Alex Hendrie

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


Treasury: Tax Refunds Match Previous Year

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Posted by Alex Hendrie on Thursday, February 28th, 2019, 11:16 AM PERMALINK

See also: GOP Tax Cuts Help Small Businesses Nationwide

Tax refunds increased by 17 percent last week and are now at the same level as last year, according to Treasury Secretary Steven Mnuchin.

The left and the media have spent the past few weeks arguing that the reduction in tax refunds in the first few weeks of tax filing season meant that families are seeing a tax increase.

This is misleading and wrong. Even if an individual has a lower refund, this is not cause for a concern. A lower refund simply means that the government has been holding less of your money interest-free over the past year.

In net, the Tax Cuts and Jobs Act is a tax cut for the majority of Americans, including middle class families:

  • 90 percent of wage earners have seen more money in their paychecks.
     
  • Taxpayers earning between $20,000 and $50,000 are seeing net federal tax cuts of 10 percent or higher according to the Joint Committee on Taxation.
     
  • 91 percent of taxpayers with annual income between $64,000 and $108,000 are seeing a 2018 federal tax cut averaging $1,400 according to the left of center Institute for Taxation and Economic Policy. 
     
  • A family of four with annual income of $73,000 is seeing a 60 percent reduction in federal taxes totaling more than $2,058.
     
  • According to the Heritage Foundation, the typical American family will be almost $45,000 better off over the next decade because of higher take-home pay and a stronger economy.

 

See also: 752 examples of pay raises, bonuses, 401(k) match increases, expansions, benefit increases, and utility rate reductions due to the Republican tax cuts.

Photo Credit: GotCredit - Flickr


Economy Grew at 3.1% Following GOP Tax Cuts

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Posted by Alex Hendrie on Thursday, February 28th, 2019, 9:22 AM PERMALINK

The economy grew by 3.1 percent in 2018 (between the fourth quarter of 2017 to the fourth quarter of 2018) and 2.6 percent in Q4 of 2018 according to data released by the Bureau of Economic Analysis.

This release shows the success of the Tax Cuts and Jobs Act in growing the economy and stands in stark contrast with the 1.9 percent average growth experienced under President Obama.

Since President Trump took office, 5.3 million jobs have been created with 304,000 jobs created in January.

Wages are increasing at 3.2 percent – a ten-year high.  Labor force participation is improving after hitting 40-year lows under President Obama.

In the months following passage of the TCJA, the U.S. was named the most competitive economy in the world.

In the past year, the unemployment rate for key demographics including women, African-Americans and Hispanics have hit record lows.

This strong economic growth is also improving the nation's fiscal health. CBO has found that 0.1 percent in revenue equals 1.4 percent in GDP growth and over $400 billion in revenue over a decade, and in the past they have stated that 0.1 percent in GDP equals $300 billion.

This means that economic growth of higher than the 1.7 percent predicted by CBO will net the federal government trillions of dollars in higher revenues over 10 years.

While the Democrats continue to claim the GOP tax cuts are not working, the latest economic growth figures prove otherwise. GDP growth is up, new jobs are being created, and wages are rising.

Photo Credit: Gage Skidmore


Despite Dem Claims, Post-TCJA Still Steeply Progressive

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Posted by Alex Hendrie on Monday, February 25th, 2019, 4:09 PM PERMALINK

Democrats have claimed that the GOP Tax Cuts and Jobs Act benefits the wealthy and does little for middle class families.

This claim is false. After passage of TCJA, the tax code is steeply progressive as noted in an analysis by the Treasury Department:

  • In 2018, the top 10 percent of wage earners (with annual income of $123,716) pay 82.6 percent of federal income taxes and 61.2 percent of all federal taxes.
  • The top 10 percent of wage earners pay an average federal tax rate of 25.2 percent and an average individual income tax rate of 16.5 percent.
  • The top 1 percent pay 29.8 percent of federal taxes and 45.9 percent of federal income taxes.
  • The top 30 percent of wage earners pay 87 percent of federal taxes and 104.1 percent of federal income taxes.
  • The median quintile of wage earners (wage earners between 40 and 60 percent of earners) pay 6.3 percent of federal taxes and 0.6 percent of individual income taxes.
  • The median quintile of wage earners pay an average federal tax rate of 9.9 percent.

Photo Credit: House Democrats - Flickr


Rep. Clyburn Corporate Tax Hike Bill Would Undermine Success of Tax Reform

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Posted by Alex Hendrie on Monday, February 25th, 2019, 2:30 PM PERMALINK

The cornerstone of the Republican-passed Tax Cuts and Jobs Act is the 21 percent corporate rate. 

Prior to passage of the TCJA, the U.S. had the highest rate in the developed world at 35 percent. Now, the U.S. has a rate that is competitive with other countries.

In addition to making the U.S. more competitive in the global economy, the 21 percent rate has benefited the economy, workers and consumers. The reduced corporate rate has increased employee wages and benefits and made America a more competitive place to do business.

Unfortunately, Democrats are taking aim at the tax bill in an effort to raise the corporate rate.

House Budget Chairman John Yarmuth (D-Ky.) has proposed increasing the rate to 28 percent, an effective corporate rate of 34 percent after factoring in state taxes, which average approximately 6 percent.

More recently, House Majority Whip Jim Clyburn (D-SC) has introduced legislation that would raise the corporate rate in order to restore non-profit deductibility of fringe transportation benefits.

While the bill proposes a modest rate hike to 21.03 percent, it would undermine the success of the GOP tax cuts and open the door to additional corporate rate hikes to pay for leftist spending priorities.

Following the GOP tax cuts, the U.S. was named the most competitive economy in the world. By several metrics, the tax cuts have worked: wages grew by 3.2 percent in 2018, unemployment recently hit a 50 year low, labor force participation is improving, and business investment is up by almost 10 percent.

In addition to broad macroeconomic effects, the corporate rate reduction has benefited everyday Americans in the form of pay raises, new employee benefits and lower utility bills.

Companies have created new employee benefit programs. For example: 

  • 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.
     

Companies have reduced utility bills for Americans across the country. 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: 

Companies have provided increased wages and bonuses to their employees. For example: 

  • Wells Fargo raised base wages from $13.50 to $15.00 per hour.
  • AT&T provided $1,000 bonuses to 200,000 employees. 
  • Cigna raised base wages to $16 per hour.
  • Apple provided $2,500 employee bonuses in the form of restricted stock.
     

While Rep. Clyburn's corporate tax hike proposal is relatively minor, it undermines the success of the GOP tax cuts and opens the door to further Democrat tax hike proposals that would threaten economic growth and worker benefits that GOP tax reform helped to flourish. 

Photo Credit: House Democrats - Flickr


Cutting the Capital Gains Tax Increases Investment and Federal Revenue

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Posted by Alex Hendrie on Monday, February 25th, 2019, 1:15 PM PERMALINK

Reducing the capital gains tax leads to higher revenues over the short term, based on data released by the Treasury Department.

Indexing capital gains taxes to inflation – as has been proposed by Members of Congress led by Senator Ted Cruz (R-Texas) and Congressman Devin Nunes (R-Calif.), conservative groups, and economists – would give the Trump administration stronger growth and higher revenues to buy down the deficit.

When the capital gains tax was cut by President Clinton from 28% to 20% in 1997, revenue as a % of GDP rose from 2.89% in 1996 to 3.84% in 1997, 4.67% in 1998 and 4.99% in 1999.

Similarly, President George W. Bush’s capital gains tax cut from 20% to 15% resulted in revenue rising from 2.56% of GDP in 2003 to 3.8% in 2004, 4.95% in 2005, and 5.42% in 2006.

Increasing the capital gains tax also distorts economic decision making. The top capital gains rate increased from 20% to 28% effective Jan 1, 1987. In anticipation of this rate hike, revenues as a % of GDP increased from 3.83% in 1985 to 6.95% in 1986 before dropping to 2.88% in 1987 and 2.92% in 1988.

Click here to access ATR's analysis as pictured above. 

This data should not be surprising. Cutting the capital gains tax creates an "unlocking effect," where pent-up gains they had built up over time are realized at greater rates than they otherwise would be.

The capital gains tax is a tax on investment and economic productivity, which negatively impacts wages and jobs.

Lowering the capital gains rate would encourage the formation of more capital and would result in the creation of more jobs. In turn, worker productivity and wages would be higher. 

Lower capital gains taxes also result in higher federal revenues because the government collects additional revenue from taxes on the higher levels of economic activity. In fact, the government could collect higher income and payroll taxes on wages, higher income taxes on corporate and non-corporate business profits, and additional excise taxes and tariffs because of increased economic activity.


Amazon's Federal Income Tax Liability is a Non-Story

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Posted by Alex Hendrie on Monday, February 25th, 2019, 9:18 AM PERMALINK

Recent media reports have highlighted the fact that Amazon owed the federal government no income taxes during the past year. However, this should not be cause for concern.

There is nothing sinister here – Amazon utilized no loopholes and fully followed the law. The company owed no taxes in 2018 because they utilized several credits and deductions for research-and-development costs, investment costs, losses from previous years, and employee compensation.

Corporations pay taxes on net profit, not income, and the deductions taken exceeded the company’s profits.

These tax provisions are all good policy. For example, the research & development credit allows companies to quickly recover the cost of expenditures for research and experimentation. This credit has bipartisan support – it was first created under President Reagan and was routinely extended and then made permanent by Congress.  President Obama even proposed expanding the credit in several budget proposals.

Amazon also utilized full business expensing, which allows companies to deduct the cost of new equipment purchased. This important policy encourages investment and helps grow the economy – even the Organization for Economic Co-operation and Development (OECD) has recognized that expensing increases GDP.  

The company also took net operating loss carryforwards because of losses in previous years.

Finally, Amazon deducted stock compensation granted to employees. This should not be cause for concern. As noted in a Bloomberg article, stock benefits are eventually taxed:

“The U.S. government is better off because Amazon employees end up paying more in tax than the company can write off. Companies take that deduction off their profits taxed at a 21 percent rate. Employees must pay tax on the income they receive from those shares at rates that top out at 37 percent.”

In addition, this deduction is based off the share price of stock and Amazon’s stock has surged in recent years, significantly increasing the value of the deduction. 

It is also important to note that Amazon is still paying taxes -- the company owes $322 million in state taxes and paid the government employer payroll taxes for its more than 200,000 employees.

Regardless, Amazon's zero federal income tax liability is a non-story. The truth is the company utilized several common, yet important business credits and deductions which exist to encourage investment and promote economic development.

 

Photo Credit: GotCredit - Flickr


Senator Toomey is Right When it Comes to Stock Buybacks

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Posted by Alex Hendrie on Thursday, February 14th, 2019, 12:34 PM PERMALINK

In a recent floor speech, Senator Pat Toomey (R-Pa.) pushed back on the left’s misrepresentation of stock buybacks. Restricting buybacks, as proposed by Senate Minority Leader Chuck Schumer (D-NY) and Senator Bernie Sanders (I-Vt.), would harm savers and investors and undermine the free economy in favor of government control and, ultimately, socialism.

Functionally, buybacks occur when a company is reinvesting in itself 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.

Restricting buybacks would have several consequences. First, as noted in Sen. Toomey’s remarks, it would harm the economy:

“It would do great harm to an economy that is, right now, doing quite well. And the main way that it would be so damaging is it would scare away capital. You just stop and think about it, our economy thrives when people are willing to invest in existing businesses, in new business, in startup businesses but that investment is an absolutely essential part of a thriving economy.”

Today, the economy is strong. GDP is projected to grow at 3.1 percent in 2018 while wage growth is at a nine-year high. Job openings have now hit a record high of 7.3 million and over 300,000 jobs were created last month. Restricting buybacks would undermine this success.

Restricting buybacks would also harm the 55 million workers that own a 401k and the 54 percent of Americans that own stocks, as noted by Sen. Toomey:

“This idea would be very harmful to the people that it's presumably meant to help. You know about 40% of all equities in the U.S. are held in pension and retirement accounts. These are the accounts of teachers and cab drivers and truck drivers and folks who work at factories and do every other job that our economy depends on who put a little money away. It's in a 401k plan or it's in an IRA or it's in an employer-sponsored pension plan.”

Finally, restricting buybacks are an attack on economic freedom, as Sen. Toomey noted in his remarks:

"I will say it seems exactly equivalent to me to confiscating the property of somebody, in this case their ownership in a business, and redistributing that confiscated asset to whoever they choose. That strikes me is pretty close to the definition of socialism, Mr. President. So it’s clearly an attack on the economic freedom that underpins our entire economy, an entire market economy."

The economy is at record strength by many metrics. Proposals that take aim at share buybacks take direct aim at economic freedom in a way that will harm workers and stifle economic growth. 

Photo Credit: Gage Skidmore


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