Tag Archives: Taxes

Why a Consumption Tax May not Make any Sense at All

By Steve Roth – You often hear calls out there — mostly from Right economists but also from some on the Left — for a consumption tax in the U.S. As presented, it’s a super-simple idea: tally your income, subtract your saving, and what’s left is your consumption. You pay taxes on that.

We want to encourage thrifty saving and discourage profligate consumption, so what’s not to like?

Start with a simple pared-down household. The only accounting complication is that they own a house.

How much did this household “save”? Should the interest payments count as consumption? The principal payments almost certainly should not. But what about home maintenance? A new paint job increases your home’s asset value. Should you depreciate that asset value over some years? Or say you buy new appliances for your kitchen: You’re cash out of pocket, but your home is worth more. Are those purchases “consumption”?

This notion of some simple tally of your “saving” starts to look more complicated.

The tuition line raises a particularly vexing question, and brings us back to the second question: what economic effects would we see from a consumption tax, under various accounting and taxation rules? Clearly, if you tax tuition, you discourage education.

And consider more-prosperous families paying for private school. Are those families “consuming” more education than public-school families? Those households would be especially hard hit if tuition counts as taxable consumption — as would those private schools. Is that A Good Thing? more> https://goo.gl/LZSRZd

Going to BAT for American workers: Why the border adjustment tax was a genuinely good idea

By Adam Looney – Although it has now been killed by the Republican congressional leadership and the White House, it’s worth understanding why it would be better for the U.S. economy and American workers than any available alternative.

If the goal is to disincentivize firms from inverting—moving their residence abroad—or shifting profits and activities to lower-tax countries, reforms must address why firms move abroad or start overseas to begin with. Firms don’t move abroad to pay lower taxes on foreign-source income—after all, they don’t pay that much now—but to reduce the taxes they owe on their domestic profits.

The BAT addresses the fundamental problem: as long as there is a lower-tax country out there, there is always going to be a tax incentive to produce abroad and sell it in America, rather than to make it in America in the first place.

Under the BAT (border adjustment tax), all companies would pay tax if they sold to Americans, no matter where the goods and services were produced or where the company makes its headquarters. If firms don’t sell to Americans, they don’t pay U.S. tax. And if something is produced in America and consumed abroad, that’s tax free too. In this world, the U.S. tax rate or tax burden no longer matters for the firm’s decision on where to locate. more> https://goo.gl/Vwcocw

Republicans are victims of a discredited economic ideology

By Isabel V. Sawhill – Republicans have become trapped in their own rhetoric, crafted during years of being in opposition. As Ross Douthat noted in a recent New York Times column, drawing on new analysis in a report by Lee Drutman, that rhetoric is now well to the right of the beliefs held by the broader Republican electorate.

Republican leaders have failed to recognize the fact that the economic views of those who voted Republican in 2016 “lean only slightly to the right.”

Republicans could have used the Trump election to effect a political realignment—one that would have combined a more moderate set of economic policies than the Republican elite currently supports with a more moderate set of cultural positions than those espoused by leading Democrats.

Instead, the Republican elites are now out-of-step with their followers and could pay a big political price if they continue down their current path. more> https://goo.gl/AXQ7x3

Wealth managers are the driving force behind global inequality

BOOK REVIEW

Capital Without Borders, Author: Brooke Harrington.

By Aamna Mohdin – In researching the book, Harrington traveled to 18 countries, interviewed 65 wealth managers, and even trained as one herself to better understand how tax avoidance works. In an interview last week with the Nation, she said although tax evasion would exist even without wealth managers, they have massively accelerated the trend. Tax dodging couldn’t happen “on the grand scale that we are seeing today without expert intervention,” she said.

“There’s a certain group of well-to-do people who don’t want to be subject to the laws that bind the rest of us,” she said. “With the help of wealth managers, they put themselves above the nation-state system by changing passports at will, having multiple residences, and bouncing around strategically to ensure that no national laws apply to them.” more> https://goo.gl/fzaAqJ

Why States Are Struggling to Tax Services

The Pew Charitable Trusts – Twenty-three state legislatures considered proposals this year to impose taxes on at least some services. But so far, none has made it into law intact — and most died outright. And in several states, new taxes on services that took effect this year are so complicated that tax offices are writing clarifying memos, like the one in North Carolina to distinguish between roof repair (taxable) and roof replacement (not taxable).

Trying to define exactly what services should be subject to a new tax can be tricky, with proposals to tax specific businesses usually drawing opposition from those who would be affected. And proposals to tax all services prompt demands for exceptions from businesses that maintain they are “essential” (like funeral services) and should not be subject to tax.

“The services that get pulled into these plans … are not necessarily the ones that bring in the most revenue, but the ones that are more politically viable,” said Meg Wiehe, deputy director of the Institute on Taxation and Economic Policy, a study group that looks at the distributional effects of tax policy. more> https://goo.gl/XNJKS5

The White House Unveiled a Tax Reform Plan. It’s Not Really a Plan

By Alex Altman – The proposal, which the White House promised would be the “the biggest individual and corporate tax cut in American history,” was strikingly short on details, from how much the goodies President Donald Trump is dangling would cost to how his Administration plans to patch the hole it would blow in the budget.

That’s an especially pressing question given how zealous many Republican lawmakers have been in the recent past about keeping legislation revenue-neutral.

The Committee for a Responsible Federal Budget estimated the plan could cost between $3 trillion and $7 trillion. Its base-case estimate, $5.5 trillion, would be 20% of U.S. GDP. “Even if tax cuts could generate more growth than estimated,” the group wrote, “no plausible amount of economic growth would be able to pay for a substantial portion of the tax plan.”

Even if a true tax-reform package isn’t in the offing anytime soon—the last reform of the tax code took place more than 30 years ago—Trump’s party has the power to simply slash rates this year.

That would juice the U.S. economy as Republicans head into a difficult election cycle in 2018. Which, to Trump, may be as good a goal as any. more> https://goo.gl/PRuvyB

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Why Tax Cuts Worked for Russia, But Not Kansas

By Leonid Bershidsky – Republican governor, Sam Brownback’s tax reform immediately deprived the Kansas State General Fund of $800 million a year, when revenue had been just $6.17 billion in the 2013 fiscal year, the last before the cuts took effect.

The resulting shortfalls have caused Brownback’s administration and legislators to scramble for extra revenue. Since the income tax cuts, Kansas has raised its sales tax twice. Combined local and state sales taxes are now higher here than in New York or California. The state has also plundered the highway construction fund to pay other bills and used every legal opportunity to defer payments.

Russia avoided a similar predicament because President Vladimir Putin was trying to solve a specific, narrow problem. In a country where tax evasion was a way of life, he was trying to give Russian employers an incentive to pay salaries legally rather than under the table. This benefited the budget, businesses (the tax environment became clearer and more stable) and the workers — suddenly, they had official income that allowed them to take out bank loans, creating a credit boom and speeding up growth. more> https://goo.gl/fPXxp6

A Wealth Tax Looks Like It Can Make a Country Richer

By Noah Smith – Standard economic theory says that taxation reduces productivity.

But what if it were possible to impose taxes in a way that also increased productivity?

The basic idea is startlingly simple.

Lots of people have wealth but aren’t able to use it effectively — they pick bad investments, or use it to start failing businesses. The U.S. tax system accommodates these people with a variety of breaks; if they lose on their investments, they get capital gains tax write-offs, while if their businesses are unprofitable those companies pay no tax.

Meanwhile, the people who put wealth to good use — the savvy entrepreneurs and wise investors of the world — get taxed on their profits and capital gains.

The net effect of this system is to allocate more of society’s capital to the people who are least able to put it to good use. more> http://goo.gl/SLWtwh

Closing Tax ‘Loopholes’ Would Choke the Middle Class

By Megan McArdle – Paying for new spending by “closing the loopholes” is a favorite rallying cry of almost everyone. But rarely are those people picturing giving up their own deductions for mortgage interest, employer-sponsored health insurance, dependent children, or retirement accounts.

Why, no! Those aren’t loopholes.

Even things that sound like easy ways to hit the rich — getting rid of the tax-preferred treatment of capital gains, dividends and municipal bond interest — would do damage well beyond the obvious targets.

There is a reason that even big European welfare states don’t try to tax capital gains too heavily; capital is mobile, and more importantly, capital formation is a voluntary decision to save rather than consume. more> http://goo.gl/YfWFgB

Updates from CHICAGO BOOTH

Why countries should tax couples as individuals
By Vanessa Sumo – When low-earning people tend to marry each other, a policy that links their incomes and tax rates becomes expensive because it results in a high level of government subsidies.

When one low earner loses some income, the spouse faces a higher tax rate and a disincentive to work.

That combination makes the partners poorer and may make them eligible for a higher level of government subsidies, creating an additional cost for taxpayers. more> http://tinyurl.com/qeuxz9r

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