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Tax Facts

 Citation

 

"Tax Facts." By James D. Agresti and Christopher Edward Bohn. Just Facts, July 7, 2015. http://www.justfacts.com/taxes.asp

 

 Finding What You Want

 

» 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

Be Infomed: Taxes

 

 Overview


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


* In 2014, federal, state and local governments collected a combined total of $4.7 trillion in taxes, or an average of $38,317 for every household in the U.S.[2]


* Between 1929 and 2014, 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 23%. In 2014, the figure was 27%:

 

Federal, State, and Local Taxes

[3]


* In federal fiscal year 2014 (October 1, 2013 to September 30, 2014), the federal government collected $3.0 trillion in revenues, which were comprised of 46% individual income taxes, 34% social insurance taxes, 11% corporate income taxes, 3% excise taxes, 1% custom duties, 0.6% estate and gift taxes, and 4% miscellaneous receipts.[4]


* In 2013, state and local governments collected $1.5 trillion in taxes, which were comprised of 34% sales taxes, 30% property taxes, 23% individual income taxes, 4% corporate income taxes, 1% social insurance taxes, and 8% other taxes.[5]

_______

* 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]


* In 2014, the gap between federal, state and local government revenues and spending was $805 billion or an average of $6,534 for every household in the U.S.:

 

Federal, state and local revenues and spending

†To measure the entirety of government revenues and spending, "total" instead of "current" figures are preferable, but data for "total" spending only extends back to 1960.

[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 2014 fiscal year, the federal government had $74.3 trillion in debts, liabilities, and unfunded obligations. This equates to $232,627 for every person living in the U.S. or $603,194 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:

 

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. … 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. … 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 willingness of the employee to accept a lower wage and supply the same, or nearly the same, quantity of labor.[16]


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

 

[T]he ultimate cost of a tax or fee is not necessarily borne by the entity that writes the check to the government.[17]


* 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:

 

Effective federal tax rates by household income

NOTE: This data does not account for 8% of federal revenues, which CBO could not allocate to households by income group.

[31]

 

Effective federal tax burdens by household income

NOTE: This data does not account for 8% of federal revenues, which CBO could not allocate to households by income group.

[32]


* Data from the graphs above:

 

Effective Federal Tax Burdens (2011)

Income Group Average Household

Income

Effective Federal

Tax Rate

Average Federal Taxes

Paid Per Household

Lowest 20% $24,600 1.9% $467
Second 20% $45,300; 7.0% $3,171
Middle 20% $66,400 11.2% $7,437
Fourth 20% $97,500 15.2% $14,820
Top 20% $245,700 23.4% $57,494
Top 1% $1,453,100 29.0% $421,399

 

* CBO has approximated effective federal tax rates up through 2013. These estimates reflect tax law changes since 2011, but they "do not include any shifts in the income distribution that have occurred between 2011 and 2013" or "any behavioral effects in response to the tax law changes":

 

Income Group 2013 Tax Rate
Lowest 20% 2.9%
Second 20% 8.0%;
Middle 20% 12.3%
Fourth 20% 16.4%
Top 20% 25.5%
Top 1% 33.3%

[33]


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


Historical effective federal tax rates by household income

NOTE: This data does not account for 8% of federal revenues, which CBO could not allocate to households by income group.

[34]


* CBO does not include state and local taxes in its analysis of effective tax rates "because of the complexity" of estimating them for individual households.[35] Just Facts has not found a reliable analysis of the distribution of state and local taxes (details in footnote).[36]

 



Media

_______

* 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.[37] [38] CBO's breakdown of effective federal tax rates is as follows:

 

Effective Federal Tax Burdens (2011)

Type of Tax

 Household Income Group

Lowest

20%

Second

20%

Middle

20%

Fourth

20%

Top

20%

Top

1%

Individual income -7.5† -1.3† 2.4 5.8 14.2 20.3
Social insurance 7.1 6.7 7.2 7.8 5.9 2.1
Corporate income 0.6 0.6 0.9 0.9 2.9 6.4
Excise 1.6 1.0 0.7 0.7 0.4 0.2
Overall 1.9 7.0 11.2 15.2 23.4 29.0
† Negative income tax burdens result from refundable tax credits, which

often exceed the income tax liabilities of low-income households.[39]

In such cases, individuals receive cash payments from the government

through the IRS (for more detail, see tax preferences).[40]

[41]


* 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."[42] This article failed to account for the burden of corporate income taxes, which fall more heavily on upper-income households.[43]


* 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."[44] This article failed to account for the burden of social insurance taxes, which fall more heavily on lower-income households.[45]


* In two columns published by the New York Times in 2012, James B. Stewart, a Pulitzer Prize-winning professor of journalism at Columbia University,[46] wrote:

 

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.[47]


[W]hat 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.[48]


* Both of these columns failed to account for the burden of corporate income taxes, which fall more heavily on upper-income households.[49]


* 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.[50] [51] [52] [53] All of these articles failed to account for the burden of corporate income taxes, which fall more heavily on upper-income households.[54] 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.[55] [56] [57]

• 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.[58] [59] [60]

• determined a middle-class tax burden by using adjusted gross income as the denominator for their calculation,[61] [62] [63] even though the source they cite (the Tax Policy Center) states that 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 ETRs [effective tax rates].[64] [65]

 

* 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 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 2009 estimate for middle-income Americans.[66] [67]


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

 



"Buffett Rule"


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

 

Last year my federal tax bill — the income tax I paid, as well as payroll taxes paid by me and on my behalf — was $6,938,744. That sounds like a lot of money. But what I paid was only 17.4 percent of my taxable income — and that's actually a lower percentage than was paid by any of the other 20 people in our office. Their tax burdens ranged from 33 percent to 41 percent and averaged 36 percent.

 

If you make money with money, as some of my super-rich friends do, your percentage may be a bit lower than mine. But if you earn money from a job, your percentage will surely exceed mine — most likely by a lot.[68]


* 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."[69] Per a Congressional Research Service report on the "Buffett Rule":

 

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.[70]


* 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:

 

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]


* Per CBO, during 2011 households in the middle 20% of the U.S. income distribution paid an effective tax rate of 11.2%, as compared to 29.0% for the top 1% of income earners. For 2013, CBO estimates that the effective tax rate for households in the middle 20% was 12.3% and 33.3% for the top 1%.[72]

_______

* In 2011, 15,000 individuals with incomes over $200,000 paid no federal individual income taxes (this does not include corporate income taxes). In 58% of these cases, the primary reason was because they had earned interest from tax-exempt bonds issued by state and local governments.[73] These bonds are called "municipal bonds" or "munis," and they are a principal means by which wealthy investors limit their federal income taxes.[74] [75]


* Per CBO:

 

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.[76]


* Per the IRS:

 

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"….[77] [78]

 

 Individual Income Taxes


* In fiscal year 2014, income taxes paid by individuals (as opposed to corporations) comprised 46% of the taxes collected by the federal government.[79]


* 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.[80] [81]


* 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).[82] [83] [84] [85]


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).[86] [87]


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).[88] [89] [90]


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.[91] For example, in 2015, the tax rates for single individuals were:


• 10% on their first $9,225 in taxable income,
• plus 15% on the next $28,225 in taxable income,
• plus 25% on the next $53,300,
• plus 28% on the next $98,550,
• plus 33% on the next $222,200,
• plus 35% on the next $1,700,
• plus 39.6% on all income thereafter (more detail in footnotes).[92]


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.[93] [94] [95] [96] [97]


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,[98] which are addressed below.

_______

* When the modern federal individual income tax was instituted in 1913,[99] 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).[100] [101] In 2014, the bottom rate was 10%, and the top rate was 39.6%.[102]

 

Federal Income Tax Bottom and Top Rates

[103]


* 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:

 

Federal Income Tax Receipts and Top Rates

[104]


* In 2013, individual income taxes comprised 23% of the taxes collected by state and local governments.[105]


* As of January 1, 2015, the states have individual income tax rates that vary from a top rate of 13.3% in California to 0% in seven states that don't have such a tax (Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming).[106]


* In 2011, 4,943 counties, cities, townships, and school districts in 17 states levied individual income taxes (more detail in footnote).[107]


* In fiscal year 2012, the portion of state and local tax collections that were comprised of individual income taxes varied from a high of 39.4% in Oregon, to a median of 23.1% in Arkansas, Iowa and Kansas, to a low of 0% in Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming.[108]


 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.[109] [110] [111] [112]


* In fiscal year 2014, social insurance taxes comprised 34% of the taxes collected by the federal government.[113]

 

* In 2013, social insurance taxes comprised 1% of the taxes collected by state and local governments.[114]


* 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."[115] [116] [117] [118] [119] (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.[120]


* In fiscal year 2014, 99% of federal social insurance taxes were levied for three programs: Social Security, Medicare hospital insurance, and unemployment insurance.[121]


* 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:

 

Social Insurance Taxes

[122]

 



Social Security


* In fiscal year 2014, Social Security payroll taxes accounted for 72% of federal social insurance taxes.[123]


* In 2015, Social Security's baseline payroll tax rate (employee and employer combined) was 12.4%. [124]

 

* Social Security payroll taxes are restricted to a "taxable maximum" or "wage threshold." Earnings above the threshold are not subject to this tax. In 2015, the threshold was $118,500.[125] Since 1982, the taxable maximum has been annually indexed roughly based upon average worker compensation levels.[126] [127]


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

 

And finally, beginning in 1949, 12 years from now, you and your employer will each pay 3 cents on each dollar you earn, up to $3,000 a year. That is the most you will ever pay.[128]


* Accounting for inflation, the figures above equate to a maximum tax collection of $1,755 per person in 2015 dollars.[129] In 2015, the maximum payroll tax collection per person was $14,694 or eight times the promised maximum.[130] 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.[131] 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.[132] This assumes Social Security will have enough money to pay scheduled benefits for this entire period, which it is not projected to have.[133]


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

 



Medicare


* Medicare hospital insurance, which is also known as Medicare "Part A," provides coverage for hospital inpatient services, skilled nursing facility care (not custodial care[134]), and hospice care.[135]


* In fiscal year 2014, Medicare hospital insurance payroll taxes accounted for 22% of federal social insurance taxes.[136]


* 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.[137]


* Medicare's baseline payroll tax rate is 2.9% of workers' wages (employer and employee combined).[138] [139]


* 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.[140] [141] That year, Congress and Democratic President Bill Clinton passed a law that removed the threshold, thus making all earnings subject to Medicare payroll taxes.[142] The bill passed with 85% of Democrats voting for it and 100% of Republicans voting against it.[143]


* 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.[144] [145]


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

 



Unemployment insurance


* In fiscal year 2014, unemployment insurance payroll taxes accounted for 5% of federal social insurance taxes.[146] [147]

 

 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.[148] [149] [150]


* In fiscal year 2014, corporate income taxes comprised 11% of the taxes collected by the federal government.[151]

 

* In 2013, corporate income taxes comprised 4% of the taxes collected by state and local governments.[152]


* 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.[153] [154]


* The Congressional Budget Office (CBO) estimates that 75% of corporate income taxes are borne by owners/stockholders and 25% are borne by workers.[155] Other creditable sources estimate that owners/stockholders bear anywhere from 33% to 100% of this tax burden.[156] (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.[157] [158] (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:

 

When a business purchases a tangible asset such as a machine or structure, it is not incurring a cost. Rather, the business 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. 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 year.[159] [160]


* In 2014, federal corporate income tax rates ranged from 15% to 34% for corporations earning less than $100,000 and 34% to 39% for those earning $100,000 or more. Most corporate taxable income is earned by large corporations and is taxed at the 35% rate.[161] [162]


* In 2011 (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 22%. Out of 20 major business sectors, effective rates averaged as low as 14% for mining and 16% for accommodation and food services—to as high as 33% for health care and social assistance and 34% for educational services.[163] (For more detail, see tax preferences).


* In fiscal year 2012, the portion of state and local tax collections that were comprised of corporate income taxes varied from a high of 9.9% in New Hampshire—to a median of 3.3% in North Dakota and Oregon—to a low of 0% in Nevada, Texas, Washington and Wyoming.[164]

 

 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.[165] [166] 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).[167]


* A "dividend" is a company profit that is distributed to shareholders.[168] [169]


* "Interest income" is money earned from "certain bank accounts or from lending money to someone else."[170]


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

 

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.[171] [172] [173]


[T]he capital gains tax on corporate stock can be viewed as an aspect of the double taxation of corporate income….[174] [175] [176]


* 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.[177] [178] [179] [180]


* In 2015, the tax rates on most dividends and capital gains range from 0% to 20%. For couples filing jointly, the typical rates are:


• 0% for taxable income below $74,900.
• 15% for taxable income from $74,900 to $464,850 .
• 20% for taxable income above $464,850.[181] [182]

 

* 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.[183] [184]


* 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. This tax is termed the net investment income tax.[185] [186] [187]


* 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").[188] [189] 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[190])

• $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[191]


* 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.[192] [193] [194]


* In 2013 (latest CBO data), 7.9% of federal individual income tax receipts came from capital gain taxes.[195]


* For 2015, the Joint Committee on Taxation projects that 5.9% of gross income earned by individuals will come from capital gains, 2.3% from dividends, and 1.1% from interest income.[196]


* In 2014, 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 13.3% in California and 9.9% in Minnesota and Oregon.[197] [198] [199]

 

 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."[200]


* 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."[201]


* 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."[202]


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

 

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.[203] [204] [205]


* Examples of unambiguous tax preferences include the deduction for home mortgage interest,[206] [207] business credits for renewable energy,[208] credits for paid child care,[209] the exemption for interest earned on state and local government bonds,[210] [211] the deduction for charitable contributions,[212] credits for education,[213] and exclusions for employer-provided benefits such as pensions and health insurance.[214] [215]


* 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.[216] [217] [218] [219] Due to refundable tax credits, in 2011 the lowest-earning 20% of U.S. households paid an effective income tax rate of -7.5%, amounting to an average payment from the federal government of $1,845 per household.[220] [221]


* 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, $80,360 for a family of three in 2015, $97,000 for a family of four, or $113,640 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.[222] [223] [224] In 2015, nearly 6.5 million people qualified for an average tax credit of $3,216 per year.[225]


* 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.[226] [227] [228] [229]


* 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."[230]

_______

* 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%.[231] 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:

 

justFacts

NOTE: This data does not account for 8% of federal revenues, which CBO could not allocate to households by income group.

[232]


* The 1986 tax reform kept in place some of the more widely used tax preferences, such as the deduction for home-mortgage interest.[233] 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.[234]

_

* 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.[235] [236] Per the Internal Revenue Service:

 

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"….[237]


* In 2011, out of 20 major business sectors, the effective corporate income tax rate averaged as low as 14% for mining and 16% for accommodation and food services—to as high as 34% for educational services and 33% for health care and social assistance. These differences are primarily due to tax preferences.[238]


* 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.[239] [240] [241]

 

 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.[242] [243] [244] [245]


* Per the Congressional Budget Office (CBO):

 

The alternative minimum tax is a parallel income tax system with fewer exemptions, deductions, and rates than the regular income tax. Households must calculate the amount they owe under both the alternative minimum tax and the regular income tax and pay the larger of the two amounts.[246]

 

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.

 

Many of the taxpayers previously subject to the alternative tax were the relatively small number of higher-income filers…. 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).[247]


* The AMT has a greater impact on taxpayers with large families, high medical bills, and high state and local taxes.[248]


* Between 2001 and 2011, various congresses and presidents partially alleviated the inflationary impact of the AMT by enacting temporary changes in the law.[249] [250]

 

* In 2012, President Obama and Congress passed permanent legislation to adjust the AMT for inflation on an annual basis. This reduced but did not eliminate the impact of bracket creep.[251] [252]


* Between 1983 and 1998, the portion of taxpayers liable for the AMT stayed below 1%. By 2011, 4.6% of taxpayers were required to pay the AMT:

 

Impact of the Alternative Minimum Tax

[253]


* 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…."[254] [255]


* 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."[256] [257]


* 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."[258] [259]


* Over the ensuing three decades, various congresses and presidents made at least 18 changes to this tax.[260] 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."[261]


* The 155 tax returns cited by Barr amounted to 0.0002% of taxable returns in 1967.[262] Adjusted for inflation, $200,000 in 1967 is equivalent to $1.4 million in 2011.[263] In 2011, the AMT levied additional taxes on 4.6% of taxable returns,[264] including:


• 179,493 returns with adjusted gross incomes below $100,000.
• 784,992 returns with adjusted gross incomes from $100,000 to $200,000.
• 2,778,701 returns with adjusted gross incomes from $200,000 to $500,000.
• 417,110 returns with adjusted gross incomes from $500,000 to $1 million.
• 87,886 returns with adjusted gross incomes above $1 million.[265]


* In 2011, 15,000 individuals with incomes over $200,000 paid no federal individual income taxes (this does not include corporate income taxes). In 58% of these cases, their primary tax preference was interest earned from tax-exempt bonds issued by state and local governments.[266] These bonds are called "municipal bonds" or "munis," and they are a principal means by which wealthy individuals limit their federal income taxes.[267] [268]


* 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."[269]


* 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.[270] [271] [272]


* Per the CBO:

 

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.[273]


* Per the IRS:

 

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"….[274] [275]

 

 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…."average federal tax rates would increase in the long run."[276] This is referred to as "bracket creep."


* CBO projected in 2014 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 16% of their income in 2014 to 19% over the next 25 years, which is a 19% increase.[277]


* Over the past 40 years, federal revenues have averaged 17.4% of the nation's gross domestic product (GDP). In 2014, CBO projected that if current laws remain unchanged, federal revenues will grow to 19% above this long-term average over the next 40 years and will continue to increase thereafter:

 

Federal Revenues, Actual and Projected Under Current Law

[278]


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


• 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.[279] These taxes currently affect 30% of all Social Security benefits and are projected to affect 50% of these benefits by 2037.[280]

• the deduction for home mortgage interest, which is projected to fall in real terms from $1 million in 2014 to $600,000 by 2039.[281]

• excise taxes. In this case, the lack of indexing generally decreases the burden of these taxes over time.[282]

• 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.[283] [284]

- a 3.8% tax on income from investments imposed on singles with income above $200,00 and couples with income above $250,000.[285] [286] [287]


* 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.[288]

• 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 2014 to 13% in 2039.[289]

• the annual gift tax exemption. This is the annual amount that can be given away without potentially incurring taxes.[290]

 


Politics/Media


* 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.[291] [292] [293]


* 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.[294] [295]

 

 Compliance

 

Complexity


* Per the Congressional Budget Office:

 

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. … 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.[296]


* The federal tax code is approximately 10,000 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.[297] [298] [299]


* 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."[300] 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.[301] [302]


* 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."[303] [304]


* The IRS's Taxpayer Advocate estimates that in 2010, the cost of complying with federal income tax laws was $168 billion or 15% of income tax receipts. Other estimates for this figure run as high as 22%.[305]


* In 2006, General Electric filed the nation's longest federal tax return, which was about 24,000 pages long.[306]


* In the federal government's 2014 fiscal year, the IRS spent $11.6 billion and employed 91,018 people, including seasonal and part-time workers.[307]


* Per the IRS's Taxpayer Advocate:

 

[T]ax 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.[308]

 



Noncompliance


* 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%.[309] [310]


* Per the IRS's Taxpayer Advocate, the tax gap represents an effective tax on most taxpayers "to subsidize noncompliance by others."[311] Adjusted for inflation into 2012 dollars, the 2006 tax gap was an average of $3,952 for every household in the U.S.[312]


* Per the IRS's Taxpayer Advocate:

 

IRS data show that when taxpayers have a choice about reporting their income, voluntary tax compliance rates are disturbingly low. Among self-employed workers whose income is not subject to tax withholding, reporting compliance rates are 43 percent for the business income of non-farm sole proprietors and 28 percent for unincorporated farming businesses.[313]


* 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%.[314]

 



Refundable tax credits


* 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.[315] [316] [317] Per the Treasury Department's Inspector General for Tax Administration, "the risk of fraud for these types of claims is significant."[318] [319]

 

* Two of the costliest and most frequently claimed refundable tax credits are the earned income tax credit and the child tax credit.[320] [321]


* In fiscal year 2013, the IRS improperly paid $14.5 billion in earned income tax credits, amounting to an improper payment rate of 24%.[322] [323] [324] These improper payments were greater than the budget of the IRS.[325]

 

* In fiscal year 2013, the IRS improperly paid between $5.9 billion and $7.1 billion in refundable child tax credits, amounting to an improper payment rate of 25.2% to 30.5%.[326]

 

* 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.[327] [328]


* 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.[329]


* In February 2013, Republican Congressman Sam Johnson sponsored a bill that would restrict illegal immigrants from obtaining refundable child tax credits.[330] [331] The bill was cosponsored by 67 Republicans and no Democrats. It was never voted upon.[332]


* In February 2015, Republican Congressman Larry Bucshon sponsored a bill that would restrict illegal immigrants from obtaining refundable child tax credits.[333] [334] As of May 2015, the bill has not been cosponsored or voted upon.[335]


* 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."[336]


* 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."[337]


* 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).[338] 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).[339]

• The IRS had mailed 23,994 ITIN refunds totaling $46,378,040 to a single address in Atlanta, Georgia (more examples in footnote).[340]

• The IRS had deposited 2,706 ITIN refunds totaling $7,319,518 into a single bank account (more examples in footnote).[341]

• In 2010, the IRS had eliminated a process used to detect fraud in ITIN applications.[342]

• "The environment created by [IRS] management discourages tax examiners from identifying questionable ITIN applications."[343]

• "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."[344]


* 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."[345]


* 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.[346] [347] The bill passed the House of Representatives with 93% of Republicans voting for it and 100% of Democrats voting against it. The Senate never voted upon it.[348]

 

 Economic Effects


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


• whether or not to work.[349]

• how long to hold investments.[350]

• whether or not to get married.[351]

• how much to save.[352]

• whether or not to buy a house.[353]

• whether to be self-employed or work for somebody else.[354]

• how to finance a business.[355]


* 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.[356] [357]


* 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…."[358]


* 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.[359] [360] For example, a household with $66,000 in annual income will typically pay about $7,000 in federal taxes, which amounts to an effective tax rate of 11%.[361] However, if the members earn another $10,000, they will typically pay a marginal tax rate of about 40% on this added income.[362]


* Marginal tax rates can have differing effects on people depending upon their circumstances and mindsets.[363] Per the Congressional Budget Office (CBO):

 

Changes in marginal tax rates have two different types of effects on people. On the one hand, the lower those tax rates are, the greater the share of the returns from additional work or saving that people can keep, thus encouraging them to work and save more. On the other hand, because lower marginal tax rates increase after-tax income, they make it easier for people to attain their consumption goals with a given amount of work or saving, thus possibly causing people to work and save less.[364]


* 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.[365] [366]

• 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."[367]

• 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."[368]

• 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.[369] [370]


* 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."[371]

• "If saving is reduced by its treatment under the income tax, future productivity and income is lost to society."[372]

• "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."[373]


* 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.[374]

• 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.[375] [376] [377]

 

 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.[378] [379]


* In addition to raising revenue, excise taxes are sometimes imposed to discourage or penalize certain activities.[380] [381] Per the U.S. Joint Committee on Taxation:

 

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.[382]


* 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.[383] [384]


* In fiscal year 2014, excise taxes comprised 3% of the taxes collected by the federal government.[385]


* In fiscal year 2012, state and local excise taxes ranged from a low of $283 per person in Wyoming to a high of $1,013 per person in Vermont. The nationwide average was $517 per person.[386]


* Excise taxes are remitted by businesses that manufacture, import, or sell the goods and services that are taxed.[387] [388]


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

 

The burden of excise taxes relative to income is greatest for lower-income households, which tend to spend a larger share of their income on those taxed goods and services.[389] [390] [391] [392]


* 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.[393] [394] [395]


* Most states don't impose a sales tax on prescription drugs or food.[396]


* In 2013, sales taxes comprised 34% of the taxes collected by state and local governments.[397]


* In fiscal year 2012, the portion of state and local tax collections that were comprised of sales taxes varied from a high of 42.6% in Tennessee, to a median of 23.9% in South Carolina, to a low of 0% in Delaware, Montana, New Hampshire and Oregon.[398]

 

 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:

 

in ancient times but the modern tax has roots in the feudal obligations owed to British and European kings or landlords. In the fourteenth and fifteenth centuries, British tax assessors used ownership of property to estimate ability to pay. In time the tax came to be regarded as a levy on the property … itself. In the United Kingdom the tax developed into a system of "rates" based upon the annual (rental) value of the property.[399]


* 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.[400]


* In addition to property taxes on real estate, some states levy taxes on personal property such as automobiles, boats, and aircraft.[401]


* In 2013, property taxes comprised 30% of the taxes collected by state and local governments.[402]


* In fiscal year 2012, the portion of state and local tax collections that were comprised of property taxes varied from a high of 65% in New Hampshire, to a median of 31% in Wyoming, to a low of 12% in North Dakota.[403]


* In fiscal year 2012, state and local property taxes ranged from a low of $531 per person (not per household) in Alaska to a high of $2,924 per person in New Jersey. The nationwide average was $1,427 per person.[404]


* 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.[405]


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."[406]


* 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."[407]


* In fiscal year 2014, estate and gift taxes comprised 0.6% of the taxes collected by the federal government.[408]


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):

 

[T]he ultimate cost of a tax or fee is not necessarily borne by the entity that writes the check to the government.[409]


* 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.[410] [411] [412] For example, retail consumers pay an average of 48.9 cents in federal, state, and local excise taxes per gallon of gasoline, but these taxes do not appear on their purchase receipts.[413]

• employer payroll taxes, which are remitted by employers but are primarily borne by employees in the form of lower wages.[414] [415] [416] For example, middle-income households lose about 3.6% of their income to federal payroll taxes on employers, but these taxes do not appear on employees' paychecks or tax returns.[417]

• corporate income taxes, which are remitted by corporations but are primarily borne by stockholders and employees in the form of lower profits and wages.[418] [419] [420] For example, the top 1% of income earners lose about 6.4% of their income to federal corporate income taxes, but these taxes do not appear on their paychecks or tax returns.[421]


* 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.[422]

• 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.[423]

• 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.[424]

 

 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.[425]

 



Bush/Obama tax cuts


* 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 federal tax rates would increase in the long run" (for more detail, see bracket creep).[426]


* 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.[427] In 2000, the stock market "dot.com" bubble burst,[428] [429] [430] the NASDAQ lost 39% of its value,[431] and profits for nonfinancial corporations fell by 18%.[432] [433] [434] In the first quarter of 2001, the nation's GDP contracted and a recession began.[435] [436]


* On January 20, 2001, Republican President George W. Bush entered office,[437] and in June 2001, Bush signed his first major economic proposal.[438] 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).[439] [440]


* 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.[441] The 2002 bill passed with 100% of Republicans and 95% of Democrats voting for it.[442] The 2003 bill passed with 99% of Republicans voting for it and 96% of Democrats voting against it.[443] 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).[444] [445] [446] [447] [448]


* The combination of the 2001 recession in conjunction with the Bush tax cuts caused federal revenues to decline to 17.0% of GDP in fiscal year 2002, 15.7% in 2003, and 15.6% in 2004. This is 10.4% below the historical average of the past 40 years.[449] [450]


* With the Bush tax cuts in place and annual economic growth averaging 3.2% above the rate of inflation from 2003 through 2006,[451] [452] federal revenues rose to 16.7% of GDP in fiscal year 2005, 17.6% in 2006, and 17.9% in 2007. This is 2.8% above the historical average of the past 40 years.[453]


* In 2007, the housing bubble burst, and "banks began reporting large losses resulting from declines in the market value of mortgages and other assets."[454] The nation entered a recession in the last quarter of 2007,[455] and unemployment increased from 5.0% at the outset of 2008 to 9.9% at the end of 2009.[456]


* 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.[457]


* On January 20, 2009, Democratic President Barack Obama entered office,[458] and in February 2009, Congress passed and Obama signed his first major economic proposal.[459] 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.[460]


* This Obama stimulus bill passed with 98% of Democrats voting for it and 99% of Republicans voting against it.[461]


* The combination of the 2007-2009 recession in conjunction with the tax provisions of the stimulus bills caused federal revenues to decline to 17.1% of GDP in fiscal year 2008, 14.6% in 2009, and 14.6% in 2010. This is 16.2% below the historical average of the past 40 years.[462] [463]


* 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.[464] [465] In 2011 and 2012, Congress and Obama extended the Social Security tax cut through the end of 2012.[466] [467]


* With annual economic growth averaging 2.1% above the rate of inflation from 2010 through 2012,[468] federal revenues slightly increased to 15.0% of GDP in fiscal year 2011 and 15.2% in 2012. This is 13.7% below the historical average of the past 40 years.[469] [470]


* In January 2013, Congress passed and Obama signed a bill to make most of the previous tax cuts permanent for everyone but high-income earners (except for adjustments to the estate, gift, and alternative minimum taxes). Also, the law did not renew the Social Security payroll tax cut.[471] [472]

 

* In fiscal year 2013, federal revenues increased to 16.7% of GDP or 4.1% below the historical average of the past 40 years. In fiscal year 2014, federal revenues rose to 17.5% of GDP, which is 0.5% above the 40-year historical average.[473]

 

* CBO projects that federal revenues will increase to 18.2% of GDP in fiscal years 2015 and 2016, which is 4.5% above the historical average of the past 40 years.[474] [475]

 

* Beyond 2016, CBO projects that federal revenues will continue to increase, mainly due to bracket creep, the expiration of certain tax benefits, and the implementation of new taxes that are already scheduled to take effect:

 

Federal Revenues, Actual and Projected Under Current Law

 [476]

 



Media


* 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.[477]


* 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.[478] [479]

 



Obama tax increases


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

 

I can make a firm pledge: under my plan, no family making less than $250,000 a year will see any form of tax increase. Not your income tax, not your payroll tax, not your capital gains taxes, not any of your taxes.[480]


* About two weeks after taking office, Obama signed a law that more than doubled federal excise taxes on cigarettes, cigars, and other tobacco products.[481] [482] [483] The bill passed with 99% of Democrats voting for it and 77% of Republicans voting against it.[484] 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."[485]


* 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% to 89% of Democrats voting for them and 100% of Republicans voting against them.[486] [487] These laws impose or increase ten types of taxes, fees, and penalties (in addition to fines for not having health insurance).[488] 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 began in 2013.[489] [490]

• an added 0.9% Medicare payroll tax on earnings above $200,00 for singles and $250,00 for couples. This began in 2013.[491] [492]

• a 40% excise tax imposed on high-cost health insurance plans. This begins in 2018.[493]

• an annual fee imposed on health insurance providers. This began in 2014.[494]

• an annual fee imposed on manufacturers and importers of pharmaceuticals. This began in 2011.[495]

• a 2.3% excise tax imposed on manufacturers and importers of certain medical devices. This began in 2013.[496]


* 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, $94,200 for a family of four).[497] [498] The law also eliminates or reduces six other preferences while adding three others.[499] [500]


* The Affordable Care Act also imposes fines on large employers that don't provide full time-employees with health insurance that meets certain requirements,[501] and the law requires most Americans to carry some form of health insurance starting in 2014 or pay a fine.[502] [503] [504] 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."[505]


* 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."[506] The Supreme Court ruled that the fine is constitutional on the grounds that it is a tax.[507]


* Obama's budget proposal for fiscal year 2016 contains 43 pages of tax-related provisions.[508] Some of his proposals are:


• Impose a one-time 14 percent tax on the estimated $1 to $2 trillion of untaxed foreign earnings that U.S. corporations hold overseas.[509]

• Increase the tax rate on capital gains and dividends from 20% to 24.2% for upper income individuals (for a total tax rate of 28 percent when combined with the 3.8 percent net investment tax).[510]

• Enact the "Buffett rule."[511]

• Enact, expand, or extend at least 19 different tax credits.[512]


* 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."[513]

• "Complexity also arises from efforts to achieve certain equity goals."[514] [515]

• "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."[516]

• "Economists have shown that the efficiency loss from taxation increases as the marginal tax rate increases."[517]

• "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."[518]

• "[M]any of the same aspects of the tax system that reduce economic efficiency also increase complexity."[519]

• "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."[520]




Debt


* 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.[521] [522] [523] [524]


* 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,[525] economic cycles, terrorist attacks, natural disasters, demographics, and the actions of U.S. citizens and foreign governments.[526]


 During the first session of the 113th Congress (January–December 2013), U.S. Representatives and Senators introduced 168 bills that would have reduced spending and 828 bills that would have raised spending.[527]


* The table below quantifies the costs and savings of these bills by political party. This data is provided by the National Taxpayers Union Foundation:


  Costs/Savings of Bills Sponsored or

Cosponsored in 2013 by Typical Congressman (in billions)

   Increases  Decreases  Net Agenda
House Democrats  $407  $10  $397
Senate Democrats  $22  $3  $18
House Republicans  $9  $91  -$83
Senate Republicans  $6  $165  -$4.6

[528] [529]


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


* The table below quantifies the net agendas of the political parties in previous congresses:


 

Costs/Savings of Bills Sponsored or Cosponsored in the First

Sessions of Congress by Typical Congressman (in billions)

   2013  2011  2009  2007 2005 2003 2001 1999
House Democrats $397 $497 $500 $547 $547 $402 $262 $34
Senate Democrats $18 $24 $134 $59 $52 $174 $88 $15
House Republicans -$83 -$130 -$45 $7 $12 $31 $20 -$5
Senate Republicans -$159 -$239 $51 $7 $11 $26 $19 -$324
NOTE: Data not adjusted for inflation.

[530]

 



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

 

Many of you have talked about the need to pay down our national debt. I listened, and I agree. We owe it to our children and grandchildren to act now, and I hope you will join me to pay down $2 trillion in debt during the next 10 years. At the end of those 10 years, we will have paid down all the debt that is available to retire. That is more debt, repaid more quickly than has ever been repaid by any nation at any time in history.[531]


* From the time that Congress enacted Bush's first major economic proposal (June 7, 2001[532]) until the time that he left office (January 20, 2009), the national debt rose from 53% of GDP to 74%, or an average of 2.7 percentage points per year.[533]


* During eight years in office, President Bush vetoed 12 bills, four of which were overridden by Congress and thus enacted without his approval.[534] These bills were projected by the Congressional Budget Office to increase the deficit by $26 billion during 2008-2022.[535]

 



* In February 2009, Democratic President Barack Obama stated:

 

I refuse to leave our children with a debt that they cannot repay—and that means taking responsibility right now, in this administration, for getting our spending under control.[536]


* From the time that Congress enacted Obama's first major economic proposal (February 17, 2009[537]) until December 31, 2014, the national debt rose from 74% of GDP to 103%, or an average of 4.8 percentage points per year.[538]


* As of May 18, 2015, President Obama has vetoed four bills, none of which have been overridden by Congress and thus enacted without his approval.[539]

 


_______

* Without mentioning the role of Congress or any other factors that impact the national debt,[540] [541] PolitiFact, a Pulitzer Prize-winning project of the Tampa Bay Times "to help you find the truth in politics,"[542] 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."[543]


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

 

Political Power  Dates  Average Annual Change

in National Debt

(Percentage Points of GDP)

Bill Clinton with Democratic

House and Senate

 1/20/93 - 1/4/95  0.9
Bill Clinton with Republican

House and Senate

 1/4/95 - 1/19/01  -1.6
George W. Bush with Republican

House and Senate

 1/19/01 - 6/6/01,

11/12/02 - 1/4/07

 0.8
George W. Bush with Republican

House and Democratic Senate

 6/6/01 - 11/12/02  2.3
George W. Bush with Democratic

House and Senate

 1/4/07 - 1/20/09  6.5
Barack Obama with Democratic

House and Senate

 1/20/09 - 1/4/11  9.3
Barack Obama with Republican

House and Democratic Senate

 1/5/11 - 1/6/15  1.9

[544]

 

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] The following sources detail the calculation of total tax revenues and average taxes per household, documenting that:


• "Current tax receipts," as defined by the U.S. Bureau of Economic Analysis, does not account for all taxes.
• Total taxes paid by U.S. households can be calculated by summing "current tax receipts," "capital transfer receipts" (i.e., estate and gift taxes), and "contributions for government social insurance" (i.e., taxes for Social Security, Medicare, unemployment insurance, and some smaller social programs) less "taxes from the rest of the world."


a) Email from the U.S. Bureau of Economic Analysis to Just Facts, March 19, 2015.
"Based on the classification used for the national income and product accounts, total tax receipts would be the sum of current and capital tax receipts. Current tax receipts are on table 3.1 line 2 (details lines 3 through 6) and capital transfer receipts are on table 3.1 line 33 (capital transfer receipts only include estate and gift taxes, which can be seen on table 5.11, line 37."

b) "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."

c) Dataset: "Table 3.1. Government Current Receipts and Expenditures (Billions of dollars)." U.S. Department of Commerce, Bureau of Economic Analysis. Last revised May 29, 2015. http://www.bea.gov/iTable/iTable.cfm?ReqID=9&step=1
"Current tax receipts [=] $3,520.6 billion … Taxes from the rest of the world [=] $18.9 billion … Contributions for government social insurance [=] $1,167.8 billion … Capital transfer receipts [=] $26.1 billion"

d) Dataset: "Table H3. Households by Race and Hispanic Origin of Household Reference Person and Detailed Type: 2014." U.S. Census Bureau, January 2015. http://www.census.gov/hhes/families/data/cps2014H.html
"Total households [=] 123,229,000"

CALCULATIONS:
$3,520.6 current tax receipts + $26.1 capital transfer receipts + $1,167.8 contributions for government social insurance - $18.9 taxes from the rest of the world = $4,721.7 billion in federal, state and local taxes

$4,721,700,000,000 taxes / 123,229,000 households = $38,317 taxes/household

[3] The following sources detail the calculation of total tax revenues and gross domestic product, documenting that:


• "Current tax receipts," as defined by the U.S. Bureau of Economic Analysis, does not account for all taxes.
• Total taxes paid by U.S. households can be calculated by summing "current tax receipts," "capital transfer receipts" (i.e., estate and gift taxes), and "contributions for government social insurance" (i.e., taxes for Social Security, Medicare, unemployment insurance, and some smaller social programs) less "taxes from the rest of the world."


a) Email from the U.S. Bureau of Economic Analysis to Just Facts, March 19, 2015.
"Based on the classification used for the national income and product accounts, total tax receipts would be the sum of current and capital tax receipts. Current tax receipts are on table 3.1 line 2 (details lines 3 through 6) and capital transfer receipts are on table 3.1 line 33 (capital transfer receipts only include estate and gift taxes, which can be seen on table 5.11, line 37."

b) "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."

c) Dataset: "Table 3.1. Government Current Receipts and Expenditures (Billions of dollars)." U.S. Department of Commerce, Bureau of Economic Analysis. Last revised May 29, 2015. http://www.bea.gov/iTable/iTable.cfm?ReqID=9&step=1

d) Dataset: "Table 1.1.5. Gross Domestic Product." U.S. Department of Commerce, Bureau of Economic Analysis. Last revised May 29, 2015. http://www.bea.gov/iTable/iTable.cfm?ReqID=9&step=1

NOTE: 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 2015 to 2025." Congressional Budget Office, January 26, 2015. https://www.cbo.gov/publication/49892

Supplementary dataset: "Historical Budget Data—January 2015." https://www.cbo.gov/…
"Table 2. Revenues, by Major Source, Since 1965 (In Billions of Dollars)"

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


[5] Calculated with data from:

 

a) Dataset: "Table 3.3. State and Local Government Current Receipts and Expenditures." U.S. Department of Commerce, Bureau of Economic Analysis. Last revised February 27, 2015. http://www.bea.gov/iTable/iTable.cfm?ReqID=9&step=1

 

b) Dataset: "Table 5.11. Capital Transfers Paid and Received (Billions of dollars)." U.S. Department of Commerce, Bureau of Economic Analysis. Last revised August 5, 2014. http://www.bea.gov/iTable/iTable.cfm?ReqID=9&step=1


NOTES:

- Taxes calculated by adding together "Current tax receipts," "Estate and gift taxes paid by persons" and "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 May 29, 2015. 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 May 29, 2015. http://www.bea.gov/iTable/iTable.cfm?ReqID=9&step=1


c) Dataset: "Table H3. Households by Race and Hispanic Origin of Household Reference Person and Detailed Type: 2014." U.S. Census Bureau, January 2015. http://www.census.gov/hhes/families/data/cps2014H.html
"Total households [=] 123,229,000"

NOTE: 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 Cengage 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 Cengage 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 Cengage 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, 2011." Congressional Budget Office, November 12, 2014. https://www.cbo.gov/…


Page 31: "CBO allocated individual income taxes and the employee's share of payroll taxes to the households paying those taxes directly.2 The agency also allocated the employer's share of payroll taxes to employees because employers appear to pass on their share of payroll taxes to employees by paying lower wages than they would otherwise pay.3 Therefore, CBO also added the employer's share of payroll taxes to households' earnings in calculating before-tax income."


[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 Molly F. Sherlock and Donald J. Marples. Congressional Research Service, November 21, 2014.
https://www.fas.org/sgp/crs/misc/RL32808.pdf

Page 13:


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. 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] Webpage: "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, 2011." Congressional Budget Office, November 12, 2014. http://www.cbo.gov/…


b) Report: "The Distribution of Household Income and Federal Taxes, 2011." Congressional Budget Office, November 12, 2014. https://www.cbo.gov/…


Page 1: "Federal taxes as examined in this report comprise four separate sources: individual income taxes, payroll (or social insurance) taxes, corporate income taxes, and excise taxes."

Page 5:


For this analysis, federal taxes include individual income taxes, payroll taxes, corporate income taxes, and excise taxes, which together accounted for approximately 92 percent of all federal revenues in fiscal year 2011. Revenues from states' deposits for unemployment insurance, estate and gift taxes, miscellaneous fees and fines, and net income earned by the Federal Reserve, which make up the remaining 8 percent, are not allocated to households in this analysis, mainly because it is uncertain to which households those revenue sources should be attributed.


Page 2 (in PDF): "Before-tax income is market income plus government transfers. Market income consists of labor income, business income, capital gains (profits realized from the sale of assets), capital income excluding capital gains, income received in retirement for past services, and other sources of income."

Pages 32–33:


Government transfers consist of the cost of two types of benefits: 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. In-Kind Benefits. The cost of Supplemental Nutrition Assistance Program vouchers (popularly 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 5:


Transfers as measured in this report do not equal total government spending on the transfer programs included in the analysis. The values of most transfers are based on amounts reported in the Census Bureau's Current Population Survey. The values of transfers from Medicare, Medicaid, and the Children's Health Insurance Program are based on the Census Bureau's estimate of the government's average cost of providing those benefits. In addition, because some transfers go to recipients outside the scope of the survey data collected by the Census Bureau and because some recipients misreport the amount of transfer payments they receive, the total amount of government transfers observed in the data used here is lower than the total amount the government spends through those transfer programs.


Pages 15–16:


Two important caveats apply to CBO's estimates of federal tax rates under 2013 tax rules. First, the analysis does not account for any shifts in the distribution of income between 2011 and 2013, which will not be known until detailed tax information becomes available. The further recovery of the economy might have resulted in uneven growth in incomes at different points in the income scale, which could affect tax rates for households in different income groups. Additionally, taxpayers probably changed their behavior in various ways in response to the changes in tax rules between 2011 and 2013. For example, higher-income taxpayers probably shifted some income from 2013 into 2012 in anticipation of the scheduled tax increases. Such shifts represent temporary changes in income, and holding incomes fixed, as this analysis does, may be a better way to measure the longterm effects of the tax changes. However, higher-income taxpayers probably also reduced their incomes in permanent ways because of the tax increases, and to the extent that is true, holding incomes fixed misstates the long-term effects of the tax changes.

Second, CBO considered only the major changes to individual income and payroll taxes and did not incorporate minor changes to those taxes or any changes to corporate income taxes or excise taxes.20 For example, under 2011 law, tax filers with qualifying investment properties could deduct 100 percent of their investment expenses. That full expensing provision (introduced in the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010) expired at the end of 2012, and the depreciation schedule used for investments in 2013 was less generous than the full expensing in effect in 2011. Under the rules for 2013, depreciation deductions would have been smaller and taxable business income and taxes would therefore have been larger than the amounts reflected in CBO's analysis of 2011 data.


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, 2011." Congressional Budget Office, November 12, 2014. http://www.cbo.gov/…


b) Report: "The Distribution of Household Income and Federal Taxes, 2011." Congressional Budget Office, November 12, 2014. https://www.cbo.gov/…


Page 1: "Federal taxes as examined in this report comprise four separate sources: individual income taxes, payroll (or social insurance) taxes, corporate income taxes, and excise taxes."

Page 5:


For this analysis, federal taxes include individual income taxes, payroll taxes, corporate income taxes, and excise taxes, which together accounted for approximately 92 percent of all federal revenues in fiscal year 2011. Revenues from states' deposits for unemployment insurance, estate and gift taxes, miscellaneous fees and fines, and net income earned by the Federal Reserve, which make up the remaining 8 percent, are not allocated to households in this analysis, mainly because it is uncertain to which households those revenue sources should be attributed.


Page 2 (in PDF): "Before-tax income is market income plus government transfers. Market income consists of labor income, business income, capital gains (profits realized from the sale of assets), capital income excluding capital gains, income received in retirement for past services, and other sources of income."

Pages 32–33:


Government transfers consist of the cost of two types of benefits: 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. In-Kind Benefits. The cost of Supplemental Nutrition Assistance Program vouchers (popularly 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 5:


Transfers as measured in this report do not equal total government spending on the transfer programs included in the analysis. The values of most transfers are based on amounts reported in the Census Bureau's Current Population Survey. The values of transfers from Medicare, Medicaid, and the Children's Health Insurance Program are based on the Census Bureau's estimate of the government's average cost of providing those benefits. In addition, because some transfers go to recipients outside the scope of the survey data collected by the Census Bureau and because some recipients misreport the amount of transfer payments they receive, the total amount of government transfers observed in the data used here is lower than the total amount the government spends through those transfer programs.


Pages 15–16:


Two important caveats apply to CBO's estimates of federal tax rates under 2013 tax rules. First, the analysis does not account for any shifts in the distribution of income between 2011 and 2013, which will not be known until detailed tax information becomes available. The further recovery of the economy might have resulted in uneven growth in incomes at different points in the income scale, which could affect tax rates for households in different income groups. Additionally, taxpayers probably changed their behavior in various ways in response to the changes in tax rules between 2011 and 2013. For example, higher-income taxpayers probably shifted some income from 2013 into 2012 in anticipation of the scheduled tax increases. Such shifts represent temporary changes in income, and holding incomes fixed, as this analysis does, may be a better way to measure the longterm effects of the tax changes. However, higher-income taxpayers probably also reduced their incomes in permanent ways because of the tax increases, and to the extent that is true, holding incomes fixed misstates the long-term effects of the tax changes.

Second, CBO considered only the major changes to individual income and payroll taxes and did not incorporate minor changes to those taxes or any changes to corporate income taxes or excise taxes.20 For example, under 2011 law, tax filers with qualifying investment properties could deduct 100 percent of their investment expenses. That full expensing provision (introduced in the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010) expired at the end of 2012, and the depreciation schedule used for investments in 2013 was less generous than the full expensing in effect in 2011. Under the rules for 2013, depreciation deductions would have been smaller and taxable business income and taxes would therefore have been larger than the amounts reflected in CBO's analysis of 2011 data.


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

 

[33] Report: "The Distribution of Household Income and Federal Taxes, 2011." Congressional Budget Office, November 12, 2014. https://www.cbo.gov/…

 

Page 1:

 

Tax rules have changed since 2011 in several important ways. Most notably, by 2013, several provisions affecting high-income taxpayers—originally enacted in 2001 (in the Economic Growth and Tax Relief Reconciliation Act, or EGTRRA) and 2003 (in the Jobs and Growth Tax Relief Reconciliation Act, or JGTRRA)—were allowed to expire. In addition, payroll tax rates that had been reduced in 2011 and 2012 were reset to their previous, higher levels in 2013, and new taxes for high-income taxpayers enacted in the Affordable Care Act took effect in 2013.2 As part of this analysis, CBO estimated the effects of those changes on the distribution of federal taxes.3 If the income distribution was unchanged between 2011 and 2013, the average federal tax rate for all households would have been 1.7 percentage points higher under 2013 tax rules than it was in 2011, CBO estimates. Although average federal tax rates would have increased by about 1 percentage point across much of the income distribution, the average tax rate for households in the top 1 percent of the income distribution would have increased by an estimated 4.3 percentage points.

 

Page 2:

 

CBO chose 1979 as a starting point for the analysis because it is the earliest year for which the Census Bureau provides consistent estimates of some measures of income. The beginning and end points of the analysis—1979 and 2011—were quite different in terms of economic activity; 1979 was a peak year for the economy right before a recession, whereas 2011 was a year in which the economy was still slowly recovering from the deep recession that began in 2007.

 

Page 4: "Federal tax rates for 2013 are calculated by applying individual income tax and payroll tax rules in place in 2013 to the income distribution observed in 2011."

 

Page 14:

 

Between 2011 and 2013, tax rules changed significantly—and probably shifted the distribution of federal taxes in notable ways. CBO estimated the effects of major changes to individual income tax and payroll tax provisions that occurred between 2011 and 2013 by simulating tax liabilities under 2013 tax rules using reported 2011 incomes.18 Those estimates do not include any shifts in the income distribution that have occurred between 2011 and 2013 attributable to either the continued recovery of the economy since the last recession or any behavioral effects in response to the tax law changes.
 

Pages 15–16:

 

Two important caveats apply to CBO's estimates of federal tax rates under 2013 tax rules. First, the analysis does not account for any shifts in the distribution of income between 2011 and 2013, which will not be known until detailed tax information becomes available. The further recovery of the economy might have resulted in uneven growth in incomes at different points in the income scale, which could affect tax rates for households in different income groups. Additionally, taxpayers probably changed their behavior in various ways in response to the changes in tax rules between 2011 and 2013. For example, higher-income taxpayers probably shifted some income from 2013 into 2012 in anticipation of the scheduled tax increases. Such shifts represent temporary changes in income, and holding incomes fixed, as this analysis does, may be a better way to measure the long-term effects of the tax changes. However, higher-income taxpayers probably also reduced their incomes in permanent ways because of the tax increases, and to the extent that is true, holding incomes fixed misstates the long-term effects of the tax changes.

 

Second, CBO considered only the major changes to individual income and payroll taxes and did not incorporate minor changes to those taxes or any changes to corporate income taxes or excise taxes.20 For example, under 2011 law, tax filers with qualifying investment properties could deduct 100 percent of their investment expenses. That full expensing provision (introduced in the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010) expired at the end of 2012, and the depreciation schedule used for investments in 2013 was less generous than the full expensing in effect in 2011. Under the rules for 2013, depreciation deductions would have been smaller and taxable business income and taxes would therefore have been larger than the amounts reflected in CBO's analysis of 2011 data.

 

Table 4. Average Federal Tax Rates, by Before-Tax Income Group, 2011 and Projected Under 2013 Law

 

Projected Under 2013 Law

 

Lowest Quintile [=] 2.9%

Second Quintile [=] 8.0%

Middle Quintile [=] 12.3%

Fourth Quintile [=] 16.4%

Top Quintile [=] 25.5% …

Top 1 Percent [=] 33.3%

 

[34] Constructed with data from:


a) Dataset: "The Distribution of Household Income and Federal Taxes, 2011." Congressional Budget Office, November 12, 2014. http://www.cbo.gov/…


b) Report: "The Distribution of Household Income and Federal Taxes, 2011." Congressional Budget Office, November 12, 2014. https://www.cbo.gov/…


Page 1: "Federal taxes as examined in this report comprise four separate sources: individual income taxes, payroll (or social insurance) taxes, corporate income taxes, and excise taxes."

Page 5:


For this analysis, federal taxes include individual income taxes, payroll taxes, corporate income taxes, and excise taxes, which together accounted for approximately 92 percent of all federal revenues in fiscal year 2011. Revenues from states' deposits for unemployment insurance, estate and gift taxes, miscellaneous fees and fines, and net income earned by the Federal Reserve, which make up the remaining 8 percent, are not allocated to households in this analysis, mainly because it is uncertain to which households those revenue sources should be attributed.


Page 2 (in PDF): "Before-tax income is market income plus government transfers. Market income consists of labor income, business income, capital gains (profits realized from the sale of assets), capital income excluding capital gains, income received in retirement for past services, and other sources of income."

Pages 32–33:


Government transfers consist of the cost of two types of benefits: 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. In-Kind Benefits. The cost of Supplemental Nutrition Assistance Program vouchers (popularly 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 5:


Transfers as measured in this report do not equal total government spending on the transfer programs included in the analysis. The values of most transfers are based on amounts reported in the Census Bureau's Current Population Survey. The values of transfers from Medicare, Medicaid, and the Children's Health Insurance Program are based on the Census Bureau's estimate of the government's average cost of providing those benefits. In addition, because some transfers go to recipients outside the scope of the survey data collected by the Census Bureau and because some recipients misreport the amount of transfer payments they receive, the total amount of government transfers observed in the data used here is lower than the total amount the government spends through those transfer programs.


Pages 15–16:


Two important caveats apply to CBO's estimates of federal tax rates under 2013 tax rules. First, the analysis does not account for any shifts in the distribution of income between 2011 and 2013, which will not be known until detailed tax information becomes available. The further recovery of the economy might have resulted in uneven growth in incomes at different points in the income scale, which could affect tax rates for households in different income groups. Additionally, taxpayers probably changed their behavior in various ways in response to the changes in tax rules between 2011 and 2013. For example, higher-income taxpayers probably shifted some income from 2013 into 2012 in anticipation of the scheduled tax increases. Such shifts represent temporary changes in income, and holding incomes fixed, as this analysis does, may be a better way to measure the longterm effects of the tax changes. However, higher-income taxpayers probably also reduced their incomes in permanent ways because of the tax increases, and to the extent that is true, holding incomes fixed misstates the long-term effects of the tax changes.

Second, CBO considered only the major changes to individual income and payroll taxes and did not incorporate minor changes to those taxes or any changes to corporate income taxes or excise taxes.20 For example, under 2011 law, tax filers with qualifying investment properties could deduct 100 percent of their investment expenses. That full expensing provision (introduced in the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010) expired at the end of 2012, and the depreciation schedule used for investments in 2013 was less generous than the full expensing in effect in 2011. Under the rules for 2013, depreciation deductions would have been smaller and taxable business income and taxes would therefore have been larger than the amounts reflected in CBO's analysis of 2011 data.


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


[35] Report: "The Distribution of Household Income and Federal Taxes, 2011." Congressional Budget Office, November 12, 2014. https://www.cbo.gov/…

 

Page 9: "Because of the complexity of estimating state and local taxes for individual households, this report considers federal taxes only. Researchers differ about whether state and local taxes are, on net, regressive, proportional, or slightly progressive, but most agree that state and local taxes are less progressive than federal taxes."

_______

[36] 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


‡ Webpage: "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"


[37] Report: "The Distribution of Household Income and Federal Taxes, 2011." Congressional Budget Office, November 12, 2014. https://www.cbo.gov/…


Page 12: "The burden of excise taxes relative to income is greatest for lower-income households, which tend to spend a larger share of their income on those taxed goods and services."


[38] Report: "Overview of the Federal Tax System." By Molly F. Sherlock and Donald J. Marples. Congressional Research Service, November 21, 2014.
https://www.fas.org/sgp/crs/misc/RL32808.pdf


Page 13:


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.


[39] Dataset: "The Distribution of Household Income and Federal Taxes, 2011." Congressional Budget Office, November 12, 2014. http://www.cbo.gov/…


Contents and Notes tab: "When refundable tax credits, such as the earned income and child tax credits, exceed the individual income tax liabilities of the households in an income group, the average individual income tax rate for that group is negative. (Refundable tax credits are not limited to the amount of individual income tax owed before they are applied.)"


[40] Report: "Overview of the Federal Tax System." By Molly F. Sherlock and Donald J. Marples. Congressional Research Service, November 21, 2014.
https://www.fas.org/sgp/crs/misc/RL32808.pdf


Page 7: "If a tax credit is refundable, and the credit amount exceeds tax liability, a taxpayer receives a payment from the government."


[41] a) Dataset: "The Distribution of Household Income and Federal Taxes, 2011." Congressional Budget Office, November 12, 2014. http://www.cbo.gov/…

Table 1. "Average Federal Tax Rates for All Households, by Before-Tax Income Group, 1979 to 2011 (Percent)."


b) Report: "The Distribution of Household Income and Federal Taxes, 2011." Congressional Budget Office, November 12, 2014. https://www.cbo.gov/…


Page 5:


For this analysis, federal taxes include individual income taxes, payroll taxes, corporate income taxes, and excise taxes, which together accounted for approximately 92 percent of all federal revenues in fiscal year 2011. Revenues from states' deposits for unemployment insurance, estate and gift taxes, miscellaneous fees and fines, and net income earned by the Federal Reserve, which make up the remaining 8 percent, are not allocated to households in this analysis, mainly because it is uncertain to which households those revenue sources should be attributed.


[42] 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.


[43] See the table "Effective Federal Tax Burdens."


[44] 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.


[45] See the table "Effective Federal Tax Burdens."


[46] 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."


[47] 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.


[48] 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.


[49] See the table "Effective Federal Tax Burdens."


[50] 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.


[51] 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.


[52] 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.


[53] Article: "Obama team signals nasty White House race." By Stephen Collinson. Agence France-Presse, April 10, 2012. http://news.yahoo.com/…


"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.


[54] See the table "Effective Federal Tax Burdens."


[55] 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


[56] 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


[57] 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"


[58] 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)"


[59] 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."


[60] Textbook: Public Finance (Second edition). By John E. Anderson. South-Western Cengage 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."


[61] 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 up to 15.5%. The next two footnotes show that this is the figure used by PolitiFact and FactCheck.


[62] 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"


[63] 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."


[64] 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.


[65] 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.


[66] 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/…


[67] 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/…


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


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


Pages 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).


[70] 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


[71] 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.


[72] Report: "The Distribution of Household Income and Federal Taxes, 2011." Congressional Budget Office, November 12, 2014. https://www.cbo.gov/…


Page 16:


Table 4. Average Federal Tax Rates, by Before-Tax Income Group, 2011 and Projected Under 2013 Law … All Federal Taxes … Average Federal Tax Rate (Calculated by dividing federal taxes by before-tax income) … 2011 … Middle Quintile [=] 11.2 … Top 1 Percent [=] 29.0

Projected Under 2013 Law … Middle Quintile [=] 12.3 … Top 1 Percent [=] 33.3 (Federal tax rates for 2013 are calculated by applying individual income tax and payroll tax rules in place in 2013 to the income distribution observed in 2011.)


[73] Report: "High-Income Tax Returns for 2011." By Justin Bryan. IRS, Statistics of Income Bulletin, Spring 2014. http://www.irs.gov/pub/irs-soi/14insprbulhignincome.pdf


Page 51:


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 The expanded income concept 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 (AMT) 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

There are also two tax concepts in this article used to classify returns as taxable or nontaxable: "U.S. income tax" and "worldwide income tax." The first concept, U.S. income tax, is total Federal income tax liability, which includes the AMT, less all credits against income tax and does not include payroll or self-employment taxes. To be considered taxable, a return had to have a positive income tax liability after accounting for all credits (including refundable credits). A nontaxable return, on the other hand, could either have a zero or negative income tax liability after accounting for all credits (including refundable credits). Since the Federal income tax applies to worldwide income and allows a credit (subject to certain limits) for income taxes paid to foreign governments, a return could be classified as nontaxable under the U.S. income tax concept even though income taxes had been paid to a foreign government. The second tax concept, worldwide income tax, addresses this circumstance by adding back the allowable foreign tax credit and foreign taxes paid on excluded foreign-earned income to U.S. income tax.6, 7 The sum of these two items is believed to be a reasonable proxy for foreign taxes actually paid.

For 2011, the number of expanded-income returns over $200,000 increased 9.4 percent to almost 4.8 million returns. Of these, 15,000 returns had no worldwide income tax liability. … Tax-exempt interest was the primary reason for nontaxability on more than half (58.2 percent) of these returns.


Page 59: "On returns without any worldwide tax and expanded income of $200,000 or more, the most important item in eliminating tax, on 58.2 percent of returns, was the exclusion for State and local Government interest ('tax-exempt interest') (Table 8)."

Pages 63–64:


[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. 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.


[74] Webpage: "Investor Bulletin: Municipal Bonds." U.S. Securities and Exchange Commission, June 15, 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.


[75] 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"


[76] 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


[77] Report: "High-Income Tax Returns for 2011." By Justin Bryan. IRS, Statistics of Income Bulletin, Spring 2014. http://www.irs.gov/pub/irs-soi/14insprbulhignincome.pdf


Pages 63-64:


[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. 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.


[78] 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/…

 

Page 4:


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.


[79] Calculated with data from the report: "The Budget and Economic Outlook: Fiscal Years 2015 to 2025." Congressional Budget Office, January 26, 2015. https://www.cbo.gov/publication/49892


Supplementary dataset: "Historical Budget Data—January 2015 Baseline." https://www.cbo.gov/…

"Table 2. Revenues, by Major Source, Since 1965 (In Billions of Dollars) … 2014 … Individual Income Taxes [=] 1,394.6 … Total [=] 3,020.8"

CALCULATION: 1,394.6 / 3,020.8 = 46.2%


[80] 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."


[81] "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."


[82] 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."


[83] Report: "Overview of the Federal Tax System as in Effect for 2014." U.S. Congress, Joint Committee on Taxation, March 28, 2014. https://www.jct.gov/publications.html?func=startdown&id=4568


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.4 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,5 trusts or estates.6 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. …


4 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.


5 In general, partnerships and S corporations (i.e., corporations subject to the provisions of subchapter S of the Internal Revenue Code) 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. A business entity organized as a limited liability company ("LLC") under applicable State law generally is treated as a partnership for Federal income tax purposes.


6 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.


[84] Form 9452: "Filing Assistance Program." Internal Revenue Service, 2014. 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)"


[85] 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.


[86] 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."


[87] Report: "Overview of the Federal Tax System as in Effect for 2014." U.S. Congress, Joint Committee on Taxation, March 28, 2014. https://www.jct.gov/publications.html?func=startdown&id=4568


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."


[88] 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."


[89] Report: "Overview of the Federal Tax System as in Effect for 2014." U.S. Congress, Joint Committee on Taxation, March 28, 2014. https://www.jct.gov/publications.html?func=startdown&id=4568


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 2014, the amount deductible for each personal exemption is $3,950. This amount is indexed annually for inflation. Additionally, the personal exemption phase-out ("PEP") reduces a taxpayer's personal exemptions by two percent for each $2,500 ($1,250 for married filing separately), or fraction thereof, by which the taxpayer's AGI exceeds $254,200 (single), $279,650 (head-of-household), $305,050 (married filing jointly) and $152,525 (married filing separately).7 These threshold amounts are indexed for inflation.

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 2014, the amount of the standard deduction is $6,200 for single individuals and married individuals filing separate returns, $9,100 for heads of households, and $12,400 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 10 percent of AGI, or 7.5 percent in the case of taxpayers above age 64), 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). Additionally, the total amount of itemized deductions allowed is reduced by $0.03 for each dollar of AGI in excess of $254,200 (single), $279,650 (head-of-household), $305,050 (married filing jointly) and $152,525 (married filing separately).9 These threshold amounts are indexed for inflation.


[90] 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.


[91] Report: "Overview of the Federal Tax System." By Molly F. Sherlock and Donald J. Marples. Congressional Research Service, November 21, 2014.
https://www.fas.org/sgp/crs/misc/RL32808.pdf


Page 2: "The tax liability depends on the filing status of the taxpayer. There are four main filing categories: married filing jointly, married filing separately, head of household, and single individual. The computation of a taxpayer's tax liability depends on their filing status."


[92] Report: "Overview of the Federal Tax System as in Effect for 2015." U.S. Congress, Joint Committee on Taxation, March 30, 2015. https://www.jct.gov/publications.html?func=startdown&id=4763


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 2015, the regular individual income tax rate schedules are as follows:


Table 2.–Federal Individual Income Tax Rates for 2015 …


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.11


NOTE: The following information is derived from Table 2:

 

Single Individuals

Taxable Income Rate

 

Differential from

previous upper threshold

 

Lower Threshold Upper Threshold
$0 $9,225 10% -
$9,225 $37,450 15% $28,225
$37,450 $90,750 25% $53,300
$90,750 $189,300 28% $98,550
$189,300 $411,500 33% $222,200
$411,500 $413,200 35% $1,700
$413,200 infinity 39.6% infinity

 

Heads of Households
Taxable Income Rate

 

Differential from

previous upper threshold

 

Lower Threshold Upper Threshold
$0 $13,150 10% -
$13,150 $50,200 15% $37,050
$50,200 $129,600 25% $79,400
$129,600 $209,850 28% $80,250
$209,850 $411,500 33% $201,650
$411,500 $439,000 35% $27,500
$439,000 infinity 39.6% infinity

 

Married Individuals Filing Joint Returns and Surviving Spouses
Taxable Income Rate

 

Differential from

previous upper threshold

 

Lower Threshold Upper Threshold
$0 $18,450  10% -
$18,450 $74,900  15% $56,750
$74,900 $151,200  25% $76,300
$151,200 $230,450  28% $79,250
$230,450 $411,500  33% $181,050
$411,500 $464,850 35% $53,350
$464,850 infinity  39.6% infinity

 

Married Individuals Filing Separate Returns
Taxable Income Rate

 

Differential from

previous upper threshold

 

Lower Threshold Upper Threshold
$0 $9,225 10% -
$9,225 $37,450 15% $28,225
$37,450 $75,600 25% $38,150
$75,600 $115,225 28% $39,625
$115,225 $205,750 33% $90,525
$205,750 $232,425 35% 26,675
$232,425 infinity 39.6% infinity


[93] Report: "The Alternative Minimum Tax for Individuals: A Growing Burden." By Kurt Schuler. U.S. Congress, Joint Economic Committee, May 2001. http://taxpolicycenter.org/TaxFacts/papers/amt.pdf


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."


[94] Report: "Overview of the Federal Tax System." By Molly F. Sherlock and Donald J. Marples. Congressional Research Service, November 21, 2014.
https://www.fas.org/sgp/crs/misc/RL32808.pdf


Page 1: "For taxpayers with high levels of AGI [adjusted gross income], the personal and dependent exemptions are phased out."

Page 5: "Itemized deductions are also phased out as income exceeds a certain threshold."

Page 7: "If a tax credit is refundable, and the credit amount exceeds tax liability, a taxpayer receives a payment from the government. … Many [tax] credits are phased out as income rises and thus do not benefit higher income individuals."

Page 8: "The basic exemptions [for alternative minimum tax] are phased out for taxpayers with high levels of AMT income."


[95] 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."


[96] Report: "Overview of the Federal Tax System as in Effect for 2014." U.S. Congress, Joint Committee on Taxation, March 28, 2014. https://www.jct.gov/publications.html?func=startdown&id=4568


Pages 7-8:


Credits against tax


An individual may reduce his or her tax liability by any available tax credits. In some instances, a permissible credit is "refundable," i.e., it may result in a refund in excess of any credits for withheld taxes or estimated tax payments available to the individual. Two major credits are the child tax credit and the earned income credit.

An individual may claim a tax credit for each qualifying child under the age of 17. The amount of the credit per child is $1,000.11 The aggregate amount of child credits that may be claimed is phased out for individuals with income over certain threshold amounts. Specifically, the otherwise allowable child tax credit is reduced by $50 for each $1,000 (or fraction thereof) of modified adjusted gross income over $75,000 for single individuals or heads of households, $110,000 for married individuals filing joint returns, and $55,000 for married individuals filing separate returns. To the extent the child credit exceeds the taxpayer's tax liability, the taxpayer is eligible for a refundable credit12 (the additional child tax credit) equal to 15 percent of earned income in excess of $3,000.13

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 2014, the maximum EITC is $6,143 for taxpayers with more than two qualifying children, $5,460 for taxpayers with two qualifying children, $3,305 for taxpayers with one qualifying child, and $496 for taxpayers with no qualifying children. The credit amount begins to phaseout at an income level of $23,260 for joint-filers with children, $17,830 for other taxpayers with children, $13,540 for joint-filers with no children and $8,110 for other taxpayers with no qualifying children. The phaseout percentages are 15.98 for taxpayers with one qualifying child, 17.68 for two or more qualifying children and 7.65 for no qualifying children.

Tax credits are also allowed for certain business expenditures, certain foreign income taxes paid or accrued, certain education expenditures, certain child care expenditures, and for certain elderly or disabled individuals. Credits allowed against the regular tax are allowed against the alternative minimum tax.


[97] "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."


[98] Report: "Overview of the Federal Tax System as in Effect for 2014." U.S. Congress, Joint Committee on Taxation, March 28, 2014. https://www.jct.gov/publications.html?func=startdown&id=4568


Page 4: "Tax liability … Lower rates apply for long-term capital gains and certain dividends; those rates apply for both the regular tax and the alternative minimum tax."


[99] 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."


[100] Report: "Federal Individual Income Tax Rates History: Income years 1913–2013 (Nominal dollars)." National Taxpayers Union. Accessed April 7, 2015 at http://taxfoundation.org/...


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


[102] Report: "Overview of the Federal Tax System as in Effect for 2014." U.S. Congress, Joint Committee on Taxation, March 28, 2014. https://www.jct.gov/publications.html?func=startdown&id=4568


Pages 4-6: "Table 2.–Federal Individual Income Tax Rates for 2014"


[103] Constructed with data from the report: "Federal Individual Income Tax Rates History: Income years 1913–2013 (Nominal dollars)." National Taxpayers Union. Accessed April 7, 2015 at http://taxfoundation.org/…


[104] Constructed with data from:


a) Webpage: "Federal Individual Income Tax Rates History: Income years 1913–2013 (Nominal dollars)." National Taxpayers Union. Accessed April 7, 2015 at http://taxfoundation.org/…


b) Dataset: "Table 3.4. Personal Current Tax Receipts." U.S. Department of Commerce, Bureau of Economic Analysis. Last revised August 5, 2014. 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 February 27, 2015. 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] Calculated with data from: "Table 3.3. State and Local Government Current Receipts and Expenditures." U.S. Department of Commerce, Bureau of Economic Analysis. Last revised February 27, 2015. http://www.bea.gov/iTable/iTable.cfm?ReqID=9&step=1


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


[106] Report: "Facts & Figures 2015: How Does Your State Compare?" By Jared Walczak. Tax Foundation, March 10, 2015. http://taxfoundation.org/…


Table 12: "State Individual Income Tax Rates, as of January 1, 2015."


[107] 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."


[108] Report: "Facts & Figures 2015: How Does Your State Compare?" By Jared Walczak. Tax Foundation, March 10, 2015. http://taxfoundation.org/…


"Table 8: Sources of State and Local Tax Collections, Percentage of Total from Each Source, Fiscal Year 2012"


[109] Report: "Overview of the Federal Tax System as in Effect for 2014." U.S. Congress, Joint Committee on Taxation, March 28, 2014. https://www.jct.gov/publications.html?func=startdown&id=4568


Page 20: "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."


[110] 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."


[111] "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."


[112] "Financial Report of the United States Government for Fiscal Year 2014." U.S. Department of the Treasury, February 26, 2015. http://www.fiscal.treasury.gov/fsreports/rpt/finrep/fr/fr_index.htm


Page 165: "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."


[113] Calculated with data from the report: "The Budget and Economic Outlook: Fiscal Years 2015 to 2025." Congressional Budget Office, January 26, 2015. https://www.cbo.gov/publication/49892


Supplementary dataset: "Historical Budget Data—January 2015 Baseline." https://www.cbo.gov/…

"Table 2. Revenues, by Major Source, Since 1965 (In Billions of Dollars) … 2014 … Social Insurance Taxes [=] 1,023.9 … Total [=] 3,020.8"

CALCULATION: 1,023.9 / 3,020.8 = 33.9%


[114] 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 February 27, 2015. http://www.bea.gov/iTable/iTable.cfm?ReqID=9&step=1


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


[115] 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."


[116] 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."


[117] Textbook: Public Finance (Second edition). By John E. Anderson. South-Western Cengage 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.


[118] "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.


[119] Webpage: "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."


[120] 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.

 

NOTE: For more detail, see the table "Effective Federal Tax Burdens."


[121] Calculated with data from the report: "The Budget and Economic Outlook: Fiscal Years 2015 to 2025." Congressional Budget Office, January 26, 2015. https://www.cbo.gov/publication/49892

Page 96: "Table 4-2. Payroll Tax Revenues Projected in CBO's Baseline (Billions of dollars) … Actual, 2014 … Social Security [=] 736 … Medicare [=] 224 … Unemployment Insurance [=] 55 … Railroad Retirement [=] 5… Other Retirementa [=] 3 … Total [=] 1,024 … a. Consists primarily of federal employees' contributions to the Federal Employees Retirement System and the Civil Service Retirement System."

CALCULATION: ($736 + $224 + $55) / $1,024 = 99.1%

Page 96:


The two largest sources of payroll tax receipts are the taxes that are dedicated to Social Security and Part A of Medicare. Much smaller amounts are collected in the form of unemployment insurance taxes (most imposed by states but 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 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.


[122] 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 5, 2014. 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 February 27, 2015. http://www.bea.gov/iTable/iTable.cfm?ReqID=9&step=1


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


[123] Calculated with data from the report: "The Budget and Economic Outlook: Fiscal Years 2015 to 2025." Congressional Budget Office, January 26, 2015. https://www.cbo.gov/publication/49892


Page 96: "Table 4-2. Payroll Tax Revenues Projected in CBO's Baseline (Billions of dollars) … Actual, 2014 … Social Security [=] 736 … Total [=] 1,024"

CALCULATION: $736 / $1,024 = 71.9%

 

[124] Webpage: "Contribution and Benefit Base." United States Social Security Administration, Office of the Chief Actuary. Accessed April 10, 2015 at http://www.ssa.gov/oact/cola/cbb.html
 

"The OASDI [Old-Age, Survivors, and Disability Insurance] tax rate for wages paid in 2015 is set by statute at 6.2 percent for employees and employers, each."

 

[125] Webpage: "Contribution and Benefit Base." United States Social Security Administration, Office of the Chief Actuary. Accessed April 10, 2015 at 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 2015, this base is $118,500."


[126] 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."


[127] 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."

 

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


[129] Calculated with data from: Webpage: "CPI Inflation Calculator." United States Department of Labor, Bureau of Labor Statistics. Accessed April 10, 2015 at 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."


CALCULATION: 6% of $3,000 = $180 (Using the above-cited inflation calculator, $180 in 1949 is equivalent to $1,775 in 2015.)


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


a) Webpage: "Social Security & Medicare Tax Rates." United States Social Security Administration, Office of the Chief Actuary. Accessed April 10, 2015 at http://www.ssa.gov/oact/ProgData/taxRates.html

[The 2015 payroll tax rate is 12.4%.]


b) Webpage: "Contribution and Benefit Base." United States Social Security Administration, Office of the Chief Actuary. Accessed April 10, 2015 at 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 2015, this base is $118,500."

CALCULATIONS:
$118,500 × 12.4% = $14,694

$14,694 / $1,775 = 8.3


[131] Publication number 05-10070: "Your Retirement Benefit: How It's Figured." United States Social Security Administration, January 2015. http://www.socialsecurity.gov/pubs/EN-05-10070.pdf
 

Many people wonder how we figure their Social Security retirement benefit. We base Social Security benefits on your lifetime earnings. We adjust or "index" your actual earnings 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." 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.


* Webpage: "Contribution and Benefit Base." United States Social Security Administration, Office of the Chief Actuary. Accessed April 10, 2015 at 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."


† Webpage: "Social Security & Medicare Tax Rates." United States Social Security Administration, Office of the Chief Actuary. Accessed April 10, 2015 at http://www.ssa.gov/oact/ProgData/taxRates.html


[132] Report: "Social Security Reform: Current Issues and Legislation." By Dawn Nuschler. Congressional Research Service, November 28, 2012. https://www.fas.org/sgp/crs/misc/RL33544.pdf


Page 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.


[133] 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.


[134] Booklet: "Medicare Coverage of Skilled Nursing Facility Care." Centers for Medicare and Medicaid Services, January 2015. http://www.medicare.gov/publications/pubs/pdf/10153.pdf


Page 8:


Skilled care is health care given when you need skilled nursing or therapy staff to treat, manage, observe, and evaluate your care. Examples of SNF [Skilled Nursing Facility] care include intravenous injections and physical therapy. Care that can be given by non-professional staff isn't considered skilled care. People don't usually stay in a SNF until they're completely recovered because Medicare only covers certain SNF care services that are needed daily on a short term basis (up to 100 days).


Page 29: "… Medicare doesn't cover custodial care if it's the only kind of care you need."

Page 47: "Custodial care—Nonskilled personal care, like help with activities of daily living like bathing, dressing, eating, getting in or out of a bed or chair, moving around, and using the bathroom. It may also include the kind of health-related care that most people do themselves, like using eye drops. In most cases, Medicare doesn't pay for custodial care."

[135] Report: "Medicare Primer." By Patricia A. Davis. Congressional Research Service, January 31, 2013. https://fas.org/sgp/crs/misc/R40425.pdf

Page 1:

Medicare consists of four distinct parts:

• Part A (Hospital Insurance, or HI) covers inpatient hospital services, skilled nursing care, hospice care, and some home health services. 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 Parts 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 outpatient prescription drug benefits. Funding is included in the SMI trust fund and is financed through beneficiary premiums, general revenues, and state transfer payments.


[136] Calculated with data from the report: "The Budget and Economic Outlook: Fiscal Years 2015 to 2025." Congressional Budget Office, January 26, 2015. https://www.cbo.gov/publication/49892


Page 96: "Table 4-2. Payroll Tax Revenues Projected in CBO's Baseline (Billions of dollars) … Actual, 2014 … Medicare [=] 224 … Total [=] 1,024"

CALCULATION: $224 / $1,024 = 21.9%


[137] Report: "Medicare Primer." By Patricia A. Davis. Congressional Research Service, January 31, 2013. https://fas.org/sgp/crs/misc/R40425.pdf

Page 2-3:

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.


Pages 4-5:


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 entitled to premium-free Part A may obtain coverage by paying a monthly premium ($441 in 2013) or, for persons with at least 30 quarters of covered employment, a reduced monthly premium ($243 in 2013). 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.19 For most Part B enrollees, the 2013 monthly premium is $104.90. Higher income enrollees pay higher premiums. (See the "Part B Financing" section below.)


[138] "2014 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, July 28, 2014. http://www.cms.gov/…

Page 11–12:


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 a worker's wages, while self-employed workers pay 2.9 percent of their net earnings. Starting in 2013, high-income workers 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 Social Security recipients with incomes above certain unindexed thresholds pay on their benefits, as well as interest paid from the general fund on the U.S. Treasury securities held in the HI trust fund.

[139] 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."


[140] Webpage: "Contribution and Benefit Base." United States Social Security Administration, Office of the Chief Actuary. Accessed April 13, 2015 at 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."


[141] Webpage: "Contribution and Benefit Base." United States Social Security Administration, Office of the Chief Actuary. Accessed April 13, 2015 at 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 changes each year with changes in the national average wage index."


[142] Webpage: "History of SSA-related Legislation: 103rd Congress." United States Social Security Administration. Accessed April 13, 2015 at http://www.socialsecurity.gov/legislation/history/103.html


"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."


[143] 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."


[144] "2014 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, July 28, 2014. http://www.cms.gov/…


Page 11: "Starting in 2013, high-income workers 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)."


[145] Report: "Overview of the Federal Tax System as in Effect for 2014." U.S. Congress, Joint Committee on Taxation, March 28, 2014. https://www.jct.gov/publications.html?func=startdown&id=4568


Pages 15-16:


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.28 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 (unmarried individual or head of household).29


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.30


29 These threshold amounts are not indexed for inflation.


30 Sec. 1402(b).


[146] Calculated with data from the report: "The Budget and Economic Outlook: Fiscal Years 2015 to 2025." Congressional Budget Office, January 26, 2015. https://www.cbo.gov/publication/49892


Page 96: "Table 4-2. Payroll Tax Revenues Projected in CBO's Baseline (Billions of dollars) … Actual, 2014 … Unemployment Insurance [=] 55 … Total [=] 1,024 … Much smaller amounts are collected in the form of unemployment insurance taxes (most imposed by states but classified as federal revenues) …"

CALCULATION: $55 / $1,024 = 5.4%


[147] Report: "Overview of the Federal Tax System as in Effect for 2014." U.S. Congress, Joint Committee on Taxation, March 28, 2014. https://www.jct.gov/publications.html?func=startdown&id=4568


Page 15:


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.


[148] 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."


[149] Report: "Overview of the Federal Tax System." By Molly F. Sherlock and Donald J. Marples. Congressional Research Service, November 21, 2014.
https://www.fas.org/sgp/crs/misc/RL32808.pdf


Pages 23–24:


Forms of Business Organization


The Internal Revenue Code recognizes several different forms of business organization and their tax treatment varies. The principal forms are C corporations, S corporations, partnerships, and sole proprietorships.49

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.

49 For more information see CRS Report R40748, Business Organizational Choices: Taxation and Responses to Legislative Changes.


[150] "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:


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.


[151] Calculated with data from the report: "The Budget and Economic Outlook: Fiscal Years 2015 to 2025." Congressional Budget Office, January 26, 2015. https://www.cbo.gov/publication/49892


Supplementary dataset: "Historical Budget Data—January 2015 Baseline." https://www.cbo.gov/…

"Table 2. Revenues, by Major Source, Since 1965 (In Billions of Dollars) … 2014 … Corporate Income Taxes [=] 320.7 … Total [=] 3,020.8"

CALCULATION: 320.7 / 3,020.8 = 10.6%


[152] 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 February 27, 2015. http://www.bea.gov/iTable/iTable.cfm?ReqID=9&step=1


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


[153] 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.


[154] 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."


[155] a) Report: "The Distribution of Household Income and Federal Taxes, 2011." Congressional Budget Office, November 12, 2014. https://www.cbo.gov/…

Page 11:


CBO allocates 75 percent of the corporate income tax to households in proportion to their share of capital income and 25 percent to households in proportion to their share of labor income. For more discussion of the incidence of the corporate income tax, see Congressional Budget Office, The Distribution of Household Income and Federal Taxes, 2008 and 2009 (July 2012), www.cbo.gov/publication/43373.

 

b) Report: "The Distribution of Household Income and Federal Taxes, 2011." Congressional Budget Office, November 12, 2014. https://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.


[156] 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."


[157] Webpage: "Corporations." Internal Revenue Service, November 12, 2014. 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."


[158] Report: "Overview of the Federal Tax System." By Molly F. Sherlock and Donald J. Marples. Congressional Research Service, November 21, 2014.
https://www.fas.org/sgp/crs/misc/RL32808.pdf


Page 10:


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.


[159] Report: "Overview of the Federal Tax System." By Molly F. Sherlock and Donald J. Marples. Congressional Research Service, November 21, 2014.
https://www.fas.org/sgp/crs/misc/RL32808.pdf


Pages 9–10:


The base of the corporate income tax is net income, or profits, as defined by the tax code. In general this is gross revenue less the cost of doing business. 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. 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 22:


When a business purchases a tangible asset such as a machine or structure, it is not incurring a cost. Rather, the business 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. 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.

Because of the time value of money, a tax deduction of a given dollar amount is worth more to a business the sooner it can be claimed. Further, 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.


[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/…


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.


[161] Report: "Overview of the Federal Tax System." By Molly F. Sherlock and Donald J. Marples. Congressional Research Service, November 21, 2014.
https://www.fas.org/sgp/crs/misc/RL32808.pdf

 

Page 9:


Table 3 contains the marginal corporate tax rates faced by U.S. firms. Smaller firms face a progressive tax schedule.22 The tax schedule was designed so that most firms face an effective tax rate of 35%. In order to increase the effective tax rate for larger firms, the statutory rate increases above 35% for two brackets: the 39% bracket for income between $100,000 and $335,000 and the 38% bracket for income between $15,000,000 and $18,333,333. Having these "bubble" rates, or higher marginal tax rates along part of the schedule, increases the effective tax rate for higher income corporations. Essentially, these higher "bubble" brackets serve to reduce any tax savings larger corporations would have incurred from having their first $75,000 in income taxed at lower rates.

 

Table 3. Corporate Tax Rate Schedule

Taxable Corporate Income Corporate Tax Rate
$0–$49,999 15%
$50,000–$74,999 25%
$75,000–$99,999 34%
$100,000–$334,999 39%
$335,000–$9,999,999 34%
$10,000,000–$14,999,999 35%
$15,000,000–$18,333,332 38%
$18,333,333 and over; 35%


[162] Report: "2014 Instructions for Form 1120. U.S. Corporation Income Tax Return." U.S. Department of the Treasury, Internal Revenue Service, January 8, 2015. http://www.irs.gov/pub/irs-pdf/i1120.pdf


Page 17:

 

Table 3. Corporate Tax Rate Schedule

Over:— But not over— Tax is: Of the amount over—
$0 $50,000 15% $0
$50,000 $75,000 $7,500 + 25% $50,000
$75,000 $100,000 $13,750 + 34% $75,000
$100,000 $335,000 $22,250 + 39% $100,000
$335,000 $10,000,000 $113,900 + 34% $335,000
$10,000,000 $15,000,000 $3,400,000 + 35% $10,000,000
$15,000,000 $18,333,333 $5,150,000 + 38% $15,000,000
$18,333,333 ------ 35% $0


[163] Calculated with data from the report: "2011 Statistics of Income: Corporation Income Tax Returns." Internal Revenue Service, 2014. http://www.irs.gov/pub/irs-soi/11coccr.pdf


Pages 19–34: "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.


[164] Report: "Facts & Figures 2015: How Does Your State Compare?" By Jared Walczak. Tax Foundation, March 10, 2015. http://taxfoundation.org/…

"Table 8: Sources of State and Local Tax Collections, Percentage of Total from Each Source, Fiscal Year 2012"


[165] 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"


[166] 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"


[167] Publication 544: "Sales and Other Dispositions of Assets, For use in preparing 2014 Returns." Internal Revenue Service, February 3, 2015. http://www.irs.gov/pub/irs-pdf/p544.pdf


Pages 22–23:


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.


[168] 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"


[169] 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"


[170] Glossary: "Understanding Taxes Teacher Site." Internal Revenue Service, 2015. 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."


[171] 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.


[172] Webpage: "Corporations." Internal Revenue Service, November 12, 2014. 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."


[173] "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"


[174] 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."


[175] Report: "Overview of the Federal Tax System." By Molly F. Sherlock and Donald J. Marples. Congressional Research Service, November 21, 2014.
https://www.fas.org/sgp/crs/misc/RL32808.pdf


Page 10:


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.


[176] "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"


[177] Report: "Overview of the Federal Tax System as in Effect for 2014." U.S. Congress, Joint Committee on Taxation, March 28, 2014. https://www.jct.gov/publications.html?func=startdown&id=4568


Pages 2-4: "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.

Dividends are generally taxed at the same rate as capital gains.

[178] 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."


[179] Report: "Overview of the Federal Tax System." By Molly F. Sherlock and Donald J. Marples. Congressional Research Service, November 21, 2014.
https://www.fas.org/sgp/crs/misc/RL32808.pdf


Page 3: "Long-term capital gains—that is, gain on the sale of assets held more than 12 months—and qualified dividend income are taxed at lower tax rates. Net investment income is also subject to an additional tax for taxpayers above certain income thresholds."

Page 5:


Tax Rates

As was noted above, income earned from long-term capital gains and dividends is taxed at lower rates. The maximum rate on long-term capital gains and dividends is 20%. This 20% rate applies to taxpayers in the 39.6% bracket (single filers with taxable income above $406,750; married filers with taxable income above $432,200). Taxpayers in the 25%, 28%, 33%, and 35% tax brackets face a 15% tax rate on long-term capital gains and dividends. The tax rate on capital gains and dividends is 0% for taxpayers in the 10% and 15% tax brackets.


Page 19:


Capital Gains

Under current income tax law, a capital gain or loss can result from the sale or exchange of a capital asset. If the asset is sold for a higher price than its acquisition price, then the sale produces a capital gain. If the asset is sold for a lower price than its acquisition price, then the sale produces a capital loss. Under current law, capital assets held for more 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.


[180] "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.


[181] Report: "Overview of the Federal Tax System as in Effect for 2015." U.S. Congress, Joint Committee on Taxation, March 30, 2015. https://www.jct.gov/publications.html?func=startdown&id=4763


Page 7:

 

A maximum rate applies to capital gains and dividends. For 2015, the maximum rate of tax on the adjusted net capital gain of an individual is 20 percent on any amount of gain that otherwise would be taxed at a 39.6 rate.12 In addition, any adjusted net capital gain otherwise taxed at a 10- or 15-percent rate is taxed at a zero-percent rate. Adjusted net capital gain otherwise taxed at rates greater than 15-percent but less than 39.6 percent is taxed at a 15 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.

12 An additional 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. 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. Thus, for taxpayers with modified adjusted gross income in excess of this threshold, the rate on certain capital gains and dividends is 23.8%.

Net investment income is the excess of (1) the sum of (a) gross income from interest, dividends, annuities, royalties, and rents, other than such income which is derived in the ordinary course of a trade or business that is not a passive activity with respect to the taxpayer or a trade or business of trading in financial instruments or commodities, and (b) net gain (to the extent taken into account in computing taxable income) attributable to the disposition of property other than property held in the active conduct of a trade or business that is not in the trade or business of trading in financial instruments or commodities, over (2) deductions properly allocable to such gross income or net gain.


Page 5: "Table 2.–Federal Individual Income Tax Rates for 2015"

NOTE: The following information is derived from Table 2:

 

Married Individuals Filing Joint Returns and Surviving Spouses
Taxable Income Rate

 

Differential from

previous upper threshold

 

Lower Threshold Upper Threshold
$0 $18,450  10% -
$18,450 $74,900  15% $56,750
$74,900 $151,200  25% $76,300
$151,200 $230,450  28% $79,250
$230,450 $411,500  33% $181,050
$411,500 $464,850 35% $53,350
$464,850 infinity  39.6% infinity


[182] Publication 550: "Investment Income and Expenses (Including Capital Gains and Losses), For use in preparing 2014 returns." Internal Revenue Service, February 12, 2015. http://www.irs.gov/pub/irs-pdf/p550.pdf

Page 70:


Capital Gain Tax Rates

The tax rates that apply to a net capital gain are generally lower than the tax rates that apply to other income. These lower rates are called the maximum capital gain rates.
 

Table 4-4. What Is Your Maximum Capital Gain Rate?

If your net capital gain is from … THEN your maximum

capital gain rate is …

collectibles gain 28%
eligible gain on qualified small business

stock minus the section 1202 exclusion

28%
unrecaptured section 1250 gain 25%
other gain1 and the regular tax

rate that would apply is 39.6%

20%
other gain1 and the regular tax rate that

would apply is 25%, 28%, 33%, or 35%

15%
other gain1 and the regular tax rate

that would apply is 10% or 15%

0%
1"Other gain" means any gain that is not collectibles gain, gain

on small business stock, or unrecaptured section 1250 gain.

 

The term "net capital gain" means the amount by which your net long-term capital gain for the year is more than your net short-term capital loss.

For 2014, the maximum capital gain rates are 0%, 15%, 20%, 25%, and 28%. See Table 4-4 for details. …

28% rate gain. This gain includes gain or loss from the sale of collectibles and the eligible gain from the sale of qualified small business stock minus the section 1202 exclusion.

Collectibles gain or loss. This is gain or loss from the sale or trade of a work of art, rug, antique, metal (such as gold, silver, and platinum bullion), gem, stamp, coin, or alcoholic beverage held more than 1 year.

Collectibles gain includes gain from the sale of an interest in a partnership, S corporation, or trust due to unrealized appreciation of collectibles.

Gain on qualified small business stock. If you realized a gain from qualified small business stock that you held more than 5 years, you generally can exclude some or all of your gain under section 1202. The eligible gain minus your section 1202 exclusion is a 28% rate gain. See Gains on Qualified Small Business Stock, earlier in this chapter.

Unrecaptured section 1250 gain. Generally, this is any part of your capital gain from selling section 1250 property (real property) that is due to depreciation (but not more than your net section 1231 gain), reduced by any net loss in the 28% group. Use the Unrecaptured Section 1250 Gain Worksheet in the Schedule D (Form 1040) instructions to figure your unrecaptured section 1250 gain. For more information about section 1250 property and section 1231 gain, see chapter 3 of Publication 544.

 

[183] Publication 550: "Investment Income and Expenses (Including Capital Gains and Losses), For use in preparing 2014 Returns." Internal Revenue Service, February 12, 2015. http://www.irs.gov/pub/irs-pdf/p550.pdf


Page 5:


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, 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.


[184] Report: "Overview of the Federal Tax System." By Molly F. Sherlock and Donald J. Marples. Congressional Research Service, November 21, 2014.
https://www.fas.org/sgp/crs/misc/RL32808.pdf


Page 3: "Taxable interest income is added to a taxpayer's AGI [adjusted gross income] and taxed according to the taxpayer's marginal tax rate. Interest that is earned on tax-exempt securities, such as those issued by state and local governments, is not subject to taxation."


[185] Webpage: "Find out if Net Investment Income Tax applies to you." IRS, April 13, 2015. http://www.irs.gov/Individuals/Net-Investment-Income-Tax
 

If an individual has income from investments, the individual may be subject to net investment income tax. Effective Jan. 1, 2013, individual taxpayers are liable for a 3.8 percent Net Investment Income Tax on the lesser of their net investment income, or the amount by which their modified adjusted gross income exceeds the statutory threshold amount based on their filing status.

The statutory threshold amounts are:


• Married filing jointly—$250,000,
• Married filing separately—$125,000,
• Single or head of household—$200,000, or
• Qualifying widow(er) with a child—$250,000.


[186] "2014 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, August 28, 2014. http://www.cms.gov/…


Page 22: "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."


[187] Report: "Overview of the Federal Tax System as in Effect for 2014." U.S. Congress, Joint Committee on Taxation, March 28, 2014. https://www.jct.gov/publications.html?func=startdown&id=4568


Pages 8-9:


Tax on net investment income


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.14 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.15

Net investment income is the excess of (1) the sum of (a) gross income from interest, dividends, annuities, royalties, and rents, other than such income which is derived in the ordinary course of a trade or business that is not a passive activity with respect to the taxpayer or a trade or business of trading in financial instruments or commodities, and (b) net gain (to the extent taken into account in computing taxable income) attributable to the disposition of property other than property held in the active conduct of a trade or business that is not in the trade or business of trading in financial instruments or commodities, over (2) deductions properly allocable to such gross income or net gain.

For purposes of this tax, modified adjusted gross income is AGI increased by the amount excluded from income as foreign earned income (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 over the dollar amount at which the highest income tax bracket applicable to an estate or trust begins.16

14 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 Code (relating to income taxes).

15 These amounts are not indexed for inflation.

16 The tax does not apply to a nonresident alien or to a trust in which all the unexpired interests 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.


[188] 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.


[189] 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."


[190] Book: Quantitative Investing for the Global Markets: Strategies, Tactics, and Advanced Analytical Techniques. Edited by Peter Carman. Fitzroy Dearborn Publishers, 1997.


Pages 25-26: "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."


[191] 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.


[192] Report: "Overview of the Federal Tax System as in Effect for 2015." U.S. Congress, Joint Committee on Taxation, March 30, 2015. https://www.jct.gov/publications.html?func=startdown&id=4763


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."


[193] Report: "Overview of the Federal Tax System." By Molly F. Sherlock and Donald J. Marples. Congressional Research Service, November 21, 2014.
https://www.fas.org/sgp/crs/misc/RL32808.pdf


Pages 21–22:


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, taxes are often deferred into the future. This can happen when income is taxed when it is realized, rather than when it accrues or when there is a mismatch between when income is earned and the expenses associated with earning that income. 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.

Income from capital gains can be used to illustrate the benefits of tax deferral. For capital gains, 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%, 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 with no deferral. 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.


[194] 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.


[195] "The Budget and Economic Outlook: 2014 to 2024." Congressional Budget Office, February 4, 2014. https://www.cbo.gov/publication/45010

Supplementary dataset: "Individual Income Tax Receipts and the Individual Tax Base—February 2014 Baseline." https://www.cbo.gov/publication/45065

Table 6: "Actual and Projected Capital Gains Realizations and Tax Receipts … Capital Gains Tax Receipts … (Percentage of individual income tax receipts)… Historical … 2013 [=] 7.9 … Projected 2014 [=] 6.4"


[196] Report: "Overview of the Federal Tax System as in Effect for 2015." U.S. Congress, Joint Committee on Taxation, March 30, 2015. https://www.jct.gov/publications.html?func=startdown&id=4763


Page 24: "Figure A-4.—Sources of Gross Income for All Individual Taxpayers … Source: Joint Committee on Taxation staff projections."


[197] Report: "Fiscal Fact No. 414: The High Burden of State and Federal Capital Gains Tax Rates" By Kyle Pomerleau. Tax Foundation, February 11, 2014. http://taxfoundation.org/…

Page 6: "Table 1. Top Marginal Tax Rate on Capital Gains, by U.S. States, 2014 … State Rate … California 13.3% … Oregon 9.9% … Minnesota 9.9% … Alaska 0% … Florida 0% … Nevada 0% … New Hampshire 0% … South Dakota 0% … Tennessee 0% … Texas 0% … Washington 0% …Wyoming 0%"

[198] Report: "Capital Gains Taxation: Federal and State." By Nina Manzi and Joel Michael. Minnesota House of Representatives, Research Department, June 2014. 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 2013?


• 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 from specific types of assests:

- 16 states and the District of Columbia have preferential treatment of long-term gains on a certain (usually in-state) investments, such as in new business, farmland or other real estate, or low-income housing. Two courts have held [that] restrictions to in-state investments unconstitutionally discriminate against interstate commerce.

- 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


[199] 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.


[200] Report: "Estimates of Federal Tax Expenditures for Fiscal Years 2014–2018." Joint Committee on Taxation, August 5, 2014. https://www.jct.gov/publications.html?func=startdown&id=4663

Page 2:
 

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 detailed lists of tax expenditures annually. 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 USC 601(f).


[201] 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.


[202] 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/…


[203] 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.


[204] 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."


[205] Report: "Estimates of Federal Tax Expenditures for Fiscal Years 2014–2018." Joint Committee on Taxation, August 5, 2014. https://www.jct.gov/publications.html?func=startdown&id=4663


Page 6: "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 13: "The Joint Committee staff and Treasury lists of tax expenditures differ in at least six respects."


[206] 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).


[207] "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."


[208] "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.


[209] Report: "Overview of the Federal Tax System." By Molly F. Sherlock and Donald J. Marples. Congressional Research Service, November 21, 2014.
https://www.fas.org/sgp/crs/misc/RL32808.pdf


Page 7:


Dependent Care Credit14

This credit is provided for the costs of paid care for dependents, mostly children. The maximum credit rate is 35% of costs. The value of the credit is capped at $3,000 for one dependent and $6,000 for two or more dependents. The credit rate is reduced when the taxpayer's adjusted gross income (AGI) exceeds $15,000, but is no less than 20% for higher-income taxpayers.

14 For more, see CRS Report RS21466, Dependent Care: Current Tax Benefits and Legislative Issues.


[210] Webpage: "Investor Bulletin: Municipal Bonds." U.S. Securities and Exchange Commission, June 15, 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.


[211] 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


[212] Report: "Overview of the Federal Tax System as in Effect for 2015." U.S. Congress, Joint Committee on Taxation, March 30, 2015. https://www.jct.gov/publications.html?func=startdown&id=4763


Page 3: "The deductions that may be itemized include … charitable contributions….


[213] Report: "Overview of the Federal Tax System." By Molly F. Sherlock and Donald J. Marples. Congressional Research Service, November 21, 2014.
https://www.fas.org/sgp/crs/misc/RL32808.pdf


Page 8:

 

Higher Education Credits17

 

The Hope credit and the Lifetime Learning credit were added to the code in 1997. The Hope credit has been temporarily replaced by the American Opportunity Tax Credit (AOTC) for 2009 through 2017. The maximum value of the AOTC credit is $2,500 per student annually for the first four years of college. Prior to 2009, the maximum value of the Hope credit was $1,800, limited to the first two years of college. The Hope credit is scheduled to remain available after the AOTC expires at the end of 2017. The AOTC is partially refundable. Both the Hope credit and the AOTC phase out for higher-income individuals.

Additionally, qualified expenditures on tuition and related expenses may qualify taxpayers for the Lifetime Learning credit. The Lifetime Learning credit rate is 20% of costs up to $10,000 for qualified tuition and related expenses. The credit is capped at $2,000. The Lifetime Learning credit is nonrefundable and phases out for higher-income individuals.


[214] "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.


[215] Report: "Estimates of Federal Tax Expenditures for Fiscal Years 2014–2018." Joint Committee on Taxation, August 5, 2014. https://www.jct.gov/publications.html?func=startdown&id=4663


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.


[216] Report: "The Alternative Minimum Tax for Individuals: A Growing Burden." By Kurt Schuler. U.S. Congress, Joint Economic Committee, May 2001. http://taxpolicycenter.org/TaxFacts/papers/amt.pdf


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."


[217] Report: "Overview of the Federal Tax System." By Molly F. Sherlock and Donald J. Marples. Congressional Research Service, November 21, 2014.
https://www.fas.org/sgp/crs/misc/RL32808.pdf


Page 7: "If a tax credit is refundable, and the credit amount exceeds tax liability, a taxpayer receives a payment from the government."


[218] Report: "Options for Reducing the Deficit: 2015 to 2024." Congressional Budget Office, November 20, 2014. http://www.cbo.gov/budget-options/2014

Page 38:


Low- and moderate-income people are eligible for certain refundable tax credits under the individual income tax if they meet specified criteria. If the amount of a refundable tax credit exceeds a taxpayer's tax liability before that credit is applied, the government pays the excess to that person. Two refundable tax credits are available only to workers: the earned income tax credit (EITC) and the refundable portion of the child tax credit (referred to in the tax code as the additional child tax credit).


[219] Report: "Overview of the Federal Tax System as in Effect for 2015." U.S. Congress, Joint Committee on Taxation, March 30, 2015. https://www.jct.gov/publications.html?func=startdown&id=4763


Pages 7–8:


The individual may reduce his or her tax liability by any available tax credits. … 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 2015, the maximum EITC is $6,242 for taxpayers with more than two qualifying children, $5,548 for taxpayers with two qualifying children, $3,359 for taxpayers with one qualifying child, and $503 for taxpayers with no qualifying children.

[220] Calculated with data from the report: "The Distribution of Household Income and Federal Taxes, 2011." Congressional Budget Office, November 12, 2014. https://www.cbo.gov/…


Pages 9–10: "In 2011, households in the lowest quintile of before-tax income had an average tax rate for the individual income tax of -7.5 percent, and households in the second quintile had a rate of -1.3 percent, CBO estimates. (An income quintile has a negative average income tax rate if refundable tax credits in that quintile exceed other income tax liabilities.)"

Page 12: "Negative average tax rates for individual income taxes result when refundable tax credits, such as the earned income tax credit and the child tax credit, exceed the other income tax liabilities of the households in an income group."

Page 10: "Table 1. Average Household Income, Transfers, and Taxes, by Before-Tax Income Group, 2011 … Before-Tax Income (Dollars) … Lowest Quintile [=] 24,600"

CALCULATION: $24,600 × 7.5% = $1,845


[221] "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."


[222] Report: "Overview of Private Health Insurance Provisions in the Patient Protection and Affordable Care Act (ACA)" By Annie L. Mach. Congressional Research Service, April 23, 2013. https://www.fas.org/sgp/crs/misc/R43048.pdf


Page 11:


Premium Tax Credits

Certain individuals who obtain coverage through an exchange will be eligible to receive health insurance premium tax credits. Premium tax credits are generally available to individuals who


• purchase nongroup coverage through an exchange;
• have household income22 between 100% and 400% of the federal poverty level (FPL);23
• are not eligible for minimum essential coverage;24 and
• are U.S. citizens (or legally residing in the United States).


To receive a premium tax credit, individuals also must be part of a tax-filing unit, as the credits are administered through federal income tax returns.

While the tax credits are generally directed at individuals who do not have access to coverage outside the nongroup market, certain individuals with access to employer-sponsored insurance (ESI) may be eligible for premium tax credits.

[223] 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.


[224] Webpage: "2015 HHS Poverty Guidelines." U.S. Department of Health & Human Services. Last revised January 22, 2015. http://aspe.hhs.gov/poverty/15poverty.cfm

"Persons in Family [=] 3 … 48 Contiguous States and D.C. [=] $20,090 … Alaska [=] $25,120 … Hawaii [=] $23,110"
CALCULATION: $20,090 × 400% = $80,360

"Persons in Family [=] 4 … 48 Contiguous States and D.C. [=] $24,250 … Alaska [=] $30,320 … Hawaii [=] $27,890"
CALCULATION: $24,250 × 400% = $97,000

"Persons in Family [=] 5 … 48 Contiguous States and D.C. [=] $28,410 … Alaska [=] $35,520 … Hawaii [=] $32,670"
CALCULATION: $28,410 × 400% = $113,640


[225] Report: "Heath Insurance Marketplace 2015: Average Premiums After Advance Premium Tax Credits Through January 30 in 37 States Using the HealthCare.gov Platform." By Arpit Misra and Thomas Tsai. U.S. Department of Health and Human Services, Office of Assistant Secretary for Planning and Evaluation, February 9, 2015. http://aspe.hhs.gov/…

Page 2: "In the 37 States using the HealthCare.gov platform from November 15, 2014 through January 30, 2015, among consumers who selected or were re-enrolled in a plan for 2015 coverage: … Almost 6.5 million individuals qualify for an average advance premium tax credit of $268 per month."

CALCULATION: $268 × 12 = $3,216


[226] 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."


[227] 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.


[228] 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…."


[229] Webpage: "Ten Facts About the Child Tax Credit." Internal Revenue Service, January 21, 2015. http://www.irs.gov/…
 

The Child Tax Credit is an important tax credit that may be worth as much as $1,000 per qualifying child depending upon your income. Here are 10 important facts from the IRS about this credit and how it may benefit your family.


1. Amount—With the Child Tax Credit, you may be able to reduce your federal income tax by up to $1,000 for each qualifying child under the age of 17.


2. Qualification—A qualifying child for this credit is someone who meets the qualifying criteria of six tests: age, relationship, support, dependent, citizenship, and residence.


3. Age Test—To qualify, a child must have been under age 17—age 16 or younger—at the end of 2010.


4. Relationship Test—To claim a child for purposes of the Child Tax Credit, they must either be your son, daughter, stepchild, foster child, brother, sister, stepbrother, stepsister or a descendant of any of these individuals, which includes your grandchild, niece or nephew. An adopted child is always treated as your own child. An adopted child includes a child lawfully placed with you for legal adoption.


5. Support Test—In order to claim a child for this credit, the child must not have provided more than half of their own support.


6. Dependent Test—You must claim the child as a dependent on your federal tax return.


7. Citizenship Test—To meet the citizenship test, the child must be a U.S. citizen, U.S. national, or U.S. resident alien.


8. Residence Test—The child must have lived with you for more than half of 2010. There are some exceptions to the residence test, which can be found in IRS Publication 972, Child Tax Credit.


9. Limitations—The credit is limited if your modified adjusted gross income is above a certain amount. The amount at which this phase-out begins varies depending on your filing status. For married taxpayers filing a joint return, the phase-out begins at $110,000. For married taxpayers filing a separate return, it begins at $55,000. For all other taxpayers, the phase-out begins at $75,000. In addition, the Child Tax Credit is generally limited by the amount of the income tax you owe as well as any alternative minimum tax you owe.


10. Additional Child Tax Credit—If the amount of your Child Tax Credit is greater than the amount of income tax you owe, you may be able to claim the Additional Child Tax Credit.


[230] "2010 Annual Report to Congress." Internal Revenue Service, Taxpayer Advocate Service, December 31, 2010. http://www.irs.gov/…

Executive Summary: Preface & Highlights: "The Most Serious Problems Encountered by Taxpayers." http://www.irs.gov/pub/tas/execsummary_2010arc.pdf

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.


[231] 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: "Table A-1.—Summary of Estimated Budget Effects of the Act (H.R. 3838), Fiscal Years 1987-1991) [Millions of dollars] … Grand total … 1987-91 [=] -257"


[232] Calculated with data from:


a) Dataset: "The Distribution of Household Income and Federal Taxes, 2011." Congressional Budget Office, November 12, 2014. http://www.cbo.gov/…


b) Report: "The Distribution of Household Income and Federal Taxes, 2011." Congressional Budget Office, November 12, 2014. https://www.cbo.gov/…


Page 1: "Federal taxes as examined in this report comprise four separate sources: individual income taxes, payroll (or social insurance) taxes, corporate income taxes, and excise taxes."

Page 5:


For this analysis, federal taxes include individual income taxes, payroll taxes, corporate income taxes, and excise taxes, which together accounted for approximately 92 percent of all federal revenues in fiscal year 2011. Revenues from states' deposits for unemployment insurance, estate and gift taxes, miscellaneous fees and fines, and net income earned by the Federal Reserve, which make up the remaining 8 percent, are not allocated to households in this analysis, mainly because it is uncertain to which households those revenue sources should be attributed.


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


[233] 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."


[234] "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.


[235] 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.


[236] 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


[237] Report: "High-Income Tax Returns for 2011." By Justin Bryan. IRS, Statistics of Income Bulletin, Spring 2014. http://www.irs.gov/pub/irs-soi/14insprbulhignincome.pdf


Pages 63–64:


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.


[238] Calculated with data from the report: "2011 Statistics of Income: Corporation Income Tax Returns." Internal Revenue Service, 2014. http://www.irs.gov/pub/irs-soi/11coccr.pdf

Pages 19–34: "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, accommodation and food services, educational services, and health care and social assistance) are all between 34% and 37%.

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


[239] 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.


[240] 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."


[241] 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.


[242] 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.


[243] Report: "The Alternative Minimum Tax for Individuals: A Growing Burden." By Kurt Schuler. U.S. Congress, Joint Economic Committee, May 2001. http://taxpolicycenter.org/TaxFacts/papers/amt.pdf


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.


[244] 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.


[245] Report: "Overview of the Federal Tax System as in Effect for 2015." U.S. Congress, Joint Committee on Taxation, March 30, 2015. https://www.jct.gov/publications.html?func=startdown&id=4763


Pages 6-7:


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. For 2015, the tentative minimum tax is the sum of (1) 26 percent of so much of the taxable excess as does not exceed $185,400 ($92,700 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 breakpoint between the 26-percent and 28-percent bracket is indexed for inflation. 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 for 2015 are: (1) $83,400 in the case of married individuals filing a joint return and surviving spouses; (2) $53,600 in the case of other unmarried individuals; (3) $41,700 in the case of married individuals filing separate returns; and (4) $23,800 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) $158,900 in the case of married individuals filing a joint return and surviving spouses, (2) $119,200 in the case of other unmarried individuals, and (3) $79,450 in the case of married individuals filing separate returns or an estate or a trust. These amounts are indexed for inflation.

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.
 

[246] Report: "The 2014 Long-Term Budget Outlook." Congressional Budget Office, July 15, 2014. https://www.cbo.gov/publication/45471

Page 64:

 

The alternative minimum tax is a parallel income tax system with fewer exemptions, deductions, and rates than the regular income tax. Households must calculate the amount they owe under both the alternative minimum tax and the regular income tax and pay the larger of the two amounts. The American Taxpayer Relief Act raised the exemption amounts for the AMT for 2012 and, beginning in 2013, permanently indexed those exemption amounts for inflation. Also indexed for inflation were the income thresholds at which those exemptions phase out and the income threshold at which the second rate bracket for the AMT begins. Although rising real income would gradually make more taxpayers subject to the AMT, many of those newly affected would owe only slightly more than their regular income tax liability.

[247] 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.


[248] 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.


[249] Report: "The Alternative Minimum Tax for Individuals: A Growing Burden." By Kurt Schuler. U.S. Congress, Joint Economic Committee, May 2001. http://taxpolicycenter.org/TaxFacts/papers/amt.pdf


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."


[250] 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."


[251] Report: "The 2014 Long-Term Budget Outlook." Congressional Budget Office, July 15, 2014. https://www.cbo.gov/publication/45471


Page 64:


Slightly more taxpayers would become subject to the alternative minimum tax (AMT) over time, although the share of taxpayers who would pay the alternative tax was greatly limited by the American Taxpayer Relief Act of 2012.10

10 The alternative minimum tax is a parallel income tax system with fewer exemptions, deductions, and rates than the regular income tax. Households must calculate the amount they owe under both the alternative minimum tax and the regular income tax and pay the larger of the two amounts. The American Taxpayer Relief Act raised the exemption amounts for the AMT for 2012 and, beginning in 2013, permanently indexed those exemption amounts for inflation. Also indexed for inflation were the income thresholds at which those exemptions phase out and the income threshold at which the second rate bracket for the AMT begins. Although rising real income would gradually make more taxpayers subject to the AMT, many of those newly affected would owe only slightly more than their regular income tax liability.


[252] Report: "The Budget and Economic Outlook: 2015 to 2025." Congressional Budget Office, January 26, 2015. https://www.cbo.gov/publication/49892

Page 94:


The most significant factor pushing up taxes relative to income is real bracket creep. That phenomenon occurs because the income tax brackets and exemptions under both the regular income tax and the alternative minimum tax (AMT) are indexed only to inflation.2 If incomes grow faster than inflation, as generally occurs when the economy is growing, more income is pushed into higher tax brackets. In CBO's estimates, real bracket creep raises revenues relative to GDP by 0.2 percentage points between 2014 and 2016.

[253] 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://taxpolicycenter.org/TaxFacts/papers/amt.pdf

Page 3: "Table 1. Basic data and projections on the alternative minimum tax for individuals"


b) Report: "Individual Income Tax Rates and Shares, 2011." By Adrian Dungan and Michael Parisi. IRS, Statistics of Income Bulletin, Spring 2014. http://www.irs.gov/pub/irs-soi/14insprbultaxrateshares.pdf
Page 6: "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 14: "Figure F: Alternative Minimum Tax, Tax Years 1986–2011 [Tax rates are in percentages—money amounts are in thousands of dollars]"


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.


[254] Report: "The Alternative Minimum Tax for Individuals: A Growing Burden." By Kurt Schuler. U.S. Congress, Joint Economic Committee, May 2001. http://taxpolicycenter.org/TaxFacts/papers/amt.pdf


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.


[255] "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.


[256] 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.


[257] 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.


[258] Report: "The Alternative Minimum Tax for Individuals: A Growing Burden." By Kurt Schuler. U.S. Congress, Joint Economic Committee. May, 2001. http://taxpolicycenter.org/TaxFacts/papers/amt.pdf


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.


[259] 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.


[260] Report: "The Alternative Minimum Tax for Individuals: A Growing Burden." By Kurt Schuler. U.S. Congress, Joint Economic Committee. May, 2001. http://taxpolicycenter.org/TaxFacts/papers/amt.pdf


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.


[261] 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).


[262] 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%


[263] "CPI Inflation Calculator." Bureau of Labor Statistics. Accessed April 28, 2015 at http://www.bls.gov/data/inflation_calculator.htm


"$200,000 in 1967 has the same buying power as $1,405,520.96 in 2011"


[264] Calculated with data from the report: "Individual Income Tax Rates and Shares, 2011." By Adrian Dungan and Michael Parisi. IRS, Statistics of Income Bulletin, Spring 2014. http://www.irs.gov/pub/irs-soi/14insprbultaxrateshares.pdf

Page 6: "Figure A: Total Number of Returns, and Selected Income and Tax Items for Taxable Returns, Tax Years 1986–2011. [Money amounts are in billions of dollars, except where indicated] … Tax Year 2011 … Number of taxable returns [=] 91,694,201"

Page 14: "Figure F: Alternative Minimum Tax, Tax Years 1986–2011 [Tax rates are in percentages—money amounts are in thousands of dollars] … Tax Year 2011 … Number of AMT returns [=] 4,248,183"

CALCULATION: 4,248,183 / 91,694,201 = 4.6%


[265] Calculated with data from the report: "Individual Income Tax Rates and Shares, 2011." By Adrian Dungan and Michael Parisi. IRS, Statistics of Income Bulletin, Spring 2014. http://www.irs.gov/pub/irs-soi/14insprbultaxrateshares.pdf


Page 13: "Figure E: Returns with Alternative Minimum Tax Computation Reported on Form 6251: Total Adjustments and Preferences, and Alternative Minimum Taxable Income and Tax, by Size of Adjusted Gross Income, Tax Years 2010 and 2011 [Money amounts are in thousands of dollars]"


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


[266] Report: "High-Income Tax Returns for 2011." By Justin Bryan. IRS, Statistics of Income Bulletin, Spring 2014. http://www.irs.gov/pub/irs-soi/14insprbulhignincome.pdf


Page 51:


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 The expanded income concept 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 (AMT) 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. …

For 2011, the number of expanded-income returns over $200,000 increased 9.4 percent to almost 4.8 million returns. Of these, 15,000 returns had no worldwide income tax liability. This was a 6.7-percent decline in the number of returns with no worldwide income tax liability from 2010, and the second decrease in a row since reaching an all-time high of 19,551 returns in 2009. (For comparison, the total number returns filed increased 1.7 percent from 2009 to 2010 and again from 2010 to 2011.) Tax-exempt interest was the primary reason for nontaxability on more than half (58.2 percent) of these returns.
 

Page 67:


Two tax concepts are used in this article to classify tax returns as taxable (i.e., returns showing an income tax liability) or nontaxable (i.e., returns showing no income tax liability) and to measure the tax burdens on taxable returns: U.S. income tax and worldwide income tax. Worldwide income tax is defined for purposes of this article as U.S. income tax, plus the foreign tax credits reported on the U.S. income tax return and foreign taxes paid on excluded foreign-earned income (obtained from Form 1116, Foreign Tax Credit).
 

Page 59: "On returns without any worldwide tax and expanded income of $200,000 or more, the most important item in eliminating tax, on 58.2 percent of returns, was the exclusion for State and local Government interest ('tax-exempt interest') (Table 8)."

 

Page 63: "[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."


[267] Webpage: "Investor Bulletin: Municipal Bonds." U.S. Securities and Exchange Commission, June 15, 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.


[268] 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"


[269] 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."


[270] Form 9452: "Filing Assistance Program." Internal Revenue Service, 2014. 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)"


[271] 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


[272] Report: "High-Income Tax Returns for 2011." By Justin Bryan. IRS, Statistics of Income Bulletin, Spring 2014. http://www.irs.gov/pub/irs-soi/14insprbulhignincome.pdf


Page 59: "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."


[273] 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


[274] Report: "High-Income Tax Returns for 2011." By Justin Bryan. IRS, Statistics of Income Bulletin, Spring 2014. http://www.irs.gov/pub/irs-soi/14insprbulhignincome.pdf


Page 63:


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.


[275] 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.


[276] Report: "The 2014 Long-Term Budget Outlook." Congressional Budget Office, July 15, 2014. https://www.cbo.gov/publication/45471


Page 56: "CBO's baseline and extended baseline are meant to be benchmarks for measuring the budgetary effects of legislation, so they mostly reflect the assumption that current laws remain unchanged."


Page 66:


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 would tend to decline relative to income over time under current law. One consequence is that, under the extended baseline, average federal tax rates would increase in the long run.


[277] Report: "The 2014 Long-Term Budget Outlook." Congressional Budget Office, July 15, 2014. https://www.cbo.gov/publication/45471


Page 56: "CBO's baseline and extended baseline are meant to be benchmarks for measuring the budgetary effects of legislation, so they mostly reflect the assumption that current laws remain unchanged."

Page 66:


The cumulative effect of rising prices would significantly reduce the value of some parameters of the tax system that are not indexed for inflation. As one example, CBO estimates that the amount of mortgage debt eligible for the mortgage interest deduction, which is not indexed for inflation, would fall from $1 million today to less than $600,000 in 2039 measured in today's dollars. As another example, the portion of Social Security benefits subject to taxation would increase from about 30 percent now to about 50 percent by 2039, CBO estimates, because the thresholds for taxing benefits are not indexed for inflation.

Even tax parameters that are indexed for inflation would lose value relative to income over the long term under the extended baseline. For example, according to CBO's projections, the current $3,950 personal exemption would rise by more than 80 percent by 2039 because it is indexed for inflation, but income per household would more than double during that period, so the value of the exemption relative to income would decline by more than 30 percent. If income grew at similar rates for higher income and lower-income taxpayers, the decline in the value of the personal exemption relative to income would tend to boost the average tax rates of lower-income taxpayers more than the average tax rates of other taxpayers because the personal exemption is larger relative to income for lower-income taxpayers. As another example, without legislative changes, the proportion of taxpayers claiming the earned income tax credit is projected to fall from 16 percent this year to 13 percent in 2039 as growth in real income would move 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 by varying amounts over time for households at different points in the income distribution. According to CBO's analysis, a married couple with two children earning the median income of $100,900 (including both cash income and other compensation) in 2014 and filing a joint tax return would pay about 4 percent of their income in individual income taxes (see Table 5-3).13 By 2039, under current law, a similar couple earning the median income would pay 7 percent of their income in individual income taxes, an increase of 3 percentage points.


Page 67: "Table 5-3. Individual Income and Payroll Taxes as a Share of Total Income Under CBO's Extended Baseline Scenario … Married Couple (With Two Children) Filing a Joint Returnc … Median Total Income … Taxes as a Share of Total Income (Percent) … Income and Payroll Taxesb … 2014 [=] 16 … 2039 [=] 19 … b. Payroll taxes include the share paid by employers. … c. The examples for a married couple reflect the assumption that the spouses earn the same amount."

CALCULATION: (19 -16) / 16 = 19%


[278] Calculated with the dataset: "The 2014 Long-Term Budget Outlook." Congressional Budget Office, July 15, 2014.
https://www.cbo.gov/…

 

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


[279] 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.


[280] Report: "The 2014 Long-Term Budget Outlook." Congressional Budget Office, July 15, 2014. https://www.cbo.gov/publication/45471


Page 66: "The portion of Social Security benefits subject to taxation would increase from about 30 percent now to about 50 percent by 2039, CBO estimates, because the thresholds for taxing benefits are fixed in nominal terms."


[281] Report: "The 2014 Long-Term Budget Outlook." Congressional Budget Office, July 15, 2014. https://www.cbo.gov/publication/45471


Page 66: "The cumulative effect of rising prices would significantly reduce the value of some parameters of the tax system that are not indexed for inflation. As one example, CBO estimates that the amount of mortgage debt eligible for the mortgage interest deduction, which is not indexed for inflation, would fall from $1 million today to less than $600,000 in 2039 measured in today's dollars."


[282] Report: "The 2014 Long-Term Budget Outlook." Congressional Budget Office, July 15, 2014. https://www.cbo.gov/publication/45471


Page 60: "Revenues derived from excise taxes have declined over time relative to GDP because many excise taxes are levied on the quantity of a good purchased (such as a gallon of gasoline) as opposed to a percentage of the price paid. Because those levies are not indexed for inflation, revenues have declined relative to GDP as prices have risen over time."


[283] "2014 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, August 28, 2014. http://www.cms.gov/…


Page 11: "Starting in 2013, high-income workers 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)."


[284] Report: "Overview of the Federal Tax System as in Effect for 2015." U.S. Congress, Joint Committee on Taxation, March 30, 2015. https://www.jct.gov/publications.html?func=startdown&id=4763


Pages 14–15:
 

The employee portion of the HI [Hospital Insurance] tax is increased by an additional tax of 0.9 percent on wages received in excess of a specific threshold amount.27 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, $125,000 in the case of a married individual filing a separate return, and $200,000 in any other case (unmarried individual, head of household or surviving spouse).28

The same additional HI tax applies to the HI portion of SECA [Self-Employment Contributions Act] 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.29

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

28 These threshold amounts are not indexed for inflation.

29 Sec. 1402(b).


[285] Webpage: "Questions and Answers on the Net Investment Income Tax." Internal Revenue Service. Last updated or reviewed November 30, 2014. http://www.irs.gov/…
 

The Net Investment Income Tax is imposed by section 1411 of the Internal Revenue Code. The NIIT applies at a rate of 3.8% to certain net investment income of individuals, estates and trusts that have income above the statutory threshold amounts. …

The Net Investment Income Tax went into effect on Jan. 1, 2013. The NIIT affects income tax returns of individuals, estates and trusts, beginning with their first tax year beginning on (or after) Jan. 1, 2013. It does not affect income tax returns for the 2012 taxable year filed in 2013. …

Individuals will owe the tax if they have Net Investment Income and also have modified adjusted gross income over the following thresholds:

Filing Status; Threshold Amount;
Married filing jointly; $250,000;
Married filing separately; $125,000;
Single; $200,000;
Head of household (with qualifying person); $200,000;
Qualifying widow(er) with dependent child; $250,000;

Taxpayers should be aware that these threshold amounts are not indexed for inflation.


[286] "2014 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, August 28, 2014. http://www.cms.gov/…


Page 22: "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."


[287] 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)"


[288] Report: "The 2014 Long-Term Budget Outlook." Congressional Budget Office, July 15, 2014. https://www.cbo.gov/publication/45471


Page 56: "CBO's baseline and extended baseline are meant to be benchmarks for measuring the budgetary effects of legislation, so they mostly reflect the assumption that current laws remain unchanged."

Page 60:


Some of the variation in the amounts of revenue generated by different types of taxes has stemmed from changes in economic conditions and from the way those changes interact with the tax code. For example, in the absence of legislated tax reductions, receipts from individual income taxes tend to grow relative to GDP because rising real income tends to push a greater share of income into higher tax brackets—a phenomenon known as real bracket creep. In addition, because some parameters of the tax system are not indexed to increase with inflation, rising prices alone push a greater share of income into higher tax brackets.3

3 The parameters of the tax system include the amounts that define the various tax brackets; the amounts of the personal exemption, standard deductions, and credits; and tax rates. Many of the parameters—including the personal exemption, standard deduction, and tax brackets—are indexed for inflation, but some, such as the amount of the maximum child tax credit, are not. The effect of price increases on tax receipts was much more significant before 1984 when none of the parameters of the individual income tax were indexed for inflation.


Page 66:


Even tax parameters that are indexed for inflation would lose value relative to income over the long term under the extended baseline. For example, according to CBO's projections, the current $3,950 personal exemption would rise by more than 80 percent by 2039 because it is indexed for inflation, but income per household would more than double during that period, so the value of the exemption relative to income would decline by more than 30 percent. If income grew at similar rates for higher income and lower-income taxpayers, the decline in the value of the personal exemption relative to income would tend to boost the average tax rates of lower-income taxpayers more than the average tax rates of other taxpayers because the personal exemption is larger relative to income for lower-income taxpayers. As another example, without legislative changes, the proportion of taxpayers claiming the earned income tax credit is projected to fall from 16 percent this year to 13 percent in 2039 as growth in real income would move more taxpayers out of the eligibility range for the credit.


[289] Report: "The 2014 Long-Term Budget Outlook." Congressional Budget Office, July 15, 2014. https://www.cbo.gov/publication/45471


Page 56: "CBO's baseline and extended baseline are meant to be benchmarks for measuring the budgetary effects of legislation, so they mostly reflect the assumption that current laws remain unchanged."

Page 66: "Even tax parameters that are indexed for inflation would lose value relative to income over the long term under the extended baseline. … As another example, without legislative changes, the proportion of taxpayers claiming the earned income tax credit is projected to fall from 16 percent this year to 13 percent in 2039 as growth in real income would move more taxpayers out of the eligibility range for the credit."
 

[290] Report: "The 2014 Long-Term Budget Outlook." Congressional Budget Office, July 15, 2014. https://www.cbo.gov/publication/45471

Page 1: "A number of aspects of the Federal tax laws are subject to change over time. For example, some dollar amounts and income thresholds are indexed for inflation. The standard deduction, tax rate brackets, and the annual gift tax exclusion are examples of amounts that are indexed for inflation."
 

[291] 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."


[292] 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.


[293] 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. Updated 11/8/12. 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.


[294] 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.


[295] "National Debt Facts." By James D. Agresti. Just Facts, April 26, 2011. Updated 8/3/12. http://www.justfacts.com/nationaldebt.asp#media-nothing


[296] 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.


[297] Webpage: "Tax Code, Regulations and Official Guidance." Internal Revenue Service. Last reviewed or updated on February 6, 2015. 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.


[298] U.S. Code Title 26: "Internal Revenue Service." United States House of Representatives, Office of the Law Revision Counsel. Accessed May 5, 2015 at http://uscode.house.gov/…

NOTE: The full printed code is 10,615 pages. Just Facts converted this code into a Microsoft Word file to ascertain page count, font, and page size.

[299] "2012 Annual Report to Congress." Internal Revenue Service, Taxpayer Advocate Service, December 31, 2012. http://www.taxpayeradvocate.irs.gov/…

Chapter 1: "The Complexity of the Tax Code." http://www.taxpayeradvocate.irs.gov/…

Page 6:


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.


[300] Webpage: "Tax Code, Regulations and Official Guidance." Internal Revenue Service. Last reviewed or updated on February 6, 2015. 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."


[301] 2012 Code of Federal Regulations: "Title 26—Internal Revenue." U.S. Government Printing Office. Accessed May 4, 2015 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 14,084 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.


[302] 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 is a codification of the general and permanent rules published in the Federal Register by the Executive departments and agencies of the Federal Government. The Code is divided into 50 titles which represent broad areas subject to Federal regulation. Each title is divided into chapters which usually bear the name of the issuing agency. Each chapter is further subdivided into parts covering specific regulatory areas.


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.


[303] "2012 Annual Report to Congress." Internal Revenue Service, Taxpayer Advocate Service, December 31, 2012. http://www.taxpayeradvocate.irs.gov/…

Chapter 1: "The Complexity of the Tax Code." http://www.taxpayeradvocate.irs.gov/…

Page 5:


According to a TAS [Taxpayer Advocate Service] analysis of IRS data, individuals and businesses spend about 6.1 billion hours a year complying with the filing requirements of the Internal Revenue Code.7 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.

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.8

7 The TAS Research function arrived at this estimate by multiplying the number of copies of each form filed for tax year 2010 by the average amount of time the IRS estimated it took to complete the form. While the IRS's 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.

8 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).


[304] Calculated with data from the footnote above and the dataset: "Table H3. Households by Race and Hispanic Origin of Household Reference Person and Detailed Type: 2012." U.S. Census Bureau, February 2014. www.census.gov/…

"Total households [=] 121,084,000"

CALCULATION: 6,100,000,000 hours / 121,084,000 households = 50.4 hours/household


[305] "2012 Annual Report to Congress." Internal Revenue Service, Taxpayer Advocate Service, December 31, 2012. http://www.taxpayeradvocate.irs.gov/…


Chapter 1: "The Complexity of the Tax Code." http://www.taxpayeradvocate.irs.gov/…


Pages 5-6:


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 2010 amounted to $168 billion—or a staggering 15 percent of aggregate income tax receipts.9

9 The IRS and several outside analysts have attempted to quantify the costs of tax 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 tax code. … TAS estimated the cost of complying with personal and business income tax requirements (and thus excluding the time spent complying with employment, estate and gift, excise, and exempt organization tax requirements) by multiplying the total number of such hours (5.648 billion) by the average hourly cost of a civilian employee ($29.72), as reported by the Bureau of Labor Statistics. … TAS estimated compliance costs as a percentage of total income tax receipts for 2010 by dividing the income tax compliance cost as computed above ($168 billion) by total 2010 income tax receipts ($1.09 trillion). … TAS's estimate that compliance costs amount to about 15 percent of aggregate income tax receipts falls within the range of some previous estimates. For example, Professor Joel Slemrod computed that compliance costs constitute about 13 percent of receipts, while the Tax Foundation computed that compliance costs constitute about 22 percent of income tax receipts.


[306] 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/…


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.


[307] 2014 Internal Revenue Service Data Book. Internal Revenue Service, March 2015. http://www.irs.gov/pub/irs-soi/14databk.pdf


Table of Contents page: "This report describes activities conducted by the Internal Revenue Service during Fiscal Year 2014 (October 1, 2013, through September 30, 2014)."

Page 65: "IRS's actual expenditures for Fiscal Year (FY) 2014 were $11.6 billion for overall operations in FY 2014, down slightly from FY 2013…."

Page 70:


Table 31. Internal Revenue Service Labor Force, Compared to National Totals for Federal and Civilian Labor Forces, by Gender, Race/Ethnicity, and Disability, Fiscal Year 2014 … Internal Revenue Service, number of employees1 … Total [=] 91,018

1 Includes total full-time, part-time, and seasonal personnel employed by the Internal Revenue Service, including IRS Chief Counsel, during Fiscal Year 2014, i.e., October 1, 2013, through September 30, 2014.


[308] "2010 Annual Report to Congress." Internal Revenue Service, Taxpayer Advocate Service, December 31, 2010. http://www.taxpayeradvocate.irs.gov/…

 

Executive Summary 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.


[309] 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)"


[310] 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.


[311] 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/tas/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."


[312] 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 May 5, 2015 at http://www.bls.gov/data/inflation_calculator.htm

"$385 in 2006 has the same buying power as $452.10 in 2014"


CALCULATION: 452,100,000,000 tax gap / 114,384,000 households = $3,952 / household


[313] 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).


[314] 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."


[315] Report: "The Alternative Minimum Tax for Individuals: A Growing Burden." By Kurt Schuler. U.S. Congress, Joint Economic Committee. May, 2001. http://taxpolicycenter.org/TaxFacts/papers/amt.pdf


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."


[316] Report: "Overview of the Federal Tax System." By Molly F. Sherlock and Donald J. Marples. Congressional Research Service, November 21, 2014.
https://www.fas.org/sgp/crs/misc/RL32808.pdf


Page 7: "If a tax credit is refundable, and the credit amount exceeds tax liability, a taxpayer receives a payment from the government."


[317] Report: "Options for Reducing the Deficit: 2015 to 2024." Congressional Budget Office, November 20, 2014. http://www.cbo.gov/budget-options/2014


Page 38:


Low- and moderate-income people are eligible for certain refundable tax credits under the individual income tax if they meet specified criteria. If the amount of a refundable tax credit exceeds a taxpayer's tax liability before that credit is applied, the government pays the excess to that person. Two refundable tax credits are available only to workers: the earned income tax credit (EITC) and the refundable portion of the child tax credit (referred to in the tax code as the additional child tax credit).


[318] 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.


[319] Report: "Existing Compliance Processes Will Not Reduce the Billions of Dollars in Improper Earned Income Tax Credit and Additional Child Tax Credit Payments." Treasury Inspector General for Tax Administration, September 29, 2014. http://www.treasury.gov/…

Page 15:
 

Compliance resources are limited, and additional alternatives to traditional compliance methods have not been developed. Consequently, the IRS does not address the majority of potentially erroneous EITC [Earned Income Tax Credit] claims. …

In addition to limited compliance resources and the reliance on traditional compliance methods, statutory requirements further limit the IRS's ability to ensure that EITC claims are valid before they are paid. The Internal Revenue Code requires the IRS to process tax returns and pay any related tax refunds within 45 calendar days of receipt of the tax return or the tax return due date, whichever is later. Because of this requirement, the IRS cannot conduct extensive eligibility checks similar to those that occur with other Federal programs that typically certify eligibility prior to the issuance of payments or benefits.

 

[320] "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."


[321] 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."


[322] 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."


[323] Report: "Overview of the Federal Tax System as in Effect for 2015." U.S. Congress, Joint Committee on Taxation, March 30, 2015. https://www.jct.gov/publications.html?func=startdown&id=4763


Pages 7–8:


An individual may reduce his or her tax liability by any available tax credits. In some instances, a permissible credit is "refundable," i.e., it may result in a refund in excess of any credits for withheld taxes or estimated tax payments available to the individual. …


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 2015, the maximum EITC is $6,242 for taxpayers with more than two qualifying children, $5,548 for taxpayers with two qualifying children, $3,359 for taxpayers with one qualifying child, and $503 for taxpayers with no qualifying children.


[324] Report: "Improper Payments: Government-wide estimates and reduction strategies." By Beryl H. Davis (Director, Financial Management and Assurance). United States Government Accountability Office, July 9, 2014. http://www.gao.gov/assets/670/664692.pdf

Page 1:


It is important to note that reported improper payment estimates may or may not represent a loss to the government. For example, errors consisting of insufficient or lack of documentation for a payment are included in the improper payment estimates. …

An improper payment is defined by statute 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, any 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 4: "Table 1: Improper Payment Dollar Estimates: Five Programs with the Highest Reported Amounts in Fiscal Year 2013 … Earned Income Tax Credit … Dollars (in billions) [=] 14.5 … Error rate (percentage of outlays) [=] 24.0"


[325] 2014 Internal Revenue Service Data Book. Internal Revenue Service, March 2015. http://www.irs.gov/pub/irs-soi/14databk.pdf


Table of Contents page: "This report describes activities conducted by the Internal Revenue Service during Fiscal Year 2014 (October 1, 2013, through September 30, 2014)."

Page 65: "IRS's actual expenditures for Fiscal Year (FY) 2014 were $11.6 billion for overall operations in FY 2014, down slightly from FY 2013…."


[326] Report: "Existing Compliance Processes Will Not Reduce the Billions of Dollars in Improper Earned Income Tax Credit and Additional Child Tax Credit Payments." Treasury Inspector General for Tax Administration, September 29, 2014. http://www.treasury.gov/…

Page 8:


Each year since Fiscal Year 2011, the IRS has continually rated the risk of improper payments associated with the ACTC [Additional Child Tax Credit] as low. However, our review of the IRS's own enforcement data indicates that the ACTC improper payment rate is similar to that of the EITC. We estimate that the ACTC improper payment rate for Fiscal Year 2013 is between 25.2 percent and 30.5 percent, with potential ACTC improper payments totaling between $5.9 billion and $7.1 billion.
 

[327] 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.


[328] 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."


[329] 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."


[330] House Resolution 556: "Refundable Child Tax Credit Eligibility Verification Reform Act of 2013." U.S. Congress, February 6, 2013. https://www.congress.gov/bill/113th-congress/house-bill/556

Summary:


Refundable Child Tax Credit Eligibility Verification Reform Act of 2013—Amends the Internal Revenue Code, with respect to the child tax credit, to require taxpayers claiming such credit to provide their social security numbers on their tax returns.

Prohibits taxpayers who improperly claimed such credit in a previous year from claiming such credit during a disallowance period of: (1) 2 years for claims made with reckless or intentional disregard of rules governing such credit, or (2) 10 years for fraudulent claims.

Requires the Secretary of the Treasury to prescribe a form for completion by paid income tax preparers in connection with claims for the refundable portion of the child tax credit. Imposes a penalty on preparers who fail to comply with due diligence requirements for claiming the refundable portion of the credit.


NOTE: The information in the next footnote shows why this bill would restrict illegal immigrants from obtaining refundable child tax credits.

[331] 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.


[332] House Resolution 556: "Refundable Child Tax Credit Eligibility Verification Reform Act of 2013." U.S. Congress, February 6, 2013. https://www.congress.gov/…

Cosponsors: "Republican [=] 67"

Latest Action: "02/19/2013 Referred to the Subcommittee on Social Security."


[333] House Resolution 713: "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, February 4, 2015. https://www.congress.gov/…

Summary: "Amends the Internal Revenue Code to disallow the refundable portion of the child tax credit to taxpayers who use individual taxpayer identification numbers issued by the Internal Revenue Service instead of social security account numbers to claim such credit on their tax returns."


NOTE: The information in the next footnote shows why this bill would restrict illegal immigrants from obtaining refundable child tax credits.


[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/…


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.


[335] House Resolution 713: "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, February 4, 2015. https://www.congress.gov/…

Cosponsors: "As of 05/06/2015 no cosponsor information has been received for H.R.713 - 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."

Latest Action: "02/04/2015 Referred to the House Committee on Ways and Means."


[336] 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


[337] 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


[338] 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."


[339] 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"

 

justFacts


[340] 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"

 

justFacts


[341] 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"

 

justFacts


[342] 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 12:


The Questionable Identification Detection Team was in place from October 2007 to April 2010. While in operation, procedures required all questionable ITIN applications with identified discrepancies to be sent to this team. The purpose of this team was to reduce misuse of ITINs by identifying patterns involving questionable applications and fraudulent tax refund claims. Despite its successes in identifying ITIN application fraud schemes and patterns, IRS management disbanded the Questionable Identification Detection Team but did not put in place similar adequate processes to identify schemes and detect trends that could indicate fraud.

IRS guidelines directed tax examiners to refer daily those ITIN applications with questionable documentation. Tax examiners did not have to identify a certain number of errors with ITIN applications to make a referral to the Questionable Identification Detection Team. Any ITIN application and tax return with similar characteristics or patterns were routed to this team for analysis. The Questionable Identification Detection Team consisted of three experienced tax examiners who, upon receipt of referred applications, would prepare case summary sheets that captured characteristics from questionable applications to identify fraud schemes. According to IRS records, this team prepared 6,395 case summary sheets during the time period it was in place.

The Questionable Identification Detection Team worked in partnership with Criminal Investigation by referring potential fraud schemes for review. Based on this work, thousands of fraudulent ITIN tax returns with erroneous tax refunds totaling more than $43 million were identified.

[343] 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.


[344] 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.


[345] 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."


[346] 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.


[347] 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.


[348] Webpage: "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.


[349] 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.


[350] 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.


[351] Report: "Overview of the Federal Tax System." By Molly F. Sherlock and Donald J. Marples. Congressional Research Service, November 21, 2014.
https://www.fas.org/sgp/crs/misc/RL32808.pdf


Page 20–21:


Marriage Penalties and Bonuses

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).44 This can be viewed as a violation of the principle of horizontal equity, whereby individuals with equal income should have similar tax burdens.

The most important structural factors affecting the marriage neutrality of the income tax are the earned income tax credit (EITC), the marginal tax rate schedules, and the phaseout of credits and deductions for higher-income individuals. Under the current tax system, single individuals, heads of households, and married couples are subject to different tax rate schedules.45 In addition, the EITC amounts and phaseout 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. Specifically, two individuals having $80,000 each in taxable income would be in the 25% marginal tax bracket when being taxed as individuals. Their federal income tax liability would be $15,928.75 each (or $31,857.50 jointly).46 However, were these same persons taxed as a married couple, they would be in the 28% marginal tax bracket and have a joint federal income tax liability of $32,265.50.The marriage tax penalty for this couple would be $408.

On the other hand, married couples where one spouse earns all the earned income have the largest marriage tax bonuses. For example, an individual with a taxable income of $100,000 would have a federal income tax liability of $21,283.25. If that individual took a spouse who had no earnings, the tax liability for a couple with $100,000 in taxable income is $16,857.50. Hence, this couple would have a marriage tax bonus of $4,435.75.

44 Research looking at 2007 tax law found that amongst cohabiting unmarried couples, if those couples were to marry, 48% would experience a marriage penalty while 38% would have a marriage bonus. See Emily Y. Lin and Patricia K. Tong, "Marriage and Taxes: What Can We Learn From Tax Returns Filed by Cohabiting Couples, " National Tax Journal, vol. 65, no. 4 (December 2012), pp. 807-826.

45 Prior to 2003, the standard deduction for married couples filing jointly was less than twice the standard deduction available to individual filers, leading many filers to experience a marriage tax penalty.

46 Calculations in this section are based on 2013 tax schedules.


[352] Report: "The 2014 Long-Term Budget Outlook." Congressional Budget Office, July 15, 2014. https://www.cbo.gov/publication/45471


Pages 73–74:


Increases in marginal tax rates on labor and capital income reduce output and income relative to what would be the case with lower rates (all else held equal). A higher marginal tax rate on capital income decreases the after-tax rate of return on saving, weakening people's incentive to save. However, because that higher marginal tax rate also decreases people's return on their existing savings, they need to save more to have the same future standard of living, which tends to increase the amount of saving. CBO concludes, as do most analysts, that the former effect outweighs the latter, so that a higher marginal tax rate on capital income decreases saving. Specifically, CBO's analyses of fiscal policy incorporate an estimate that an increase in the marginal tax rate on capital income that decreases the after-tax return on saving by 1 percent results in a decrease in private saving of 0.2 percent. (A lower marginal tax rate on capital income has the opposite effect.) Less saving results in less investment, a smaller capital stock, and lower output and income.


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


Page 1: "Taxes influence many of the economic decisions that people make: whether to work, in what occupation, and to what extent; what fringe benefits employers offer and how much value workers place on those benefits relative to wages; how much to consume or save; what type of investments to make; whether to buy a home; and how much to donate to charity."


[354] Report: "The Taxation of Capital and Labor Through the Self-Employment Tax." Congressional Budget Office, September 2012. http://www.cbo.gov/…

Pages 1-2:


How the FICA and SECA Tax Bases Differ

A tax's "base" is the measure—for example, income or property—that is subject to the tax. The FICA tax base includes the wages of employees, and the SECA tax base is the net business income (that is, receipts minus expenses) of self-employed workers. The FICA tax base is limited to labor income, but the SECA base can include some capital income. Although the intent of the Congress was to tax the self-employed "on remuneration received for one's own labor," the tax base that was enacted did not conform to that intent.3


Specifically, the SECA [Self-Employment Contributions Act] tax base can include the return on investments in tangible and intangible (but not financial) assets made by an unincorporated business. In contrast, if an incorporated business makes the same investment, the return is reflected in the company's profits, not in its employees' wages, and therefore is not included in the FICA tax base. Another difference is that when a person's labor income exceeds net business income across all businesses (or portions thereof ) owned by that person, the excess labor income is excluded from the SECA tax base. In contrast, for an incorporated business, profitability has no effect on the FICA tax liability of its owners.


Those differences can affect an individual's decision about whether to be self-employed or to work for somebody else. It can also influence the choice of how to organize a firm: A business owner's capital income (and losses) will be taxed differently under the Social Security Act depending on whether the business incorporates. In both cases, the tax code can prompt people to make choices that they would not otherwise make, thereby reducing the efficient allocation of resources.


[355] 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


Double taxation also makes equity finance "more costly" to the corporation than debt finance. This is because corporations are allowed to deduct interest payments on corporate taxes as a business expense but are not allowed to take a tax deduction for the costs of equity finance. As a consequence, the returns from corporate investments that are ultimately paid out to bondholders are subject to only one level of tax. In effect, this means that one dollar of investment that is financed by debt needs to earn a lower overall rate of return in order to pay bondholders their required return after tax, because this dollar is subject only to the personal income tax, than does one dollar of investment that is financed by equity, which is subject to both the corporate and personal income taxes.


[356] 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 29: "Marginal tax rates are the rates that taxpayers pay on the next dollar of income that is earned. Marginal tax rates can be presented as both marginal statutory rates and marginal effective rates."


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


Page 1: "In general, the type of tax rate that most directly affects decisions about whether to engage in more of an activity is the effective marginal tax rate—the percentage of an additional dollar of income that will have to be paid in taxes."


Page 2:


The effective marginal tax rate depends on features of tax law besides statutory rates. Most taxpayers' effective marginal rate is the same as their statutory marginal rate. But in some cases, the two rates differ because of the phasing in or out of particular tax provisions. …


A person's effective marginal tax rate influences many different decisions about working: whether to take on an overtime shift, bargain for wages or fringe benefits, get a second job, or enter the labor force at all.


[358] Report: "Federal Tax Treatment Of Individuals." U.S. Congress, Joint Committee on Taxation September 12, 2011. https://www.jct.gov/…


Page 25:


Economists have shown that 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.25 Thus, in order to minimize economic inefficiency, economists in general have long recommended a broad base of taxation in order to keep marginal tax rates as low as possible subject to revenue needs.


25 The magnitude of the efficiency loss from taxation depends upon a measure of the taxpayer's behavioral response, or the elasticity, and the square of the total effective marginal tax rate. Hence, a small change in an effective tax rate can create an efficiency loss that is large in relation to the change in revenue. For a detailed discussion of this point, see Joint Committee on Taxation, Methodology and Issues in Measuring Changes in the Distribution of Tax Burdens (JCS-7-93), June 14, 1993, pp. 20–31 and Harvey S. Rosen, Public Finance, seventh edition, (Boston MA: McGraw-Hill), 2004.


[359] Report: "Federal Tax Treatment Of Individuals." U.S. Congress, Joint Committee on Taxation September 12, 2011. https://www.jct.gov/…


Page 4: "Different maximum marginal tax rates apply to different sources of income. … A taxpayer's average tax rate (total tax paid divided by total income) is generally less than the taxpayer's marginal tax rate (the increased tax that accrues from an additional dollar of income)."


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


Page 3: "Average tax rates are only loosely related to statutory rates, in part because total income differs from taxable income by the exemptions and deductions that taxpayers claim and because income can fall into multiple statutory brackets, as described above."


Page 7: "To determine regular [individual income] 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."


[361] Calculated with data from the report: "The Distribution of Household Income and Federal Taxes, 2011." Congressional Budget Office, November 12, 2014. https://www.cbo.gov/…

 

Page 2: "Table 1. Average Household Income, Transfers, and Taxes, by Before-Tax Income Group, 2011 … Before-Tax Income [=] 66,400"

Page 16: "Table 4. Average Federal Tax Rates, by Before-Tax Income Group, 2011 and Projected Under 2013 Law … 2011 … Middle Quintile [=] 11.2"

Page 5:


For this analysis, federal taxes include individual income taxes, payroll taxes, corporate income taxes, and excise taxes, which together accounted for approximately 92 percent of all federal revenues in fiscal year 2011. Revenues from states' deposits for unemployment insurance, estate and gift taxes, miscellaneous fees and fines, and net income earned by the Federal Reserve, which make up the remaining 8 percent, are not allocated to households in this analysis, mainly because it is uncertain to which households those revenue sources should be attributed.


CALCULATION: $66,400 income × 11.2% effective federal tax rate = $7,400


[362] Just Facts estimated the marginal tax rate in this example by summing the following categories of tax rates: Social Security payroll taxes, Medicare payroll taxes, and individual income taxes. This approximate marginal tax rate is based upon the research in the sections above pertaining to each of these types of taxes.

 

CALCULATION: 12.4% in Social Security payroll taxes + 2.9% in Medicare payroll taxes + 25% in individual income taxes = 40.3% marginal tax rate


[363] Report: "Federal Tax Treatment Of Individuals." U.S. Congress, Joint Committee on Taxation September 12, 2011. https://www.jct.gov/…


Page 25:


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. …


The magnitude of the efficiency loss from taxation depends upon a measure of the taxpayer's behavioral response, or the elasticity, and the square of the total effective marginal tax rate. Hence, a small change in an effective tax rate can create an efficiency loss that is large in relation to the change in revenue. For a detailed discussion of this point, see Joint Committee on Taxation, Methodology and Issues in Measuring Changes in the Distribution of Tax Burdens (JCS-7-93), June 14, 1993, pp. 20–31 and Harvey S. Rosen, Public Finance, seventh edition, (Boston MA: McGraw-Hill), 2004.


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


Page 132:


Changes in marginal tax rates have two different types of effects on people. On the one hand, the lower those tax rates are, the greater the share of the returns from additional work or saving that people can keep, thus encouraging them to work and save more. On the other hand, because lower marginal tax rates increase after-tax income, they make it easier for people to attain their consumption goals with a given amount of work or saving, thus possibly causing people to work and save less. On balance, the evidence suggests that reducing tax rates boosts work and saving relative to what would occur otherwise, if budget deficits remain the same. But without other changes to taxes or spending, reducing tax rates from current levels would generally decrease revenues and increase deficits; higher deficits, even with lower tax rates, can reduce economic activity over the longer term.


[365] Report: "The 2012 Long-Term Budget Outlook." By Joyce Manchester and others. Congressional Budget Office, June 2012. http://cbo.gov/…


Pages 36-37:


Similarly, a lower marginal tax rate on labor income increases the incentive to work, raising the number of hours people work and therefore the amount of output and income. However, because that lower marginal tax rate increases people's after-tax income from the work they are already doing, they do not need to work as much to maintain their standard of living, which reduces the supply of labor. Again, CBO concludes, as do most analysts, that the former effect outweighs the latter and that lower marginal tax rates on labor income increase the labor supply. A higher marginal tax rate on labor income has the opposite effect.


To reflect the high degree of uncertainty that attends the effect of the marginal tax rate on labor supply, CBO produced estimates of the economic effects of the two budget scenarios using three assumptions about how people would adjust the number of hours they worked in response to changes in marginal tax rates (and changes in pretax wages as well):


• A "strong labor supply response," under which workers' response is on the high side of the consensus range of empirical estimates;

• A "weak labor supply response," under which workers' response is on the low side of the consensus range; and

• A "medium labor supply response," under which workers' response is roughly midway between strong and weak.


The responsiveness of labor supply to taxes is often expressed as the total wage elasticity (the change in total labor income caused by a 1 percent change in after-tax wages). The total wage elasticity, in turn, has two components: a substitution elasticity (which measures the effect of changes in marginal tax rates) and an income elasticity (which measures the effect of changes in average tax rates). In this analysis, CBO's assumptions for labor supply response correspond to total wage elasticities of about 0.35 for the strong response (composed of a substitution elasticity of 0.35 and an income elasticity of zero); about -0.05 for the weak response (composed of a substitution elasticity of 0.15 and an income elasticity of -0.20); and about 0.15 for the medium response (composed of a substitution elasticity of 0.25 and an income elasticity of -0.1). (Reflecting CBO's review of research in this area, the strong labor supply response is substantially stronger, and the weak labor supply response slightly weaker, than those used for CBO's 2011 long-term budget outlook.)


[366] 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.


[367] Report: "Federal Tax Treatment Of Individuals." U.S. Congress, Joint Committee on Taxation September 12, 2011. https://www.jct.gov/…


Page 25:


Economists have shown that 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.25 Thus, in order to minimize economic inefficiency, economists in general have long recommended a broad base of taxation in order to keep marginal tax rates as low as possible subject to revenue needs.


25 The magnitude of the efficiency loss from taxation depends upon a measure of the taxpayer's behavioral response, or the elasticity, and the square of the total effective marginal tax rate. Hence, a small change in an effective tax rate can create an efficiency loss that is large in relation to the change in revenue. For a detailed discussion of this point, see Joint Committee on Taxation, Methodology and Issues in Measuring Changes in the Distribution of Tax Burdens (JCS-7-93), June 14, 1993, pp. 20–31 and Harvey S. Rosen, Public Finance, seventh edition, (Boston MA: McGraw-Hill), 2004.


[368] Report: "Federal Tax Treatment Of Individuals." U.S. Congress, Joint Committee on Taxation September 12, 2011. https://www.jct.gov/…


Page 27:


In addition to labor supply and saving effects, increased 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. …


Increased marginal tax rates also may alter taxpayers' decisions regarding when to recognize income or to claim expenses. Any such tax motivated changes in the timing of income or expense generally require time and expense by the taxpayer. Such time and expense represents an efficiency loss to the economy.


[369] Report: "The 2014 Long-Term Budget Outlook." Congressional Budget Office, July 15, 2014. https://www.cbo.gov/publication/45471


Pages 73–74:


Increases in marginal tax rates on labor and capital income reduce output and income relative to what would be the case with lower rates (all else held equal). A higher marginal tax rate on capital income decreases the after-tax rate of return on saving, weakening people's incentive to save. However, because that higher marginal tax rate also decreases people's return on their existing savings, they need to save more to have the same future standard of living, which tends to increase the amount of saving. CBO concludes, as do most analysts, that the former effect outweighs the latter, so that a higher marginal tax rate on capital income decreases saving. Specifically, CBO's analyses of fiscal policy incorporate an estimate that an increase in the marginal tax rate on capital income that decreases the after-tax return on saving by 1 percent results in a decrease in private saving of 0.2 percent. (A lower marginal tax rate on capital income has the opposite effect.) Less saving results in less investment, a smaller capital stock, and lower output and income.


[370] Report: "Federal Tax Treatment Of Individuals." U.S. Congress, Joint Committee on Taxation September 12, 2011. https://www.jct.gov/…


Pages 26-27:


The distorted choices that may result from increased marginal tax rates are not limited to decisions to work. By reducing the net return to saving, increased marginal tax rates may distort taxpayers' decisions to save. Substantial disagreement exists among economists as to the effect on saving of changes in the net return to saving. Empirical investigation of the responsiveness of personal saving to after tax returns provides no conclusive results. Some studies have argued that one should expect substantial increases in saving from increases in the net return.29 Other studies have argued that large behavioral responses to changes in the net return need not occur.30 Empirical investigation of the responsiveness of personal saving to the taxation of investment earnings provides no conclusive results.31 Some find personal saving responds strongly to increases in the net return to saving,32 while others find little or a negative response.33 Studies of retirement savings incentives follow a similar pattern, with some finding an increase in saving as a result of the incentives,34 while others find little or no increase as retirement plan savings substitute for other saving.35 With respect to the tax advantaged forms of saving, the revenue loss to the Federal government represents a decline in government saving (unless offset by equal spending cuts), and thus must be accounted for to determine net national saving. If saving is reduced by its treatment under the income tax, future productivity and income is lost to society.


[371] Report: "The 2012 Long-Term Budget Outlook." By Joyce Manchester and others. Congressional Budget Office, June 2012. http://cbo.gov/…


Page 36:


Changes in marginal tax rates (the rates that apply to an additional dollar of a taxpayer's income) also affect output and income. For example, a lower marginal tax rate on capital income (income derived from wealth, such as stock dividends, realized capital gains, or the owner's profits from a business) increases the after-tax rate of return on saving, strengthening the incentive to save; more saving implies more investment, a larger capital stock, and greater output and income. However, because that lower marginal tax rate increases people's after-tax returns on savings, they do not need to save as much to have the same future standard of living, which reduces the supply of saving. CBO concludes, as do most analysts, that the former effect outweighs the latter, such that a lower marginal tax rate on capital income increases saving. A higher marginal tax rate on capital income has the opposite effect.


[372] Report: "Federal Tax Treatment Of Individuals." U.S. Congress, Joint Committee on Taxation September 12, 2011. https://www.jct.gov/…


Pages 26-27:


The distorted choices that may result from increased marginal tax rates are not limited to decisions to work. By reducing the net return to saving, increased marginal tax rates may distort taxpayers' decisions to save. Substantial disagreement exists among economists as to the effect on saving of changes in the net return to saving. Empirical investigation of the responsiveness of personal saving to after tax returns provides no conclusive results. Some studies have argued that one should expect substantial increases in saving from increases in the net return.29 Other studies have argued that large behavioral responses to changes in the net return need not occur.30 Empirical investigation of the responsiveness of personal saving to the taxation of investment earnings provides no conclusive results.31 Some find personal saving responds strongly to increases in the net return to saving,32 while others find little or a negative response.33 Studies of retirement savings incentives follow a similar pattern, with some finding an increase in saving as a result of the incentives,34 while others find little or no increase as retirement plan savings substitute for other saving.35 With respect to the tax advantaged forms of saving, the revenue loss to the Federal government represents a decline in government saving (unless offset by equal spending cuts), and thus must be accounted for to determine net national saving. If saving is reduced by its treatment under the income tax, future productivity and income is lost to society.


[373] Report: "The 2012 Long-Term Budget Outlook." By Joyce Manchester and others. Congressional Budget Office, June 2012. http://cbo.gov/…


Pages 25-26:


Long-term economic growth could differ greatly from the path that underlies the budget projections in this report. CBO assumes that in the long run, total factor productivity will grow by 1.3 percent annually, approximately the average rate seen over the past half century.22 A small change in the growth of productivity can, over a long period, have a larger effect on GDP than most recessions do. For example, CBO estimates that during the depths of the recessions experienced since the 1970s, GDP was more than 4 percent lower, on average, than it could have been if the nation's labor force and capital stock had been fully utilized; in addition, output subsequently remained below potential levels for an average of three years. Over the course of a lengthy recession, the cumulative loss in GDP would be substantial, but as long as the economy fully recovered, GDP would return to its previous growth path. By comparison, if productivity growth was 0.3 percentage points lower every year than CBO had assumed, GDP in the 10th year would be 3 percent lower than projected, but cumulative GDP over that decade would be lower by about 16 percent of one year's output, and that shortfall would be growing at an increasing rate. In other words, 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.


[374] Article: "U.S. Firms Move Abroad to Cut Taxes: Despite '04 Law, Companies Reincorporate Overseas, Saving Big Sums on Taxes." By John D. McKinnon And Scott Thurm. Wall Street Journal, August 28, 2012. http://online.wsj.com/…


"More big U.S. companies are reincorporating abroad despite a 2004 federal law that sought to curb the practice. One big reason: Taxes."


[375] Report: "Overview of the Federal Tax System." By Molly F. Sherlock and Donald J. Marples. Congressional Research Service, November 21, 2014.
https://www.fas.org/sgp/crs/misc/RL32808.pdf


Page 10: "[T]he corporate income tax … favors corporate debt over corporate equity investment since the former is not subject to the tax."


[376] 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


Double taxation also makes equity finance "more costly" to the corporation than debt finance. This is because corporations are allowed to deduct interest payments on corporate taxes as a business expense but are not allowed to take a tax deduction for the costs of equity finance. As a consequence, the returns from corporate investments that are ultimately paid out to bondholders are subject to only one level of tax. In effect, this means that one dollar of investment that is financed by debt needs to earn a lower overall rate of return in order to pay bondholders their required return after tax, because this dollar is subject only to the personal income tax, than does one dollar of investment that is financed by equity, which is subject to both the corporate and personal income taxes.


[377] "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: "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."


[378] Report: "Overview of the Federal Tax System as in Effect for 2015." U.S. Congress, Joint Committee on Taxation, March 30, 2015. https://www.jct.gov/publications.html?func=startdown&id=4763


Page 15:


The Federal tax system imposes excise taxes on selected goods and services. 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 products (e.g., the tax on ozone depleting chemicals, and a tax on crude oil and certain petroleum products to fund the Oil Spill Liability Trust Fund), coal, certain telephone communications (e.g. local service), certain wagers, certain medical devices, indoor tanning services, and vehicles lacking in fuel efficiency.30 … The largest excise taxes in terms of revenue (for fiscal year 2013) are those for gasoline motor fuel ($24.7 billion), domestic cigarettes ($13.6 billion), diesel motor fuel ($8.9 billion), and domestic air tickets ($8.8 billion).31


[379] Report: "Overview of the Federal Tax System." By Molly F. Sherlock and Donald J. Marples. Congressional Research Service, November 21, 2014.
https://www.fas.org/sgp/crs/misc/RL32808.pdf


Page 12: "Excise taxes are a form of consumption tax—levies on the consumption of goods and services rather than income. Unlike sales taxes, they apply to particular commodities, rather than to broad categories."


[380] 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: "In addition to excise taxes the primary purpose of which is revenue production, excise taxes also are imposed to promote adherence to other policies (e.g., penalty excise taxes)."


[381] Report: "Overview of the Federal Tax System." By Molly F. Sherlock and Donald J. Marples. Congressional Research Service, November 21, 2014.
https://www.fas.org/sgp/crs/misc/RL32808.pdf


Page 13:


Excise taxes serve a variety of fiscal purposes. Some were enacted simply to raise revenue (for example, the telephone tax and certain fuel taxes were enacted for deficit reduction).35 The taxes linked with trust funds serve to fund expenditure programs by taxing their beneficiaries, or by taxing those responsible for certain problems addressed by expenditure programs. Some excise taxes adjust for the effects of negative externalities—that is, they seek to ensure that the price of products that produce side-effects like the consumption of alcohol and tobacco reflects their true cost to society. Other purposes of excise taxes include adjusting the price of imports to reflect domestic taxes and regulation of activities thought to be undesirable.


[382] "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: "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."


[383] "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 44:


In 2010, the Congress enacted several new excise taxes. These taxes are: the Patient-Centered Outcomes Research Trust Fund taxes;69 the annual fee on branded prescription pharmaceutical manufacturers and importers;70 the excise tax on indoor tanning services;71 the excise tax on certain medical devices;72 the annual fee on health insurance providers;73 the excise taxes on individuals without minimum essential health coverage;74 the excise tax on certain large employers not offering health care coverage;75 the excise tax on insurers for high-cost employer-sponsored health coverage;76 and the foreign procurement excise tax.77


69 Sec. 4375 (relating to health insurance); and sec. 4376 (relating to self-insured health plans).

70 Sec. 9008 of Pub. L. No 111-148, as amended by sec. 1404 of Pub. L. No. 111-152.

71 Sec. 5000B.

72 Sec. 4191.

73 Sec. 9010 of Pub. L. No. 111-148, as amended by sec. 10905 of such Act, as further amended by sec. 1406 of Pub. L. No. 111-152.

74 Sec. 5000A.

75 Sec. 4980H.

76 Sec. 4980I.

77 Sec. 5000C.


NOTE: All of the provisions above are contained in two laws collectively known as the Affordable Care Act or Obamacare. Details about these laws and some of the taxes above are available in Just Facts' research on healthcare.


[384] 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 29: "Revenue provision effective dates."


[385] Calculated with data from the report: "The Budget and Economic Outlook: Fiscal Years 2015 to 2025." Congressional Budget Office, January 26, 2015. https://www.cbo.gov/publication/49892


Supplementary dataset: "Historical Budget Data—January 2015 Baseline." http://www.cbo.gov/…


"Table 2. Revenues, by Major Source, Since 1965 (In Billions of Dollars) … 2014 … Excise Taxes [=] 93.4 … Total [=] 3,020.8"

CALCULATION: 93.4 / 3,020.8 = 3.1%


[386] Report: "Facts & Figures 2015: How Does Your State Compare?" By Jared Walczak. Tax Foundation, March 10, 2015. http://taxfoundation.org/…


Page 46:


Table 30: State and Local Excise Tax Collections Per Capita, Fiscal Year 2012 …

Note: Excise taxes are sales and other special taxes imposed on select items, such as tobacco products, alcoholic beverages, and motor fuels. This table also includes excise taxes, or selective sales taxes, on amusements, insurance premiums, parimutuels, and public utilities. See Table 39 for average people per household by state. … Source: U.S. Census Bureau, Tax Foundation.


[387] "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."


[388] Report: "Overview of the Federal Tax System." By Molly F. Sherlock and Donald J. Marples. Congressional Research Service, November 21, 2014.
https://www.fas.org/sgp/crs/misc/RL32808.pdf


Page 13:


Federal excise taxes are levied on a variety of products. The collection point of the tax varies across products; for some goods taxes are collected at the production level while other excise taxes are collected on retail sales. In terms of receipts, the single largest tax is the excise tax on gasoline.33 Other prominent excise taxes are those on diesel fuel, domestic air passengers, distilled spirits, beer,34 cigarettes, and telephone services.


[389] Report: "The Distribution of Household Income and Federal Taxes, 2011." Congressional Budget Office, November 12, 2014. https://www.cbo.gov/…


Page 12: "The burden of excise taxes relative to income is greatest for lower-income households, which tend to spend a larger share of their income on those taxed goods and services."

Page 32:


CBO allocated excise taxes to households according to their consumption of taxed goods and services (such as gasoline, 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's spending on taxed goods and services was the same as that reported in the Bureau of Labor Statistics' Consumer Expenditure Survey for a household with comparable income and other characteristics.


[390] Book: Basic Economics (15th Edition). By Frank V. Mastrianna. Cengage Learning, 2008. Page 353:

 

The burden of a tax does not always fall on the person or firm paying the tax. Where it does fall depends on the slopes of the supply and demand curves for the product being taxed. For example, the burden of taxes on cigarettes, liquor, and other consumer goods with very inelastic demands is usually shifted to the final consumer. The tax is paid by the manufacturer or distributor, who, because of the inelastic demand for the product, then adds the amount of the tax to the selling price of the good and passes the burden of the tax on to the consumer.


[391] Report: "Overview of the Federal Tax System." By Molly F. Sherlock and Donald J. Marples. Congressional Research Service, November 21, 2014.
https://www.fas.org/sgp/crs/misc/RL32808.pdf


Page 13:


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. 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.


[392] Webpage: "Excise Tax." Internal Revenue Service. Last reviewed or updated January 22, 2015. http://www.irs.gov/…


"Excise taxes are taxes paid when purchases are made on a specific good, such as gasoline. Excise taxes are often included in the price of the product."


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


[M]ost state sales tax statutes require the seller of the product to pay the state sales tax rather than the buyer. Although you might think that you pay the state sales tax on your purchase at Wal-Mart, that is not so. … It appears as though the retailer requires us to pay the whole sales tax, simply adding the tax to our bill, but the reality is that the retailer may still bear a part of the tax burden implicitly through a lower price received on the product than would be charged in the absence of the sales tax. … The true economic incidence of the tax is likely to be shared between the retailer and the customer. …


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.


[394] Book: Basic Economics (15th Edition). By Frank V. Mastrianna. Cengage Learning, 2008. Page 353:

 

The burden of a tax does not always fall on the person or firm paying the tax. Where it does fall depends on the slopes of the supply and demand curves for the product being taxed. For example, the burden of taxes on cigarettes, liquor, and other consumer goods with very inelastic demands is usually shifted to the final consumer. The tax is paid by the manufacturer or distributor, who, because of the inelastic demand for the product, then adds the amount of the tax to the selling price of the good and passes the burden of the tax on to the consumer.


[395] Book: Handbook on Taxation. Edited by W. Bartley Hildreth and James A. Richardson. Marcel Dekker, 1999.


Page 445: "Businesses making retail sales to households would be responsible for remitting the tax to the government and thus in a literal sense would pay the tax. In an economic sense, however, households would pay the tax as part of the overall price they pay for goods and services. … [S]tate and local sales taxes are now listed separately on sales receipts…."


[396] Report: "State Sales Tax Rates and Food & Drug Exemptions (As of January 1, 2015). Federation of Tax Administrators, January 2015. http://www.taxadmin.org/fta/rate/sales.pdf


[397] 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 February 27, 2015. http://www.bea.gov/iTable/iTable.cfm?ReqID=9&step=1


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


[398] Report: "Facts & Figures 2015: How Does Your State Compare?" By Jared Walczak. Tax Foundation, March 10, 2015. http://taxfoundation.org/…


"Table 8: Sources of State and Local Tax Collections, Percentage of Total from Each Source, Fiscal Year 2012"


[399] Book: The Oxford Companion to American Law. Edited by Kermit L. Hall and others. Oxford University Press, 2002. Page 789:


Property taxes are annual levies on the assessed value of property. … Imposts based on the ownership of property were used in ancient times but the modern tax has roots in the feudal obligations owed to British and European kings or landlords. In the fourteenth and fifteenth centuries, British tax assessors used ownership of property to estimate ability to pay. In time the tax came to be regarded as a levy on the property (in rem) itself. In the United Kingdom the tax developed into a system of "rates" based upon the annual (rental) value of the property.


[400] Article: "Brown University, PILOTS, and Tax-Exemptions." By I. Harry David. Tax Foundation, May 10, 2012. http://taxfoundation.org/…


Although Brown University is a non-profit institution and is exempt from paying property taxes to the city of Providence, Rhode Island, it still makes payments of $4 million per year to the city. This week the city convinced Brown University to pay $31 million more over the next 11 years. To put this in perspective, if Brown had to pay the commercial property real estate tax, it would owe about $38 million per year. The city will raise a total of nearly $100 million by collecting these payments in lieu of taxes (PILOTs) from nine of the city's tax exempt organizations.


Generally, municipal governments exempt universities, hospitals and other nonprofits from paying property taxes. But the government is often partially compensated for lost tax revenue by collecting PILOTs either from the exempt organizations or from the state government. As for colleges and universities, a 'significant minority' pay PILOTs, according to the Lincoln Institute. In Brown's case, the state government used subtle coercion to increase these payments by considering legislation to require PILOTs from tax exempt organizations. In another example of coercion, Baltimore threatened to tax hospital and dorm beds at Johns Hopkins University if it didn't agree to a PILOT arrangement. …


PILOT payments are less than what a nonprofit would pay if it was not tax exempt, but more than what it is obligated to pay as tax exempt organizations (i.e. zero).


[401] Book: 2009 Federal Tax Course. CCH, 2008.


Page 8: "States that impose a tax on tangible personal property generally tax property that taxpayers registers with the state, like motor vehicles, boats, and aircraft."


[402] 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 February 27, 2015. http://www.bea.gov/iTable/iTable.cfm?ReqID=9&step=1


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


[403] Report: "Facts & Figures 2015: How Does Your State Compare?" By Jared Walczak. Tax Foundation, March 10, 2015. http://taxfoundation.org/…


"Table 8: Sources of State and Local Tax Collections, Percentage of Total from Each Source, Fiscal Year 2012"


[404] Report: "Facts & Figures 2015: How Does Your State Compare?" By Jared Walczak. Tax Foundation, March 10, 2015. http://taxfoundation.org/…


"Table 32. State and Local Property Tax Collections Per Capita, Fiscal Year 2012."


[405] Book: Handbook on Taxation. Edited by W. Bartley Hildreth and James A. Richardson. Marcel Dekker, 1999. Page 359:


Evaluation of property tax hinges crucially on assumptions made about its economic tax incidence (i.e., who actually bears the burden of the tax). Unlike retail sales and personal income taxes, the incidence of the property tax is complex and controversial. Debate still rages among public finance scholars as to whether capital owners, renters/consumers, or labor bear the burden of the tax. As discussed in Chapter 6, there are three different views of property tax incidence. All views concur that the land portion of the tax is borne by land owners and owner-occupied housing is borne by home owners. Controversy surrounds commercial and industrial property (Mieszkowski and Zodrow, 1989).


[406] Report: "Overview of the Federal Tax System." By Molly F. Sherlock and Donald J. Marples. Congressional Research Service, November 21, 2014.
https://www.fas.org/sgp/crs/misc/RL32808.pdf


Page 11: "The federal estate tax is imposed when property is transferred at death. The taxable unit is the estate, in contrast to an inheritance tax, which is levied on heirs. The base of the federal estate tax is property transferred at death, less allowable deductions and exemptions."

Page 12: "The federal gift tax operates alongside the estate tax to prevent individuals from avoiding the estate tax by transferring property to heirs before dying."


[407] 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."


[408] Calculated with data from the report: "The Budget and Economic Outlook: Fiscal Years 2015 to 2025." Congressional Budget Office, January 26, 2015. https://www.cbo.gov/publication/49892

Page 160: "Table G-2. Revenues, by Major Source, Since 1965 (In Billions of Dollars) … 2014 … Estate and Gift Taxes [=] 19.3. … Total [=] 3,020.8"

CALCULATION: 19.3 / 3,020.8 = 0.6%


[409] Letter from Congressional Budget Office Director Douglas W. Elmendorf to U.S. Senator Charles E. Grassley, March 4, 2010. http://www.cbo.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.


[410] "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."


[411] 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."


[412] Report: "Overview of the Federal Tax System." By Molly F. Sherlock and Donald J. Marples. Congressional Research Service, November 21, 2014.
https://www.fas.org/sgp/crs/misc/RL32808.pdf


Page 13: "Federal excise taxes are levied on a variety of products. The collection point of the tax varies across products; for some goods taxes are collected at the production level while other excise taxes are collected on retail sales."


[413] Report: "State Motor Fuel Taxes." American Petroleum Institute, April 1, 2015. http://www.api.org/oil-and-natural-gas-overview/industry-economics/fuel-taxes

Page 1:


The nationwide average tax on gasoline is 48.85 cpg, up 0.62 cpg from the January 2015 study. … The federal tax on gasoline is 18.40 cpg. The average state gasoline excise tax is 20.70, up 0.06 cpg from January 2015. Other taxes (such as applicable sales taxes, gross receipts taxes, oil inspection fees, county and local taxes, underground storage tank fees and other miscellaneous environmental fees) were 9.76 cpg, up 0.67 cpg from January. Adding these taxes and fees to the state excise taxes results in a volume-weighted average state and local tax of 30.45 cpg.


[414] 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."


[415] 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."


[416] 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."


[417] Calculated with data from:


a) Dataset: "The Distribution of Household Income and Federal Taxes, 2011." Congressional Budget Office, November 12, 2014. http://www.cbo.gov/…

"Table 1. Average Federal Tax Rates for All Households, by Before-Tax Income Group, 1979 to 2011 (Percent) … Average Payroll Tax Rate … 2011 … Middle Quintile [=] 7.2"


b) 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."

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."


CALCULATION: 7.2% burden of payroll taxes × half remitted by employer but borne by employee = 3.6% remitted by employer but borne by employee


[418] 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.


[419] 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."


[420] 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."


[421] Dataset: "The Distribution of Household Income and Federal Taxes, 2011." Congressional Budget Office, November 12, 2014. http://www.cbo.gov/…

 

"Table 1. Average Federal Tax Rates for All Households, by Before-Tax Income Group, 1979 to 2011 (Percent) … Average Corporate Tax Rate … 2011 … Top 1 Percent [=] 6.4"


[422] Report: "EMTALA: Access to Emergency Medical Care." By Edward C. Liu. Congressional Research Service, July 1, 2010. http://aging.senate.gov/


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. Failure to abide by these requirements can subject hospitals or physicians to civil monetary sanctions or exclusion from Medicare. Hospitals may also be subject to civil liability under the statute for personal injuries resulting from the violation.


NOTE: More details about this law are presented in Just Facts' research on healthcare.


[423] Article: "New York Offers Costly Lessons on Insurance." By Anemona Hartocollis. New York Times, April 17, 2010. http://www.nytimes.com/2010/04/18/nyregion/18insure.html?hp


In 1993, motivated by stories of suffering AIDS patients, the state became one of the first to require insurers to extend individual or small group coverage to anyone with pre-existing illnesses. …


Healthy people, in effect, began to subsidize people who needed more health care. The healthier customers soon discovered that the high premiums were not worth it and dropped out of the plans. The pool of insured people shrank to the point where many of them had high health care needs. Without healthier people to spread the risk, their premiums skyrocketed, a phenomenon known in the trade as the "adverse selection death spiral."


NOTE: Details regarding the preexisting condition mandate in the Affordable Care Act (a.k.a. Obamacare) are presented in Just Facts' research on healthcare.


[424] Paper: "The High Cost of Renewable-Electricity Mandates." By Robert Bryce. Manhattan Institute, February 2012. http://www.manhattan-institute.org/pdf/eper_10.pdf


Executive Summary: "Motivated by a desire to reduce carbon emissions, and in the absence of federal action to do so, 29 states (and the District of Columbia and Puerto Rico) have required utility companies to deliver specified minimum amounts of electricity from 'renewable' sources, including wind and solar power."


Pages 3-4:


Although the push for more renewable energy is contributing to the rising cost of electricity, it's certainly not the only factor—new environmental regulations and overall expansion of the electricity transmission system are also to blame. Without rigorous cost-benefit analysis by the states, it's difficult to isolate the cost of the renewable mandates from these other factors. …


That said, we have compared the costs of electricity in RPS [renewable portfolio standards] and non-RPS states, using price information from the EIA [Energy Information Administration]. …


In the ten-year period between 2001 and 2010—the period during which most of the states enacted their RPS mandates—residential and commercial electricity prices in RPS states increased at faster rates than those in non-RPS states. …


To get closer to an "apples to apples" comparison of electricity rates, we focused on seven states with RPS mandates and seven without. All 14 are heavily dependent on coal—responsible, on average, for 63 percent of their electricity—and also on natural gas. To be certain, this is not a perfect comparison. The combined population of the non-RPS states is only about half that of the states with RPS mandates, for example. Nevertheless, a striking pattern of higher rates in coal-dependent RPS states emerged from this analysis….


Between 2001 and 2010, electricity rates in the coal-dependent RPS states increased by an average of 54.2 percent, more than twice the increase seen in the coal-dependent non-RPS states.


[425] Constitution of the United States. Signed September 17, 1787. http://justfacts.com/constitution.asp


Article I, Section 7:


[Clause 1] All Bills for raising Revenue shall originate in the House of Representatives; but the Senate may propose or concur with Amendments as on other Bills.


[Clause 2] Every Bill which shall have passed the House of Representatives and the Senate, shall, before it become a Law, be presented to the President of the United States; If he approve he shall sign it, but if not he shall return it, with his Objections to that House in which it shall have originated, who shall enter the Objections at large on their Journal, and proceed to reconsider it. If after such Reconsideration two thirds of that House shall agree to pass the Bill, it shall be sent, together with the Objections, to the other House, by which it shall likewise be reconsidered, and if approved by two thirds of that House, it shall become a Law. But in all such Cases the Votes of both Houses shall be determined by yeas and Nays, and the Names of the Persons voting for and against the Bill shall be entered on the Journal of each House respectively. If any Bill shall not be returned by the President within ten Days (Sundays excepted) after it shall have been presented to him, the Same shall be a Law, in like Manner as if he had signed it, unless the Congress by their Adjournment prevent its Return, in which Case it shall not be a Law.


Article I, Section 8, Clause 1: "The Congress shall have Power To lay and collect Taxes, Duties, Imposts and Excises, to pay the Debts and provide for the common Defence and general Welfare of the United States…."


[426] Report: "The 2014 Long-Term Budget Outlook." Congressional Budget Office, July 15, 2014. https://www.cbo.gov/publication/45471


Page 56: "CBO's baseline and extended baseline are meant to be benchmarks for measuring the budgetary effects of legislation, so they mostly reflect the assumption that current laws remain unchanged."

Page 66:


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 would tend to decline relative to income over time under current law. One consequence is that, under the extended baseline, average federal tax rates would increase in the long run.


[427] Calculated with the dataset: "Table 3.2. Federal 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


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.


[428] Transcript: "Inside the Dot.Com Crash." CNN Moneyline, December 26, 2000. http://transcripts.cnn.com/TRANSCRIPTS/0012/26/se.01.html


"One year ago at this time, Internet stocks were in the midst of an astonishing rally, and their future seemed limitless. But since then, investors have been facing a brutal reality check, watching their shares fall 70, 80, 90 percent from their highs and in some cases disappear completely."


[429] Textbook: Financial Markets and Institutions (Abridged Ninth Edition). By Jeff Madura. South-Western Cengage Learning, 2011.


Page 248: "The Wilshire 5000 Total Market Index was created in 1974 to reflect the values of 5,000 U.S. stocks. … It represents the broadest index of the U.S. stock market. It is widely quoted in financial media and closely monitored by the Federal Reserve and many financial institutions."


[430] Webpage: "Dow Jones Wilshire 5000 Composite Index." Accessed October 9, 2008 at http://www.wilshire.com/

 

Dow Jones Wilshire 5000 Composite Index


[431] Calculated with data from the webpage: "History of The NASDAQ Composite Index." FedPrimeRate.com. Accessed September 29, 2012 at http://www.fedprimerate.com/nasdaq-composite-history.htm


"December 31, 1999 [=] 4,069.31 … December 31, 2000 [=] 2,470.52"


CALCULATION: (4,069.31 - 2,470.52) / 4,069.31 = 39.3%


[432] Book: Guide to Economic Indicators (Fifth edition). By Richard Stutely. Bloomberg Press, 2003.


Page 40: "[T]he rush to publish information often means that figures are revised several times as new information comes to hand, perhaps causing major changes in interpretation. For example, industrial production figures may be based initially on sales and output data and adjusted later to take account of changes in inventories not caught in the sales figures."


[433] Commentary: "Sunny Clinton forecast leaves cloud over Bush." By Robert Novak. CNN, August 9, 2002. http://www.cnn.com/


"The Commerce Department's Bureau of Economic Analysis estimates before-tax profits of domestic nonfinancial corporations quarterly. Revised figures last week showed profits were really lower by 10.7 percent, 12.2 percent, 15.2 percent and 18 percent for the four quarters of 1999. In 2000, this gap became a chasm. The revised quarterly profits for the election year are lower than the announced figures by 23.3 percent, 25.9 percent, 29.9 percent and 28.2 percent."


[434] Calculated with the dataset: "Table 1.14: Gross Value Added of Domestic Corporate Business in Current Dollars and Gross Value Added of Nonfinancial Domestic Corporate Business in Current and Chained Dollar." U.S. Department of Commerce, Bureau of Economic Analysis. April 29, 2015. http://www.bea.gov/iTable/iTable.cfm?ReqID=9&step=1


Line 37: "Nonfinancial corporate business: Profits before tax (without IVA and CCAdj)."

 

Nonfinancial corporate business: Profits before tax


[435] Dataset: "Table 1.1.1. Percent Change From Preceding Period in Real Gross Domestic Product." U.S. Department of Commerce, Bureau of Economic Analysis. Last revised April 29, 2015. http://www.bea.gov/iTable/iTable.cfm?ReqID=9&step=1


"Gross domestic product … 2001Q1 [=] -1.1%"


[436] Report: "US Business Cycle Expansions and Contractions. National Bureau of Economic Research, September 20, 2010. http://www.nber.org/…


Page 1: "Contractions (recessions) start at the peak of a business cycle and end at the trough."

Page 2: "Peak [=] March 2001 (I) … Trough [=] November 2001 (IV)"


[437] Webpage: "Chronology of Swearing-In Events." Joint Congressional Committee on Inaugural Ceremonies. Accessed May 14, 2015 at http://www.inaugural.senate.gov/swearing-in/chronology


[438] Article: "$1.35 trillion tax cut becomes law." By Kelly Wallace. CNN, June 7, 2001. http://edition.cnn.com/2001/ALLPOLITICS/06/07/bush.taxes/


"President George W. Bush signed into law Thursday the first major piece of legislation of his presidency, a $1.35 trillion tax cut over 10 years."


[439] Report: "The Budget and Economic Outlook: An Update." Congressional Budget Office, August 2011. https://www.cbo.gov/…


Page 85:


Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA): This legislation (Public Law 107-16) significantly reduced tax liabilities (the amount of tax owed) between 2001 and 2010 by cutting individual income tax rates, increasing the child tax credit, repealing estate taxes, raising deductions for married couples who file joint returns, increasing tax benefits for pensions and individual retirement accounts, and creating additional tax benefits for education. EGTRRA phased in many of those changes, including some that did not become fully effective until 2010. For legislation that modified or extended provisions of EGTRRA, see Jobs and Growth Tax Relief Reconciliation Act of 2003 and Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010.


Page 87:


Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA): This legislation (Public Law 108-27) reduced taxes by advancing to 2003 the effective date of several tax reductions previously enacted in the Economic Growth and Tax Relief Reconciliation Act of 2001. JGTRRA also increased the exemption amount for the individual alternative minimum tax, reduced the tax rates for income from dividends and capital gains, and expanded the portion of capital purchases that businesses could immediately deduct through 2004. Those tax provisions were set to expire on various dates. (The law also provided roughly $20 billion for fiscal relief to states.)


[440] Report: "Major Tax Issues in the 111th Congress." By Jane G. Gravelle and Pamela J. Jackson. Congressional Research Service, May 6, 2009. http://royce.house.gov/…


Pages 9-10:


The Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA; P.L. 107-16) provided a substantial tax cut that it scheduled to be phased in over the 10 years following its enactment. However, to comply with a Senate procedural rule for legislation affecting the budget (the "Byrd rule"), the act contained language "sunsetting" its provisions after calendar year 2010. Thus, all of EGTRRA's tax cuts expire at the end of 2010.


The most prominent provisions EGTRRA scheduled for phase-in were


• reduction in statutory individual income tax rates;

• creation of a new 10% tax bracket;

• an increase in the per-child tax credit;

• tax cuts for married couples designed to alleviate the "marriage tax penalty"; and

• repeal of the estate tax.


In addition, EGTRRA provided for a temporary reduction in the individual alternative minimum tax (AMT) by increasing the AMT's exemption amount, but scheduled the AMT relief to expire at the end of 2004.


Page 18:


Congress has enacted tax cuts in the recent past partly to provide a fiscal stimulus. The Economic Growth and Tax Reconciliation Act of 2001 (EGTRRA; P.L. 107-16) was enacted partly as a means of boosting an economy that entered recession in March 2001. EGTRRA contained a broad range of tax cuts, but was designed partly to deliver an immediate stimulus, and thus included a rate-reduction tax credit that was mailed to individuals in 2001 as checks from the U.S. Treasury.39


39 U.S. Congress, Joint Committee on Taxation, General Explanation of Tax Legislation Enacted in the 107th Congress, committee print, 107th Cong., 2nd sess. (Washington: GPO, 2003), p. 8. For an explanation of the credit, see CRS Report RS21171, The Rate Reduction Tax Credit - "The Tax Rebate" - in the Economic Growth and Tax Relief Reconciliation Act of 2001: A Brief Explanation, by Steven Maguire.


Page 18:


Following the September 11, 2001, attacks and in the midst of increased certainty that the economy was in recession, Congress considered additional fiscal stimulus proposals that initially included a tax rebate for individuals. The final stimulus package that was adopted (the Job Creation and Worker Assistance Act of 2002; P.L. 107-147), however, did not contain a rebate. The act did include temporary "bonus" accelerated depreciation that was aimed at boosting business investment as well as a temporary extension of net operating loss (NOL) carrybacks for businesses.


Page 10:


The Jobs and Growth Tax Relief and Reconciliation Act of 2003 (JGTRRA; P.L. 108-27) provided for the "acceleration" of most of EGTRRA's scheduled tax cuts—that is, it moved up the effective dates of most of the tax cuts EGTRRA had scheduled to phase-in gradually, generally making them effective in 2003. (The phased-in repeal of the estate tax was not accelerated by JGTRRA.) Many of JGTRRA's accelerations, however, were themselves temporary and were scheduled to expire at the end of 2004. Also, JGTRRA temporarily implemented a reduction in the maximum tax rate on dividends and capital gains, reducing the rates to 15% (5% for individuals in the 10% and 15% marginal income tax brackets). The reduction was initially scheduled to expire at the end of 2008.


In 2004, Congress thus faced two "expiration" issues related to EGTRRA and JGTRRA. One was a question for the longer term: the scheduled expiration of EGTRRA's tax cuts at the end of 2010. The second was the expiration of JGTRRA's accelerations at the end of 2004. In September, Congress addressed the second of these with enactment of the Working Families Tax Relief Act (WFTRA; P.L. 108-311). WFTRA generally extended JGTRRA's accelerations of EGTRRA's tax cuts through 2010—that is, up to the point at which EGTRRA's cuts are scheduled to expire. WFTRA also extended EGTRRA's increased AMT exemption for one year.


In 2005, TIPRA extended JGTRRA's dividend and capitals gains rate cuts along with its AMT reduction. The dividend and capital gains cuts were extended through 2010; the increased AMT exemption through 2006.


Notwithstanding the various extensions and accelerations, the issue of EGTRRA's scheduled expiration at the end of 2010 remains and was debated in Congress throughout 2008. The debate over extension of the tax cuts has centered on three broad issues: its likely impact on the federal budget deficit, its possible effect on long-term economic growth, and its results for the fairness of the tax system.


[441] Calculated with data from:


a) Vote 118: "Economic Growth and Tax Relief Reconciliation Act." U.S. House of Representatives, May 26, 2001. http://clerk.house.gov/evs/2001/roll149.xml


b) Vote 170: "Economic Growth and Tax Relief Reconciliation Act of 2001." U.S. Senate, May 26, 2001. http://www.senate.gov/…


Party Voted YES Voted NO
Republican 262 100% 0 0%
Democrat 25 10% 229 90%
Independent 1 50% 1 50%


NOTE: Results do not include those not present or not voting.


[442] Calculated with data from:


a) Vote 52: "Job Creation and Worker Assistance Act of 2002." U.S. House of Representatives, March 7, 2002. http://clerk.house.gov/evs/2002/roll052.xml


b) Vote 247: "Job Creation and Worker Assistance Act of 2002." U.S. Senate, March 8, 2002. http://www.senate.gov/…


Party Voted YES Voted NO
Republican 265 100% 0 0%
Democrat 234 95% 12 5%
Independent 3 100% 0 0%


NOTE: Results do not include those not present or not voting.


[443] Calculated with data from:


a) Vote 225: "Jobs and Growth Reconciliation Tax Act." U.S. House of Representatives, May 23, 2003. http://clerk.house.gov/evs/2003/roll225.xml


b) Vote 196: "Jobs and Growth Reconciliation Tax Act." U.S. Senate, May 23, 2003. http://www.senate.gov/…

 

Party Voted YES Voted NO
Republican 272 99% 4 1%
Democrat 9 4% 244 96%
Independent 0 0% 2 100%


NOTE: Results do not include those not present or not voting.


[444] Report: "Filibusters and Cloture in the Senate." By Richard S. Beth & Stanley Bach. Congressional Research Service, Updated March 28, 2003. http://www.senate.gov/reference/resources/pdf/RL30360.pdf


Summary (page 2 in pdf):


The filibuster is widely viewed as one of the Senate's most characteristic procedural features. Filibustering includes any use of dilatory or obstructive tactics to block a measure by preventing it from coming to a vote. The possibility of filibusters exists because Senate rules place few limits on Senators' rights and opportunities in the legislative process. …


Senate Rule XXII, however, known as the "cloture rule," enables Senators to end a filibuster on any debatable matter the Senate is considering. Sixteen Senators initiate this process by presenting a motion to end the debate. The Senate does not vote on this cloture motion until the second day after the motion is made. Then it usually requires the votes of at least three-fifths of all Senators (normally 60 votes) to invoke cloture. Invoking cloture on a proposal to amend the Senate's standing rules requires the support of two-thirds of the Senators present and voting.


Page CRS-10:


Invoking cloture usually requires a three-fifths vote of the entire Senate—"three-fifths of the Senators duly chosen and sworn." If there are no vacancies, therefore, 60 Senators must vote to invoke cloture. In contrast, most other votes require only a simple majority (that is, 51%) of the Senators present and voting, assuming that those Senators constitute a quorum. In the case of a cloture vote, the key is the number of Senators voting for cloture, not the number voting against. Failing to vote on a cloture motion has the same effect as voting against the motion: it deprives the motion of one of the 60 votes needed to agree to it.


[445] Statement of U.S. Senator Phil Gramm (Republican, Texas). Congressional Record, June 12, 2002. http://www.gpo.gov/…


"The Senator complains that the tax cut is temporary. Why? Because we did not have 60 votes; because the Democrats opposed the President's tax cut in overwhelming numbers. They had the ability to filibuster. The only way we could get the tax cut adopted was to use a procedure that required that the tax cut expire after 10 years. Now the Senator from North Dakota is attacking us for a provision that exists because the Democrats would have filibustered the tax cut."


NOTE: A video clip of this statement is available at http://www.c-spanvideo.org/clip/11287


[446] Report: "Committee on the Budget, United States Senate, 1974–2006." United States Senate Committee on the Budget, 2006. http://budget.senate.gov/…


Page 10:


Economic Growth and Tax Relief Reconciliation Act of 2001


P.L. 107–16 (June 7, 2001) Public Law 107–16 was signed by President George W. Bush and reduced revenues significantly; revenue reductions, together with outlay increases for refundable tax credits, reduced the projected surplus by $1.349 trillion over FY2001–FY2011. The tax cuts in the Act were scheduled to sunset in no more than 10 years in order to comply with the Senate's "Byrd rule" against extraneous matter in reconciliation legislation (Section 313 of the Congressional Budget Act of 1974).


[447] Report: "The Budget Reconciliation Process: The Senate's 'Byrd Rule'." By Bill Heniff Jr. Congressional Research Service, September 13, 2010. http://democrats.budget.house.gov/…


Page 12: "In 2001, no actions under the Byrd rule were taken during consideration of a significant revenue reduction measure, the Economic Growth and Tax Relief Reconciliation Act of 2001. The potential application of the Byrd rule to the measures was averted by the inclusion of "sunset" provisions that limited the duration of the tax cuts, thereby preventing deficit increases beyond the applicable budget window."


[448] 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 16-17: "Legislation in 2001, 2003, and 2004, addressed marriage tax penalties by increasing the standard deduction for couples to twice that of singles and broadening the 15% tax bracket to twice the width of singles' bracket.6 (These changes also increase the marriage tax bonuses experienced by many married couples. Because of procedural rules in the Senate, however, these changes are scheduled to sunset after 2010.)"


[449] Report: "Major Tax Issues in the 111th Congress." By Jane G. Gravelle and Pamela J. Jackson. Congressional Research Service, May 6, 2009. http://royce.house.gov/…


Page 4: "In part, the fluctuations [in federal receipts] were a result of the business cycle; the long economic boom of the 1990s helped push receipts to their record level in FY2000, while the ensuing recession and sluggish recovery helped reduce the level of revenues in subsequent years. However, policy changes, too, were responsible: significant tax cuts in 2001, 2002, and 2003 each contributed to the decline in taxes."


[450] Calculated with the dataset: "The 2014 Long-Term Budget Outlook." Congressional Budget Office, July 15, 2014.
https://www.cbo.gov/…


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


[451] Report: "Major Tax Issues in the 111th Congress." By Jane G. Gravelle and Pamela J. Jackson. Congressional Research Service, May 6, 2009. http://royce.house.gov/…


Page 2: "Prior to the recent downturns, the economy performed relatively strongly through the first half of 2007, yielding 22 consecutive quarters of real growth."


NOTE: The federal government often revises its official figures for GDP. Per the next footnote, real GDP growth was positive for 25 consecutive quarters from 2001Q4 through 2007Q4. This however, may change with future revisions.


[452] Calculated with the dataset: "Table 1.1.1. Percent Change From Preceding Period in Real Gross Domestic Product." U.S. Department of Commerce, Bureau of Economic Analysis. Last revised April 29, 2015. http://www.bea.gov/iTable/iTable.cfm?ReqID=9&step=1


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


[453] Calculated with the dataset: "The 2014 Long-Term Budget Outlook." Congressional Budget Office, July 15, 2014.
https://www.cbo.gov/…


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


[454] Report: "Major Tax Issues in the 111th Congress." By Jane G. Gravelle and Pamela J. Jackson. Congressional Research Service, May 6, 2009. http://royce.house.gov/…


Page 2:


As 2007 progressed, however, signs of economic weakness surfaced in a number of areas. One prominent area was housing, where prices stopped rising after years of growth and drops occurred in house sales and residential investment. Second, financial markets came under strain as investor concerns about the credit quality of mortgages (especially "subprime mortgages") had a damping effect on credit flows. Further, banks began reporting large losses resulting from declines in the market value of mortgages and other assets, leading them to become more restrictive in their lending to firms and households.3 The Federal Reserve Board responded by taking actions to ease monetary policy beginning in the second part of 2007. Additional interest rate cuts continued in March, April, and October 2008.


[455] Report: "US Business Cycle Expansions and Contractions. National Bureau of Economic Research, September 20, 2010. http://www.nber.org/…


Page 1: "Contractions (recessions) start at the peak of a business cycle and end at the trough."

Page 2: "Peak [=] December 2007 (IV) … Trough [=] June 2009 (II)"


[456] Dataset: "Unemployment Rate - Civilian Labor Force - LNS14000000." Bureau of Labor Statistics, U.S. Department of Labor. Data extracted May 13, 2015 at http://data.bls.gov/cgi-bin/surveymost?ln


[457] Report: "Major Tax Issues in the 111th Congress." By Jane G. Gravelle and Pamela J. Jackson. Congressional Research Service, May 6, 2009. http://royce.house.gov/…


Pages 15-17:


As noted above (see "The State of the Economy"), developments in late 2007 led prominent economic policymakers to call for legislation that would provide an economic stimulus. Support for a stimulus package came from both the Administration and Congress. In addition, in testimony before Congress, Federal Reserve Board chairman Ben Bernanke stated that legislation providing fiscal stimulus (i.e., tax cuts or spending increases) would be helpful if implemented quickly and did not compromise "fiscal discipline in the longer term."34


On February 7, both the House and Senate approved a version of the stimulus plan that had been passed earlier in the House. The final bill's main elements were a tax rebate in the form of a two-part credit, and an increased expensing tax benefit and enhanced depreciation for business investment in 2008. The bill is estimated to reduce tax revenue by $151.7 billion in FY2008 and by $134.0 billion over FY2008-FY2013. The smaller revenue loss over the five year period compared to the first year is due to the shifting of tax deductions into the present from depreciation.


The tax rebates were equal to a "basic" tax credit plus a per-child tax credit. The credits were refundable. Under the basic credit, individuals received a tax credit equal to the greater of two amounts that depended, respectively, on their pre-credit tax liability and their earned income. First, a taxpayer could claim a credit equal to their income tax liability, but not to exceed $600 ($1,200 for a joint return). For the earned income amount, a taxpayer could claim a $300 tax credit ($600 for a joint return) if the individual has at least $3,000 in qualified income (generally, income from salaries and wages, plus Social Security and veterans' disability payments) or an income tax liability of at least $1 and gross income exceeding the sum of the applicable standard deduction and one personal exemption (two, for joint returns). The child tax credit was $300 for each qualifying child.


The tax credit was ultimately based on individuals' 2008 tax and income, and was issued from the U.S. Treasury during the 2008 calendar year, with the Treasury basing its distributions on individuals' 2007 tax returns. When filing their 2008 tax returns (in 2009), individuals will recalculate the credit based on 2008 information, and can claim an additional credit if the 2008 information increases the amount of the credit. If the 2008 credit is less than that actually received, individuals will not be required to pay the difference. According to the Treasury Department, the checks began to be issued in May, 2008.35


The plan phased out the combined child and basic credit for individuals earning a threshold amount of more than $75,000 ($150,000 for joint returns). It reduced the credit by 5% of the individual's income in excess of the threshold phase-out threshold.


Business Tax Benefits


Under current law, businesses are allowed to "expense" (i.e., deduct immediately) the acquisition cost of a limited amount of new investment in machines and equipment rather than depreciating it over a period of years. Expensing thus provides a postponement (deferral) of taxes which constitutes a tax benefit because of the economic principle of discounting—the idea that a given amount of funds is worth more, the sooner it is received. Prior to the stimulus act, for 2008 firms were permitted to expense up to $128,000 of investment; the allowance was gradually reduced ("phased out") for firms whose investment exceeds a $510,000 threshold. The $128,000 amount was a temporary increase over a permanent cap of $25,000 that is set to apply in 2011 and thereafter. (The permanent phase-out threshold is $200,000.) The stimulus bill provided a one-year (for 2008) additional increase in the expensing cap and threshold, to $250,000 and $800,000, respectively.


When not eligible for expensing, outlays for tangible business property—that is, machines and equipment and commercial structures—are required to be deducted gradually (i.e. depreciated) over a number of years. For 2008, the stimulus plan provided temporarily more generous depreciation rules for machines and equipment under which 50% of the asset's cost could be deducted in its first year. Like expensing, this provision provided a tax benefit in the form of a deferral, although it was not as large.


[458] Webpage: "Chronology of Swearing-In Events." Joint Congressional Committee on Inaugural Ceremonies. Accessed May 14, 2015 at http://www.inaugural.senate.gov/swearing-in/chronology


[459] Transcript: "Obama's Remarks at Stimulus Bill Signing." Washington Post, February 17, 2009. http://www.washingtonpost.com/…


"The American Recovery and Reinvestment Act that I will sign today, a plan that meets the principles I laid out in January, is the most sweeping economic recovery package in our history."


[460] Report: "Major Tax Issues in the 111th Congress." By Jane G. Gravelle and Pamela J. Jackson. Congressional Research Service, May 6, 2009. http://royce.house.gov/…


Pages 5-6:


In response to deteriorating economic conditions, Congress enacted a second stimulus bill in February 2009, the American Recovery and Reinvestment Act of 2009, P.L. 111-5. This package cost $787 billion, and included spending programs, but about 40% of the cost was tax cuts. The elements include the following:


• Temporary income tax cuts for individuals, including $116.2 billion for a 6.2% credit for earnings with a maximum of $400 for singles and $800 for couples, phased out for taxpayers with incomes over $75,000 ($150,000 for joint returns); $4.7 billion for a temporary increase in the earned income credit, $14.8 to increase refundability of the child credit, $13.9 billion to expend tuition tax credits and make them 40% refundable (the refundability feature accounts for $3.9 billion). These provisions are effective for 2009 and 2010, though the associated revenue loss extends over FY2009-FY2011. For 2009 there is also an exclusion for $2,400 of unemployment benefits costing $4.7 billion, a sales tax deduction for new auto purchases at $1.7 billion and an extension of the AMT "patch", mainly a temporary increase in the AMT exemption, at a cost of $70.1 billion. An extension and revision of the first time homebuyers credit has revenue consequences over a longer period, costing $6.6 billion over FY2009-2019. Overall, the individual income tax cuts were $230 billion.

 

• Tax provisions for business, which lose revenue in FY2009-FY2010 and gain revenue thereafter, including $37.8 billion for extending bonus depreciation, $12.9 billion for the deferral and exclusion of income from the discharge of indebtedness, $4.1 billion for a temporary five year loss carryback for 2008 and 2009 for small business, and $1.1 billion for extending small business expensing. Along with a few other minor provisions, there is a revenue gain from enacting legislation to restrict the carryover of losses with an ownership change, reversing a Treasury ruling from 2007. Because these are largely timing provisions the overall revenue loss for FY2009-FY2010 is $6.2 billion.

 

• A series of provisions relating to tax exempt bonds aimed at aiding State and local governments, which cost $3.8 billion for FY2009-2010, and $30.0 billion from FY2009-FY2019. Almost half the revenue loss arises from allowing a taxable bond options which would make bonds attractive to tax exempt investors. Other major provisions measured by dollar cost are qualified school construction bonds, recovery zone bonds, and provisions allowing financial institutes more freedom to buy tax exempt bonds.

 

• A one-year delay in the 3% withholding for government contractors, which costs $5.8 billion in FY2011, gains most of the revenue in the next year, and costs $0.3 billion for FY2009-2019.

 

• Energy provisions, some permanent and some temporary, totaling $3.4 billion in FY2009-FY2011 and $20.0 billion in FY2009-2019. There is also a provision substituting grants for credits for certain energy projects which shifts benefits to the present.

 

• The proposal also includes a substitution of grants for the low-income housing credit, which shifts benefits to FY2009 ($3 billion), with a negligible effect over the long term. The plan also includes a much smaller provision to substitute grants for certain energy credits.

 

• A minor provision ($231 million for FY2009-2019) would provide incentives for hiring unemployed veterans and disconnected youth.


[461] Calculated with data from:


a) Vote 70: "American Recovery and Reinvestment Act of 2009." U.S. House of Representatives, February 13, 2009. http://clerk.house.gov/evs/2009/roll070.xml


b) Vote 64: "American Recovery and Reinvestment Act of 2009." U.S. Senate, February 13, 2009. http://www.senate.gov/…


Party Voted YES Voted NO
Republican 3 1% 214 99%
Democrat 302 98% 7 2%
Independent 1 100% 0 0%


NOTE: Results do not include those not present or not voting.


[462] Report: "Major Tax Issues in the 111th Congress." By Jane G. Gravelle and Pamela J. Jackson. Congressional Research Service, May 6, 2009. http://royce.house.gov/…


Page 3: "The decline in revenues had four main sources: the recession of 2001 and subsequent sluggish economic growth, enacted tax cuts, the economic stimulus payments (tax rebates), and the current economic slowdown."


[463] Calculated with the dataset: "The 2014 Long-Term Budget Outlook." Congressional Budget Office, July 15, 2014.
https://www.cbo.gov/…


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


[464] Report: "The Budget and Economic Outlook: An Update." Congressional Budget Office, August 2011. https://www.cbo.gov/…


Page 91:


Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (the 2010 tax act, Public Law 111-312): This law temporarily extended through 2012 provisions set to expire in 2010 that were initially enacted in the Economic Growth and Tax Relief Reconciliation Act of 2001, the Jobs and Growth Tax Relief Reconciliation Act of 2003, and the American Recovery and Reinvestment Act of 2009. Those extensions affected individual income tax rates, credits, and deductions. The act also increased the exemption amount for the alternative minimum tax, reduced the employee's contribution for the Social Security payroll tax, modified other tax provisions, and extended benefits for long-term unemployed workers.


[465] Report: "The Budget and Economic Outlook: Fiscal Years 2011 to 2021." Congressional Budget Office, January 2011. http://www.cbo.gov/…


Pages 8-9:


In December 2010, lawmakers enacted 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 legislation temporarily extended several tax provisions that affect individual income tax rates, credits, and deductions and the alternative minimum tax (AMT). It also reduced the employee's share of the Social Security payroll tax, modified other tax provisions, and extended benefits for long-term unemployed workers. The Congressional Budget Office (CBO) estimates that the act will increase the deficit by $390 billion in 2011, by $407 billion in 2012, and by $120 billion in 2013, and that it will reduce deficits by $59 billion between 2014 and 2020.1


Several provisions of the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), the Jobs and Growth Tax Relief Reconciliation Act of 2003, and the American Recovery and Reinvestment Act of 2009 (P.L. 111-5) have been extended:


• The 10 percent tax bracket, which otherwise would have reverted to 15 percent, and the lower statutory tax rates of 25, 28, 33, and 35 percent for the highest four tax brackets, which would have otherwise risen to 28, 31, 36, and 39.6 percent;

• The expanded 15 percent tax bracket and the standard deduction for married couples, which was set to contract to less than twice the deduction for single taxpayers;

• The 15 percent top tax rate on long-term capital gains realizations and dividends, which would have reverted to 20 percent for capital gains and 39.6 percent for dividends;

• The postponement of the phaseout of itemized deductions and personal exemptions for higher-income taxpayers;

• The $1,000 tax credit per child (maintained rather than dropping to $500) and the expanded availability of that credit to taxpayers without tax liability; and

• The American Opportunity Credit (for certain postsecondary education expenses) and an expansion of the earned income tax credit.


Those extensions will increase deficits by $403 billion between 2011 and 2014, according to estimates by CBO and the staff of the Joint Committee on Taxation.


EGTRRA began to reduce the estate tax in 2001 and eliminated it entirely in 2010. It also reduced tax rates on gifts through December 2010. Tax rates and effective exemption amounts for estate and gift taxes were to return to previously scheduled levels (a maximum rate of 55 percent and an exemption amount of $1 million) on January 1, 2011. The 2010 tax act set the rates and effective exemption amounts for 2011 and 2012 at 35 percent and $5 million (adjusted for inflation), lowering revenues, on net, by $68 billion over the 2011–2020 period. Those lower rates and higher exemption amounts will expire on December 31, 2012.


The "AMT patch," which increased the exemption amounts, was first enacted in 2001 to hold down the number of taxpayers affected. That provision expired most recently at the end of December 2009. The new tax legislation extended the patch through December 2011, at a cost of $86 billion in fiscal year 2011 and $68 billion in 2012. Because of effects on the timing of tax payments, the new provision is estimated to increase revenue by $17 billion in 2013.


The employee's portion of the payroll tax for Social Security was reduced by 2 percentage points for calendar year 2011, reducing revenues by $84 billion in 2011 and by $28 billion in 2012, CBO estimates.


As a result of the 2010 tax act, rather than deducting all such costs over several years, businesses were able to immediately deduct the full costs of their investment in business equipment beginning late in 2010 and continuing for all of 2011; half of the cost of such investments may be deducted in 2012. In all, the provision will reduce revenues by about $55 billion in each of the next two years and increase revenues by nearly $90 billion between 2013 and 2020. (Because it will allow companies to take depreciation deductions earlier, fewer deductions will be available for later years, thus increasing taxable income and raising businesses' income taxes.)


[466] 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.".


[467] 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.".


[468] Calculated with the dataset: "Table 1.1.1. Percent Change From Preceding Period in Real Gross Domestic Product." U.S. Department of Commerce, Bureau of Economic Analysis. Last revised April 29, 2015. http://www.bea.gov/iTable/iTable.cfm?ReqID=9&step=1


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


[469] Report: "Major Tax Issues in the 111th Congress." By Jane G. Gravelle and Pamela J. Jackson. Congressional Research Service, May 6, 2009. http://royce.house.gov/…


Page 3: "The decline in revenues had four main sources: the recession of 2001 and subsequent sluggish economic growth, enacted tax cuts, the economic stimulus payments (tax rebates), and the current economic slowdown."


[470] Calculated with the dataset: "The 2014 Long-Term Budget Outlook." Congressional Budget Office, July 15, 2014.
https://www.cbo.gov/…


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


[471] Report: "The 'Fiscal Cliff' and the American Taxpayer Relief Act of 2012." By Mindy R. Levit and others. Congressional Research Service, January 4, 2013. https://www.fas.org/sgp/crs/misc/R42884.pdf

Page 1: "On January 2, 2013, President Obama signed into law the American Taxpayer Relief Act of 2012 (ATRA; H.R. 8 as enacted), which prevented many—but not all—of the fiscal cliff policies from going into effect."

Pages 3-6:


ATRA addressed several revenue provisions that had been set to expire at the end of 2012. These included the "Bush-era tax cuts," provisions related to the estate tax, certain tax provisions enacted or expanded as part of the American Recovery and Reinvestment Act of 2009, the Alternative Minimum Tax (AMT), and a number of temporary tax provisions (also known as "tax extenders"). …

The Bush-era tax cuts included provisions—initially enacted as part of the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA; P.L. 107-16) and the Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA; P.L. 108-27)8—which reduced income tax liabilities from 2002 to 2010. These tax cuts were extended for 2011 and 2012 by the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (P.L. 111-312). The Bush-era tax cuts lowered income taxes in a variety of ways, including by reducing marginal tax rates on ordinary income; reducing tax rates on long-term capital gains and dividends; reduced and ultimately repealed limitations for personal exemptions (PEP) and itemized deductions (Pease);9 and expanded certain tax credits, including the Earned Income Tax Credit (EITC),10 child tax credit,11 adoption tax credit,12 and dependent care tax credit.13 The Bush-era tax cuts also contained provisions to reduce the marriage tax penalty,14 as well as modifying and expanding various education-related tax incentives.

ATRA made a variety of changes to these tax provisions. The law permanently extended and in certain cases modified tax provisions originally included in EGTRRA and JGTRRA. Specifically, ATRA permanently extended the reduced tax rates on both ordinary income and capital gains and dividends for taxpayers with taxable income15 below $400,000 ($450,000 for married taxpayers filing jointly).16 For taxpayers with taxable income above these thresholds, the marginal tax rate on ordinary income rose from 35% to 39.6% on the portion of their income above these thresholds, and the top tax rate on long term capital gains and dividends rose from 15% to 20%. ATRA also reinstated PEP and Pease for taxpayers with adjusted gross income (AGI) above $250,000 ($300,000 for married couples filing jointly), allowing these limitations on personal exemptions and overall itemized deductions to expire for those with AGI below these thresholds. ATRA also permanently extended the tax changes to a variety of tax credits, the marriage penalty and education-related tax incentives. …

Estate and Gift Tax

EGTRRA enacted provisions to phase out the estate tax18 over a 10-year period. In 2010, there was no federal estate tax. The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 temporarily reinstated, through 2012, the estate tax. As reinstated, the top rate for the estate tax was lower than it had been in 2009 (35%, as opposed to 45%). The exemption amount, as reinstated, was also higher than it had been in 2009 ($5.0 million, as opposed to $3.5 million). Absent legislative action, after 2012 the estate tax would have returned to pre-EGGTRA rules, with a top rate of 55% and a $1 million exemption level per decedent. ATRA permanently extended the estate tax rules established by the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010,19 except for the top tax rate which was increased from 35% to 40%. Hence, under ATRA, $5 million of a decedent's estate would be exempt from the estate tax (this threshold is indexed for inflation occurring after 2011 and was $5.12 million per decedent in 2012), and the top rate on estates over this threshold would be 40%. …

19 Thus, ATRA also extends the gift tax levels of a $5.12 million ($5 million indexed for inflation after 2011) exemption and a 40% top rate. In addition, it extends portability rules related to the passing of an exemption amount onto a surviving spouse.

Alternative Minimum Tax (AMT) Patch

The Alternative Minimum Tax (AMT) was designed to ensure that higher-income taxpayers who owed little or no taxes under the regular income tax because they could claim tax preferences would still pay some tax.21

Crucially, prior to the enactment of H.R. 8, key parts of the AMT—including the exemption amount—were not indexed for inflation. This meant that additional taxpayers—an estimated 27 million in 2012—would be subject to the AMT due to the rise of their nominal income levels over time.22 Over the past decade, Congress had regularly enacted temporary increases of the AMT exemption amount to adjust for inflation and allowed nonrefundable personal tax credits to reduce AMT tax liability (these policies are often known as the AMT "patch"). ATRA permanently adjusts the AMT exemption amount for inflation,23 ending the need for temporary "patches," and permanently allows nonrefundable personal tax credits to offset AMT liability.


Pages 11–12:


Payroll Tax Reduction

In an effort to stimulate the economy, Congress, in December 2010, temporarily reduced the employee and self-employed shares of the Social Security payroll tax by two percentage points (4.2% for employees and 10.4% for the self-employed). Social Security trust funds were "made whole" by a transfer of general revenue, so that Social Security did not lose revenues as a result of the payroll tax rate reduction. The temporary reduction was scheduled to expire at the end of 2011, but the reduction was extended for two months as part of the Temporary Payroll Tax Cut Continuation Act of 2011 (P.L. 112-78). Congress later extended the payroll tax rate reduction through the remainder of 2012 as part of the Middle Class Tax Relief and Job Creation Act of 2012 (P.L. 112-96). ATRA did not extend the payroll tax reduction past its current expiration date of December 31, 2012 and it has therefore reverted back to the original rates (6.2% for employees and 12.4% for the self-employed). Thus, the employee share of Social security payroll taxes is again 6.2% on the first $113,700 of wages in 2013.45


[472] Report: "The 2013 Long-Term Budget Outlook." By Joyce Manchester and others. Congressional Budget Office, September 2013.
https://www.cbo.gov/…

Pages 66–67:

 

The American Taxpayer Relief Act of 2012 (Public Law 112-240), which was enacted in early January 2013, permanently extended some lower tax rates and other tax provisions that expired at the end of calendar year 2012. In addition, it modified the alternative minimum tax (AMT) to permanently limit its reach and temporarily extended other tax provisions.1 The staff of the Joint Committee on Taxation and the Congressional Budget Office (CBO) estimated that, relative to laws in place at the end of 2012, enactment of the American Taxpayer Relief Act would reduce revenues by $3.6 trillion over the 2013–2022 period. The reduction in 2022 amounted to $496 billion, or about 10 percent of the revenues CBO had previously projected. With some modifications affecting high-income taxpayers, the new law made permanent several major tax provisions, originally enacted in 2001 and 2003, that expired on December 31, 2012.2 Those provisions include the following:


▪ Lower tax rates on ordinary income (generally all income except capital gains and dividends);
▪ An expanded 15 percent tax bracket and an increase in the standard deduction for married couples;
▪ The child tax credit of $1,000 per child;
▪ The 15 percent tax rate on long-term capital gains realizations and dividends; and
▪ The estate and gift tax rules in effect in 2012, with some modifications.


Under prior law, at the end of 2012, tax rates on ordinary income were slated to rise from the lower rates in effect that year (10, 15, 25, 28, 33, and 35 percent) to the rates in effect before 2001 (15, 28, 31, 36, and 39.6 percent). The American Taxpayer Relief Act permanently extended the lower rates, with the following exception: The top tax rate for single taxpayers with income above $400,000 and for married taxpayers who file jointly and have income above $450,000 is now set at 39.6 percent, the same top rate that had been scheduled to take effect in 2013 before the law was enacted.

The new law permanently extended the increase in the child tax credit from $500 to $1,000 per child; it also permanently extended provisions (enacted in 2001) that made the credit refundable for more families. (Before 2001, the credit was refundable only for families with three or more children.) In addition, the law extended, through 2017, a lower earned income threshold for the refundability of the child tax credit, expansions of the earned income credit, and the American Opportunity Tax Credit (a refundable credit for postsecondary education expenses)—all of which were enacted in 2009.

Before the enactment of the American Taxpayer Relief Act, the tax rate on capital gains was scheduled to rise to 20 percent, and the tax rate on dividends was scheduled to equal the taxpayer's rate on other income in 2013. The new law kept the 15 percent limit on those rates for most taxpayers and raised the top rate on dividends and capital gains to 20 percent for high-income taxpayers. Separately, the law permanently extended the estate and gift tax rules in effect in 2012, although with a higher top tax rate of 40 percent, and indexed the unified credit under that tax for inflation. The law also increased the AMT's exemption amount (the higher amount had expired at the end of 2011) and indexed that amount (and other parameters of the tax) for inflation, beginning in 2013.

Several tax provisions extended by the new law through calendar year 2013 had expired at the end of calendar year 2011. Some of those, including the research and experimentation tax credit, have routinely been extended in the past. The law also extended for one year a tax provision that allows businesses to immediately deduct 50 percent of new investments in equipment.

[473] Calculated with data from:

a) Dataset: "The 2014 Long-Term Budget Outlook." Congressional Budget Office, July 15, 2014. https://www.cbo.gov/…

b) Report: "The Budget and Economic Outlook: Fiscal Years 2015 to 2025." Congressional Budget Office, January 26, 2015. https://www.cbo.gov/publication/49892

Supplementary dataset: "Historical Budget Data—January 2015 Baseline." https://www.cbo.gov/…
"Table 2. Revenues, by Major Source, Since 1965 (In Billions of Dollars)"

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

[474] Report: "The 2014 Long-Term Budget Outlook." Congressional Budget Office, July 15, 2014. https://www.cbo.gov/publication/45471

 

Pages 60-61:


CBO's extended baseline follows the agency's April 2014 baseline budget projections for the next decade and then extends the baseline concept beyond that 10-year window.4 The extended baseline reflects the assumptions that, after 2024, the rules governing the individual income, payroll, excise, and estate and gift taxes would evolve as specified under current law and that revenues from corporate income taxes and all other sources (such as receipts from the Federal Reserve) would remain constant as a share of GDP.

Under current law, certain tax provisions are scheduled to expire during the next decade, and new provisions of law are scheduled to go into effect. Therefore, the baseline and extended baseline incorporate the following specific assumptions:


▪ A new tax on certain employment-based health insurance plans with high premiums, which is scheduled to go into effect as a result of the ACA beginning in 2018, would be implemented as specified in current law.
▪ Certain tax provisions that have recently expired would not be subsequently extended, and provisions scheduled to expire over the next several years would do so, even if those provisions have been routinely extended in the past. In particular, rules allowing for accelerated depreciation deductions for certain business investments, which expired at the end of December 2013, would not be extended, and certain individual income tax credits would expire or decline in value after 2017.


[475] Calculated with the dataset: "The 2014 Long-Term Budget Outlook." Congressional Budget Office, July 15, 2014.
https://www.cbo.gov/…

 

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

 

[476] Constructed with data from:

 

a) Dataset: "The 2014 Long-Term Budget Outlook." Congressional Budget Office, July 15, 2014.
https://www.cbo.gov/…

 

b) Report: "The 2014 Long-Term Budget Outlook." Congressional Budget Office, July 15, 2014. https://www.cbo.gov/publication/45471

 

Page 60:


Some of the variation in the amounts of revenue generated by different types of taxes has stemmed from changes in economic conditions and from the way those changes interact with the tax code. For example, in the absence of legislated tax reductions, receipts from individual income taxes tend to grow relative to GDP because rising real income tends to push a greater share of income into higher tax brackets—a phenomenon known as real bracket creep. In addition, because some parameters of the tax system are not indexed to increase with inflation, rising prices alone push a greater share of income into higher tax brackets.3

3 The parameters of the tax system include the amounts that define the various tax brackets; the amounts of the personal exemption, standard deductions, and credits; and tax rates. Many of the parameters—including the personal exemption, standard deduction, and tax brackets—are indexed for inflation, but some, such as the amount of the maximum child tax credit, are not. The effect of price increases on tax receipts was much more significant before 1984 when none of the parameters of the individual income tax were indexed for inflation.

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

 

[477] Article: "Snip!, Snip!, Snip!" By Howard Fineman and Rich Thomas. Newsweek, February 19, 2001. Pages 18-22.


[478] 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."


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. (The value of health insurance is measured on the basis of the Census Bureau's estimates of the average cost to the government of providing such insurance.)


[479] Calculated with the 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"


Tab 7: "Income Source by Market Income"


NOTES:

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

- Newsweek used gross income as a measure of income, while CBO broke down income sources into various categories that can be summed to make an estimate of gross income. In accord with the IRS's definition of gross income†, Just Facts estimated gross income from the CBO data by summing the following categories of income: cash wages and salaries, employee's contributions to deferred compensation plans, capital income, capital gains, business income, other market income, and Social Security.


[480] Transcript: "Remarks in Dover, New Hampshire." Barack Obama, September 12, 2008. http://www.presidency.ucsb.edu/ws/index.php?pid=78612


"And I can make a firm pledge: under my plan, no family making less than $250,000 will see their taxes increase - not your income taxes, not your payroll taxes, not your capital gains taxes, not any of your taxes."


NOTE: A video of the comments is available at https://www.youtube.com/watch?v=Q8erePM8V5U


[481] Webpage: "Chronology of Swearing-In Events." Joint Congressional Committee on Inaugural Ceremonies. Accessed May 14, 2015 at http://www.inaugural.senate.gov/swearing-in/chronology


"Inauguration Date January 20, 2009 … President Barack H. Obama"      


[482] Bill: "Children's Health Insurance Program Reauthorization Act of 2009." Signed into law by Barack Obama on February 4, 2009 (became Public Law No: 111-003). http://www.gpo.gov/…


Page 99 (in pdf):


TITLE VII—REVENUE PROVISIONS

SEC. 701. INCREASE IN EXCISE TAX RATE ON TOBACCO PRODUCTS.

(a) CIGARS.—Section 5701(a) of the Internal Revenue Code of 1986 is amended—

(1) by striking "$1.828 cents per thousand ($1.594 cents per thousand on cigars removed during 2000 or 2001)" in paragraph (1) and inserting "$50.33 per thousand",

(2) by striking "20.719 percent (18.063 percent on cigars removed during 2000 or 2001)" in paragraph (2) and inserting "52.75 percent", and

(3) by striking "$48.75 per thousand ($42.50 per thousand on cigars removed during 2000 or 2001)" in paragraph (2) and inserting "40.26 cents per cigar".

(b) CIGARETTES.—Section 5701(b) of such Code is amended—

(1) by striking "$19.50 per thousand ($17 per thousand on cigarettes removed during 2000 or 2001)" in paragraph (1) and inserting "$50.33 per thousand", and

(2) by striking "$40.95 per thousand ($35.70 per thousand on cigarettes removed during 2000 or 2001)" in paragraph (2) and inserting "$105.69 per thousand".

(c) CIGARETTE PAPERS.—Section 5701(c) of such Code is amended by striking "1.22 cents (1.06 cents on cigarette papers removed during 2000 or 2001)" and inserting "3.15 cents".

(d) CIGARETTE TUBES.—Section 5701(d) of such Code is amended by striking "2.44 cents (2.13 cents on cigarette tubes removed during 2000 or 2001)" and inserting "6.30 cents".

(e) SMOKELESS TOBACCO. …


[483] Webpage: "Federal Excise Tax Increase and Related Provisions." U.S. Treasury, Alcohol and Tobacco Tax Trade Bureau. Page last reviewed or updated on September 4, 2012. http://www.ttb.gov/main_pages/schip-summary.shtml


The Children's Health Insurance Program Reauthorization Act of 2009 (CHIPRA, Public Law 111–3) ("the Act"), was signed into law on February 4, 2009. The Act increases the Federal excise taxes on tobacco products, imposes a floor stocks tax, imposes new requirements on manufacturers and importers of processed tobacco, expands the definition of roll-your-own tobacco, and changes the basis for denial, suspension, or revocation of permits. …


… The tax rates in effect on April 1, 2009, and just previous to the increase, as well as the floor stocks tax, are shown in the table below. …


[484] Calculated with data from:


a) Vote 50: "Children's Health Insurance Program Reauthorization Act of 2009." U.S. House of Representatives, February 4, 2009. http://clerk.house.gov/evs/2009/roll050.xml


b) Vote 31: "Children's Health Insurance Program Reauthorization Act of 2009." U.S. Senate, January 29, 2009. http://www.senate.gov/…


Combined vote totals from both House of Congress:

 

Party Voted YES Voted NO
Republican 49 23% 165 77%
Democrat 305 99% 2 1%
Independent 2 100% 0 0%


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


[485] 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."


[486] Calculated with data from:


a) Vote 165: "Patient Protection and Affordable Care Act." U.S. House of Representatives, March 21, 2010. http://clerk.house.gov/evs/2010/roll165.xml


b) Vote 396: "Patient Protection and Affordable Care Act." U.S. Senate, December 24, 2009. http://www.senate.gov/…


Combined vote totals from both House of Congress:

 

Party Voted YES Voted NO
Republican 0 0% 178  100%
Democrat 277 79% 73 21%
Independent 2 100% 0 0%


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


[487] Calculated with data from:


a) Vote 194: "Health Care and Education Reconciliation Act of 2010." U.S. House of Representatives, March 25, 2010. http://clerk.house.gov/evs/2010/roll194.xm


b) Vote 105: "Health Care and Education Reconciliation Act of 2010." U.S. Senate, March 25, 2010. http://www.senate.gov/…


Combined vote totals from both House of Congress:


Party Voted YES Voted NO
Republican 0 0% 215 100%
Democrat 274 89% 35 11%
Independent 2 100% 0 0%


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


[488] Determined with data from:


a) 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

NOTES:

- Revenue provision # 6 (Require information reporting on payments to corporations) has been repealed and is thus subtracted from the total. [Article: "President Signs Repeal of Expanded 1099 Requirements." Journal of Accountancy, April 14, 2011. http://www.journalofaccountancy.com/web/20114071.htm]

- Not included in the table below are provisions with a "Negligible Revenue Effect" or a gain or loss of less than $50 million.


b) 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/…

NOTE: This report contains plain-language explanations of each provision, which Just Facts used to determine the tax category of each provision. (For example, is a provision considered a tax increase or the elimination of a targeted tax deduction?) There is room for subjectivity in making some of these determinations.

 

Provision Becomes

effective

Revenue

FY 2010-19

(billions)

Deloitte

explanation

(page #)

40% excise tax on health coverage in excess of $10,200/$27,500 … 2018 $32.0 9
Increase in additional tax on distributions from HSAs and Archer MSAs not used for qualified medical expenses to 20% 2011 $1.4 21
Impose annual fee on manufacturers and importers of branded drugs … 2010 $27.0 11
Impose 2.3% excise tax on manufacturers and importers of certain medical devices 2013 $20.0 12
Impose annual fee on health insurance providers 2014 $60.1 10
$500,000 deduction limitation on taxable year remuneration to officers, employees, directors, and service providers of covered health insurance providers 2012 $0.6 14
Broaden Medicare Hospital Insurance Tax Base for High-Income Taxpayers… 2013 $210.2 5-7
Impose 10% excise tax on indoor tanning services 2010 $2.7 12
Codify economic substance doctrine and impose penalties for underpayments 2010 $4.5 18
Impose Fee on Insured and Self-Insured Health Plans; Patient-Centered Outcomes Research Trust Fund 2013-2019 $2.6 12
TOTAL   $361.1  


[489] 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.


[490] "2014 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, August 28, 2014. http://www.cms.gov/…


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."


[491] 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.


[492] "2014 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, August 28, 2014. http://www.cms.gov/…


Page 28: "As noted, high-income workers pay an additional 0.9 percent of their earnings above $200,000 (for single workers) or $250,000 (for married couples filing joint income tax returns) in 2013 and later. Since these income thresholds are not indexed, over time an increasing proportion of workers and their earnings will become subject to the additional HI [Hospital Insurance] tax rate."


[493] 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."


[494] Report: "The Budget and Economic Outlook: 2015 to 2025." Congressional Budget Office, January 26, 2015. https://www.cbo.gov/publication/49892


Page 100:


Tax on Health Insurance Providers. Under the Affordable Care Act (ACA), health insurers are subject to an excise tax. The amount is specified in law and must be divided among insurers according to their share of total premiums charged. However, several categories of health insurers—such as self-insured plans, federal and state governments, and tax-exempt providers—are fully or partially exempt from the tax. CBO estimates that revenues from the tax totaled $7 billion in 2014 and will rise to $11 billion in 2015 and to $20 billion by 2025.


[495] Webpage: "Annual Fee on Branded Prescription Drug Manufacturers and Importers." Internal Revenue Service. Last reviewed or updated on May 13, 2015.