International Corporate Tax Rate Comparisons and Policy Implications

[Excerpt] This report focuses on the global issues relating to tax rate differentials between the United States and other countries. It provides tax rate comparisons; discusses policy implications, including the effect of a corporate rate cut on revenue, output, and national welfare; and discusses the outlook for and consequences of a revenue neutral corporate tax reform

Tax Havens: International Tax Avoidance and Evasion

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. The taxation of passive income (called Subpart F income) has been reduced, perhaps significantly, through the use of hybrid entities that are treated differently in different jurisdictions. The use of hybrid entities was greatly expanded by a new regulation (termed check-the-box) introduced in the late 1990s that had unintended consequences for foreign firms. In addition, earnings from income that is taxed often can be shielded by foreign tax credits on other income. On average, very little tax is paid on the foreign source income of U.S. firms. Ample evidence of a significant amount of profit shifting exists, but the revenue cost estimates vary substantially. Evidence also indicates a significant increase in corporate profit shifting over the past several years. Recent estimates suggest losses that may approach, or even exceed, $100 billion per year. Individuals can evade taxes on passive income, such as interest, dividends, and capital gains, by not reporting income earned abroad. In addition, because interest paid to foreign recipients is not taxed, individuals can evade taxes on U.S. source income by setting up shell corporations and trusts in foreign haven countries to channel funds into foreign jurisdictions. There is no general third-party reporting of income as is the case for ordinary passive income earned domestically; the Internal Revenue Service (IRS) relies on qualified intermediaries (QIs). In the past, these institutions certified nationality without revealing the beneficial owners. Estimates of the cost of individual evasion have ranged from$40 billion to $70 billion. The Foreign Account Tax Compliance Act (FATCA; included in the HIRE Act, P.L. 111-147) introduced required information reporting by foreign financial intermediaries and withholding of tax if information is not provided. These provisions became effective only recently, and their consequences are not yet known. Most provisions to address profit shifting by multinational firms would involve changing the tax law: repealing or limiting deferral, limiting the ability of the foreign tax credit to offset income, addressing check-the-box, or even formula apportionment. President Obama’s proposals include a proposal to disallow overall deductions and foreign tax credits for deferred income, along with a number of other restrictions. Changes in the law or anti-abuse provisions have also been introduced in broader tax reform proposals. Provisions to address individual evasion include increased information reporting and provisions to increase enforcement, such as shifting the burden of proof to the taxpayer, increased penalties, and increased resources. Individual tax evasion is the main target of the HIRE Act, the proposed Stop Tax Haven Abuse Act, and some other proposals

Business Investment and Employment Tax Incentives to Stimulate the Economy

[Excerpt] According to the Business Cycle Dating Committee of the National Bureau of Economic Research (NBER), the U.S. economy has been in recession since December 2007. Congress passed and the President signed an economic stimulus package, the American Recovery and Reinvestment Act of 2009 (P.L. 111-5), in February 2009. The $787 billion package included$286 billion in tax cuts to help stimulate the economy. Among the tax reductions, many were tax incentives directed to business. The preliminary estimate of third quarter real gross domestic product (GDP) growth is 2.8%; the unemployment rate, a lagging indicator, averaged 9.6% in the third quarter and 10.0% in the fourth quarter of 2009. Federal Reserve Chairman Ben Bernanke expects the economy to continue growing at a modest pace, but predicts that bank lending will remain constrained and the job market will remain weak into at least 2010. To further assist unemployed workers, help business, and stimulate housing markets, Congress passed the Worker, Homeownership, and Business Assistance Act of 2009 (P.L. 111-92). The Obama Administration has advocated further business tax incentives to spur investment and employment, especially for small business. The two most common measures to provide business tax incentives for new investment are investment tax credits and accelerated deductions for depreciation. The evidence, however, suggests that a business tax subsidy may not necessarily be the best choice for fiscal stimulus, largely because of the uncertainty of its success in stimulating aggregate demand. If such subsidies are used, however, the most effective short-run policy is probably a temporary investment subsidy. Permanent investment subsidies may distort the allocation of investment in the long run. Employment and wage subsidies are designed to increase employment directly by reducing a firm’s wage bill. The tax system is a frequently used means for providing employment subsidies. Most of the business tax incentives for hiring currently under discussion are modeled partially on the New Jobs Tax Credit (NJTC) from 1977 and 1978. Evidence provided in various studies suggests that incremental tax credits have the potential of increasing employment, but in practice may not be as effective in increasing employment as desired. There are several reasons why this may be the case. First, jobs tax credits are often complex and many employers, especially small businesses, may not want to incur the necessary record-keeping costs. Second, since eligibility for the tax credit is determined when the firm files the annual tax return, firms do not know if they are eligible for the credit at the time hiring decisions are made. Third, many firms may not even be aware of the availability of the tax credit until it is time to file a tax return. Lastly, product demand appears to be the primary determinant of hiring

The Effect of Base-Broadening Measures on Labor Supply and Investment: Considerations for Tax Reform

[Excerpt] This report attempts to show how options to broaden the tax base by placing limitations on itemized deductions can potentially work against the expansionary effects of reducing marginal tax rates. After base-broadening tax reform taxpayers may face lower statutory marginal rates but some taxpayers—those who itemize—may have more of their income is subject to tax, effectively increasing their marginal tax rates. The report also addresses other common base-broadening provisions that increase the effective marginal tax rate on the return to capital

An Overview of the Nonprofit and Charitable Sector

[Excerpt] A number of policy issues have direct or indirect consequences for the nonprofit and charitable sector, including the establishment of a social innovation initiative, changes in the tax treatment of charitable donations, responses to the economic downturn, and health care reform. The nonprofit and charitable sector represents a significant portion of the U.S. economy. The sector is also highly diverse. Having a greater understanding of the nonprofit and charitable sector as a whole may help policymakers evaluate proposals that may impact the sector. The first section of this report provides a formal definition of the nonprofit and charitable sector. The term “nonprofit sector” is generally intended to refer to organizations with federal tax-exempt status; “charitable sector” refers to the subset of these organizations that have 501(c)(3) public charity status. The next section reports on the size and scope of the charitable sector. Charitable organizations are estimated to employ more than 7% of the U.S. workforce, while the broader nonprofit sector is estimated to employ 10% of the U.S. workforce. In 2009, the charities filing Form 990 with the Internal Revenue Service reported approximately $1.4 billion in revenue and reported holding nearly$2.6 billion in assets. Nonprofit institutions serving households (largely charities) constituted more than 5% of GDP in 2008. The third section of this report examines how charities are funded. Revenue comes from a variety of sources, including private contributions, payments (fees for service), government grants, and investment income. Revenue sources vary significantly across different types of charities: charities involved in health care (including nonprofit hospitals) and educational institutions rely heavily on private payments while arts, culture, and humanities charities and environment and animals charities are more reliant on private contributions. Private contributions to charities are of particular interest as charitable giving may respond to changes in the tax code. As the recent economic downturn has increased the demand for goods and services provided by a number of charities, the impact of the business cycle on funding is also discussed. The fourth section provides an overview of the charitable sector’s relationship with government. From a theoretical perspective, economics suggests that the government should subsidize activities that are either public goods or have positive external effects. It can be argued that some charitable activities possess these qualities. The costs to the government of providing grants, allowing charitable contributions to be tax deductible, exempting investment income of charities from tax, and providing property and sales tax exemptions are presented. The oversight role of the government is also reviewed. Finally, the report concludes with policy considerations. This section opens by surveying what policy options are considered most important by charitable organizations themselves. Building on this, a number of policy options are examined, including (1) increasing government grants and subsidies to charitable organizations; (2) creating an oversight agency within the federal government to gather data, conduct research, and advocate for the charitable sector; (3) implementing policies designed to help charities and foundations in economic downturns; (4) changing the itemized deduction for charitable contributions by limiting, converting to a credit, or making the deduction more widely available; and (5) a variety of other tax issues

Tax Rates and Economic Growth

[Excerpt] This report summarizes the evidence on the relationship between tax rates and economic growth, referring in a number of cases to more-detailed CRS reports. Potentially negative effects of tax rates on economic growth have been an issue in the debate about whether to increase taxes to address the budget deficit and whether to broaden the base and lower the rates with tax reform. After first distinguishing between short-run counter-cyclical considerations and long-run growth effects, the following section provides some historical data on tax rates and measures of factor supply and growth. This report then reviews the empirical evidence on the major contributors to growth. The final section concludes with a review of dynamic scoring issues

The Distributional Effects of Fundamental Tax Revisions

This Article addresses the distributional effects of new tax proposals, such as the flat tax and the USA tax. It explains how these proposals relate to each other, and then explores the combination of rate-flattening, base-broadening, and corporate tax integration contained in the flat tax proposal. The Article then proceeds to look at the consequences of the shift to a consumption base. The author concludes with adjustment costs, behavioral responses, and transition relief

The Incidence and Efficiency Costs of Corporate Taxation when Corporate and Noncorporate Firms Produce the Same Good

This year marks the twenty-fifth anniversary of Arnold Harberger's celebrated model of the corporation income tax. While the model has been enormously useful as an analytical device for studying two sector economies, its usefulness for understanding the incidence and excess burden of the corporate income tax remains in question. One difficulty confronting all empirical analyses of the Harberger Model is how to treat noncorporate production in primarily corporate sectors and corporate production in primarily noncorporate sectors. The Harberger Model provides no real guide to this question since it assumes that one good is produced only by corporations and the other good is produced only by noncorporate firms. Stated differently, Harberger models the differential taxation of capital used in the production of different goods, rather than the taxation of capital used by corporations per se. This paper presents a two good model with corporate and noncorporate production of both goods. The incidence of the corporate tax in our Mutual Production Model (MPM) can differ markedly from that in the Harberger model. A hallmark of Harberger's corporate tax incidence formula is its dependence on differences across sectors in elasticities of substitution between capital and labor. In contrast, the incidence of the corporate tax in the MPM may fall 100 percent on capital regardless of sector differences in substitution elasticities. The difference between the two models in the deadweight loss from corporate taxation is also striking. Using the Harberger - Shoven data and assuming unitary substitution and demand elasticities, the deadweight loss is over ten times larger in the CES version of the MPM than in the Harberger Model. Part of the explanation for this difference is that in the Harberger Model only the difference in the average corporate tax in the two sectors is distortionary, while the entire tax is distortionary in the MPM. A second reason for the larger excess burden in the MPM is that the MPM has a very large, indeed infinite, substitution elasticity in demand between corporate and noncorporate goods; in contrast, applications of the Harberger Model assume this elasticity is quite small.