from Lawrence Summers:
Time nears for an American tax overhaul
However the U.S. presidential election turns out, the trifecta of the Bush tax cut expiration, the debt limit ceiling on the horizon once again, and the Congressionally mandated sequesters – cuts in domestic spending – will force the president and Congress to wrestle with fiscal issues either in a lame duck session after the election or in early 2013. The decisions they make will have profound impacts on America’s fiscal future.
For many observers, the central question on the table is about entitlement programs: What will be done with them? Growth in entitlement spending associated with our aging population and its rising health care costs is the major factor in overall federal spending growth. But the capacity of near-term policy changes to have large impacts on that spending is less than many would suppose. The rising ratio of retirees to workers means that Social Security benefits at current levels will not be sustainable without some kind of tax increase. Sooner or later, revenue will have to rise or else outlays will have to be curtailed. While it is surely better to act sooner, the reality is that, out of necessity, action on entitlements is inevitable.
While almost everyone agrees on the desirability of containing federal health care spending, this is likely to be more difficult than we'd like to believe. Certainly beneficiaries can bear more of the cost of their government insurance than others, and there are steps like malpractice reform and the further encouragement of preventive medicine that should be taken. Yet without intrusions into the private health care system that are unlikely to be politically acceptable, there are severe limits on what can be done. Otherwise the result will be unacceptable cuts in the availability of care for the clients of federal programs. Given all the uncertainties associated with new technologies, changing lifestyles, and ongoing changes in the private system, health care reform will and should be a continuing project.
But let's place health care aside for now. Less discussed in the context of major deficit reduction is tax reform. For a variety of reasons, 2013 should be the year when the tax code is overhauled in a substantial way.
First, the United States will need to mobilize more revenue. This year the federal government will collect less than 16% of GDP in taxes—far below the post World War II average. The combination of an aging society, rising health care costs, debt service costs that will skyrocket whenever interest rates normalize, a still-dangerous world in which our allies’ defense spending is falling even as that of potential adversaries rises rapidly, and a growing fraction of the population unable to hold steady work means that in all likelihood federal spending will need to be larger not smaller relative to GDP in the future.
Raising marginal corporate rates or increasing individual rates beyond their Clinton-era level raises serious issues about incentive effects or encouraging tax shelter activities. Raising rates is, in any event, unlikely to be politically feasible. A much better strategy for raising necessary revenue would start from the premise adopted by the Simpson-Bowles bipartisan commission that tax expenditures are a form of government expenditure and presumptively should be cutback unless they can be justified.
Second, the current tax system is, in certain ways, manifestly unfair at a time of rising inequality. As is well recognized, America’s rich have gotten richer with the top 1 percent’s income share rising from the 10 percent range to the 20 percent range over the last generation, while middle class incomes have stagnated or worse. There is plenty of room for debate about the causes of rising inequality, and the extent to which reducing inequality should be a central objective of government policy and about the possible disincentive effects of excessively progressive taxes.
from Tales from the Trail:
The wishful thinking behind a repatriation tax holiday
By Ryan McCarthy
The opinions expressed are his own.
Big U.S. multinationals have a strange sense of timing: apparently, now is the ideal time to fight for a tax holiday. The New York Times on Monday had an in-depth look at the topic of a repatriation tax holiday, with lovely charts and a helpful video detailing the myriad ways corporations cut their tax bills by stashing profits overseas. Given the clamoring about lack of demand in the economy, the deficit talks and swollen corporate cash holdings, the lobbying push seems poorly timed at best.
New York Times' David Kocieniewski is rightly skeptical of the effort that’s currently backed by even tech titans like Apple and Google. He ferrets out an NBER study that excoriates the results of an abysmal 2004 dalliance with a repatriation tax holiday, which the study finds, led to little actual hiring and investment in the U.S. The appeal of a repatriation tax holiday is that large U.S.-based corporations could temporarily see much of their taxable income fall to 5.25 percent -- the rate often paid through overseas subsidiaries -- from 35 percent, the U.S. corporate rate. In theory, this windfall would temporarily prevent corporations from stashing profits overseas, bring in tax revenue, create jobs and spur investment.
And while Kocieniewski spends nearly 2,000 words on the issue, he doesn't mention specifics of the actual legislation in play, which make the latest tax repatriation push seem just as unpromising as its predecessor.
The "Freedom to Invest Act" -- a title that couldn't be more ironic given the state of corporate coffers -- makes at best only a cursory attempt to do better than its 2004 version. Introduced by Rep. Jim Brady (R-Texas), the bill has gained nine co-sponsors, including Democrats like Colorado's Jared Polis and Tennessee's Jim Cooper.
The key difference in the current version of the repatriation push seems to be a taxable income penalty of $25,000 that would be assessed to corporations that lay off employees within two years of the tax holiday. The penalty is meant to punish corporations that repatriate overseas profits, then simply pay that money to their shareholders and do little or no hiring.
If I had a fortune safely esconced in some other country with a low tax rate I would leave it there, rather than have some politician redistribute, confiscate or attach long term obligations to the “holiday”.
from James Saft:
Private equity wins, U.S. creditors lose
James Saft is a Reuters columnist. The opinions expressed are his own.
The move to reform taxation of billions of dollars in so-called carried interest paid to hedge fund and private equity executives is dead and prominent among the mourners should be investors in U.S. debt.
A country that can't even get it together to ensure that some of its highest paid people pay as much proportionally in tax as their secretaries and personal trainers is a country with very little hope of effecting meaningful budgetary reform.
Suffice to say that the long bond didn't sell off on news that U.S. Senate Finance Committee Chairman Max Baucus has dropped a higher carried interest provision from his since-defeated tax bill, a sign that the Democrats have effectively given up hope of the measure. The news should, however, make holders of U.S. debt even more willing to sell to the Federal Reserve, currently buying Treasuries often and in size. The script has been written for tax and spending reform over the next two years and for lenders to the U.S. the story does not end happily.
As it stands private equity and other investment managers pay the lower capital gains rate on "carried interest," their share of the takings when a holding such as a start-up or turnaround is sold at a profit. That means many pay taxes for the bulk of their compensation for their labor at a lower rate than many middle-class earners, an injustice so patent as to be seemingly unarguable.
Arguable of course it was, and the private equity industry mounted a lobbying campaign that has had a return on investment most of us can only dream of, painting the proposed reforms as an attack on funding for innovative job-creating start-up businesses and even, unbelievably, as against the best interests of pension savers. And while I am sure that the anti-carried-interest lobby is talented, well funded and smart, I doubt very much that they are that much better than the lobbies that will work against most other tax rises or spending cuts over the next two years.
The industry argued both that a rise in tax on carried interest would fall on the savers putting money into the industry and on the businesses that it finances, but this is far from evident.
I am a dyed in the wool conservative, fiscal that is…and this guy hit it dead right. The hedge fund lower tax scheme is awful for banks, companies and people. The only winners are hedgefund managers! Shame on the GOP for letting this happen!
Taxing spoils of the financial sector
If you want less of something, tax it.
That truism is often used as an argument against a tax on profits, or health benefits, or employment, but in the case of the rents extracted from the economy by the financial services industry here’s hoping it proves more of a promise than a threat.
The International Monetary Fund has put forward two new taxes on banks to pay the costs of future rescues, one of which is a fairly conventional “Financial Stability Contribution,” with an initial flat levy on all banks, to be refined later into something with more precise institutional and systemic risk adjustments.
More interestingly, the IMF is also proposing a “Financial Activities Tax,” (FAT) a tax on bank pay and profits which, if correctly designed, could serve as a tax on rents — the unwarranted spoils — of the financial sector.
In economics the concept of “rents”, essentially the extra money a given individual or industry is able to extract from its clients above what it would if there were perfect competition, is central. If there is only one cable television provider in your neighborhood you will know what I am talking about.
In financial services, the evidence is that rents are huge, in part because of impaired competition and in part because increasingly complex financial services allow banks to sell clients products that they don’t understand, may not need and will almost always be over-charged for. Bank employees in turn charge hefty rents to their bosses, boards and shareholders, each of whom, as you journey up the organizational chart, understand less about the complex services, and like clients, are then less able to defend their own interests.
Some of the best evidence forming the intellectual underpinning of this is provided by economists Thomas Philippon of New York University and Ariell Reshef of the University of Virginia, whose work found that about 30 to 50 percent of the extra pay bankers get as compared to similar professionals is attributable to rents. <http://people.virginia.edu/~ar7kf/paper s/pr_rev15_submitted.pdf>
As a long in the tooth former consultant to Central Banks & Commercial Banks, here is my “old fashioned” view.
Banks are the primary engine driving the world’s economy.
Tax the Banks and they will pass it on their customers.
More expensive money means Less economic dynamism & incidentally more unproductive public service costs to regulate.
Obama must have fools for advisers.
But what do I know, it is 20 years since I was advising governments of the world.
from MacroScope:
A “Greed Tax” on banks
The International Monetary Fund has done what it was bid by the G20 and come up with proposals for getting banks to pay for the government help they receive when they get in trouble. You can read the actual wording here, but it comes down to this:
1) A "Financial Stability Contribution" which would be pooled into a fund that would use it to help weak banks, or just go into general government revenues.
2) A "Financial Activities Tax" -- perhaps intentionally known as FAT -- to be levied on combined bank profits and remuneration (for which read "bonuses") and paid to governments.
The first is a kind of insurance policy. The second, however, looks decidedly like what might be called a Greed Tax -- government action on the kind of wealth that has infuriated taxpayers across the world.
The debate will be over whether this is simple kowtowing to populist sentiment or whether it is a reasonable limit on people being accused of knowing none.
UK bonus tax both cynical and justified
(James Saft is a Reuters columnist. The opinions expressed are his own)
A cynical election maneuver it may well be, but Britain’s plan to impose a punitive tax on bonus payments is also reasonably well crafted and in broad terms justified.
Facing a monumental budget deficit and an election in months, British Chancellor Alistair Darling announced a plan to slap a 50 percent payroll tax, payable by banks, on their bonus payments in excess of 25,000 pounds to a given employee.
Banks can pay what they like to whom they like, but every pound a banker gets above the threshold means an additional 50 pence for the public purse. The tax will only raise about 550 million pounds, compared to a public sector borrowing requirement of 178 billion, and will expire in April, leaving delayed bonuses subject to a new higher 50 percent personal tax rate previously announced.
So, you can say it is politically motivated, that it is too small to matter and that it is subject to evasion, but these counsels of perfection ignore that it, in its own small way, will make British banks less risky, less liable to need government help and more likely to lend. It is also, given the past two years, something very like fair. Crucially it encourages banks to retain money to rebuild capital.
Banks within an insurance-based system with fiat money are inherently creatures of government; good banks outperform bad banks, the same goes for bankers, but all exist and profit because of forces greater than themselves.
There can be no denying that all banks in Britain benefited from government action to bail out the sector; it is patent that many would not have survived. It is further true that having been allowed to live and fight another day, all banks in Britain are now able to make better profits than they otherwise would because of the current alignment of government policy and the perception and reality of socialized insurance. This has all been done at great future cost to the British taxpayer.
Fad taxation never solves anything. There’s far too many bloody taxes as it is for any that ought to make sense to make sense to regular citizens. The fad ones just engender disregard for the whole point of taxation to begin with.
The feel-good tax at issue in this case doesn’t even really discourage questionable practices it is presumed to penalize. All it does is add another brick in the wall between helping people in general learn sensible ways of making a living, keeping them more likely than not hyper-aware of “pretty good ploys to avoid paying taxes”.
Being born in Britain these days ought to come with a free god-accountant. Not being a banker, I have to pay for mine. After taxes, that is.
Pittsburgh: A city transformed by R&D
– Phil Bond is President of TechAmerica, which represents 1,500 companies across the technology industry. The views expressed are his own. —
Will Pittsburgh, with its historical role in two American industrial revolutions, remain a leader in revitalization? Or will it be have to carry the extra burden of uncompetitive national policy?
The first revolution, perhaps a product of geographical chance, made the city and the nation a manufacturing powerhouse. The second, resulting from a tremendous act of will by the people, remade Pittsburgh into a great research and development (R&D) center that could help lead us out of the current recession. These hardworking Americans are going to need smart policy from Washington if their technology revolution, and efforts to emulate it across the country, are to continue.
For many years now, there has been too much talk inside the beltway about pro-innovation economic policies and too little action. Case in point: Congress has yet to take action to extend the R&D tax credit, due to expire at the end of 2009, that is so vital to the U.S. keeping its innovation edge and helping other cities do what Pittsburgh accomplished – achieve economic revitalization.
R&D creates new industries and products, new solutions to our toughest challenges and many new jobs. In Pittsburgh, R&D and testing labs account for the second highest category of high-tech employment, generating thousands of good, high-paying jobs, according to TechAmerica’s latest Cybercities research. Nationwide, at least 70 percent of R&D investments are spent directly on employment.
This tax credit applies only to R&D performed in the United States, and it stands as the only broad incentive offered by the federal government for private-sector investments in R&D. Without it, many companies based here might not chose to make potentially risky R&D investments because the return on those investments would be insufficient. Meanwhile, other countries around the world offer much more robust incentives to lure companies to their shores.
America’s tax credit, once a world-leading policy, is now comparatively modest – especially when you consider that in the long-term, nearly two dollars are generated for every dollar of tax benefit. To bolster the U.S. economy and create jobs, Congress should strengthen the credit and make it permanent.
from Commentaries:
Why the U.S. needs a Value Added Tax
Swelling deficits and an aging population leave few palatable options when it comes to taxes.
The best choice by far would be the creation of a new value added tax -- a "money machine" that can bring in huge sums with relatively little effort. America is alone among rich nations in not charging a VAT, and its continued unwillingness to do so will make it harder to cope with the fiscal challenges ahead.
Giving birth to a new tax will certainly not be an easy sell. The stunning 1980 reelection defeat of Al Ullman, the powerful chairman of the House Ways and Means Committee who had advocated a VAT, is still a warning to American politicians.
The timing of a new tax on consumption may also seem suspect. Aren't we supposed to be getting Americans back into the malls?
VAT, however, is worth the risk. It could yield enough money to pay for healthcare reform, as well as a meaty cut in income tax and a reduction in the deficit. It could also be done without destroying Obama or the Democrats.
Unlike taxing the rich -- which has emerged as a favorite strategy of many Democrats -- a VAT is extremely easy to collect. This is partly because it is gathered from each producer in a chain.
Take bread. The farmer, miller, baker and grocer all pay their share of the tax. If the grocer cheats, the government loses only a quarter of its tax. Furthermore, each producer has incentive to make sure its suppliers have paid VAT. The miller becomes liable for the farmer's share of VAT unless he can prove the tax has already been paid. VAT collection polices itself to a large extent. The sums of money that could be raised are immense, making it easier to strike a political compromise. Exactly how lucrative VAT would be depends largely on which goods are exempt.
If the US issues a VAT then it also needs to do away with income tax. It also needs to do away with all of it’s very poorly run programs and instead take a position of referee.
That is to say that rather than actually running programs like education and medical programs, and housing programs etc.. It needs to institute a financial social safety net which distributes assistance payments to the citizenry. It would be much like continuously receiving stimulus payments. They wouldn’t amount to very much for each household, but it would serve to smooth things over during difficult times.
Then the government simply needs to uphold standards of ethical business practices, and the rule of law. And in all law it is the citizen that must come first. No more special interest groups. EVERYONE has the same rights. Gay, straight, man, or woman, it doesn’t matter. All citizens have the same rights to life liberty and pursuit of happiness.
On the surface this may seem like it would be very expensive. But in actuality it would cost much less than what the government currently pays for corporate welfare and the administration of its entitlement programs. With what our war is costing us alone this plan could be easily carried out for decades.
The advantage of putting money directly into the hands of the citizenry is that they will be encouraged to consume, pay bills, choose their own medical care, schools, etc.
Our money is backed by faith alone. If one is going to have faith in something, then that something actually has to come through in a positive way. Otherwise why would anyone have faith?
If you want the forest of American business to grow strong then the roots of that forest must have the water they need. The citizenry are the roots of American business. Capitalize the citizenry. Then even if all they do is buy cheetos with their money they will still be supporting the economy. And as long as they are capitalized they will continue to support the economy.
The rich are not an easy quarry
– Christopher Swann is a Reuters columnist. The views expressed are his own –
Cash-strapped politicians are more willing to play Robin Hood than at any time in a generation. Tax rates on the rich may soon hit levels not seen since the 1980s. The wealthy, alas, are not easy prey. Backed by highly paid lawyers and accountants, no other group is better able to run circles around the taxman. As a result, America’s politicians may get less cash than they bargained for and more economic distortions.
There are many easier and less disruptive ways to get the cash.
Of course, the temptation to launch a direct strike on the rich is understandable. The past three decades have been very good to the affluent. The top 1 percent of earners now account for 19 percent of America’s income, up from 9 percent in 1980. This elite group has also been quiescent, dutifully paying 40 percent of all income tax, according to the non-partisan Congressional Budget Office.
It has been many years since the rich had a powerful incentive to test the limits of the tax code. The top rate of income tax has fallen with only minor interruptions since its vertiginous peak of 92 percent in 1953. But a foretaste of what might be expected was offered by Maryland’s ill-fated creation of a millionaires-tax bracket in 2008.
A year later 1,000 millionaires had disappeared — a third of the total — and revenues from this group had fallen by $100 million. Some may have left the state while others may have found ingenious ways to reduce their reported income.
The U.S. tax code is replete with legal dodges for the wealthy, whether you are a top executive, independent business owner or the lucky recipient of inherited wealth.
Dear author,
very good article on American riches thoughts to their tax systems.
On running governments,taxes are other sources of revenues.
Now a days ,many !New rich! segments are created in all countries,because of double or thrice income by working,on line trade,part time jobs are not covered by any notable tax deductions by concerned authorities.
For example,a man or woman educated can work as a teacher in pay system,at the same time,they will be getting considerable unaccounted tuition fees from students.
Many part time works income will not be noticeable by many
In order to bring a good tax revenues for further nation building,she has to get more money from top riches,growing rich brackets, and increasing usercharges for sustaining, and for further growth.
A simpler way to pay taxes
– Diana Furchtgott-Roth, dfr@hudson.org, former chief economist at the U.S. Department of Labor, is a senior fellow at the Hudson Institute. The views expressed are her own. –
It’s April 15, and you’ve finished the arduous task of filing your taxes. You’ve found your W-2 form from your employer, your pennies of interest income from your checking account. If you itemize, you’ve tracked down the acknowledgement of your charitable contributions to the church, the Sierra Club, and the local anti-poverty organization.
The system is so complex that it may have contributed to the tax delinquencies of four Cabinet-level Obama appointees (or their spouses) who had to pay up to win Senate confirmation. At least two other Obama choices withdrew because of their tax problems.
President Obama recognizes the problem. Today he asked his Economic Advisory Board, under the leadership of former Federal Reserve Chairman Paul Volcker, to send him recommendations for tax simplification by the end of the year.
Enter Wisconsin Representative Paul Ryan, a member of Congress for 10 years and now the ranking Republican on the House Budget Committee. In H.R. 6110, entitled “Roadmap for America’s Future” (www.americanroadmap.org), he has proposed a radical simplification of the tax code.
Mr. Ryan describes the tax system as “needlessly complex and burdensome.” In contrast, he writes, “a world-class tax system should be simple, fair, and efficient. The U.S. tax code fails on all three counts.” Under the Ryan proposal, couples would pay tax at a 10 percent rate on their first $100,000 of taxable income ($50,000 for singles), and then 25 percent on any earnings above that. They would pay a 15 percent tax on capital gains and dividends, and no tax on savings. In exchange, they would give up almost all deductions, including home mortgage interest and charitable contributions.
The only deduction allowed would be a refundable $5,000 tax credit for families and $2,500 for individuals to help with the purchase of private-sector health insurance. Health insurance could be purchased in any state, to encourage more companies and plans to participate.
An excellent proposal! One suggestion though, there should be no taxes on any earned income up to the poverty level. This will accommodate the people who spend all their earnings on food and other necessities, and will overcome the criticism of being regressive.
Larry, you know as well as we all know that your statement about tax problems, “….will force the president and Congress to wrestle with fiscal issues either in a lame duck session after the election or in early 2013. ” simply has no validity. Congress hasn’t wrestled for so long that it is only a showplace in the Capitol Building. Without political consequences for each member, they’ll continue to do nothing in order to fool the public into thinking that it is the other side whom is ineffective. It is such a charade as to be shameful.