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The High Burden of State and Federal Capital Gains Tax Rates in the United States

May 22, 2015 Comments off

The High Burden of State and Federal Capital Gains Tax Rates in the United States
Source: Tax Foundation

Key Findings

  • The average combined federal, state, and local top marginal tax rate on long-term capital gains in the United States is 28.6 percent – 6th highest in the OECD.
  • This is more than 10 percentage points higher than the simple average across industrialized nations of 18.4 percent, and 5 percentage points higher than the weighted average.
  • Nine industrialized countries exempt long-term capital gains from taxation.
  • California has the 3rd highest top marginal capital gains tax rate in the industrialized world at 33 percent.
  • The taxation of capital gains places a double-tax on corporate income, increases the cost of capital, and reduces investment in the economy.
  • The President’s FY 2016 budget would increase capital gains tax rates in the United States from 28.6 percent to 32.8, the 5th highest rate in the OECD.

CRS — Tax Havens: International Tax Avoidance and Evasion (1/15/15)

May 20, 2015 Comments off

Tax Havens: International Tax Avoidance and Evasion (PDF)
Source: Congressional Research Service (via Cornell University ILR School)

Addressing tax evasion and avoidance through use of tax havens has been the subject of a number of proposals in Congress and by the President. Actions by the Organization for Economic Cooperation and Development (OECD) and the G-20 industrialized nations also have addressed this issue. In the 111th Congress, the HIRE Act (P.L. 111-147) included several anti-evasion provisions, and P.L. 111-226 included foreign tax credit provisions directed at perceived abuses by U.S. multinationals. Numerous legislative proposals to address both individual tax evasion and corporate tax avoidance have been advanced.

Multinational firms can artificially shift profits from high-tax to low-tax jurisdictions using a variety of techniques, such as shifting debt to high-tax jurisdictions. Because tax on the income of foreign subsidiaries (except for certain passive income) is deferred until income is repatriated (paid to the U.S. parent as a dividend), this income can avoid current U.S. taxes, perhaps indefinitely.

Roundup of Recent CRS Reports About Taxation

May 18, 2015 Comments off

Competing for Jobs: Local Taxes and Incentives

May 15, 2015 Comments off

Competing for Jobs: Local Taxes and Incentives (PDF)
Source: Federal Reserve Bank of San Francisco

State and local governments frequently offer tax incentives to attract businesses to locate in their area. Proponents view these incentives as a valuable tool to encourage economic development. Critics, on the other hand, argue either that incentives have little effect on business location decisions—and hence are wasteful giveaways—or that their benefits come at the expense of reduced economic activity in other areas. A key element in this debate is distinguishing what is best from a local versus a national perspective.

Cost Sharing Arrangements and Income Shifting

May 8, 2015 Comments off

Cost Sharing Arrangements and Income Shifting
Source: Social Science Research Network

This study investigates the cost sharing arrangement (CSA), which is a mechanism used by multinational corporations (MNCs) to shift valuable intellectual property (IP) offshore to low-tax jurisdictions. We find that a CSA enables the MNC to shift income to low-tax foreign jurisdictions when the effect of domestic marketing intangibles on foreign income exceeds the effect of foreign marketing intangibles on domestic income. We also find that a CSA is less attractive if payments for the use of IP are not based on the fair market value of that IP. If the MNC can understate the value, it prefers to sell domestically developed IP to a foreign subsidiary, which in turn will develop the IP. If the tax authority can overstate the value by imposing retroactive revaluations of the IP, the MNC prefers to develop the IP domestically.

TIGTA — Billions of Dollars in Potentially Erroneous Education Credits Continue to Be Claimed for Ineligible Students and Institutions

May 5, 2015 Comments off

Billions of Dollars in Potentially Erroneous Education Credits Continue to Be Claimed for Ineligible Students and Institutions
Source: Treasury Inspector General for Tax Administration

An estimated 3.6 million taxpayers received more than $5.6 billion in potentially erroneous education credits on their 2012 tax returns, according to a report released today by the Treasury Inspector General for Tax Administration (TIGTA).

The Taxpayer Relief Act of 1997 created two permanent education tax credits, the Hope Credit and Lifetime Learning Credit. The American Recovery and Reinvestment Act of 2009 temporarily replaced the Hope Credit with a refundable tax credit known as the American Opportunity Tax Credit (AOTC). The AOTC was initially set to expire at the end of Calendar Year 2010 but has since been extended through Calendar Year 2017. These credits help taxpayers offset the costs of higher education.

Prior TIGTA audits have reported that taxpayers have claimed billions of dollars of erroneous education credits. TIGTA has made a number of recommendations to the IRS to help reduce the number of erroneous claims. This audit was initiated to assess the IRS’s efforts to improve the detection and prevention of questionable education credit claims.

“The IRS still does not have effective processes to identify erroneous claims for education credits,” said J. Russell George, Treasury Inspector General for Tax Administration. “Although the IRS has taken steps to address some of our recommendations, many of the deficiencies TIGTA previously identified still exist. As a result, taxpayers continue to receive billions of dollars in potentially erroneous education credits.”

Fiscal and Economic Aspects of Book Consumption in the European Union

May 4, 2015 Comments off

Fiscal and Economic Aspects of Book Consumption in the European Union (PDF)
Source: University of Southern Denmark

One of the available and yet underappreciated tools in cultural policy at the national level is the reduction of VAT rates for cultural goods and services. We document the standard and reduced VAT rates in EU-28 countries in the period from 1993 to 2013 and explore the underlying determinants. We further introduce a simple theoretical framework to explain how reduced fiscal rates are expected to decrease prices and increase quantities of the consumed cultural goods and services. We then estimate quantitatively that a decrease in the VAT rate for books by one percentage point is associated with an economically significant drop in the price by 2.6 percent. Finally, we show the positive effect of a fiscal rate reduction on the book expenditure of well-off households, where a one percentage point decrease in the VAT rate for books leads to an increase in expenditure by 2.7 percent.

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