The poll is now closed.
Had you heard of the Anti Counterfeiting Trade Agreement (ACTA) before today?
No surprise here; the agreement is not well known. But as I argued in the related post, this treaty, if it withstands constitutional challenge, will increase the cost of medications in many countries by taking away the ability of government health agencies to negotiate with drug companies for lower prices.
Tuesday, November 1, 2011
As I argued yesterday, when taxes are reduced for one group, government must raise taxes on someone else, run bigger deficits, or cut programs. Tax havens, jurisdictions with strong secrecy provisions and low or zero tax rates, are one way that rich individuals and corporations reduce their tax payments, both legally and illegally. A recent book by Ronen Palan, Richard Murphy, and Christian Chavagneux summarizes the latest work on tax havens and contends that they form a central part of the global economy. Tax Havens: How Globalization Really Works presents data that 30% of multinational corporations' foreign direct investment passes through tax havens like Bermuda, Ireland, or Luxembourg, overwhelmingly for tax purposes. Tax havens, then, are far more central to the global economy than we generally suppose.
How much does this cost average taxpayers? In a separate report, Murphy calculated that wealthy individuals have roughly $11.5 trillion in tax havens, which at a 7.5% rate of return would generate $860 billion in income each year. If, on average, these people faced a 30% marginal tax, that would come to $255 billion annually that the rich avoid in taxes. Needless to say, this is a best guess, since the value of these assets is not disclosed publicly. See his report for more details on how he generated those figures.
That's just individuals. The situation with corporations is murkier still. While corporations set up subsidiaries in tax havens for the obvious purpose of reducing their tax, Palan et al. say there is no solid estimate of the overall cost of these activities. The Government Accountability Office reported in 2008 that of the largest 100 U.S. companies, 86 had subsidiaries abroad, and 83 of these had subsidiaries in tax havens. Bank of America had 115 subsidiaries in tax havens, including 59 in the Cayman Islands. Citigroup had a whopping 427 tax haven subsidiaries, including 91 in Luxembourg and 90 in the Cayman Islands. Goldman Sachs only had 29, 15 in the Cayman Islands.
I mention the Cayman Islands because President Obama has long been a critic of tax havens, saying during the 2008 campaign of Ugland House in the Cayman Islands, "Either this is the largest building in the world or the largest tax scam in the world. And I think the American people know which it is." Palan et al. report that the Caymans are the sixth largest financial center in the world, with $1.9 trillion in assets in December 2007. However, since taking office, the President has not succeeded in passing a version of the Stop Tax Haven Abuse Act, which in its original form he co-sponsored with Carl Levin, Norm Coleman, Ken Salazar and Sheldon Whitehouse.
Tax havens could not exist without the financial services industry, which provides the tax lawyers, accountants, and other professionals who make it possible for the rich and corporations to reduce their taxes. Collectively, they and their clients are the 1%. Occupy Wall Street has highlighted the abuses benefiting them, and tax havens are most definitely part of their pattern of abuse. Tax havens have proved amazingly resilient, however, and it will take sustained political pressure to shut them down.
Sunday, October 30, 2011
We've been hearing about Herman Cain's 9-9-9 Plan for a few weeks and now Governor Rick Perry has released his tax proposal, supposedly a 20% flat tax. We will undoubtedly hear more as the Presidential campaign kicks into higher gear. As a public service, I am providing a simple way to understand the impact of these tax plans.
Step 1: Assume revenue neutrality.
Don't laugh; Cain's “9-9-9 Scoring Report” claims to be revenue neutral and Perry says he will keep federal revenue at 18% of gross domestic product.
Step 2: Look at what income is no longer taxed.
For example, the 9-9-9 Plan “features zero tax on capital gains and repatriated profits,” eliminates the estate tax, and cuts the corporate income tax from 35% to 9%, while Rick Perry's tax plan eliminates taxes on capital gains, dividends, Social Security, estates, repatriated profits, and cuts the corporate income tax from 35% to 20%.
Step 3: Determine how much of that income you have.
If you're not rich, you've got very little of it, except Social Security in the Perry plan. If you're not retired, you'll get virtually no reductions under either plan.
Step 4: Ask what taxes have to be raised to get to revenue neutrality.
Step 5: Look in the mirror to see who pays them.
Comments: As I argued in Competing for Capital, if you cut one group's tax burden, one of three things has to happen to offset the reduction: someone else's tax burden increases, government runs higher deficits, or programs must be cut. If you maintain revenue neutrality, the first of these options is the only one possible, as flat tax pioneers Robert Hall and Alvin Rabushka admitted as far back as 1983: “It is an obvious mathematical law that lower taxes on the successful will have to be made up by higher taxes on average people” (h/t James Carville, We're Right, They're Wrong).
But in fact, Perry's proposal clearly is not revenue neutral. How could it be, when people have the option of filing under the current tax system or his new system? People who would pay more under the new plan would pay under the old plan and people who would save money under the new plan would pay under the new plan: this necessarily means less revenue. Rich people would save quite a bit of money, as Seth Hanlon at Think Progress has shown. Using published tax returns of famous people and the tax form on the Perry website, he shows that Warren Buffett's tax rate would fall from 11% to 0.2%, former Vice-President Cheney's rate would drop from 19.1% to 6.4%, President Obama would get a $60,000 tax cut, and Governor Perry's rate would fall from 18.6% to 15.8%.
Similarly, Cain's 9-9-9 Plan would raise far less than current taxes do, even as it increases taxes on the middle class and the poor. Michael Linden at Think Progress estimates that it would only bring in 14% of gross domestic product, well below the current low revenue that's giving us a $1 trillion deficit. In addition, many analysts think his corporate income tax is actually a value-added tax in disguise (h/t Michael Linden).
The bottom line is that if we cut taxes for the wealthy and corporations, it will impact the budget elsewhere, in some combination of tax increases on the middle class, program cuts, and deficit increases. Regardless of the spin surrounding these and other tax plans that may come down the pike, if a proposal reduces some taxes but doesn't reduce your taxes, you will lose out via these three methods of compensating for the lost revenue.