IRS RECORDS SHOW WEALTHIEST AMERICANS, INCLUDING BEZOS AND MUSK, PAID LITTLE IN INCOME TAXES AS SHARE OF WEALTH, REPORT SAYS. ProPublica obtains tax data on richest Americans, which could send Washington scrambling By Todd C. Frankel and Douglas MacMillan June 8, 2021 at 4:48 p.m. EDT
Tax reforms to raise revenue efficiently and equitably
Wendy Edelberg, Elizabeth Lee, Sara Estep, and Madison Bober
Wednesday, April 28, 2021
Introduction
As the United States rebuilds its economy following the pandemic, policymakers are considering various tax reforms that would raise revenues, reduce inequality, and minimize avoidance and evasion. In this blog, we highlight a selection of policy proposals from The Hamilton Project’s 2020 book titled Tackling the Tax Code: Efficient and Equitable Ways to Raise Revenue .. https://www.hamiltonproject.org/papers/tackling_the_tax_code_efficient_and_equitable_ways_to_raise_revenue?_ga=2.137314352.10429291.1623270795-2099459823.1622026371 . These proposed reforms tackle several broad areas of our tax code, including transfers and gifts, individual income, multinational business income, and tax enforcement.
Wendy Edelberg Director - The Hamilton Project Senior Fellow - Economic Studies
Elizabeth Lee Senior Communications Coordinator - The Hamilton Project eslee_123
Sara Estep Research Analyst - The Hamilton Project saraestep3
Madison Bober Events and Communications Intern - The Hamilton Project madisonrbober
In the last few decades, economic inequality—whether measured by income or wealth—has grown in the United States. In addition, among high-income countries, the U.S. has comparatively lower levels of intergenerational economic mobility, and some aspects of the country’s tax code play a key role in perpetuating this trend. For example, inherited income is a substantial determinant of a child’s economic future,yet such income is taxed at less than one-seventh the average tax rate on income from work and savings. To address these disparities, Lily Batchelder (New York University) proposes several reforms to the current taxation of estates and gifts.
Specifically, Batchelder proposes repealing the current estate and gift taxes and instead taxing as regular income the inheritances an heir receives that exceed a lifetime exemption level; the proposal shows estimates for exemption levels ranging from $500,000 to $2.5 million per heir. In addition, if the gift or bequest includes any assets that reflect capital gains, Batchelder proposes taxes on all accrued gains above an exemption level. In contrast, under current law, both the donor and the heir can avoid paying tax on the capital gains obtained as of the date of transfer. The asset is essentially treated as new (a tax rule called stepped up basis) and the transfer is subject solely to the estate tax, which has diminished markedly in scope in recent decades, and only applies to the portion of a decedent’s overall estate (if any) that exceeds very high threshold amounts.
By only taxing individuals who receive inheritances that exceed very high exemption levels, the proposal would both raise revenue and result in a more equitable allocation of taxes. Moreover, by curtailing unproductive tax planning and reducing distortions to labor markets and capital allocation, the proposal also promotes efficiency and economic growth. In 2019, the Urban-Brookings Tax Policy Center estimated that the proposal would raise $1.4 trillion over the next decade if the lifetime exemption were set at $500,000 and $340 billion if the exemption were $2.5 million.
Current tax law raises too little corporate tax revenue and creates incentives for multinational corporations to legally avoid paying U.S. taxes on their profits. Changes under Public Law 115-97, enacted in 2017 and commonly known as the Tax Cuts and Jobs Act (TCJA), lowered the corporate tax rate to 21 percent and essentially left intact loopholes in the tax code that allow corporations to shift their profits to other countries. The result was hundreds of billions of dollars in lost corporate tax revenue. Kimberly Clausing (now Deputy Assistant Secretary for Tax Analysis at the Treasury Department, previously at the University of California, Los Angeles) proposes several changes that would raise corporate tax revenue and limit the ability of corporations to engage in shifting profits overseas, while maintaining U.S. competitiveness. Using pre-pandemic economic projections, these reforms would raise an estimated $1.4 trillion in tax revenue from 2021 to 2030.
First, Clausing’s proposal would increase the corporate rate from 21 percent to 28 percent. That change would raise substantial revenue but keep the U.S. an attractive location for investment. As evidence of that, Clausing points out that in 2017, when the corporate tax rate was higher at 35 percent, the largest corporations across the world were disproportionately located in the United States.
Second, Clausing’s proposal would make several changes to increase taxes on profits that firms have, under current law, endeavored to shift abroad. The proposal would move to taxing foreign profits with a stronger minimum tax, by applying the global intangible low-taxed income (GILTI) minimum tax on a per-country basis at a rate of 21 percent. Under current law, GILTI is taxed on a global basis. That means multinational corporations can minimize their tax burden by mixing streams of low-taxed foreign income with streams of higher-taxed foreign income that provide offsetting tax credits, with the total foreign amount then taxed at a 50 percent discount relative to how corporate income that’s earned in the U.S. is taxed. In addition, the proposal would eliminate the provision under current law that allows the first 10 percent return on foreign assets to be tax free. The result would greatly reduce profit shifting and raise substantial revenue. As an alternative to the per-country basis, Clausing offers another option that would raise the GILTI tax rate so that it is equal to the domestic corporate tax rate.
The third proposal repeals the deduction for foreign-derived intangible income, which acted as a tax preference for profits from export sales. Under current law this deduction, in conjunction with the GILTI, incentivizes offshoring and does little to encourage multinationals to move assets to the U.S.
Federal spending needs will grow as a result of government policy and underlying economic forces such as an aging population, the growing cost of certain government-funded services such as health care, and inequality. To match these needs, authors Natasha Sarin (now Deputy Assistant Secretary for Economic Policy at the Treasury Department, previously at the University of Pennsylvania), Lawrence Summers (Harvard University), and Joe Kupferberg (Harvard University and University of Pennsylvania) propose a two-fold approach to raising revenue progressively and pragmatically: 1) deterring illegal tax evasion, and 2) reducing legal tax avoidance by broadening the tax base and closing loopholes that enable many of the wealthiest individuals to decrease their tax liabilities.
To deter illegal tax evasion, Sarin, Summers, and Kupferberg propose increasing investments in the Internal Revenue Service (IRS), to be used for greater tax compliance. Specifically, they suggest: providing more resources to increase and better target tax audit efforts, especially towards the very wealthy; investing in information technology infrastructure so the IRS can better detect erroneous returns; and encouraging more cross-party reporting to verify that all income is reported and tax liabilities are appropriately assessed. Given that tax noncompliance is more common among the wealthiest filers (since their income sources, such as capital gains income, are most opaque and thus less likely to be honestly reported and taxed, especially as compared to wages and salaries), simply enhancing the IRS’s capabilities would have a progressive effect on taxation.
To broaden the tax base and close loopholes that enable the wealthy to reduce their tax liabilities, the authors propose a number of reforms, including: eliminating certain corporate tax shelters and deterring corporations from shifting profits overseas; closing individual tax shelters such as the payroll tax loophole that allows owners of S-corporations to lower or avoid payroll tax liability by categorizing income as “business profits” rather than “wage income”; increasing tax rates on capital gains and dividends to the same level as ordinary income; changing the tax on capital gains in bequests in line with Batchelder’s proposal described above; and capping tax deductions for the wealthy.
In total, these reforms would effectively raise taxes for the wealthiest individuals, creating a more efficient and progressive tax system. Using pre-pandemic economic projections, the authors estimated their proposal would raise more than $4 trillion from 2020 to 2029, including $1 trillion in greater revenue from improved tax compliance.
House Bill Raises Chance for Global Pact to Curb Corporate Tax Havens
Several big details remain to be worked out before an international October deadline.
The Paris headquarters of the Organization for Economic Cooperation and Development, whose members are negotiating a global minimum tax for multinational companies. Francois Mori/Associated Press
By Alan Rappeport Sept. 14, 2021
WASHINGTON — The prospect of the largest overhaul to the global tax system in a century took a step forward this week as top Democrats introduced a plan to rewrite tax rules for multinational companies .. https://www.nytimes.com/2021/09/13/us/politics/democrats-tax-plan.html .. in a way that would allow the United States to join the rest of the world in an effort to crack down on tax havens.
Passing such legislation will be critical for the Biden administration, which is leading global negotiations aimed at limiting the ability of companies to minimize their tax bills by setting up offices in low-tax jurisdictions. The White House says this corporate strategy deprives economies of much-needed revenue.
Finance ministers from around the world have been working for months to complete a plan to end what they describe as a race to the bottom on corporate taxation before an October deadline .. https://www.nytimes.com/2021/07/10/us/politics/global-tax-overhaul-g20.html . More than 130 countries have agreed to adopt a global minimum tax of at least 15 percent and are discussing a change in how taxing rights are allocated so that large businesses, including technology giants like Amazon .. https://www.nytimes.com/2021/05/04/business/amazon-corporate-tax.html .. and Facebook, pay taxes in countries where their goods or services are sold, even if they have no physical presence there.
House Democrats, as part of their plan to raise as much as $2.9 trillion to finance President Biden’s social safety net package, proposed raising the tax rate on companies’ overseas earnings to 16.6 percent from 10.5 percent and calculating the tax on a country-by-country basis. The plan would meet the primary commitments of the global agreement that is being negotiated through the Organization for Economic Cooperation and Development.
“This is more than just tweaks,” said Craig A. Hillier, an international tax expert at Ernst & Young. “These are material moves being proposed on how foreign income is taxed.”
However, the legislation offered by the House Democrats would in some ways be less revolutionary than what the Biden administration envisioned and less onerous for companies.
The Treasury Department has called for a 21 percent tax on corporate foreign earnings, a higher rate than the House proposal or what the finance ministers have so far agreed to support. Part of the reason for the push is that Mr. Biden has proposed raising the corporate tax rate in the United States to 28 percent from 21 percent, and administration officials say a higher global minimum tax would reduce the incentive for U.S. companies to shift profits overseas.
Understand the Infrastructure Bill
*One trillion dollar package passed. The Senate passed a sweeping bipartisan infrastructure package .. https://nyti.ms/3zjcxU1 .. on Aug. 10, capping weeks of intense negotiations and debate over the largest federal investment in the nation’s aging public works system in more than a decade.
* The final vote. The final tally in the Senate was 69 in favor to 30 against. The legislation, which still must pass the House, would touch nearly every facet of the American economy and fortify the nation’s response to the warming of the planet.
* Main areas of spending. Overall, the bipartisan plan focuses spending on transportation, utilities and pollution cleanup.
* Transportation. About $110 billion would go to roads, bridges and other transportation projects .. https://nyti.ms/3kpOMFi ; $25 billion for airports; and $66 billion for railways, giving Amtrak the most funding it has received since it was founded in 1971.
* Utilities. Senators have also included $65 billion meant to connect hard-to-reach rural communities to high-speed internet .. https://nyti.ms/2XE3EYh , and $8 billion for Western water infrastructure.
* Pollution cleanup: Roughly $21 billion would go to cleaning up abandoned wells and mines .. https://nyti.ms/39pbkQc , and Superfund sites.
House Democrats are also offering more generous exclusions than what the Treasury Department proposed this year. Under their proposal, companies could exclude 5 percent of their foreign tangible assets, such as property and equipment, from the global minimum tax. The Biden administration wanted to eliminate the exclusion, which currently allows 10 percent of those assets to be carved out.
Chye-Ching Huang, executive director of the Tax Law Center at New York University’s law school, said retaining the benefit .. https://twitter.com/dashching/status/1437533591358091264?s=20 .. “is an incentive to locate profits and investments offshore” and argued that the overall plan should be strengthened.
Other international measures that have been under discussion would also be eased under the plan produced by House Democrats.
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Companies would be able to claim more foreign tax credits than they would under the White House plan, said Monika Loving, who leads the international tax services group at BDO U.S. She added that a plan to deny deductions to corporations with headquarters in low-tax countries was also left out.
“It had a stinging reaction from the business community,” Ms. Loving said of the idea, known as Stopping Harmful Inversions and Ending Low-Tax Developments, or SHIELD.
The Biden administration had hoped that other countries would adopt similar mechanisms as a way of penalizing any countries that might try to remain low-tax havens. It is not clear if the plan in the House bill to make changes to existing tools for deterring “base erosion” will have that effect.
Treasury officials are continuing to work with their international counterparts to put the finishing touches on the global tax agreement so that leaders of the Group of 20 nations can sign off on the pact when they meet for a summit in Rome at the end of October. But many questions must still be resolved in the next six weeks.
Three countries with tax rates below 15 percent — Ireland, Hungary and Estonia — have yet to join the agreement. That poses a problem for the European Union, which needs all of its member countries to sign on for the tax changes to take effect there.
A senior Treasury official said last week that negotiators were still refining details for how to tax the most profitable companies and when European countries would then roll back their digital services taxes, which have angered companies and lawmakers in the United States. They must also establish the exact rate of the global minimum tax. In addition to the United States, France has been agitating to go above 15 percent.
After a virtual meeting with her counterparts of the Group of 7 nations last week, Treasury Secretary Janet L. Yellen said the higher rate would “generate funding for a sustained increase in critical investments in education, research and clean energy.”
More details about those plans are expected to be unveiled in early and mid-October. However, it is not clear how and when the United States would enact that part of the agreement, known as Pillar 1, and there are lingering concerns among business groups and Republicans that American companies would bear the brunt of the new taxes.
The October deadline is self-imposed, and it could be pushed back. Countries have set a goal of fully activating the agreement by 2023, as it will take time for countries to change their tax laws.
The House proposal, laid out by Democrats on the Ways and Means Committee, could still undergo substantial changes before a final vote. Ultimately it will have to be melded with a proposal by Senate Democrats, who have yet to settle on a tax rate for corporate foreign earnings.
Manal Corwin, a Treasury official in the Obama administration who now heads the Washington national tax practice at KPMG, said it was possible that the rate could still inch higher despite pushback from companies.
“You never know how these things play out when they need more revenue,” Ms. Corwin said.
Any changes could come in tandem with adjustments to the House Democrats’ proposal for the domestic corporate tax rates. Despite Mr. Biden’s call for 28 percent, the House has proposed a graduated structure, ranging from 18 percent for the smallest businesses, with income below $400,000, to 26.5 percent for companies with taxable income above $5 million.
Alan Rappeport is an economic policy reporter, based in Washington. He covers the Treasury Department and writes about taxes, trade and fiscal matters. He previously worked for The Financial Times and The Economist. @arappeport
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