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Matt Lykken
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It would be good to have something to be for rather than just something to be against, though. Globalization is a fact of life and we need to push for changes that will make it work better for ordinary Americans. The aggravating factors were summarized at a recent House Ways and Means Committee hearing. The problems outlined by the witnesses can be summed up easily. If a company puts operations in America and earns $100 before tax, it keeps $65. If it puts the same operations in the Dominican Republic and earns the same $100, it keeps $100. With those incentives, it is stupid to invest in U.S. operations. Lots of people say lots of things about how this effect plays out, but the bottom line can be seen in U.S. incomes over the past 30 years. Starting at the end of the 1970s, average U.S. income flatlined in inflation-adjusted dollars. This started at the low end, where U.S. workers were competing against low-wage foreign workers. Since then, it has gradually worked its way up the education scale, with most professional incomes flatlining by the end of the 1990s as the rise of educated foreign workers mixed with our foolish U.S. tax disincentives to discourage investment in America. What happened to all the excess money? It flowed to the wealthy, who have been receiving an ever-increasing share of U.S. income and wealth. In the late 1970s, the top 1% of Americans received 9% of U.S. income. By 2008 they received 23%. When the incomes of the general population don’t rise, the economy can’t grow. The government has been trying to create the appearance of growth through encouraging ever-increasing amounts of debt, first in private hands with government backing, and now with the government directly borrowing and spending. That cannot continue. We need to encourage real investment in America by changing the incentives so that our country is the best place to invest rather than the worst. How can that be done without aggravating the concentration of wealth or further increasing the deficit? The witnesses did not offer a credible proposal, but Professor Reuven Avi-Yonah of the University of Michigan has. At www.law.colombia.edu/null/download?&exclusive=filemgr.download&file_id=55888 , he proposes to shift the imposition of tax from the corporate level to the shareholder level by allowing a corporation to take a deduction when it pays out a dollar of dividend, and taxing that dollar to the shareholder at the same progressive rates that apply to wage income. With some tweaks, as outlined at www.sharedeconomicgrowth.org , this simple action would actually increase federal revenues without any voodoo economics, and it would shift the burden of taxation from middle-class savers and retirees to wealthy speculators. Suddenly, that hypothetical company earning $100 in the U.S. would keep $100, so long as it paid out the cash instead of hoarding it. That would make America the best place on the planet in which to locate high-wage, high-value operations, and corporations would respond nicely to that incentive. Listen carefully to the debate on how to improve the economy. You will hear of plans to spend government money that we can’t afford, to train workers for jobs that don’t exist, to increase the disincentive to incorporate in America, and to give lots more money to “small business”, which is the new Orwellian term for extremely-high-income individuals (though the terminology cabal seems to be shifting to using “job creators” for millionaires, despite solid analysis showing that such persons derive relatively little of their income from job creating activities). What you will not hear is any discussion of Professor Avi-Yonah’s proposal, despite the fact that he is a respected tax economist who has been invited to testify before the Ways and Means Committee on other topics, and despite the fact that it is the only solution that cleanly addresses the difficult issues outlined to the Committee. Why? Because it involves getting rid of special capital gains rates, the primary driver of the low effective tax rates on rich individuals. No one in the government will even mention getting rid of special capital gains rates unless and until the public demands it. The irony here is that President Reagan eliminated special capital gains rates back in his Administration. Our whole government is now to the right of Reagan when it comes to anything affecting the wealthy. That is a sad state of affairs.
A Bill To amend the Internal Revenue Code of 1986 to remove incentives to shift employment abroad, and to remove hidden taxes on retirement savings and provide equitable taxation of earnings. SECTION 1: SHORT TITLE This Act may be cited as the “Shared Economic Growth Act of 2011”. SECTION 2: PROVIDING INCENTIVES TO LOCATE HIGH-VALUE JOBS IN AMERICA AND TO INJECT CASH INTO THE AMERICAN ECONOMY (a) Part VIII of Subchapter B of Chapter 1 of Subtitle A of the Internal Revenue Code of 1986 is amended by adding the following new section: “251. (a) General Rule. In the case of a corporation, there shall be allowed as a deduction an amount equal to the amount paid as dividends in a taxable year of the corporation beginning on or after January 1, 2012. (b) Limitation of benefit to tax otherwise payable. 1) The deduction under this section may not exceed the corporation’s taxable income (as computed before the deduction allowed under this section) for the taxable year in which the dividend is paid, decreased by an amount equal to 2.85 times any tax credits allowed to the corporation in the taxable year. 2) Where the deduction otherwise allowable under this section in a taxable year exceeds the limitation provided in paragraph 1 of this subsection, the excess may be carried back and taken as a deduction in the two prior taxable years or forward to each of the 20 taxable years following the year in which the dividends were paid. However, the total deduction under this section for dividends paid during the taxable year plus carryovers from other taxable years may not exceed the limit provided in paragraph 1 of this subsection. Rules equivalent to those provided in paragraphs 2 and 3 of subsection 172(b) of this subchapter shall govern the application of such carryover deductions. 3) No amount carried back under paragraph 2 of this subsection may be claimed as a deduction in any taxable year beginning on or before December 31, 2011. c) Consolidated groups. In the case of a group electing to file a consolidated return under section 1501 of this Subtitle, the deduction provided under this section may be claimed only with respect to dividends paid by the parent corporation of such consolidated group.” (b) Subparagraph (b)(1)(A) of Section 243 of Part VIII of Subchapter B of Chapter 1 of Subtitle A of the Internal Revenue Code of 1986 is amended to read as follows: “(A) if the payor of such dividend is not entitled to receive a dividends paid deduction for any amount of such dividend under section 251 of this Part, and if at the close of the day on which such dividend is received, such corporation is a member of the same affiliated group as the corporation distributing such dividend, and”. (c) Section 244 of Part VIII of Subchapter B of Chapter 1 of Subtitle A of the Internal Revenue Code of 1986 is repealed for tax years beginning after December 31, 2011. (d) Subparagraph (a)(3)(A) of Section 245 of Part VIII of Subchapter B of Chapter 1 of Subtitle A of the Internal Revenue Code of 1986 is amended to read as follows: “(A) the post-1986 undistributed U.S. earnings, excluding any amount for which the distributing corporation or any corporation that paid dividends, directly or indirectly, to the distributing corporation was entitled to receive a deduction under section 251 of this Part, bears to”. (e) Subsection 1(h) of Part I of Subchapter A of Chapter 1 of Subtitle A of the Internal Revenue Code of 1986 is repealed for tax years ending after December 31, 2011. (f) Subsection (a) of Section 901 of Part III of Subchapter N of Chapter 1 of Subtitle A of the Internal Revenue Code of 1986 is amended to read as follows: “(a) Allowance of credit If the taxpayer chooses to have the benefits of this subpart, the tax imposed by this chapter shall, subject to the limitation of section 904, be credited with the amounts provided in the applicable paragraph of subsection (b) plus, in the case of a corporation, the taxes deemed to have been paid under sections 902 and 960. However, in the case of a corporation, no credit shall be allowed under this section or under section 902 for foreign taxes paid or accrued, or deemed to have been paid or accrued, in tax years beginning after December 31, 2011. Such choice for any taxable year may be made or changed at any time before the expiration of the period prescribed for making a claim for credit or refund of the tax imposed by this chapter for such taxable year. The credit shall not be allowed against any tax treated as a tax not imposed by this chapter under section 26(b).” This amendment shall override any contrary provision in any existing income tax convention. SECTION 3: PREVENTING WINDFALL BENEFITS FOR FOREIGN INVESTORS (a) Section 1441 of Subchapter A of Chapter 3 of Subtitle A of the Internal Revenue Code of 1986 is amended by adding at the end of subsection (a) thereof: “, and except that in the case of dividends, the tax shall be equal to 35 percent of such item.” The imposition of this 35 percent withholding tax on dividends shall override any contrary restriction in any existing income tax convention. (b)Section 1442 of Subchapter A of Chapter 3 of Subtitle A of the Internal Revenue Code of 1986 is amended by adding at the end of the first sentence of subsection (a) thereof: “, except that in the case of dividends, the tax shall be equal to 35 percent of such item.” The imposition of this 35 percent withholding tax on dividends shall override any contrary restriction in any existing income tax convention, except that any treaty limiting the imposition of U.S. tax on dividends paid from a U.S. resident corporation to a foreign parent corporation shall not be overridden where the foreign parent owns, directly or indirectly, at least 80 percent of the voting stock of the U.S. corporation and where the foreign parent is 100 percent owned, directly or indirectly, by a corporation whose ordinary common shares possessing at least 51 percent of the aggregate voting power in the corporation are regularly traded on one or more recognized stock exchanges. SECTION 4: FAIR FUNDING FOR RETIREMENT SECURITY (a) Section 1 of Part I of Subchapter A of Chapter 1 of Subtitle A of the Internal Revenue Code of 1986 is amended by adding the following new subsection: “1(h) (1) (a) Tax imposed. There is hereby imposed a tax of 7.65 percent on so much of the adjusted gross income for the taxable year of that exceeds-- (A) $500,000, in the case of (i) every married individual (as defined in section 7703) who makes a single return jointly with his spouse under section 6013; (ii) every surviving spouse (as defined in section 2(a)); and (iii) every head of a household (as defined in section 2(b)), ; (B) $250,000, in the case of (i) every individual (other than a surviving spouse as defined in section 2(a) or the head of a household as defined in section 2(b)) who is not a married individual (as defined in section 7703); and (ii) every married individual (as defined in section 7703) who does not make a single return jointly with his spouse under section 6013; (C) $7,500, in the case of every estate and every trust taxable under this subsection. (b) Credit for hospitalization tax paid. There shall be allowed as a credit against the tax imposed by this subsection so much of the amount of hospitalization tax paid by the individual with respect to his wages under subsection 3101(b) and to his self-employment income under subsection 1401(b) of this Title as exceeds the following amounts: A) In the case of individuals described in subparagraph (1)(A) of this subsection, $14,500; and B) In the case of individuals described in subparagraph (1)(B) of this subsection, $7,250. Shared Economic Growth – Bill and Computations Summary The Shared Economic Growth bill allows a corporate dividends paid deduction, restricted to taxable income otherwise reported decreased by 2.85 times any credits claimed, so that the deduction may only reduce tax to zero. Excess reductions could be carried back 2 years and forward 20, so there would be incentive to pay out earnings with 2 years. Subsection 2(a) of the bill makes this change, with Subsections 2(b), (c) and (d) making certain conforming changes to the existing corporate dividends received deduction provisions. In 2006 corporations paid tax of $353 billion, so offsets of up to $353 billion would be required for static revenue neutrality. The first and most natural offset is individual tax payable on the dividends paid. In order for the proposal to work, special rates for dividends and for capital gains on equity would need to be eliminated, so that these dividends would be taxed at full 2011 individual rates. Subsection 2(e) repeals these special rates. Per the Joint Committee on taxation 2006-10 tax expenditure report, this would have provided an offset of $92.2 billion for 2006 without altering the various special capital gains exemption and rollover provisions. As a practical matter, this offset is only feasible in conjunction with the allowance of a dividends paid deduction, since such a deduction eliminates double taxation on the corporate side and thus eliminates any legitimate argument in favor of the capital gains rate benefits. As is noted below, the bill provides substantial excess offsets, so select non-equity capital gain rate benefits could be retained if desired. Subsection2(f) provides an offset mechanism that is only possible in conjunction with enactment of a dividends paid deduction. Because the deduction would effectively eliminate taxation of corporate income, including foreign income, it would no longer be necessary to allow a corporate credit for foreign taxes paid. A deduction could be permitted instead with the same bottom line effect. However, allowance of a deduction would impel corporations to pay out more dividends in order to eliminate the corporate level tax on the foreign income, which in turn increases the offset at the individual level. With this provision, the individual level offset from full 2011 rate taxation of the dividends needed to reduce corporate tax to zero would be some $153.6 billion, after factoring out shareholders not subject to tax. Section 3 provides another offset only feasible in conjunction with a dividends paid deduction. Foreign investors are effectively paying the 35% U.S. corporate level tax on their investment earnings. Congress would not have to let them have the benefit of the dividends paid deduction, since U.S. resident shareholders would have to pay full rate tax on such dividends. So, Section 3 imposes a 35% incremental withholding tax on dividends paid to foreign portfolio holders, exemption certain qualified foreign parent companies. This offset figure is somewhat inflated because I lack data to sort out the portion attributable to qualifying foreign parents corporations versus portfolio investors. Section 4 provides the final offset, which the draft bill sets at a much higher level than necessary, since there is a certain attraction in subjecting individual income over $500,000 a year to an AGI tax equivalent to the individual portion of the FICA taxes that ordinary wage earners pay. The minimum level needed for this levy is some 2.65%. At a 7.65% level, this levy would offset the revenue attributable to dividends paid to non-taxable retirement plans, so in effect this levy is requiring high income individuals to pay a supplemental tax similar to FICA taxes that supports non-social security private and state pension savings, thereby taking pressure off of the social security system. Moreover, because these retirement savings will ultimately be paid out and taxed (at an average rate of some 17.66% after exclusions (as computed from the 2006 IRA/pension/annuity distribution income by AGI class), this would increase revenue by some 22.2 billion per year on a static basis as the pension income is paid out. Use of a 7.65% rate provides an excess offset of $67.6 billion that can be used to reduce the other offsets or to provide other compensating benefits or deficit reduction. The static computations, based on 2006 IRS, JCT and Federal Reserve data, are reproduced in summary below and are available in full on request. I should note a computation relating to a variant from the static model. The static model ignores the fact that if corporations pay out a higher share of their earnings as dividends, capital gains taxes that would otherwise be payable under current law would be reduced, since a portion of capital gains tax collections pertain to gains flowing from the increment in share values attributable to retained earnings. The sensitivity computation below shows that at worst this effect would not be large enough to invalidate the model. The static model already conservatively accounts for taxes payable under current law on dividends that are normally distributed. The maximum effect of the above-described capital gains interaction is thus computable based upon the incremental taxable dividends as computed in the model. This results in the following computation. Maximum reduction in capital gains tax due to elimination of capital gains attributable to earnings that would otherwise be retained Incremental dividends subject to tax $454,991,419 Times 65% to account for earnings reduction from corp tax under current law $295,744,423 Times 20% maximum capital gains rate $59,148,885 This is less than the excess offset This computes the necessary offsets, based on IRS 2006 SOI data and Federal Reserve ownership data Total corporate tax collected $353,083,862 Foreign tax credits used $78,183,457 Incremental tax if FTCs replaced by deductions $50,819,247 Adjusted corporate tax for computation $403,903,109 Grossed up by dividing by 35% to obtain value of dividends required to reduce corporate tax to zero $1,154,008,883 Qualifying taxable dividends reported by shareholders $137,195,800 Percentage of stock held by retirement funds 31.14% Percentage of stock held by state & local gov't 0.52% Percentage of stock held by foreigners 17.02% Total dividends % not subject to income tax 48.68% Implied non-taxable dividends paid $130,160,817 Incremental dividends to reduce corporate tax to zero $886,652,266 Incremental dividends subject to tax $454,991,419 Individual tax on those incremental dividends 156,287,339 Remaining offset needed $196,796,523 35% withholding on foreign shareholders $68,747,233 Remaining offset needed $128,049,290 Capital gains & dividends rate benefit $92,200,000 Remaining offset needed $35,849,290 2.65% AGI tax on income > $500,000 $35,849,290 Remaining offset needed $0 Note: At an AGI tax of 7.65% on income over $500K, there would be an excess offset of $67,550,274 allowing plenty of room to tweak the other offsets Based on 2006 IRA/pension/annuity distributions, the dividends going to pension funds will ultimately be taxed at a weighted average rate after exclusions of 17.66% Producing tax of $63,474,391 Of which the incremental amount produced by SEG would be $22,216,037 Continue reading
Posted Feb 11, 2011 at Matt Lykken's blog
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Feb 11, 2011