Tax Break

Which tax cuts stimulate the economy?

A statue of company founder Henry Ford overlooks part of the historic Rouge Plant complex in Dearborn, Michigan. REUTERS/Gary Cameron

Tax cuts are the key to job creation, or so Mitt Romney, running mate Paul Ryan and the 2012 Republican platform all say. But what does the empirical evidence show? Is the rhetoric in line with the known facts?

Studies examining the impact of cutting personal income tax rates on job growth or economic activity generally have been inconclusive, said Will McBride, chief economist for the Tax Foundation.

Owen M. Zidar, a graduate economics student at the University of California at Berkeley, and a former staff economist on the White House Council of Economic Advisers for President Obama, has taken another crack at it, sifting through the data, using the National Bureau of Economic Research’s tax simulation model. Zidar looked at state level income and economic data.

He reasoned that “if tax cuts for high income earners generate substantial economic activity, then states with a large share of high income taxpayers should grow faster following a tax cut for high income earners.” The data show that tax cuts at the top, though, do not result in faster growth in states with more high-earners.

Essential reading: Amazon, forced to collect a tax, is adding roots, and more

A worker collects products at the warehouse facility in New Castle, Delaware. REUTERS/Tim Shaffer

Welcome to the top tax and accounting headlines from Reuters and other sources.

* Amazon, forced to collect a tax, is adding roots. David Streitfeld – The New York Times. Amazon’s multibillion-dollar building frenzy comes as the company is about to lose perhaps its biggest competitive edge — that the vast majority of its customers do not pay sales tax. After negotiations with lawmakers, the company is beginning to collect taxes in California, Texas, Pennsylvania and other states. But Amazon hopes new warehouses will allow it to provide better service, giving it the ability to up-end the retailing industry in an entirely new way. Link  

* Top managers avoid pension tax caps. Alison Smith – The Financial Times. More than two-fifths of the executives with defined-benefit (DB) pensions at the UK’s 100 largest quoted companies by market value are escaping new rules aimed at capping the tax-free amounts paid into their retirement packages. But executives with DB pensions from the next band of big companies – ranked in the FTSE 250 – are far more likely to have contributions inside the tax net, with only one in 20 protected from the new regime limiting tax relief. Link  

Essential reading: Californians face rival ballot initiatives, and more

Welcome to the top tax and accounting headlines from Reuters and other sources.

 * Californians face rival ballot initiatives that would raise taxes and aid schools. Brooks Barnes – The New York Times. California’s Proposition 30 would increase statewide sales taxes by one-fourth of a cent and impose an income tax surcharge on Californians who earn more than $250,000 annually. The sales tax increase would expire after four years, and the income tax component would last for seven years. Some of the new money would go to public safety programs, like the supervision of parolees. Link  

* Tax hike cuts tobacco consumption. Dennis Cauchon – USA Today. A giant federal tobacco tax hike has spurred a historic drop in smoking, especially among teens, poor people and those dependent on government health insurance, a USA TODAY analysis finds. President Obama signed the tax hike — the biggest to take effect in his first term — on his 16th day in office, reversing two vetoes by President Bush. The federal cigarette tax jumped from 39 cents to $1.01 per pack on April 1, 2009. Since then, the change has brought in more than $30 billion in new revenue, tax records show. Link

* Romney on defensive over lack of tax detail. James Politi – The Financial Times. During an April fundraiser in the backyard of a large private home in Palm Beach, Florida, Mitt Romney offered donors a brief glimpse of what it would take for his tax plan to work. To prevent his proposals to slash income taxes by 20 percent from blowing a massive hole in the US budget, he would be willing to limit some of America’s most prized tax breaks. Link  

Essential news: Travelers to Chicago pay steep taxes, and more

Welcome to the top tax and accounting headlines from Reuters and other sources.

* Chicago tops nation in tax burden for travels. Hugo Martin – The Los Angeles Times. For an average visit to downtown Chicago, a traveler will pay about $40.31 in combined taxes per day, according to the GBTA Foundation. The lowest taxes imposed on travelers can be found in the Florida cities of Fort Lauderdale, Fort Myers and West Palm Beach. Link

 * Romney’s tax plan leaves key variables blank. Annie Lowrey and David Kocieniewski – The New York Times. If any single question can be said to dominate the presidential campaign, it is whether the conservative policies advocated by Mitt Romney would help or hurt the middle class. And no issue hits the heart of that question more than taxes. Link 

 * Romney blasts debt-ceiling deal that Ryan backed. Thomas Ferraro and David Morgan – Reuters. Republican vice presidential candidate Paul Ryan denied that Mitt Romney’s proposal to cut taxes and eliminate yet-to-be-identified tax loopholes amounts to a “secret plan.” “What we don’t want is a secret plan,” Ryan said, explaining that the details are not being kept under cover but instead have not yet been worked out. Ryan suggested that eliminating tax loopholes would hit higher income people harder. Link 


Some important tax and accounting events in the week ahead:

Monday, September 10

*Martin F. Baumann, Chief Auditor and Director of Professional Standards for the Public Company Accounting Oversight Board, speaks to the American Institute of Certified Public Accountants’ national conference on financial institutions. Washington.

Tuesday, September 11

* House Ways and Means Oversight Subcommittee hearing on the Internal Revenue Service’s implementation and administration of healthcare reform legislation. 10 a.m. EDT,  Longworth House Office Building. Washington.

Wednesday, September 12

International Tax Institute conference on tax treaty limitation on benefits clauses. 12:15 p.m. EDT, Grand Hyatt Hotel. New York.

Essential reading: Pharma company exploits tax structure, and more

Welcome to the top tax and accounting headlines from Reuters and other sources.

 * Valeant exploits tax structure in Dedicis deal. Vipal Monga – The Wall Street Journal. Pharmaceutical company Valeant will use a tax structure it inherited from a 2010 merger to shave millions of dollars off of the tax bill of its latest target, Medicis. Link 

* Democrats hint at showdown with GOP after election. Damian Paletta – The Wall Street Journal. Top White House and Senate officials at the Democratic National Convention in Charlotte, N.C., offered new clues Thursday about their strategy heading into the lame-duck session of Congress after the November election, suggesting they plan on a showdown with Republicans over tax and spending policy. Democratic Senator Dick Durbin rejected a suggestion that lawmakers in the next few weeks block spending cuts that are scheduled to begin in January because he said he wants to keep the threat of these cuts looming over Republicans to force them to negotiate. Link  

* New York State tax department attacks fraud on new front. Nanette Byrnes – Reuters. New York State, a pioneer at catching tax scofflaws in the digital age, has a new weapon in its arsenal – data collected from debit and credit card purchases that will help it detect retailers who are under-reporting sales. By checking customer data against retailer tax returns, wholesaler records and other sources, the state hopes to find retailers who either fail to collect or remit the sales taxes due. Link  

Who pays the top income tax rate?

President Obama wants to raise the top marginal income tax rate on salaries and other ordinary income from 35 percent to 39.6 percent by letting the extended temporary Bush tax cuts expire at year-end. 

Mitt Romney wants to drop the top rate by a fifth to 28 percent (and running mate Paul Ryan has called for a top rate of 25 percent).

So who pays the 35 percent rate? How much do they pay? And how much more would they pay if the Clinton-era rate of 39.6 percent were restored?

Essential reading: FBI, Secret Service deepen Romney tax mystery, and more

Welcome to the top tax and accounting headlines from Reuters and other sources.

* FBI, Secret Service deepen Romney tax mystery. Delvin Barrett – The Wall Street Journal. The two local Tennessee political leaders who received envelopes claiming to contain long-secret Mitt Romney tax returns said they didn’t believe the strange claims in the anonymous letters and didn’t take it seriously until the Secret Service knocked on their doors Wednesday. Earlier Wednesday, accounting firm PricewaterhouseCoopers said it had no evidence that anybody had gained access to Romney’s old tax returns, following a report that hackers claimed to have broken into a PwC office in Tennessee and were threatening to release the tax information. Link  

* Online buying surges as tax deadline looms. The San Francisco Chronicle. Chris Cheng doesn’t need 40 hand warmers right now, but the longtime customer is loading up on them anyway. With the Internet retail giant set to begin collecting sales taxes on California purchases Sept. 15, the San Francisco resident is among many tech-savvy consumers trying to cram in some last-minute tax-free shopping. Link

* Soda tax war taking shape in two California cities. Lisa Baertlein and Martinne Geller – Reuters. Two small California cities are the latest battlegrounds in the $111 billion U.S. soda industry’s fight to defend a near-perfect record of defeating proposed taxes on sugary drinks. In November, voters in cash-strapped Richmond and El Monte will decide whether to pass penny-per-ounce taxes on sugar-sweetened drinks to bolster municipal coffers and fight obesity. Link 

Essential reading: How Romney avoided a controversial tax practice, and more

Welcome to the top tax and accounting headlines from Reuters and other sources.

 * How Romney avoided controversial tax practice. Mark Maremont – The Wall Street Journal. Mitt Romney appears to have dodged a bullet after his lawyer said last week that the GOP candidate never engaged in a tax practice that’s now being investigated by New York’s attorney general. The statement, however, created another mystery: How did Romney avoid getting involved in a tax practice that appears to have been widely used in recent years at his old firm, Bain Capital? Link  

* Facebook says no secondary offering to cover tax bill. Alexei Oreskovic – Reuters. Facebook Inc promised not to sell stock to cover a nearly $2 billion tax bill and said it will allow employees to cash in their stock weeks ahead of schedule, moving to soothe nervous investors and its own staff as its share price spirals downward. The world’s largest online social network company, which has lost more than 50 percent of its market value since going public in May, said on Tuesday its total shares outstanding will be reduced by roughly 101 million shares as a result of the move. Link  

* Reid renews attacks on Romney’s tax disclosures. John McKinnon – The Wall Street Journal. Senate Majority Leader Harry Reid renewed his hard-nosed attack on Mitt Romney over the Republican’s personal taxes, during an appearance at the Democratic convention Tuesday. This time, though, Reid seemed to pull a couple of his big punches. Notably, Reid didn’t repeat his well-publicized charge that Romney hasn’t paid any taxes for a decade, perhaps because Romney has categorically denied that charge. Link  

Essential reading: Candidates split over tax credit for wind energy, and more

Welcome to the top tax and accounting headlines from Reuters and other sources.

* Candidates split over extending tax credit for wind energy producers. Catherine Ho – The Washington Post. President Obama and presumptive Republican nominee Mitt Romney clashed last week over a federal tax credit for businesses that produce wind and other alternative energy. In campaign events in Colorado, Obama emphasized his support for extending the tax credit and attacked Romney for opposing the extension, framing his opponent’s stance as a threat to job creation. Link

* Ryan wants to give the wealthy even bigger tax cuts than Romney does. Suzy Khimm – The Washington Post. In picking Paul Ryan, Mitt Romney has doubled down on his own campaign promise to give big tax breaks to the wealthy, uniting himself with a candidate who goes even further to do so: While Romney would bring taxes for top incomes down to 28 percent, Ryan has proposed bringing the top rate down even lower, to 25 percent. Meanwhile, Ryan’s plan would actually increase the effective tax rate on the very poorest Americans by getting rid of tax breaks that benefit low earners. Link

* Paul Ryan gave Romney camp several years of tax returns. Reuters. Mitt Romney released two years of his own tax returns to the public, but that didn’t appear to be enough when he vetted running-mate Paul Ryan and other vice presidential candidates. The campaign team for Romney, the Republican presidential candidate, reviewed several years of tax returns from Ryan and others, according to the head of Romney’s VP search process Beth Myers. Link