Tax Roundup, 5/7/14: How to keep from beating up the poor with high marginal rates? And: priorities!

May 7th, 2014 by Joe Kristan
The EITC as a poverty trap: phaseouts of the benefit impose stiff marginal tax rates on the working poor.

The EITC as a poverty trap: phaseouts of the benefit impose stiff marginal tax rates on the working poor.

Arnold Kling ponders solutions to the hidden high tax rates on the poor in SNEP Solution: Flexible Benefits and Extreme Catastrophic Health Insurance.  The problem arises because many welfare benefits phase out as income rises.  For example, the phase-out of the Earned Income Tax Credit means Iowans who qualify can face a combined federal and state tax rate of over 50% on additional income.  The problem is finding a way to means-test benefits without turning the inevitable reduction of benefits as income rises into a poverty trap.  Some Kling thoughts:

One approach would be to replace all forms of means-tested assistance, including food stamps, housing subsidies, Medicaid, and the EITC, with a single cash benefit. For this purpose, we might also think of unemployment insurance as a means-tested benefit.

The classic approach is the negative income tax. What I would suggest is a modification of the negative income tax, in which recipients are instead given flexdollars. These would be like vouchers or food stamps, in that they can be used only for “merit goods:” food, health care/insurance, housing, and education/training. One way to think of this is that it takes the food stamp concept and broadens it to include the other merit goods.

Flexdollars would start at a high level for households with no income and then fade out at rate of 20 percent of the recipient’s adjusted gross income. This “fade-out” would act as a marginal tax rate on income, so we should be careful not to set the fade-out rate too high.

This would give recipients some power over their benefits, and the ability to choose which ones are more important to them — like normal people do with their earnings.  Unused  flexdollars would go into a savings account, which “could be used for medical emergencies, down payments when buying a home, or to save for retirement.”  This would reduce the incentive for “use it or lose it” spending binges.

Implicit marginal ratesImplicit marginal ratesThis seems like a much more promising approach than the current system with its overlapping benefits and multiple phase-outs that sometimes result in effective marginal rates over 100% for the working poor.   Modifying the income tax to provide a standard deduction up to the amount at which the phase-outs end would complement this system, keeping the income tax from adding a layer of explicit marginal tax rates to the rate implicit in the phase out.

Mr. Kling is a brilliant and underappreciated thinker.  I’m re-reading his Unchecked and Unbalanced, which among other things ponders ways to move decision-making on government services to the household and neighborhood level.

 

O. Kay Henderson, About 91 percent of Iowans e-filed their state income taxes:

A dwindling number of Iowa taxpayers submit paper income tax returns to the State of Iowa. Victoria Daniels of the Iowa Department of Revenue has preliminary results for all but the last three days of the tax season, which ended April 30 for Iowa income taxpayers.

“E-filing is up about 4.1 percent and approximately 91 percent of Iowans, to date, have filed electronically,” Daniels says.

I’ve been a fan of e-filing, but the IRS is doing its best to change my mind.

 

 

20140507-1Paul Neiffer, Payments to Veterinarians Require 1099 (Even If Incorporated)!

Peter Reilly, IRS Cannot Levy Tribal Payments

TaxProf, The IRS Scandal, Day 363.  This Washington Post Op-ed linked in today’s scandal roundup gets it right: “The very idea that the administration would protect someone who is hiding behind the fifth when there is not only smoke, but there is actually a clear glow of flames, is insulting.”

Annette Nellen, Taxes and Deficits in the Highway Trust Fund.  “Certainly, if we have more electric cars on the road, which don’t generate anything for the HTF, but still use the roads, a funding mechanism tied only to gasoline purchases is outdated.”

Kay Bell, Home prices, construction outlook up. So are property tax bills

 

Alan Cole, US International Tax System is Fundamentally Unserious (Tax Policy Blog):

The United States is one of the last six remaining countries in the OECD – along with Chile, Ireland, Israel, South Korea, and Mexico – to use a “worldwide” system of corporate taxation. The other twenty-eight countries in the OECD use the much sounder territorial system.

A territorial tax system ends at its country’s borders. In contrast, the United States tries to levy taxes on profits earned in countries other than the United States. The tax system sees an auto assembly plant in Craiova, Romania, built using international funding, staffed by Romanian workers, building a vehicle – the Ford B-Max – that isn’t even sold in the United States – and says “Aha! This is economic activity the United States should be able to tax!”

While it may seem unserious, worldwide taxation is deadly serious to Americans abroad and to U.S. Green Card holders.  Serious, and sometimes catastrophically costly.

 

taxanalystslogoTax Analysts Blog is on an equality kick:

Martin Sullivan, Piketty, Zuckerberg, and a Plan to Tax Wealth That Conservatives Can Support.  “David Miller, a tax attorney at Cadwalader,Wickersham & Taft in New York, has proposed that the federal government tax stock gains of the wealthy whether or not those stocks are sold.”   So they get to deduct losses, too?

David Brunori, Tax Follies in Pursuit of Equality.  “The fact that rich people are rich bugs the heck out of folks on the left.” David points out the folly of a California tax scheme that would try to control CEO compensation by hitting CEOs with punitive California tax rates.  That would make sure no corporate headquarters stay in California.

Joseph Thorndike, Piketty Is Wrong: Americans Don’t Have a ‘Passion for Equality’.  This strikes me as correct.  Patrick Henry said “give me liberty or give me death,” not “Give me liberty or give me equality.”  That contrasts with the “Liberté, égalité, fraternité” of Picketty’s France.

Renu Zaretsky, Retirement, Driving, Greenhouse Gases and Tax Burdens.  The TaxVox tax headline roundup covers a disturbing increase in retirement plan early withdrawal penalties and the Missouri override of its governor’s tax cut veto.

 

Sadly, this may compare favorably with all adults.  According to This FINRA Foundation Quiz, 76% of Millennials Have Absolutely No Clue (Going Concern)

 

Priorities.  From the Milwaukee Journal Sentinel:

George W. Curtis, 77, of Pickett, who practices law in Oshkosh, was charged with willfullly failing to pay taxes he owed for 2007, 2008 and 2009, a period when his law practice generated profits of more than $1 million. Curtis has been designated a “Super Lawyer” several times and has practiced for more than 50 years.

77?  Some people just love the law.  Except maybe not the tax law:

Assistant U.S. Attorney Matthew Jacobs, the prosecutor, said Curtis testified that his income wasn’t steady, that he had to front many expenses, and that he had higher financial priorities at times than paying taxes. In fact, Curtis did file returns that showed his income, but just didn’t pay.

But the government argued Curtis could have paid. During the period he wasn’t, he was paying his wife’s children’s college tuitions and a wedding, a new Lincoln SUV and buying $17,000 on wine.

You need a nice SUV to transport high-class wine.  Have you ever tried to get your wine home in a tax payment?

 

 

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