Taxes Matter IX: U.S. Effective Corporate Tax Rate on Par with Uzbekistan

Kukeldash Madrassa, Tashkent
Creative Commons License photo credit: upyernoz

A distressing new study by well-respected Canadian tax economist–Duanjie Chen and Jack Mintz–for CATO found that the effective U.S. Corporate Tax was 34.6 percent in 2010 (pdf).  The U.S. corporate rate is the 4th highest among all OECD countries and on par with Uzbekistan (34.9 percent).  That’s what it says . . . Uzbekistan!

Also, I’m glad to see them recognize the destructiveness of state sales taxes:

State governments also play an important role in business tax policy. Unfortunately, the average state corporate tax rate has not been cut in at least three decades, despite major reductions around the world since then. Furthermore, state retail sales taxes impose substantial burdens on capital purchases, which undermines investment and productivity. Thus, sales taxes should be reformed to remove taxation on business inputs.

This may seem to be a minor point, but there is a clear movement among state-based policymakers that it is OK tax reform to raise sales taxes and cut other taxes.  I disagree and did so time and time again in the recent debate over reforming Maine’s tax system which included a cut in the income tax rate in exchange for a broader sales tax base.  I argued that the sales tax is a job-killer. (pdf)

While cutting the federal corporate income tax rate may seem like a distant dream because of high budget deficit, state can get in on the game by reducing their own corporate income tax rate and/or sales tax rate.  The benefits of doing so are very large.

A growing number of policymakers are recognizing that the U.S. corporate tax system is a major barrier to economic growth. The aim of corporate tax reforms should be to create a system that has a competitive rate and is neutral between different business activities. A sharp reduction to the federal corporate rate of 10 percentage points or more combined with tax base reforms would help generate higher growth and ultimately more jobs and income. Such reforms would likely lose the government little, if any, revenue over the long run.

Landlords Get Caught in 1099 Dragnet

In my previous blog post, “Prepare for 900% Increase in 1099 Workload,” I estimated that the expanded requirements for filing a 1099 (on everything over $600 in value) could increase tax compliance as high as the estimated increase in revenue of $17 billion.  So the economy would suffer a net loss of $34 billion ($17 billion in new tax revenue and $17 billion in higher tax compliance costs).

Now Commerce Clearing House is reporting that the 1099 dragnet is widening and up next are landlords:

Congress in 2010 expanded the information return reporting requirements contained in Code Sec. 6041. Generally, Code Sec. 6041 requires payments of $600 or more to a single recipient in the course of a trade or business to be reported by the payor to the IRS and the payee, usually on Form 1099-MISC. There are exceptions to the general reporting requirements but these exceptions begin to disappear in 2011.

One of these disappearing exceptions to the reporting requirements involves landlords. The Small Business Jobs Act of 2010 (2010 Jobs Act) (P.L. 111-240) amended the definition of trade or business to include renting real property. Before 2011, most landlords were not subject to the reporting requirements because renting real property was not considered to be a trade or business. Under the new version of Code Sec. 6041, real property rental is now considered a trade or business but only for purposes of the reporting requirements.

Of course, as with many government regulations, there will also be unintended consequences.  In this case, the 1099 requirements could make landlords vulnerable to identity theft:

Since landlords have not, until now, been “engaged in a trade or business,” the reporting requirements create a problem. According to the instructions for Form 1099, sole proprietors and others, like landlords, who are not otherwise required to have an employer identification number (EIN) should use their Social Security number (SSN) for reporting purposes. Moreover, the instructions state that the filer’s name and TIN should be consisted with the name and TIN used on the filer’s other returns. This opens up the opportunity for identity theft.

So I wonder whose going to be scooped up next in the  1099 dragnet as more of these exceptions disappear?

A Marginal Income Tax Rate of 288 Percent?

Michael E. Newton, author of book and blog “The Path to Tyranny,” (what an excellent name) has reported on a disturbing court ruling in New York that could open the door to taxation of people’s income who don’t live or work in the state.

I want to focus on this line:

Under the ruling, if an owner doesn’t spend a single a day in a home it could still count toward a permanent residence.

If every state applied this ruling and federal court does not overturn it, a person could in theory own housing property in every single state and thus owe income tax in every single state and the District of Columbia. By my rough calculation using the top marginal federal income tax rate of 35% and the sum of all the top marginal state income tax rates, a person could theoretically be taxed at a rate of 288%. (Yes, I recognize it is absurd for somebody to have property in all 50 states and DC, but the whole notion of paying income taxes in every state you own property is equally absurd.)


Yet, this is the logical extension of the mentality behind the so-called “Jock Tax” where players are taxed based on the number of games played within a state.  Even if the player doesn’t play, i.e., work, they still have to pay the Jock Tax.  So if simple presence is enough to trigger tax nexus (who taxes what)–any business trip could trigger nexus even if you’re just a prop.  In fact, New Jersey has already extended the Jock Tax to out-of-state lawyers.  Taken a few steps further, they are now saying that a house is like having presence in the state full-time.

Also I wonder what New York is going to do about all the tax treaties it has signed with other states governing tax nexus?  What will happen is what happened with the Jock Tax . . . California first imposed it and then Illinois imposed theirs in retaliation and then other states jumped in the fray.  I think most states, and some cities, with a professional team in the big four (NFL, NBA, NHL and MLB) now have a Jock Tax.  Retaliation is what could make Michael’s doomsday scenario a reality.

The Feds should have put a stop to the Jock tax along time ago . . . now one bad tax idea is snow-balling into another bad tax idea.

Wall Street Journal Chimes in Against the Estate Tax

A recent lead editorial in the Wall Street Journal chimes in against the estate tax. More importantly, at least from my perspective, they cited my recent Rhode Island migration study in their editorial.  Here is what they had to say:

New research indicates that high state death taxes may be financially self-defeating. A 2011 study by the Ocean State Policy Research Institute, a think tank in Rhode Island, examined Census Bureau migration data and discovered that “from 1995 to 2007 Rhode Island collected $341.3 million from the estate tax while it lost $540 million in other taxes due to out-migration.”

Not all of those people left because of taxes, but the study found evidence that “the most significant driver of out-migration is the estate tax.” After Florida eliminated its estate tax in 2004, there was a significant acceleration of exiles from Rhode Island to Florida . . .

Proponents argue that the death tax has minimal incentive effects because people can’t change their behavior after they die. But every day people make decisions to minimize their tax bills before they die. In other words, estate taxes don’t redistribute income among taxpayers. They redistribute income among states.

Unfortunately, the federal estate comes back in 2012 including the state “pick-up” tax which creates a huge financial incentive for states to adopt their own estate tax.  If we return to a pre-2001 estate tax world, then this new found tax competition between the states will end.  Even if the federal estate tax comes back, federal lawmakers should make sure that the “pick-up” tax never comes back–the federal government should not be in the business of encouraging states to have certain types of taxes.  The U.S. is a federal system . . . or at least use to be.

In the meantime, if you live in one of these states and possess significant assets . . . you may want to get out.

States of Confiscation

The Coming Food Tax

Excise taxes violate the most basic principle of taxation–low rate, broad base–since they are purposefully levied on a narrow base and generally with the highest rate possible.  Why?  Generally to “discourage” the activity being taxed.

Take cigarettes for example.  The base is defined as one product and the tax rate, especially over the last decade or so, keeps going up, up and up i the name of “reducing smoking.”  Unfortunately, violating the principles of taxation carry a heavy price.  In the case of cigarettes it can lead to cigarette smuggling and cross-border shopping.

Now, apparently, they want to tax your food . . . I wonder what kind of unintended consequences will come of this?

Hat Tip to International Liberty