Alex Hendrie

List of Tax Hikes in Sanders “Medicare for All” Plan

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Posted by Alex Hendrie on Wednesday, April 10th, 2019, 5:36 PM PERMALINK

Self-avowed socialist and Democrat presidential candidate Bernie Sanders has released his proposal for a government takeover of the American healthcare system. The proposal, which Sanders calls “Medicare for All,” replaces private insurance with government as the single payer.

Rather than including financing mechanisms in the legislation, Sanders released a set of tax hike “options” that would be paired with the proposal.

These tax hikes would hit American families at every income level and businesses large and small. The proposal increases taxes by $14.3 trillion over the next decade, according to an estimate of Americans for Tax Reform.

This would pay for roughly half of the cost of single payer healthcare, which costs between $32 trillion and $36 trillion according to estimates.

The list of proposed tax hikes are below:

A New, 4 Percent Employee Payroll Tax

Sanders would impose another 4 percent payroll tax which on employees which he calls an “income-based premium paid by employees.”

According to Sen. Sanders’ estimates, this increases taxes on American families and individuals by $3.9 trillion.

A New, 7 Percent Employer Payroll Tax

Sanders would impose another 7 percent payroll tax which on employees which he calls an “income-based premium paid by employers.”

This is a $3.5 trillion tax increase over ten years.

Eliminating Health Tax “Expenditures”

The proposal would ban employer-provided insurance and repeal the deduction for health care, increasing taxes on businesses by over $3 trillion over a decade.

This proposal would also repeal Health Savings Accounts, which are utilized by an estimated 25 million American families. These tax advantaged savings accounts largely benefit the middle class – roughly half of all HSAs are owned by families earning between $60,000 and $200,000.

The deduction for cafeteria plans and the medical expense deduction is also eliminated.

In all, Sanders estimates this will increase taxes on families and businesses by $4.2 trillion.

70 percent Top Tax Bracket for Ordinary Income and Capital Gains Income
This would give America the highest income tax rate in the world.

According to the Tax Foundation, a top 70 percent rate for ordinary income and capital gains income above $10 million will raise $51.4 billion over a decade. After accounting for macroeconomic effects, the proposal would actually cost the government $63.5 billion because of the proposal suppresses investment and economic growth.

77 Percent Death Tax

Sanders proposes raising the death tax rate to 77 percent for inheritances. Under the proposal, the death tax would kick in at $3.5 million with a rate of 45 percent.

Currently, the death tax applies to estates over $11 million and applies a 40 percent rate.

This proposal will increase taxes by $315 billion over ten years.

Wealth Tax
Sanders proposes an annual wealth tax of 1 percent kicking in above $21 million in assets. Sanders estimates the proposal will increase taxes by $1.3 trillion over ten years.

Bank Tax
Sanders proposes a tax on financial institutions totaling $800 billion over ten years.

Broaden the Self Employment Tax
Sanders would require business owners to report more of their business income as salary, increasing the amount of self-employment tax owed. This would increase taxes by $247 billion over ten years.

Photo Credit: Gage Skidmore


ATR Urges Support for Rep. Foxx’s Spending Safeguard Amendment

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Posted by Alex Hendrie on Tuesday, April 9th, 2019, 1:46 PM PERMALINK

Congressman Virginia Foxx (R-NC) has introduced an amendment to H.R. 2021, the Investing in the People Act, to control runaway mandatory spending.

The amendment, titled the Spending Safeguard Amendment, will inject much needed government oversight into mandatory spending programs which operate on autopilot and have driven the increase in government spending.

This legislation creates a mechanism for the Office of Management and Budget to direct the Treasury Department to halt a mandatory program’s operations if it exceeds its spending limit, defined as 110% of the amount CBO estimates its cost to be when Congress approves it or 120% of that cost estimate for Social Security, health, poverty, or veterans’ programs.

This mechanism will create an important safeguard against mandatory spending and will force Congress to make tough decisions rather than ignoring them.

As it stands, mandatory spending comprise the bulk of growth in government spending according to the Congressional Budget Office. Currently, mandatory spending compromises 12.7 percent of GDP, roughly double the level of defense and nondefense discretionary spending which sits at 6.3 percent.

By 2028, mandatory spending will increase to 15.1 percent of GDP, while CBO projects discretionary spending will be lower for 5 percent. Over the long-term, this problem will get worse. CBO projects mandatory spending will total 17.3 percent of GDP between 2040 and 2049, meaning it will consume almost all revenue taken in by the federal government.

Photo Credit: Virginia Foxx


The IRS Must Stop Harassing Taxpayers Over the Conservation Easement Deduction

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Posted by Alex Hendrie, Tom Hebert on Monday, April 8th, 2019, 9:00 AM PERMALINK

In 1976, Congress created a charitable deduction under section 170(h) of the tax code to encourage taxpayers to conserve their property for future generations. Congress has consistently reaffirmed this provision, known as the conservation easement deduction, in legislation over the past several decades.  

In recent years, the IRS has targeted taxpayers that claim the deduction. In a clear violation of Congressional intent, the agency has sought to make it more difficult for taxpayers to claim the deduction and has taken taxpayers to court over their use of this deduction.

While the IRS has a responsibility to go after bad actors, it is unacceptable for the agency to harass law-abiding taxpayers for claiming a deduction provided by Congress. Unfortunately, that is exactly what appears to be occurring.

Moving forward, policymakers should ensure that the deduction is being properly administered by the IRS and is being used to expand private conservation as intended by Congress. Congress should debate and consider reforms through regular order to ensure that the IRS is not subjecting taxpayers that are properly taking the deduction to undue scrutiny.

What is the Conservation Easement Deduction?

The conservation easement deduction has existed for decades and incentivizes property owners to conserve land and historic sites by offering a charitable deduction. 

In order to claim the deduction, the taxpayer must agree to restrict their right to develop or alter the property. Organizations known as land trusts agree to monitor the restrictions placed on the property. 

Essentially, the taxpayer agrees to have the land conserved for the benefit of future generations. The amount of the tax deduction is based on the value of what was donated – a value determined by an independent appraiser.

The taxpayer typically can deduct up to 50 percent of adjusted gross income (AGI) in any given year and carry forward any unused deductions for up to 15 years.  

Congress Has Consistently Reaffirmed Its Commitment to Easement Deductions

It is important to note that the conservation easement deduction has bipartisan Congressional support.

Congress initially codified the provision in 1976 and extended the provision in 1977. It was then made permanent in the Tax Treatment and Extension Act of 1980.

More recently, in 2006, Congress narrowed the definition of conservation easements. At the same time, Congress temporarily expanded the easement deduction to 50 percent of AGI. This expansion was routinely extended by Congress and made permanent in 2015.

The IRS is Targeting Taxpayers Over the Conservation Easement Deduction

Despite the long history of the conservation easement deduction, the IRS has recently taken aim at taxpayers subjecting them to burdensome new filing requirements and onerous costs. 

On December 23, 2016, the IRS published Notice 2017-10, making partnership donations of conservation easements “listed transactions,” which means the IRS suspects tax avoidance. This notice was implemented in the final days of the Obama administration without any opportunity for public comment.

The Notice ignores the fact that partnerships syndicated to multiple individuals are an extremely common form of financing real estate investments. As a result of the Notice, partnership conservation easement donations are being more heavily scrutinized, and taxpayers are exposed to a flurry of complex paperwork and compliance requirements. For instance, taxpayers wishing to claim an easement deduction covered by the Notice must now fill out Form 8886, a “Reportable Transaction Disclosure Statement.” This form takes approximately 20 hours to complete and has a top penalty of $100,000 for failing to properly complete it.  

Adding insult to injury, Notice 2017-10 was applied retroactively all the way back to tax year 2010, so the complexity and potential liability is significant. In fact, if an individual fails to comply with the new listed transaction disclosure requirements, they could be hit with penalties up to $100,000 with no reasonable cause exception. 

Notice 2017-10 does nothing to address the problem it identifies — overvaluation of the conservation easement. Instead of addressing potential overvaluation, the Notice just makes it harder for taxpayers to claim an easement deduction by burdening them with excessive paperwork and threat of audit. 

The IRS has also used Section 6695A of the code to constrain the use of easement deductions. Section 6695A attempts to ensure that appraisals are accurate and applies a penalty of 125% of the appraiser’s fee if the appraised value is 150 percent above the IRS’s determined value.

There are several issues with this penalty as it relates to easement deductions. The IRS now routinely asserts on audit that conservation easements have little or no value – no matter how carefully prepared. The unreasonable threat of the penalty has the unfortunate effect of deterring competent appraisers that would otherwise appraise conservation easements. In Colorado, for example, there are now only five appraisers who are willing to work on valuing conservation easements. The recent Department of Justice action seeking an injunction and disgorgement of all past income from one conservation easement appraiser (whose appraisals have been upheld in court) only adds to difficulties of taxpayers in finding a competent and willing appraiser.

In addition, the penalty inherently assumes a bad faith motive on the behalf of the appraiser. Two competent appraisers can have different opinions on the highest-use value of a donation while still acting in good faith.

The IRS is Hauling Taxpayers to Tax Court

The IRS is also taking taxpayers to court to deny conservation easement deductions by asserting that longstanding and common easement grant deed provisions violate the rules. The IRS is also routinely alleging (without the benefit of qualified appraisals) that conservation easement donations have little or no value and that taxpayer easement appraisals are inflated. While there is nothing inherently wrong with the IRS challenging taxpayers that may be abusing the law, the IRS should not be routinely challenging tax benefits that Congress has specifically provided, particularly when there is no evidence of abuse.

Under these cases, the burden of proof typically falls on the accused, not the accuser, flipping the entire notion of American justice on its head.

Reforms Are Needed, But Law-abiding Taxpayers Must Be Protected

To be clear, it is important that the conservation easement deduction is not abused by taxpayers. There are several simple fixes that would strengthen and protect the easement deduction from potential abuse. 

One possible solution is adding additional requirements specific to conservation easements to ensure the accuracy of appraisals by both taxpayers and the IRS.

Congress could also introduce more transparency into the process by requiring public disclosure of easement donations and the resulting benefits to the public.

These reforms would uphold the integrity of the conservation easement deduction while it remains in law for all taxpayers.

Photo Credit: Martin Haesemeyer


Senators Should Reject Sen. Rick Scott Legislation To Import Foreign Price Controls

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Posted by Alex Hendrie on Wednesday, April 3rd, 2019, 5:19 PM PERMALINK

Senator Rick Scott (R-Fla) has introduced legislation that would import foreign price controls into the U.S. ATR urges Senators not to cosponsor this legislation. 

The legislation, known as the Transparent Drug Pricing Act, would institute a price control on medicines so that the list price of a drug cannot exceed the lowest price of the drug in Canada, France, the United Kingdom, Japan, or Germany.

Foreign countries frequently utilize a range of arbitrary and market-distorting policies to determine the cost of medicines – by definition such approaches are price controls. There is no negotiation and foreign governments often force innovators to accept lower prices in a “take-it-or-leave it” proposition. This results in reduced or restricted access to new medicines and higher prices for those medicines that enter the market.

In contrast, the U.S. is a world leader in research & development because the system of healthcare rejects price controls and encourages innovation. As a result, a majority of new medicines are developed and launched in America.

This innovative environment is enormously beneficial to the long-term well-being of Americans and the efficiency of the U.S. healthcare system. In addition, the investment required for research and development of medicines leads to more high-paying jobs and a stronger economy.

Conservative opposition to foreign reference pricing is strong. Nearly 60 groups and activists wrote in opposition to the proposal in a coalition letter led by ATR late last year.

In addition, the administration has recognized the damage that adopting foreign pricing would have on American innovation in a report released in February 2018 by the president’s Council of Economic Advisors:

 “If the United States had adopted the centralized drug pricing policy in other developed nations twenty years ago, then the world may not have highly valuable treatments for diseases that required significant investment.”

Importing price controls is the wrong approach. This proposal will suppress competition and innovation and harm American competitiveness and investment. It should be rejected by Senators.

 

Photo Credit: Gage Skidmore


The Tax Cuts and Jobs Act is Working for the Middle Class

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Posted by Alex Hendrie on Wednesday, March 27th, 2019, 8:00 AM PERMALINK

The House Ways and Means Committee is holding a hearing entitled, “The 2017 Tax Law and Who it Left Behind.”  While the Democrats argue that the tax cuts are overwhelmingly benefiting the wealthy, nothing could be further from the truth.

The Tax Cuts and Jobs Act has grown the economy, reduced taxes for the middle class, given workers a pay raise and new employee benefits, reduced utility costs, and given families relief from Obamacare.

The Economy is Strong Following the Tax Cuts

  • GDP growth was 3.1 percent between Q4 of 2017 and Q4 of 2018, according to the Bureau of Economic Analysis.
     
  • Over 2.6 million jobs were created in 2018 and over 5.1 million jobs have been created since the beginning of 2017 according to the Bureau of Labor Statistics.
     
  • Nominal wages have grown by 3.4 percent over the last year, a ten-year high.
     
  • Job openings sit at almost 7.6 million, a record high.
     
  • The unemployment rate is at 3.8 percent. In September, the unemployment rate hit 3.7 percent, a 50 year-low.
     
  • In October, the U.S. was named the most competitive economy in the world, according to the World Economic Forum.
     
  • Gross private domestic investment grew by over 7 percent between Q4 of 2017 and Q4 of 2018.
     

Middle Class Families are Seeing Strong Tax Reduction

  • A family of four with annual income of $73,000 (median family income) will see a tax cut of more than $2,058, a 58 percent reduction in federal taxes.
     
  • A single parent with one child with annual income of $41,000 will see a tax cut of $1,304, a 73 percent reduction in federal taxes.
     
  • 91 percent of taxpayers with annual income between $64,000 and $108,000 saw an average federal tax cut of $1,400 in 2018, according to the left of center Institute for Taxation and Economic Policy.
     
    • Similarly, 90 percent of taxpayers with annual income of between $40,000 and $64,000 saw an average federal tax cut of $810, while 87 percent of taxpayers with annual income between $108,000 and $232,000 saw an average federal tax cut of $2,710.
       
  • The Tax Cuts and Jobs Act doubled the standard deduction for an individual from $6,000 to $12,000 and for a family from $12,000 to $24,000. 105 million Americans took the standard deduction in 2015 according to the IRS statistics of income (SOI) database.
     
  • The Tax Cuts and Jobs Act doubled the child tax credit from $1,000 to $2,000 per child, benefiting 22 million families that took the Credit.
     
  • The Tax Cuts and Jobs Act raised the threshold of the Alternative Minimum Tax so fewer taxpayers are forced to comply with the provision. 4,464,430 families and individuals paid the Alternative Minimum Tax in 2015.
     

Businesses Have Created New Employee Benefit Programs.

  • Walmart and Lowes now provide $5,000 to help cover the cost of adopting a child.
  • Express Scripts in Missouri has created a $30 million education fund for their employees’ children.
  • Boeing provided $100 million in workforce development programs
  • McDonald’s employees who work just 15 hours a week receive $1,500 worth of tuition assistance every year per year.

Businesses Have Also Increased Wages and Given Bonuses to Their Employees.

  • Wichita Railway Services is giving its five employees tax reform bonuses of between $3,000 and $6,000.
  • Wells Fargo raised base wages from $13.50 to $15.00 per hour.
  • Anfinson Farm Store – a family owned business in Cushing, Iowa (population 223) – has given its employees a $1,000 tax reform bonus and raised wages by 5 percent.
  • AT&T provided $1,000 bonuses to 200,000 employees. 
  • Kentucky-based Turning Point Brands, Inc. will give 107 employees a $1,000 tax reform bonus.Cigna raised base wages to $16 per hour.
  • Apple provided $2,500 employee bonuses in the form of restricted stock.
     

Utility Companies in All 50 States Are Passing on the Tax Savings in the Form of Lower Rates for Customers.

This means lower electric bills, lower gas bills, and lower water bills for Americans than if the corporate rate cut had not occurred. For example: 

Tax Reform Gave Middle Class Families Relief From the Obamacare Individual Mandate Tax Penalty

  • Obamacare imposed a tax penalty of $695 for an individual and $2,085 for a family of four for failing to buy “qualifying” health insurance as defined by the federal government. The Tax Cuts and Jobs Act repeals this unfair tax.
     
  • The Obamacare individual mandate tax penalty is one of the most regressive taxes in the code as it disproportionately impacts low and middle-income families:
     
    • In tax year 2016, 4,953,490 households paid a total of $3,628,017,000 in individual mandate tax penalties. 77 percent of those paying the mandate had annual income of less than $50,000. 34 percent of those paying the mandate had annual income of less than $25,000.
    • In tax year 2015, 6,665,480 households paid a total of $3,079,255,000 in individual mandate tax penalties. 79 percent of those paying the mandate had annual income of less than $50,000. 37 percent of those paying the mandate had annual income of less than $25,000.
       

Photo Credit: Gage Skidmore


Increasing Taxes on Carried Interest is A Terrible Idea


Posted by Alex Hendrie on Wednesday, March 13th, 2019, 10:44 AM PERMALINK

Democrats have vowed higher taxes on the American people across every income level and on businesses large and small.

Already, they have proposed repealing the entire GOP passed Tax Cuts and Jobs Act, raising the corporate rate to 28 percent, increasing the top income tax rate to 70 percent, and instituting a financial transactions tax on the sale of every stock, bond, or derivative.

The latest Democrat tax hike proposal comes from Senator Tammy Baldwin (D-Wis.) and Congressman Bill Pascrell (D-NJ) and would increase taxes on carried interest capital gains.

This is a terrible idea.

 “The left’s stated long-term goal is to tax all capital gains as ordinary income. Taxing carried interest is the opening salvo in this goal,” said Grover Norquist, President of Americans for Tax Reform. “On principle, carried interest should be taxed as capital gains not at artificially higher rates.”

There is no justification for increasing taxes on carried interest. The tax treatment of carried interest capital gains is based on long-standing principles of the tax code and is simply a trojan horse toward raising taxes on all capital gains.

Increasing taxes on carried interest is bad policy that fails to raise any significant amount of revenue and undermines pro-growth tax reform.

A Tax Increase on Carried Interest Capital Gains Would Harm Economic Growth

The goal of Democrats is to increase taxes on all capital gains. Many view a tax increase on carried interest is just the first step.

For instance, 2016 presidential candidate Hillary Clinton wanted dramatic tax increases on capital gains including a tax increase on carried interest.

Capital gains taxes are a tax on investment and negatively impact pension funds, retirement savings, charities, and colleges that depend on robust investment in order to meet savings goals. Small businesses would also be badly affected as investment money would dry up.

This same is true for carried interest – investment associated with carried interest capital gains drives significant economic growth across the country.

It is widely accepted that taxes on capital gains – including taxes on carried interest capital gains –  suppress growth and economic productivity, harm the creation of jobs and wages, and reduces other government revenue sources.

Carried interest is a Mainstay of the Tax Code

Carried interest is grounded in two long-standing tax principles.

It is treated as partnership income, meaning taxation flows through to individual taxpayers. In this case, carried interest is the investor’s share of partnership income they receive for providing expertise on investment decisions. All taxpayers involved in the partnership – those providing expertise and those providing capital – are taxed the same.

It is also treated as capital gains income as it is earned through long-term investment, not as ordinary income. There is no justification for treating this as ordinary income – the investor purchased an asset, grew the asset by making it more economically valuable, and sold the asset at a profit – exactly the same as other types of investment.

Undermining either of these two principles undermines the existing tax code as a whole by opening the door to arbitrarily higher taxes.

A Tax Increase on Carried Interest Capital Gains Fails to Raise Meaningful Revenue

Not only is a tax hike on carried interest bad policy, it would fail to raise any significant revenue and so is useless as a pay-for.

In fact, taxing carried interest as ordinary income would raise just $14 billion over ten years, according to the Congressional Budget Office.

For context, the estimated price tag of Medicare for all is $32 trillion, while the price tag of the Green New Deal is at least $91 trillion. Carried interest is a drop in the bucket compared to these proposals.

The Tax Treatment of Carried Interest Was Settled During Debate over the Tax Cuts and Jobs Act

Republicans should not be fooled into increasing taxes on carried interest as the issue has already been litigated.

The Tax Cuts and Jobs Act was developed under an extensive regular order process that involved six years of debate and more than 40 hearings in the House Ways and Means Committee.

After significant debate, lawmakers chose to maintain the tax treatment of carried interest as partnership income that is treated as a capital gain.

Choosing to increase taxes on carried interest capital gains by arbitrarily changing the tax treatment of this type of income would undermine the treatment of all capital gains and erode the gains of the tax reform.

 

More from Americans for Tax Reform


Trump Budget Expands Health Savings Accounts

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Posted by Alex Hendrie on Monday, March 11th, 2019, 4:20 PM PERMALINK

President Trump’s 2020 budget proposal calls for expanding tax advantaged Health Savings Accounts.

Most notably, the proposal will expand HSAs to millions of American families by integrating healthcare plans with an actuarial value of up to 70 percent with HSAs.

Since they were created in 2004, HSAs have become a popular and successful vehicle that promotes patient choice in health care. HSAs are used in conjunction with low premium, high deductible health insurance plans and provide a vehicle for individuals to spend and control their own money on their own health needs. Today, HSAs are used by over 25 million American families and individuals. 

HSAs contribute to lower healthcare spending by promoting consumer driven healthcare. HSA funds are completely controlled by the individual and follow them between jobs creating an incentive to spend funds wisely.

Research shows that families and individuals that utilize HSAs spend less on health care and use fewer medical services without forgoing necessary primary and preventative care.

HSAs are a significant vehicle to pay for healthcare expenses. An HSA user can accumulate as much as $360,000 after contributing to an account for 40 years assuming a rate of return of just 2.5 percent, according to the Employee Benefit Research Institute. With a rate of return of 5 percent, an HSA user can accumulate $600,000 over 40 years.

HSAs also reduce taxes for American families. HSAs offer triple tax benefits to users – contributions made are tax free, interest and investment is earned tax free, and payments made to qualifying health expenses are tax free. Expanding HSAs will provide additional tax reduction for American families and will promote saving and investment.

By giving millions of American families access to HSAs, the Trump budget proposal will expand healthcare freedom and access for Americans across the country.

Photo Credit: Gage Skidmore


Trump Budget Repeals Electric Vehicle Tax Credit

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Posted by Alex Hendrie on Monday, March 11th, 2019, 4:06 PM PERMALINK

President Trump’s 2020 budget proposal calls for repeal of the Electric Vehicle Tax Credit.

This is the right policy. The EV credit is regressive, distortionary tax policy that arbitrarily benefits one type of car over others.

Under current law, the EV tax credit grants a taxpayer purchasing a qualifying vehicle a credit of between $2,500 and $7,500 depending on the vehicle sold. The credit is capped at 200,000 vehicles per manufacturer at which point it begins to phase out.

However, this credit is highly regressive with a majority of the benefits of this credit go to residents of wealthy, blue states.

Almost 80 percent of the credit goes to those making $100,000 or more per year. 

Further, according to 2019 projections of electric vehicle sales in the United States, California will account for over 61 percent of all EV sales in the nation. California’s clear domination of EV market share occurs despite the fact that California only accounts for roughly 12% of all licensed U.S. drivers.

Unsurprisingly, this type of tax subsidy is unpopular with the American people with 67 percent of voters oppose subsidizing electric vehicles.

Broadly, the tax code should promote economically efficient decisions by limiting the number of distortionary provisions. The electric vehicle tax credit directly undermines this goal.

As such,  Congress should follow the lead of the President repealing the EV credit as part of revenue-neutral tax reform.

Photo Credit: Gage Skidmore


Treasury Should Use Its Regulatory Authority to Resolve GILTI Double Taxation

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Posted by Alex Hendrie on Monday, March 11th, 2019, 10:00 AM PERMALINK

Adding a Broader High-Tax Exception to GILTI as Currently Exists Under Subpart F Would Address Double Taxation and Promote American Competitiveness

The Tax Cuts and Jobs Act dramatically improved the U.S. tax code and the ability of American companies to compete globally. Specifically, TCJA reduced the tax rate on businesses to 21 percent – a rate in line with other developed countries – and modernized the international system of taxation.

However, the complexity of the legislation has resulted in an unintended consequence: the law inadvertently subjected high-tax foreign income that was previously exempt from U.S. taxation to the new GILTI regime.

This is problematic and should be fixed by Treasury through the agency’s rulemaking authority. Ideally, Treasury should expand the high-tax exception that exists under Subpart F to GILTI income.

GILTI was passed as part of the TCJA as a way to ensure that income was not improperly assigned to low tax jurisdictions. GILTI is calculated by applying U.S. tax to a U.S. entity’s Controlled Foreign Corporation (CFC) exceeding 10 percent of the deemed rate of return of that CFCs tangible assets.

Although it is intended to impose taxation on low-tax IP-derived income of foreign subsidiaries, it is not necessarily limited to passive income.

In some cases, the provision applies to active, already-taxed business income due to interactions with other international tax provisions including expense allocation rules and the Base Erosion Anti-Abuse Tax (BEAT).

There is no evidence that Congress intended for this outcome. At the time the TCJA was passed, the conference report to accompany the TCJA clearly stated the intent to exclude high-tax income from GILTI: 

“The Committee believes that certain items of income earned by CFCs should be excluded from the GILTI, either because they should be exempt from U.S. tax – as they are generally not the type of income that is the source of base erosion concerns – or are already taxed currently by the United States. Items of income excluded from GILTI because they are exempt from U.S. tax under the bill include foreign oil and gas extraction income (which is generally immobile) and income subject to high levels of foreign tax.”

The rationale of the committee, and the reason that high-tax income (defined as income that had been taxed by a foreign jurisdiction a minimum of 90 percent of the U.S. rate) has historically been exempt from U.S. taxation under Subpart F rules is clear. There is no opportunity for erosion of the U.S. tax base in cases where foreign earned income of a U.S. entity is being properly taxed in another jurisdiction. 

Expanding the Subpart F exemption is an eloquent solution to unintended double taxation because the provision is already vetted.

In addition, it would not create a windfall for taxpayers as the existing Subpart F provision is elective and only applies to the extent “the taxpayer establishes to the satisfaction of the Secretary” that the income has already faced high tax rates.

Failing to add an expanded high-tax exception will harm American competitiveness given U.S. businesses face additional tax on high-tax CFC income, while foreign competitors face no additional tax on their high-tax income.

While the TCJA has substantially improved the U.S. tax code, it is crucial that Treasury ensures the pro-growth elements of the law are preserved. Preventing the double taxation of high-tax foreign income under the GILTI regime should be a priority and can be achieved through an expanded Subpart F high-tax exception.

Photo Credit: Erik Drost - Flickr


A Financial Transactions Tax Is A Terrible Idea

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Posted by Alex Hendrie on Thursday, March 7th, 2019, 12:06 PM PERMALINK

Senator Brian Schatz (D-HI) and Congressman Peter DeFazio (D-Ore.) have introduced legislation that would institute a financial transactions tax of 0.1 percent on the sale of any stocks, bonds, and derivates.

A financial transactions tax would be a terrible idea and has failed when it has been tried before. It would restrict economic growth and investment and would fail to raise revenue as supporters claim. 

A financial transaction tax would harm investment & economic growth

This tax would have broad, negative economic effects. On a macroeconomic level, this tax would increase the cost of capital and reduce productivity which would in turn harm wages and jobs. 

This tax would also increase market volatility as there would be fewer buyers and sellers and therefore more price jumps.

An FTT would especially impact fund managers that are responsible for 401(k)s, pensions, and index funds and make frequent trades. As a result, returns on pension funds and other savings would be lower because of the increased the costs of buying and selling and the reduction in value of shares.

In fact, BlackRock has previously estimated a financial transaction tax of 0.1 percent would result in an investor losing $2,300 in returns on a $10,000 investment in a global equity fund over ten years.

A financial transactions tax is bad tax policy

Ideal tax policy should be economically neutral by taxing income once (ideally at the point of consumption).

However, the FTT would be an additional layer of taxation on top of existing capital gains taxes, individual income taxes, and corporate taxes. 

Because it is levied on a transaction, this tax could be imposed on the same financial instrument multiple times. In addition, the FTT would often be imposed at the same time as the capital gains tax – tax would be paid on the act of selling the asset and also on the gain of the asset.

A financial transactions tax fails to raise the revenue supporters claim

Because it would result in less trades and cause capital to flee, this tax would have the flow on effect of reducing income tax and capital gains tax revenue. 

Case in point - an analysis by the Congressional Budget Office found that imposing a FTT would “decrease the volume of transactions and would make some types of trading activity” and “probably reduce output and employment.” 

In fact, some have predicted that a financial transactions tax would raise little, if any net revenue because of these negative impacts.

A financial transactions tax has failed in the past

In 1984, Sweden imposed a financial transaction tax, a proposal that lasted just six years. Even though investors were restricted in moving capital to foreign markets, most trading migrated to London to avoid the tax. 

Not only did this mean the FTT raised little revenue, capital gains tax revenue dropped because of a reduction in sales. When it was abolished in 1990, investment began to return to Sweden.

This is not an isolated incident.

When Italy and France imposed FTTs in 2012, both countries raised less than a quarter of expected revenues.

study of New York State’s FTT that was in effect between 1932 and 1981 found that the tax increased the cost of capital, reduced trading and increased market volatility.

Photo Credit: GotCredit - Flickr


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