Alex Hendrie

IRS Data: Trump Tax Cuts Benefited Indiana Middle Class Taxpayers

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Posted by Alex Hendrie on Monday, January 10th, 2022, 12:25 PM PERMALINK

Congressional Democrats and President Joe Biden falsely claim that the Trump tax cuts, also known as the “Tax Cuts and Jobs Act,” was a giveaway for “the rich” and large corporations that did little or nothing to help middle class families.

This is not true. In Indiana and across the country, the TCJA has provided significant tax relief for middle income families, according to an analysis of official IRS Statistics of Income data performed by ATR. The analysis compares 2017 data with 2019 data, the most recent year available:

INDIANA 

24.7% tax cut for Hoosiers making between $25k - $50k. Indiana households with adjusted gross income between $25,000 and $50,000 saw their average federal income tax liability drop from $2,275.81 in 2017 to $1.824.61 in 2019, a 24.7% reduction in federal income tax liability. 

23.5% tax cut for Hoosiers making between $50k - $75k. Indiana households with adjusted gross income between $50,000 and $75,000 saw their average federal income tax liability drop from $5,364.01 in 2017 to $4,342.34 in 2019, a 23.5% reduction in federal income tax liability. 

22.4% tax cut for Hoosiers making between $75k - $100k. Indiana households with adjusted gross income between $75,000 and $100,000 saw their average federal income tax liability drop from $8,597.87 in 2017 to $7,018.70 in 2019, a 22.4% reduction in federal income tax liability. 

The TCJA also contained numerous reforms that benefited Indiana households: 

IN households no longer stuck paying the Obamacare mandate tax. The TCJA zeroed out the Obamacare individual mandate tax penalty effective 2019. In 2017, 106,960 Indiana households paid the Obamacare individual mandate tax penalty. 20,940 (92%) taxpayers earned less than $75,000. 82,850 households paid the Obamacare individual mandate tax penalty in 2018. 74,700 (90%) of taxpayers earned less than $75,000. 

Doubled Standard Deduction. The TCJA doubled the standard deduction from $12,000 to $24,000 for taxpayers filing jointly and $6,000 to $12,000 for single filers. 2,925,250 IN households took the standard deduction in 2018 including 2,866,830 households earning less than $200,000. 2,991,030 taxpayers took the standard deduction in 2019 including 2,927,440 taxpayers earning less than $200,000. 

20% tax deduction for IN small businesses. The TCJA created a new, 20% deduction for small businesses organized as passthrough entities (LLCs, sole proprietors, S-corporations, partnerships). 401,460 IN taxpayers claimed the small business deduction in 2019 including 340,350 taxpayers earning less than $200,000. 343,310 taxpayers claimed the small business deduction in 2018 including 292,250 taxpayers earning less than $200,000. 

Doubled Child Tax Credit. The TCJA doubled the child tax credit from $1,000 to $2,000. 820,450 IN households took the child tax credit in 2019 including 775,710 households earning less than $200,000. 815,420 households took the child tax credit in 2018 including 773,230 households earning less than $200,000. 

Employers of all sizes also responded to the tax cuts by hiring, expanding, raising pay and increasing employee benefits. These gains will be threatened if Democrats succeed in repealing the TCJA.

Photo Credit: "welcome to indiana" by Jim Hickcox is licensed under CC BY-NC 2.0.

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Manchin’s Call to Repeal Trump Tax Cuts Will Harm West Virginians

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Posted by Alex Hendrie on Wednesday, January 5th, 2022, 9:00 AM PERMALINK

IRS data: West Virginians making between $25,000 and $75,000 got a 25% tax cut

Sen. Joe Manchin (D-W.V.) has said Democrats should repeal the Trump tax cuts.

But the Tax Cuts and Jobs Act provides significant tax relief for middle income West Virginia households, according to an analysis of official IRS Statistics of Income data performed by ATR. The analysis compares 2017 data with 2019 data, the most recent year available:

26% tax cut for West Virginians making between $25k - $50k. West Virginia households with adjusted gross income between $25,000 and $50,000 saw their average federal income tax liability drop from $2,190 in 2017 to $1,783 in 2019, a 26% reduction in federal income tax liability.

25% tax cut for West Virginians making between $50k - $75k. West Virginia households with adjusted gross income between $50,000 and $75,000 saw their average federal income tax liability drop from $5,348 in 2017 to $4,268 in 2019, a 25% reduction in federal income tax liability.

23% tax cut for West Virginians making between $75k - $100k. West Virginia households with adjusted gross income between $75,000 and $100,000 saw their average federal income tax liability drop from $8,720 in 2017 to $7,064 in 2019, a 23% reduction in federal income tax liability.

Just a 2.9% tax cut for West Virginians making over $1 million. Manchin and Democrats claim the tax cuts were for “the rich” but as shown by the data, middle income West Virginians saw a significantly greater tax cut than those earning over $1 million. West Virginia households earning over $1 million saw their federal income tax liability drop from $627,329 in 2017 to $609,768 in 2019, a reduction of just 2.9%. Data from the Congressional Budget Office also shows that high-earning Americans pay a greater share of taxes than before the Trump tax cuts. In other words, the tax code actually became more progressive, though you won’t hear Democrats admit it.

The TCJA also contained numerous reforms that benefited West Virginia households:

WV households no longer stuck paying the Obamacare mandate tax. The TCJA zeroed out the Obamacare individual mandate tax penalty effective 2019. In 2017, 22,960 West Virginia households paid the Obamacare individual mandate tax penalty. 20,940 (91%) households earned less than $75,000. 18,320 households paid the Obamacare individual mandate tax penalty in 2018. 16,180 households (88%) earned less than $75,000.

Doubled Standard Deduction. The TCJA doubled the standard deduction from $12,000 to $24,000 for taxpayers filing jointly and $6,000 to $12,000 for single filers. 723,830 WV households took the standard deduction in 2018 including 712,380 households earning less than $200,000. 739,300 households took the standard deduction in 2019 including 722,600 households earning less than $200,000.

20% tax deduction for WV small businesses. The TCJA created a new, 20% deduction for small businesses organized as passthrough entities (LLCs, sole proprietors, S-corporations, partnerships). 71,030 WV taxpayers claimed the small business deduction in 2019 including 61,630 taxpayers earning less than $200,000. 62,510 taxpayers claimed the small business deduction in 2018 including 54,390 taxpayers earning less than $200,000.

Doubled Child Tax Credit. The TCJA doubled the child tax credit from $1,000 to $2,000. 187,660 WV households took the child tax credit in 2019 including 180,710 households earning less than $200,000. 186,230 households took the child tax credit in 2018 including 179,600 households earning less than $200,000.

Employers of all sizes also responded to the tax cuts by hiring, expanding, raising pay and increasing employee benefits. These gains will be threatened if Manchin succeeds in repealing the TCJA.

Photo Credit: "DSC_8490" by Governor Earl Ray Tomblin is licensed under CC BY-ND 2.0.

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House Dems Should Not Force Vote on Socialist Tax and Spend Bill Without CBO Score

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Posted by Alex Hendrie on Monday, November 15th, 2021, 3:30 PM PERMALINK

House Speaker Nancy Pelosi (D-Calif.) and Democrat leadership want to force a vote on their socialist multi-trillion tax and spending bill this week even though the Congressional Budget Office has announced they will not release a score of the legislation until Friday.

To date, five House Democrats – Reps. Ed Case (D-Hawaii), Josh Gottheimer (D-N.J.), Stephanie Murphy (D-Fla.), Kathleen Rice (D-N.Y.) and Kurt Schrader (D-Ore.) -- have said they want to see a CBO score before voting on this legislation.

To be clear, this massive legislation should be rejected. However, the least lawmakers can do is wait for a score given the complex interactions of many policies contained in the Democrat legislation.

While the cost of the plan is steep, we currently do not know exactly how much it costs because the Congressional Budget Office has not yet completed its score.

There is also significant uncertainty over how this massive, 2,000+ page bill will impact healthcare costs and access. Senate Democrats have suggested expanding drug price controls into the commercial market, which would only create greater uncertainty over the impacts this bill would have over the healthcare system.

Democrats are also pushing this legislation as significant uncertainty over the state of the economy persists. Inflation is at a 31-year high with the consumer price index increasing by 6.2 percent in October on an annualized basis.

Key household products have increased significantly in the past year. Gasoline has increased 49.6 percent in the past 12 months, while meats, poultry, and eggs have increased 11.9 percent in the past 12 months. Furniture and bedding have increased 12.0 percent, TVs have increased 10.4 percent, and bacon has increased 20.2 percent.

According to an analysis by Moody’s analytics, inflation is forcing a family with median household income of $70,000 to spend $175 more per month on essentials like food, fuel, and housing.

This erosion of purchasing power is especially concerning given that wages are decreasing. Real average hourly earnings for all employees decreased 0.5 percent from September to October, seasonally adjusted. In the past year, since October 2020, real average hourly earnings decreased 1.2 percent, seasonally adjusted.

The reconciliation bill also includes massive tax hikes on businesses, like the 15 percent global minimum tax, 15 percent domestic minimum tax, and a new surtax on adjusted gross income (AGI) that will hit pass through businesses. This, similarly, will be passed on to consumers through higher prices. According to a 2020 National Bureau of Economic Research paper, 31 percent of the corporate tax rate is borne by consumers through higher prices of goods and services. 

By an 81 to 19 margin, voters believe raising taxes on corporations will increase the cost of goods and services, according to a new poll conducted by HarrisX. 

The Democrat’s massive socialist multi-trillion-dollar legislation is a reckless piece of legislation. This bill should be rejected. However, simply being able to read the bill and know what it does should be the bare minimum requirement for legislation to be voted on.

Photo Credit: "SpaceX Crew-2 Launch (NHQ202104230027)" by NASA HQ PHOTO is licensed under CC BY-NC-ND 2.0.

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Democrat Bill Imposes Price Controls and 95% Excise Tax on Medical Innovation

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Posted by Alex Hendrie on Wednesday, November 3rd, 2021, 4:40 PM PERMALINK

The Democrat multi-trillion dollar tax and spend bill includes a 95 percent excise tax and price controls on American medical innovation. This proposal mirrors H.R.3, legislation pushed by House Speaker Nancy Pelosi (D-Calif.) and progressive lawmakers.

This proposal allows government bureaucrats to impose price controls on up to 20 medicines in Medicare Part B and Part D. If the manufacturer does not accept this government set price, they are hit with a 95 percent excise tax on the total revenues of the drug. The proposal also includes an inflationary rebate penalty on every medicine in Medicare Part B and Part D.

While supporters of this proposal falsely conflate the proposal with allowing the government to “negotiate,” this plan will actually undermine the market-based structure of Medicare Part D harming patients, manufacturers, and the American healthcare system. While it is imposed on a small group of medicines, it creates a new tax and regulatory structure that can be expanded to all cures and to the entire healthcare system and become a stepping stone toward socialized healthcare.

Price Controls Should Not be Conflated with “Negotiation”

Supporters of government price controls on American medicines routinely characterize this plan as allowing the government to negotiate with the private sector. This is misleading because there is already negotiation and competition in Medicare Part D.

Part D facilitates negotiation between pharmacy benefit managers (PBMs), pharmaceutical manufacturers, and plans. This system works because Congress created a non-interference clause when Part D was created, which prevents the secretary of Health and Human Services (HHS) from interfering with the robust private-sector negotiations.

Since the law’s enactment, the program has proven to be a successful model of healthcare by saving taxpayers billions of dollars and granting patients access to medicines at low costs. Under this system, plans are free to compete based on the goal of maximizing access and minimizing coverage costs.

Federal spending on Part D has come in 45 percent below projections and is just 14 percent of total Medicare spending. Average monthly premiums in 2019 were just $32.50 and have been stable since 2011. Part D spending also helps keep costs in the rest of Medicare down – it has decreased hospital admissions by 8 percent, resulting in $2.3 billion in annual savings. 

According to a 2020 survey, 84 percent of seniors found their Part D premiums affordable and 93 percent found their plan convenient to use. 9 in 10 seniors are satisfied with the Part D drug coverage.

The Proposal Imposes a 95 percent, Retroactive Excise Tax on Hundreds of Medicines

The legislation enforces its price controls through a 95 percent, retroactive tax . This tax is imposed on the sales of a drug if the manufacturer does not agree to government-imposed prices. The tax starts at a 65 percent rate, increasing by 10 percent every quarter a manufacturer is out of “compliance.”

This tax is concerning for a number of reasons. It is imposed at such a high rate that it will result in income taxes above 100 percent of income even if applied to a portion of a business’s sales.  In addition, it is imposed on sales, not income. Businesses are typically taxed on their income as it allows them to deduct expenses such as wages and other employee benefits, equipment, and machinery. A tax on sales is imposed irrespective of whether a business made any money. 

H.R. 3 contained a more expansive version of the 95 percent excise tax. It was imposed on up to 250 medicines. Over time, Democrats will undoubtedly push to expand the tax to more and more medicines.

The Proposal Could Cost High-Paying Jobs Across the Country

President Biden has repeatedly promised to create millions of new high paying manufacturing jobs in America. However, H.R. 3 would threaten existing jobs by imposing taxes and price controls on American businesses.

Nationwide, the pharmaceutical industry directly or indirectly accounts for over four million jobs across the U.S and in every state, according to research by TEconomy Partners, LLC. This includes 800,000 direct jobs, 1.4 million indirect jobs, and 1.8 million induced jobs, which include retail and service jobs that are supported by spending from pharmaceutical workers and suppliers.

The average annual wage of a pharmaceutical worker in 2017 was $126,587, which is more than double the average private sector wage of $60,000.

Existing Part D Negotiation Already Protects Against Price Increases

The inflationary rebate penalty requires a manufacturer to pay a “fee” to the government if they increase the price of a medicine faster than inflation. In effect, this establishes a private sector ceiling or cap on the amount by which the price of a medication increases.

The government has no business dictating changes in price. There are many reasons the price of a product increases – whether that is through supply chain issues, labor shortages, or an increase in production cost.

Perversely, the inflationary rebate penalty could create an incentive for manufacturers to automatically increase the list price of their drugs each year to keep pace with inflation. 

While inflation is hitting American families hard, the cost of medicines is actually decreasing. Prescription drugs have decreased by 1.6 percent on an annualized basis over the past 12 months, according to the Bureau of labor statistics. By comparison, the Consumer price index has increased by 5.4 percent over the same period. Many household goods and services have increased even more. For instance, gasoline has increased by 42 percent, meat has increased by 12.6 percent, furniture and bedding has increased by 11.2 percent and used cars and trucks have increased by 24.4 percent.

There are already mechanisms in Medicare Part D that keep costs down. For example, pharmacy benefit managers and manufactures negotiate “price protection rebates.”  Under these agreements, any price increase past a predetermined threshold results in increased rebates from the manufacturers to the PBM. Today, almost 100 percent of medicines are subject to these rebates.

This Proposal is a Step Closer to Socialized Healthcare

Progressives are pushing proposals to expand the power that government has over the healthcare system like “Medicare for All” and the public option. These proposals also heavily rely on price controls on the healthcare system. Giving federal bureaucrats the ability to set prices in Medicare Part B and Part D would be a step toward this goal.

Imposing price controls are a key tool toward socialist healthcare because they allow the federal government to forcefully lower costs in a way that distorts the economically efficient behavior and natural incentives created by the free market.

When imposed on medicines, price controls suppress innovation and access to new medicines. This deters the development and supply of new life saving and life improving medicines to the detriment of consumers, patients, and doctors.

If the left had their way, government would control the entire healthcare system, an outcome that would also result in significant tax and spending increases and the loss of existing coverage for millions and millions of Americans.

It would lead to health care rationing, which occurs in other nations that have socialized health care, such as Canada and the United Kingdom. In the UK, there was a shortage of 10,000 doctors and 43,000 nurses in 2019, with 9 in 10 managers in the National Health Service saying that too few doctors and nurses presented a danger to patients. At any one time, 4.5 million patients were waiting to see a doctor or receive care.

France has been forced to make significant spending cuts to its “free” socialist healthcare system and there have been significant shortages of basic supplies. Australia has also experienced problems with shortages of medicines and healthcare professionals.

Photo Credit: "Male biomedical engineers develop blood filtering treatment" by This is Engineering is licensed under CC BY-NC-ND 2.0.

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Democrat Socialist Spending Bill Includes Corporate Tax Hike on Working Families

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Posted by Alex Hendrie on Wednesday, November 3rd, 2021, 4:30 PM PERMALINK

The latest version of the Democrats socialist tax and spend bill contains $800 billion in tax increases on corporations. The legislation, known as the “Build Back Better Act,” imposes a 15 percent domestic corporate minimum tax on “book income” as well as a 15 percent global minimum tax on American businesses operating overseas. The legislation also creates a tax on share repurchases.

While the Left claims they are going after large, profitable corporations, these tax increases will actually hit working families in the form of higher prices, fewer jobs, and lower wages.

The 15 percent global minimum tax would be created by increasing the tax rate on GILTI (Global Intangible Low-Taxed Income) and applying it on a country-by-country basis, rather than a worldwide basis. This change would create significant tax complexity and uncertainty for businesses operating overseas. It would make American businesses uncompetitive and could cost millions of jobs and tens of billions of dollars in U.S. investment, as noted by a study conducted by Ernst and Young.

This tax increase is part of the Biden administration’s goal to create a 15 percent global minimum tax agreement across the world, in order to “end the race to the bottom” and “make all citizens fairly share the burden of financing government.”

However, two-thirds of voters do not trust other countries to play by the rules when it comes to implementing and enforcing this agreement, according to recent HarrisX polling.

The 15 percent domestic minimum tax is based on the premise that corporations exploit tax loopholes to pay zero income tax every year. In reality, businesses utilize legal tax deductions and credits that were created on a bipartisan basis to promote investment, job creation, and growth.

For instance, corporations utilize full business expensing to deduct the cost of new equipment and investment. This policy incentivizes new investment, leading to greater economic productivity, job growth, and higher wages and simplifies the tax code by equalizing the tax treatment of new investments with other business expenses such as wages, rent, and healthcare costs.

There is strong bipartisan support for full business expensing. Former Obama Economic Adviser Jason Furman has long supported full business expensing, and the policy was included in several Obama budgets (albeit as part of a net tax increase). In addition, the Obama White House correctly noted that the provision would help businesses and workers in press releases and fact sheets.

The 1% tax on stock buybacks would harm Americans that have their life savings invested in 401(k)s, IRAs and the stock market. Eighty to 100 million Americans have a 401(k), 46.4 million households have an individual retirement account and half of Generation-Zers and Millennials are invested in stocks.

Buybacks occur when a company is reinvesting by returning funds to shareholders and the economy. Contrary to the left’s narrative, stock buybacks do not come at the expense of productive investment, instead occurring after a company has no better or higher use for cash.

These tax increases will not be borne by corporations but will be passed along to working families including those making less than $400,000 per year.

The Joint Committee on Taxation estimates that 25 percent of the corporate tax falls on workers while the Tax Foundation estimates that 70 percent of this tax is borne by labor. Similarly, a 2020 study by the National Bureau of Economic Research found that 31 percent of the corporate tax falls on consumers through higher prices.

81 percent of voters believe that raising taxes on businesses and corporations will cause them to raise the prices of goods and services including 89 percent of Republicans, 81 percent of independents, 74 percent of Democrats, and 81 percent of suburban voters. Similarly, 74 percent of voters believe that raising taxes on corporations will increase the price of goods and services for Americans making less than $400,000 per year.

Inflation has already raised the cost of goods and services for American families. The consumer price index increased by 5.4 percent on an annualized basis in September, matching a 13-year high, according to the Bureau of Labor Statistics (BLS).  In January 2021, before Joe Biden took over the presidency, annual inflation was at a stable 1.4 percent.

As noted by BLS, the cost of many goods and services have increased significantly over the past year: 

  • Gasoline has increased 42.1 percent in the past 12 months.  
  • Used cars and trucks have increased 24.4 percent in the past 12 months. 
  • Meats have increased 12.6 percent in the past 12 months.
  • Fresh fish and seafood have increased 10.7 percent in the past 12 months. 
  • Bacon has increased 19.3 percent in the past 12 months.  
  • Eggs have increased 12.6 percent in the past 12 months.  
  • Furniture and bedding have increased 11.2 percent in the past 12 months. 
  • Children’s footwear has increased 11.9 percent in the past 12 months. 

 

The tax increases on corporations being proposed by President Biden and Congressional Democrats will not harm big businesses but will, instead, be passed along to working families. It will exacerbate inflation by increasing the costs of goods and services, while also reducing the life savings of Americans and making the U.S. less globally competitive.

Photo Credit: "Businessman showing empty pockets over flag of USA" by Jernej Furman is licensed under CC BY 2.0.

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Dem Tax and Spend Bill Includes Provision to Create IRS-Run Tax Prep Program

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Posted by Alex Hendrie on Monday, November 1st, 2021, 10:15 AM PERMALINK

Buried within the 1,700-page reckless tax and spend bill is a provision that would move the U.S. toward the creation of a government tax preparation system. This is a terrible idea that has been a long priority of progressive politicians in Congress like Senator Bernie Sanders (I-Vt.), Senator Elizabeth Warren (D-Mass.) and Congresswoman Alexandria Ocasio-Cortez (D-NY). It would replace the existing system of voluntary compliance, where Americans are responsible for filling out their own tax returns, with a system where the government assesses and files taxes for Americans.

The provision is found under section 138301, “enhancement of internal revenue service resources” and is described as a task force to design an IRS-run “direct e-file” tax return system. It would provide $15 million to have the IRS conduct a report to Congress examining the cost of building and administering a government tax preparation system. It would also require the collection of taxpayer opinions on government tax preparation, and the opinions of an unspecified “independent third party” on the feasibility, cost, and best approach of this new program.

There are many reasons to be concerned with this proposal.

First, it would create a strong conflict of interest. Under a system of government-run tax preparation, the IRS would tell you how much you owe and give you the opportunity to contest. This would give the government an incentive to overcharge or withhold information from taxpayers.

Americans already struggle with understanding the tax code -- 65 percent of voters think the tax code is too complicated, according to polling conducted by HarrisX. Just 7 percent think the code Is too simple, and 28 percent think the code has "about the right level of complexity." Given this, it is probable that many taxpayers will take the government at their word and accept whatever the IRS tells them they owe. Even if a taxpayer does decide to contest, there is no guarantee they will be aware of every deduction and credit they are owed unless they hire an expert to assist them.

Second, the proposal would empower the IRS to collect even more personal information. A recent report by the Progressive Policy Institute noted that the IRS currently does not have the information it needs to prepare tax returns for American families. This could deprive low-income Americans from important tax credits like the child tax credit and earned income tax credit (EITC).

In order to properly file for Americans, the report notes that the IRS would have to have a “deep knowledge” of the personal lives of a family, which would result in a significant intrusion into the personal lives of American citizens.

Not only would giving the government this new power be unfeasible, but it is also deeply unpopular. According to data by the Computer & Communications Industry Association, 60 percent of taxpayers oppose government tax preparation including 45 percent that “strongly oppose.” Just 8 percent of taxpayers strongly support government tax preparation.

Third, the IRS already struggles to protect taxpayer data and complete basis tasks, so we should be wary of giving the agency new responsibilities. In June of this year, the progressive group ProPublica announced it had received the stolen private tax returns of thousands of taxpayers covering 15 years. Since this announcement, ProPublica has released multiple articles claiming to have detailed taxpayer information of specific individuals. If this information is accurate, its disclosure is illegal. However, the IRS and Treasury department claim to not know how this tax information was obtained. 

While this is concerning, it is not the only case where the IRS has failed to protect taxpayer data. For instance, a 2016 TIGTA report found that the IRS had lost track of 1,000 laptops containing sensitive taxpayer data that contract employees used. Similarly, in 2015, hackers stole the personal data of 330,000 taxpayers. Reports indicated that the hackers didn’t use suspected tactics but instead managed to steal data by going through the website and pretending to be regular people filing their taxes.

California already tried a government tax filing system, and it was an abject failure. According to media reports, roughly 3 percent of eligible taxpayers used the system when it was first launched, and total participants topped out at 90,000 filers.

The Democrat’s $2 trillion socialist tax and spend plan contains numerous troubling provisions including tax increases on working families and small businesses and special giveaways to left-wing special interests. The proposal to put the U.S. on the pathway to having a government-run tax preparation system is yet another way the Left wants to expand the size and scope of the federal government, further intrude in the lives of taxpayers, and squeeze more tax dollars out of American families.

Photo Credit: "Tax Notice" by Catawba County, North Carolina (Government)

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Poll: Voters Do Not Trust Foreign Countries to Play by the Rules in Global Minimum Tax Agreement

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Posted by Alex Hendrie on Thursday, October 28th, 2021, 12:00 PM PERMALINK

65 percent of voters do not trust foreign countries to abide by the global agreement being pushed by the Biden administration to force businesses to pay a global minimum tax rate, according to a new poll conducted by HarrisX.

The Biden administration, led by Treasury Secretary Janet Yellen, is pushing the flawed narrative that we need a global agreement locking in high taxes in order to “end the race to the bottom” and “make all citizens fairly share the burden of financing government.” Unfortunately, more than 130 countries have agreed to this plan.

By signing onto this proposal, Biden will surrender U.S. sovereignty to foreign leaders in Russia, China, Saudi Arabia, and the European Union and bind the world into higher taxes and bigger government. It is unrealistic at best and naïve at worst for the U.S. to expect foreign countries – many of which have a history of undemocratic governance and human rights violations -- to play by the rules in a way that ensures American businesses and workers are treated fairly.

While there is no guarantee that foreign countries will play by the rules, this plan will lead to higher taxes on American businesses and workers. Biden and Congressional Democrats have proposed increase the tax rate for the Global Intangible Low-Taxed Income (GILTI) provision and applying it on a country-by-country basis. This will make America less competitive, harming workers, reducing wages, and costing jobs.

Voters were asked the following:

The Biden administration is working with foreign countries and global organizations to require businesses to pay a minimum tax rate across the world. Do you trust other countries to abide by this agreement or do you think they will find ways to ensure their businesses have an advantage?

  • 35 percent of voters said they “Trust other countries to abide by this agreement”
  • 65 percent of voters said they “do not trust other countries” including:
    • 60 percent of male voters
    • 69 percent of female voters
    • 82 percent of Republicans
    • 44 percent of Democrats
    • 69 percent of independents
    • 47 percent of Biden voters
    • 85 percent of Trump voters
    • 71 percent of suburban voters
    • 82 percent of rural voters

 

The poll was conducted between October 26 - 27 among 937 registered voters. The sampling margin of error of this poll is plus or minus 3.2 percentage points and results reflect a nationally representative sample of registered voters.

Photo Credit: "2021 Spring Meetings: Economic Recovery" by World Bank Photo Collection is licensed under CC BY-NC-ND 2.0.

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Dem 15% Min Tax Will Harm Workers and Consumers, Disallow Bipartisan Tax Deductions

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Posted by Alex Hendrie on Wednesday, October 27th, 2021, 1:20 PM PERMALINK

Senators Elizabeth Warren (D-Mass.), Angus King (I-Vt.) and Ron Wyden (D-Ore.) have introduced legislation to create a 15 percent minimum tax on American businesses that they are pushing to include in President Biden’s multi-trillion reckless tax and spend plan.

This tax increase is based on the premise that corporations exploit tax loopholes to pay zero income tax every year. In reality, businesses utilize legal tax deductions and credits that were created on a bipartisan basis to promote investment, job creation, and growth.

For instance, corporations utilize full business expensing to deduct the cost of new equipment and investment. There are several benefits to this policy. First, it incentivizes new investment, leading to greater economic productivity, job growth and higher wages. Second, it simplifies the tax code by equalizing the tax treatment of new investments with other business expenses such as wages, rent, and healthcare costs. 

There is strong bipartisan support for this policy. Former Obama Economic Adviser Jason Furman has long supported full business expensing, and the policy was included in several Obama budgets (albeit as part of a net tax increase). In addition, the Obama White House correctly noted that the provision would help businesses and workers in press releases and fact sheets: 

“If a business bought an additional $1 million worth of equipment next year, they would be able to deduct the full $1 million up front, potentially accelerating hundreds of thousands of dollars in tax cuts. That’s real money that businesses… could use to expand or hire new workers right now, and provides a strong incentive to increase investment now, creating even more jobs.” 

Corporations can also deduct stock compensation granted to employees. This is only a good thing – it gives workers more wealth and may actually leave the government better off because the income is taxed as ordinary income and therefore at a higher rate than the corporate tax.

In addition, businesses can deduct net operating losses (NOLs) and can carryforward unused losses to future years. This provision ensures that businesses large and small do not pay taxes when they do not make money. There is strong bipartisan support for this tax treatment with NOLs having been expanded during periods of economic downturn including in 2008 and 2009 when Democrats had control of both chambers of Congress and the White House.

It is also important to note that companies are not literally paying zero taxes. They still pay state taxes as well as the 6.2 percent Social Security and 1.45 percent Medicare payroll taxes on employee wages.

This tax increase will ultimately harm the economy and working families. Businesses will not absorb the cost of this tax increase, but will pass it along to workers and consumers.

First, increasing taxes on corporations will cause businesses to invest less in the United States and more overseas (or not at all), resulting in fewer job opportunities and lower wages for American workers:

  • According to the Stephen Entin of the Tax Foundation, labor (or workers) bear an estimated 70 percent of the corporate income tax in the form of wages and employment.
  • A Treasury Department study estimated that “a country with a 1 percentage point lower tax rate than its competitors attracts 3 percent more capital.”
  • The non-partisan Joint Committee on Taxation recently affirmed in congressional testimony that the corporate tax rate hike will fall on "labor, laborers." Testifying before the House Ways & Means Committee, JCT Chief of Staff Thomas A. Barthold said"Literature suggests that 25% of the burden of the corporate tax may be borne by labor in terms of diminished wage growth."
  • Even the left-of-center Tax Policy Center estimates that 20 percent of the burden of the corporate income tax is borne by labor.  

 

In addition, raising taxes on corporations will increase the cost of goods and services.

A 2020 study by the National Bureau of Economic Research found that 31% of the corporate tax falls on consumers. Additionally, customers directly bear the cost of corporate income taxes imposed on utility companies. In this way, customers would have to pay more for their utility use. 

Inflation has already raised the cost of goods and services for American families. The consumer price index increased by 5.4 percent on an annualized basis in September, matching a 13-year high, according to the Bureau of Labor Statistics (BLS).  In January 2021, before Joe Biden took over the presidency, annual inflation was at a stable 1.4 percent.

As noted by BLS, the cost of many goods and services have increased significantly over the past year: 

  • Gasoline has increased 42.1 percent in the past 12 months.  
  • Used cars and trucks have increased 24.4 percent in the past 12 months. 
  • Meats have increased 12.6 percent in the past 12 months.
  • Fresh fish and seafood have increased 10.7 percent in the past 12 months. 
  • Bacon has increased 19.3 percent in the past 12 months.  
  • Eggs have increased 12.6 percent in the past 12 months.  
  • Furniture and bedding have increased 11.2 percent in the past 12 months. 
  • Children’s footwear has increased 11.9 percent in the past 12 months. 

 

Raising taxes on businesses through a 15 percent minimum tax will make this inflation worse. It will undo important, pro-growth deductions, threaten jobs and wages, and harm working families.

Photo Credit: "Elizabeth Warren's Speech in Atlanta, GA" by Elizabeth Warren is licensed under CC BY 2.0.

More from Americans for Tax Reform


10 Problems with Taxing Unrealized Gains

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Posted by Alex Hendrie on Tuesday, October 26th, 2021, 3:05 PM PERMALINK

Democrats are pushing a tax on unrealized gains. This “mark to market” regime, or wealth tax would force Americans to pay taxes every year on the paper gain in the value of assets (i.e. stocks, collectibles, real estate).

Currently, taxpayers only pay the capital gains tax when an asset is sold. This makes sense because the asset is illiquid until it is disposed of. This tax on unrealized gains would create a new tax system that requires taxpayers to pay tax on the value of an asset based on the value of these assets on a particular arbitrary date.

Here are 10 reasons to be concerned with a tax on unrealized gains:

1. The Tax would Empower The IRS

In order to enforce this tax, the IRS would have to be given vast new powers to value the assets of taxpayers. This would be an extremely invasive and difficult task. As noted by Howard Gleckman of the Tax Policy Center, taxing unrealized gains is not practical and would be extremely complex:

“The concept is theoretically appealing but raises many practical problems. While in principle it could work for publicly traded securities and other investments with easily determined market values, many assets don’t fit that bill.”

With the IRS’s history of discrimination and malpractice, it should be concerning to have agents collect this information. There would be significant compliance and administrative issues with this tax. For instance, the IRS would have to monitor assets of taxpayers to determine if they hit the thresholds and are encompassed by the tax. Many assets cannot easily be valued so both the taxpayer and the federal government would be required to hire armies of accountants and lawyers to determine valuations.

2. The Tax Would Likely Grow to Hit Millions of Americans Over Time

According to media reports, the tax would apply to taxpayers with over $1 billion in assets or a taxpayer that earned $100 million in income for three years. This would impact 700 taxpayers according to reports. However, it is likely the tax will grow in size in future years to hit thousands or even millions of taxpayers.

When the federal income tax was first imposed in 1913, it imposed a 1 percent tax on incomes above $3,000 (4,000 for married couples). The top rate was 7 percent on incomes of $500,000. In Today’s dollars the 1 percent tax would be imposed on incomes above $83,124 for an individual and $110,832 for a married couple, while the top 7 percent rate would be imposed on $13.8 million in income.

Today, the bottom income tax bracket is 12 percent and applies to income of $9,950 for a single filer and $19,900 for joint returns, with a $12,550 standard deduction ($25,100 for joint returns). The top rate is 37 percent on incomes above $523,600 ($628,300 for joint returns).

Similarly, Congress enacted the Alternative Minimum Tax (AMT) in 1969 following the discovery that 155 people with adjusted gross income above $200,000 had paid zero federal income tax. Over time, The AMT grew so large that millions of Americans paid the tax and millions more saw increased tax complexity. By 2010, the AMT grew so large that Congress had to step in and prevent it from hitting nearly 30 million Americans (20 percent of filers).

3. The Tax Will Encourage Taxpayers to Move Overseas or Move States

Taxpayers impacted by the tax on unrealized gains will be incentivized to move overseas in order to avoid the tax. In response to this concern, several proposals have created an “exit tax” on taxpayers that want to leave the country. The Washington Post editorial board said this arrangement "conveys a certain authoritarian odor," as it binds people to the United States with severe financial consequences for deciding to leave.  

In addition to encouraging taxpayers to leave the country, it would result In taxpayers leaving states with high capital gains taxes, like California to states with no capital gains tax. Blue states would like to ensure their state capital gains tax would apply to unrealized gains so taxpayers would be hit twice In many states.

4. The Tax Will Harm Jobs and the Economy

This tax would lead to a reduction in new investment in the economy, which would harm working families and small businesses and lead to a reduction in jobs and wages. An American Action Forum (AAF) study, on Senator Elizabeth Warren's (D-Mass.) $3 trillion wealth tax proposal found that the tax would decrease innovation and investment, driving down wages and causing unemployment. 

It would shrink GDP by $1.1 trillion over the first ten years, and then continue to shrink it each year by $283 billion, or 1 percent of GDP. 

This tax would result in a loss of $785 billion in labor income. Over the long run, wage losses would amount to $241 billion annually. As described in AAF’s study, “In short, over the long run Warren’s wealth tax is more damaging to workers than anyone else.”  

The tax on unrealized gains being considered by Democrats would undoubtedly have similar negative Impacts on workers and the economy.

5. The Tax Code is Already Steeply Progressive

While Democrats routinely assert that the “rich” need to pay their “fair share,” the tax code is already steeply progressive.

According to the Congressional Budget Office, the top one percent of earners paid 41.7 percent of income taxes in 2018 and 25.9 percent of federal taxes. The top 20 percent of earners paid 90.9 percent of income taxes and 69.8 percent of all federal taxes.

While the “rich” pay over 40 percent of income taxes, they earn just 21 percent of all income, according to the Heritage Foundation. The bottom 50 percent pay just 3 percent of income taxes, while the bottom 75 percent pay just 13 percent of income taxes.

In addition, the Joint Committee on Taxation found that taxpayers with incomes of $1 million or more pay an average federal tax rate of 31.5 percent, while the bottom half of income earners ($63,179 or less) pay an average rate of just 6.3 percent.

6. The Tax would Likely be Unconstitutional

Article I, Section 9 of the U.S. Constitution bars the federal government from imposing direct taxes unless they are apportioned. To get around a decision made by the Supreme Court in Pollock v. Farmers’ Loan & Trust Co. (1895), which ruled the income tax unconstitutional under Section 9, the Sixteenth Amendment was adopted. This amendment authorized an unapportioned tax on income “derived from a source.” Commissioner v. Glenshaw Glass (1955) described the “derived” requirement as income that constitutes “an accession to wealth, clearly realized, over which the taxpayer has complete dominion.” 

In the context of mark-to-market taxation, “unrealized” gains certainly do not meet the “clearly realized” condition. This form of taxation is also, indisputably, not apportioned. Further, the Supreme Court explicitly said that unrealized gains do not qualify as “income” under the 16th Amendment. The Supreme Court ruled in Eisner v. Macomber that realization is a requirement for a tax to be considered income under the 16th Amendment: 

“… we are brought irresistibly to the conclusion that neither under the Sixteenth Amendment nor otherwise has Congress power to tax without apportionment a true stock dividend made lawfully and in good faith, or the accumulated profits behind it, as income of the stockholder.” 

If mark-to-market taxation of capital gains is a direct tax, is not covered by the 16th Amendment, and is not apportioned, then it is unconstitutional.

7. Americans Oppose Taxing Unrealized Gains

Americans oppose taxing unrealized gains by a ratio of 3-1, according to a survey experiment with 5,000 respondents published in May 2021. The paperThe Psychology of Taxing Capital Income: Evidence from a Survey Experiment on the Realization Rule, is authored by Professor Zachary D. Liscow of Yale University Law School and Edward G. Fox of the University of Michigan Law School. 

Specifically, 75 percent of respondents opposed taxing unrealized gains, with all demographic groups opposing the measure:

"Respondents strongly prefer to wait to tax gains on publicly-traded stocks until sale versus taxing unsold gains each year: 75% to 25%. Though this opposition is strongest among those who are wealthier or own stocks, all demographic groups oppose taxing unsold gains by large margins. This opposition persists and is often strengthened when looking across a variety of other assets and policy framings."

Survey-takers’ massive rejection of abandoning the realization rule held up even after they heard arguments in favor of this kind of taxation, when they themselves don’t own stock, and even if they’re Democrats. Respondents did not consider the gains "real" until the stock has yielded cash in the taxpayer's hand. Simply put, taxing unrealized gains cuts deeply against Americans’ sense of fairness and common sense.

8. The Tax has Failed and Been Repealed in Foreign Countries

Foreign countries have tried taxing wealth before, and it has failed. In 1995, 15 countries implemented a wealth tax. Since then, 11 have been repealed.  The countries that have repealed their wealth taxes are Sweden, Denmark, the Netherlands, Austria, Finland, France, Germany, Iceland, Luxembourg, Ireland, and Italy.

In addition to cost of enforcement, which Austria cited specifically, and the difficulty of valuing assets, these countries also found that the tax was ineffective at combating wealth insecurity and did not redistribute wealth in favor of low-to-middle income earners.      

9. The Tax Will Force Taxpayers to Liquidate their Assets and Could Create Market Volatility

The tax would force taxpayers to liquidate their assets because many will have their wealth tied up in a business. For publicly traded companies, taxpayers will have to sell stock which could affect the value of the company, reduce the value of retirement portfolios and harm investors.

It could also result in taxpayers losing control of parts of their business if the company is privately held or lead to a company being broken up.

There is also the problem of how this tax would treat losses. It could require the federal government to refund taxpayers if they have a loss in a given year. At the very least, it could zero out the tax liability for wealthy taxpayers in a certain year.

10. It Would Impose Taxes Retroactively

A tax on unrealized gains would punish taxpayers for past decision making by taxing paper gains from the original date that asset was acquired. It would impose significant tax liability when first implemented as taxpayers would be required to pay taxes on assets they first acquired years or decades ago. Even if this payment was spread out over several years, it would be a significant tax liability.

The tax code must be applied with consistency, certainty, and fairness. Taxpayers routinely make decisions based on a reasonable interpretation of the law with the expectation that future changes to the law will not be applied looking backwards.

Retroactively changing the tax code and requiring taxpayers to pay taxes on assets they acquired years or decades ago undermines these principles by changing the rules after the fact.

This also undermines confidence in the tax system and discourage taxpayers from taking advantage of explicit tax incentives (e.g., for charitable contributions, business investments, and energy efficiency) if they fear Congress might retroactively eliminate these incentives in the future.

Photo Credit: "That was supposed to be going up, wasn't it?" by Rafael Matsunaga is licensed under CC BY 2.0.


Democrats' GILTI Tax Increase Would Harm U.S. Competitiveness, Reduce Jobs and Wages

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Posted by Alex Hendrie on Tuesday, October 12th, 2021, 12:35 PM PERMALINK

Democrat proposals to increase the tax rate for the Global Intangible Low-Taxed Income (GILTI) provision will make America less competitive, increase tax complexity for American businesses, and cost jobs and wages. These proposals would also give the U.S. higher taxes than the global agreement amongst foreign countries to set a foreign minimum tax rate of 15 percent.

What is GILTI? 

GILTI was created by the Tax Cuts and Jobs Act of 2017 and was included in the bill as a tradeoff for other tax cuts including ending the double taxation of American businesses and reducing the corporate tax rate to 21 percent, a rate in line with the rest of the developed world. 

GILTI establishes a minimum tax on foreign earnings of American businesses and was designed to discourage businesses from shipping profits overseas.

It is calculated by applying the corporate tax on net foreign income after a deduction of 10 percent on foreign tangible assets, or qualified business asset investment (QBAI). Businesses are allowed a 50 percent deduction on GILTI, resulting in an effective tax rate of 10.5 percent. Foreign tax credits can also be taken against GILTI equal to 80 percent of taxes paid, in which case taxpayers pay a 13.125 percent rate. Starting 2025, the GILTI rates increase from 10.5 percent to 13.125 percent and 13.125 percent to 16.4 percent.

What have Democrats proposed? 

President Biden proposed significantly increasing GILTI in his fiscal year 2022 budget proposal. Biden's plan calls for:

  • Increasing the rate from 10.5 percent to 21 percent, which after the disallowance of foreign tax credits would provide a top rate of 26.25 percent. 
  • Eliminating the deduction against taxable income for a 10 percent rate of return on tangible assets. 
  • Assessing GILTI on a country-by-country basis, rather than a worldwide basis, a proposal that would create significant tax complexity for businesses.   

 

House Democrats have proposed a similar tax increase in their $3.5 trillion reconciliation proposal:

  • Increasing the GILTI rate to 16.5 percent. 
  • Reduce the deduction for Qualified Business Asset Investment (QBAI) to 5 percent.
  • Assess GILTI on a country-by-country basis.
  • Reduce the Foreign Tax Credit to 5 percent. 

 

Senators Ron Wyden (D-Ore.), Sherrod Brown (D-Ohio) and Mark Warner (D-Va.) have also proposed changes to GILTI in a discussion draft released in August. While they have not set a rate for GILTI, they propose shrinking the 50 percent deduction, which would raise the top rate. They also propose repealing the QBAI deduction and applying GILTI on a country-by-country basis for low-tax income.

Any of these proposals would make the U.S. less competitive. In addition to these tax increases, the Democrats want to significantly increase the corporate income tax. Biden has proposed raising the corporate tax rate to 28 percent (32 percent after state taxes), while House Democrats want to raise it to 26.5 percent (31 percent after state taxes). Either rate would be higher than foreign competitors such as China, which has a 25 percent rate, or Europe, which has an average rate of 21.7 percent.

How would this impact the US economy? 

Biden’s proposed changes to GILTI would lead to a $340 billion tax hike over the next decade, could eliminate one million jobs and cause $20 billion in lost economic activity, according to a recent EY report published by the National Association of Manufacturers. 

 As the report explains, Biden’s proposed GILTI tax increase could result in anywhere from a 200,000 to 3.1 million loss in jobs. The report estimates the most likely employment loss is approximately 1,000,000 lost jobs. Additionally, the changes would cause a decline in investment ranging between $10 billion and $20 billion. This is because the tax hike increases the cost of capital, making investing less profitable.  

The report also notes the following:   

  • U.S. Multination Corporation (MNC) domestic employment is estimated to decline by between 0.6% and 10.9%  
  • U.S. MNC domestic compensation is estimated to decline by between 2.2% and 10.4%  
  • U.S. MNC domestic investment is estimated to decline by between 1.1% and 7.3%

 

EY also studied the impacts of the proposed changes to GILTI provision on economic activity in Texas. This study was commissioned by the Texas Association of Business by EY and the Bureau of Business Research at the University of Texas at Austin.  

In Texas, EY assessed that the most plausible employment effects of GILTI tax hikes for U.S. multinational corporations range between 16,000 and 33,000 lost jobs with a high-end estimate of 100,000 potential lost jobs. These changes could reduce gross state product (GSP) by up to $14.5 billion. 

Both President Biden’s and congressional Democrats’ proposed changes to the GILTI tax would hurt workers, the economy, and make U.S. businesses less capable of competing with foreign competitors. It would also undermine the TCJA’s territorial system and moves the U.S. once again towards a worldwide system of taxation. These proposals should be rejected.  

Photo Credit: "US Capitol" by Sandwich is licensed under CC BY-NC-ND 2.0.


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