About | HeinOnline Law Journal Library | HeinOnline Law Journal Library | HeinOnline
LOG IN
LOG IN

272 IRET Congressional Advisory 1 (2010)

handle is hein.taxfoundation/iretcgadv0269 and id is 1 raw text is: INSTITUTE FOR RESEARCH ON THE ECONOMICS OF TAXATION IRET is a non-profit 501 (c)(3) economic policy research and educational organization devoted to informing the public about policies thait will promote growth and efficient operation of the market economy. December 23, 2010 Advisory No. 272 FISCAL COMMISSION REPORT FALLS SHORT The National Commission on Fiscal Responsibility and Reform (Bowles-Simpson) has issued its deficit reduction plan. The good features are spoiled by some real clunkers. The tax changes are a mixed bag. The plan would end the alternative minimum tax (AMT) and trade some distorting exclusions and tax credits for lower individual tax rates. But it would keep credits that do not aid growth, such as the earned income credit (EIC) and child credit, and end some legitimate deductions needed to measure net income properly. The Commission is too light on spending restraint. It is right to note the need for entitlement reform, but it scarcely touches medical entitlements. The plan does well to reduce the corporate income tax rate and move to a territorial tax system. But it offsets the benefits by treating capital gains and dividends as ordinary income and, presumably, ending the 50% expensing provision for equipment. Some corporate heads may think this a good swap for a lower corporate tax rate, and class warriors think it harmless fun to raise taxes on shareholders. But the truth is, you can't love the corporation and hate the shareholders. As a simple reality check, look at the tax on an added dollar of corporate income. The corporate tax takes 35 cents, leaving 65 cents subject to the 15% tax on shareholders' dividends or capital gains. Shareholders net 55.25 cents after both taxes. With the manufacturer's credit, which the Commission would end, they net 57.93 cents. The Commission's preferred plan has top personal and corporate tax rates of 28%, which drop the net return for top bracket shareholders to 51.84 cents, a 6% or 10.5% drop in yield. Shareholders would need a lower, 23% personal rate to break even (under 20% for manufacturing). To avoid the tax hit on shareholders when raising new money, companies could increase leverage (like Bear Stearns and Lehman Brothers???) or sell out to foreigners (if enough step forward). Otherwise, they must issue new shares at prices depressed enough to compensate U.S. buyers for higher taxes on the earnings. That would raise the cost of new funds for investment. Digging deeper, we ran the plan through a large sample of tax returns at 2008 income levels covering all rate brackets and types of income. The Commission plan trims marginal tax rates on wages, interest, and non-corporate business income between 9% and 18%. But it raises marginal tax rates on capital gains by 90% and on dividends by 84%. The tax changes were then fed into a neoclassical economic model. At these rates, the pre-tax return needed to justify investment would fall slightly for non-corporate businesses, but rise greatly for C- corporations even with the corporate rate cut. Over all, required pre-tax returns would jump an average of 7.2%, reducing capital formation by $2.5 trillion. GDP would be depressed 2.8%, costing $70 billion in annual tax revenue compared to the Commission's target. Mission not accomplished. By contrast, keeping current capital gains and dividend rates and expensing, while adopting the tax 8~em k3. S I ee~ I ~6I

What Is HeinOnline?

HeinOnline is a subscription-based resource containing thousands of academic and legal journals from inception; complete coverage of government documents such as U.S. Statutes at Large, U.S. Code, Federal Register, Code of Federal Regulations, U.S. Reports, and much more. Documents are image-based, fully searchable PDFs with the authority of print combined with the accessibility of a user-friendly and powerful database. For more information, request a quote or trial for your organization below.



Contact us for annual subscription options:

Contact Us

Already a HeinOnline Subscriber?

Log In

profiles profiles most