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Published: Sun, 18 Feb 2018 00:00:00 -0500

Last Build Date: Sun, 18 Feb 2018 13:17:48 -0500


If You Owe the IRS Over $51,000, It Can Trap You in the United States

Thu, 15 Feb 2018 11:05:00 -0500

The IRS wants you to know: If you owe it more than $51,000 in back taxes, penalties, and interest, then under most circumstances it can and will instruct the State Department to not issue you or renew your passport, leaving you stranded in the open-air prison known as the United States of America. (Full passport revocation is also possible.) The rule is part of 2015's Fixing America's Surface Transportation (FAST) Act, and the IRS intends to begin enforcing it now. You won't necessarily be trapped in the U.S.A. instantly. When you apply to acquire or renew a passport, the tax attorneys at Caplin & Drysdale explain, "the State Department will generally hold such application open for 90 days to allow the taxpayer a chance to resolve his or her tax delinquency or any other certification issues before denying a passport." So you've got that going for you. A passport is very important indeed (even though it shouldn't be in a free country). Since 2009 it has been necessary even to return from our northern and southern neighbors. And if you want to hold two such precious documents, either to hedge your bets or just to share significant parts of your life between two different sets of arbitrary lines drawn by different regimes, governments are more and more likely to target you. The righteously salty Kevin D. Williamson at National Review points out something especially awful about this policy: It doesn't even require that your tax liability be in any way criminal. You don't have to have been convicted or even charged with tax evasion or fraud. You merely must owe enough in back taxes plus penalties to cross the $51,000 line. (That threshold will rise with inflation.) Williamson reminds the IRS and its supposed masters in Congress that "Americans as free people have a God-given right to come and go as they please, irrespective of the preferences of any pissant bureaucrat in Washington. Yes, we curtail people's rights in certain circumstances—when they have been charged with a crime and convicted after due process. Tax fraud is a crime; having unpaid taxes is not." "Suspending passports in the course of a civil dispute—a civil dispute that may well be in litigation or soon to be in litigation—is banana-republic, totalitarian stuff," he adds, and he's right. Robert W. Wood at Forbes gives some advice on what to do if you find yourself approaching the threshold of being denied a working passport. "Before a tax debt gets to this stage, the IRS usually sends multiple notices, so you should respond, and keep protesting," he notes. "If you receive an IRS Notice of Proposed Deficiency or Examination Report, prepare a protest before the deadline....A tax debt does not become final if you keep your tax dispute going." If this eventually fails, then consider "striking a deal with the IRS. It is often not too difficult to get an installment agreement with the IRS to pay your tax debt over time. If you sign one, stick to its terms. Even if your debt is huge, the IRS doesn't call it "seriously delinquent" if you are paying the installments on time." The Taxpayer Advocate Service, an internal ombudsman of sorts within the IRS, has criticized aspects of the program, after noting (as Matt Welch did at Reason in a 2004 feature) that the IRS has since 1996 been able to do the passport-snatching thing against those who are even $5,000 overdue on child support. As that ombudsman writes on the IRS's own website, there are serious issues with this sort of thing: Courts have long recognized that the right to travel internationally is a liberty right, protected by the Due Process Clause. See e.g., Kent v. Dulles, 357 U.S. 116 (1958). In the context of passport denial for unpaid child support, courts have found the statute meets due process requirements because it provides for notice and an opportunity to be heard prior to the state agency certifying the unpaid child support to the federal government.... In the context of passport denial for a seriously delinquent tax debt, notice and an opportunity to be heard prior to the certification are limi[...]

Happy Valentine's Day! Here's Why You Shouldn't Get Married If You Earn About as Much as Your Partner!

Wed, 14 Feb 2018 16:05:00 -0500

In honor of the one day every year when even the most wonkish tax policy nerds can set aside the calculators and spreadsheets for a bottle of wine and some red roses, here's some cold, hard, unemotional data about the financial consequences of government-recognized matrimony. The upshot: If you earn about the same income as your would-be spouse, your bank account will be better off if you don't get married. According to a new analysis from the Tax Foundation, couples who earn roughly the same amount of money are most likely to face a tax penalty for getting hitched, and couples at both ends of the income spectrum are more likely to be penalized for tying the knot than middle-income earners. For example, two people who each earn $15,000 and are jointly raising one child would end up paying more than $600 in extra federal taxes if they get married. At the higher end of the scale, a couple that earns more than $250,000 jointly would have to pay an additional Medicaid surtax if they get married, but the same surtax only kicks in at $200,000 for individuals. Under the tax reform bill passed in December, tax rates for married couples are exactly double the tax rates for unmarried individuals (a significant change from the old tax code)—until you hit the top marginal bracket of 37 percent, which kicks in at $500,000 for singles but $600,000 for couples. That means most people won't see any significant marriage penalty at lower income levels, but couples earning well into the six figures could end up paying thousands in additional taxes after their wedding. Besides draining away any romantic inclinations you might have been feeling today, marriage bonuses and penalties have real consequences for public policy and the economy. "These penalties and bonuses potentially affect people's behavior, especially whether to work," says the Tax Foundation's Amir El-Sibaie, who wrote the report. Tax status isn't a deal-breaker for most couples deciding whether to get married, but financial incentives do matter in the search for love. Aside from wishy-washy greeting card nonsense about "meeting the right person," the most common reason never-married adults give for not being married is that they are "not financially stable," according to the Pew Research Center. Not surprisingly, low-income individuals are much more likely to avoid marriage for financial reasons, Pew found. Low-incomes couple can get whacked by a secondary marriage penalty because some government welfare programs are means-tested differently for individuals than for married pairs. And if your marriage falls apart? Well, the tax bill may have made your divorce more expensive too, by eliminating a deduction for alimony payments. Madeline Marzano-Lesnevich, president of the American Academy of Matrimonial Lawyers, says that change "removed a powerful negotiating tool and turned it into a difficult stumbling block for spouses trying to settle a divorce." But that's exactly the type of reform that Congress should have done more of when it rewrote the federal tax code late last year. Specialized deductions and exemptions—whether for having children, for paying alimony, or for putting solar panels on your roof—only distort incentives. The tax code should not be used for social engineering. And the tax code should not treat married individuals differently from single people. Eliminating married couples' ability to file taxes jointly would be one way to solve the problem, says El-Sibaie. But, like other possible solutions, that's politically difficult. Not everyone ends up paying more for the privilege of being married. Under current tax law, a couple earning $60,000 jointly would be on the hook for $8,560 in federal income and payroll taxes this year, according to the Tax Foundation's analysis. Getting hitched wouldn't reduce the payroll taxes, but it would allow this theoretical couple to pay $31 less in federal income taxes. Of course, that's less than the cost of a marriage license in most states. If even after all that, you're still determined to[...]

The Philadelphia Eagles Won the Super Bowl, but They'll Lose on Tax Day

Mon, 05 Feb 2018 09:55:00 -0500

The Philadelphia Eagles won the Super Bowl when they defeated the New England Patriots last night. But it's the tax man who really always wins. Because the game was played in Minneapolis, the $112,000 bonuses paid to each player on the winning team (and the $56,000 bonuses paid to the losers), will be taxable in Minnesota, which has some of the highest personal income tax rates in the country. Each member of the Eagles will end up paying about $7,200 of their Super Bowl bonus to the state of Minnesota. That comes on top of an estimated $23,500 federal tax hit for each of the winning player's shares. And that's just the start. Minnesota also imposes a so-called "jock tax" on athletes that visit the state for practices and games. Income earned during the days leading up to Sunday's big game will be taxed at the state's top marginal rate of 9.85 percent. Only California has a higher jock tax, and even states with no personal income taxes—like Texas and Florida, both frequent Super Bowl hosts—still hit up professional athletes, coaches, and team staff with special taxes. Robert Raiola, chief of the sports and entertainment group at PKF O'Connor Davies, a New York–based accounting firm that specializes in working with athletes, tells that most players on the two teams would have spent about a week in Minnesota during the lead-up to the Super Bowl. That works out to about 3 percent of their total working time for the year, and their tax bills will vary depending on how much they earned during the season. Raiola told Time that Patriots quarterback Tom Brady, who earned about $15 million in salary this year, could end up owing Minnesota roughly $43,000. While stars like Brady can make tens of millions of dollars annually in salary alone (and yet more in paid endorsements), the average NFL player makes $1.9 million—considerably less than the average in America's other major sports. Still, that works out to more than $3,300 in state taxes owed simply for spending a week in Minnesota. And of course those players still owe taxes in Massachusetts and Pennsylvania, along with every other state where they played a road game during the season. Tennessee is the only state without a jock tax. You may find it difficult to feel bad about the tax hurdles that come with being paid a lot of money to play a game for a living. Even so, jock taxes are fundamentally unfair, targeting income earned from a handful of high-profile professions. "The problem I have is [visiting athletes] are not receiving benefits that other people in that state receive who are paying the tax. It's unfair that the athletes get singled out," Illinois tax specialist Mark Goldstick told Stateline in 2014. "If an attorney makes a million-dollar deal in that state, they are not made to pay the tax, they are not pursued. But the fact that an athlete was in the state is in the box score." Chris Stephens, a law clerk with the D.C.-based Tax Foundation, writes that states like to tax visiting pro athletes because they are perceived to be easy targets for taxation. Their schedules are published in advance, some have very high incomes, and as non-residents, they cannot vote to voice their displeasure with the tax. While some teams in low-tax states can use their location to attract highly sought after free agents, players and team staff have no choice about where they play road games. And no one is going to turn down an opportunity to play in the Super Bowl because of the potential for a multi-thousand-dollar tax hit. But all those special tax bills might help explain why more than three quarters of professional football players find themselves in financial difficulties within a few years after retirement.[...]

Woman Still Getting Civil-War Survivor Benefits Shows How Federal Policies Mortgage the Future

Sun, 04 Feb 2018 00:01:00 -0500

Twenty or 50 years from now, the uproar over the House Intelligence Committee memo will be no more than a footnote to history, and many Americans living then will have fading memories, if any, of the Trump administration. But they will be sure to feel the consequence of other policies, little noticed now, that will weigh more heavily with each passing year. You may have never heard of Irene Triplett, who illustrates something politicians often forget: Decisions made for immediate purposes can reverberate for a long, long time. During the Civil War, to bolster military recruitment, the U.S. government established pensions for veterans wounded in battle and widows of those killed. After the war, the system was repeatedly expanded to cover ever more beneficiaries, including men whose disabilities had nothing to do with their service in uniform. As economist John Cogan of Stanford University and the Hoover Institution notes in his new book, The High Cost of Good Intentions, Congress eventually granted pensions to widows of Union veterans who married after 1890. Then it included all widows whose marriages had lasted 10 years. "In 1957," he writes, "Congress dropped the 10-year requirement. Incredibly, a year later, Congress granted pensions to widows of Confederate soldiers." In 1924, Mose Triplett, who had served in both the Union and the Confederate armies, married a woman who bore him a daughter named Irene. Born five years later, she is still getting survivor benefits from the Civil War, 153 years after it ended. Cogan's book chronicles the steady growth of federal entitlements. Social Security was originally meant to ensure protection against poverty to about half of future retirees. But "every Congress, save one, and every president during the years from 1950 to 1972 took action to expand the program." The pattern is logical. New programs "confine benefits to a group of individuals who are deemed to be particularly worthy of assistance," says Cogan. But groups outside the category push to be included and ultimately prevail. The change puts another group closer to qualifying, and that group does the same thing. The process repeats until the original rationale is lost. Today, federal entitlement assistance of one type or another goes to more than half of U.S. households—and 31 percent of beneficiaries are in families whose income exceeds the national average. In 2015, households in the top fifth of earners collected $225 billion in federal benefits. Restraining the cost of entitlements such as Social Security and Medicare is especially hard now. The ongoing retirement of the baby boom generation automatically swells their rolls. With a commitment to fiscal responsibility and regard for future generations, our elected officials might devise humane ways to curb this growth. But to the extent that commitment ever existed, it is gone. It vanished on December 22, when President Donald Trump signed a tax bill that the Committee for a Responsible Federal Budget projects will generate $1.8 trillion in additional deficits over the next decade—on top of the $10.2 trillion already in the pipeline. The bipartisan watchdog group also says, "Congress is likely to consider increasing discretionary spending caps for the next two years, disaster relief to deal with last year's hurricanes, (and) extensions of temporary tax provisions that expired at the end of 2016." In that scenario, the extra 10-year deficits would be more like $2.2 trillion. Conservatives claim the gap will force Congress to slash domestic spending. Fat chance. In the late 1990s, President Bill Clinton and the Republican Congress could envision and reach a clear achievement: balancing the budget. But once that goal is hopelessly out of reach, politicians have nothing to gain from spending discipline. Once deficits are considered the immutable norm, elected officials have every reason to enlarge them, delivering ever-richer benefits to current voters without charging those voters the fu[...]

The Puffy Coat Makers at Patagonia Want You to Subsidize Their Rich Customers

Sat, 03 Feb 2018 07:00:00 -0500

"The President Stole Your Land." That was the message, in stark white letters against a black background, that replaced the usual bright-colored images of puffy jackets and backpacks on the outdoor retailer Patagonia's website last month. "In an illegal move," the text continued, "the president just reduced the size of Bears Ears and Grand Staircase-Escalante National Monuments. This is the largest elimination of protected land in American history." The pop-up was probably jarring for anyone browsing to buy a thermal base layer. It was also inaccurate. Even if the administration's monument reductions survive legal challenges, the area in question wasn't "stolen" from the public: It remains federally owned public land. Patagonia wasn't the only outdoor recreation company to rail against President Trump's announcement that he would shrink the two monuments. REI's website noted "the loss of millions of acres of protected lands this week," a disingenuous line given the numerous laws and statutes—from the National Environmental Protection Act to the Archaeological Resources Protection Act—that already protect federal lands. The outdoor recreation industry's politics share a common conviction: that public lands should be "free" for everyone because they belong to all citizens, and that many more acres should be set aside for recreation. In arguing for stricter protections at Bears Ears in particular, companies like Patagonia play a familiar role, albeit one not usually described in such terms: Corporate interests get their policy preference despite vehement opposition from the locals. Trump is also guilty of framing the public lands dispute spuriously, having called his predecessor's designation of Bears Ears as a national monument a "massive federal land grab." In fact, the area was already federal land—managed by the Bureau of Land Management (BLM) and the U.S. Forest Service—before Barack Obama made it a national monument during his last month in office. (Monument designations can be controversial because they usually impose land-use restrictions, such as limiting or prohibiting activities such as livestock grazing or mineral development.) In its calls to limit uses on more and more public lands, Patagonia tends to come across as what most of its devotees no doubt see it as: a noble, thoroughly "green" company simply seeking a higher calling. Much of the media buys into that rendition: "Patagonia has long been an active participant in the fight to protect the environment," The Washington Post declared in its coverage of the splash page. The company's actions could just as accurately be described as a corporate interest lobbying for policies that will help its bottom line. The outdoor recreation industry certainly thinks its success hinges on public lands. A 2017 report by the Outdoor Industry Association called public lands and waterways "the backbone of our outdoor recreation economy." Patagonia CEO Rose Marcario used similar language when attacking Utah's elected officials for "their blatant disregard for Bears Ears National Monument and other public lands, the backbone of our business." Patagonia founder Yvon Chouinard has complained that Utah politicians "don't seem to get that the outdoor industry—and their own state economy—depend on access to public lands for recreation." Most of the visitors to those public lands are decidedly well-off when compared to the typical American household. According to the National Park Service and Forest Service, in recent years slightly more than half of visitors to national parks and forests had household incomes over $75,000. Both agencies also reported that less than 10 percent of visitors had household incomes under $25,000. Meanwhile, the public lands that bolster outdoor companies' profits are anything but "free." Collective maintenance needs for national parks and forests alone exceed $16 billion. According to a 2015 study by my colleagues at the Property and [...]

Immigration Is the Only Thing Saving Connecticut From an Even Worse Budget Crisis

Fri, 26 Jan 2018 13:32:00 -0500

Connecticut's state motto—"Qui Transtulit Sustinet"—translates to "he who transplanted, sustains." It's a nod to the people who founded the Connecticut colony: immigrants who first fled religious persecution in England, then moved again out of disagreements with the ways their fellow colonists were running Massachusetts. In the past few years, thousands of residents have transplanted themselves out of Connecticut. The state government has imposed two massive tax increases in the span of less than a decade. Those increases have not solved Connecticut's fiscal problems—the place finished the most recent fiscal year with a $3.5 billion deficit, and it's running in the red again this year—but they have certainly exacerbated the migration crisis. The full fiscal crisis runs far deeper than the budget. Connecticut's debt has climbed from 12 percent in 1997 to 31 percent this year, according to the state Office of Fiscal Analysis. An analysis by The Connecticut Mirror found that annual debt service costs climbed by about 10 percent every year from 2011 to 2017. Equally unsustainable is the state's public pension system, which has a deficit of about $74 billion and only enough assets to meet 50 percent of its long-term obligations. The biggest factor behind Connecticut's shrinking population, the state's Office of Policy Management noted in a report last year, is the sharp increase in the number of people leaving the state. Net out-migration was up 55 percent in the years 2014–16 when compared to the previous decade's averages. And it's not just individuals who are leaving: Companies—General Electric, Aetna, Alexion—have fled the state in search of a lower tax burden. About the only thing that's working in Connecticut's favor right now is that it remains an attractive destination for international immigrants. While the state has been a net loser in domestic migration every year since 2003—with the biggest losses coming in 2014–2016—Connecticut has gained more than 10,000 residents from abroad every year this century. That won't solve the state's long-term financial problems, but it certainly could soften the blow. Here's how that looks: Connecticut is looking like the Illinois of New England: a place where tax increases are no longer fiscally or politically realistic, even though budgetary obligations continue to grow and spending is completely out of control. In fact, on a per capita level, Connecticut extracts more—about a thousand dollars more—from its residents than Illinois does, according to the U.S. Census Bureau. While there are many reasons to leave Connecticut that have nothing to do with taxes—job opportunities, a better climate, getting away from New England Patriots fans—it's notable that the state's population decline sets it apart from its neighbors. Whether you compare it to the rest of New England or the rest of the states in the greater New York City region, Connecticut is an outlier: Connecticut isn't just it's losing population. It's losing the high-earning (and therefore high-taxpaying) portion of its population. According to Internal Revenue Service data, the estimated 20,000 residents who left the state last year earned an estimated $2.6 billion in adjusted gross income. That about $130,000 per resident. The decline started, as the chart above shows, after a $1.5 billion tax increase in 2011. Lawmakers followed that with a $1.2 billion tax increase in 2015, after which the exodus picked up steam. According to the Yankee Institute, a Hartford-based think tank, Connecticut has lost more than 77,000 people with a combined adjusted gross income of $8.8 billion since 2011. "Connecticut has had a steady flow of people leaving the state for decades," says Suzanne Bates, director of public policy at the Yankee Institute. "But the pace has increased in recent years—and those years when the increase has been the greatest have been the years directly [...]

Is Tax Reform Already Working?

Fri, 19 Jan 2018 11:30:00 -0500

To read the press releases, you might think the GOP's new tax reform law is already a smash success. The legislation, which permanently slashed corporate tax rates from 35 percent down to 21 percent, was only signed into law last month. But more than 100 companies have already indicated that they will make big moves to benefit workers and the economy—including raising wages, handing out bonuses, granting 401(k) increases, and committing to increased capital investment—while citing the law's reduction in the corporate income tax rate as at least part of the reason. American for Tax Reform published an impressive list of the companies who have made such announcements so far, with quotes linking their action to the tax bill. Walmart increased its base wage for all hourly employees from $10 to $11 and granted $1,000 bonuses. Aflac Insurance is extending parental leave, increasing its 401(k) match from 50 percent to 100 percent on the first 4 percent of compensation, and making one-time $500 contributions to every employee's 401(k). That amounts to a $250 million increase in overall U.S. investment. But it's not clear how many of these moves would have happened anyway, even if tax reform had never passed. The recent burst of activity isn't at all in line with the standard economic theory of how reductions in marginal federal business tax rates affect workers' compensation. Economists usually argue that lowering marginal tax rates on investment gives companies an incentive to earn more taxable income leading them to invest in other businesses and the expansion of their factories. This in turn raises workers' productivity, and ultimately leads to higher wages. In other words, it takes time for companies to invest new capital, and reap the benefits of their investment. This is clearly not what happened here, however, since many of the bonuses were announced after the House and the Senate passed the tax bill but before the president even signed it. So what's really going on? I asked tax expert Scott Greenberg at the Tax Foundation how he explains the discrepancy. He said that "an alternate theory may be needed to explain the recent bonuses and pay increases." According to him, "One such theory, which has been suggested by Kevin Hassett, is that workers may have some ability to bargain for a share of the windfall from a business tax cut." He isn't sure how to evaluate yet whether that theory is correct, but he acknowledges that "it is true that some of the companies providing bonuses and wage increases have done so after demands by labor unions." Greenberg also offered another, more cynical theory. "Companies may have been planning on raising labor compensation anyway, due to increasingly tight labor market, and chose to attribute bonuses and wage increases to the tax bill, as part of an effort to build public goodwill for the legislation." With Moody's estimating that the unemployment rate will drop to 3.5 percent by the end of the year, the raises probably indicate a tighter labor market, and employers taking steps to retain their employees. If this theory is correct, it is a brilliant public relations move from companies who for years have been labeled greedy bastards who always keep all their profits and will keep the benefits from the tax cuts all to themselves while leaving their employees out to dry. But it's not exactly a sign that the tax law is an instant hit. Now, this could play out in multiple ways. On one hand, based on the commitment made by many companies on the ATR list to increase their capital expenses significantly in 2018, more wage increases could be coming as the standard theory predicts. It will take some time to materialize, but it will happen. On the other hand, the narrative that the bonus frenzy is a direct result of successful tax reform legislation could backfire. For one thing, Americans and employees may incorrectly expect for it to h[...]

Trump Turns One

Thu, 18 Jan 2018 09:30:00 -0500

The 45th president does not tend to elicit measured evaluations. Since even before his formal entry into national politics in 2015, Trump has acted as a powerful magnet on the body politic—attracting and repelling onlookers with equal force. A year ago, as we prepared to see a former reality television star sworn into the highest office on Earth, predictions abounded regarding the effects he was about to have on the country and the world. On one side were confident assertions that he would repeal the Affordable Care Act, bring back manufacturing jobs, and end political correctness once and for all. On the other were fears that he was a racist and a dimwit who would certainly abuse the powers of his station and might well start a nuclear war. On the Trump presidency's first birthday, the reality is less extreme than either set of prognosticators envisioned. The Republican Party under his leadership managed one major legislative accomplishment—tax reform that cut the corporate rate and is projected to add nearly $1.5 trillion to the debt—and failed after months of wrangling to enact an Obamacare replacement. Tensions with foreign governments from Iran to Russia to North Korea continue to simmer. The stock market has followed a dramatic upward trajectory, yet anger continues to grow over perceived wealth and income inequality. With the midterm elections now 10 months away, political polarization seems to hit new highs daily, but in many ways the checks and balances of our federalist system are working to keep even the current unscrupulous White House occupant from actualizing his most ambitious plans. As the 365-day mark approaches, have we reached a milestone worth celebrating or taken just another step in our national descent to unthinkable places? Reason asked 11 experts to weigh in on Trump's record so far. From positive signs on transportation policy and regulatory rollback to a worrying rise in nationalist sentiments and redoubled efforts to cleanse the United States of undocumented immigrants, the answers were a mixed bag, highlighting just how much uncertainty awaits the country in the year to come. —Stephanie Slade TAXES AND HEALTH CARE: Victory, Sort of, Maybe Peter Suderman At the beginning of 2017, Speaker of the House Paul Ryan told GOP lawmakers that the new Congress would repeal Obamacare and pass deficit-neutral tax reform by August. At summer's end, Republicans, despite holding majorities in both chambers, had accomplished neither. But eventually they would accomplish parts of each. In March, the House was set to hold a vote on legislation that would have repealed much of the Affordable Care Act while setting up a new system of related federal tax credits. Ryan was initially forced to pull the bill from the floor due to lack of support, but after making a series of tweaks intended to provide states with more flexibility, the body passed a health care bill in May. GOP leaders congratulated themselves for making progress on the issue, but the plaudits were premature. The bill stalled out in the Senate. By September, the Obamacare repeal effort was dead and Republicans had moved on to more comfortable territory: rewriting the tax code. At the center of the new effort was a significant cut to America's corporate tax rate, which at 35 percent was the highest in the developed world. Donald Trump had campaigned on slashing it to 15 percent. The GOP aimed for 20. At first, the tax effort went much like the health care effort. There were disagreements between the House, which hoped to partially offset any revenue losses with spending cuts, and the Senate, which gave itself permission to increase the deficit by $1.5 trillion. Republican senators also disagreed among themselves: Jeff Flake (R–Ariz.) and Bob Corker (R–Tenn.) worried about sinking the country further into the red, for instance, while Marco Rubio (R–F[...]

Who Knew Letting People Keep More of Their Money Leads to Good Things?

Tue, 16 Jan 2018 12:31:00 -0500

In the six weeks since the passage of the tax law, dozens of companies have announced bonuses and wage hikes, some of them just hours after the bill was passed. Although the bill has not yet gone into effect, there been other tangible benefits to a lower tax burden—some gas and electric companies, for example, have decided to pass on their tax savings via lower rates for customers. None of this should've been unexpected. Nearly 140 economists, urging Congress in November to pass the tax reform bill, predicted more jobs, higher wages, and a better standard of living for Americans, largely because of a lower corporate tax rate, which they explained would spur investment, business formation, and productivity. Shikha Dalmia wrote positively about the tax bill back in April. She predicted it would spur the kind of growth we're starting to see signs of, and also noted that that growth could have the effect of undercutting Trump's ethno-nationalist agenda. There's also evidence that historically lower tax rates in the U.S. overall lead to higher economic growth. Perhaps Peter Suderman put it best: the tax bill was in no way perfect, but not the end of the world its critics predicted. Instead, it was a "predictable, conventional piece of Republican tax legislation," with predictable drawbacks (primarily a deficit increase) and benefits, some of which are starting to be seen. Before the new law, the U.S. had one of the highest corporate tax rates in the world, leading many companies to move some operations overseas to lower their burden. Studies suggested the rate was so high it was actually reducing productivity so much as to lead to decreased revenue. In the run-up to last month's vote on the Republican tax bill, critics poo-pooed the intuitive idea that if companies pay less in taxes, some of that will make its way back to workers. Democrats in Congress were even worse, deploying apocalyptic rhetoric about the bill. The Center for American Progress' Igor Volsky, meanwhile, sounded downright ecstatic that Walmart announced layoffs. Paul Ryan in December: "majority of businesses are going to do just what we say, reinvest in their workers, reinvest in their factories, pay people more money, higher wages." TODAY, WALMART --THE LARGEST PRIVATE EMPLOYER -- ANNOUNCED IT WAS LAYING OFF THOUSANDS OF WORKERS. — igorvolsky (@igorvolsky) January 11, 2018 Volsky's characterization of what happened is misleading. Walmart is reportedly closing dozens of its underperforming Sam's Club locations after years of expansions. Walmart, meanwhile, announced it was raising its starting wage to $11 an hour, handing out bonuses to eligible employees, and looking for other ways to re-invest their tax savings. For his part, Ryan's prediction was about what a "majority of companies" would do, as Volsky himself described it, not every single one. A lower tax burden makes it easier to do business but it's hardly a cure-all. Most advocates avoided that kind of exaggeration. Companies' decisions to give employees bonuses or raise wages are headline-grabbers, and in the coming months and years there ought to be evidence other good things happening, too. And all because individuals the companies who employs them can keep more of their own money.[...]

Legal Weed Could Create $50+ Billion in Federal Tax Revenue

Fri, 12 Jan 2018 10:15:00 -0500

(image) There's big money in legal weed, and the federal government's cut could be more than $5 billion a year from sales tax revenue alone.

So says a new study by New Frontier Data, a marijuana market research firm, which assumed a 15 percent retail sales tax. Add payroll tax deductions and business tax revenue from new jobs and enterprises, and the study says new revenue will total more than $138 billion. (That estimate is based on a 35 percent corporate tax rate, and the new tax law lowered the rate to 21 percent. No biggie.)

The study also estimated that if the federal government legalized pot, the marijuana industry could create more than a million new jobs over the next eight years.

Whether or not the numbers are exactly right, the study's broad conclusions are intuitive. It should be obvious that bringing a portion of the drug trade out of the black market will create new legal jobs and new tax revenue. (The study suggests that 25 percent of the pot trade could remain in the black market even with full legalization, although lower taxes could reduce that.)

The economic arguments for legalization are not new, but the mainstream is finally catching on. Vermont is set to become the ninth state to legalize recreational marijuana, and the first to do so via the state legislature.

In 2012, Colorado and Washington became the first states to fully legalize marijuana, via ballot initiatives. At the same time, for the first time since Gallup polled the question in 1969, a majority of Americans—58 percent—favored legalization. Today the number is 64 percent. In 1969, it was just 12 percent. The Trump administration, unfortunately, is moving in the other direction.

'Economists Say' a Lot of Things. Many of Them Are Wrong

Fri, 05 Jan 2018 00:30:00 -0500

"A wave of optimism has swept over American business leaders, and it is beginning to translate into the sort of investment in new plants, equipment and factory upgrades that bolsters economic growth, spurs job creation—and may finally raise wages significantly," opens a recent New York Times article surveying the state of the American economy. One imagines that readers of the esteemed paper were surprised to run across such a rosy assessment after having been bombarded with news of a homicidal Republican tax plan for so many weeks. But not to worry! Over the next few thousand words, the authors do their best to assure readers that neither deregulation nor tax cuts are really behind this new economic activity—even if business leaders keep telling them otherwise. For example, they claim that "There is little historical evidence tying regulation levels to growth." A few paragraphs later, we again learn that "The evidence is weak that regulation actually reduces economic activity or that deregulation stimulates it." A reporter without an agenda might have written that evidence was "arguable," because I bet I could corral a bunch of economists to tell you that lowering the cost of doing business spurs economic activity quite often. And though the Trump administration somewhat overstates its regulatory cutbacks, it has stopped hundreds of Obama-era regulations from being enacted. Even better, it has stopped thousands of yet-to-be-invented regulations from ever being considered. There's plenty of evidence, in the article and elsewhere, that this kind of deregulation has plenty to do with investment and job growth. There is also plenty of evidence that econ reporters at major publications have spent the past decade propping up economists who tell them what they want to hear. That is to say, they prop up economists who obsess over "inequality" rather than economic growth, who worry about the future of labor unions or climate change or whatever policy liberals happen to be plying at the moment. There are plenty of economists out there making good arguments for the free market who will never be member of the "economists say" clique. For eight years, we consistently heard about how "economists say" everything Democrats were doing was great (even when hundreds disagreed). Unsurprisingly, "economists" were wrong about a lot. The rosy predictions set by President Obama's Council of Economic Advisers regarding the "stimulus," the administration's prediction of 4.6 percent growth by 2012 and the Congressional Budget Office predictions about Obamacare were all way off base. There are thousands of unknowns that can't be quantified or computed, including human nature. But after decades of using data to help us think about goods, services, jobs, consumption and our choices, "economists say" is now used to coat liberal policy positions with a veneer of scientific certitude. And since Democrats began successfully aligning economics with social engineering, we've stopped seriously talking about the tradeoffs of regulations. A good example of this trend is the push for a $15 minimum wage—an emotionally satisfying, popular and destructive policy idea. Most cities that have passed the hike have experienced job losses. When researchers at the University of Washington studied Seattle's $15 minimum-wage hike, one of the largest in the nation, they found that thousands of fewer jobs were created and thousands of people lost hours of work, making them poorer. No doubt a lot of people were surprised. Vox, a leading light in the liberalism-masquerading-as-science genre, ran an article headlined "The Controversial Study Showing High Minimum Wages Kill Jobs, Explained." You might wonder why incessantly quoted studies from liberal "nonpartisan" groups that falsely predicted minimum [...]

California Is Taxing the Hell Out of Pot, but Washington Is Even Greedier

Thu, 04 Jan 2018 09:15:00 -0500

Marijuana merchants in California, who began legally serving recreational customers on Monday, complain that they are overtaxed, and they have a point. Of the eight states that have legalized marijuana for nonmedical use, California has the second highest total taxes, beaten only by Washington, where legal recreational sales began in 2014. Alaska, where state-licensed pot shops first opened for business in 2016, has the lowest taxes (although not the lowest prices). Here is a state-by-state breakdown of recreational marijuana taxes, from lowest to highest. To estimate the impact of taxes imposed at the wholesale level, I use a typical pretax retail price for an eighth of an ounce, as advertised by dispensaries in each state. ALASKA Recreational sales began: October 1, 2016 Relevant taxes: $50 per ounce on sales by growers, plus local sales taxes ranging from zero in Anchorage to 7.5 percent in Homer Upshot: The wholesale tax adds $6.25 to the price of an eighth. Based on a pretax retail price of $60 (legal marijuana is expensive in Alaska), the 5 percent sales tax in Juneau would make the final price $63 and the total effective tax rate about 17 percent. In Anchorage, which has no sales tax, the rate would be 12 percent. OREGON Recreational sales began: October 1, 2015 Relevant taxes: 17 percent state marijuana tax collected by retailers, plus local marijuana taxes (up to 3 percent); no general sales tax Upshot: Marijuana taxes in cities such as Portland, Eugene, and Salem total 20 percent. MASSACHUSETTS Recreational sales begin: mid-2018 Relevant taxes: 10.75 percent excise tax collected by retailers, along with the 6.25 percent state sales tax and a local marijuana tax of up to 3 percent Upshot: As in Oregon, taxes in major cities probably will total 20 percent. NEVADA Recreational sales began: July 1, 2017 Relevant taxes: 15 percent tax on sales by growers, 10 percent retail excise tax, 4.6 percent state sales tax, and local sales tax Upshot: Based on a wholesale marijuana price of $2,300 per pound of buds, the first tax adds $2.70 to the cost of an eighth. Assuming a pretax retail price of $60, the final price would be $70.95 in Las Vegas, where the local sales tax is 3.65 percent. The total effective tax rate would be 24 percent. MAINE Recreational sales begin: unknown Relevant taxes: 20 percent state tax on retail marijuana sales (proposed), plus 5.5 percent general state sales tax Upshot: Assuming the proposed tax is enacted, the total tax rate will be 25.5 percent. COLORADO Recreational sales began: January 1, 2014 Relevant taxes: 15 percent excise tax on sales by growers, 15 percent marijuana sales tax, local marijuana taxes, and local sales taxes; recreational marijuana has been exempt from the general state sales tax since July Upshot: Based on a wholesale marijuana price of $1,300 per pound, the excise tax adds $1.52 to the cost of an eighth. Assuming a pretax retail price of $30, the final price would be $36.65 in Denver, where the local marijuana tax is 3.5 percent and the local sales tax is 3.65 percent. The total effective tax rate would be 29 percent. CALIFORNIA Recreational sales began: January 1, 2018 Relevant taxes: $9.25 per ounce sold by growers, 15 percent excise tax collected by retailers, local marijuana taxes, 6 percent state sales tax, and local sales taxes Upshot: The wholesale tax adds $1.16 to the cost of an eighth. Based on a pretax retail price of $50, the final price would be $67.10 in Oakland, where the local marijuana tax is 10 percent and the local sales tax is 3.25 percent. The total effective tax rate would be 37 percent. WASHINGTON Recreational sales began: July 1, 2014 Relevant taxes: 37 percent state excise tax collected by retailers, 6.5 percent state sales tax, and local sales tax Up[...]

Prepaid Property Tax Perplexity Highlights the Tax Code's Confounding Complexity

Fri, 29 Dec 2017 13:50:00 -0500

Although the tax bill that Congress enacted last week was sold as a simplification measure, it created a bunch of new wrinkles for Americans trying to figure out how much they owe the federal government and why. This week's confusion over prepayment of property taxes shows how even a step in the right direction—in this case, limiting a deduction that favors the wealthiest taxpayers in the most expensive parts of the country—can make the tax code even more complicated. The tax bill imposed a $10,000 limit on the deduction for state and local taxes (SALT), effective this Monday. The change does not affect most Americans, because most Americans do not pay more than $10,000 in state income taxes, local property taxes, or the two combined. The change does not affect my family, for example, because we live in Texas, which has no income tax, and rent our home, so we have no property taxes to deduct. It would be a different story if we still lived in Virginia, which has an income tax, and still owned a house in Fairfax County, where the median property tax bill is about $5,000. When you add state income tax, a middle-class family can easily pay more than $10,000 total. In parts of the country with higher home prices and/or higher property tax rates, such as New York City and Los Angeles, the SALT deduction is worth even more. And the bigger and more expensive your house, the more you can expect to save on your federal income taxes (especially when you take into account the deduction for mortgage interest, which the tax bill also limits). The new SALT ceiling therefore makes the tax code less favorable to rich people with mansions (as well as politicians who overtax their constituents). But it also introduces new complications, especially during the transition period. This week homeowners in places such as Fairfax County, Chicago, Washington, D.C., and Hempstead, Long Island, lined up to prepay their 2018 property taxes before the new limit takes effect. New York Gov. Andrew Cuomo and New Jersey Gov. Chris Christie, who see the SALT limit as an affront to residents of expensive, high-tax states like theirs, encouraged advance payments, while officials in Connecticut said they do not have the legal authority to accept them. The tax office in Simsbury warned that prepayment "could be considered an effort to evade federal income tax liability." Compounding the confusion, the IRS on Wednesday issued an advisory saying prepayments are deductible only if the property tax was officially assessed before the end of this year. The tax bill specifically precludes deductions under the old rules for prepaid state taxes on 2018 income, but it does not address prepaid property taxes. The IRS did not explain the legal rationale for distinguishing between payments and assessments, which is bound to be the subject of litigation. The upshot is that people who have shelled out thousands of dollars in lump-sum property tax payments may get no benefit from paying early and may not know for sure whether their deductions are valid for months or years. "It's fun if you're a tax lawyer," David Herzig, a professor of tax law at Valparaiso University, told The New York Times. "I'm not sure it's fun if you're a person going through it." Beyond the economic distortion caused by the tax code's myriad deductions, credits, and exemptions, there is something fundamentally wrong with a system of revenue collection that can be navigated only with the help of experts—and in many cases (like this one) not even then. When it comes to figuring out what the tax code requires, the experts may disagree. People are expected to comply with the law but have no way of determining what that means.[...]

Democratic Rhetoric on GOP Tax Law Is Just Silly

Fri, 29 Dec 2017 00:01:00 -0500

An acquaintance who owns a large California business likes to talk about the negligible impact of the tax code on his personal life. As he puts it, well-off folks can afford the homes, cars and vacations they enjoy. Their lifestyle is static. When the government taxes them at a higher rate, that simply means they have less money to expand their business. It won't force them to subsist on macaroni and cheese, sell the Tesla or feel any personal discomfort. That's a key point to consider when you listen to the rhetoric from Democratic leaders about the supposed evils of the recently passed Republican tax plan. The left wants to punish the rich, but defending higher taxes mainly punishes everyone else. House Minority Leader Nancy Pelosi referred to the bill as a "rip-off, this plundering, this pillaging of the middle class." Sen. Bernie Sanders (I-Vt.), whose leftist rhetoric almost gained him the Democratic presidential nomination, said: "Today marks a great victory for the Koch brothers and other billionaire Republican campaign contributors who will see huge tax breaks for themselves while driving up the deficit by almost $1.5 trillion." Sanders' words were particularly foul by suggesting that these donors—people who fund myriad libertarian causes, including some such as criminal-justice reform that should appeal to liberals—are trying to stuff more dollars in their pockets. But Sanders probably is right that the tax plan will add to the nation's appalling deficit. That's an apparent flaw in a Republican tax bill that lowers tax rates in an attempt to jump-start economic growth, but Democrats (through the Byrd Rule) have made it virtually impossible to cut spending. Better half a loaf than nothing. And how can Democrats seriously complain about deficit spending? Their political platform is all about spending more government money. Massachusetts Sen. Elizabeth Warren even compared the bill to robbery, yet all such spending is taken from current taxpayers—or from future ones in the form of the growing national debt. That said, many observers—even conservative ones—don't believe that the bill's myriad breaks will pay for themselves. "Most Republicans say that the tax cut will generate so much extra growth that it will increase revenues," opined the editors of the conservative National Review. "No economic model of the tax cut, not even any of the models produced by conservative economists, backs this claim." It lets Republicans, however, "offer tax cuts to various constituencies without having to impose any restraint on spending." The last sentence sums up my problem with every tax bill I've written about in my adult life. Despite Republican rhetoric about cutting government, no one ever cuts government spending. Indeed, the Trump administration wants to invest in military and national-security programs, build a border wall (that Mexico is definitely not going to pay for), and even push NASA to send astronauts back to the moon. Those things aren't free, either. Nevertheless, many of us object to the Democratic concept that cutting taxes for individuals and businesses is the same as "spending" more money, as writer David French pointed out. That's only true if the government has a claim to our entire paycheck. A lot of attention has focused on the political ramifications of the bill. Indeed, the plan was the first major legislative victory for the president—one he desperately needed. But that's neither here nor there in terms of policy. (As an aside, if Donald Trump spent more time on such substantive matters and less time tweeting nonsense, perhaps Republicans would have a better chance of passing other substantive measures.) What matters is whether the bill's prov[...]

Another Winner From Tax Reform: State Governments

Tue, 26 Dec 2017 14:30:00 -0500

During a dinner in December 1974 at the Washington Hotel, so the story goes, Authur Laffer sketched a curved line on a cocktail napkin to demonstrate to Donald Rumsfeld how cutting tax rates could actually increase tax revenue. The basic idea imparted to Rumsfeld, chief of staff for then-President Gerald Ford, (and other Republicans attending dinner that night) would serve as the basis for nearly every GOP-backed tax proposal since—including the Tax Cuts And Jobs Act, signed into law by President Donald Trump on Friday. The so-called "Laffer Curve" makes a solid, important argument for reducing tax rates and letting Americans keep more of their own money. As a practical matter, it lets Republican lawmakers have their cake and eat it, too, by promising economic growth, fatter worker paychecks and more government revenue. It doesn't always work out. No matter how much Republicans wish for the Economic Growth Fairy, not a single analysis of the Tax Cuts And Jobs Act projects that economic growth will cancel out the $1.5 trillion in tax cuts included in the bill. The impact at state capitols, though, could be quite different. In all, states figure to be one of the big winners from federal tax reform—they stand to collect a windfall of cash without having to make any change in their own policies. Some state policymakers are already figuring out what to do with that bounty. In some places, that will be an added dose of good news for taxpayers. The passage of federal tax reform could mean an increase of between $150 million and $200 million annually in state revenue in Oregon, state economist Mark McMullen told the Oregon Senate Committee on Revenue and Finance earlier this month. And they are in line with what is being seen in other states. "These are big numbers, and catching our attention," McMullen said. "In the past, when we've seen big federal changes to tax law—in the Reagan era and the Bush tax cuts—both of those turned into real significant boosts in terms of Oregon's own source of revenue." The same is true in Maryland, where Gov. Larry Hogan's administration expects state tax revenues to increase by "hundreds of millions of dollars a year," according to The Baltimore Sun. The relationship between federal taxes and state tax revenue can't quite be reproduced on the back of a cocktail napkin, but the correlation is a strong one. Taxpayers in 36 states begin their state returns with their federal gross or taxable income, says Joseph Bishop-Henchman, vice president of the Tax Foundation, a tax policy think tank based in Washington, D.C. Nine states have no income tax, leaving just a handful of states with no direct connection to the federal tax code. The changes wrought by the federal tax bill generally broaden the income tax base by eliminating or reducing deductions for individuals and businesses. Eliminating those exemptions and deductions at the federal level will increase taxable income amounts. Unless states follow suit by reducing their tax rates, the result will be a larger level of taxable income for state-level taxpayers, McMullen says. An expanded corporate tax base and one-time repatriation (under the federal tax reform, corporations can pay a one-time tax to bring $2.6 trillion in overseas assets) will also boost state tax revenues as those assets suddenly reappear on businesses' tax returns. "States will receive a windfall from this, although it will be uneven based on where international companies have state tax liability," Henchman says. Doubling the standard deduction will also impact states. Twelve states conform with the federal standard deduction, and will see lower revenue as a consequence and 10 states have a person[...]