Tag Archives: Taxes

Republicans tackle tax reform

My column for the Washington County Daily News is online. Here you go:

In an attempt to rise from the ashes of their failure to repeal Obamacare, the Republicans in Washington are forging ahead with an ambitious tax reform plan. While it remains to be seen if Congress can accomplish anything substantial under Republican management, this tax reform plan needs to get done.

There are substantial political obstacles for any real reform of the federal income tax system. The first political obstacle is that the United States’ federal income tax has become so progressive that any real reform of it will be lambasted by political opponents with the old tired rhetoric that it “benefits the rich more.” And that rhetoric will be largely true if the benefit is measures in real dollars.

As of the latest figures from the Tax Foundation, the so-called “rich” pay the vast majority of the taxes — and they pay a disproportionate amount of taxes compared to their share of income. The top 10 percent of income earners earn 47 percent of the aggregate adjusted gross income while they pay 71 percent of the overall income tax burden. The top 50 percent of income earners earn 89 percent of the aggregate adjusted gross income while they pay 97 percent of the overall income tax burden.

Looking at the numbers from the alternate perspective, the bottom 50 percent of income earners earn 11 percent of the aggregate adjusted gross income while they pay 2.75 percent of the overall income tax burden. Our federal income tax system is beyond progressive. It is redistributory. It is almost a mathematical impossibility to reform the federal income tax system without disproportionally benefitting the upper half of income earners.

The second political obstacle to tax reform is the throng of lobbyists and special interests in Washington who will fight against reform. While the average American and business owner yearns for a simple and fair tax system, the lobbyists and special interests thrive in the system’s complexity. For every tax exemption, loophole, credit, and shelter, there is a constituency that will fight tooth and nail to protect it. Any attempt at simplifying the tax code will run into a withering fire from K Street.

Despite the obvious political obstacles, the Republicans are seeking to simplify and flatten the tax code. There are many components to the plan, but the thrust is very straightforward and sensible. They want to lower the overall rates while removing almost all of the loopholes.

Under the plan, the individual income tax framework wouldbe reduced from the current seven tax brackets to just three brackets with rates of 12 percent, 25 percent and 35 percent. But while reducing the number of brackets and the rates, the plan would eliminate all tax exemptions except for those for home ownership, charitable giving, retirement savings and higher education. The plan would also increase the child tax credit and the standard deduction.

As a point of comparison, the current highest tax rate is 39.6 percent, but the effective average tax rate of the 1 percent is 27 percent after all of the deductions, credits, and loopholes. Under the plan, even though the highest rate would be lowered to 35 percent, the effective tax rate will most likely increase due to the elimination of most of those loopholes.

For business taxes, the Republicans’ plan would lower the corporate tax rate from a ridiculously high 35 percent to 20 percent — slightly below he world average. The plan would also eliminate almost all of the loopholes that corporations use to avoid paying income taxes.

Perhaps more importantly, the Republicans’ reform plan would decrease the top tax rate on small businesses from 39.6 percent to 25 percent. Since most businesses in America are small businesses whose profits are taxed at the individual tax rate of the owners, they are usually paying a much higher rate than corporations, although corporate profits are taxed twice.

Finally, the Republicans’ plan would switch to a territorial system for taxing overseas profits of American companies, which is more in line with the majority of industrial nations. This would encourage American companies to bring home and spend the estimated $2.6 trillion in cash that they are currently holding overseas to shield it from confiscatory taxation.

Year after year, Americans have clamored for a simpler, fairer, less burdensome tax system for our businesses and our own incomes. The Republicans’ tax reform plan would go a long way toward delivering that kind of system. It is also the Republicans’ last chance to deliver on one of their big promises before the next election. For the sake of the American people, let us hope that the Republicans can overcome the obstacles and pass their plan into law.

 

GOP Releases Tax Reform Plan

CNN has a good, easy to read, list of the major items in the tax plan. I encourage you to go read through the whole list.

Drastically lower rates for businesses. Fewer income tax rates for individuals. A much larger standard deduction and child tax credit. A repeal of the estate tax.
CNN obtained a copy Wednesday of a Republican framework for tax reform that has been in the works for months and will finally be presented Wednesday.

Given the performance of the Congress as of late, I don’t hold out high hopes that they can get this passed, but one can hope. Overall, it’s a good plan. It simplifies and streamlines the tax code. The cut in the corporate income tax, small business taxes, repeal of the AMT, repeal of the death tax, and reduction in the number of deductions are good. I’m not a fan of increasing the child tax credit. But overall, it’s a good, comprehensive plan that would greatly help America’s people and economy. I’ll get more excited about it once we see if the GOP in Congress can actually move this forward.

DHS Refuses to Waive Shipping Restrictions for Puerto Rico

Huh.

On Monday, U.S. Representative Nydia Velázquez and seven other representatives asked Elaine Duke, acting head of Homeland Security, to waive the nearly 100-year-old shipping law for a year to help Puerto Rico recover from Hurricane Maria.Gregory Moore, a spokesman for Customs and Border Protection, an office of Homeland Security, said in a statement that an assessment by the agency showed there was “sufficient capacity” of U.S.-flagged vessels to move commodities to Puerto Rico.

“The limitation is going to be port capacity to offload and transit, not vessel availability,” Moore said.

Puerto Rico has long railed against the Jones Act, saying it makes the cost of imported basic commodities, such as food, clothing and fuel, more expensive.

First, there is the actual discussion of whether or not this would help. If there is plenty of shipping, but the ports don’t have enough capacity, then the waiver wouldn’t actually help anyone. It seems that there is some dispute about that.

But second, it does highlight how high American taxes actually impact everyday Americans. After this spat passes, perhaps the Congress can see about lowering the tax burden.

Tax Freedom Day Is Finally Here

This is a healthy reminder for those Republicans in the legislature who want to increase taxes. Wisconsin is still a tax hell, and you have a lot of work to do.

It’s Tax Freedom Day for the Badger State, the day when hard-working Wisconsinites have finally earned enough money to cover their total tax burden for 2017, according to the Tax Foundation’s annual Tax Freedom Day initiative. That’s right – we work the first 117 days of the year to cover our tax bill.

National Tax Freedom Day was April 23 – 113 days of work – but since Wisconsin taxpayers still bear a heavier-than-average tax burden compared with the country as a whole, we must toil away for four more days.

Tax Freedom Day in Wisconsin ranks #40 on the Tax Foundation’s Tax Freedom Day list, meaning Wisconsinites pay off their tax bill before residents of New York, California, Minnesota, and Illinois. However, taxpayers are better off in four Midwestern states: Iowa (#14), Indiana (#19), Ohio (#27), and Michigan (#32).

Wisconsin’s #40 ranking held steady from 2016 but is down from #37 in 2015. Also, in 2015 Tax Freedom Day was on April 25, two days earlier than this year. Despite efforts to reduce the tax burden in the Badger State, it seems that other states have leapfrogged Wisconsin by taking on even more dramatic tax reform.

Wisconsin is the lowest-ranked state with a Republican trifecta – where the GOP controls both houses of the legislature and the governor’s mansion.

The tax burden matters

My column for the West Bend Daily News is online. Here you go:

One of the assets of our grand republic that has allowed it to perpetuate and thrive is the fact that we are also a federation of states. Our nation was designed to have a relatively small national government with limited powers while states retain broader and deeper powers to regulate our lives. This allows each state to experiment with different policies and for other states to observe and learn from the results of those policies.

Sometimes, those experiments go very well and other states can copy them to benefit their own citizens. This was the case when concealed carry began to sweep the nation after Florida allowed it in the 1987 and saw nothing but positive results. Since then, every state in the nation has come to allow some form of concealed carry and states continue to get closer to a full recognition of the right to keep and bear arms in the form of what has come to be called Constitutional Carry.

Sometimes, however, states try policies that prove instructive to warn other states to not attempt those policies. Minnesota has just provided one of those examples that Wisconsin, in particular, should be watching closely.

Minnesota has long been a state susceptible to fits of political absurdity. It is, after all, a state that has elected such luminaries as Saturday Night Live alum Al Franken and former professional wrestler Jesse Ventura to high office. In 2010 Minnesotans elected the ultra-leftist Democratic-FarmerLabor (DFL) Party member Mark Dayton with a 43.6 percent of the vote. The Republican and Independent candidates split the remaining 56.4 percent of the vote.

Not to be deterred by his mere plurality of support, Gov. Dayton and his DFL majorities in the state legislature launched an ambitious agenda including a massive tax increase on the “1 percent” to fill a budget deficit created by overspending.

Specifically, they passed a $2.1 billion tax increase in 2013 by increasing the income tax rate for people earning over $150,000 ($250,000 for people filing jointly) from 7.85 percent to 9.85 percent. They also passed a slew of other tax increases on the middle and lower taxes, but the crown jewel of their plan was to “tax the rich” to fund their spending.

The results were predictable. Minnesota saw an immediate increase in tax revenue. This makes sense. When a tax increase like this is passed, most people have little choice but to pay it. The prospect of uprooting their families, changing schools, getting a new job and moving out of state to avoid the tax is not an option immediately doable.

But over time, all fixed costs become variable costs. When those high earners begin seeking out their next career move, one of the factors they will consider is the amount of their paycheck they have to send to the government that they would be able to keep by simply moving to a different state. That is exactly what is happening in Minnesota.

The results of the tax increase are becoming known. The IRS keeps track of when people move to different states by the flagging when people list a new resident on their tax returns. This data gives us a vivid picture of taxpayer movement because it is actual data and not just a statistical projection.

As detailed in a report by the Center of the American Experiment, the most recent IRS data available is for the year immediately after Minnesota’s tax increase and it shows a grim picture. Between 2013 and 2014, Minnesota reported its largest net loss of income in its history with $944 million of adjusted gross income leaving the state. Lest one think this is the natural flow of retirees moving to warmer climes, 63 percent of the state’s net loss of tax filers were younger than 65.

Most of the former Minnesotans are predictable fleeing to states with better tax climates like Colorado, Florida, South Dakota, Texas, Arizona and Washington. In fact, five of the 10 states to which Minnesotans flee do not have an income tax at all. It is notable that one of the places that is not receiving an outflow of high-earning Minnesotans is Wisconsin. That is because despite a few years of progress, Wisconsin remains a state with one of the highest tax burdens in the nation. Even after Minnesota’s tax increases, Wisconsin still ranks four notches worse than Minnesota on Forbes’ ranking of overall tax burdens.

The data shows what we all know. The tax burden matters. In the short run, most people do not have a choice but to pay what the government tells them to pay. But over time, choices expand and people will factor the tax burden into their decisions about their lives. Minnesota’s experiment with higher taxes is showing a way that Wisconsin should not follow. In fact, they are showing that Wisconsin should do the exact opposite and push harder to have a tax burden that actually attracts high-earners to our state.

Wisconsin Improves in Tax Rankings

Wisconsin is moving ever so slightly in the right direction. There’s still so much work to do.

After reaching 11.8 percent of income in 2011, Wisconsin’s state and local tax burden has declined for three consecutive years, the WTA reported, due largely to a drop in local taxes as a share of personal income.

“During 2011-14, Wisconsin’s local tax burden fell from 4.8 percent to 4.1 percent of income,” the analysis stated. “By comparison, state taxes as a share of personal income dropped less – 0.3 percentage points, from 7 percent to 6.7 percent. A tightening of property tax limits imposed by the state on local governments explains the drop in local tax burden.”

Return of the Living Death Tax

Despite what the media has decided are the important stories for this election, there are some real issues out there that have a real impact on real families.

Likewise, interpretations of regulations by the IRS can change, leading to additional tax liability for family farms. Most recently, the IRS has proposed changes to the estate tax regulations regarding the valuation of business assets. The American Farm Bureau Federation has cautioned that this change may result in family farms seeing an increase in estate tax liability, and has urged members to contact their congressional leaders to support proposed legislation prohibiting the change.

Despite favorable provisions, the death of the family’s patriarch or matriarch may still result in a family farm being divided up and sold off to pay the taxes. Farmers are usually considered cash poor, because their money is tied up in assets, especially land. When the value of a deceased’s estate goes over the exempted amount, the hefty tax has to be paid whether the estate actually has the cash to do so. Many times, that means farmland, equipment, or buildings have to be sold to pay Uncle Sam. For children that wanted to keep farming, this scenario could dash their dreams.

[…]

In an election that has been filled with the scandalous and salacious, there is hardly room for estate tax discussion on the campaign trail. For family farmers though, the very real possibility that it could result in their farm being divided up and sold upon their death makes this issue extremely important and relevant. There are many issues that voters should take into consideration when making their choice on Election Day, but the future of the estate tax should definitely be one of them.

 

Over 45% of Americans Don’t Pay Any Federal Income Tax

For almost half of American adults, today is either a “whatever” day or a day of celebration as they look forward to their check from the folks who pay income taxes. Raise your hand if you pay income taxes 

An estimated 45.3% of American households — roughly 77.5 million — will pay no federal individual income tax, according to data for the 2015 tax year from the Tax Policy Center, a nonpartisan Washington-based research group. (Note that this does not necessarily mean they won’t owe their states income tax.)

Roughly half pay no federal income tax because they have no taxable income, and the other roughly half get enough tax breaks to erase their tax liability, explains Roberton Williams, a senior fellow at the Tax Policy Center.

Bill Allowing County Sales Tax Increase Moves Ahead

James Wigderson opines over at MacIver.

A proposal to allow counties to raise taxes 0.5 percent to pay for road costs is on the highway to passage by the Assembly this week. After cruising through the Assembly transportation committee on a bipartisan 14-0 vote, the bill is scheduled to be considered by the full Assembly on February 9.

The bill, Assembly Bill 210 (AB 210), would allow counties to ask voters in a referendum for a 0.5% sales tax that can only be used for road costs. Using a formula that takes into account road miles and population, the counties would distribute aid to municipalities while keeping some for county road projects. Counties would be required to hold referendums every four years to renew the tax.

[…]

The proposed plan to allow increases in the sales tax county-by-county may have the noble purpose of solving part of the state’s transportation funding problems. But the road to tax hell is paved with good intentions. The bill’s many flaws should cause the legislature to scrap the increased sales tax idea and look for a long term solution to the state’s transportation funding and expenditures.

Go read the whole thing. He’s spot on. It is also worth noting that Wisconsin’s legislative Republicans have found time to legalize switchblades, approve blaze pink for hunting, and push ahead another way to raise taxes, but can’t seem to repeal the minimum markup law. Curious, no?

 

WPRI Study Discusses Serious Tax Reform

It is disappointing that neither candidate for governor is willing to have a serious conversation about tax reform, but that is not unexpected when we are five weeks out from an election.

The candidates responded to a study from the Milwaukee-based Wisconsin Policy Research Institute that found Wisconsin could boost its economy without bankrupting state government by cutting income and property taxes, while broadening its sales tax on consumer goods and services — including groceries.

[…]

The study treads on some volatile political turf, presenting the elimination of 24 sales tax exemptions — including grocery store food, gas, construction labor, legal services, bottled water, fitness clubs, newspapers, coffins and funeral services — as a way to cut taxes while balancing the state budget. Taxing such goods and services would generate $2.3 billion in state revenue.

It also raises the possibility of replacing the sales tax with a gross receipts tax or value-added tax, which are used in Canada and many European countries.

Still, there are some very worthwhile ideas in this study that are worthy of discussion. Personally, I am in favor of shifting more of the tax burden to various consumption taxes, but I do not like VATs. A sales tax levied on the end consumer is more transparent than the VAT and less susceptible to political monkeying around.