cbo.gov/...

Page 2: "The extended baseline scenario, which reflects the assumption that current laws generally remain unchanged; that assumption implies that lawmakers will allow changes that are scheduled under current law to occur, forgoing adjustments routinely made in the past that have boosted deficits."

Pages 87-88: "Most parameters of the tax code are not indexed for real income growth, and some are not indexed for inflation. As a result, the personal exemption, the standard deduction, the amount of the child tax credit, and the thresholds for taxing income at different rates all decline relative to income over time. One consequence is that average tax rates increase over time under the extended baseline [current law] scenario."

[292] Report: "The 2012 Long-Term Budget Outlook." By Joyce Manchester and others. Congressional Budget Office, June 2012. http://cbo.gov/...

Page 2: "The extended baseline scenario, which reflects the assumption that current laws generally remain unchanged; that assumption implies that lawmakers will allow changes that are scheduled under current law to occur, forgoing adjustments routinely made in the past that have boosted deficits."

Page 88:

Under the extended baseline scenario, the cumulative effect of rising prices will sharply reduce the value of some parameters of the tax system that are not indexed for inflation. Therefore, CBO estimates that the estate tax exemption, which is set to be $1 million in 2013, would be worth less than $600,000 in 2012 dollars by 2037; the same is true for the amount of mortgage debt eligible for the mortgage interest deduction, which is also limited to $1 million under current law. The portion of Social Security benefits subject to taxation would increase from about 30 percent now to about 50 percent by 2037, CBO estimates, because the thresholds for taxing benefits are fixed in nominal terms.

Even tax parameters that are indexed for inflation would lose value relative to income over the long term under the extended baseline scenario. The current $3,800 personal exemption is projected to rise by more than 75 percent by 2037 because it is indexed for inflation, but income per household is projected to more than double during that period, so the value of the exemption relative to income would decline by more than 30 percent. Moreover, without legislative changes, the proportion of taxpayers claiming the earned income tax credit would fall from 16 percent this year to 11 percent in 2037 as growth in real income moved more taxpayers out of the eligibility range for the credit.

Those developments and others would cause individual income taxes as a share of income to grow over time by varying amounts for households at different points in the income distribution. For example, a married couple with two children earning the median income of $96,200 (including both cash income and other compensation) in 2012 and filing a joint tax return will pay about 4 percent of their income in individual income taxes (see Table 6-4).⁹ By 2037, under the extended baseline scenario, a similar couple earning the median income would pay 13 percent of their income in individual income taxes, an increase of 9 percentage points. By comparison, if the same couple earned four times the median income, the share of income that they would pay in individual income taxes would rise by 2 percentage points—from 20 percent in 2012 to 22 percent by 2037. After 2037, income taxes as a share of income would continue rising at both income levels—but, again, by a greater proportion for the couple earning the median income. Taxes as a share of income for households at other points in the income distribution would also differ greatly from what they are today. …

Page 89: "Table 6-4. Individual Income and Payroll Taxes as a Share of Income Under CBO's Extended Baseline Scenario … Married Couple With Two Children and Filing a Joint Return^c … Median Income … Taxes as a Share of Income (Percent) … Income and Payroll Taxes^b … 2012 [=] 14 … 2037 [=] 24 … b. Payroll taxes include the share paid by employers. … c. The examples for a married couple assume that the spouses earn the same amount."

CALCULATION: (24-14) / 14 = 71%

[293] Calculated with the dataset: "The 2012 Long-Term Budget Outlook." By Joyce Manchester and others. Congressional Budget Office, June 2012. http://cbo.gov/...

NOTE: An Excel file containing the data and calculations is available upon request.

[294] Publication number 05-10024: "Understanding the Benefits." United States Social Security Administration, January 2010. http://www.ssa.gov/pubs/10024.html

"You will have to pay taxes on your benefits if you file a federal tax return as an 'individual' and your total income is more than $25,000. If you file a joint return, you will have to pay taxes if you and your spouse have a total income that is more than $32,000."

NOTE: For more detail about taxes on Social Security benefits, visit Just Facts' research on Social Security.

[295] Report: "The 2012 Long-Term Budget Outlook." By Joyce Manchester and others. Congressional Budget Office, June 2012. http://cbo.gov/...

Page 88: "The portion of Social Security benefits subject to taxation would increase from about 30 percent now to about 50 percent by 2037, CBO estimates, because the thresholds for taxing benefits are fixed in nominal terms."

[296] Report: "The 2012 Long-Term Budget Outlook." By Joyce Manchester and others. Congressional Budget Office, June 2012. http://cbo.gov/...

Page 2: "The extended baseline scenario, which reflects the assumption that current laws generally remain unchanged; that assumption implies that lawmakers will allow changes that are scheduled under current law to occur, forgoing adjustments routinely made in the past that have boosted deficits."

Page 88: "Under the extended baseline scenario, the cumulative effect of rising prices will sharply reduce the value of some parameters of the tax system that are not indexed for inflation. Therefore, CBO estimates that the estate tax exemption, which is set to be $1 million in 2013, would be worth less than $600,000 in 2012 dollars by 2037; the same is true for the amount of mortgage debt eligible for the mortgage interest deduction, which is also limited to $1 million under current law."

[297] Report: "The 2012 Long-Term Budget Outlook." By Joyce Manchester and others. Congressional Budget Office, June 2012. http://cbo.gov/...

Page 79: "Some of the variation in the composition of total tax revenues has stemmed from interactions between the tax code and the economy. For example, many excise taxes are levied on the quantity of a good purchased (for instance, cents per gallon of gasoline) as opposed to a percentage of the price paid. Because those levies are not indexed for inflation, revenues derived from excise taxes have declined relative to GDP as the general level of prices has risen."

[298] "2011 Annual Report of the Boards of Trustees of the Federal Hospital Insurance and Federal Supplementary Medical Insurance Trust Funds." United States Department of Health and Human Services, Centers for Medicare & Medicaid Services, May 13, 2011. https://www.cms.gov/reportstrustfunds/downloads/tr2011.pdf

Page 9: "Starting in 2013, high-income workers will pay an additional 0.9 percent tax on their earnings above an unindexed threshold ($200,000 for single taxpayers and $250,000 for married couples)."

[299] Report: "Prescription for change 'filled': Tax provisions in the Patient Protection and Affordable Care Act, Updated to reflect changes approved in the Reconciliation Act of 2010." By Clint Stretch and others. Deloitte, March 30, 2010. http://www.deloitte.com/...

Pages 5-6:

Beginning in 2013, the Act imposes an additional 0.9 percent Medicare Hospital Insurance tax (HI tax) on self-employed individuals and employees with respect to earnings and wages received during the year above specified thresholds. This additional tax applies to earnings of self-employed individuals or wages of an employee received in excess of $200,000. If an individual or employee files a joint return, then the tax applies to all earnings and wages in excess of $250,000 on that return. The Act does not change the employer HI tax.

Effective date – The additional HI tax applies to wages received and taxable years beginning after December 31, 2012.

[300] Report: "Prescription for change 'filled': Tax provisions in the Patient Protection and Affordable Care Act, Updated to reflect changes approved in the Reconciliation Act of 2010." By Clint Stretch and others. Deloitte, March 30, 2010. http://www.deloitte.com/...

Page 7:

The Act includes a proposal offered by President Obama for an unearned income Medicare contribution levied on income from interest, dividends, capital gains, annuities, royalties, and rents, other than such income that is derived in the ordinary course of a trade or business and not treated as a passive activity. The Act taxes this income at a rate of 3.8 percent (up from 2.9 percent in the president's plan). … These thresholds are set at $200,000 for singles and $250,000 for joint filers. …

The new unearned income Medicare contribution applies to taxable years beginning after December 31, 2012.

[301] "2011 Annual Report of the Boards of Trustees of the Federal Hospital Insurance and Federal Supplementary Medical Insurance Trust Funds." United States Department of Health and Human Services, Centers for Medicare & Medicaid Services, May 13, 2011. https://www.cms.gov/reportstrustfunds/downloads/tr2011.pdf

Page 20: "The ACA [Affordable Care Act] also specifies that individuals with incomes greater than $200,000 per year and couples above $250,000 will pay an additional "Medicare contribution" of 3.8 percent on some or all of their non-work income (such as investment earnings). However, the revenues from this tax are not allocated to the Medicare trust funds."

[302] Report: "Estimated Revenue Effects Of The Amendment In The Nature Of A Substitute To H.R. 4872, The 'Reconciliation Act Of 2010,' As Amended, In Combination With The Revenue Effects Of H.R. 3590, The 'Patient Protection And Affordable Care Act ('PPACA'),' As Passed By The Senate, And Scheduled For Consideration By The House Committee On Rules On March 20, 2010." United States Congress, Joint Committee on Taxation, March 20, 2010. http://www.jct.gov/publications.html?func=startdown&id=3672

Page 2: "Unearned Income Medicare Contribution on 3.8% on investment income for taxpayers with AGI in excess of $200,000/$250,000 (unindexed)"

[303] Report: "The 2012 Long-Term Budget Outlook." By Joyce Manchester and others. Congressional Budget Office, June 2012. http://cbo.gov/...

Page 8: "In later years, revenues would continue to rise relative to GDP, for three main reasons. … And third, the excise tax on certain high-premium health insurance plans, which is scheduled to take effect in 2018, would have a growing impact on revenues."

[304] Report: "Prescription for change 'filled': Tax provisions in the Patient Protection and Affordable Care Act, Updated to reflect changes approved in the Reconciliation Act of 2010." By Clint Stretch and others. Deloitte, March 30, 2010. http://www.deloitte.com/...

Page 9: "Beginning in 2018, the Act imposes a nondeductible 40 percent excise tax on the "excess benefit" provided in any month under any employer-sponsored health plan. This provision is projected to raise $32 billion through 2019. An excess benefit is a benefit the cost of which, on an annual basis, exceeds $10,200 a year for individuals or $27,500 for families. … Effective date – The high-cost plan excise tax applies to taxable years beginning after 2017."

[305] Report: "The 2012 Long-Term Budget Outlook." By Joyce Manchester and others. Congressional Budget Office, June 2012. http://cbo.gov/...

Page 2: "The extended baseline scenario, which reflects the assumption that current laws generally remain unchanged; that assumption implies that lawmakers will allow changes that are scheduled under current law to occur, forgoing adjustments routinely made in the past that have boosted deficits."

Page 80:

With individual income taxes, in contrast, receipts tend to grow relative to GDP in the absence of legislated tax reductions. That increase occurs because rising income tends to push a greater share of income into higher tax brackets (a phenomenon known as "real bracket creep"). Before 1984, when none of the parameters of the individual income tax were indexed for inflation, inflation by itself caused revenues to increase as a greater share of income was taxed at higher rates.⁴ Even since 1984, when many of the parameters of the tax system have been indexed for inflation, growth in real income has caused a greater share of income to be taxed at higher rates (and, because not all of the parameters of the tax system are indexed for inflation, rising prices have continued to have some effect). …

4. The parameters of the tax system are the amounts that define the various tax brackets, the amounts of the personal exemption and standard deductions, and tax rates.

Pages 87-88:

Most parameters of the tax code are not indexed for real income growth, and some are not indexed for inflation. As a result, the personal [income tax] exemption, the standard deduction, the amount of the child tax credit, and the thresholds for taxing income at different rates all decline relative to income over time. One consequence is that average tax rates increase over time under the extended baseline scenario. Because some parameters of the tax code (such as the personal exemption and the standard deduction) are larger relative to income for lower-income taxpayers, the decline in the value of those parameters relative to income would tend to boost the average tax rates of lower-income taxpayers more than the average tax rates of other taxpayers. …

Even tax parameters that are indexed for inflation would lose value relative to income over the long term under the extended baseline scenario. The current $3,800 personal exemption is projected to rise by more than 75 percent by 2037 because it is indexed for inflation, but income per household is projected to more than double during that period, so the value of the exemption relative to income would decline by more than 30 percent."

[306] Report: "The 2012 Long-Term Budget Outlook." By Joyce Manchester and others. Congressional Budget Office, June 2012. http://cbo.gov/...

Page 2: "The extended baseline scenario, which reflects the assumption that current laws generally remain unchanged; that assumption implies that lawmakers will allow changes that are scheduled under current law to occur, forgoing adjustments routinely made in the past that have boosted deficits."

Page 88: "Even tax parameters that are indexed for inflation would lose value relative to income over the long term under the extended baseline scenario. … Moreover, without legislative changes, the proportion of taxpayers claiming the earned income tax credit would fall from 16 percent this year to 11 percent in 2037 as growth in real income moved more taxpayers out of the eligibility range for the credit."

[307] Webpage: "Jared Bernstein." Center on Budget and Policy Priorities. Accessed June 8, 2012 at http://www.cbpp.org/experts/index.cfm?fa=view&id=204

"Jared Bernstein joined the Center in May 2011 as a Senior Fellow. From 2009 to 2011, Bernstein was the Chief Economist and Economic Adviser to Vice President Joe Biden, executive director of the White House Task Force on the Middle Class, and a member of President Obama's economic team."

[308] Commentary: "We Can Tame the Debt Without Breaking Medicare, Medicaid and Social Security." By Jared Bernstein. Rolling Stone, June 7, 2012. http://www.rollingstone.com/...

Under that scenario, which in fact happens to conform to current law (meaning all the Bush tax cuts expire, for example), debt stabilizes as a share of the economy in a few years and then starts down a slow glide path. …

… The Bush tax cuts would all have to eventually sunset, and we'd need to continue – and ramp up – what looks like early progress on slowing the growth of health care spending.

But aside from dysfunctional politics feeding a largely misleading public debate, we could do this. If we, as a nation, decide that we want to achieve fiscal sustainability and preserve the entitlement programs, along with government's other critical functions, it is well within our means to do so.

NOTE: In addition to neglecting the effects of bracket creep, Bernstein omits several other important consequences of the current law scenario, which are detailed in the footnote below.

[309] Article: "Can we prevent a debt-driven economic collapse without reforming entitlements?" By James D. Agresti and Dustin Siggins. Just Facts Daily, June 15, 2012. http://www.justfactsdaily.com/...

NOTE: An Excel file containing the Congressional Budget Office data and Just Facts' calculations is available at the end of the article.

[310] Commentary: "The graph all budget discussions should start with." By Ezra Klein. Washington Post, April 11, 2011.

http://www.washingtonpost.com/...

That's Austin Frakt's graph, which uses the Congressional Budget Office's September numbers, and it shows what happens if we do ... nothing. The answer, as you can see, is that the budget comes roughly into balance. Our problems are solved!

But nothing is hard to do. This nothing, for instance, includes three crucial elements: (1) All the Bush tax cuts expire, as they're currently scheduled to do; (2) The Medicare doc fix is either implemented or its repeal is paid for over the next 70 years; and (3) the Affordable Care Act is implemented, and all of its spending targets are met and all of its taxes are collected.

… But overall, this should be the framework we start with, if for no other reason than it's the framework the government is currently operating under right now.

NOTE: In addition to neglecting the effects of bracket creep, Klein misstates another aspect of the current law scenario, which is detailed in the footnote below.

[311] "National Debt Facts." By James D. Agresti. Just Facts, April 26, 2011. Updated 8/3/12. http://www.justfacts.com/nationaldebt.asp#media-nothing

[312] Report: "Reducing the Deficit: Spending and Revenue Options." Congressional Budget Office, March 2011. http://cbo.gov/...

Pages 134-135:

The complexity of the tax system partly results from tax expenditures that are designed to affect behavior by taxing some endeavors more or less than others. Those tax expenditures include tax exemptions for some activities, deductions for various preferred items, and credits for undertaking certain actions. As a consequence, many of the same aspects of the tax system that reduce economic efficiency also increase complexity.

Complexity also arises from efforts to achieve certain equity goals. Provisions that phase out various tax credits and deductions at higher income levels are designed to target benefits toward people with the greatest need, but they make taxes more difficult to calculate. Similarly, refundable tax credits—such as the earned income tax credit and the child tax credit—provide cash assistance to low-income workers with children, but their eligibility rules are often difficult to administer. In addition, the alternative minimum tax is intended to limit the use of tax preferences by higher-income taxpayers, but it requires people to recalculate their tax liability in an entirely different way and then pay the larger of the regular tax or the AMT.

[313] Web page: "Tax Code, Regulations and Official Guidance." Internal Revenue Service. Last reviewed or updated on August 2, 2012. http://www.irs.gov/...

Federal tax law begins with the Internal Revenue Code (IRC), enacted by Congress in Title 26 of the United States Code (26 U.S.C.). ….

… The version of the IRC underlying the retrieval functions presented above is generated from the official version of the U.S. Code made available to the public by Congress. However, this version is only current through the 1st Session of the 112th Congress convened in 2011.

Finally, the IRC is complex and its sections must be read in the context of the entire Code and the court decisions that interpret it.

[314] U.S. Code Title 26: "Internal Revenue Service." United States House of Representatives, Office of the Law Revision Counsel. Accessed September 13, 2012 at http://uscodebeta.house.gov/browse/

NOTE: The full printed code is 8,297 pages. Just Facts printed this code as a .pdf file to ascertain page count, font, and page size.

[315] "2010 Annual Report to Congress." Internal Revenue Service, Taxpayer Advocate Service, December 31, 2010. http://www.taxpayeradvocate.irs.gov/...

Introduction: "The Most Serious Problems Encountered by Taxpayers." http://www.irs.gov/pub/irs-utl/2010arcmsp1_taxreform.pdf

Page 3:

The printed code contains certain information that does not have the effect of law, such as a description of amendments that have been adopted, effective dates, cross references, and captions. Therefore, our count somewhat overstates the number of words that are officially considered a part of the tax code, although as a practical matter, a person seeking to determine the law will likely have to read and consider many of these additional words, including effective dates, cross references, and captions.

[316] Web page: "Tax Code, Regulations and Official Guidance." Internal Revenue Service. Last reviewed or updated on August 2, 2012. http://www.irs.gov/...

"Treasury regulations (26 C.F.R.)--commonly referred to as Federal tax regulations--pick up where the Internal Revenue Code (IRC) leaves off by providing the official interpretation of the IRC by the U.S. Department of the Treasury."

[317] 2012 Code of Federal Regulations: "Title 26—Internal Revenue." U.S. Government Printing Office. Accessed September 19, 2012 at http://www.gpo.gov/...

NOTES:

- The U.S government has printed these regulations in twenty volumes, which total 15,460 pages in length and contain 14,074 pages of regulations.

- The page count of regulations does not include introductory pages or "finding aids" (a.k.a indexes).

- An Excel file containing the breakdown of pages from each volume is available upon request.

[318] Code of Federal Regulations Title 26, Part 1, Sections 1.0-1.60: "Internal Revenue." U.S. Government Printing Office. Revised as of April 1, 2012. http://www.gpo.gov/...

Page v: "The Code of Federal Regulations (CFR) annual edition is the codification of the general and permanent rules published in the Federal Register by the departments and agencies of the Federal Government. It is divided into 50 titles that represent broad areas subject to Federal regulation. The 50 subject matter titles contain one or more individual volumes, which are updated once each calendar year, on a staggered basis."

Page vi: "Provisions that become obsolete before the revision date stated on the cover of each volume are not carried."

NOTE: This source is the first of the twenty volumes that contain the federal tax regulations. All of these volumes include a note stating that obsolete provisions are not carried.

[319] "2010 Annual Report to Congress." Internal Revenue Service, Taxpayer Advocate Service, December 31, 2010. http://www.taxpayeradvocate.irs.gov/...

Introduction: "The Most Serious Problems Encountered by Taxpayers." http://www.irs.gov/pub/irs-utl/2010arcmsp1_taxreform.pdf

Page 3:

According to a TAS [Taxpayer Advocate Service] analysis of IRS data, U.S. taxpayers and businesses spend about 6.1 billion hours a year complying with the filing requirements of the Internal Revenue Code.¹ And that figure does not include the millions of additional hours that taxpayers must spend when they are required to respond to IRS notices or audits. (For a breakdown of hours by tax form and information reporting document, see Table 1.1.1 at the end of this discussion.)

If tax compliance were an industry, it would be one of the largest in the United States. To consume 6.1 billion hours, the "tax industry" requires the equivalent of more than three million full-time workers.²

¹ The TAS [Taxpayer Advocate Service] Research function arrived at this estimate by multiplying the number of copies of each form filed for tax year 2008 by the average amount of time the IRS estimated it took to complete the form. While the IRS estimates are the most authoritative available, the amount of time the average taxpayer spends completing a form is difficult to measure with precision. This TAS estimate may be low because it does not take into account all forms and, as noted in the text, it does not include the amount of time taxpayers spend responding to post-filing notices, examinations, or collection actions. Conversely, the TAS estimate may be high because IRS time estimates have not necessarily kept pace fully with technology improvements that allow a wider range of processing activities to be completed via automation. We note that the aggregate burden of 6.1 billion hours is lower than the 7.6 billion hour estimate included in our 2008 report. Analysts in the IRS Office of Research, Analysis and Statistics (RAS) have advised us that the lower burden estimates likely reflect efficiency gains attributable to wider use of tax software, particularly by higher income business taxpayers. However, these efficiency gains have not necessarily reduced the burden on middle income and lower income taxpayers. Indeed, measured by dollars, RAS estimates that the mean burden has declined but the median burden has increased. TAS cannot independently determine the margin of error of existing estimates, and RAS acknowledges that the reduction in the time burden estimates may be at least partially attributable to measurement error.

² This calculation assumes each employee works 2,000 hours per year (i.e., 50 weeks, with two weeks off for vacation, at 40 hours per week).

[320] Calculated with data from the footnote above and the dataset: "Average Number of People per Household, by Race and Hispanic Origin, Marital Status, Age, and Education of Householder: 2011." U.S. Census Bureau, November 2011. http://www.census.gov/...

"Total households [=] 118,682,000"

CALCULATION: 6,100,000,000 hours / 118,682,000 households = 51 hours/household

[321] "2010 Annual Report to Congress." Internal Revenue Service, Taxpayer Advocate Service, December 31, 2010. http://www.taxpayeradvocate.irs.gov/...

Introduction: "The Most Serious Problems Encountered by Taxpayers." http://www.irs.gov/pub/irs-utl/2010arcmsp1_taxreform.pdf

Pages 3-4:

Compliance costs are huge both in absolute terms and relative to the amount of tax revenue collected. Based on Bureau of Labor Statistics data on the hourly cost of an employee, TAS [Taxpayer Advocate Service] estimates that the costs of complying with the individual and corporate income tax requirements for 2008 amounted to $163 billion – or a staggering 11 percent of aggregate income tax receipts.³ …

³ The IRS and several outside analysts have attempted to quantify the costs of compliance. … There is no clearly correct methodology, and the results of these studies vary. All monetize the amount of time that taxpayers and their preparers spend complying with the Code. The TAS estimate of the cost of complying with personal and business income tax requirements (and thus excluding the time spent complying with employment, estate and gift, excise, exempt organization tax requirements) was made by multiplying the total number of such hours (5.6 billion) by the average hourly cost of a civilian employee ($29.18), as reported by the Bureau of Labor Statistics. … The TAS estimate of compliance costs as a percentage of total income tax receipts for 2008 was made by dividing the income tax compliance cost as computed above ($163 billion) by total 2008 income tax receipts ($1.45 trillion). … TAS's estimate that compliance costs amount to about 11 percent of aggregate income tax receipts falls on the lower side of some previous estimates. For example, Professor Joel Slemrod computed that compliance costs constitute about 13 percent of income tax receipts, while the Tax Foundation computed that compliance costs constitute about 22 percent of income tax receipts. …

[322] Press release: "IRS e-file Moves Forward; Successfully Executes Electronic Filing of Nation's Largest Tax Return." Internal Revenue Service, May 31, 2006. http://www.irs.gov/newsroom/article/0,,id=157845,00.html

The Internal Revenue Service today announced significant progress in its corporate e-file program, including the successful May 18, 2006 e-filing of the nation's largest tax return from General Electric (GE).

On paper, GE's e-filed return would have been approximately 24,000 pages long. After filing, GE received IRS' acknowledgement of its filing in about an hour. The file was 237 megabytes.

[323] 2011 Internal Revenue Service Data Book. Internal Revenue Service, March 2012. http://www.irs.gov/pub/irs-soi/11databk.pdf

Title page: "This report describes activities conducted by the Internal Revenue Service during Fiscal Year 2011 (October 1, 2010, through September 30, 2011)."

Page 63: "IRS's actual expenditures for FY 2011 totaled nearly $12.4 billion. … In FY 2011, the IRS employed a total workforce of 104,403, including seasonal and part-time employees."

[324] "2010 Annual Report to Congress." Internal Revenue Service, Taxpayer Advocate Service, December 31, 2010. http://www.taxpayeradvocate.irs.gov/...

Page 2:

Perhaps most troubling, tax law complexity leads to perverse results. On the one hand, taxpayers who honestly seek to comply with the law often make inadvertent errors, causing them to either overpay their tax or become subject to IRS enforcement action for mistaken underpayments. On the other hand, sophisticated taxpayers often find loopholes that enable them to reduce or eliminate their tax liabilities. Taxpayers have developed a sense of cynicism about the tax system, and compliance takes a hit. …

Although there are multiple causes of noncompliance, tax law complexity plays a significant role. No one wants to feel like a "tax chump" – paying more while suspecting that others are taking advantage of loopholes to pay less. Because of tax complexity, taxpayers often suspect that the "special interests" are receiving tax breaks while they themselves are paying full freight.

[325] Report: "IRS Releases New Tax Gap Estimates; Compliance Rates Remain Statistically Unchanged From Previous Study." Internal Revenue Service, January 6, 2012. http://www.irs.gov/...

"Tax Year 2006 (billions) … Net Tax Gap … $385 (85.5% compliance)"

[326] Report: "Reducing the Federal Tax Gap." Internal Revenue Service, August 2, 2007. http://www.irs.gov/...

Page 2: "Based on the limited information available, compliance rates appear to have remained relatively stable at around 85 percent for decades."

Pages 6-7:

The Internal Revenue Code places three primary obligations on taxpayers: (1) to file timely returns; (2) to make accurate reports on those returns; and (3) to pay the required tax voluntarily and timely. Taxpayers are compliant when they meet these obligations. Noncompliance — and the tax gap — results when taxpayers do not meet these obligations.

The tax gap is defined as the aggregate amount of true tax liability imposed by law for a given tax year that is not paid voluntarily and timely. True tax liability for any given taxpayer means the amount of tax that would be determined for the tax year in question if all relevant aspects of the tax law were correctly applied to all of the relevant facts of that taxpayer's situation. For a variety of reasons, this amount often differs from the amount of tax that a taxpayer reports on a return. The taxpayer might not understand the law, might make inadvertent mistakes, or might misreport intentionally. …

It is important to emphasize that IRS estimates of the tax gap are associated with the legal sector of the economy only. Although tax is due on income from whatever source derived, legal or illegal, the tax attributable to income earned from illegal activities is extremely difficult to estimate. Moreover, the government's interest in pursuing this type of noncompliance is, ultimately, to stop the illegal activity, not merely to tax it.

Although they are related, the tax gap is not synonymous with the "underground economy." Definitions of the "underground economy" vary widely. However, most people characterize it in terms of the value of goods and services that elude official measurement. Furthermore, there are some items in the "underground economy" that are not included in the tax gap (such as tax due on illegal-source income), and there are contributors to the tax gap that no one would include in the "underground economy" (such as the tax associated with overstated exemptions, adjustments, deductions, or credits, or with claiming the wrong filing status). The greatest area of overlap between these two concepts is sometimes called the "cash economy," in which income (usually of a business nature) is received in cash, which helps to hide it from taxation.

Pages 8-9:

As noted above, for the 2001 tax year, the overall gross tax gap was estimated to be approximately $345 billion, corresponding to a noncompliance rate of 16.3 percent. After accounting for enforcement efforts and late payments, the amount was reduced to $290 billion, corresponding to a net noncompliance rate of 13.7 percent.

• not filing required returns on time (nonfiling);

• not reporting one's full tax liability on a timely filed return (underreporting); and

• not timely paying the full amount of tax reported on a timely return (underpayment). The IRS has separate tax gap estimates for each of these three types of noncompliance. Underreporting (in the form of unreported receipts and overstated expenses) constitutes over 82 percent of the gross tax gap, up slightly from earlier estimates. Underpayment constitutes nearly 10 percent and nonfiling almost 8 percent of the gross tax gap.

Nonfiling

The nonfiling gap is defined as the amount of true tax liability that is not paid on time by taxpayers who do not file a required return on time (or at all). It is reduced by amounts paid on time, such as through withholding, estimated payments, and other credits. The nonfiler population does not include legitimate nonfilers (i.e., those who have no obligation to file).

Underreporting

The underreporting gap is defined as the amount of tax liability not voluntarily reported by taxpayers who file required returns on time. For income taxes, the underreporting gap arises from three errors: underreporting taxable income, overstating offsets to income or to tax, and net math errors. Taxable income includes such items as wages and salaries, rents and royalties, and net business income. Offsets to income include income exclusions, exemptions, statutory adjustments, and deductions. Offsets to tax are tax credits. Net math errors involve arithmetic mistakes or transcription errors made by taxpayers that are corrected at the time the return is processed. In addition to developing an estimate of the aggregate underreporting gap, it is possible to break aspects of this estimate down into measures of the underreporting gap attributable to specific line items on the tax return.

Underpayment

The underpayment gap is the portion of the total tax liability that taxpayers report on their timely filed returns but do not pay on time. This arises primarily from insufficient remittances from taxpayers themselves. However, it also includes employer under-deposits of withheld income tax. In the case of withheld income tax, it is the responsibility of the employees to report the corresponding tax liability on timely filed returns, and it is the responsibility of their employers to deposit those withholdings with the government on time.

[327] Report: "Making Tax Compliance Easier and Collecting What's Due." By Nina E. Olson. IRS, Taxpayer Advocate Service, June 28, 2011. http://www.irs.gov/pub/irs-utl/nta_testimony_taxgap_062811.pdf

Page 2: "According to the IRS's most recent comprehensive estimate, the net tax gap stood at $290 billion in 2001,² when 132 million tax returns were filed.³ This means that each taxpayer was effectively paying a 'surtax' of some $2,200 to subsidize noncompliance by others. For this reason, it is important to reduce the tax gap."

[328] Calculated with data from:

a) Report: "IRS Releases New Tax Gap Estimates; Compliance Rates Remain Statistically Unchanged From Previous Study." Internal Revenue Service, January 6, 2012. http://www.irs.gov/...

"Tax Year 2006 (billions) … Net Tax Gap … $385 (85.5% compliance)"

b) Dataset: "Average Number of People per Household, by Race and Hispanic Origin, Marital Status, Age, and Education of Householder: 2006." U.S. Census Bureau, March 27, 2007. http://www.census.gov/...

Total Households (In Thousands) [=] 114,384

c) "CPI Inflation Calculator." Bureau of Labor Statistics. Accessed September 21, 2012 at http://www.bls.gov/data/inflation_calculator.htm

"$385 in 2006 has the same buying power as $439.96 in 2012"

CALCULATION: 439,960,000,000 tax gap / 114,384,000 households = $3,846 / household

[329] Written Statement: "How Tax Complexity Hinders Small Businesses: The Impact On Job Creation And Economic Growth." By Nina E. Olson. Internal Revenue Service, National Taxpayer Advocate, April 13, 2011. http://www.irs.gov/...

Page 4:

IRS data show that when taxpayers have a choice about reporting their income, tax compliance rates are remarkably low. Workers who are classified as employees have little opportunity to underreport their earned income because it is subject to tax withholding. Employees thus report about 99 percent of their earned income. But among workers whose income is not subject to withholding, compliance rates plummet. IRS studies show that nonfarm sole proprietors report only 43 percent of their business income and unincorporated farming businesses report only 28 percent.¹²

Noncompliance cheats honest taxpayers, who must pay more to make up the difference. To me, this raises an important question: Why is it that few Americans would steal from a local charity, yet a high percentage of taxpayers who have a choice about paying taxes appear to have no compunctions about cheating their fellow citizens?

The Taxpayer Advocate Service has conducted research into the causes of noncompliance and plans to conduct additional studies. While we do not have definitive answers, we can suggest at least two hypotheses. First, no one wants to feel like a "tax chump" – paying more while suspecting that others are taking advantage of loopholes to pay less. Taxpayers who believe they are unfairly paying more than others inevitably will feel more justified in "fudging" to right the perceived wrong. Transparency is a critical feature of a successful tax system. It is essential if the system is to build taxpayer confidence and maintain high rates of compliance. Simplifying the code to make computations more transparent would go a long way toward reassuring taxpayers that the system is not rigged against them.

¹² See IRS News Release, IRS Updates Tax Gap Estimates, IR-2006-28 (Feb. 14, 2006) (accompanying charts at http://www.irs.gov/newsroom/article/0,,id=154496,00.html).

[330] Report: "IRS Releases New Tax Gap Estimates; Compliance Rates Remain Statistically Unchanged From Previous Study." Internal Revenue Service, January 6, 2012. http://www.irs.gov/...

"Overall, compliance is highest where there is third-party information reporting and/or withholding. For example, most wages and salaries are reported by employers to the IRS on Forms W-2 and are subject to withholding. As a result, a net of only 1 percent of wage and salary income was misreported. But amounts subject to little or no information reporting had a 56 percent net misreporting rate in 2006."

[331] Report: "The Alternative Minimum Tax for Individuals: A Growing Burden." By Kurt Schuler. U.S. Congress, Joint Economic Committee. May, 2001.

Page 2: "A tax credit is a provision that allows a reduction in tax liability by a specific dollar amount, regardless of income. For example, a tax credit of $500 allows both taxpayers with income of $40,000 and those with income of $80,000 to reduce their taxes by $500, if they qualify for the credit."

[332] Report: "Overview of the Federal Tax System." By David L. Brumbaugh and others. Congressional Research Service, March 10, 2005. http://www.policyarchive.org/handle/10207/bitstreams/2366.pdf

Page 5: "If a tax credit is refundable and it exceeds tax liability, a taxpayer receives a payment from the government."

[333] Report: "Reducing the Deficit: Spending and Revenue Options." Congressional Budget Office, March 2011. http://cbo.gov/...

Page 135: "Similarly, refundable tax credits—such as the earned income tax credit and the child tax credit—provide cash assistance to low-income workers with children, but their eligibility rules are often difficult to administer."

[334] Report: "Individuals Who Are Not Authorized to Work in the United States Were Paid $4.2 Billion in Refundable Credits." Treasury Inspector General for Tax Administration, July 7, 2011. http://www.treasury.gov/...

Page 2:

Refundable credits can result in refunds even if no income tax is withheld or paid; that is, the credits can exceed the liability for the tax. Two of the largest refundable tax credits are the EITC [Earned Income Tax Credit] and the ACTC [Additional Child Tax Credit]. …

The ACTC is the refundable portion of the Child Tax Credit (CTC). The CTC can reduce an individual's taxes owed by as much as $1,000 for each qualifying child. The ACTC is provided in addition to the CTC to individuals whose taxes owed were less than the amount of CTC they were entitled to claim. The ACTC is always the refundable portion of the CTC, which means an individual claiming the ACTC receives a refund even if no income tax was withheld or paid. As with all refundable credits, the risk of fraud for these types of claims is significant.

[335] "Testimony of the Staff of the Joint Committee On Taxation before the Joint Select Committee on Deficit Reduction." By Thomas A. Barthold. United States Congress, Joint Committee on Taxation, September 22, 2011. http://www.jct.gov/...

Page 20: "The two most widely used refundable credits are the earned income tax credit (the "EITC") and the child tax credit."

[336] Report: "Individuals Who Are Not Authorized to Work in the United States Were Paid $4.2 Billion in Refundable Credits." Treasury Inspector General for Tax Administration, July 7, 2011. http://www.treasury.gov/...

Page 2: "Two of the largest refundable tax credits are the EITC and the ACTC. The appropriations for these credits in Fiscal Year 2010 were $54.7 billion for the EITC and $22.7 billion² for the ACTC."

[337] Report: "Reducing the Deficit: Spending and Revenue Options." Congressional Budget Office, March 2011. http://cbo.gov/...

Page 135: "Similarly, refundable tax credits—such as the earned income tax credit and the child tax credit—provide cash assistance to low-income workers with children, but their eligibility rules are often difficult to administer."

[338] Report: "Overview of the Federal Tax System as in Effect for 2012." Joint Committee on Taxation, February 24, 2012. https://www.jct.gov/publications.html?func=startdown&id=4400

Page 7:

The individual may reduce his or her tax liability by any available tax credits. … In addition, a refundable earned income tax credit ("EITC") is available to low-income workers who satisfy certain requirements. The amount of the EITC varies depending upon the taxpayer's earned income and whether the taxpayer has one, two, more than two, or no qualifying children. In 2012, the maximum EITC is $5,891 for taxpayers with more than two qualifying children, $5,236 for taxpayers with two qualifying children, $3,169 for taxpayers with one qualifying child, and $475 for taxpayers with no qualifying children.

[339] Report: "Improper Payments: Remaining Challenges and Strategies for Governmentwide Reduction Efforts." By Beryl H. Davis (Director Financial Management and Assurance). United States Government Accountability Office, March 28, 2012. http://www.gao.gov/assets/590/589681.pdf

Introduction:

It is important to note that not all of the reported improper payment estimates represent a loss to the government. For example, such estimates include payments where there is insufficient documentation or a lack of documentation. …

It is important to recognize that improper payment estimates reported by federal agencies in fiscal year 2011 are not intended to be an estimate of fraud in federal agencies' programs and activities. An improper payment is defined as any payment that should not have been made or that was made in an incorrect amount (including overpayments and underpayments) under statutory, contractual, administrative, or other legally applicable requirements. It includes any payment to an ineligible recipient, any payment for an ineligible good or service, any duplicate payment, payment for a good or service not received (except for such payments where authorized by law), and any payment that does not account for credit for applicable discounts. Office of Management and Budget guidance also instructs agencies to report as improper payments any payments for which insufficient or no documentation was found.

Page 6: "Table 1: Improper Payment Dollar Estimates: 10 Programs with the Highest Reported Amounts in Fiscal Year 2011 … Earned Income Tax Credit … Dollars (in billions) [=] 15.2 … Error rate (percentages) [=] 23.5 … Reported primary cause(s): Complexity of the tax law, structure of the program, confusion among eligible claimants, high turnover of eligible claimants, and unscrupulous return preparers"

[340] 2011 Internal Revenue Service Data Book. Internal Revenue Service, March 2012. http://www.irs.gov/pub/irs-soi/11databk.pdf

Title page: "This report describes activities conducted by the Internal Revenue Service during Fiscal Year 2011 (October 1, 2010, through September 30, 2011)."

Page 63: "IRS's actual expenditures for FY 2011 totaled nearly $12.4 billion. … In FY 2011, the IRS employed a total workforce of 104,403, including seasonal and part-time employees."

[341] Report: "Individuals Who Are Not Authorized to Work in the United States Were Paid $4.2 Billion in Refundable Credits." Treasury Inspector General for Tax Administration, July 7, 2011. http://www.treasury.gov/...

Page 1:

Everyone who is employed in the United States (U.S.) is required to have a Social Security Number (SSN). An SSN is a unique, nine-digit identification number used for taxpayer identification, income reporting, and record-keeping purposes. The Social Security Administration issues numbers to all U.S. citizens, permanent residents, and eligible foreign nationals. Generally, only those noncitizens authorized to work in the United States by the Department of Homeland Security can get an SSN.

Any person required to file a tax return is required to include an identifying number, referred to as a taxpayer identification number. For the majority of filers, the taxpayer identification number is the individual's SSN. Non-U.S. citizens who do not have employment authorization must prove a valid reason for requesting an SSN in order to receive one. There are very limited circumstances for this, and these Social Security Cards are marked "Not Valid for Employment."

Many individuals who are not eligible to obtain an SSN earn income in the United States. This presents a problem for tax administration because the Internal Revenue Code requires foreign investors and individuals working without authorization in the United States to file tax returns and pay any Federal income taxes owed. As explained by a former Internal Revenue Service (IRS) Commissioner, "the IRS's job is to make sure that everyone who earns income within our borders pays the proper amount of taxes, even if they may not be working here legally." …

An Individual Taxpayer Identification Number (ITIN) is available to individuals who are required to have a taxpayer identification number for tax purposes, but do not have and are not eligible to obtain an SSN because they are not authorized to work in the United States. An ITIN is issued by the IRS and looks very similar to an SSN in that it is a nine-digit number. ITINs are issued regardless of immigration status, because both resident and nonresident aliens may have a U.S. filing or reporting requirement under the Internal Revenue Code. ITINs are for Federal tax reporting only and are not intended to serve any other purpose. Even income obtained illegally is subject to income taxes. Therefore, the IRS issues ITINs to help individuals comply with the U.S. tax laws and to provide a means to process and account for tax returns and payments for those not eligible for SSNs. An ITIN does not authorize an individual to work in the United States or provide eligibility for Social Security benefits or the Earned Income Tax Credit (EITC); however, the IRS currently processes claims for the Additional Child Tax Credit (ACTC), a refundable tax credit, filed by taxpayers with ITINs.

Page 2:

Refundable credits can result in refunds even if no income tax is withheld or paid; that is, the credits can exceed the liability for the tax. Two of the largest refundable tax credits are the EITC and the ACTC. The appropriations for these credits in Fiscal Year 2010 were $54.7 billion for the EITC and $22.7 billion² for the ACTC. Because concerns were raised by Congress, the Government Accountability Office, and the IRS regarding noncompliance with EITC requirements, a law was passed in Calendar Year 1996 to deny the EITC to individuals who file a tax return without an SSN that is valid for employment.³ As such, filers using an ITIN are not eligible for the EITC. The change in the law was made prior to the establishment of the ACTC.⁴ However, the same law prohibits aliens residing without authorization in the United States from receiving most Federal public benefits, with the exception of certain emergency services and programs.

Nonetheless, IRS management's view is that the law does not provide sufficient legal authority for the IRS to disallow the ACTC to ITIN filers. In addition, the Internal Revenue Code does not require an SSN to claim the ACTC and does not provide the IRS math error authority to deny the credit without an examination. As such, the IRS continues to pay the ACTC to ITIN filers.

The ACTC is the refundable portion of the Child Tax Credit (CTC). The CTC can reduce an individual's taxes owed by as much as $1,000 for each qualifying child. The ACTC is provided in addition to the CTC to individuals whose taxes owed were less than the amount of CTC they were entitled to claim. The ACTC is always the refundable portion of the CTC, which means an individual claiming the ACTC receives a refund even if no income tax was withheld or paid. As with all refundable credits, the risk of fraud for these types of claims is significant. …

³ The Personal Responsibility and Work Opportunity Reconciliation Act of 1996 (Pub. L. No. 104-193).

⁴ The Taxpayer Relief Act of 1997 (Pub. L. No. 105-34) established the Child Tax Credit and the Additional Child Tax Credit.

Page 4:

Although they are not authorized to work in the United States, ITIN filers are receiving billions of dollars in CTCs and ACTCs intended for working families. Prior to Tax Year⁷ 2001, the CTC was only refundable if the taxpayer had three or more qualifying children and Social Security taxes⁸ exceeding any earned income credits. The Economic Growth and Tax Relief Reconciliation Act of 20019 removed these requirements and increased the CTC over time from $500 to $1,000 per child, making more families eligible for the refundable portion of the credit (known as the ACTC). Since then, claims for the ACTC by ITIN filers have increased significantly. In Processing Year 2005, 796,000 ITIN filers claimed ACTCs totaling $924 million. By Processing Year 2008, these claims had risen to 1,526,276 ITIN filers claiming ACTCs totaling $2.1 billion.

The American Recovery and Reinvestment Act of 2009 (Recovery Act)¹⁰ temporarily increased eligibility by changing the income threshold for calculating the ACTC for Tax Years 2009 and 2010. Prior to the Recovery Act, the ACTC would have been limited to 15 percent of earned income more than $12,550. The Recovery Act changed this threshold to 15 percent of earned income more than $3,000. As such, more taxpayers could claim the ACTC or claim a greater amount. In Processing Year 2010, 2.3 million ITIN filers claimed ACTCs totaling $4.2 billion.¹¹

NOTE: See the next footnote for an example of a federal benefit that illegal immigrants do receive.

[342] Report: "EMTALA: Access to Emergency Medical Care." By Edward C. Liu. Congressional Research Service, July 1, 2010. http://aging.senate.gov/crs/medicare20.pdf

Summary: "The Emergency Medical Treatment and Active Labor Act (EMTALA) ensures universal access to emergency medical care at all Medicare participating hospitals with emergency departments. Under EMTALA, any person who seeks emergency medical care at a covered facility, regardless of ability to pay, immigration status, or any other characteristic, is guaranteed an appropriate screening exam and stabilization treatment before transfer or discharge."

[343] Report: "Individuals Who Are Not Authorized to Work in the United States Were Paid $4.2 Billion in Refundable Credits." Treasury Inspector General for Tax Administration, July 7, 2011. http://www.treasury.gov/...

Page 1:

Everyone who is employed in the United States (U.S.) is required to have a Social Security Number (SSN). … The Social Security Administration issues numbers to all U.S. citizens, permanent residents, and eligible foreign nationals. …

Many individuals who are not eligible to obtain an SSN earn income in the United States. This presents a problem for tax administration because the Internal Revenue Code requires foreign investors and individuals working without authorization in the United States to file tax returns and pay any Federal income taxes owed. …

An Individual Taxpayer Identification Number (ITIN) is available to individuals who are required to have a taxpayer identification number for tax purposes, but do not have and are not eligible to obtain an SSN because they are not authorized to work in the United States.

Page 2: "The ACTC [Additional Child Tax Credit] is the refundable portion of the Child Tax Credit (CTC). … The ACTC is always the refundable portion of the CTC, which means an individual claiming the ACTC receives a refund even if no income tax was withheld or paid."

Page 7: "Erroneous or fraudulent claims are not unique to the ACTC, nor are they unique to ITIN filers. However, ITIN filers are much more likely to claim the ACTC than other individual taxpayers. We found that in Processing Year 2010, 72 percent of all ITIN filers claimed the ACTC, while only 14 percent of non-ITIN filers claimed the ACTC."

[344] House Resolution 1956: "Refundable Child Tax Credit Eligibility Verification Reform Act." U.S. Congress, May 24, 2011. http://www.gpo.gov/...

Social Security Number Required to Claim the Refundable Portion of the Child Tax Credit.

(a) In General- Subsection (d) of section 24 of the Internal Revenue Code of 1986 is amended by adding at the end the following new paragraph:

"(5) IDENTIFICATION REQUIREMENT WITH RESPECT TO TAXPAYER-

(A) IN GENERAL- Paragraph (1) shall not apply to any taxpayer for any taxable year unless the taxpayer includes the taxpayer's Social Security number on the return of tax for such taxable year. …"

NOTE: The information in the next footnote shows why this bill would restrict illegal immigrants from obtaining refundable child tax credits

[345] Report: "Individuals Who Are Not Authorized to Work in the United States Were Paid $4.2 Billion in Refundable Credits." Treasury Inspector General for Tax Administration, July 7, 2011. http://www.treasury.gov/...

Highlights: "Many individuals who are not authorized to work in the United States, and thus not eligible to obtain a Social Security Number (SSN) for employment, earn income in the United States. The Internal Revenue Service (IRS) provides such individuals with an Individual Taxpayer Identification Number (ITIN) to facilitate their filing of tax returns."

Pages 10-12:

Although the IRS created the ITIN to help individuals who cannot legally obtain an SSN comply with the U.S. tax laws, the fact remains that these individuals generally cannot obtain a job in the United States without an SSN. Therefore, these individuals may either fabricate an SSN or improperly use someone else's SSN (and sometimes their name) to obtain employment. These SSNs may also be used for other purposes, such as to obtain credit, which can cause significant hardships to the lawful taxpayers to whom these SSNs belong.

In the process of validating wages and withholding, AMTAP [Accounts Management Taxpayer Assurance Program] function employees are in a unique position to identify cases in which a taxpayer's SSN has been compromised. In reviewing the Forms W-2 attached to the returns, these employees can see that an SSN was used to gain employment that did not belong to the person filing the return.

[346] Web page: " Cosponsors: H.R.1956 - Refundable Child Tax Credit Eligibility Verification Reform Act." Congress.gov. Accessed September 28, 2012 at http://beta.congress.gov/...

[347] Web page: "All Congressional Actions - Refundable Child Tax Credit Eligibility Verification Reform Act." U.S. Library of Congress. Accessed September 22, 2012 at http://thomas.loc.gov/

"5/24/2011: Referred to the House Committee on Ways and Means."

[348] House Resolution 3275: "To amend the Internal Revenue Code of 1986 to disallow the refundable portion of the child credit to taxpayers using individual taxpayer identification numbers issued by the Internal Revenue Service." U.S. Congress, October 27, 2011. http://www.gpo.gov/...

Disallowance of Refundable Portion of Child Credit for Taxpayers Using ITINs.

(a) In General- Subsection (e) of section 24 of the Internal Revenue Code of 1986 is amended to read as follows:

"(e) Identification Requirements-

"(1) IN GENERAL- No credit shall be allowed under this section to a taxpayer with respect to any qualifying child unless the taxpayer includes the name and taxpayer identification number of such qualifying child on the return of tax for the taxable year.

"(2) SPECIAL RULE RELATING TO REFUNDABLE PORTION OF CREDIT- No credit shall be allowed under this section by reason of subsection (d) with respect to a taxpayer if the identifying number of such taxpayer, and, in the case of a joint return, of the taxpayer's spouse, is an individual Taxpayer Identification Number (known as an ITIN) issued by the Secretary.".

NOTE: The information in the next footnote shows why this bill would restrict illegal immigrants from obtaining refundable child tax credits

[349] Report: "Individuals Who Are Not Authorized to Work in the United States Were Paid $4.2 Billion in Refundable Credits." Treasury Inspector General for Tax Administration, July 7, 2011. http://www.treasury.gov/...

Highlights: "Many individuals who are not authorized to work in the United States, and thus not eligible to obtain a Social Security Number (SSN) for employment, earn income in the United States. The Internal Revenue Service (IRS) provides such individuals with an Individual Taxpayer Identification Number (ITIN) to facilitate their filing of tax returns."

Pages 10-12:

Although the IRS created the ITIN to help individuals who cannot legally obtain an SSN comply with the U.S. tax laws, the fact remains that these individuals generally cannot obtain a job in the United States without an SSN. Therefore, these individuals may either fabricate an SSN or improperly use someone else's SSN (and sometimes their name) to obtain employment. These SSNs may also be used for other purposes, such as to obtain credit, which can cause significant hardships to the lawful taxpayers to whom these SSNs belong.

In the process of validating wages and withholding, AMTAP [Accounts Management Taxpayer Assurance Program] function employees are in a unique position to identify cases in which a taxpayer's SSN has been compromised. In reviewing the Forms W-2 attached to the returns, these employees can see that an SSN was used to gain employment that did not belong to the person filing the return.

[350] Web page: "Cosponsors: H.R.3275 - To amend the Internal Revenue Code of 1986 to disallow the refundable portion of the child credit to taxpayers using individual taxpayer identification numbers issued by the Internal Revenue Service." Congress.gov. Accessed September 28, 2012 at http://beta.congress.gov/...

[351] Web page: "All Congressional Actions - To amend the Internal Revenue Code of 1986 to disallow the refundable portion of the child credit to taxpayers using individual taxpayer identification numbers issued by the Internal Revenue Service." U.S. Library of Congress. Accessed September 22, 2012 at http://thomas.loc.gov/

"10/27/2011: Referred to the House Committee on Ways and Means."

[352] Article: "Tax loophole costs billions." By Bob Segall. WTHR, April 26, 2012. Updated July 5, 2012. http://www.wthr.com/story/17798210/tax-loophole-costs-billions

But 13 Investigates has found many undocumented workers are claiming the tax credit for kids who live in Mexico – lots of kids in Mexico. …

The whistleblower has thousands of examples, and he brought some of them to 13 Investigates. …

WTHR spoke to several undocumented workers who confirmed it is easy. …

Full statement to WTHR from the Internal Revenue Service …

The IRS has procedures in place specifically for the evaluation of questionable credit claims early in the processing stream and prior to issuance of a refund.

NOTE: The full series of investigative reports (including videos) is located at http://www.wthr.com/story/18204912/tax-loophole-investigation

[353] Article: "IRS workers OK 'phony' documents from illegal immigrants." By Bob Segall. WTHR, May 24, 2012. http://www.wthr.com/...

NOTE: The full series of investigative reports (including videos) is located at http://www.wthr.com/story/18204912/tax-loophole-investigation

[354] Report: "Substantial Changes Are Needed to the Individual Taxpayer Identification Number Program to Detect Fraudulent Applications." Treasury Inspector General for Tax Administration, July 16, 2012. http://www.treasury.gov/...

Highlights: "In Calendar Year 1996, the IRS created the Individual Taxpayer Identification Number (ITIN) so that individuals who are not eligible to obtain Social Security Numbers could obtain an identification number for tax purposes. … In Processing Year 2011, the IRS processed more than 2.9 million ITIN tax returns resulting in tax refunds of $6.8 billion."

Page 2: "An ITIN is issued regardless of an individual's immigration status. However, individuals assigned an ITIN should either be a resident not authorized to work in the United States or a nonresident. Nonresident aliens must file a tax return only if they are engaged in a trade or business in the United States or if they have any other U.S. sources of income on which the tax was not fully paid by the amount of tax withheld at the source."

Page 3: "The IRS Submission Processing Center in Austin, Texas, is responsible for processing all ITIN applications."

[355] Report: "Substantial Changes Are Needed to the Individual Taxpayer Identification Number Program to Detect Fraudulent Applications." Treasury Inspector General for Tax Administration, July 16, 2012. http://www.treasury.gov/...

Page 17: "Figure 5: Most Frequently Used Addresses on ITIN Applications"

[356] Report: "Substantial Changes Are Needed to the Individual Taxpayer Identification Number Program to Detect Fraudulent Applications." Treasury Inspector General for Tax Administration, July 16, 2012. http://www.treasury.gov/...

Page 18: "Figure 6: Most Frequently Used Addresses for ITIN Tax Refunds"

[357] Report: "Substantial Changes Are Needed to the Individual Taxpayer Identification Number Program to Detect Fraudulent Applications." Treasury Inspector General for Tax Administration, July 16, 2012. http://www.treasury.gov/...

Page 18: "Figure 7: Most Frequently Used Bank Accounts for ITIN Tax Refunds"

[358] Report: "Substantial Changes Are Needed to the Individual Taxpayer Identification Number Program to Detect Fraudulent Applications." Treasury Inspector General for Tax Administration, July 16, 2012. http://www.treasury.gov/...

[359] Report: "Substantial Changes Are Needed to the Individual Taxpayer Identification Number Program to Detect Fraudulent Applications." Treasury Inspector General for Tax Administration, July 16, 2012. http://www.treasury.gov/...

Page 7: "The environment created by management discourages tax examiners from identifying questionable ITIN applications. Although the IRS states that the mission of the ITIN Program is to ensure ITINs are issued timely to qualifying individuals, IRS management's primary focus is on quickly processing the applications rather than on ensuring ITINs are issued only to qualifying individuals."

Page 10:

This could negatively impact tax examiners' performance rating, the length of their employment, and whether they are called to return to duty (for seasonal tax examiners). Below are examples of tax examiners' comments relating to the quality review process.¹⁵

• "If TEs [tax examiners] do not identify supporting documents as questionable or fraudulent, they are not charged with a quality error. So where is the incentive to report fraud…Where is the disincentive NOT to report fraud? In fact TE's are negatively impacted with regard to their quality and efficiency ratings when they do identify and properly process fraudulent applications as they take longer and are more prone to errors."

• "There is no penalty if TEs fail to properly or diligently identify questionable fraudulent documents or applications."

• "QR [quality review] has issues also in being able to determine if a document is valid, most times they want it changed to valid when it is truly fraudulent."

Page 22:

Individuals applying for an ITIN are not required to provide original documents and/or copies of documents certified by the issuing agency (reproduction of a document or record authenticated by the issuing agency) to establish their identity and foreign status. The IRS will accept notarized copies. However, notarized copies have serious limitations and present difficulties for tax examiners required to verify these documents and confirm the identity and foreign status of the individual applying for the ITIN. Concerns about this issue were raised in an IRS ITIN Task Force report in September 2002. The Task Force recommended that all supporting required documents be one of the following:

• Original.

• Certified by the issuing agency.

The IRS did not act on the recommendation and continues to accept notarized copies of the documentation required to be provided in support of ITIN applications. Figure 10 provides a list of acceptable documentation.

Page 23:

The IRS's acceptance of notarized copies differs significantly from other Federal agencies. For example, original documents or copies certified by the issuing agency are required to obtain an SSN or a passport. The SSA accepts only original documents or certified documents from applicants submitting an application for an SSN and returns these documents submitted with the application. We discussed this issue with representatives from the SSA, who stated that notarized documents are not accepted because a notary does not authenticate the legitimacy of the documents or prove the identity of the individuals. Unlike an original document or a copy certified by the issuing agency, notaries are not responsible for the accuracy or legality of documents they notarize. A notary only certifies the identity of signers by witnessing the signature of the individual signing the documents. The signers are responsible for the content of the documents. Figure 11 shows a comparison of the requirements for obtaining an ITIN to other Federal Government programs.

[360] Report: "Individuals Who Are Not Authorized to Work in the United States Were Paid $4.2 Billion in Refundable Credits." Treasury Inspector General for Tax Administration, July 7, 2011. http://www.treasury.gov/...

Highlights:

Although the law prohibits aliens residing without authorization in the United States from receiving most Federal public benefits, an increasing number of these individuals are filing tax returns claiming the Additional Child Tax Credit (ACTC), a refundable tax credit intended for working families. The payment of Federal funds through this tax benefit appears to provide an additional incentive for aliens to enter, reside, and work in the United States without authorization, which contradicts Federal law and policy to remove such incentives.

[361] Article: "Tax Scam: IRS Pays Out Billions in Fraudulent Refunds." By Eamon Javers. CNBC, August 2, 2012. http://www.cnbc.com/id/48462508

The IRS is paying out billions of dollars in fraudulent tax refunds to identity thieves; a problem that the tax service's inspector general told CNBC is a "growing problem" involving numbers that are increasing "exponentially." …

"Once the money is out the door, it is almost impossible to get it back," IRS inspector general J. Russell George told CNBC. "The bad guys know that the IRS is unable, given the limited number of its staff it has, to address every single allegation of tax fraud it has."

[362] House Resolution 5652: "Sequester Replacement Reconciliation Act of 2012 (as passed in the House). U.S. Congress, May 10, 2012. http://www.gpo.gov/...

Page 157 (Title VI, Subtitle B):

Social Security Number Required to Claim the Refundable Portion of the Child Tax Credit

(a) IN GENERAL.—Subsection (d) of section 24 of the Internal Revenue Code of 1986 is amended by adding at the end the following new paragraph:

"(5) IDENTIFICATION REQUIREMENT WITH RESPECT TO TAXPAYER.—

"(A) IN GENERAL.—Paragraph (1) shall not apply to any taxpayer for any taxable year unless the taxpayer includes the taxpayer's Social Security number on the return of tax for such taxable year. …"

NOTE: The information in the next footnote shows why this bill would restrict illegal immigrants from obtaining refundable child tax credits

[363] Report: "Individuals Who Are Not Authorized to Work in the United States Were Paid $4.2 Billion in Refundable Credits." Treasury Inspector General for Tax Administration, July 7, 2011. http://www.treasury.gov/...

Highlights: "Many individuals who are not authorized to work in the United States, and thus not eligible to obtain a Social Security Number (SSN) for employment, earn income in the United States. The Internal Revenue Service (IRS) provides such individuals with an Individual Taxpayer Identification Number (ITIN) to facilitate their filing of tax returns."

Pages 10-12:

Although the IRS created the ITIN to help individuals who cannot legally obtain an SSN comply with the U.S. tax laws, the fact remains that these individuals generally cannot obtain a job in the United States without an SSN. Therefore, these individuals may either fabricate an SSN or improperly use someone else's SSN (and sometimes their name) to obtain employment. These SSNs may also be used for other purposes, such as to obtain credit, which can cause significant hardships to the lawful taxpayers to whom these SSNs belong.

In the process of validating wages and withholding, AMTAP [Accounts Management Taxpayer Assurance Program] function employees are in a unique position to identify cases in which a taxpayer's SSN has been compromised. In reviewing the Forms W-2 attached to the returns, these employees can see that an SSN was used to gain employment that did not belong to the person filing the return.

[364] Web page: "Major Congressional Actions - Sequester Replacement Reconciliation Act of 2012." U.S. Library of Congress. Accessed September 22, 2012 at http://thomas.loc.gov/

5/9/2012	Introduced in House
5/9/2012	The House Committee on The Budget reported an original measure, H. Rept. 112-470, by Mr. Ryan (WI).
5/10/2012	Passed/agreed to in House: On passage Passed by recorded vote: 218 - 199, 1 Present (Roll no. 247).
5/15/2012	Read the second time. Placed on Senate Legislative Calendar under General Orders. Calendar No. 398.

[365] Report: "Federal Tax Treatment Of Individuals." U.S. Congress, Joint Committee on Taxation September 12, 2011.

https://www.jct.gov/...

Pages 25-26:

Some analysts have suggested that high marginal tax rates may alter taxpayers' decisions to work and alter economic output. For example, assume a taxpayer in the 35 percent tax bracket is considering working on an overtime assignment which pays $1,000, and which the taxpayer would certainly choose to undertake if he or she received the full $1,000. However, the taxpayer's net of tax remuneration for the project is $650. The taxpayer may feel the net remuneration of $650 is insufficient to offset the loss of leisure time and the effort that would be expended to complete the project. If the taxpayer chooses not to work, society loses the benefit of his or her labor.

There is disagreement among economists on the extent to which labor supply decisions are affected by the marginal tax rate on labor income. Empirical evidence indicates that taxpayer response is likely to vary depending upon a number of taxpayer-specific factors. In general, findings indicate that the labor supply of so called "primary earners" tends to be less responsive to changes in marginal tax rates than is the labor supply of "secondary earners."²⁶ Some have suggested that the labor supply decision of the lower earner or "secondary earner" in married households may be quite sensitive to the household's effective marginal tax rate.²⁷ Other evidence suggests the decision to work additional hours may be less sensitive to changes in the marginal tax rate than the decision to enter the labor force.²⁸ That is, there may be more effect on an individual currently not in the labor force than on an individual already in the labor force.

²⁶ The phrase "primary earner" refers to the individual in the household who is responsible for providing the largest portion of household income. "Secondary earners" are earners other than the primary earner.

²⁷ For a review of econometric studies on labor supply of so-called primary and secondary earners, see United States Congress, Congressional Budget Office Memorandum, "Labor Supply and Taxes," 2006, and Charles L. Ballard, John B. Shoven, and John Whalley, "General Equilibrium Computations of the Marginal Welfare Costs of Taxes in the United States," American Economic Review, 75, March 1985. See also John Pencavel, "A Cohort Analysis of the Association between Work Hours and Wages Among Men," Journal of Human Resources 37(2), 2002, pp. 251-274; and Francine D. Blau and Lawrence M. Kahn "Changes in the Labor Supply Behavior of Married Women: 1980 -2000," Journal of Labor Economics, July 2007.

[366] Article: "Capital gains taxation." By Gerald E. Auten (U.S. Treasury Department). NTA Encyclopedia of Taxation and Tax Policy (Second Edition). Edited by Joseph J. Cordes and others. Urban Institute Press, 2005. http://www.taxpolicycenter.org/...

Because capital gains are taxed only when realized, high capital gains tax rates discourage the realization of capital gains and encourage the realization of capital losses. Investors induced to hold appreciated assets because of capital gains tax when they would otherwise sell are said to be "locked in." Lock-in effects impose efficiency losses when investors are induced to hold suboptimal portfolios with inappropriate risk or diversification, or to forego investment opportunities offering higher expected pre-tax returns. Investors with appreciated property may also incur unnecessary transactions costs to avoid capital gains taxes if they obtain cash from their investment by using it as security for a loan, or reduce their risk by selling short an equivalent asset (selling short against the box). The lock-in effect is greater for long-held, highly appreciated assets and is increased by the step-up in basis at death.

[367] Report: "Overview of the Federal Tax System." By David L. Brumbaugh and others. Congressional Research Service, March 10, 2005. http://www.policyarchive.org/handle/10207/bitstreams/2366.pdf

Page 16:

Defining the married couple as a single tax unit under the federal individual income tax violates the principle of marriage neutrality. Some married couples pay more income tax than they would as two unmarried singles (a marriage tax penalty) while other married couples pay less income tax than they would as two unmarried singles (a marriage tax bonus).

The most important structural factors affecting the marriage neutrality of the income tax are the earned income tax credit (EITC), the standard deductions, and the tax rate schedules. Under the current tax system, single individuals, heads of households, and married couples are subject to different standard deductions and tax rate schedules. In addition, the EITC amounts and phase-out ranges vary based on the number of dependents claimed. These differences give rise to structural marriage tax bonuses and penalties.

Generally, the more evenly divided the earned income of the two spouses, the more likely they are to have a structural marriage tax penalty. Hence, married couples in which each spouse earns 50% of the total earned income have the largest marriage tax penalties. On the other hand, married couples where one spouse earns all the earned income have the largest marriage tax bonuses.

The actual determination of whether any given married couple has a marriage tax penalty or bonus depends on how their income, deductions, and personal/ dependent exemptions are split between the two spouses for calculation purposes. It also depends on the filing status under which each spouse's tax liability is computed — single or head of household. CBO uses assumptions that some economists believe may overstate marriage tax penalties. However, even under these assumptions, CBO estimated that in 1999, only 43% of married couples incurred a tax penalty, while 52% experienced a marriage tax bonus.