Win Olympic Gold, Pay the IRS
WASHINGTON, D.C. — While 529 hardworking athletes proudly represent the United States in the 2012 Olympics, any medals and money they earn wearing red, white and blue will be taxed by the IRS. According to research done by the Americans for Tax Reform Foundation, U.S. Olympic athletes are liable to pay income tax on medals earned and prizes received at the London games.
American medalists face a top income tax rate of 35 percent. Under U.S. tax law, they must add the value of their Olympic medals and prizes to their taxable income. It is therefore easy to calculate the tax bite on Olympic glory.
At today’s commodity prices, the value of a gold medal is about $675. A silver medal is worth about $385 while a bronze medal is worth under $5.
There are also prizes that accompany each medal: $25,000 for gold, $15,000 for silver, and $10,000 for bronze.
So how much will U.S. Olympic medal winners have to pay in taxes to the IRS?
Total Tax Burden
American gold medal winners will pay the IRS up to $8,986. Silver medal winners will pay up to $5,385. Bronze medal winners will pay up to $3,502.
It gets even worse. Not only do our Olympic athletes have to pay taxes on their medals and prizes – chances are their competitors on the field will face no such taxation when they get home. Because the U.S. is virtually the only developed nation that taxes “worldwide” income earned overseas by its taxpayers, our Olympic athletes face a competitive disadvantage that has nothing to do with sports.
How Many Jobs Will Taxmageddon Kill?
This week, the U.S. House will vote to prevent the most damaging aspects of Taxmageddon from taking effect on January 1, 2013. Below is a comprehensive resource list of all the economic studies showing how many jobs Taxmageddon will kill, and what Taxmageddon will do to damage economic growth:
- According to the Joint Committee on Taxation, President Obama’s income tax proposal would force 940,000 taxpayers with business income (that is, owners of small- and medium-sized businesses) to pay higher taxes at top marginal rates of 36% or 39.6%.
CBO Analysis: “Under those fiscal conditions, which will occur under current law, growth in real (inflation-adjusted) GDP in calendar year 2013 will be just 0.5 percent, CBO expects—with the economy projected to contract at an annual rate of 1.3 percent in the first half of the year and expand at an annual rate of 2.3 percent in the second half. Given the pattern of past recessions as identified by the National Bureau of Economic Research, such a contraction in output in the first half of 2013 would probably be judged to be a recession.”
- From the same CBO report; extending the tax cuts: “CBO analyzed what would happen if lawmakers changed fiscal policy in late 2012 to remove or offset all of the policies that are scheduled to reduce the federal budget deficit by 5.1 percent of GDP between calendar years 2012 and 2013. In that case, CBO estimates, the growth of real GDP in calendar year 2013 would lie in a broad range around 4.4 percent, well above the 0.5 percent projected for 2013 under current law.”
Ernst and Young
- According to Ernst & Young LLC, the lower after-tax rewards to work resulting from end-of-year tax increases on upper-income individuals will 1) reduce long-run output by 1.3%, or $200 billion, 2) reduce long-run employment by 0.5%, or roughly 710,000 jobs, 3) reduce long-run capital stock and investment by 1.4% and 2.4%, respectively, and 4) reduce real after-tax wages to all workers by 1.8%, which will negatively impact their standard of living.
Ways and Means
- According to the House Committee on Ways & Means, Taxmageddon could quintuple the tax liability of a family of four that makes $50,000 per year — a tax hike of $2,200. Under this scenario, married seniors making $40,000 per year could pay $1,700 in higher taxes, and single mothers earning $36,000 per year could face up to $1,100 in higher taxes. This would constitute a doubling of both cohorts’ tax liabilities.
- From Speaker Boehner, “Roughly 940,000 small businesses will be hit by a big tax hike. According to the National Federation of Independent Business (NFIB), ‘75 percent of small businesses are organized as pass-through entities meaning they pay taxes on their business income at the individual rate.’”
House Majority Leader
- Eric Cantor released a statement citing an Ernst & Young study “showing the President’s small business tax hike will cost the economy more than 700,000 jobs, over 19,000 in Virginia.”
House Majority Whip
- According to Majority Whip Kevin McCarthy, “The White House and Congressional Democrats have focused their energies on the divisive rhetoric of class warfare. Just last week, President Obama introduced a proposal that would raise taxes on hundreds of thousands of small businesses. According to a new report by Ernst and Young, this tax hike is expected to shrink our economy by 1.3% and over 700,000 jobs would be lost.
According to James Pethokoukis at AEI: “If taxes were to go up in January of 2013, the economy might well have notched averaged growth of less than 2% over the same span given how 2012 is shaping up. Growth that weak puts the U.S economy in the recession red zone where it doesn’t take much to spark another downturn. As it is, Citigroup thinks letting just the upper-end Bush tax cuts expire would knock 0.4 percentage points from GDP growth.”
- AEI recently found that if the tax cuts were allowed to expire they “would reduce taxable income, increase unemployment, depress consumption and retard growth.” However if those cuts do not expire, AEI found that "growth in 2013 is projected to be robust, at 4.4 percent.”
“A tsunami of tax hikes is set to hit the American people in 2013 if Congress fails to act. Here are some snapshots of how Taxmageddon affects the country, drawn from the research of The Heritage Foundation’s Center for Data Analysis (CDA):”
- The Nation: $494 billion total tax increase on all Americans
- Families: $4,138 average tax increase
- Baby Boomers: $4,223 average tax increase
- Millennials: $1,099 average tax increase
- Low-Income Workers: $1,207 average tax increase
- Retirees: $857 average increase
- States: $1,929 (WV) to $5,161 (CT) range in average tax hikes per return
- Congressional Districts: $1,236 (NY-16) to $13,951 (NY-14) range in average tax hikes per return.
- Larry Kudlow writes that, “Raising the tax on the upper-two income brackets would slam the 3.5 percent of small-business owners who generate 53 percent of the small-business income, according to the Joint Tax Committee. And that’s where the jobs are. Ernst & Young estimates a job loss of 710,000 if those upper tax brackets are raised. And when you combine all that with scheduled new taxes from Obamacare, you’re looking at substantially higher tax rates than anything Bill Clinton ever had.”
18 Chief Executive Officers
- A letter from 18 CEOs to Secretary Geithner, “The administration’s plan to increase the top tax rate on dividends from 15 percent to 39.6 percent in 2013 will very likely have a seriously disruptive effect on this economic sector, reducing the incentive to pay dividends. Lower dividend yields and higher taxes on dividends would also hurt economic security for taxpayers at every income level.”
Increasing Taxes Hits Small Business Job Creators
This content is provided by the Americans for Tax Reform Foundation.
Taxing small business to pay for more government is the policy equivalent of “you didn’t build that.” Increasing taxes on the top bracket—$200,000 single; $250,000 married—hits small businesses, sole proprietorships and family farms that file as individuals or “pass through entities.”
In 2011, the nonpartisan Joint Committee on Taxation estimated that this plan hits 750,000 entities. A more recent update in their model concludes that, under this plan, 940,000 small businesses will pay higher taxes.
The economy grew 2.0 and 1.5 percent in the last two quarters. Growth in real nonresidential fixed investment declined for the third straight quarter. RNRFI is an indicator of how much businesses spend on new or improved facilities and technology from quarter to quarter. It is an important measure of how much the private sector is growing and planning to grow since the new equipment is used to expand operations, hire more people and increase overall prosperity. It seems, then, that the private sector is not “doing fine.”
So the economy is in a stall, businesses are investing less and less in pro-growth measures like expanded production capacities and hoarding cash. Meanwhile, Congress is talking about raising taxes on 940,000 small businesses which comprise 75 percent of all small businesses in the country. As Americans for Tax Reform noted, the top 3 percent of small businesses employ a majority of everyone who works for a small business. Raising taxes on these businesses in a good economy is bad policy, in a recession it is a recipe for economic contraction and further job loss.
Kissing Cousins and Carbon Taxes
Testifying in front of the Senate Finance Committee on tax and energy issues, Harvard’s Dr. Dale Jorgenson proposed a tax increase on fossil fuels equivalent to a 1.5 percent increase in federal revenues as a percent of GDP. Chairman Baucus asked if the increase is a “cousin” to a carbon tax and Dr. Jorgenson replied “a kissing cousin.” Defending the tax increase as a way to reduce consumption of carbon based fuels; Dr. Jorgenson claimed such a tax would be most effective if heavily weighted towards coal—this sounds like a carbon tax to us.
A carbon tax harms American industries and consumers at a time when businesses need access to cheap energy sources so they can grow our way out of the Great Recession. The Energy Information Agency estimated that coal, oil and natural gas represent 83 percent of US energy sources as of 2010.
The same study found that 76 percent of commercial and residential energy consumption and 41 percent of industrial consumption comes from natural gas while petroleum, as expected, represents 94 percent of transportation energy consumption. Additionally, 92 percent of coal produced in this country goes to electrical power generation—power plants designed to sell electricity to the public to heat and cool our homes. Raising taxes on oil, coal and natural gas drives up costs for everyone and prevents businesses from expanding.
Dr. Jorgenson claimed a carbon tax will raise revenues and reduce consumption of fossil fuels, but ignored the negative effects this has on economic growth. When the government taxes something we get less of it so hoping to increase revenues and reduce consumption of fossil fuels with a carbon tax seems like faulty logic to us. This is the same logic behind cigarette taxes designed to curb smoking and raise revenue—the government wants to tax your cake and eat it too.
Just the Facts on Big Spending
Unlike most normal people, we closely follow Twitter wars between competing economists. On Wednesday, AEI economist James Pethokoukis took issue with Rex Nutting of MarketWatch.com who claimed Obama is not a big spender because spending rose 1.4 percent during his Presidency.
First of all, Nutting doesn’t give credit to Tea Party conservatives for preventing rapid spending growth of the kind President Obama’s budget proposes. Secondly, Pethokoukis points at two overlapping metrics which accurately show Obama’s big spending tendencies—baseline spending and spending as GDP.
Nutting’s baseline is FY2009 part of which fell under Bush’s final budget and represented the initial injection of failed stimulus dollars that drove up federal spending. From this high spending baseline and ignoring Republican opposition to even more spending, it’s easy to claim Obama is a tightwad because spending grew 1.4 percent over 3+ years. It’s like a football team starting every drive on its own 1 yard line. They’re never going to score and the defense looks artificially good by comparison.
To measure Obama’s big spending tendencies, Pethokoukis looks at government spending as a percentage of GDP. While the historical average has been 20 percent, under Obama the average has been roughly 24 percent. Again, Nutting’s 2009 baseline was 25.2 percent according to OMB so by comparison, Obama will look like a cheapo—but that’s the problem with Nutting’s analysis.
In addition to these two metrics, we like to look at a third point: what trajectory would spending take under a second Obama term? According to the President’s OMB analysis, under Obama’s latest budget proposal spending as a percent of GDP declines to 22 percent by 2018 then trends upward to 22.8 percent by 2022. The historical average is 20.6 percent.
The President’s budget doesn’t bring government spending down towards historical trends; it trends towards more spending and increased public debt. According to CBO, by 2022 the President’s budget increases public debt to 76.3 percent of GDP whereas baseline CBO projections put publically held debt at 61.3 percent.
Obama is a big spender and wants to inject more of your taxpayer dollars into failed stimulus and crony capitalist policies. The President and Joe “Summer Recovery” Biden demagogue Tea Party conservatives as the party of “No” and this is correct—they’ve said no to even more spending and higher taxes that the President wrongly feels is right for the country. Pethokoukis is correct in pointing out Nutting’s flawed analysis and wins the Twitter war with a nice counterfactual that ATR likes to cite: How much higher would spending be if Democrats still had huge congressional majorities?
Taxing Facebook to Pay for MySpace
Facebook’s IPO today will likely mint a new crop of millionaires in Silicon Valley as well as a few billionaires. While much has been made of the site’s creator Mark Zuckerberg, its co-founder Eduardo Saverin garnered some negative press recently for a decision to renounce U.S. citizenship and move to Singapore.
While his reasons are likely personal as well as financially motivated, it’s interesting that much of the talk has focused on Saverin’s unstated desire to avoid high taxation in the United States. Depending on when he cashes in his stock Saverin would face capital gains or individual income taxes. Singapore has no capital gains rate and doesn’t tax income earned abroad. The United States has a long term cap-gains rate of 15 percent (increasing to 23.8 percent in 2013 thanks to Obamacare) and tries to tax income earned abroad.
Singapore’s highest marginal rate is 20 percent on income over $320,000. If Saverin cashes in his stock sooner, in the United States he would face the highest rate of 35 percent plus a state tax rate. Supposing he lives in California—where Facebook is headquartered—Saverin could face a total income tax burden of 44.3 percent before deductions, exemptions and credits.
We can’t say whether Saverin left for personal reasons or tax avoidance, but ATR’s point is that taxes change behavior and can drive valuable citizens and investors away from America to more tax friendly countries. This happens within the United States as taxpayers move from highly regulated, highly taxed states to more friendly neighbors. California is experiencing this right now.
So what’s the best response? Taxing people more according to Senators Bob Casey and Charles Schumer. Essentially Casey and Schumer are saying it isn’t fair for entrepreneurs to benefit from lower tax rates elsewhere. Their “Facebook Tax” would set a 30 percent capital gains rate on American expatriates like Saverin. This is the most convoluted definition of fairness and does nothing to encourage foreign entrepreneurs, investors and workers to come here and create jobs. Taxing success in the name of fairness is like taking Facebook profits to pay for Myspace losses.
In an interview, Senator Casey referred to Saverin when arguing in favor of the “Facebook Tax” claiming, “To renounce your citizenship and go to Singapore to take advantage of their tax laws, I think there should be a consequence for that.” Here’s an idea, lets lower rates here thereby making America more attractive to investors and entrepreneurs rather than raising taxes thereby encouraging businessmen to stay away from financing innovation and job creation in America.
New Study: High Corporate Taxes Stifle Small Businesses
It’s generally best to speak to experts when making broad claims about national policy. For instance, if we want to analyze U.S. corporate tax policy it’s probably best to take the word of a few tax attorneys than, say, a constitutional law scholar. A new study by Jonathan Sallet and Robert Rizzi, partner attorneys in the tax practice of O’Melveny & Myers LLP, highlight the constricting nature of corporate tax rates. ATR has previously highlighted the job-killing nature of high corporate taxes and the anti-growth effects of maintaining the highest corporate tax rate in the industrialized world. Published by the RATE Coalition, Sallet and Rizzi’s white paper analyzes the nature of capital mobility, the effects and incidence of high corporate tax rates and how to approach tax reform that encourages business rather than stifling it.
The advent of online trading, electronic banking and digital transfers has made money more mobile than ever. This also means businesses are more aware and influenced by tax rates when deciding how to treat capital. According to Sallet and Rizzi, “A recent Ernst & Young report has noted that increased globalization has led to greater capital mobility. The free flow of capital also makes it more sensitive to tax treatment.” Higher corporate tax rates incentivize businesses keeping money, jobs and factory investment overseas where rates are lower. While Sallet and Rizzi are discussing corporate taxation, it’s worth noting that the nature of capital gains taxes in the United States likely exacerbates the perverse incentives that come with the highest corporate tax rate in the OECD. In short, businesses don’t innovate or invest in America because the returns on such investments—profit—are taxed lower in Japan.
Proponents of higher taxes on businesses claim that the top marginal rate only affects a handful of large businesses. Let’s ignore, for a moment, the fact that this argument doesn’t refute the principle that high taxes cause corporations to create fewer jobs on the margin. Sallet and Rizzi found that,
Most U.S. corporations pay the top rate of 35 percent on their marginal income, close to that rate on their overall profits, and they are more likely to be smaller corporations. But research has demonstrated that it is small and midsize businesses that drive economic growth and that are out-sized creators of jobs.
It’s easy to conjure up images of ExxonMobil, Apple and Microsoft when talking about the highest corporate tax rate, but small businesses are likely to fall into this top bracket. The taxable income level at which the top rate hits smaller corporations is $75,000. You don’t need to be a big company at all to face the corporate income tax top rate. Small businesses, which drive economic growth and embody the American dream, are hit by these taxes. Meanwhile, other nations lower their corporate rates to attract entrepreneurs and incentivize growth while President Obama proposes a tax credit that small businesses will never use.
Sallet and Rizzi mention 25 percent as an acceptable corporate rate since it’s the OECD average. ATR believes 20 percent is better since American businesses face state corporate tax rates in addition to the federal rate. Regardless, we agree with Sallet and Rizzi conclusion that lowering corporate taxes to a level, “More consistent with rates across the industrialized world would be good tax policy and good innovation policy as well.” It’s time we listen to the tax law experts instead of the constitutional scholars, especially those that can’t understand the nature of judicial review.
Cruel and Unusual Regulation
Despite being prohibited by no less than the United States Constitution, cruel and unusual punishment is apparently in vogue at the EPA. Obviously former EPA administrator Al Almendariz meant figurative crucifixion, but his negative attitude betrays an alarming view towards oil and natural gas companies that provide over 90 percent of primary residential energy consumption.
Thankfully Al Almendariz resigned when his comments recently came to light nearly two years after he made them. That’s two years of crucifying oil and natural gas companies while Obama wastes money Solyndra and other on failed green collar projects. Green energy provides less than 1 percent of America’s total energy consumption.
Obama might like you to think that Almendariz is the exception at his administration’s EPA, but the Sackett family story shows the effects of EPA regulations on the individual American family. The Sacketts wanted to build a home on a piece of land adjacent to other vacation homes and with a complete sewer hookup, but the EPA shut down construction claiming the project was infringing on protected wetlands. The Sacketts successfully challenged the order in court, but like the Almendariz example, it shows the EPA’s enormous power over commercial and residential development as well as energy production and business creation.
Almendariz wanted to crucify fossil fuel producers who provide affordable energy for Americans while creating millions of jobs. What the regulators and green energy sycophants at EPA won’t admit is that cruel and unusual regulations toward oil and natural gas producers will drive up costs for everyone.
The Huxtable Tax
As a well-researched economist Paul Krugman used to play by the numbers, now he’s distorting the facts to rob the Huxtables. In a recently released excerpt from his contribution to the Occupy Handbook, Paul “blame Bush” Krugman discusses political polarization as a negative extension of power borne by the so-called one-percenters. Never mind the free-speech protections and profligation of online media that have allowed a larger number of Americans to participate politically, Krugman blames the one-percent.
Krugman blames the one percent for everything from political polarization to the economic crisis. His solution is to find more “things to tax”—specifically higher income earners since they can pay more. This argument follows the “pay your fair-share” philosophy behind Occupy Wall Street (which has degenerated into an anarchist movement). So on tax-day 2012 we’d like to look at the nature of “fair-share” taxation and shed some light on the highly progressive structure of the federal tax code.
The tax code is a progressive, highly redistributive tool for government to affect the behavior of a large group of households. About 70% of taxes are paid by homes with an income at or above $100,000—equivalent to the household income of a teacher and firefighter living together and earning an average of $57,000 and $43,000 respectively.
What about the 1% which many on the left want to tax more? A lawyer and an obstetrician living together earn an average of $349,000 putting them in the one-percent where they pay about 40% of income tax. These aren’t super wealthy bankers or some millionaire tax-cheat, these are the Huxtables. Raising taxes on the 1% in the name of “fairness” is like robbing Cliff and Claire to pay Cockroach.
Like Michael Moore, Paul Krugman is in the one-percent, although Moore he denies it revealing that he either doesn’t understand the meaning of percentages, income or both. If they want to pay more they can make a voluntary payment to the Treasury today by sending in a check or using their credit cards on the Treasury’s website. We find it ironic that you can take out a line of credit to pay off the government’s rapidly expanding line of credit.
In his Occupy Handbook excerpt, Krugman claims that Republican politicians must have failed Econ 101 otherwise they wouldn’t propose tax decreases. Never mind that every economist agrees on principle that taxes distort behavior, drive away investment and decrease wealth for society as a whole—if you don’t believe us take a look at any economics textbook including the one written by Professor Krugman. Correction: Dr. Krugman, he’s earned his PhD after all and even Obama can’t tax that away from him.
Is Filing Taxes Harder than Reading Shakespeare?
If you’re reading this, you’ve likely filed your 2011 income tax return or maybe you’re taking a break from hours spent deciphering the tax code to file an individual tax return before the April 17 deadline. Either way you’re one of the millions of Americans who are struggling to comply with a complicated tax system that wastes working hours and hard earned dollars.
By both IRS and Forbes’ estimates, Americans spend billions of hours complying with federal tax law; a number that is likely higher if we include state compliance costs. The same report concluded that the average taxpayer spends over $250 on tax preparation services.
These costs don’t just affect individual income taxpayers. Businesses spend millions of hours and investor dollars to prepare and file corporate tax returns, while the IRS has 35 permanent staffers at ExxonMobil’s headquarters to enforce compliance—paid for by taxpayers like you.
Finally, if you think we “doth protest too much”—the current tax code including instructions and regulations is about 3.8 million words long. Shakespeare’s entire works, by comparison, are 900,000 words long. Remember how long it took you to read Hamlet in High School? It’s no wonder taxpayers waste so much time worrying about how much money the government will take on April 17th.