tag:theconversation.com,2011:/us/topics/tax-policy-14929/articlestax policy – The Conversation2024-01-22T13:28:57Ztag:theconversation.com,2011:article/2213822024-01-22T13:28:57Z2024-01-22T13:28:57ZCongress is close to expanding the child tax credit again − with a smaller boost for families this time<figure><img src="https://images.theconversation.com/files/570367/original/file-20240119-25-35ut1k.jpg?ixlib=rb-1.1.0&rect=94%2C83%2C6903%2C4395&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">The costs of raising children can strain a household's budget.</span> <span class="attribution"><a class="source" href="https://www.gettyimages.com/detail/photo/mother-and-daughter-shopping-school-supplies-in-a-royalty-free-image/1585987057?adppopup=true">Phynart Studio/E+ via Getty Images</a></span></figcaption></figure><p><em><a href="https://www.axios.com/2024/01/16/child-tax-credit-reduce-poverty">Influential lawmakers have struck a deal</a> that could increase the extent to which low-income U.S. families can benefit from the child tax credit for three years. The Conversation asked <a href="https://fordschool.umich.edu/faculty/natasha-pilkauskas">Natasha Pilkauskas</a> and <a href="https://fordschool.umich.edu/faculty/katherine-michelmore">Katherine Michelmore</a>, public policy researchers at the University of Michigan, to explain what may change and why.</em></p>
<h2>Why does Congress want to expand the child tax credit?</h2>
<p>The child tax credit, <a href="https://www.ncsl.org/human-services/child-tax-credit-overview">first enacted in 1997</a>, was originally designed to help middle-class families with the costs of raising kids by giving them and upper-class families a tax credit of US$400 per child.</p>
<p>After several changes, this credit grew to as much as $2,000. Then the government temporarily expanded the credit in two main ways for the 2021 tax year. </p>
<p>Families could get up to $3,600 for each child, and nearly all low-income families could obtain it. In addition, half of this money was disbursed in monthly payments in the second half of 2021.</p>
<p>In 2022, the credit reverted to its previous terms, in accordance with the tax reform package that President Donald Trump <a href="https://www.taxpolicycenter.org/sites/default/files/briefing-book/what-is-the-child-tax-credit.pdf">signed into law in late 2017</a>.</p>
<p>The maximum credit is currently worth $2,000. Families must earn at least $2,500 to claim any credit, but their earnings must be higher to get the full credit. For example, a family with two children must earn at least about $40,000 to receive the full $4,000 in child tax credits. Families with three or more children have to earn even more to get the full benefits.</p>
<h2>What could change this time?</h2>
<p>A bipartisan group of House and Senate <a href="https://gop-waysandmeans.house.gov/wp-content/uploads/2024/01/The-Tax-Relief-for-American-Families-and-Workers-Act-of-2024-Technical-Summary.pdf">lawmakers agreed on Jan. 16, 2024</a>, to expand the credit again. If Congress <a href="https://www.nytimes.com/2024/01/16/us/politics/tax-deal-congress.html">passes the $33 billion measure</a> and President Joe Biden signs it into law, the credit would still be smaller than the 2021 version, and it would not be available to all low-income families.</p>
<p>The new proposal would adjust the earnings requirements. These changes would make it easier for many lower-income families – those earning roughly between $10,000 and $50,000 – to get the full credit. These families would get an <a href="https://www.vox.com/future-perfect/2024/1/16/24035922/child-tax-credit-wyden-smith-deal">average credit that is about $1,130 higher</a> than in 2022.</p>
<p>Families with higher incomes will also see larger benefits in future years if this expansion is passed, because the credit would be indexed to inflation to help families keep pace with rising expenses.</p>
<p>Unlike the 2021 expansion, which gave families monthly checks for six months, this credit would come only at tax time as a lump sum.</p>
<p>The Center on Budget and Policy Priorities <a href="https://www.cbpp.org/sites/default/files/1-16-24tax.pdf">projects that this policy would boost benefits</a> for 16 million kids. That’s more than <a href="https://www.childstats.gov/americaschildren/demo.asp">1 in 5 of the nation’s 72 million children</a>.</p>
<p>Families who would <a href="https://www.investopedia.com/financial-edge/0411/5-groups-that-dont-pay-taxes.aspx">not otherwise have to file their taxes</a> will need to do so to claim the child tax credit. In our own research, we found that almost 25% of lower-income families <a href="https://doi.org/10.1257/pandp.20231089">didn’t receive any of the monthly child tax credits</a>, perhaps because they didn’t file their taxes. </p>
<p>For parents who worked in 2023 and have kids younger than 17 who live with them, it may be worth filing taxes in 2024.</p>
<h2>What’s the rationale for this expansion?</h2>
<p>Raising children can be very expensive.</p>
<p>Consider a mother who is working year-round in a full-time, minimum-wage job who has two kids. Assuming she earns the <a href="https://www.usa.gov/minimum-wage">federal minimum wage of $7.25 an hour</a>, she would <a href="https://www.indeed.com/career-advice/pay-salary/how-much-does-a-minimum-wage-job-pay-a-year">earn just over $15,000 each year</a>. Once she pays her rent, food and utility bills, she likely has very little money left for other important expenses like child care or school fees.</p>
<p>For this woman, getting a bigger check at tax time could really help her make ends meet. This new plan would nearly double her child tax credit <a href="https://www.cbpp.org/sites/default/files/1-16-24tax.pdf">from about $1,875 to $3,600</a>.</p>
<p>There’s also widespread support to expand the child tax credit because the 2021 child tax credit lifted <a href="https://www.census.gov/library/stories/2022/09/record-drop-in-child-poverty.html">3 million children out of poverty</a>. </p>
<p>Many researchers, including us, have found that most <a href="https://doi.org/10.1257/pandp.20231089">families with low incomes</a> spent the 2021 credit on bills, <a href="https://doi.org/10.3386/w31339">rent</a>, <a href="https://doi.org/10.3386/w30533">food and clothing</a>.</p>
<p>We also determined that the expanded child tax credit made <a href="https://doi.org/10.1016/j.ssmph.2023.101420">parents less anxious and depressed</a>.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/570384/original/file-20240119-25-yp90kj.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="A group of children sit and stand in front of a banner that says 'hungry for the child tax credit.'" src="https://images.theconversation.com/files/570384/original/file-20240119-25-yp90kj.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/570384/original/file-20240119-25-yp90kj.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/570384/original/file-20240119-25-yp90kj.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/570384/original/file-20240119-25-yp90kj.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/570384/original/file-20240119-25-yp90kj.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/570384/original/file-20240119-25-yp90kj.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/570384/original/file-20240119-25-yp90kj.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<span class="caption">The children of advocates for changes to the child tax credit gathered in front of the White House in September 2022.</span>
<span class="attribution"><a class="source" href="https://www.gettyimages.com/detail/news-photo/parents-and-caregivers-with-the-economic-security-project-news-photo/1425648693?adppopup=true">Larry French/Getty Images for SKDK</a></span>
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<h2>Who wants this expansion to go into effect?</h2>
<p>In the past, bipartisan coalitions have voted to expand the child tax credit. Republicans and Democrats alike have proposed making it more generous over the years.</p>
<p>The current expansion also has bipartisan support, even though <a href="https://www.washingtonpost.com/business/2024/01/15/child-tax-credit-increase-2024/">progressive lawmakers would have preferred</a> a return to the 2021 version of the credit, which was larger, available to more low-income families and disbursed in monthly installments. </p>
<p>Some conservatives worry that bigger credits <a href="https://www.aei.org/center-on-opportunity-and-social-mobility/tax-extenders-package-would-cut-the-child-tax-credits-annual-work-requirement-in-half/">make people less likely to work</a>. There’s not much evidence to support that claim. </p>
<p>Instead, <a href="https://doi.org/10.1002/pam.22528">there’s ample evidence</a> that the <a href="https://www.nber.org/papers/w29823">2021 tax credit expansion</a> <a href="https://www.aeaweb.org/articles?id=10.1257/pandp.20231087">didn’t make parents less likely to earn money</a>.</p>
<p>And it’s important to remember that families will still have to work in order to receive any benefit from the child tax credit under this proposal.</p>
<h2>How long would the expansion last?</h2>
<p>To be clear, <a href="https://www.washingtonpost.com/business/2024/01/15/child-tax-credit-increase-2024/">there is no guarantee that Congress will approve</a> this measure. It’s part of a <a href="https://www.politico.com/news/2024/01/16/tax-chiefs-reach-deal-on-child-credit-business-breaks-00135631">larger array of tax changes</a> subject to other partisan battles.</p>
<p>Should Congress pass the tax package and Biden sign it by Jan. 29, American families would be able to claim this expanded credit in 2024 on their 2023 taxes.</p>
<p>Even so, this expansion would be short-lived. The current child tax credit <a href="https://www.taxpolicycenter.org/taxvox/evidence-suggests-expanding-child-tax-credit-could-ease-hardship-among-families-kids">is slated to become smaller after the 2025 tax year</a> unless Congress takes further action. It’s one of the many 2017 tax reforms that will expire in 2026.</p>
<p>After that point, the child tax credit will <a href="https://www.taxpolicycenter.org/briefing-book/what-child-tax-credit">decline to a maximum of $1,000</a> per child.</p><img src="https://counter.theconversation.com/content/221382/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Natasha Pilkauskas has received funding from the Charles and Lynn Schusterman Family Philanthropies and the Washington Center for Equitable Growth.</span></em></p><p class="fine-print"><em><span>Katherine Michelmore has received funding from the Washington Center for Equitable Growth</span></em></p>Republicans and Democrats have committed to making this family-friendly government benefit a little more generous. Unless lawmakers act, it will get much smaller in 2026.Natasha Pilkauskas, Associate Professor of Public Policy, University of MichiganKatherine Michelmore, Associate Professor of Public Policy, University of MichiganLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/2125292023-08-30T03:45:46Z2023-08-30T03:45:46ZTaxing questions: is National glossing over the likely cost of administering its new ‘revenue measures’?<p>The National Party’s newly released <a href="https://assets.nationbuilder.com/nationalparty/pages/17859/attachments/original/1693346887/Back_Pocket_Boost.pdf?1693346887">tax package</a> makes a clear and politically prudent play for the middle-income vote. Proposing to alleviate the financial pain of this “squeezed middle”, it may be key to determining who forms the next government.</p>
<p>The package attempts to provide some tax relief without fuelling inflation. To pay for the proposed tax cuts, the party would introduce new “revenue measures”. Just what these might cost to set up and administer may be a missing element of the picture.</p>
<p>National has announced four key initiatives as part of its tax plan, with implications for those on middle incomes, as well as those at the top and bottom of the income spread: </p>
<p>• shifting income tax brackets to compensate for inflation</p>
<p>• expanding tax credits to reach more modest income earners</p>
<p>• introducing the “<a href="https://www.national.org.nz/familyboost">FamilyBoost</a>” childcare tax credit (while ending Labour’s extension of 20 hours’ early childhood education for two-year-olds that was scheduled to start in July 2024)</p>
<p>• increasing Working for Families tax credits for working families (from July 2024).</p>
<p>Relief measures aimed at superannuitants include promising to increase NZ Super annually – although that <a href="https://www.workandincome.govt.nz/about-work-and-income/news/2023/1-april-payment-rate-changes.html">already happens under the current scheme</a> – and to keep the <a href="https://www.workandincome.govt.nz/products/a-z-benefits/winter-energy-payment.html">Winter Energy Payment</a>. </p>
<p>Environmental measures are a mixed bag. The <a href="https://www.transport.govt.nz/area-of-interest/environment-and-climate-change/clean-cars/">Clean Car Standard</a> or “ute tax” will be abolished, as will the <a href="https://at.govt.nz/projects-roadworks/regional-fuel-tax/">Auckland Regional Fuel Tax</a>. National has also promised not to increase fuel levies in its first term. </p>
<p>The party’s plans for the Emissions Trading Scheme are vague, but polluters will be expected to pay more for the damage they cause in the future. As the tax policy makes clear, short-term concerns about the cost of living trump longer-term considerations about climate change. </p>
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<h2>Revenue neutral means new taxes</h2>
<p>To ensure the package is revenue neutral, four new taxes will be introduced. If the policy is aimed at those who vote, then three of the new taxes are aimed at shifting the tax burden to those who cannot vote. </p>
<p>The Foreign Buyer Tax (FBT) will be levied at a flat rate of 15% on residential properties worth more than NZ$2 million bought by non-residents. </p>
<p>A second stream of revenue will come from a tax on offshore gambling. </p>
<p>And a third will be from cost recovery from immigrants to cover public spending on the immigration system. To be competitive, charges will not exceed 90% of corresponding Australian immigration charges.</p>
<p>The last seems to be least problematic, although questions might be raised about barriers to overseas student entry. </p>
<p>While there are overseas examples of the FBT, National could face logistical hurdles in introducing something similar here. The Vancouver FBT, for example, piggybacks on the state transfer tax (stamp duty) and so there is an existing administrative structure. </p>
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<p>It would be interesting to see whether a low-cost new tax can be introduced without existing infrastructure. </p>
<p>The casino tax seems most problematic. According to this new policy, a National government would establish a “regulatory regime” requiring foreign online betting operators to report their New Zealand income. This proposal seems fanciful. </p>
<p>It is also interesting to compare this initiative with the proposal to scrap Labour’s proposed extension of GST to providers of platform-based services, such as Airbnb. Both proposals are aimed at offshore services but Labour’s seems far easier to implement. </p>
<p>Generally, two of the new proposals appear to gloss over the massive IT costs that tend to accompany new taxes. Establishing a new bureaucracy to chase offshore companies also goes against the reduction of the public sector espoused by ACT, National’s likely partner. </p>
<p>The fourth proposal to scrap depreciation for commercial buildings, introduced during the COVID-19 pandemic, is the least National-like initiative. It seems to jar with the reinstatement of favourable tax treatment of rental properties. </p>
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<h2>Safeguarding the ‘un-squeezed top’</h2>
<p>If National’s package is aimed at helping the “squeezed middle”, it is likely to go some way to achieving that goal – and secure votes. What the package does not do is engage with the problem of tax-free wealth. </p>
<p>Just this week the International Monetary Fund once again <a href="https://www.rnz.co.nz/news/business/496786/new-zealand-economy-faces-year-or-more-of-tepid-growth-imf-report">urged New Zealand</a> to introduce a comprehensive capital gains tax. National’s package favours “the un-squeezed top” by reinstating tax deductions for rental properties, reducing the <a href="https://www.ird.govt.nz/property/buying-and-selling-residential-property/the-brightline-property-rule">brightline test</a> to two years, and leaving capital gains untaxed. </p>
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Read more:
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<p>And the bottom? National would increase Working for Families tax credits. But as the Child Poverty Action Group have <a href="https://www.cpag.org.nz/our-campaigns/fix-working-for-families">consistently observed,</a> the discrimination against the children of non-working welfare recipients is unjustified and unfair.</p>
<p>Moving the income tax thresholds and extending eligibility for the Independent Earner Tax Credit are welcome. But these will make little difference to the lowest income earners. </p>
<p>Take a single person with no children earning the minimum wage of $22.70 per hour, working 37.5 hours per week ($44,265 a year). They gain around $1.30 a fortnight from the extended Independent Earner Tax Credit, and around $4.30 a fortnight from the income tax threshold movement. </p>
<p>So, roughly $5.60 a fortnight – not enough for a café coffee, let alone that lower priced tank of petrol the National Party policy also promises. </p>
<p>Contrast this with a single person without children who earns $180,000 per year. This person benefits to a greater extent from the movement of the income tax thresholds and gains $40 per fortnight – roughly seven times the gain of someone on minimum wage. </p>
<p>Combined with policies like the removal of the Community Connect public transport subsidies (targeted at young and low-income people) and stopping Fair Pay Agreements, there isn’t a lot here for the least well off. But these are probably not the voters National is after.</p><img src="https://counter.theconversation.com/content/212529/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>The authors do not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The National Party’s tax package may be a middle-income vote winner, but it avoids the core problem of tax-free wealth. And how much the new system would cost to operate is far from clear.Jonathan Barrett, Associate Professor in Commercial Law and Taxation, Te Herenga Waka — Victoria University of WellingtonLisa Marriott, Professor of Taxation, Te Herenga Waka — Victoria University of WellingtonLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/2059282023-05-25T20:01:23Z2023-05-25T20:01:23ZElectricity prices are rising again. Here’s how to ensure renters can cash-in on rooftop solar<p>Consumers struggling with cost-of-living pressures were dealt another blow on Thursday, when the Australian Energy Regulator <a href="https://www.theguardian.com/australia-news/2023/may/25/power-bills-to-rise-by-up-to-a-quarter-in-parts-of-australia-after-regulator-issues-market-default-decision">confirmed</a> energy price hikes of up to 25% from July.</p>
<p>For the <a href="https://www.theguardian.com/environment/2023/feb/28/solar-already-australias-largest-source-of-electricity-as-rooftop-capacity-hits-20gw-consultancy-says">one in three Australian homes</a> with rooftop solar, the bill shock will be reduced – together with their carbon emissions. But households without solar, such as renters and social housing tenants, are missing out on the benefits. </p>
<p>In this month’s federal budget, A$1 billion was allocated to low-interest loans to homeowners for energy efficiency upgrades, solar panel installation and swapping out gas for electric appliances. Details are sketchy so far, but the government <a href="https://www.theguardian.com/commentisfree/2023/may/16/an-extra-13bn-to-upgrade-australias-energy-inefficient-homes-might-not-do-much-heres-what-would-help">says the package</a> “will focus on households that most need support”, including renters. </p>
<p>But do low-interest loans encourage landlords to install solar on rental homes? <a href="https://www.sciencedirect.com/science/article/pii/S0301421523000022">Our research</a> suggests in many cases, the answer is no. New measures are needed to make sure renters benefit from solar technology – both through lower bills, and more liveable homes.</p>
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<img alt="young woman and man look at papers and laptop" src="https://images.theconversation.com/files/528168/original/file-20230525-15-bzn1se.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/528168/original/file-20230525-15-bzn1se.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/528168/original/file-20230525-15-bzn1se.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/528168/original/file-20230525-15-bzn1se.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/528168/original/file-20230525-15-bzn1se.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/528168/original/file-20230525-15-bzn1se.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/528168/original/file-20230525-15-bzn1se.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
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<span class="caption">Renters without solar panels miss out on lower energy bills.</span>
<span class="attribution"><span class="source">Shutterstock</span></span>
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<h2>Solar haves and solar have-nots</h2>
<p>Rents in Australia are <a href="https://www.abs.gov.au/statistics/detailed-methodology-information/information-papers/new-insights-rental-market#:%7E:text=Median%20rents%20began%20increasing%20in,per%20week%20(Figure%203).">on the rise</a>. But as of 2017-2018, there was only a <a href="https://www.abs.gov.au/ausstats/abs@.nsf/mf/6553.0">3-4% chance</a> a rental property had solar panels on the roof. </p>
<p>The conventional view is that two main barriers exist to solar being installed on rentals. </p>
<p>The <a href="https://doi.org/10.1016/j.enpol.2017.11.069">first</a> is that property investors don’t want to pay for the technology when they aren’t directly reaping the benefits of lower bills and a more comfortable home temperature.</p>
<p>But this dynamic is an inherent part of the rental arrangement. And it ignores the fact that landlords routinely make other improvements to investment properties, such as kitchen upgrades, even though they’re not using the kitchen. Instead, landlords benefit by collecting higher rents. </p>
<p>The second perceived barrier is the upfront cost of installing solar. Until now, efforts to increase solar on rental properties have focused on reducing this cost through subsidies and low-interest finance. </p>
<p>But are upfront costs really preventing landlords from installing solar on rental properties? Our research set out to answer that question.</p>
<p>First, we surveyed 931 property investors with all types of buildings. This involved a ranking exercise where landlords selected the most and least important reasons for not yet putting solar panels on their rental home.</p>
<p>We then surveyed 147 owners of stand-alone rental homes. We asked them to choose between hypothetical policy options involving system costs, billing arrangements and interest-free loans. </p>
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<h2>Our findings</h2>
<p>Our research <a href="https://www.sciencedirect.com/science/article/pii/S0301421523000022">found</a> landlords are concerned about the upfront cost of solar. They ranked it as one of two top reasons why they hadn’t installed rooftop panels.</p>
<p>But when offered a choice of hypothetical policy options, <a href="https://www.sciencedirect.com/science/article/pii/S0301421523000022">about two-thirds</a> opted for upfront payment of solar systems rather than an interest-free loan. So for the majority of landlords, loans don’t seem to be the key tipping point.</p>
<p>And the other top reason landlords don’t install rooftop solar? Because they think renters aren’t willing to pay higher rent in exchange. </p>
<p>However, this perception runs counter to a <a href="https://www.tandfonline.com/doi/abs/10.1080/02673037.2021.2004094?journalCode=chos20">2021 study</a> that found Australian renters with solar panels pay about A$19 more in rent each week than non-solar renters. This meant landlords could recoup the cost of installation in about five years.</p>
<p>So for policymakers wanting to get more solar on rental homes, initiatives must go beyond low-interest loans.</p>
<p>Other <a href="https://c9cdneca.azureedge.net/media/3141/solar-for-renters-report-2022.pdf?rnd=132998139880000000">research</a> we’ve conducted found many landlords saw energy efficiency measures, such as electric heating, as extremely expensive – and, in the case of insulation, invisible and therefore not valued by renters. </p>
<p>Our research also examined barriers for apartment landlords when it comes to energy efficiency upgrades and installing solar panels. Many worried about issues such as body corporate approval, and physical and legal barriers.</p>
<p>This suggests policies to increase the energy efficiency of the rental housing stock must cater to different dwelling types.</p>
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Read more:
<a href="https://theconversation.com/check-your-mirrors-3-things-rooftop-solar-can-teach-us-about-australias-electric-car-rollout-162085">Check your mirrors: 3 things rooftop solar can teach us about Australia's electric car rollout</a>
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<h2>So what next?</h2>
<p>The federal government should be commended for spending on energy efficiency. But <a href="https://theconversation.com/we-need-a-lemon-law-to-make-all-the-homes-we-buy-and-rent-more-energy-efficient-204369">further actions are needed</a>.</p>
<p>One potential group that should receive more attention is the real estate industry. Property managers have relationships with both landlords and tenants, and deep knowledge of the rental market. </p>
<p>Resources could, for instance, be invested into teaching property managers about the benefits of rooftop solar and energy efficiency upgrades. Property managers could then include such features in home advertisements and talk about these benefits in discussions with landlords and prospective tenants.</p>
<p>Additional incentives could be provided to investors and property managers who, say, make a home less reliant on gas over time. This would mean as old appliances fail, they’re replaced with efficient electric versions – for hot water, heating and cooking. </p>
<p>What’s more, information about a property’s energy-efficiency performance should be made available to all prospective renters. </p>
<p><a href="https://theconversation.com/we-need-a-lemon-law-to-make-all-the-homes-we-buy-and-rent-more-energy-efficient-204369">The ACT government</a> has made steps towards this. <a href="https://www.justice.act.gov.au/renting-and-occupancy-laws/energy-efficiency-standards-for-rental-homes">It requires</a> a home’s energy efficiency rating be disclosed to prospective buyers at the time of sale, and be disclosed to renters when a rating is available. </p>
<p>This should occur nationally, and be expanded to include the amount of energy generated by solar panels on a property, and the amount of money to be saved on energy bills.</p>
<p>Lastly, tax breaks for property investing, such as negative gearing, should be conditional on rental properties meeting minimum energy efficiency standards. </p>
<p>It’s good to see rental properties on the federal government’s agenda. But our research shows improving Australia’s rental stock requires far more than low-cost financing.</p><img src="https://counter.theconversation.com/content/205928/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Bjorn Sturmberg received funding from Energy Consumers Australia for the research on solar for rental properties discussed in this piece (grant number APAPR21003. The views expressed in this document do not necessarily reflect the views of Energy Consumers Australia). He was previously the founder and CEO of SunTenants, a company making solar work for rental properties. SunTenants was aquired by Solar Analytics in 2019. Bjorn Sturmberg remains a shareholder in Solar Analytics.</span></em></p><p class="fine-print"><em><span>Lee White received funding from Energy Consumers Australia (APAPR21003) for the research on solar for rental properties discussed in this piece. The views expressed in this document do not necessarily reflect the views of Energy Consumers Australia. </span></em></p><p class="fine-print"><em><span>Mara Hammerle received funding from Energy Consumers Australia for the research on solar for rental properties discussed in this piece. She currently works at the Centre for Policy Development. </span></em></p>Landlords don’t think renters will pay more for homes with rooftop solar. But the evidence suggests otherwise.Bjorn Sturmberg, Senior Research Fellow, Battery Storage & Grid Integration Program, Australian National UniversityLee White, Fellow, Australian National UniversityMara Hammerle, PhD candidate, Australian National UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/2036162023-04-13T12:24:02Z2023-04-13T12:24:02ZAmericans spend more time and money filing their taxes than residents of other countries — but there are some benefits to a complex tax code<figure><img src="https://images.theconversation.com/files/520568/original/file-20230412-22-xymmgt.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">The average U.S. taxpayer spends 13 hours filing their return.</span> <span class="attribution"><a class="source" href="https://www.gettyimages.com/detail/photo/forms-royalty-free-image/109504675">Mehmed Zelkovic/Moment Collection/Getty Images</a></span></figcaption></figure><p>Tax Day falls on April 18 in 2023. But if you’re one of the <a href="https://www.irs.gov/pub/irs-utl/filing-season-statistics-2009-to-current-year.csv">20%-25% of Americans</a> who wait until the last minute to file, don’t panic – you still have time.</p>
<p>The IRS estimates that the average taxpayer spends <a href="https://www.irs.gov/pub/irs-pdf/i1040gi.pdf">13 hours</a> to complete their return. If you own a business, the estimate increases to <a href="https://www.irs.gov/pub/irs-pdf/i1040gi.pdf">25 hours</a>. That said, filing can be tricky.</p>
<p>As <a href="https://scholar.google.com/citations?user=9MFrZwUAAAAJ&hl=en">accounting</a> <a href="https://scholar.google.com/citations?user=kR0qeI4AAAAJ&hl=en&oi=ao">professors</a> and hosts of the podcast “<a href="https://www.taxes-for-the-masses.com">Taxes for the Masses</a>,” we know the U.S. tax system is more complex than many other countries. That complexity, however, has benefits as well as drawbacks.</p>
<h2>Simpler tax systems abroad</h2>
<p>Although the U.S. income tax system asks individuals to devote their time to complete a tax return each year – or pay someone to do it for you – dozens of countries have found another way. </p>
<p>Some nations, <a href="https://www.taxpolicycenter.org/briefing-book/what-other-countries-use-return-free-filing">such as the U.K.</a>, offer return-free systems where taxpayers have the exact correct amount of income tax withheld from their earnings during the year. </p>
<p>Other countries, <a href="https://www.oecd.org/tax/administration/36280368.pdf">such as Denmark and Spain</a>, offer tax reconciliation systems whereby the tax authority fills out the return for the taxpayer using information from third parties, such as employers and banks, with knowledge of your financial goings-on. All the taxpayer must do is review the form and submit any corrections. These systems shift the costs of determining one’s tax bill – currently estimated to be over <a href="https://www.gsa.gov/cdnstatic/54121D%20Tax%20Preparation%20Services%20in%20the%20US%20Industry%20Report.pdf">US$11 billion</a> a year in the U.S. – <a href="https://www.jstor.org/stable/40913156">from taxpayers to the government</a>. </p>
<p>The goal of return-free and tax reconciliation systems is to withhold the exact right amount of tax during the year so there’s no need to true up these amounts to the actual tax liability. So why can’t the U.S. do something similar? Well, exact withholding is easiest to do when the tax code is simple. And the U.S. tax code is not simple.</p>
<p>In fact, when the Treasury Department reported to Congress in 2003 on the feasibility of a return-free system in the U.S., the report was titled <a href="https://home.treasury.gov/system/files/131/Report-Return-Free-2003.pdf">Tax Simplification is a Prerequisite</a>.</p>
<h2>What makes the US system so complex?</h2>
<p>A simpler system taxes each individual separately. The U.S., however, taxes single individuals and married couples differently. This approach makes it difficult to withhold the right amount of tax because the applicable tax rate depends on more than just your income. It includes, for example, that of your spouse, which your bank or employer may not know.</p>
<p>A simpler system would also have flat or fewer tax rates. Instead, the U.S. has numerous tax brackets, with the goal of ensuring that higher earners pay higher rates of income tax. Although progressive rate structures like this <a href="https://us.aicpa.org/content/dam/aicpa/advocacy/tax/downloadabledocuments/tax-policy-concept-statement-no-1-global.pdf">are aimed at fairness</a>, in that those who can afford to pay more do pay more, this type of tax system adds complexity. </p>
<p>Other countries retain progressive systems with fewer tax brackets. For example, the U.K. currently has <a href="https://www.gov.uk/income-tax-rates">four tax brackets</a>, compared with <a href="https://www.irs.gov/newsroom/irs-provides-tax-inflation-adjustments-for-tax-year-2022">seven in the U.S</a>.</p>
<p>The U.S. also has different rates for ordinary income such as wages versus income such as dividends and capital gains, which are typically taxed at lower rates – in part to spur investment and also because investment income has arguably already been taxed. But the U.S. system adds complexity because capital gains on investments held for less than a year and some dividends are not taxed at preferential rates. These different rates – from different levels and types of income – reduce the chances of getting withholding right. </p>
<p>The U.S. system also adds complexity with the <a href="https://www.irs.gov/credits-deductions-for-individuals">sheer number of deductions and credits</a> available to taxpayers. Deductions reduce the amount of taxable income you have, thereby reducing your tax liability. Say a single individual has $80,000 of wage income and $15,000 of deductions. Their taxable income is $65,000. At 2022 rates, their tax liability is $9,617. Those $15,000 of deductions saved them $3,300 in taxes. </p>
<p>Fortunately, there are a lot deductions. Unfortunately, taxpayers often have to jump through hoops to qualify. You can deduct <a href="https://www.irs.gov/taxtopics/tc419">gambling losses</a> but only if you have gambling winnings, <a href="https://www.irs.gov/taxtopics/tc503">state income taxes</a> but only up to $10,000 each year, and <a href="https://www.irs.gov/taxtopics/tc456">student loan interest</a> but only if you make less than $85,000 or $175,000, depending on your marital status. </p>
<p>Further, these deductions come in different flavors: “above-the-line” deductions and “below-the-line” deductions, which themselves come in two flavors – itemized and standard. Taxpayers itemize deductions only if those amounts exceed the standard deduction. That means you might spend several hours tallying receipts for <a href="https://theconversation.com/whats-the-charitable-deduction-an-economist-explains-162647">itemized charitable donations</a> only to find you can’t deduct any of them because the total is less than your standard deduction. </p>
<p>Credits are another valuable element of the tax system because they reduce your tax liability dollar for dollar. Let’s go back to our single taxpayer with $65,000 in taxable income and a $9,617 tax liability before credits. A $1,000 credit – say for higher education or renewable energy – reduces their tax liability to $8,617. But credits also add complexity because they can be reduced as your income increases, and they can have extensive eligibility requirements.</p>
<h2>Benefits of a complex system</h2>
<p>One benefit of all this complexity is that it gives the tax system flexibility to provide economic stimulus and other responses to current events, like a global pandemic. For example, Congress allowed taxpayers to receive <a href="https://theconversation.com/a-300-charitable-deduction-explained-138247">guaranteed tax benefits</a> for some <a href="https://taxfoundation.org/charitable-deduction-tax-incentives/">charitable contributions</a> made during the pandemic as above-the-line deductions, instead of the usual requirement that taxpayers first determine whether they could itemize the charitable contribution as a below-the-line deduction. </p>
<p>Even if the U.S. could drastically simplify its tax system, a return-free or tax reconciliation system comes with its own problems. Transitioning would require a significant investment in IRS resources, and although in 2022 Congress passed an <a href="https://www.cbo.gov/publication/57444">$80 billion boost to IRS funding</a> over the next 10 years, much of this amount is needed to shore up the current system. </p>
<p>And estimates suggest that, at best, a return-free or tax reconciliation system in the U.S. would work for only <a href="https://www.taxpolicycenter.org/briefing-book/what-are-benefits-return-free-filing">62 million taxpayers</a>, meaning the majority of U.S. taxpayers would still have to complete a tax return because the withholding or pre-populated return wouldn’t be right. </p>
<p>Meanwhile, a simpler tax system potentially makes it more difficult for Congress to use tax policy to stimulate the economy or encourage certain desirable behaviors, such as investing in <a href="https://www.epa.gov/green-power-markets/inflation-reduction-act">renewable energy</a>. </p>
<p>Finally, exact withholding, when it works correctly, takes away the sizable refunds <a href="https://www.researchgate.net/publication/228272373_An_Investigation_of_Why_Taxpayers_Prefer_Refunds_A_Theory_of_Planned_Behavior_Approach">some Americans enjoy</a>. </p>
<p>In the end, no tax system is perfect. The U.S. must decide whether the complexity of its tax system is worth the time and the <a href="https://www.irs.gov/pub/irs-pdf/i1040gi.pdf">average $250 cost</a> taxpayers spend on filing their own returns instead of spending that on more pleasant activities.</p><img src="https://counter.theconversation.com/content/203616/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>The authors do not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The co-hosts of the ‘Taxes for the Masses’ podcast explain the upside and downside of all those credits and deductions.Bridget Stomberg, Associate Professor of Accounting, Indiana UniversityLisa De Simone, Associate Professor of Accounting, The University of Texas at AustinLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1873342022-08-26T12:18:59Z2022-08-26T12:18:59ZChild poverty fell to a record-low 5.2% in 2021 – here’s how it could have been even lower<figure><img src="https://images.theconversation.com/files/479412/original/file-20220816-21-c98s5a.jpg?ixlib=rb-1.1.0&rect=422%2C100%2C6287%2C3671&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Government benefits can reduce child poverty.</span> <span class="attribution"><a class="source" href="https://www.gettyimages.com/detail/photo/mother-and-daughters-with-their-backs-turned-go-royalty-free-image/1337955441">DBenitostock/Moment via Getty Images</a>, <a class="license" href="http://creativecommons.org/licenses/by-nc-nd/4.0/">CC BY-NC-ND</a></span></figcaption></figure><p>The U.S. government’s most accurate measure of <a href="https://www.census.gov/library/publications/2022/demo/p60-277.html">child poverty fell to 5.2%</a> in 2021, the lowest level on record and a decline of 4.5 percentage points from a year earlier. This sharp reduction was due, in large part, to <a href="https://www.npr.org/2022/01/27/1075299510/the-expanded-child-tax-credit-briefly-slashed-child-poverty-heres-what-else-it-d">generous government benefits</a>. Our research suggests that although policies reduced child poverty by nearly half in 2021, the decline would have been even larger had the government made it easier for families to receive those benefits.</p>
<p>One way the federal government responded to the economic upheaval that accompanied the COVID-19 pandemic was to boost the <a href="https://www.irs.gov/coronavirus-tax-relief-and-economic-impact-payments">money Americans got as benefits</a> - and to distribute those benefits to people who didn’t previously get them. </p>
<p>Starting in the spring of 2020, for example, most Americans received a series of <a href="https://home.treasury.gov/policy-issues/coronavirus/assistance-for-american-families-and-workers/economic-impact-payments">economic relief payments</a>. Those funds had already helped reduce child poverty to <a href="https://www.census.gov/library/publications/2021/demo/p60-275.html">9.7% in 2020 from 12.6% in 2019</a>, according to what’s known as the “<a href="https://www.census.gov/library/publications/2021/demo/p60-275.html">supplemental poverty measure</a>.”</p>
<p>The government data, released on Sept. 13, 2022, <a href="https://doi.org/10.1080/01603477.2022.2107017">confirms expectations</a> <a href="https://www.tandfonline.com/author/Pressman%2C+Steven">that</a> <a href="https://scholar.google.com/citations?user=zQIzkdYAAAAJ&hl=en&oi=ao">we</a> and <a href="https://www.urban.org/sites/default/files/publication/104603/2021-poverty-projections_0_0.pdf">other economists</a> had based on <a href="https://www.nber.org/papers/w30371">previous research</a> regarding the share of American children living in poverty in 2021. One key policy change brought about this decline: The government temporarily <a href="https://theconversation.com/millions-of-american-parents-will-soon-get-a-monthly-allowance-4-questions-answered-156834">expanded the child tax credit</a>, boosting the incomes of nearly all families with children.</p>
<p>We have determined, however, that child poverty would have plunged much more had the government done a better job ensuring that all who qualified got the credit.</p>
<h2>Child tax credit</h2>
<p>Unlike the <a href="https://www.census.gov/topics/income-poverty/poverty/about/history-of-the-poverty-measure.html">official poverty rate</a>, the supplemental poverty measure accounts for government benefits, such as the <a href="https://theconversation.com/snap-benefits-are-rising-for-millions-of-americans-thanks-to-a-long-overdue-thrifty-food-plan-update-167876">Supplemental Nutritional Assistance Program</a>, or SNAP. </p>
<p>The supplemental poverty measure has been consistently lower for children than the official poverty rate since its launch in 2011.</p>
<p>One reason for this is the <a href="https://www.childtaxcredit.gov/">child tax credit</a>. It began in 1998, with a maximum possible credit of $400 per child. The amount families could get was <a href="https://crsreports.congress.gov/search/#/?termsToSearch=the%20child%20tax%20credit&orderBy=Relevance">limited by the income taxes they owed</a>. Since low-income families either don’t pay any income taxes or owe very little, this did them little good. Subsequent reform measures increased both the amount of the credit and made some of this benefit available to families that paid no income tax.</p>
<p>A large federal spending package enacted in 2021 increased the credit further and made it available to all but the wealthiest families with children. Between July 2021 and June 2022, most received up to <a href="https://www.nytimes.com/2021/05/17/us/politics/child-tax-credit-payments.html">$3,600 for each child under 6 and as much as $3,000</a> for kids between the ages of 6 and 17. The Internal Revenue Service distributed half this money in monthly payments between July and December 2021, and the rest at tax time in 2022.</p>
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<h2>3 million fewer children in poverty</h2>
<p><a href="https://www.urban.org/research/publication/how-permanent-expansion-child-tax-credit-could-affect-poverty">Many economists</a> <a href="https://www.jainfamilyinstitute.org/assets/full-refundability-of-child-tax-credit-without-expansion.pdf">predicted</a> that this <a href="https://www.cbpp.org/research/federal-tax/temporarily-expanding-child-tax-credit-and-earned-income-tax-credit-would">benefit would help millions</a> of children escape poverty. </p>
<p>And, according to the Census, <a href="https://www.census.gov/content/dam/Census/library/publications/2022/demo/p60-277.pdf">2.9 million fewer U.S. children</a> were living in poverty because of the child tax credit, including its temporary expansion. This policy reduced child poverty by 4 percentage points.</p>
<p>But we estimate that the child poverty rate could have fallen even further had the government ensured that more eligible families received the expanded child tax credit last year.</p>
<p>As we explained in the <a href="https://doi.org/10.1080/01603477.2022.2107017">Journal of Post Keynesian Economics</a>, an academic publication, we reviewed detailed 2019 data to estimate what would have happened to child poverty that year had all eligible families received the 2021 tax credit expansion. </p>
<p>We estimated a supplemental child poverty rate of around 5.2%, in line with what actually happened. But our modeling was based on a few assumptions, such as that the expansion would last for a full year and that there would be no other pandemic-related benefits. These two factors came close to balancing each other out, leading to an estimate of child poverty that was close to what was reported.</p>
<p>Based on our calculations, we believe that the supplemental child poverty rate could have declined 2.2 percentage points more in 2021 than what the Census found had every eligible family gotten the child tax credit. This would have lifted another 1.6 million children from poverty.</p>
<p>Many low-income families <a href="https://taxfoundation.org/us-households-paying-no-income-tax/">didn’t file a tax return</a> in 2019 or 2020, because they didn’t owe federal income taxes. To get monthly child tax credits from the IRS, these families <a href="https://www.irs.gov/credits-deductions/advance-child-tax-credit-payments-in-2021">needed to file a return</a>.</p>
<p>Alternatively, families could log in to the IRS website and apply for the child tax credit. That was hard to do for many low-income people who <a href="https://aspe.hhs.gov/sites/default/files/private/pdf/263601/internet-access-among-low-income-2019.pdf">lacked internet access</a>.</p>
<h2>Lack of awareness</h2>
<p>Surveys by a research team at <a href="https://socialpolicyinstitute.wustl.edu/employment-financial-wellbeing-effects-2021-ctc-report/">Washington University in St. Louis</a> support our theory. It found that 29% of low- and moderate-income Americans knew little or nothing about the child tax credit expansion – or even that they were eligible to receive it.</p>
<p>Specifically, 78% of those surveyed who did not file a 2020 tax return didn’t know much about the credit. Furthermore, some journalists found that the IRS website people must use to apply for benefits when they didn’t file a tax return was not user-friendly, and <a href="https://prospect.org/coronavirus/poor-arent-getting-help-democrats-want-to-give-them/">no Spanish version was available</a>.</p>
<p>These findings, together with the official <a href="https://www.census.gov/library/publications/2022/demo/p60-277.html">child poverty statistics for 2021</a>, show that expanding the child tax credit can greatly reduce child poverty. They also point to the need for increased outreach efforts to ensure that all low-income Americans can obtain the benefits for which they are eligible. </p>
<p>And now that the Census Bureau has released its 2021 poverty statistics, we expect that calls for this benefit to be restored on a permanent basis will spread.</p>
<p><em>This article was updated on Sept. 13, 2022, to reflect that the official Census Bureau’s child poverty data for 2021 had been released.</em></p><img src="https://counter.theconversation.com/content/187334/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>The authors do not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.</span></em></p>A tax credit expansion played a big role in child poverty reduction. But the government’s failure to reach all eligible Americans meant many families never got that temporary benefit.Steven Pressman, Part-Time Professor of Economics, The New SchoolRobert H. Scott III, Professor, Dept. of Economics, Finance & Real Estate, Monmouth UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1816292022-05-13T10:23:58Z2022-05-13T10:23:58ZThree imperial policies that still influence life in Britain today<figure><img src="https://images.theconversation.com/files/462746/original/file-20220512-18-fojzfz.jpg?ixlib=rb-1.1.0&rect=0%2C0%2C9485%2C7025&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><a class="source" href="https://commons.wikimedia.org/wiki/File:Imperial_Federation_Map_of_the_World.jpg">Dennis Sylvester Hurd / Wikimedia Commons</a></span></figcaption></figure><p>The revelation that Chancellor Rishi Sunak’s wife Akshata Murty <a href="https://theconversation.com/what-is-a-non-dom-an-expert-answers-our-questions-about-the-tax-status-claimed-by-rishi-sunaks-wife-and-other-wealthy-people-180928">claimed non-dom status</a> in the UK for years has drawn renewed attention to an imperialist policy that still holds today. Non-doms may live in the UK, but are considered by the tax authorities to be “non-domiciled” in the country and therefore pay no tax in the UK on their income earned elsewhere. </p>
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<p>The backlash to Murty’s non-dom status pointed out that the chancellor’s family benefited from tax loopholes as he raised taxes on the rest of the country. Some <a href="https://www.ft.com/content/81379a7a-5182-4845-b279-570b99406b5e">articles</a> highlighted the irony that Murty, an Indian citizen, was taking advantage of rules originally put in place to protect the money British imperialists were making in India. Non-dom status is one of several polices and provisions that have roots stretching back to the British Empire, not just in India.</p>
<p>At the end of the 18th century, Britain’s “sugar colonies” were still its most profitable imperial possessions. The 1799 income tax – Great Britain’s first such tax – exempted non-resident British subjects from paying tax on incomes derived from outside Great Britain. Thousands of British men and women owned agricultural estates (or portions of them) in the colonies, where enslaved men and women laboured to produce sugar, molasses, rum, indigo, coffee and cotton. The favourable tax treatment these individuals secured is testament to the power of the colonial lobbies in policymaking at the time. </p>
<p>The act’s <a href="https://babel.hathitrust.org/cgi/pt?id=uc1.31210007001348&view=1up&seq=97&skin=2021">non-dom exception</a> would have encompassed absentee plantation owners who could claim their time in Britain was only a sojourn, as well as all the thousands of British subjects abroad in the West Indies and South Asia. It helped keep plantation owners flush with the cash they needed to keep the wheels of the imperial economy turning, and provide the goods that would pay the customs and excise taxes to keep the government afloat.</p>
<p>Now, a new generation of international elites are using such relics of empire as non-dom status for their own gain. The difference is that today, people from all over the world can take advantage of the UK’s favourable tax system, while in the past Britons went out into the world to make their fortunes.</p>
<h2>Freeports and free trade</h2>
<p>Other imperial policies from the 18th century are also having a resurgence. The current plan to create eight <a href="https://www.gov.uk/guidance/freeports#where-are-they-located">freeports in England</a> resurrects a strategy deployed by the British government in 1766. Now that the UK has exited the EU, it has the ability to alter its trade policies. The freeports plan will allow for lower taxes, customs duties and other regulations in a defined geographical area, known as a special economic zone, around a port. The government hopes the bundle of favourable policies in a freeport will spur job growth and economic activity.</p>
<figure class="align-center ">
<img alt="Overhead view of Liverpool cityscape and waterfront at dusk." src="https://images.theconversation.com/files/462764/original/file-20220512-16-4ruzsy.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/462764/original/file-20220512-16-4ruzsy.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=189&fit=crop&dpr=1 600w, https://images.theconversation.com/files/462764/original/file-20220512-16-4ruzsy.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=189&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/462764/original/file-20220512-16-4ruzsy.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=189&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/462764/original/file-20220512-16-4ruzsy.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=237&fit=crop&dpr=1 754w, https://images.theconversation.com/files/462764/original/file-20220512-16-4ruzsy.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=237&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/462764/original/file-20220512-16-4ruzsy.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=237&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Liverpool, once the centre of global trade, will be a freeport under new plans.</span>
<span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/panorama-liverpool-waterfront-evening-1558086938">Alexey Fedorenko / Shutterstock</a></span>
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</figure>
<p>In the 18th century, the government aimed to accomplish similar goals through a loosening of trade restrictions. Then, it was the <a href="https://www.britannica.com/topic/mercantilism">mercantilist</a> system as established by the <a href="https://www.parliament.uk/about/living-heritage/transformingsociety/tradeindustry/importexport/overview/navigationlaws/">Navigation Acts</a> that most restricted trade. Those laws confined most British trade to British ships, imposed duties on foreign products, and banned British colonies from trading with the other European powers and their colonies. Merchants from New England, for example, could not legally sell food and lumber to the French and Spanish West Indian colonies as they could to the British ones. </p>
<p>The Free Port Act of 1766 marked a significant break in this restrictive trade system. It opened four Jamaican ports and two in Dominica to foreign traders, partially repealing the mercantilist policies that had organised British trade for a century. Trade between British and Spanish colonies subsequently boomed. <a href="https://deepblue.lib.umich.edu/bitstream/handle/2027.42/147718/ajrutled_1.pdf?sequence=1">Exports</a> of African captives and British textiles from Jamaican ports to Spanish American ones made up much of this enlarged trade.</p>
<h2>Any port in a storm</h2>
<p>Meanwhile, some longstanding policies have been consigned to history, unlikely to ever return, yet their effects continue to be felt. The 1703 Methuen treaty between England and Portugal is one example. As part of a diplomatic alliance forged during the war of Spanish succession, Portuguese wines enjoyed favourable customs treatment in England. The treaty helped solidify the famous wool for wine trade, which the economist <a href="https://eh.net/encyclopedia/david-ricardo/">David Ricardo</a> used to illustrate the power of comparative advantage. </p>
<figure class="align-center ">
<img alt="Two glasses of red wine on a table with a sunny landscape in the background. Someone is pouring from the bottle into one of the glasses." src="https://images.theconversation.com/files/462762/original/file-20220512-2142-q5v5ua.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/462762/original/file-20220512-2142-q5v5ua.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=374&fit=crop&dpr=1 600w, https://images.theconversation.com/files/462762/original/file-20220512-2142-q5v5ua.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=374&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/462762/original/file-20220512-2142-q5v5ua.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=374&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/462762/original/file-20220512-2142-q5v5ua.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=471&fit=crop&dpr=1 754w, https://images.theconversation.com/files/462762/original/file-20220512-2142-q5v5ua.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=471&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/462762/original/file-20220512-2142-q5v5ua.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=471&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">The British taste for port has its roots in imperial trade policy.</span>
<span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/pouring-fortified-dessert-ruby-tawny-port-1875862648">barmalini / Shutterstock</a></span>
</figcaption>
</figure>
<p>The British taste for <a href="https://www.google.co.uk/books/edition/The_Portugal_Trade/r9DNngEACAAJ?hl=en">port</a> and <a href="https://books.google.co.uk/books?id=8GVgPgAACAAJ&newbks=0&hl=en&redir_esc=y">Madeira</a> wines owed much to the price advantage Portuguese producers held over their rivals. Additionally, merchants in Oporto and Madeira – many of them British – adjusted their products to meet their customers’ taste, showing high levels of entrepreneurship and innovation. The Methuen treaty may be long gone, and dry wines more popular than fortified ones, but a glass of port at Christmas continues to be a British tradition. </p>
<h2>Global Britain</h2>
<p>When we look at Britain’s history, the imprints of empire are unmistakable. In the past, British men and women could make money around the world behind protectionist walls. Today, the UK courts foreign opportunities through liberal regulatory and tax policies.</p>
<p>Following Brexit, the UK is now seeking to redefine its international standing with its “global Britain” slogan. We would do well to remember how British prosperity has long been intertwined with the rest of the world – and what “global Britain” has meant for those who were subject to <a href="https://aeon.co/essays/the-british-empire-was-built-on-slavery-then-grew-by-antislavery">British</a> <a href="https://theconversation.com/colonialism-was-a-disaster-and-the-facts-prove-it-84496">imperialism</a>.</p><img src="https://counter.theconversation.com/content/181629/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Hunter Harris does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>From the tax we pay to the wine we drink, many policies in Britain today have their roots in imperialism.Hunter Harris, Postdoctoral Research Fellow in the City of London and the History of Slavery, University of OxfordLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1765252022-03-07T16:24:08Z2022-03-07T16:24:08Z10 things everyone should know about taxation<figure><img src="https://images.theconversation.com/files/449652/original/file-20220302-27-16lx8b6.jpg?ixlib=rb-1.1.0&rect=0%2C0%2C4288%2C2848&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Keeping these aspects of taxation in mind can help us hold governments accountable for the taxes that they try to implement and prevent future unethical and legally questionable taxes from being put in place.</span> <span class="attribution"><span class="source">(Shutterstock)</span></span></figcaption></figure><p>Canadian tax history has been fraught with controversies. One example is the <a href="https://www.macleans.ca/society/the-enduring-legacy-of-canadas-racist-head-tax-on-chinese-canadians/">racist head tax</a> that was placed on Chinese migrants from 1883 until 1923, demonstrating that taxation can be both <a href="https://www.ubcpress.ca/give-and-take">political and disciminatory</a>. </p>
<p>Québec Premier François Legault triggered the most recent controversy when he proposed the idea of <a href="https://www.cbc.ca/news/canada/montreal/unvaccinated-health-contribution-quebec-1.6311054">taxing unvaccinated citizens</a>. Even though Legault dropped the <a href="https://montrealgazette.com/news/local-news/legault-is-poised-to-back-away-from-quebecs-anti-vax-tax-report-says">ethically and legally questionable tax</a>, the reaction to it illustrated just how controversial taxes can be be.</p>
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Read more:
<a href="https://theconversation.com/sex-taxes-and-covid-19-how-sex-workers-navigated-pandemic-relief-efforts-172351">Sex, taxes & COVID-19: How sex workers navigated pandemic relief efforts</a>
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<p>Ethically and legally questionable taxes <a href="https://cdnc.ucr.edu/cgi-bin/cdnc?a=d&d=SDU18520510.2.4&e=-------en--20--1--txt-txIN--------1">aren’t limited to Canada</a>. It’s an internationally recurring practice that affects people in <a href="https://www.cbc.ca/news/business/pink-tax-1.3553524">different, and often unequitable, ways</a>. </p>
<figure class="align-center ">
<img alt="Man in a suit with a red tie gesticulating with his hands" src="https://images.theconversation.com/files/449914/original/file-20220303-27214-1miivep.JPG?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/449914/original/file-20220303-27214-1miivep.JPG?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=436&fit=crop&dpr=1 600w, https://images.theconversation.com/files/449914/original/file-20220303-27214-1miivep.JPG?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=436&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/449914/original/file-20220303-27214-1miivep.JPG?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=436&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/449914/original/file-20220303-27214-1miivep.JPG?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=548&fit=crop&dpr=1 754w, https://images.theconversation.com/files/449914/original/file-20220303-27214-1miivep.JPG?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=548&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/449914/original/file-20220303-27214-1miivep.JPG?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=548&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
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<span class="caption">Québec Premier Francois Legault sparked controversy in January when he suggested that unvaccinated Québecers should pay a health tax.</span>
<span class="attribution"><span class="source">THE CANADIAN PRESS/Jacques Boissinot</span></span>
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</figure>
<p>Ironically, society’s understanding of taxes could be part of the reason why so many questionable taxes are introduced in the first place. <a href="https://www.thecanadianencyclopedia.ca/en/article/taxation">To many of us, taxes are just mandatory payments to government coffers</a>. While this view is technically correct, it doesn’t help us understand <em>why</em> and <em>how</em> taxes are implemented in democratic pluralistic societies. Unfortunately, governments, courts and taxation experts usually overlook key aspects of taxes, leading to <a href="http://www.worldcat.org/oclc/1130955308">hazy definitions of taxes in court deliberations</a>. </p>
<p>This can play a part in allowing ethically and legally questionable taxes to be imposed. It is much more difficult for unethical taxes to be put into place if citizens know what taxes are designed to do, and the correct way for taxes to be implemented. With that in mind, here are 10 things you should know about taxes.</p>
<h2>Key aspects of taxation</h2>
<ol>
<li><p><strong>Sustain society:</strong> The main goal of taxes is to levy resources for <a href="https://www.jstor.org/stable/2728515">government expenditures</a> that keep society up and running. Taxes contribute to everyday public services and social programs like <a href="https://lop.parl.ca/staticfiles/PublicWebsite/Home/ResearchPublications/BackgroundPapers/PDF/2018-45-e.pdf">health care</a>, <a href="https://www.cbc.ca/news/business/tax-dollars-1.4545415">elderly benefits</a>, <a href="https://tspace.library.utoronto.ca/bitstream/1807/98034/1/Perspectives-27-Kitchen-Slack-Hachard-Property-Tax-Issues-Prospects.pdf">public schooling</a>, <a href="https://tspace.library.utoronto.ca/bitstream/1807/94835/1/imfgperspectives_no24_propertytax_dahlbyandmcmillan_may_6_2019.pdf">public transportation, fire protection and park maintenance</a>. They can also bolster economic policies aiming to “<a href="https://policyoptions.irpp.org/magazines/october-2020/current-tax-system-wont-pay-for-covid-recovery/">improve lives post-pandemic</a>.”</p></li>
<li><p><strong>Social viability:</strong> Taxes contribute <a href="https://wwnorton.co.uk/books/9780393320336-the-cost-of-rights">to the organization of society</a>. Although they are normally associated with contemporary states and governments, taxation is a social practice that is not limited to modern-day states. For example, the <a href="http://hdl.handle.net/1807/102849">Indigenous Peoples of the Pacific Northwest Coast</a> have long practised taxation prior to settler-colonialism. Their taxation systems function according to kinship values, organization, customs and institutions. </p></li>
<li><p><strong>Social deliberation:</strong> Taxes are legitimized when they are created, detailed and applied according to the rules and institutions of society, and can be based on either <a href="https://www.ictd.ac/publication/community-based-and-customary-taxation-in-south-central-somalia-possibilities-for-hybrid-governance-and-dialogue-programming/">cultural customs or legislation</a>. Within western democratic societies, taxes are created through statutes approved by parliaments, and cannot be unilaterally imposed by governments. This means <a href="https://global.oup.com/academic/product/the-myth-of-ownership-9780195176568?cc=ca&lang=en&">taxes require careful social deliberation</a> before being put in place because they have far-reaching impacts on people’s lives and the legal responsibilities of the state.</p></li>
<li><p><strong>Economics, wealth and resources:</strong> Despite their differences, most taxation theorists agree that taxes are justified because societies need to fund the programs and services that <a href="https://global.oup.com/academic/product/the-myth-of-ownership-9780195176568?cc=ca&lang=en&">benefit everyone</a>. Taxes depend on resources and wealth in order to fund expenditures, which means things like income generation, wealth increments, property ownership, natural resource exploitation, production, sales and purchases are all <a href="http://www.worldcat.org/oclc/880990723">fair game for taxation</a>. </p></li>
<li><p><strong>Economic capacity:</strong> To adequately design and implement taxes, lawmakers must take <a href="http://www.worldcat.org/oclc/1273489784">personal economic capacity into account</a>. Personal economic capacity refers to the amount of wealth and resources an individual has that can be levied to support society. It considers how taxes impact someone’s livelihood, fundamental needs and essential living standards. As such, it is the key element that determines the burden each person can fairly and reasonably bear in the context of taxation. When lawmakers do not consider the whole scope of economic capacity, taxes can cause harm and, in the case of the infamous “<a href="http://digitalcommons.pace.edu/lawfaculty/1070/">tampon tax</a>,” further discrimination. </p></li>
<li><p><strong>Non-confiscation:</strong> Taxes are not designed to be a means of wealth deprivation, although <a href="https://www.mqup.ca/tax--order--and-good-government-products-9780773549623.php">some taxes were associated with confiscation</a> (the legal seizure of property by the government or other public authority) in the past. As a rule of thumb, ethically designed taxes consider people’s economic capacity and do not jeopardize their <a href="http://www.worldcat.org/oclc/1273489784">livelihood, fundamental needs and essential living standards</a>. As such, confiscation is <a href="https://www.hup.harvard.edu/catalog.php?isbn=9780674980822">not caused by progressive and wealth taxes</a>, as some opponents argue; instead, confiscation is the outcome of taxes that are implemented without consideration to people’s livelihood, fundamental needs, and essential living standards.</p></li>
<li><p><strong>Unrequited payments:</strong> Taxes are not payments in exchange for specific services. People pay taxes to promote social viability through <a href="http://www.worldcat.org/oclc/900096177">public or social goods, which benefit everyone. These goods include health care</a> and are available to <a href="https://www.bccourts.ca/jdb-txt/sc/20/13/2020BCSC1310.htm">everyone regardless of their economic capacity</a>. Consequently, taxes are not payments for the costs of specific services <a href="https://www.canada.ca/en/immigration-refugees-citizenship/services/canadian-passports/fees/passport-canada.html">like passports</a>, which are levied through fees.</p></li>
<li><p><strong>Socially relevant goals:</strong> Taxes can also promote or disincentivize certain behaviours for social or political reasons. The main goal of these types of taxes is not to levy revenue, but to pursue <a href="http://www.worldcat.org/oclc/457547954">“extra-fiscal”</a> objectives like <a href="http://www.worldcat.org/oclc/865274691">reducing pollution</a> or <a href="http://apps.who.int/iris/bitstream/handle/10665/260253/WHO-NMH-PND-16.5Rev.1-eng.pdf">preventing diabetes and obesity</a>. These taxes are designed to contribute to collaborative social goals, like reducing the effects of climate change, <a href="https://www.sitios.scjn.gob.mx/videoteca/reproduccion/135/VII%20Seminario%20de%20Derecho%20Constitucional%20Tributario%20en%20Iberoam%C3%A9rica?page=4">without compromising people’s economic capacity</a>.</p></li>
<li><p><strong>Not punishments:</strong> Taxes are not designed to be punitive and, by definition, taxpayers are law-abiding people. Although taxes can certainly influence certain behaviours, as mentioned previously, they do not <em>penalize</em> them. Revenue can certainly be made from legally controversial activities — like the <a href="https://www.cbc.ca/news/canada/british-columbia/even-sex-workers-need-to-file-a-tax-return-vancouver-group-offers-tips-as-deadline-nears-1.4576674">taxation of sex workers</a>, whose work exists in a grey area — but taxes are not connected to illegal activities. Using taxes as punishment severely affects how people perceive taxes, so most states ensure taxes are not used as penalties for committing crimes or other offences. Otherwise, people will start to view taxes as charges that need to be dodged.</p></li>
<li><p><strong>Substance matters:</strong> Some governments conveniently “forget” that taxes are defined by their <em>substance</em>, not their nomenclature. This substance consists of the previous nine aspects. A tax is a tax, even if it’s given an alternative name like “special charge” or “ad-hoc contribution,” as Brazil did in 2000 by implementing the “<a href="http://www.worldcat.org/oclc/989116770">contribution for intervention in the economy</a>.” Likewise, a fine does not become a tax by simply calling it a “special tax.”</p></li>
</ol>
<h2>What experts forgot this time</h2>
<p>While <a href="https://montreal.ctvnews.ca/quebec-wants-to-tax-the-unvaccinated-but-is-that-legal-1.5736383">reactions to Legault’s proposed tax were torn</a>, with some condemning it as a Charter violation and others seeing it as a viable health care solution, there are some clear conclusions that can be drawn. While most experts <a href="https://www.macleans.ca/politics/ottawa/i-have-questions-about-le-unvax-tax/">overlooked these 10 aspects</a> when discussing Legault’s tax idea, <a href="https://cdn.dal.ca/content/dam/dalhousie/pdf/dept/maceachen-institute/Briefing%20Note%20-%20Taxing%20the%20Unvaccinated.pdf">some did concede that</a> such a tax “would likely withstand legal challenges,” while pointing out it would “disproportionately impact low-income earners.” </p>
<p>However, they missed that taxes are not just a mandatory payment to government coffers. Taxes are more than that, and these 10 aspects suggest that Legault’s levy would not have been a tax at all, making his idea even more questionable. A tax on the unvaccinated would not have depended on anyone’s economic background, and would have wrongfully affected people’s economic capacity and punished taxpayers.</p>
<p>Although governments and experts can, and often do, overlook these 10 aspects, citizens should not. Adequate and fair tax implementation begins with these aspects. Keeping them in mind can help us hold governments accountable for the taxes that they try to implement, and can help prevent future unethical and legally questionable taxes.</p><img src="https://counter.theconversation.com/content/176525/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Research by Esteban Vallejo Toledo has been awarded by the Social Sciences and Humanities Research Council of Canada, Law Foundation of British Columbia, and the University of Victoria.</span></em></p>Taxes are more than mandatory payments required by governments. Understanding the essential aspects of taxation can help prevent ethically and legally questionable taxes from being imposed.Esteban Vallejo Toledo, PhD Student, Law & Society, University of VictoriaLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1722212021-11-24T14:54:03Z2021-11-24T14:54:03ZWhy there’s no real ‘common prosperity’ campaign in China<figure><img src="https://images.theconversation.com/files/433150/original/file-20211122-19-1b02qpe.jpg?ixlib=rb-1.1.0&rect=888%2C31%2C4401%2C3212&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">A woman walks past a banner reading 'prosperity' in English and Chinese on a street in central Beijing.</span> <span class="attribution"><span class="source">(AP Photo/Mark Schiefelbein) </span></span></figcaption></figure><p>After a meeting led by President Xi Jinping in August 2021, <a href="http://www.xinhuanet.com/english/2021-08/18/c_1310133051.htm">China’s Communist Party released a media summary</a> that spoke, in part, to the idea of “common prosperity.”</p>
<p>Little is new in the communiqué itself, which reiterated the message that ensuring the broad sharing of China’s wealth among the Chinese people is critical to the party’s lasting rule. </p>
<p>It acknowledged that sharing prosperity is a “long-term, difficult and complex” task and only gradual progress can be expected. And it alluded to some public spending policies benefiting the poor and middle class, but merely urged sub-national governments to “experiment” with such policies while committing to no new national measures.</p>
<p>Yet “common prosperity” has grabbed news headlines in the West in recent months. Commentators claim that China is “<a href="https://www.washingtonpost.com/world/asia_pacific/china-crackdown-tech-celebrities-xi/2021/09/09/b4c2409c-0c66-11ec-a7c8-61bb7b3bf628_story.html">cracking down on the rich</a>,” “<a href="https://www.wsj.com/articles/xi-jinping-aims-to-rein-in-chinese-capitalism-hew-to-maos-socialist-vision-11632150725">clamping down on capital</a>” and <a href="https://www.nytimes.com/2021/09/07/world/asia/china-xi-common-prosperity.html">shifting political priorities from economic growth to redistribution</a>. </p>
<p>The business media has gone into overdrive trying to decipher what Xi’s supposed populism means for <a href="https://www.theglobeandmail.com/investing/markets/inside-the-market/article-are-chinese-tech-stocks-worth-the-risk-amid-the-crackdown/">investors in Chinese stocks</a>. The spectacle of tamed tech giants like Alibaba and Tencent <a href="https://www.theglobeandmail.com/business/international-business/asia-pacific-business/article-chinas-alibaba-to-invest-155-billion-by-2025-in-support-of-common/">pledging to donate</a> tens of billions to government “common prosperity” funds seems to offer proof of Xi’s <a href="https://www.wsj.com/articles/xi-jinping-term-tencent-alibaba-crackdown-communist-party-ideology-authoritarian-11632079586">ideological turn</a>.</p>
<figure class="align-center ">
<img alt="Two men in suits stand with red sashes around their necks and hold a red book." src="https://images.theconversation.com/files/433149/original/file-20211122-17-hpw57l.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/433149/original/file-20211122-17-hpw57l.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/433149/original/file-20211122-17-hpw57l.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/433149/original/file-20211122-17-hpw57l.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/433149/original/file-20211122-17-hpw57l.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/433149/original/file-20211122-17-hpw57l.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/433149/original/file-20211122-17-hpw57l.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Jack Ma, left, chairman of Chinese e-commerce firm Alibaba Group, and Pony Ma, chairman and CEO of Chinese internet company Tencent, stand during a conference to commemorate the 40th anniversary of China’s Reform and Opening Up policy in Beijing in 2018.</span>
<span class="attribution"><span class="source">(AP Photo/Mark Schiefelbein)</span></span>
</figcaption>
</figure>
<h2>Tax revenues reveal the truth</h2>
<p>Yet these prognoses are belied by China’s fiscal realities. Consider the evolution of the ratio of tax revenue to gross domestic product (GDP) in China.</p>
<p>This statistic is important because, to pursue redistributive policies whether poverty alleviation, creating a social safety net or supporting economic mobility — a government must raise tax revenue. </p>
<p>What is Xi Jinping’s record in tax collection? </p>
<figure class="align-center ">
<img alt="A graph shows China's gross tax ratio from 1986 to 2020" src="https://images.theconversation.com/files/433204/original/file-20211122-21-1u60j1.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/433204/original/file-20211122-21-1u60j1.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/433204/original/file-20211122-21-1u60j1.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/433204/original/file-20211122-21-1u60j1.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/433204/original/file-20211122-21-1u60j1.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=502&fit=crop&dpr=1 754w, https://images.theconversation.com/files/433204/original/file-20211122-21-1u60j1.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=502&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/433204/original/file-20211122-21-1u60j1.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=502&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">China’s Gross Tax Ratio from 1986 to 2020.</span>
<span class="attribution"><span class="source">Wei Cui</span>, <span class="license">Author provided</span></span>
</figcaption>
</figure>
<p>China’s tax-to-GDP ratio enjoyed a sustained rise from 1996 to 2012, but has stagnated since then — precisely during the Xi Jinping era. </p>
<p>If tax revenue had continued to climb as it before 2012, China would have a lot more resources for redistribution than now. Instead, Xi’s rule has so far yielded the most sustained and largest tax cuts in China since 1994.</p>
<p>Many of these tax cuts delivered extraordinary benefits to China’s urban affluent. <a href="https://doi.org/10.1111/cwe.12279">The 2018 amendment</a> of the Personal Income Tax (PIT) Law, for example, dramatically raised exemptions, broadened rate brackets and introduced generous deductions.</p>
<p>The result is that many who comfortably belong to <a href="https://doi.org/10.1016/j.chieco.2020.101495">China’s top one per cent of income earners</a> would still face a marginal tax rate of merely 10 per cent.</p>
<p>The 2018 PIT cut completely wiped out the gains in the PIT’s share of total revenue that had accrued in the previous six years. </p>
<figure class="align-center ">
<img alt="A graph shows China's personal income tax revenues from 1990 to 2020." src="https://images.theconversation.com/files/433247/original/file-20211122-15-14u6x8y.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/433247/original/file-20211122-15-14u6x8y.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/433247/original/file-20211122-15-14u6x8y.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/433247/original/file-20211122-15-14u6x8y.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/433247/original/file-20211122-15-14u6x8y.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=502&fit=crop&dpr=1 754w, https://images.theconversation.com/files/433247/original/file-20211122-15-14u6x8y.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=502&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/433247/original/file-20211122-15-14u6x8y.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=502&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Personal income tax (PIT) revenues in China from 1990 to 2020.</span>
<span class="attribution"><span class="source">Wei Cui</span>, <span class="license">Author provided</span></span>
</figcaption>
</figure>
<p>Note that 2018 was after Xi <a href="https://www.nytimes.com/2018/03/07/world/asia/china-xi-jinping-party-term-limit.html">entrenched his power at the 19th Party Congress</a> and centralized much economic policy-making. This means the PIT cut cannot be pinned on anybody else — the decision to slash taxes for the rich was made by the small group of political leaders led by Xi.</p>
<h2>Baked-in benefits</h2>
<p>When reporting that Xi has launched a “common prosperity” campaign, the western media <a href="https://www.economist.com/finance-and-economics/2021/10/30/chinas-long-wait-for-a-tax-everyone-loves-to-hate">sometimes refers</a> to the possible introduction of a property tax on personal residences. </p>
<p>In reality, even this proposed measure for “taxing the rich” has benefits for the rich baked in: property tax proposals discussed in the past decade all <a href="https://www.wsj.com/articles/china-plots-property-tax-trials-as-it-targets-speculation-11634998929">exempt primary residences</a>. </p>
<p>But there is something even more interesting. China’s large PIT cut favoured the rich in 2018. The Chinese government has made large <a href="https://blogs.ubc.ca/cals/what-is-a-small-and-micro-profit-enterprise-in-china/">corporate income tax cuts</a> since 2019. It repeatedly <a href="https://www.reuters.com/article/us-china-parliament-budget-tax-idUSKCN1QM046">cut value-added tax (VAT) rates from 2016 to 2019</a>. And it made a big <a href="https://dx.doi.org/10.2139/ssrn.3686345">payroll tax cut in 2020</a>. </p>
<p>Chances are, not many outside China are aware that these tax cuts even happened. How, then, do we know so much about China’s tentative property tax increase? To see how odd this is, imagine Joe Biden’s proposal to raise taxes in the United States being greeted with lavish attention with scant mention that Donald Trump had significantly slashed those same taxes.</p>
<figure class="align-center ">
<img alt="A man in silhouette walks past a photo of Xi Jinping waving." src="https://images.theconversation.com/files/433155/original/file-20211122-19-9z8o2i.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/433155/original/file-20211122-19-9z8o2i.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/433155/original/file-20211122-19-9z8o2i.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/433155/original/file-20211122-19-9z8o2i.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/433155/original/file-20211122-19-9z8o2i.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/433155/original/file-20211122-19-9z8o2i.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/433155/original/file-20211122-19-9z8o2i.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">A visitor passes by a photo of Xi Jinping at the Museum of the Communist Party of China in Beijing in November 2021.</span>
<span class="attribution"><span class="source">(AP Photo/Ng Han Guan)</span></span>
</figcaption>
</figure>
<p>The explanation of this lopsided coverage is that public information about redistribution in China has come to depend on two highly unreliable sources. </p>
<p>The first is <a href="https://www.bbc.com/news/business-45550747">media catering to the affluent</a>. Any possible tax increase will fuel debate. Tax cuts or policies that contribute to inequality, by contrast, aren’t as likely to be reported on. </p>
<p>The second source, of course, <a href="https://www.economist.com/china/2021/10/30/chinas-state-controlled-media-are-put-on-an-even-shorter-leash">is the Chinese government</a>. In 2021, these two sources are amplifying each other: when Xi claims to be interested in greater redistribution, regardless of whether he actually does, media for both China’s economic elite and the global investor class will talk it up. </p>
<h2>Chinese tech is lucrative</h2>
<p>After all, global financiers are enamoured with the outsized profits of Chinese tech companies; any government intervention that threatens to take away such windfalls is sensationalized to geopolitical proportions. </p>
<p>Much of the media hype about “common prosperity,” therefore, is not about redistributive policy in China at all. It might however reflect a search for narratives that would rationalize the Chinese government’s regulatory actions against some <a href="https://fortune.com/2021/07/09/didi-ipo-stock-data-crackdown-china-wall-street-investors/">of its large publicly listed companies</a>.</p>
<p>The force most responsible for lifting <a href="https://www.nber.org/system/files/working_papers/w28147/w28147.pdf">hundreds of millions</a> of Chinese citizens out of poverty is probably globalization — which also <a href="https://doi.org/10.1016/j.eeh.2011.05.001">reduced global inequality</a> but exacerbated inequities in some advanced economies. </p>
<p>Discontent arising from the “<a href="https://www.brookings.edu/bpea-articles/on-the-persistence-of-the-china-shock/">China shock</a>” — the economic impact of rising Chinese exports on the West — has led to a political backlash in the U.S. There is broad bipartisan agreement that China’s economic rise represents a threat to America. Lost in the heat of this sentiment, however, is the recognition that the welfare of 1.4 billion Chinese people may also hinge on China’s economic might.</p>
<figure class="align-center ">
<img alt="A smiling man sits at his desk with his hands clasped while another man appears on a video screen to his left." src="https://images.theconversation.com/files/433159/original/file-20211122-19-1mr00os.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/433159/original/file-20211122-19-1mr00os.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/433159/original/file-20211122-19-1mr00os.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/433159/original/file-20211122-19-1mr00os.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/433159/original/file-20211122-19-1mr00os.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/433159/original/file-20211122-19-1mr00os.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/433159/original/file-20211122-19-1mr00os.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">U.S. President Joe Biden meets virtually with Chinese President Xi Jinping from the White House in November 2021.</span>
<span class="attribution"><span class="source">(AP Photo/Susan Walsh)</span></span>
</figcaption>
</figure>
<p>In reality, <a href="https://foreignpolicy.com/2018/02/01/chinas-middle-class-is-pulling-up-the-ladder-behind-itself/">China’s poor and middle class want the very same things</a> as citizens in rich countries like the U.S. and Canada: cheaper housing and child care, more even distributions of education resources and help for the unemployed, sick and elderly. </p>
<p>Yet such Chinese desires are viewed with suspicion in the West. A public clamouring for such policies is more often portrayed as a challenge to China’s autocrats than a worthy demand for progress.</p>
<p>Xi’s egalitarian credentials are much weaker than the West pretends. But if China’s have-nots nurture hopes for a better future, they have no one else to look to.</p><img src="https://counter.theconversation.com/content/172221/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Wei Cui receives funding from the Social Sciences and Humanities Research Council of Canada. </span></em></p>The western media has been reporting on Xi Jingping’s supposed ideological turn on bringing prosperity to all of China’s people. But his rule has seen sustained and large tax cuts on the wealthy.Wei Cui, Professor of Law, University of British ColumbiaLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1694212021-10-13T12:08:13Z2021-10-13T12:08:13ZTax or treat! State laws on candy taxation vary wildly<figure><img src="https://images.theconversation.com/files/425068/original/file-20211006-21-1s0m1x5.jpg?ixlib=rb-1.1.0&rect=241%2C66%2C3362%2C2951&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">While death may be a given, the certainty of taxes on candy depends on the state.</span> <span class="attribution"><a class="source" href="https://newsroom.ap.org/detail/VirusOutbreakHalloween/d3f3cb88b0974589b9817b89786f5c37/photo?Query=candy%20AND%20halloween&mediaType=photo&sortBy=arrivaldatetime:desc&dateRange=Anytime&totalCount=263&currentItemNo=2">AP Photo/Peter Prengaman</a></span></figcaption></figure><p>Halloween shoppers have many delicious decisions to make before trick-or-treaters show up at their doors. And in many states, those choices will change how much tax they pay.</p>
<p>In Illinois, for example, <a href="http://www.ilga.gov/legislation/ilcs/ilcs3.asp?ActID=582&ChapterID=8">residents pay a higher state sales tax rate</a> on Reese’s peanut butter cups, gummy worms and Hershey’s milk chocolate bars – 6.25% – than on Twix, Twizzlers and Hershey’s Cookies ‘n’ Creme bars – 1%.</p>
<p>Trying to distinguish between these two groups of treats may be devilishly hard for shoppers, but to the <a href="https://www2.illinois.gov/rev/research/taxinformation/sales/Pages/rot.aspx">Illinois Department of Revenue</a>, the difference is simple. The first three are candy, and <a href="https://www.illinoispolicy.org/candy-crush-illinois-slaps-sales-tax-on-snickers-but-not-twix/">the second three are not</a>.</p>
<p>This example illustrates how state sales taxes can affect taxpayers, retailers and Halloween candy shoppers in <a href="https://scholarship.richmond.edu/law-faculty-publications/1436/">unexpected ways</a>.</p>
<h2>The importance of sales taxes</h2>
<p>From states’ perspectives, there is a lot to like about sales taxes, which are the levies you pay when you buy a cup of coffee or new computer. <a href="https://taxfoundation.org/2021-sales-taxes/">Forty-five states have sales taxes</a> ranging from 2.9% in Colorado to 7.25% in California. The rate can be even higher in some cities that also have a local sales tax.</p>
<p><a href="http://www.doi.org/10.1257/aer.99.4.1145">Research has found</a> that taxpayers don’t seem to pay much attention to how much they pay in sales taxes. This makes sales taxes politically appealing sources of revenue.</p>
<p>Not only that, states don’t have to do a lot of work in the process since <a href="https://www.gao.gov/assets/690/688437.pdf">businesses must collect</a> the taxes at the point of sale, which <a href="https://perma.cc/UHQ4-TXK7">streamlines enforcement</a>. </p>
<p>For these reasons, states <a href="https://taxfoundation.org/state-sales-tax-reliance-2019/">rely heavily on sales taxes</a> to fund their governments. In 2019, <a href="https://www.census.gov/library/publications/2019/econ/g19-stc.html">sales tax accounted for about 31% of states’ tax revenue</a>, making it the second-biggest source behind income taxes.</p>
<p>However, sales taxes do raise concerns. Namely, they burden low-income taxpayers <a href="https://itep.org/wp-content/uploads/whopaysreport.pdf">to a greater degree</a> than high-income taxpayers, since the former spend a higher percentage of their disposable income on expenses that are typically subject to a sales tax.</p>
<p>People must buy food and other basic necessities to survive, making it harder for low-income taxpayers to change their purchasing habits to avoid the sales tax burden. To address this concern, many state legislatures have chosen to reduce the sales tax rate that applies to sales of certain necessities such as groceries and medical supplies.</p>
<p><a href="http://www.ilga.gov/legislation/ilcs/ilcs3.asp?ActID=582&ChapterID=8">Illinois</a>, for instance, lowers its sales tax rate from 6.25% to 1% for grocery purchases. Other states, like <a href="https://www.cdtfa.ca.gov/lawguides/vol1/sutl/6359.html">California</a>, exempt groceries from their sales taxes all together.</p>
<h2>States must draw a line</h2>
<p>The trick – or treat – then becomes <a href="https://www.cbpp.org/research/state-budget-and-tax/which-states-tax-the-sale-of-food-for-home-consumption-in-2017">where to draw the line</a> on which foods to exempt from the regular sales tax rate. </p>
<p>Some foods, like eggs, milk and bread, are easy to categorize as groceries. Others, like <a href="https://taxfoundation.org/how-high-are-taxes-distilled-spirits-your-state-2016/">alcohol</a> and <a href="https://taxfoundation.org/meals-taxes-major-us-cities-0/">prepared meals</a>, are easier to exclude – and often are subject to extra taxes beyond basic sales taxes.</p>
<p>But how does one deal with all the food in between those groups? For instance, is meat a necessity? How about candy?</p>
<p>One approach to this problem is to list in granular detail each food that counts as a grocery item, leaving the remaining foods to be taxed at the higher rate. Such a list would provide perfectly targeted tax relief but would demand constant and costly updating as new products make their way into grocery stores.</p>
<p>Instead of a granular method, states often take a more generalized approach, defining groceries as food for consumption off-premises – which essentially means the food is purchased to take home, not to be eaten on the spot – and everything else is not eligible for reduced sales tax rates.</p>
<p>[<em>Like what you’ve read? Want more?</em> <a href="https://theconversation.com/us/newsletters/the-daily-3?utm_source=TCUS&utm_medium=inline-link&utm_campaign=newsletter-text&utm_content=likethis">Sign up for The Conversation’s daily newsletter</a>.]</p>
<p>Many states, like Illinois, go further and provide that certain categories of food, such as candy, also do not qualify as groceries.</p>
<p>These generalized approaches sacrifice accuracy for ease of administration but ultimately demand further line drawing. When is food purchased for home consumption? What is candy?</p>
<h2>When is candy candy?</h2>
<p>States like New York sometimes look to preparation methods to determine when food is purchased for consumption at home or on the premises. Order a bagel with cream cheese or ask for it to be toasted, and the New York Department of Taxation and Finance concludes you will be dining in – and need to pay sales tax. Skipping the toaster and other extras makes that bagel exempt because the city assumes you’re <a href="https://www.tax.ny.gov/pubs_and_bulls/tg_bulletins/st/food_sold_by_food_stores.htm">taking it to go</a>.</p>
<p>Illinois defines candy as sweets and confectioneries, <a href="http://www.ilga.gov/legislation/ilcs/ilcs3.asp?ActID=582&ChapterID=8">but not if flour is a listed ingredient</a>. A <a href="https://www.avalara.com/blog/en/north-america/2019/10/state-by-state-guide-to-sales-tax-on-candy-just-in-time-for-halloween.html">couple dozen other states</a> have similar rules, while some, such as Arizona and Michigan, simply consider candy like any other grocery item.</p>
<p>Therefore, depending on which state you live in, that cookie crunch in your Twix is doubly satisfying. It feeds your sweet tooth while also getting you a sales tax break.</p>
<p>And, yes, Twizzlers and Hershey’s Cookies and Cream both have flour in them, too.</p>
<p><em>This is an updated version of an <a href="https://theconversation.com/not-all-candy-is-candy-at-least-for-tax-purposes-123905">article published</a> on Oct. 25, 2019.</em></p><img src="https://counter.theconversation.com/content/169421/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Hayes Holderness does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Whether you pay tax on your Halloween treat supply depends on which state you live in and how it defines candy.Hayes Holderness, Associate Professor of Law, University of RichmondLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1680572021-09-17T17:09:20Z2021-09-17T17:09:20Z‘Tax the rich’? Democrats’ plans to make the wealthy pay a little more will barely dent America’s long slide from progressive taxation<figure><img src="https://images.theconversation.com/files/421742/original/file-20210917-19-1xq7auo.jpg?ixlib=rb-1.1.0&rect=26%2C53%2C4420%2C2907&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">U.S. Rep. Alexandria Ocasio-Cortez making a fashion statement.</span> <span class="attribution"><a class="source" href="https://www.gettyimages.com/detail/news-photo/congresswoman-alexandria-ocasio-cortez-attends-the-2021-met-news-photo/1340272142?adppopup=true">Ray Tamarra/GC Images via Getty Images</a></span></figcaption></figure><p>Demanding tax increases on the rich is back in fashion – both in the <a href="https://www.cnbc.com/2021/09/14/house-democrats-propose-top-39point6percent-tax-rate-at-these-income-levels.html">corridors of the House of Representatives</a> and on the <a href="https://www.theguardian.com/us-news/2021/sep/14/aoc-defends-tax-the-rich-dress-met-gala">red carpet of the Met Gala</a>.</p>
<p>The House Ways and Means Committee outlined plans on Sept. 13, 2021, to move the top marginal income rate up a couple of notches to 39.6% and to introduce a <a href="https://www.wsj.com/articles/democrats-release-details-of-tax-increase-11631539532">3% surtax on incomes above $5 million</a>. That proposal would fall short of calls to really “tax the rich,” as <a href="https://www.nytimes.com/2021/09/15/style/aoc-met-gala-dress.html">Rep. Alexandria Ocasio-Cortez’s dress demanded</a> at a glitzy New York bash just hours later.</p>
<p>Tax policy is deemed progressive if the chunk of income taken increases with the income of the individual – so wealthy Americans would pay a larger proportion of their income than poorer ones. With a regressive tax policy, lower earners pay a larger percentage of their earnings in tax than wealthier ones. The committee’s plan would roughly put tax progressivity back to where it was just before President Donald Trump signed off on <a href="https://www.nbcnews.com/politics/politics-news/trump-signs-tax-cut-bill-first-big-legislative-win-n832141">Republican tax cuts in 2017</a>. </p>
<p>That would still be far below the level of progressivity the United States embraced in the middle of the 20th century – when wealthier individuals paid a much higher share of their income in taxes than the poor.</p>
<p><iframe id="lW4lQ" class="tc-infographic-datawrapper" src="https://datawrapper.dwcdn.net/lW4lQ/4/" height="400px" width="100%" style="border: none" frameborder="0"></iframe></p>
<p>In 1950, when looking at all federal, state and local taxes, the top 0.01% of earners paid <a href="https://gabriel-zucman.eu/files/SaezZucman2020JEP.pdf">almost 70% of their income in taxes</a>. In the postwar decades, <a href="https://www.investopedia.com/terms/c/corporate-profits.asp">corporate profits</a> – the main source of income for the rich – were subject to an effective corporate tax rate of 50%. Meanwhile, the rich were subject to high tax rates on wages, dividends, interest and income from partnerships.</p>
<p>The progressivity of the U.S. tax system has dramatically declined over the past seven decades. The upshot is that for most income levels the U.S. tax system now resembles a flat tax that becomes regressive at the very top end, meaning the super-rich pay proportionately less. Today, virtually all income groups pay <a href="https://gabriel-zucman.eu/files/SaezZucman2020JEP.pdf">roughly 28% of their income in taxes</a> – except for the 400 richest Americans, who each own more than $2 billion in wealth today and pay around 25% in taxes.</p>
<p>Working-class and middle-class Americans pay a substantial amount of taxes because of payroll taxes, which are high and barely affect the rich, and state and local sales taxes, which are regressive – they take a bigger chunk out of a smaller wage than out of a large income. Even households that <a href="https://taxfoundation.org/us-households-paying-no-income-tax/">pay no federal income tax</a> because of low earnings hand over a percentage similar to that of wealthier households, because of these other taxes.</p>
<p>The super-rich’s low tax rates of today are in part aided by the <a href="https://www.cbpp.org/research/the-decline-of-corporate-income-tax-revenues">collapse of federal corporate taxation</a>. In the 1950s, 5% to 7% of national income came from corporate taxes. By 2018, that figure had fallen to just 1.5%. </p>
<p>The effective tax rate collapses for billionaires further because they can avoid reporting individual income by instructing their companies not to pay dividends and holding on to their shares without realizing their gains.</p>
<p>The proposal unveiled by House Democrats would increase taxes on millionaires significantly. But it would largely leave billionaires off the hook, despite the <a href="https://ips-dc.org/u-s-billionaires-62-percent-richer-during-pandemic/">explosion of their wealth</a> during the pandemic. More ambitious proposals in the Senate would tax their <a href="https://www.cnbc.com/2021/03/30/senate-dems-propose-capital-gains-tax-at-death-with-1-million-exemption.html">unrealized capital gains</a>. In our view, this would be a bold addition that would help the United States reconnect with its tradition of tax justice.</p>
<p>[<em>Over 110,000 readers rely on The Conversation’s newsletter to understand the world.</em> <a href="https://theconversation.com/us/newsletters/the-daily-3?utm_source=TCUS&utm_medium=inline-link&utm_campaign=newsletter-text&utm_content=100Ksignup">Sign up today</a>.]</p><img src="https://counter.theconversation.com/content/168057/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>The authors do not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.</span></em></p>In 1950, the top 0.01% of earners paid almost 70% of their income in taxes. By 2018, the super-rich paid proportionately less than the average for all other Americans.Gabriel Zucman, Associate Professor of Economics, University of California, BerkeleyEmmanuel Saez, Professor of Economics, University of California, BerkeleyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1626472021-06-17T12:27:43Z2021-06-17T12:27:43ZWhat’s the charitable deduction? An economist explains<figure><img src="https://images.theconversation.com/files/406837/original/file-20210616-3808-7y7pxc.jpg?ixlib=rb-1.1.0&rect=247%2C321%2C4738%2C2619&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Donors who itemize their tax returns can get a discount.</span> <span class="attribution"><a class="source" href="https://www.gettyimages.com/detail/photo/illustration-of-a-stack-of-100-bills-broken-in-royalty-free-image/114329820">porcorex/ E+ via Getty Images</a></span></figcaption></figure><p>The <a href="https://www.investopedia.com/articles/personal-finance/041315/tips-charitable-contributions-limits-and-taxes.asp">charitable deduction</a> is a dollar-for-dollar reduction in taxable income that lowers what someone owes the <a href="https://www.irs.gov/charities-non-profits/charitable-organizations/charitable-contribution-deductions">Internal Revenue Service</a>. Only donations to <a href="https://www.irs.gov/charities-non-profits/charitable-organizations/exemption-requirements-501c3-organizations">tax-exempt charities</a> count.</p>
<p>This giving incentive is available only for the <a href="https://par.nsf.gov/biblio/10167500">10% of American taxpayers who itemize their tax returns</a>. Taxpayers who itemize can sum up certain expenses, such as the interest they pay to for a home mortgage, and then subtract that money from their taxable income.</p>
<p>Here’s a hypothetical example: Clara Doe, a veterinarian, pays a 32% <a href="https://www.investopedia.com/terms/m/marginaltaxrate.asp">marginal tax rate</a> on her US$200,000 income as a single filer. Because she itemizes, her $100 annual donation to a local food pantry costs her $68 after taxes. Uncle Sam essentially pays the rest by giving her a tax break.</p>
<p>Most Americans instead use the <a href="https://www.investopedia.com/terms/s/standarddeduction.asp">standard deduction</a>, a set amount of money based on how you file your taxes. As as of 2021, the standard deduction was $12,550 for single taxpayers. People claiming it subtract that amount from their income to see how much of it is subject to the income tax. The standard deduction usually saves more money than itemizing.</p>
<p>With the standard deduction, giving $100 costs, well, $100.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/406227/original/file-20210614-73420-1ei65p7.jpg?ixlib=rb-1.1.0&rect=130%2C101%2C4533%2C2766&q=45&auto=format&w=1000&fit=clip"><img alt="Netflix founder Reed Hastings applauds" src="https://images.theconversation.com/files/406227/original/file-20210614-73420-1ei65p7.jpg?ixlib=rb-1.1.0&rect=130%2C101%2C4533%2C2766&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/406227/original/file-20210614-73420-1ei65p7.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/406227/original/file-20210614-73420-1ei65p7.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/406227/original/file-20210614-73420-1ei65p7.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/406227/original/file-20210614-73420-1ei65p7.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/406227/original/file-20210614-73420-1ei65p7.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/406227/original/file-20210614-73420-1ei65p7.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Most people who donate extensively to charity, such as Netflix founder Reed Hastings, use this tax break.</span>
<span class="attribution"><a class="source" href="https://www.gettyimages.com/detail/news-photo/reed-hastings-attends-the-netflix-mediaset-partnership-news-photo/1179797768">Ernesto S. Ruscio/Getty Images via Netflix</a></span>
</figcaption>
</figure>
<h2>Why the charitable deduction matters</h2>
<p>People <a href="https://theconversation.com/5-reasons-why-people-give-their-money-away-plus-1-why-they-dont-87801">give to charities for many reasons</a>. Tax breaks cannot be the main one because giving money away doesn’t make you better off financially.</p>
<p><a href="https://doi.org/10.1016/j.jpubeco.2019.104114">As is true elsewhere</a>, Americans tend to donate more with government incentives. Similarly, donors usually give away smaller shares of their income when Uncle Sam scales back those advantages. </p>
<p>Consider what happened once the <a href="https://www.investopedia.com/taxes/trumps-tax-reform-plan-explained/">2017 tax reform package</a> took effect. Many <a href="https://www.aei.org/society-and-culture/2018-charitable-giving-dips-as-predicted">economists predicted beforehand</a> that its reduction in giving incentives would prompt American taxpayers to give less to charity. And that <a href="https://theconversation.com/american-giving-lost-some-ground-in-2018-amid-tax-changes-and-stock-market-losses-118892">did happen in 2018</a>.</p>
<p>Although charitable giving has since <a href="https://theconversation.com/americans-gave-a-record-471-billion-to-charity-in-2020-amid-concerns-about-the-coronavirus-pandemic-job-losses-and-racial-justice-161489">rebounded, reaching new records</a>, I believe the <a href="https://doi.org/10.1515/npf-2020-0040">total could have been higher</a> if more Americans could deduct charitable contributions from their taxable income.</p>
<h2>How many Americans claim the charitable deduction?</h2>
<p>In 2019, only an <a href="https://par.nsf.gov/biblio/10167500">estimated 8.5% of taxpayers</a> took advantage of this <a href="https://www.everycrsreport.com/reports/R46178.html">century-old tax break</a>. Nearly <a href="https://www.taxpolicycenter.org/briefing-book/what-are-itemized-deductions-and-who-claims-them">three times as many Americans</a> were claiming this deduction before the 2017 tax reforms. </p>
<p>There’s a simple explanation for this decline: The tax package nearly doubled the standard deduction. Most people who were itemizing until 2018 are now better off if they take the standard deduction instead.</p>
<p>That <a href="https://www.mlrpc.com/articles/tax-cuts-jobs-act-overview-provisions-sunset-expire/">could change after 2025</a>, when many of the 2017 tax reforms will expire.</p>
<p><em>The Conversation U.S. publishes short, accessible explanations of newsworthy subjects by academics in their areas of expertise.</em></p><img src="https://counter.theconversation.com/content/162647/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Patrick Rooney receives funding from several different foundations and charitable organizations and serves or has served on several charitable boards or advisory committees. None of them stand to gain from this essay and none have directly fundeed this effort.</span></em></p>Giving $100 to a favorite charity costs less than that for the roughly 8.5% of Americans who use this tax break.Patrick Rooney, Executive Associate Dean for Academic Programs, Glenn Family Chair, and Professor of Economics and Philanthropic Studies, IUPUILicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1478932021-06-09T17:41:33Z2021-06-09T17:41:33ZSenator Warren’s wealth tax might prevent billionaires from paying nearly nothing in taxes – but it’s probably not constitutional<figure><img src="https://images.theconversation.com/files/405399/original/file-20210609-15050-1h64umm.jpg?ixlib=rb-1.1.0&rect=344%2C106%2C4562%2C3522&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Jeff Bezos paid no taxes in some years despite gaining billions in wealth.</span> <span class="attribution"><a class="source" href="https://newsroom.ap.org/detail/BezosSpace/45fbb45ab82947a98333d8f75e3bddfa/photo?Query=bezos&mediaType=photo&sortBy=arrivaldatetime:desc&dateRange=Anytime&totalCount=737&currentItemNo=3">AP Photo/Patrick Semansky</a></span></figcaption></figure><p>A new report that shows America’s biggest billionaires <a href="https://www.propublica.org/article/the-secret-irs-files-trove-of-never-before-seen-records-reveal-how-the-wealthiest-avoid-income-tax">paid barely any income tax</a> from 2014 to 2018 has <a href="https://www.newsweek.com/elizabeth-warren-renews-wealth-tax-call-after-report-that-americas-richest-pay-little-taxes-1598752">revived talk</a> of a <a href="https://www.rollcall.com/2021/06/08/wyden-renews-wealth-tax-push-after-billionaires-returns-leak/">wealth tax</a> – such as the <a href="https://www.congress.gov/bill/117th-congress/senate-bill/510">one proposed by Sen. Elizabeth Warren</a>. </p>
<p>The report from ProPublica – which <a href="https://www.propublica.org/article/why-we-are-publishing-the-tax-secrets-of-the-001">based its findings on a trove of tax records</a> submitted by an anonymous source – found that investor Warren Buffett paid US$23.7 million in taxes on $125 million in reported income, while amassing $24.3 billion more wealth during that same five-year period. Amazon founder Jeff Bezos saw his wealth soar $99 billion from 2014 to 2018, yet paid just $973 million in taxes on $4.22 billion in reported income.</p>
<p>In total, the 25 richest Americans saw their wealth rise $401 billion over this period as the value of their investments such as stocks and properties grew. They paid just $13.6 billion in income taxes, or 3.4% of their wealth gain. For context, ProPublica noted middle-class Americans in their early 40s gained just $65,000 in wealth during the period – and paid almost the same amount in taxes</p>
<p>As an <a href="https://papers.ssrn.com/sol3/cf_dev/AbsByAuth.cfm?per_id=56687">expert on tax policy</a>, I’m deeply familiar with how America’s system has exacerbated inequality. There’s at least one problem with Warren’s wealth tax as a solution, however: It may be unconstitutional.</p>
<h2>Income and wealth inequality</h2>
<p>Concerns about inequality have increased in recent decades.</p>
<p>Americans <a href="https://www.cbpp.org/research/poverty-and-inequality/a-guide-to-statistics-on-historical-trends-in-income-inequality">enjoyed substantial economic growth</a> and broadly shared prosperity from the end of World War II into the 1970s.</p>
<p>But in the 1980s, <a href="https://www.brookings.edu/blog/up-front/2017/12/08/what-we-learned-from-reagans-tax-cuts/">President Ronald Reagan dramatically slashed taxes on the wealthy</a> – twice – cutting the top rate on wages from 70% to 28%.</p>
<p>Studies have shown that the drop in tax rates, combined with other “trickle-down” policies such as deregulation, <a href="https://www.thebalance.com/trickle-down-economics-theory-effect-does-it-work-3305572">led to steadily rising income and wealth inequality</a>. </p>
<p>The wealthiest 1% <a href="https://www.cbpp.org/research/poverty-and-inequality/a-guide-to-statistics-on-historical-trends-in-income-inequality">controlled 39%</a> of all wealth in 2016, up from less than 30% in 1989. At the same time, the bottom 90% held less than a quarter of America’s wealth, compared with more than a third in 1989. </p>
<p>Currently, the federal government <a href="https://www.nerdwallet.com/blog/taxes/federal-income-tax-brackets/">taxes all income above $518,400</a> at 37% for single filers with <a href="https://www.thebalance.com/net-investment-income-tax-3192936">an additional 3.8% investment tax</a> on incomes over $200,000. Of course, as the ProPublica cache of tax documents shows, loopholes and tax dodges <a href="https://www.propublica.org/article/how-we-calculated-the-true-tax-rates-of-the-wealthiest">result in actual income tax rates</a> significantly lower.</p>
<figure class="align-center ">
<img alt="Elizabeth Warren sits at a Senate committee table as she speaks" src="https://images.theconversation.com/files/405469/original/file-20210609-14697-1jn49oe.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/405469/original/file-20210609-14697-1jn49oe.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=390&fit=crop&dpr=1 600w, https://images.theconversation.com/files/405469/original/file-20210609-14697-1jn49oe.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=390&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/405469/original/file-20210609-14697-1jn49oe.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=390&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/405469/original/file-20210609-14697-1jn49oe.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=490&fit=crop&dpr=1 754w, https://images.theconversation.com/files/405469/original/file-20210609-14697-1jn49oe.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=490&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/405469/original/file-20210609-14697-1jn49oe.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=490&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Warren argues her wealth tax would force billionaires to pay more in taxes.</span>
<span class="attribution"><a class="source" href="https://newsroom.ap.org/detail/CongressIRS/1bdf00ba541e49598361378bc8cf8669/photo?Query=Elizabeth%20AND%20Warren&mediaType=photo&sortBy=arrivaldatetime:desc&dateRange=Anytime&totalCount=5944&currentItemNo=5">Evelyn Hockstein/Pool via AP</a></span>
</figcaption>
</figure>
<h2>Warren’s wealth tax</h2>
<p>Warren’s <a href="https://www.congress.gov/bill/117th-congress/senate-bill/510">wealth tax proposal</a> aims to change that. </p>
<p>In March 2021, the Massachusetts Democrat <a href="https://www.nytimes.com/2021/03/01/business/elizabeth-warren-wealth-tax.html">introduced a bill</a> to tax households worth over $50 million and up to $1 billion at a rate of 2%, and anything over that at 3%. She <a href="https://cdn.theconversation.com/static_files/files/1498/Wealth_Tax_Revenue_Estimates_by_Saez_and_Zucman_-_Feb_24_20211.pdf?1614702906">first proposed the idea of a wealth tax</a> during the Democratic presidential primary in 2019.</p>
<p>The legislation, which <a href="https://www.warren.senate.gov/imo/media/doc/Wealth%20Tax%20Revenue%20Estimates%20by%20Saez%20and%20Zucman%20-%20Feb%2024%2020211.pdf">could raise an estimated $3 trillion</a> over a decade, is meant to reduce inequality by using revenue from the wealthiest Americans to pay for new federal programs to lift up some of the poorest.</p>
<p>Her tax <a href="https://cdn.theconversation.com/static_files/files/1498/Wealth_Tax_Revenue_Estimates_by_Saez_and_Zucman_-_Feb_24_20211.pdf?1614702906">would affect an estimated 100,000 families</a>, or fewer than 1 in 1,000, according to University of California, Berkeley economists Emmanuel Saez and Gabriel Zucman. The tax wouldn’t start until 2023. </p>
<p>President Joe Biden, for his part, hasn’t signaled support for a wealth tax. But <a href="https://www.bloomberg.com/news/articles/2021-04-22/biden-to-propose-capital-gains-tax-as-high-as-43-4-for-wealthy?sref=Hjm5biAW">he is seeking to raise the top rate</a> the rich pay in income taxes from 37% to 39.6%. And, he wants to double the capital gains rate to help finance his infrastructure proposal. </p>
<h2>The problem with taxing wealth</h2>
<p>Unlike an income tax, a wealth tax <a href="https://theweek.com/articles/717294/wealth-inequality-even-worse-than-income-inequality">reaches the root</a> of both wealth and income inequality.</p>
<p>There’s only one snag: There are <a href="https://taxfoundation.org/warren-wealth-tax-constitutionality/">strong</a> <a href="http://nymag.com/intelligencer/2019/02/constitutional-concerns-are-a-major-risk-for-a-wealth-tax.html">arguments</a> that a federal wealth tax is <a href="https://theconversation.com/how-slaverys-lingering-stain-on-the-us-constitution-spoils-elizabeth-warrens-wealth-tax-proposal-for-now-110964">unconstitutional</a>. Wealth taxes violate Article I, Section 2, Clause 3, of the U.S. Constitution, which forbids the federal government from laying “direct taxes” that aren’t <a href="https://constitutingamerica.org/february-24-2011-%E2%80%93-article-1-section-2-clause-3-of-the-united-states-constitution-%E2%80%93-guest-essayist-w-b-allen-havre-de-grace-md-2/">apportioned equally among the states</a>. </p>
<p>A direct tax <a href="https://www.salon.com/2019/02/22/how-slaverys-lingering-stain-on-the-us-constitution-spoils-elizabeth-warrens-wealth-tax-proposal_partner/">is a tax on a thing</a>, like property or income. An indirect tax is a tax on a transaction: for example, a sale or a gift. </p>
<p>The income tax is a direct tax and constitutional <a href="https://www.law.cornell.edu/constitution/amendmentxvi">because of the 16th Amendment</a>, which specifically allows income taxes without apportionment. As for property, you may notice that <a href="https://www.financialsamurai.com/property-taxes-by-state/">only states levy real estate taxes</a>. In almost every case, the federal government cannot tax real estate or any other form of wealth absent a transaction. </p>
<p>Warren <a href="https://www.bloomberg.com/opinion/articles/2019-01-30/elizabeth-warren-s-wealth-tax-is-probably-constitutional">cites a small group</a> of law professors who back her claim that a wealth tax passes constitutional muster. But the argument against constitutionality is strong enough that a lawsuit before the Supreme Court <a href="https://minnlawyer.com/2021/03/03/wealth-tax-problem-its-probably-unconstitutional/">is sure to follow any attempt to enact a wealth tax</a>. </p>
<p>Barring a victory before a conservative Supreme Court or <a href="https://www.archives.gov/federal-register/constitution">an arduous amendment to the Constitution</a>, the federal government is shut out of taxing wealth.</p>
<h2>Two other proposals</h2>
<p>Two other proposals to tax the rich have also emerged in recent years.</p>
<p>Rep. Alexandria Ocasio-Cortez of New York <a href="https://www.cnn.com/2019/01/04/politics/alexandria-ocasio-cortez-tax-climate-change-plan/index.html">wanted to create</a> a new “60% to 70%” tax bracket for income earned from labor over $10 million. </p>
<p>One problem with that idea was that the wealthy <a href="https://www.fool.com/taxes/2018/01/27/4-tax-breaks-for-high-income-households.aspx">can avoid or lower that tax</a> by <a href="https://www.moneytips.com/how-the-mega-rich-avoid-paying-taxes">choosing when they receive the income</a>. A second is that the rich <a href="https://www.forbes.com/sites/omaseddiq/2018/03/10/how-the-worlds-billionaires-got-so-rich/#125b82df124c">earn most of their money from capital gains</a>, which <a href="https://www.bankrate.com/investing/long-term-capital-gains-tax/">are taxed at a much lower rate</a> than wage income. </p>
<p>Vermont Sen. Bernie Sanders, who has <a href="https://www.cnbc.com/2021/03/01/elizabeth-warren-bernie-sanders-propose-3percent-wealth-tax-on-billionaires.html">since signed on to Warren’s plan</a>, <a href="https://www.cnbc.com/2019/01/31/bernie-sanders-proposes-big-estate-tax-hike-including-77percent-rate-for-billionaires.html">in 2019 proposed</a> going after wealth but targeted instances when it’s being transferred to someone else – which is what makes it constitutional. He wanted to lower the threshold at which the estate tax applies from $11 million – which <a href="https://www.taxpolicycenter.org/briefing-book/how-many-people-pay-estate-tax">touches just 1,000 estates a year</a> – to $3.5 million, where the threshold stood in 2009. He would also levy a new 77% rate on estates over $1 billion. </p>
<p>Although this would bring in significantly less than his colleagues’ proposals, it is far superior because it both addresses the root of the problem – wealth disparities – and can be implemented immediately. And it wouldn’t pose a constitutional problem.</p>
<p>[<em>Like what you’ve read? Want more?</em> <a href="https://theconversation.com/us/newsletters/the-daily-3?utm_source=TCUS&utm_medium=inline-link&utm_campaign=newsletter-text&utm_content=likethis">Sign up for The Conversation’s daily newsletter</a>.]</p>
<h2>A rising tide</h2>
<p>I agree with all three lawmakers that the United States should return to economic policies that <a href="https://www.economist.com/free-exchange/2014/03/04/does-raising-all-boats-lift-the-tide">seek to lift all boats</a>.</p>
<p>Although American wealth and productivity has surged in the last 40 years, most Americans <a href="https://www.latimes.com/business/lazarus/la-fi-lazarus-economy-stagnant-wages-20180831-story.html">have not fared nearly as well</a> as the <a href="https://inequality.org/facts/wealth-inequality/">richest have</a> – and <a href="https://www.propublica.org/article/you-may-be-paying-a-higher-tax-rate-than-a-billionaire">are paying higher tax rates</a>. In 2020 alone, <a href="https://www.forbes.com/sites/chasewithorn/2020/12/16/the-worlds-billionaires-have-gotten-19-trillion-richer-in-2020/?sh=52eb3f857386">America’s billionaires saw their wealth increase $560 billion</a>, even as tens of millions <a href="https://www.bls.gov/news.release/empsit.nr0.htm">were unemployed</a> or <a href="https://philanthropynewsdigest.org/news/one-in-seven-americans-rely-on-foodbanks-report-finds">depended on food donations</a> to get enough to eat. </p>
<p>The U.S. tax system is at least partly responsible for these gaps. A wealth transfer tax – rather than one that taxes wealth – seems to be the best approach to both pass legal muster and help solve the problem.</p>
<p><em>This is an updated version of an <a href="https://theconversation.com/elizabeth-warrens-wealth-tax-would-reduce-inequality-the-problem-is-its-probably-unconstitutional-156349">article published</a> on March 2, 2021.</em></p><img src="https://counter.theconversation.com/content/147893/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Beverly Moran does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>A new report found that America’s top billionaires paid very little income tax despite tremendous gains in their wealth.Beverly Moran, Professor Emerita of Law, Vanderbilt UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1572952021-04-02T12:19:30Z2021-04-02T12:19:30ZBiden wants corporations to pay for his $2 trillion infrastructure plans, echoing a history of calls for companies to chip in when times are tough<figure><img src="https://images.theconversation.com/files/393222/original/file-20210401-15-1m667mv.jpeg?ixlib=rb-1.1.0&rect=161%2C152%2C5829%2C3817&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Biden is asking companies to cover the tab for his infrastructure plan. </span> <span class="attribution"><a class="source" href="https://newsroom.ap.org/detail/Biden/8fc737c142234133a8ff7226d9b79c92/photo?Query=Biden%20AND%20infrastructure&mediaType=photo&sortBy=arrivaldatetime:desc&dateRange=Anytime&totalCount=295&currentItemNo=45">AP Photo/Evan Vucci</a></span></figcaption></figure><p>President Joe Biden <a href="https://www.washingtonpost.com/us-policy/2021/03/31/biden-infrastructure-climate-plan/">just proposed a roughly US$2 trillion infrastructure plan</a>, which <a href="https://www.rev.com/blog/transcripts/joe-biden-speech-on-2-trillion-infrastructure-plan-transcript-march-31">he ambitiously compared</a> to the interstate highway system and the space race. He aims to pay for it solely by taxing companies more, including the <a href="https://www.taxpolicycenter.org/statistics/corporate-top-tax-rate-and-bracket">first increase in the corporate tax rate since the 1960s</a>. </p>
<p>Biden said he wants to increase the rate from 21% to 28% – which would still be below the 35% level it was at before the <a href="https://www.taxpolicycenter.org/taxvox/new-congressional-study-finds-little-economic-benefit-2017-tax-cuts">2017 tax cut</a> – and strengthen the global minimum tax to discourage multinational corporations from using tax havens. Together, he estimates it would raise the necessary funds to finance his plan over 15 years. </p>
<p>“No one should be able to complain about” raising the rate to 28%, Biden said in a speech announcing the plan. “It’s still lower than what that rate was between World War II and 2017.”</p>
<p>As an <a href="https://scholar.google.com/citations?user=9iqK9wMAAAAJ&hl=en&oi=ao">expert on tax policy</a>, I believe he’s got a point. </p>
<p>What’s more, I think the president’s plan appeals to the basic principle of tax fairness that the corporate income tax was founded on: The taxes a person or business pays should be commensurate with the benefits they receive from public spending. And companies receive quite a lot. </p>
<h2>History of the corporate tax</h2>
<p>Prior to the 20th century, the federal government funded itself primarily with <a href="https://www.everycrsreport.com/reports/RL33665.html">tariffs and excise taxes</a> on goods such as alcohol and tobacco. </p>
<p>The first corporate income tax was signed by President Abraham Lincoln in 1862 to help fund the Civil War and then phased out in the 1870s.</p>
<p>As the U.S. grew in the early 20th century, policymakers worried about the economic and trade risks of relying too heavily on <a href="https://www.politico.com/magazine/story/2017/11/12/tax-reform-is-splitting-the-gop-its-happened-before-215820/">high tariffs</a>. So in 1909 they created the corporate income tax that we know today, <a href="https://www.britannica.com/topic/Payne-Aldrich-Tariff-Act">almost as an afterthought</a>, in a bill that was designed to reform tariffs.</p>
<p>Corporate taxes did not become a major part of the U.S. tax system until they were used to help finance World Wars I and II. Before 1916, the <a href="https://www.taxpolicycenter.org/sites/default/files/legacy/taxfacts/content/pdf/corporate_historical_bracket.pdf">rate was just 1%</a> but grew to 12% during WWI and ballooned to 40% during WWII. Congress also passed “<a href="https://www.cambridge.org/core/books/deficits-debt-and-the-new-politics-of-tax-policy/8631AECFC3EBC760978370D51166BB76">excess profits</a>” taxes of up to 95% to curb wartime profiteering in certain industries.</p>
<p>Corporate tax revenue as a share of total government revenue peaked during the war, in 1943, at just under 40%. </p>
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<p>After the war, excess profits taxes were eliminated, but lawmakers kept the regular rate high and raised it to 52% in 1951 as the U.S. entered the Korean War. </p>
<p>The thinking on corporate taxes began to change in the 1960s. In his 1963 <a href="https://millercenter.org/the-presidency/presidential-speeches/january-14-1963-state-union-address">State of the Union</a> address, President John F. Kennedy proposed corporate tax cuts, arguing that they would “encourage the initiative and risk-taking on which our free system depends – induce more investment, production, and capacity use – help provide the two million new jobs we need every year – and reinforce the American principle of additional reward for additional effort.” </p>
<figure class="align-right ">
<img alt="President John F. Kennedy gestures with his right hand as he speaks in front of a lectern in 1962." src="https://images.theconversation.com/files/393223/original/file-20210402-17-u6gr1b.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/393223/original/file-20210402-17-u6gr1b.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=407&fit=crop&dpr=1 600w, https://images.theconversation.com/files/393223/original/file-20210402-17-u6gr1b.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=407&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/393223/original/file-20210402-17-u6gr1b.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=407&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/393223/original/file-20210402-17-u6gr1b.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=512&fit=crop&dpr=1 754w, https://images.theconversation.com/files/393223/original/file-20210402-17-u6gr1b.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=512&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/393223/original/file-20210402-17-u6gr1b.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=512&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">President John F. Kennedy was an early proponent of cutting corporate taxes to spur investment.</span>
<span class="attribution"><a class="source" href="https://newsroom.ap.org/detail/PresidentJohnFKennedy/a3a77811f65e457698bf05eccd5a42df/photo?Query=corporate%20AND%20tax&mediaType=photo&sortBy=arrivaldatetime:asc&dateRange=Anytime&totalCount=534&currentItemNo=1">AP Photo</a></span>
</figcaption>
</figure>
<p>Shortly after JFK’s assassination, <a href="https://taxfoundation.org/happy-birthday-kennedy-tax-cuts/">Congress passed his Revenue Act of 1964</a>, which lowered the corporate rate to 48%. </p>
<p>But the high costs of the Vietnam War led Lyndon B. Johnson to add a temporary surcharge in 1968, which raised the rate to a high of 52.8% before being lowered back to 48% by 1971.</p>
<p>After that, the corporate tax rate began its 50-year decline as successive administrations, especially Republican ones, gradually chipped away at it. As a result, by 2020, corporations were covering just 7% of government revenue – compared with the 33% borne by individuals and families – even as <a href="https://fred.stlouisfed.org/series/A053RC1Q027SBEA">they rake in record profits</a>. </p>
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<p>This same trend has been seen around the world as globalization prompted many countries such as China, Japan and European Union member states to lower business taxes in a global “<a href="https://www.washingtonpost.com/business/2018/07/24/across-globe-taxes-corporations-plummet/">race to the bottom</a>.” In 2016, <a href="https://www.oecd.org/tax/corporate-tax-remains-a-key-revenue-source-despite-falling-rates-worldwide.htm">corporate tax rates made up just 9% of total government revenue</a> on average in countries in the Organization for Economic Cooperation and Development. </p>
<p>[<em>Get the best of The Conversation, every weekend.</em> <a href="https://theconversation.com/us/newsletters/weekly-highlights-61?utm_source=TCUS&utm_medium=inline-link&utm_campaign=newsletter-text&utm_content=weeklybest">Sign up for our weekly newsletter</a>.]</p>
<h2>The benefits principle</h2>
<p>It seems that after 50 years of falling corporate tax rates, this trend may finally be coming to end – at least in the U.S. </p>
<p>Although Republicans in Congress <a href="https://guce.yahoo.com/consent?brandType=nonEu&gcrumb=cHOummg&done=https%3A%2F%2Fnews.yahoo.com%2Frepublicans-form-conservative-coalition-fight-195356032.html">remain firmly opposed to any increase in taxes</a> to pay for infrastructure spending, the public seems to be on Biden’s side. A 2019 <a href="https://news.gallup.com/poll/1714/taxes.aspx">Gallup poll found that</a> more than two-thirds of Americans believe that corporations pay less than their fair share in taxes. More recently, <a href="https://morningconsult.com/2021/03/31/biden-infrastructure-plan-raising-taxes-wealthy-corporations/">47% of those polled</a> on early reports on Biden’s infrastructure plan said they’d be “more likely” to support it if it was paid for with corporate tax increases, while 31% said it would have no impact on their views. Only 21% said it would make them less likely to support it.</p>
<p>I believe the popular appeal of Biden’s plan is that it reflects the <a href="https://www.investopedia.com/terms/b/benefits-received-rule.asp">benefits principle</a>, which states that a tax bill should be based on the value of the benefits a person or company receives from the government.</p>
<p>And that’s <a href="https://fraser.stlouisfed.org/title/tariff-1909-payne-aldrich-tariff-5874/fulltext">basically the reasoning</a> behind the corporate tax created in 1909.</p>
<p>A <a href="https://supreme.justia.com/cases/federal/us/220/107/">1911 Supreme Court decision</a> that upheld the constitutionality of the corporate income tax explicitly invoked the benefits principle, arguing that with incorporation owners of a business enjoy “distinctive privilege[s]” — such as protection from individual liability and the ability to sell stock — “which do not exist when the same business is conducted by private individuals or partnerships.</p>
<p>"It is this distinctive privilege which is the subject of taxation.” </p>
<p><a href="http://whynationsfail.com/">Decades of research</a> show that businesses benefit tremendously from being located in countries with political stability and inclusive institutions that promote the rule of law, protection of property, due process and democratic participation. Companies based in the U.S., perhaps more than anywhere else, enjoy all these privileges. </p>
<p>And that’s before we even get to what government directly spends money on. Companies have benefited enormously from investments in <a href="https://www.apta.com/wp-content/uploads/APTA-Economic-Impact-Public-Transit-2020.pdf">mass transportation</a>, <a href="https://www.eda.gov/opportunity-zones/">local development</a>, <a href="https://borgenproject.org/economic-benefits-of-education/">free public education</a>, <a href="https://hbswk.hbs.edu/item/quantifying-the-economic-impact-of-the-internet">the internet</a> and many other types of infrastructure. </p>
<figure class="align-center ">
<img alt="Heavy traffic moves along an interstate highway in Seattle with large signs directing cars to various offramps" src="https://images.theconversation.com/files/393224/original/file-20210402-23-1rhz031.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/393224/original/file-20210402-23-1rhz031.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=387&fit=crop&dpr=1 600w, https://images.theconversation.com/files/393224/original/file-20210402-23-1rhz031.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=387&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/393224/original/file-20210402-23-1rhz031.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=387&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/393224/original/file-20210402-23-1rhz031.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=486&fit=crop&dpr=1 754w, https://images.theconversation.com/files/393224/original/file-20210402-23-1rhz031.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=486&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/393224/original/file-20210402-23-1rhz031.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=486&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Corporations have benefited greatly from federal spending on the interstate highway system and other infrastructure projects.</span>
<span class="attribution"><a class="source" href="https://newsroom.ap.org/detail/SeattleViadoom/7db17f2fe4b8480e805b6cfdc0979eb3/photo?Query=interstate%20AND%20highway&mediaType=photo&sortBy=arrivaldatetime:asc&dateRange=Anytime&totalCount=1720&currentItemNo=46">AP Photo/Ted S. Warren</a></span>
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<p>Speaking of infrastructure, and <a href="https://www.washingtonpost.com/us-policy/2021/03/31/what-is-in-biden-infrastructure-plan/">Biden’s plan</a>, companies arguably benefit more than anyone from repaired bridges, upgraded electrical grids, increased broadband access, and research and development. According to a review of the research by the Congressional Research Service, public investment in core infrastructure, especially during a recession, <a href="https://fas.org/sgp/crs/misc/R44896.pdf">can spur faster productivity growth and reduce long-term unemployment</a>.</p>
<p>One objection to the benefits principle logic - as economists are fond of reminding us - <a href="https://www.econlib.org/library/Enc/CorporateTaxation.html">is that businesses cannot actually pay taxes</a>. Only people can. When a business is taxed, that tax is passed on in some combination of higher consumer prices, lower wages and lower returns to capital. Economists call this concept <a href="https://www.investopedia.com/terms/t/tax_incidence.asp">tax incidence</a> and often argue that a misunderstanding of tax incidence is what leads many people to support higher taxes on business.</p>
<p>But economists may be missing the point. The benefits principle justification for taxing corporations relies on the logic of <a href="https://law.yale.edu/justice-collaboratory/procedural-justice">procedural justice</a> - an emphasis on the fairness of the process rather than the outcome. If corporate balance sheets benefit from public investment, procedural justice dictates that their taxes should reflect that benefit, even if those costs and benefits are ultimately passed on to individuals.</p>
<h2>The price you pay</h2>
<p>And so it makes a lot of sense for companies that will benefit so much from these investments to pick up the tab. Investment that <a href="https://www.wsj.com/articles/biden-infrastructure-plan-aims-to-boost-economys-productivity-over-time-11617269403">boosts productivity will mean big gains for corporate America</a>. </p>
<p>As the recent experience with COVID-19 vaccine development has shown – in which the U.S. <a href="https://www.scientificamerican.com/article/for-billion-dollar-covid-vaccines-basic-government-funded-science-laid-the-groundwork/">has invested billions of dollars</a> to get a vaccine in record time – businesses also benefit from investment in basic science research. The sooner everyone is vaccinated, the sooner the economy and business can get back to normal. </p>
<p>Put simply, a reasonable level of taxation can be thought of as the price corporations pay for all the benefits of American taxpayers have given them.</p><img src="https://counter.theconversation.com/content/157295/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Stephanie Leiser does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The corporate tax was created on the principle that people and companies should be taxed based on what they receive in benefits – and US corporations have received an awful lot.Stephanie Leiser, Lecturer in Public Policy, University of MichiganLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1536472021-01-21T18:53:32Z2021-01-21T18:53:32ZVital Signs: Biden’s economic centrism isn’t exciting, but right for these divisive times<p>In an age of hyperpartisan politics, the Biden presidency offers a welcome centrism that might help bridge the divides.</p>
<p>But it is also Biden’s economic centrism that offers a chance to cut through what has become an increasingly polarised approach to economic policy.</p>
<p>On the Republican side of politics, there is strong support for neoliberal economic policies – that is, economic policies that don’t just emphasise the importance of markets but represent a kind of free-market fanaticism. Ronald Reagan aptly expressed this view in his <a href="https://www.reaganfoundation.org/ronald-reagan/reagan-quotes-speeches/inaugural-address-1/">1981 inaugural speech</a>, in which he said “government is not the solution to our problem, government is the problem”.</p>
<p>On the Democratic side, the centrism of the Bill Clinton era (1993- 2001) has given way to much more left-wing policies. Indeed the democratic socialism of Bernie Sanders and Alexandria Ocasio-Cortez have been in the ascendancy for several years.</p>
<p>If you have any doubt about this, consider two facts. </p>
<p>First, Sanders came very close to being the Democratic Party’s presidential nominee in 2016. Second, the 2020 Democratic presidential primaries were dominated by candidates with similar views – such as Senator Elizabeth Warren.</p>
<p>Biden, of course, ran on a much more centrist economic platform. </p>
<p>This was perhaps best captured by his approach to health care – seeking to build on Obamacare (the Affordable Care Act) and insure more people, rather than adopt the “<a href="https://berniesanders.com/issues/medicare-for-all/">Medicare for All</a>” policy advocated by Sanders and Warren.</p>
<p>In a whole range of areas Biden and his nominees for important cabinet posts have signalled the new administration’s economic policies will be responsive to the demands of the left but still be sensitive to the concerns of the right. </p>
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Read more:
<a href="https://theconversation.com/whos-who-in-joe-bidens-cabinet-152252">Who’s who in Joe Biden’s cabinet</a>
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<h2>Big spending, but within limits</h2>
<p>One of the most important things the administration will do in its early days is to orchestrate a large spending package to help deal with the fallout of the coronavirus pandemic. </p>
<p>This will include spending on the vaccine roll-out, helping schools reopen, extending unemployment insurance and cheques to households.</p>
<p>So the spending package is likely to be huge. But the administration is not going to spend with complete abandon and without acknowledging constraints.</p>
<p>As Biden’s pick for Treasury Secretary, Janet Yellen, said in her <a href="https://www.rev.com/blog/transcripts/janet-yellen-opening-statement-transcript-at-confirmation-hearing">confirmation hearing</a>:</p>
<blockquote>
<p>Neither the president elect, nor I, proposed this release relief package without an appreciation for the country’s debt burden. But right now, with interest rates at historic lows, the smartest thing we can do is act big. In the long run, I believe the benefits will far outweigh the costs, especially if we care about helping people who’ve been struggling for a very long time.</p>
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<strong>
Read more:
<a href="https://theconversation.com/vital-signs-janet-yellen-the-very-model-of-a-modern-madam-secretary-150836">Vital Signs: Janet Yellen, the very model of a modern Madam Secretary</a>
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<h2>Treading cautiously on health care</h2>
<p>Sanders and others’ “Medicare for All” plan involves single-payer (i.e. the government) universal coverage and <a href="https://www.bloomberg.com/news/articles/2019-07-05/harris-keeps-tripping-up-on-her-medicare-for-all-fuzziness">ending private health insurance</a>. This would be similar to the approach in Scandinavia, Canada and Britain.</p>
<p>Biden has strongly resisted this on two fronts. </p>
<p>One, it would be incredibly expensive, <a href="https://www.cnbc.com/2020/03/10/biden-says-he-wouldd-veto-medicare-for-all-as-coronavirus-focuses-attention-on-health.html">costing</a> US$30-40 trillion over a decade. Two, it would involve more than 150 million Americans losing their current insurance.</p>
<p>Instead, Biden wants to expand the Affordable Care Act with more incentives to push towards truly universal coverage. This is something Mitt Romney (the Republicans’ 2012 presidential candidate) might easily have proposed. Don’t forget that as governor of Massachusetts (from 2003 to 2007) he enacted a plan almost identical the Affordable Care Act – an idea championed by the conservative <a href="https://www.forbes.com/sites/johngoodman/2016/02/15/where-did-the-idea-of-obamacare-come-from-a-defense-of-the-heritage-foundation/?sh=1afbc76c4170">Heritage Foundation</a>.</p>
<h2>Likewise with tax reform</h2>
<p>Biden’s tax plan certainly involves raising taxes but not to anywhere near the levels called for by the democratic socialist wing of his party. Nor will he embrace a wealth tax like Warren championed. Under her plan, people with assets of more than US$50 million would be taxed 2% of that amount a year (and 3% for more than US$1 billion).</p>
<p>But he does plan to raise the top income tax rate (on income more than US$400,000) from <a href="https://taxfoundation.org/joe-biden-tax-plan-2020/">37% to 39.6%</a>. He will raise the flat 21% corporate tax rate introduced by Trump to 28%.</p>
<p>US companies will need to pay a minimum tax of 21% on foreign income – addressing the issue of companies avoiding taxes through legal set-ups in low-tax overseas jurisdictions (such as <a href="https://itep.org/fact-sheet-apple-and-tax-avoidance/">Apple in Ireland</a>). </p>
<p>Biden will even introduce a tax penalty on companies that move jobs overseas if their products are sold in the US.</p>
<p>This is not a package any Republican administration would be likely to introduce. On the other hand, it falls dramatically short of what Sanders, Warren and Ocasio-Cortez want.</p>
<h2>Responsive but responsible</h2>
<p>The Biden economic plan is responsive to the current – almost shocking – state of the US economy. His health care and tax policies are sensitive to concerns about inequality.</p>
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<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/joe-biden-sends-a-clear-message-to-the-watching-world-americas-back-153698">Joe Biden sends a clear message to the watching world – America’s back</a>
</strong>
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<p>His approach acknowledges, rightly, that with interest rates at historic lows there is room for considerably more spending than in the past, despite already huge deficits. But it also acknowledges there are limits to what the government can or should do. </p>
<p>In that sense it is something even conservative Republicans ought to be able to live with – and common ground is something the US desperately needs to find.</p><img src="https://counter.theconversation.com/content/153647/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Richard Holden does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Joe Biden’s middling economic policies are a chance to cut through the bitter polarisation of US politics.Richard Holden, Professor of Economics, UNSW SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1473422020-10-28T12:22:33Z2020-10-28T12:22:33ZTrump’s ultra-low tax bills are what happens when government tries to make policy through the tax code<figure><img src="https://images.theconversation.com/files/365632/original/file-20201026-21-jv1ly0.jpg?ixlib=rb-1.1.0&rect=65%2C32%2C3576%2C2014&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">The tax code can feel like a labyrinth.
</span> <span class="attribution"><a class="source" href="https://www.gettyimages.com/detail/photo/hedge-maze-in-barcelona-royalty-free-image/463203147">Marcel Germain/Moment via Getty Images</a></span></figcaption></figure><p>People tend to have one of two reactions to the revelation that President Donald Trump has paid little to no taxes in recent years: He’s either an <a href="https://www.nytimes.com/2020/10/10/opinion/sunday/trump-taxes.html">amoral tax cheat</a> or <a href="https://www.cnbc.com/2016/09/26/trump-brags-about-not-paying-taxes-that-makes-me-smart.html">he’s smart</a>.</p>
<p>To me, it reveals just how much is wrong with the U.S. tax code, which Congress treats as a sort of <a href="https://www.amazon.com/Fine-Mess-Global-Simpler-Efficient/dp/0143111140/ref=sr_1_1?dchild=1&keywords=tr+reid+a+fine+mess&qid=1601908367&sr=8-1">policy Swiss Army knife</a> to deal with innumerable desired social and economic policy goals, from <a href="https://www.nerdwallet.com/blog/mortgages/how-to-get-the-most-out-of-real-estate-tax-deductions/">homeownership</a> to protecting the <a href="https://legislature.maine.gov/statutes/36/title36sec4303.html">Maine blueberry industry</a>. </p>
<p><a href="https://scholar.google.com/citations?user=rmtYVssAAAAJ&hl=en&oi=ao">I teach</a> a course on “the politics of taxes,” in which we examine how politics shapes tax policy in the United States and other countries – as well as how taxation affects politics. My students are consistently struck by the extent to which Congress uses taxes as its <a href="https://www.routledge.com/Tax-Politics-and-Policy/Thom/p/book/9781138183391">default go-to policy lever</a>. </p>
<p>It wasn’t supposed to be this way.</p>
<h2>The tax code takes over</h2>
<p>In principle, the main function of taxation is to fund the government. But in practice, Congress also uses it to tackle challenges in virtually every policy area, from promoting conservation and charitable giving to encouraging entrepreneurship and ensuring steady business revenue. </p>
<p>All of these policies, however sound they made be individually, make the income tax system <a href="https://www.pewresearch.org/politics/2017/04/14/top-frustrations-with-tax-system-sense-that-corporations-wealthy-dont-pay-fair-share">more complicated for ordinary taxpayers</a> and creates a vast array of means by which some wealthy people <a href="https://www.jct.gov/CMSPages/GetFile.aspx?guid=fe7080a8-5a54-48e6-8cc0-ee243fc03236">can reduce their tax payments</a> to levels that feel unfair to many voters. They also, ultimately, aren’t a very good way to reach achieve the policy’s explicit goals. </p>
<p>This convoluted system <a href="https://review.chicagobooth.edu/public-policy/2018/article/why-it-s-so-hard-simplify-tax-code">was thus not created in a big bang of malfeasance</a> or ineptitude but mostly through piecemeal changes that increasingly complicated the tax code. Legislative reforms meant to simplify the tax code, such as those passed in 1986 and <a href="https://www.brookings.edu/blog/up-front/2019/09/25/a-fixable-mistake-the-tax-cuts-and-jobs-act">2017</a>, have accomplished little. </p>
<p>“The result of this process is a set of very complex provisions that appear to have no overall logic if the tax law were being designed from scratch,” as the <a href="https://www.taxpolicycenter.org/briefing-book/why-are-taxes-so-complicated">nonpartisan Tax Policy Center put it</a>. </p>
<p>This complexity has a range of negative impacts. </p>
<p>For example, estimates vary but most suggest <a href="https://bipartisanpolicy.org/wp-content/uploads/2019/04/Tax-Administration-Compliance-Complexity-Capacity.pdf">taxpayers likely pay well over US$100 billion</a> a year in time and money filing their taxes each year – known as <a href="https://onlinebusiness.northeastern.edu/blog/what-is-tax-compliance/">tax compliance</a>. The <a href="https://www.americanactionforum.org/research/tax-day-2019-little-impact-on-compliance-costs-from-tcja-so-far">2017 Tax Cuts and Jobs Act</a> does not appear to have reduced compliance costs despite its emphasis on simplifying the 1040 tax form. </p>
<p>And it’s a lot worse than in other rich countries.</p>
<p>The average American <a href="https://www.jct.gov/CMSPages/GetFile.aspx?guid=fe7080a8-5a54-48e6-8cc0-ee243fc03236">spends about 13 hours</a> filing their taxes each year, according to the Joint Committee on Taxation, <a href="https://www.theatlantic.com/ideas/archive/2019/04/american-tax-returns-dont-need-be-painful/586369/">compared with under an hour</a> in the Netherlands, Japan and Estonia. In Sweden, the government fills in the tax forms automatically, and <a href="https://www.washingtonpost.com/news/monkey-cage/wp/2018/04/12/why-the-u-s-tax-system-is-so-complicated-but-americans-are-proud-to-pay-taxes-anyway/">citizens can simply view and approve them</a> – or make changes – on their cellphone. </p>
<p>Another result is that social welfare programs in the U.S. can be needlessly complicated. </p>
<p>For example, Canada <a href="https://www.pri.org/stories/2019-02-05/what-we-can-learn-canada-s-universal-child-care-model">provides its citizens</a> with cheap child care simply by subsidizing it so that it costs $6 a day. Instead of offering subsidies, the U.S. supports lower- and middle-income parents mainly through the <a href="https://www.cbpp.org/research/federal-tax/eitc-and-child-tax-credit-promote-work-reduce-poverty-and-support-childrens">tax code with credits</a> like the earned income tax credit and the child tax credit. But both are very complicated, poorly understood and <a href="https://www.eitc.irs.gov/partner-toolkit/basic-marketing-communication-materials/eitc-fast-facts/eitc-fast-facts">often do not reach those who need it</a>. </p>
<figure class="align-center ">
<img alt="President Donald Trump listens during a White House meeting with Hispanic leaders on July 9 in Washington." src="https://images.theconversation.com/files/366176/original/file-20201028-15-eb5fon.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/366176/original/file-20201028-15-eb5fon.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=379&fit=crop&dpr=1 600w, https://images.theconversation.com/files/366176/original/file-20201028-15-eb5fon.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=379&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/366176/original/file-20201028-15-eb5fon.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=379&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/366176/original/file-20201028-15-eb5fon.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=476&fit=crop&dpr=1 754w, https://images.theconversation.com/files/366176/original/file-20201028-15-eb5fon.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=476&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/366176/original/file-20201028-15-eb5fon.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=476&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Trump has refused to release his tax returns since the 2016 election.</span>
<span class="attribution"><a class="source" href="https://newsroom.ap.org/detail/TrumpTaxes/7544c40ad3424449aeee05c552e21280/photo?Query=trump%20AND%20tax&mediaType=photo,video,graphic,audio&sortBy=arrivaldatetime:desc&dateRange=Anytime&totalCount=2654&currentItemNo=58">AP Photo/Evan Vucci</a></span>
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<h2>How Trump takes advantage</h2>
<p>Complexity also means that <a href="https://wwnorton.com/books/9781324002727">the tax code is littered with opportunities for wealthier taxpayers</a> like Trump to reduce their tax bill quite substantially. The perception that there are loopholes that only the rich can use <a href="https://www.pewresearch.org/politics/2017/04/14/top-frustrations-with-tax-system-sense-that-corporations-wealthy-dont-pay-fair-share">leads many taxpayers to view the system as unfair</a>. </p>
<p>Three of the strategies The Times reported that Trump has used to avoid taxes demonstrate this quite well. </p>
<p>In 2006, lawmakers wanted to promote conservation while helping farmers and ranchers, so <a href="https://www.propublica.org/article/conservation-easements-the-billion-dollar-loophole">they expanded conservation easements</a>, in which property holders agree to not develop land in exchange for a tax deduction. Trump used this <a href="https://www.irs.gov/charities-non-profits/conservation-easements">frequently abused</a> provision to claim a <a href="https://www.washingtonpost.com/politics/trump-got-a-21-million-tax-break-for-saving-the-forest-outside-his-ny-mansion-now-the-deal-is-under-investigation/2020/10/07/de84c1ba-ff6b-11ea-830c-a160b331ca62_story.html">$21.1 million deduction</a> in 2015 for not developing land near his Seven Springs estate that his family wanted to use as a private retreat anyway. </p>
<p>Another example is <a href="https://www.taxlawforchb.com/2017/07/abandonment-of-a-partnership-interest-or-when-a-taxpayer-rejects-its-tax-return-position/">how U.S. tax policy allows individuals to walk away</a> from an investment and, if they receive nothing, declare any losses that haven’t yet been taken on their current tax return, reducing income by that amount. The policy aim here is to encourage entrepreneurship by not making business failure too onerous.</p>
<p>Trump <a href="https://www.nytimes.com/interactive/2020/09/27/us/donald-trump-taxes.html">used this abandonment rule</a> in 2009 to declare more than $700 million in losses when he walked away from his Atlantic City casinos. Yet it appears he got something in exchange for walking way – stock in a new company – which means he may have technically violated the rules of that tax break. </p>
<p>And in 2009, Congress <a href="https://www.paulhastings.com/docs/default-source/PDFs/1444.pdf">wanted to help businesses recover</a> from the financial crisis so it made it easier to use the large losses that many companies were experiencing to offset income earned in prior years, which resulted in refunds for taxes already paid. <a href="https://www.nytimes.com/interactive/2020/09/27/us/donald-trump-taxes.html">This allowed Trump</a> to claim a refund of $56.9 million he had paid in taxes in 2005 and 2006. </p>
<p>[<em>Deep knowledge, daily.</em> <a href="https://theconversation.com/us/newsletters/the-daily-3?utm_source=TCUS&utm_medium=inline-link&utm_campaign=newsletter-text&utm_content=deepknowledge">Sign up for The Conversation’s newsletter</a>.]</p>
<p>The government has ways other than tax code to implement a policy with a social or economic aim, such as via regulations or spending on a new or existing government program. Lawmakers have often preferred to use the tax code because it can seem easier and avoids the political costs associated with <a href="http://www.artsrn.ualberta.ca/econweb/landon/CJE1997.pdf">higher taxes</a>. </p>
<p>Ultimately, however, <a href="https://fas.org/sgp/crs/misc/R44530.pdf">research shows</a> using tax code is not the best way to achieve a policy’s ends.</p><img src="https://counter.theconversation.com/content/147342/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Gary Winslett does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Congress tends to use the tax code to implement policy, which increases complexity and creates loopholes wealthy taxpayers like Trump can exploit.Gary Winslett, Assistant Professor, MiddleburyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1382472020-05-22T12:18:39Z2020-05-22T12:18:39ZA $300 charitable deduction, explained<figure><img src="https://images.theconversation.com/files/335023/original/file-20200514-77263-o3obok.jpg?ixlib=rb-1.1.0&rect=317%2C308%2C1679%2C679&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">The demand for services nonprofits offer is surging.</span> <span class="attribution"><a class="source" href="https://www.gettyimages.com/detail/news-photo/volunteers-hand-out-boxes-of-food-during-a-drive-thru-news-photo/1220786235">Paul Bersebach/MediaNews Group/Orange County Register via Getty Images</a></span></figcaption></figure><figure class="align-left ">
<img alt="" src="https://images.theconversation.com/files/333221/original/file-20200506-49538-1t9ca7k.png?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/333221/original/file-20200506-49538-1t9ca7k.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=227&fit=crop&dpr=1 600w, https://images.theconversation.com/files/333221/original/file-20200506-49538-1t9ca7k.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=227&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/333221/original/file-20200506-49538-1t9ca7k.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=227&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/333221/original/file-20200506-49538-1t9ca7k.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=285&fit=crop&dpr=1 754w, https://images.theconversation.com/files/333221/original/file-20200506-49538-1t9ca7k.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=285&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/333221/original/file-20200506-49538-1t9ca7k.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=285&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
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<p><em><a href="https://theconversation.com/us/search?utf8=%E2%9C%93&q=significant+figures">Significant Figures</a> is a series from The Conversation in which scholars explain an important number in the news.</em></p>
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<a href="https://images.theconversation.com/files/335164/original/file-20200514-77276-1kdkb7m.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/335164/original/file-20200514-77276-1kdkb7m.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/335164/original/file-20200514-77276-1kdkb7m.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=300&fit=crop&dpr=1 600w, https://images.theconversation.com/files/335164/original/file-20200514-77276-1kdkb7m.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=300&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/335164/original/file-20200514-77276-1kdkb7m.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=300&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/335164/original/file-20200514-77276-1kdkb7m.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=377&fit=crop&dpr=1 754w, https://images.theconversation.com/files/335164/original/file-20200514-77276-1kdkb7m.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=377&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/335164/original/file-20200514-77276-1kdkb7m.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=377&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<p>The COVID-19 pandemic has been hard on everyone, including <a href="https://www.marketwatch.com/story/why-coronavirus-could-devastate-charities-even-more-than-the-great-recession-did-2020-04-07">nonprofits</a>. With <a href="https://www.politico.com/news/2020/04/23/coronavirus-unemployment-claims-numbers-203455">millions of jobs lost</a>, long <a href="https://www.motherjones.com/food/2020/04/these-photos-show-the-staggering-food-bank-lines-across-america/">lines are forming outside food pantries</a>. Demands for <a href="https://www.reuters.com/article/us-health-coronavirus-philanthropy-insig/covid-19-crisis-strains-needy-and-groups-that-help-them-idUSKCN21Y1XS">a wide array of services charities provide</a> are rising fast at a time when many <a href="https://theconversation.com/what-happens-to-charitable-giving-when-the-economy-falters-133903">Americans feel unable to give away</a> as much money as they used to. </p>
<p>You may have missed it, but Congress tried to solve this problem.</p>
<p>In March, lawmakers approved a new tax break designed to encourage more charitable giving. The measure, tucked into the US$2 trillion economic relief package known as the <a href="https://aboutbtax.com/PQ6">Coronavirus Aid, Relief and Economic Security</a> (CARES) Act, will let some Americans <a href="https://www.philanthropy.com/article/How-the-New-300/248523">deduct up to $300 in charitable donations</a> from their <a href="https://www.investopedia.com/terms/t/taxableincome.asp">taxable income</a>, when they file their 2020 tax returns in 2021.</p>
<p>This small tax break <a href="https://www.philanthropy.com/article/How-the-New-300/248523">apparently applies only in 2020</a> although that could change should any of the several <a href="https://walker.house.gov/media-center/press-releases/walker-introduces-legislation-incentivize-charitable-giving-amid">related measures</a> now pending become law. The IRS hasn’t yet made clear whether couples filing jointly who don’t itemize may deduct a total of $600.</p>
<p>Currently only Americans who itemize deductions on their federal tax returns get a tax benefit from donating to charity. Less than 15% of people filing returns itemize and the <a href="https://taxfoundation.org/standard-deduction-itemized-deductions-current-law-2019/">majority of them are well-off</a>. But <a href="https://theconversation.com/fewer-americans-are-giving-money-to-charity-but-total-donations-are-at-record-levels-anyway-98291">more than half of Americans donate money each year</a>, and most of them get no tax benefit from it.</p>
<p>Like most <a href="https://scholar.google.com/citations?user=jWArVX0AAAAJ&hl=en&oi=ao">economists who study philanthropy and taxes</a>, I support <a href="https://www.taxpolicycenter.org/publications/tax-incentives-charitable-contributions/full">letting more people take advantage of a charitable deduction</a>. However, I believe it’s unlikely that this $300 deduction will do much to <a href="https://budgetmodel.wharton.upenn.edu/issues/2020/3/27/charitable-deduction-the-cares-act">boost donations to nonprofits</a>.</p>
<p>Only people who don’t itemize can use this charitable deduction, and only money given to <a href="https://www.investopedia.com/ask/answers/08/nonprofit-tax.asp">tax-exempt nonprofits</a> counts toward the $300 limit. Donated stock, furniture, clothes and canned goods don’t. Neither does giving to <a href="https://theconversation.com/donor-advised-funds-charities-with-benefits-74516">donor-advised funds</a> or foundations.</p>
<p>The data I’ve reviewed indicate that about <a href="https://psidonline.isr.umich.edu/">32% of nonitemizing taxpayers already give</a> at least $300 each year. So the new law won’t encourage them to give more money than they already do. Instead, those people will just get to deduct donations they had already made or planned on giving in 2020.</p>
<p>That leaves 68% of the people who aren’t able to itemize their tax returns and might see the new tax break as an incentive to donate. But the majority of this group hasn’t been donating any money in recent years, and it’s not clear that this will be a strong enough incentive to change that.</p>
<p>About 50% of these nongivers make less than $40,000 per year before taxes. It is unlikely that reducing their taxable income will have much of an effect on how much federal income tax they will ultimately pay in 2020. So, in my view, this tax incentive to give is not very strong.</p>
<p>There’s another hitch.</p>
<p>The <a href="https://www.taxpolicycenter.org/briefing-book/what-are-largest-tax-expenditures">government loses out on tax dollars</a> when Americans get tax breaks of any kind. Ideally in this case, the benefit to the whole country from an increase in private donations that help people right now will offset some government spending and justify Uncle Sam missing out on some revenue in the future.</p>
<p>But should the $300 charitable deduction prove to not spur new giving, the <a href="https://www.brookings.edu/policy2020/votervital/how-worried-should-you-be-about-the-federal-deficit-and-debt/">federal deficit</a> would just get even bigger at a time when federal <a href="https://www.usatoday.com/in-depth/news/2020/05/08/national-debt-how-much-could-coronavirus-cost-america/3051559001/">spending is rapidly increasing</a>.</p>
<p>[<em>Get facts about coronavirus and the latest research.</em> <a href="https://theconversation.com/us/newsletters?utm_source=TCUS&utm_medium=inline-link&utm_campaign=newsletter-text&utm_content=upper-coronavirus-facts">Sign up for The Conversation’s newsletter.</a>]</p><img src="https://counter.theconversation.com/content/138247/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Benjamin A. Priday does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>This measure, included in a pandemic relief package, is supposed to encourage Americans to give more to nonprofits.Benjamin A. Priday, Doctoral candidate of Economics, Texas A&M UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1242172019-09-26T21:28:01Z2019-09-26T21:28:01ZWhat election tax promises will mean for your wallet<figure><img src="https://images.theconversation.com/files/294242/original/file-20190925-51414-6qss81.jpg?ixlib=rb-1.1.0&rect=259%2C0%2C3307%2C1877&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Will the tax promises from the Liberals and Conservatives put more money in your pocket?</span> <span class="attribution"><span class="source">(Shutterstock)</span></span></figcaption></figure><p>Beware of politicians’ gifts, especially during election campaigns. Most political presents involve increased spending, but a growing list of promises have to do with changes to taxation.</p>
<p>The Conservatives and Liberals, the main contenders in this federal election, seem to be running even in the polls. They are also seemingly tied when it comes to the price tag of their tax promises.</p>
<p>One of the battle lines that seems to be emerging is which party can convince Canadians they are the best stewards for prosperity, and taxation is one tool politicians think they can use to influence the economy and make life fairer for Canadians.</p>
<p>So, not surprisingly, the two main parties have issued a flurry of promises regarding tax changes designed to reduce tax burdens generally and reward certain desirable activities. Both sets of tax changes currently have a net cost each of $5–6 billion. </p>
<h2>Forecasts are tricky</h2>
<p>It is always tricky to forecast the net effect of a change since the pace of economic growth will always affect the final tax take.</p>
<p>To help readers understand the current state of the <a href="https://globalnews.ca/news/5857565/canada-election-promises-trudeau-scheer-singh-may-blanchet/?utm_expid=.kz0UD5JkQOCo6yMqxGqECg.0&utm_referrer=https%3A%2F%2Fglobalnews.ca%2Fnews%2F5935433%2Fcanada-election-day-12%2F#Conservatives">proposed tax changes</a> by the Tories and Grits, I’ve prepared this cheat sheet to stick on the fridge. It will likely change over the next few weeks, so I added some lines to allow additions … I expect no deletions.</p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/294118/original/file-20190925-51438-zl7t10.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/294118/original/file-20190925-51438-zl7t10.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=352&fit=crop&dpr=1 600w, https://images.theconversation.com/files/294118/original/file-20190925-51438-zl7t10.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=352&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/294118/original/file-20190925-51438-zl7t10.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=352&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/294118/original/file-20190925-51438-zl7t10.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=442&fit=crop&dpr=1 754w, https://images.theconversation.com/files/294118/original/file-20190925-51438-zl7t10.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=442&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/294118/original/file-20190925-51438-zl7t10.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=442&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
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<span class="caption">Election Promises.</span>
<span class="attribution"><span class="source">Gregory C. Mason</span>, <span class="license">Author provided</span></span>
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<p>At first glance, it would seem the Conservatives offer the more comprehensive and potentially more generous forms of tax relief across a broader range of recipients. But let’s delve into the proposals and see.</p>
<p>Both parties will eliminate the taxation on parental benefits, and the cancellation of the carbon tax by the Conservatives aligns with their long-running view that <a href="https://www.thebalance.com/pigouvian-tax-definition-and-examples-4157479">Pigouvian taxes</a>, which are similar to <a href="https://www.investopedia.com/terms/s/sin_tax.asp">sin taxes</a> on goods viewed as potentially harmful to society, can be regressive, increasing costs for lower-income households and small businesses.</p>
<p>The Liberal promise to increase the personal exemption is quite far-reaching, especially because they propose to increase the exemption annually to 2023. The net impact of increasing the basic exemption is to focus the tax reduction on lower and middle-income households, limiting the amount of benefits to high-income taxpayers.</p>
<p>In contrast, the Conservative proposal to reduce the tax rate on the lowest tax bracket tends to spread the benefits across a broader group of Canadians. Even high-income households benefit from the Conservative tax cuts.</p>
<p>However, both approaches do focus their benefits on lower- and middle-income Canadians so, really, not much difference exists.</p>
<h2>Tax credits</h2>
<p>The Conservative proposals include tax credits for selected expenditures deemed socially desirable. Since a tax credit provides a direct reduction in taxes owed, politicians can direct the tax relief to specific groups, hopefully winning their support at the polls. </p>
<p>The restoration of tax credits for some child-related spending clearly targets parents. Similarly, increasing the age benefit targets seniors. </p>
<p>Technically, economists term a tax credit a <a href="https://www.fin.gc.ca/taxexp-depfisc/2019/taxexp1901-eng.asp">tax expenditure</a> because it represents governments voluntarily reducing their tax revenues. For example, the age tax credit in 2019 is projected to cost about <a href="https://www.fin.gc.ca/taxexp-depfisc/2019/taxexp1902-eng.asp">$4 billion</a>, which represents revenue that must be found elsewhere in the budget.</p>
<p>The other more popular term for a tax expenditure is a tax “loophole.” We normally see loopholes as devices used by the wealthy to avoid taxes, not legitimate tax breaks that give Grandpa a couple of hundred extra bucks a year.</p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/294393/original/file-20190926-51452-1qc7mlj.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/294393/original/file-20190926-51452-1qc7mlj.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/294393/original/file-20190926-51452-1qc7mlj.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/294393/original/file-20190926-51452-1qc7mlj.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/294393/original/file-20190926-51452-1qc7mlj.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/294393/original/file-20190926-51452-1qc7mlj.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/294393/original/file-20190926-51452-1qc7mlj.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
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<span class="caption">Grandpa might be delighted to get some extra cash in his bank account every year due to a tax break.</span>
<span class="attribution"><span class="source">Shutterstock</span></span>
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<h2>Breaks for small business</h2>
<p>The Conservatives are vowing to reverse the liberal taxation of small business that angered so many family businesses. This would benefit a broad swath of enterprises, including farmers and represent another difference in the tax platform of the two parties.</p>
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Read more:
<a href="https://theconversation.com/refundable-tax-credits-would-help-alleviate-poverty-118888">Refundable tax credits would help alleviate poverty</a>
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<p>However, none of the tax tinkering offered by the Conservatives or Liberals, or the other parties for that matter, represent bold policy. </p>
<p>A bold policy from the right would be tax simplification and possibly even proposing a flat tax, where all income above the basic personal exemption has the same percentage rate. Such policy trims all tax credits and loopholes … sorry Grandpa, but the age credit would have to go. </p>
<p>A bold policy from the left would be a <a href="https://www.cnbc.com/2019/09/24/bernie-sanders-proposes-wealth-tax-after-plan-from-elizabeth-warren.html">tax on wealth</a> as proposed by Democratic presidential candidates Elizabeth Warren and Bernie Sanders in the United States. An absolute wealth tax applied to the sales of homes would be a tough pill for many taxpayers to swallow.</p>
<h2>Job numbers</h2>
<p>What might provoke more dramatic economic and tax policy? With the drumbeats of a world recession growing, Canada’s September employment numbers, due in the first week of October, could be transformational. </p>
<p>Economists never place much stock in month-to-month variations of employment numbers, but Statistics Canada will publish these data two weeks before the election. This will be “hot” data.</p>
<p>The Liberals will spin any increase in employment as proof positive of their economic stewardship and stand pat with their economic and tax policy, while the Conservatives will seize on any decrease as evidence of Liberal mishandling of the economy. </p>
<p>If the employment numbers deviate much from the recent trend, we may still see bold tax policy emerge as one or both parties jockey for position in the electoral home stretch.</p>
<p>[ <em>You’re smart and curious about the world. So are The Conversation’s authors and editors.</em> <a href="https://theconversation.com/ca/newsletters?utm_source=TCCA&utm_medium=inline-link&utm_campaign=newsletter-text&utm_content=youresmart">You can read us daily by subscribing to our newsletter</a>. ]</p><img src="https://counter.theconversation.com/content/124217/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Gregory C Mason does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Taxation is one tool politicians think they can use to influence the economy and make life fairer for Canadians.Gregory C Mason, Associate Professor of Economics, University of ManitobaLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1196032019-07-07T20:09:54Z2019-07-07T20:09:54ZBuild to rent could shake up real estate but won’t take off without major tax changes<p>In the wake of <a href="https://www.abs.gov.au/ausstats/ABS@archive.nsf/log?openagent&87520033.xls&8752.0&Time%20Series%20Spreadsheet&4871AE45CFEBEB25CA2583D70015586F&0&Dec%202018&10.04.2019&Latest">slumping demand for apartment building</a>, it’s little wonder the multi-unit housing industry has been eagerly eyeing a possible new residential product: “build-to-rent”. </p>
<p>In fact, the <a href="https://www.abs.gov.au/ausstats/ABS@archive.nsf/log?openagent&87520033.xls&8752.0&Time%20Series%20Spreadsheet&4871AE45CFEBEB25CA2583D70015586F&0&Dec%202018&10.04.2019&Latest">latest figures</a> show that apartment-building construction starts were down 36% in 2018 from 2016. But how much will this little-known type of housing solve our housing problems? </p>
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Read more:
<a href="https://theconversation.com/ten-lessons-from-cities-that-have-risen-to-the-affordable-housing-challenge-102852">Ten lessons from cities that have risen to the affordable housing challenge</a>
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<p>Build-to-rent won’t be a silver bullet solution for Australia’s housing affordability stress, but it does have potential to tick the box on several important public policy objectives. These include widened housing diversity, enhanced build standards, and a better-managed, more secure form of private rental housing. </p>
<p>But for this to happen, Australia’s tax settings need adjustment.</p>
<h2>What is ‘build-to-rent’?</h2>
<p>This refers to apartment blocks built specifically to be rented, usually at market rates, and held in single ownership as long-term income-generating assets. </p>
<p>The enduring owner might be, for instance, an insurance company, an Australian super fund, a foreign sovereign wealth fund, a private equity firm, or the building’s developer. </p>
<p>Although new in Australia, build-to-rent is quite common in many other countries. Under its North American name, “multi-family housing”, the format has generated more than <a href="https://www.nmhc.org/">6.3 million new apartments since 1992 in the US alone</a>. And <a href="https://tinyurl.com/buildtorentlondon">in the UK, a build-to-rent sector</a> has led to <a href="https://www.bpf.org.uk/what-we-do/bpf-build-rent-map-uk">68,000</a> units built or under construction since 2012.</p>
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Read more:
<a href="https://theconversation.com/what-australia-can-learn-from-overseas-about-the-future-of-rental-housing-90401">What Australia can learn from overseas about the future of rental housing</a>
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<p>A scattering of build-to-rent schemes are <a href="https://cityfutures.be.unsw.edu.au/documents/551/LCOM_0000_Build_to_Rent_Report_WEB_July_2019.pdf">already underway</a> or completed, mainly in inner Sydney and Melbourne. And they may prove to be the forerunners of a new Australian residential property sector – but that is far from guaranteed.</p>
<p>In Australia, our private rental market is almost entirely owned by small-scale mum-and-dad investors, so this kind of housing would be a largely new departure from typical Australian real estate. </p>
<h2>Potential benefits</h2>
<p>The build-to-rent development model, involving a long-term owner commissioning an entire building, creates an incentive for higher, more enduring quality than the standard “build-to-sell” apartment development approach.</p>
<p>Importantly, build-to-rent is a long-run investment that caters for rental demand, which tends to grow steadily. </p>
<p>This means the model is largely immune to the fickle changes in housing demand resulting from typically short time horizons and primarily speculative instincts of individual buyers traditionally dominant in our market. </p>
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<strong>
Read more:
<a href="https://theconversation.com/australias-social-housing-policy-needs-stronger-leadership-and-an-investment-overhaul-119097">Australia's social housing policy needs stronger leadership and an investment overhaul</a>
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<p>So at its full potential, this new housing product could introduce a valuable counter-cyclical component into the notoriously volatile residential construction industry, helping to offset damaging booms and busts. In other words, build-to-rent can create stability in the Australian property market. </p>
<h2>How build-to-rent can incorporate affordable housing</h2>
<p>Optimistically, some have claimed build-to-rent could also provide <a href="https://www.smh.com.au/national/build-to-rent-a-potential-solution-to-australia-s-housing-problem-20180904-p501of.html">an “affordable housing” fix</a> for many earners who are doing it tough in our existing private rental market. </p>
<p>But this could be possible only with the aid of major government funding or planning concessions.</p>
<p>Ideally, housing at rents affordable to low or moderate income earners would be included in predominantly market-rate build-to-rent schemes. Indeed, one major construction industry player <a href="https://www.afr.com/news/politics/national/rod-fehring-would-tackle-affordable-housing-once-and-for-all-20190430-p51io8">recently advocated this</a> as a standard expectation.</p>
<p>So how should affordable housing be provided in this case? </p>
<p>To find out, <a href="https://cityfutures.be.unsw.edu.au/documents/551/LCOM_0000_Build_to_Rent_Report_WEB_July_2019.pdf">our analysis</a> compares the cost of developing affordable housing by a for-profit company with development under a not-for-profit community housing provider. </p>
<p>Thanks to that non-profit format, and the tax advantages that go along with it, community housing providers can, in fact, construct affordable rental housing at significantly lower cost than their for-profit counterparts. Less subsidy is therefore needed.</p>
<p>Nonetheless, government help in some form will be essential to enable an affordable housing element. The most painless way for this to happen, from the government perspective, is through allocating sections of federal or state-owned redevelopment sites to community housing providers at discounted rates. </p>
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<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/build-to-rent-could-be-the-missing-piece-of-the-affordable-housing-puzzle-82320">'Build to rent' could be the missing piece of the affordable housing puzzle</a>
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<p>Encouragingly, this strategy was <a href="https://www.afr.com/real-estate/residential/we-want-our-pound-of-flesh-on-government-site-sales-michael-sukkar-20190606-p51v6d">recently advocated</a> by newly designated federal housing minister Michael Sukkar. </p>
<p>Such designation of government-owned sites could, for instance, be factored into large-scale urban renewal projects like Sydney’s Central-to-Eveleigh and Rozelle Bays. When complete, it could fulfil the <a href="https://www.domain.com.au/news/calls-for-higher-affordable-housing-targets-as-more-people-on-cusp-of-poverty-20170802-gxo11s/">widely voiced</a> demand that 30% of these developments should be affordable housing.</p>
<h2>Levelling the playing field</h2>
<p>Our modelling shows that under current conditions, even market-rate build-to-rent projects are barely viable – at least in Sydney. </p>
<p>The inflated price of developable land in Australia’s urban housing markets is an important contributing constraint. But <a href="https://cityfutures.be.unsw.edu.au/documents/551/LCOM_0000_Build_to_Rent_Report_WEB_July_2019.pdf">our research</a> also identifies a range of government tax settings that disadvantage build-to-rent, compared with both mum-and-dad-investors and traditional build to sell developers. </p>
<p>Removing less favourable land tax and GST treatment could markedly improve build-to-rent feasibility. </p>
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<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/australias-foreign-real-estate-investment-boom-looks-to-be-over-here-are-five-things-we-learned-97460">Australia's foreign real estate investment boom looks to be over. Here are five things we learned</a>
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<p>From a housing policy perspective, there’s also a case for the federal government to reconsider its recent “withholding tax” decision that treats overseas-based institutional investment in rental property less favourably than investment in commercial property. </p>
<p>Since such global funds would likely lead the establishment of a new Australian build-to-rent asset class, revisiting the withholding tax changes could be a significant step in making build-to-rent a reality in Australia.</p>
<p>In any case, build-to-rent is no simple solution for Australia’s affordable housing shortage. </p>
<p>But even as a market-rate product, it could fulfil several important public policy objectives. How far it might do so in practice is something that governments rightly need to weigh up when considering industry-proposed tax and regulatory reforms.</p><img src="https://counter.theconversation.com/content/119603/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Hal Pawson receives funding from the Australian Research Council, the Australian Housing and Urban Research Institute and NSW Landcom. While this article draws on research funded by NSW Landcom, it does not necessarily reflect the views of the project sponsor.</span></em></p>Constructing buildings to rent, rather than sell, may fulfil important housing policy objectives – but it won’t take off without tax reform.Hal Pawson, Associate Director - City Futures - Urban Policy and Strategy, City Futures Research Centre, Housing Policy and Practice, UNSW SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1170722019-05-17T10:44:54Z2019-05-17T10:44:54ZWhy Congress needs to empower the IRS to give nonprofit newspapers a green light<figure><img src="https://images.theconversation.com/files/274716/original/file-20190515-60563-1qih275.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Throngs of Santa Barbara News-Press readers, rallying in 2006</span> <span class="attribution"><a class="source" href="http://www.apimages.com/metadata/Index/AP-A-CA-USA-F-NEWSPAPER-TURMOIL/9156cca79d16db11af9f0014c2589dfb/3/0">AP Photo/Michael A. Mariant</a></span></figcaption></figure><p>After nearly 150 years in business – as a business – <a href="https://www.sltrib.com/opinion/editorial/2019/05/08/letter-tribune-owner/">The Salt Lake Tribune</a> wants to become a nonprofit.</p>
<p>But first its owner is seeking approval from the Internal Revenue Service for tax-exempt status. The federal agency in charge of collecting taxes also gets to say which organizations don’t have to pay them and are eligible for related tax benefits. If the IRS decides the Tribune’s mission <a href="https://www.irs.gov/charities-non-profits/charitable-organizations/exemption-requirements-section-501c3-organizations">meets federal charitable standards</a>, the newspaper could <a href="https://www.poynter.org/business-work/2018/a-new-look-at-local-nonprofit-news-sites-finds-revenues-of-more-than-325-million-2200-journalists/">rely heavily on donations</a> as its <a href="https://www.poynter.org/business-work/2018/high-hopes-dashed-%C2%97-why-the-salt-lake-tribune-fell-so-far-so-fast/">revenue from ads and subscriptions</a> continues to dry up.</p>
<p>This is happening as a nonprofit wave is spreading across journalism, something <a href="https://scholar.google.com/citations?user=n_3ICpcAAAAJ&hl=en&oi=sra">I’ve been studying for the last decade</a>. Congress enacted the Internal Revenue Code, and the IRS enforces it, which of course involves some element of interpretation. The future of journalism, though, shouldn’t be riding on how that interpretation plays out. Instead, I believe Congress should revise the code with an eye to preserving and promoting quality journalism.</p>
<h2>Nonprofit news</h2>
<p>While some outlets, like <a href="https://www.motherjones.com/about/history/">Mother Jones</a>, founded in 1976, have been nonprofit for decades, <a href="https://theconversation.com/the-pace-of-nonprofit-media-growth-is-picking-up-98376">the sector exploded 10 years ago</a>. It includes <a href="https://www.propublica.org/article/pulitzer-winner-ms13-gangs-immigration-zero-tolerance">ProPublica</a>, a Pulitzer-Prize-winning source of investigative reporting, and the <a href="https://www.wisconsinwatch.org/">Wisconsin Center for Investigative Journalism</a>, a regional outlet aimed at improving reporting on the state of Wisconsin. </p>
<p>These organizations are primarily funded by foundation grants and donations from readers rather than subscriptions and ads. They tend to serve <a href="https://inn.org/members/">niche or hyperlocal audiences</a> or do <a href="https://www.motherjones.com/politics/2016/06/cca-private-prisons-corrections-corporation-inmates-investigation-bauer/">expensive and generally unprofitable</a> investigative work. As is the case with <a href="https://theconversation.com/us">The Conversation US</a>, they often produce coverage that no commercial enterprise regularly provides. </p>
<p>A second, much smaller, group consists of newspapers that belong to nonprofits or churches. In Philadelphia, where I live, philanthropist H.F. “Gerry” Lenfest created a foundation and gave it the <a href="https://www.niemanlab.org/2016/01/can-phillys-new-institute-for-journalism-in-new-media-live-up-to-the-enormous-hopes-pinned-on-it/">Philadelphia Inquirer and the Philadelphia Daily News</a>, ensuring both newspapers will remain locally owned.</p>
<p>Businessman <a href="https://www.apnews.com/011e8b786a4647189ca6c14ecef1e59c">Paul Huntsman</a>, the Tribune’s owner and publisher, is the first in the country trying a third option: <a href="https://www.niemanlab.org/2019/05/the-salt-lake-tribune-wants-to-go-nonprofit-in-a-new-and-unproven-way-and-now-the-irs-will-have-its-say/">making his newspaper itself a nonprofit</a>. </p>
<h2>A struggling industry</h2>
<p>What isn’t debatable is that the business model for reporting and relaying the news is in big trouble. Newspaper ad revenue soared throughout much of the 20th century, peaking in 2000, and then <a href="https://www.journalism.org/chart/sotnm-newspapers-newspaper-industry-estimated-advertising-and-circulation-revenue/">fell off a cliff</a>, dropping from US$48.6 billion to just $16.6 billion in 2017.</p>
<p>Circulation – the total number of papers sold – is down but the revenue from subscriptions and newsstand sales <a href="https://www.journalism.org/chart/sotnm-newspapers-newspaper-industry-estimated-advertising-and-circulation-revenue/">has grown</a>. Newspaper sales generated $11.2 billion in 2017, up from $10.3 billion in 2007, though that didn’t begin to plug the hole caused by lost ad dollars.</p>
<p>The Salt Lake Tribune’s advertising revenue has also plummeted. It fell 40% while the number of its daily print subscribers dropped more than 60%, <a href="https://www.poynter.org/business-work/2018/high-hopes-dashed-%C2%97-why-the-salt-lake-tribune-fell-so-far-so-fast/">from 85,000 to 31,000</a>, between 2016 and 2018.</p>
<p>As a result, U.S. newspapers employ far fewer people than they used to. The total number of their reporters, editors, photographers and film and video editors fell to 39,210 in 2017, a <a href="https://www.journalism.org/fact-sheet/newspapers/">45% decline from 2004</a>.</p>
<p>But this doesn’t matter only to the journalists who can no longer find work in their profession. Most experts agree that high-quality journalism is <a href="http://tjrs.monticello.org/letter/1289">essential to a functioning democracy</a>. Without it, unsubstantiated rumors and sensationalism fill the void and mislead the public. The consequences can be dramatic, as evidenced by the <a href="https://theconversation.com/anti-vaxxers-appear-to-be-losing-ground-in-the-online-vaccine-debate-114406">misinformation-fueled</a> movement against vaccinations now causing measles outbreaks.</p>
<iframe src="https://www.journalism.org/chart/sotnm-newspapers-newspaper-industry-estimated-advertising-and-circulation-revenue/iframe/" id="pew62609" scrolling="no" width="100%" height="600px" frameborder="0"></iframe>
<h2>A benefit for all</h2>
<p>You benefit from the fact that local news exists, even if you don’t subscribe to your local newspaper. And you probably don’t. A 2018 <a href="https://www.journalism.org/2019/03/26/most-americans-think-their-local-news-media-are-doing-well-financially-few-help-to-support-it/">Pew Research Center study</a> found that just 14% of Americans said they paid for local news.</p>
<p>Many studies have shown that when newspapers suffer, we all do. When newspaper staffs shrink, <a href="https://journals.sagepub.com/doi/abs/10.1177/1078087419838058?journalCode=uarb">fewer people run for mayor</a>. When papers close, <a href="https://www.nber.org/papers/w14817">voter turnout falls</a> and <a href="https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3175555">cities and counties spend more to borrow money</a>.</p>
<p>In other words, local news helps communities function better for everyone – not just subscribers. </p>
<figure class="align-right zoomable">
<a href="https://images.theconversation.com/files/274717/original/file-20190515-60537-12rmd7f.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/274717/original/file-20190515-60537-12rmd7f.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/274717/original/file-20190515-60537-12rmd7f.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=399&fit=crop&dpr=1 600w, https://images.theconversation.com/files/274717/original/file-20190515-60537-12rmd7f.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=399&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/274717/original/file-20190515-60537-12rmd7f.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=399&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/274717/original/file-20190515-60537-12rmd7f.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=501&fit=crop&dpr=1 754w, https://images.theconversation.com/files/274717/original/file-20190515-60537-12rmd7f.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=501&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/274717/original/file-20190515-60537-12rmd7f.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=501&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">An invaluable yet endangered resource.</span>
<span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/news-folded-newspapers-front-black-wall-241650187">qvist/Shutterstock.com</a></span>
</figcaption>
</figure>
<p>Huntsman, whose <a href="https://www.reuters.com/article/us-people-huntsman/u-s-businessman-philanthropist-jon-huntsman-sr-dead-at-80-idUSKBN1FN00Z">self-made billionaire</a> father gave away hundreds of millions of dollars, himself has <a href="https://www.sltrib.com/opinion/editorial/2019/05/08/letter-tribune-owner/">alluded to this notion</a>. “I have always seen The Salt Lake Tribune as Utah’s institution, much like our libraries, hospitals and the arts and cultural organizations that enrich our lives and reflect our shared civic goals,” he said upon announcing the nonprofit plan.</p>
<p>In the case of other services that benefit just about everybody, like public schools and parks, the government picks up the tab. With journalism, <a href="https://qz.com/1383503/americans-could-barely-buy-a-coffee-with-what-they-spend-per-year-on-public-media/">that has largely</a> not been the case in the United States to date. Federal tax dollars only cover a small portion of the budgets for <a href="https://www.npr.org/about-npr/178660742/public-radio-finances">public radio</a> and <a href="https://www.pbs.org/publiceditor/blogs/pbs-public-editor/how-do-federal-get-to-your-local-station/">television programs</a>. <a href="https://apnews.com/f18b9915d13b422fa9833f429e4c52a2">New Jersey</a> and <a href="https://current.org/state-funding-guide/">other states</a> do shore up their local media outlets but generally on a small scale.</p>
<h2>A new model</h2>
<p>Huntsman does not want to follow the same path as the other newspapers that opted for nonprofit ownership, such as those in <a href="https://www.niemanlab.org/2016/01/can-phillys-new-institute-for-journalism-in-new-media-live-up-to-the-enormous-hopes-pinned-on-it/">Pennsylvania</a>, <a href="https://www.poynter.org/archive/2002/who-owns-the-st-petersburg-times-why-it-matters-to-readers/">Florida</a> and the Tribune’s local competitor the <a href="https://www.deseretnews.com/about-us#about">Deseret News</a>, which belongs to the The Church of Jesus Christ of Latter-day Saints. Instead, he wants his paper to itself be a nonprofit.</p>
<p>Now, plenty of nonprofits own for-profit organizations, and the <a href="https://www.nonprofitissues.com/to-the-point/can-nonprofit-have-profit-subsidiary">IRS is fine with that</a>. And plenty of <a href="https://inn.org/members/">nonprofit news organizations</a> exist, having successfully made the argument to the IRS that they’re <a href="https://www.revealnews.org/about-us/">fulfilling worthy missions</a> and thus should get the associated tax breaks. </p>
<p>At issue here is whether it would be reasonable to just turn off the Tribune’s requirement to pay taxes and let it accept donations that for <a href="https://theconversation.com/the-pall-that-the-tax-law-is-casting-over-charities-89440">big givers would be tax-deductible</a>. After all, the Tribune proposes to keep doing what it’s been doing, and what hundreds of newspapers across the country are doing. </p>
<p>Wouldn’t that create an unfair playing field with its competitor, the Deseret News? Although owned by a church, that paper operates as a for-profit corporation. </p>
<p>And it’s unclear how nonprofit status would actually allow the Tribune to keep doing what it’s been doing. Can covering professional sports be considered a mission-driven endeavor?</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/274719/original/file-20190515-60541-tujxif.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/274719/original/file-20190515-60541-tujxif.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/274719/original/file-20190515-60541-tujxif.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=386&fit=crop&dpr=1 600w, https://images.theconversation.com/files/274719/original/file-20190515-60541-tujxif.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=386&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/274719/original/file-20190515-60541-tujxif.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=386&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/274719/original/file-20190515-60541-tujxif.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=485&fit=crop&dpr=1 754w, https://images.theconversation.com/files/274719/original/file-20190515-60541-tujxif.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=485&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/274719/original/file-20190515-60541-tujxif.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=485&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Is covering the Utah Jazz and other successful teams something nonprofit news should do?</span>
<span class="attribution"><a class="source" href="http://www.apimages.com/metadata/Index/Nuggets-Jazz-Basketball/28ec72c46b254d79b25cf3951428ec09/231/0">AP Photo/Rick Bowmer</a></span>
</figcaption>
</figure>
<p>Given the <a href="https://www.councilofnonprofits.org/tools-resources/political-campaign-activities-risks-tax-exempt-status">limitations on political activity</a> that go with nonprofit status, most likely the Tribune would have to <a href="http://www.dmlp.org/irs">stop endorsing political candidates</a> and <a href="https://www.niemanlab.org/2015/10/if-the-philadelphia-newspapers-wanted-to-convert-to-nonprofits-what-would-stand-in-their-way/">pending legislation</a>, mainstays of American newspaper editorial pages, if Huntsman prevails. But who ought to decide what’s off-limits or not?</p>
<p>However these decisions are made, the people making them should be concerned with urgent questions regarding the future of information and democracy – rather than what the tax code says about which organizations have historically been free to accept tax-deductible donations.</p>
<p><em>Editor’s note: This article has been updated to clarify how much discretion the IRS has in these matters.</em></p><img src="https://counter.theconversation.com/content/117072/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Magda Konieczna does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The health of American democracy could be at stake.Magda Konieczna, Assistant Professor of Journalism, Temple UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1056442019-04-12T02:03:24Z2019-04-12T02:03:24ZPeople who win big prizes shouldn’t get taxed when they give their windfalls away<figure><img src="https://images.theconversation.com/files/268632/original/file-20190410-2898-1y5zmb1.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Obama's Nobel Peace Prize ceremony in Oslo</span> <span class="attribution"><a class="source" href="http://www.apimages.com/metadata/Index/Norway-Nobel-Peace-Obama/faf175cd1e1646fbb9c5f53ec2d4fd7c/4/0">AP Photo/John McConnico</a></span></figcaption></figure><p>When former President <a href="https://www.reuters.com/article/us-obama-donation/obama-gives-1-4-million-nobel-prize-to-10-charities-idUSTRE62A5EN20100311">Barack Obama</a> won the Nobel Peace Prize in 2009, he didn’t keep the approximately <a href="https://www.thoughtco.com/monetary-value-of-the-nobel-prize-608598">US$1.4 million</a>, converted from Swedish currency, that came with it. Instead the Nobel Prize Foundation transferred the money directly to Fisher House, a nonprofit that houses families of wounded veterans while their loved ones get medical care, the Clinton Bush Haiti Fund and <a href="https://obamawhitehouse.archives.gov/sites/default/files/president-obama-2010-nobel-charity.pdf">eight other charities</a>.</p>
<p>Under the tax code, that action meant the prize money <a href="https://obamawhitehouse.archives.gov/blog/2010/04/15/president-obama-and-vice-president-biden-s-tax-returns">didn’t count as income</a>. The Internal Revenue Code provision that authorizes this special treatment is section 74, which governs taxation of prizes and awards. </p>
<p>I study <a href="https://scholar.google.com/scholar?hl=en&as_sdt=0%2C5&q=Ellen+Aprill&btnG=">federal tax law</a> pertaining to charity. The way section 74 treats prizes for outstanding artistic, intellectual, and athletic achievements strikes me as too complicated, inconsistent and outdated. I believe it’s time to revise these rules and regulations to avoid penalizing people who have been honored with these rewards and who choose to give their winnings to causes they support. Otherwise, winning a big prize could have the perverse effect of causing the prize winners financial distress.</p>
<h2>Section 74</h2>
<p><a href="https://www.law.cornell.edu/uscode/text/26/74">Under section 74</a>, as first enacted in 1954, prize money had to meet two conditions to be excluded from income. First, recipients couldn’t apply or nominate themselves. Second, if they won, they couldn’t be required “to render substantial future services.” In addition to the Nobel Prize, well-known winnings eligible for this special treatment include the cash tied to <a href="https://www.pulitzer.org/">Pulitzer Prizes</a> given to journalists and other writers and the <a href="http://www.templetonprize.org/abouttheprize.html">Templeton Prize</a>, awarded to people who make “an exceptional contribution to affirming life’s spiritual dimension, whether through insight, discovery or practical works.”</p>
<p>The rules changed in 1986. When <a href="https://www.congress.gov/bill/99th-congress/house-bill/3838">Congress overhauled the tax code</a> that year, it amended section 74. Under the new rules, money from prizes meeting those criteria would <a href="https://taxfoundation.org/nobel-prize-award-subject-income-taxation/">potentially be taxable income</a>.</p>
<p>Winners had one work-around: never personally receiving the money in the first place. That is what Obama did after winning his Nobel Peace Prize. So did <a href="https://www.editage.com/insights/ever-wondered-how-nobel-laureates-spend-their-prize-money">George Smoot</a> and <a href="https://www.livescience.com/23838-how-nobel-prize-money-is-spent.html">John Mather</a>, the co-winners of the <a href="https://www.nobelprize.org/prizes/physics/2006/summary/">2006 Nobel Prize in Physics</a>. </p>
<p>They <a href="https://www.spacegrant.org/mather">both gave their winnings</a> to charities <a href="https://news.yahoo.com/nobel-prize-winners-money-141217506.html">that support scholarships and fellowships</a>. “From my perspective the prize money didn’t feel like my money,” <a href="https://www.livescience.com/23838-how-nobel-prize-money-is-spent.html">Mather explained</a>. “I wanted to do as much good as I could with it.”</p>
<p>And in 2018, biologist <a href="https://www.columbiamissourian.com/news/higher_education/nobel-laureate-george-p-smith-donates-prize-money-to-mu/article_b64db82c-4032-11e9-a6bf-d7208017620a.html">George P. Smith</a> had the $243,000 he won for the <a href="https://www.nobelprize.org/prizes/chemistry/2018/summary/">Nobel Prize in Chemistry</a> sent directly to the University of Missouri, where he had conducted his research.</p>
<p>Taking this step can require more than generosity, as I found out in 2002. At that time, I tried to help a big prize winner take advantage of this special arrangement. But the money was from a foreign government that refused to do anything but pay the winner directly so as to avoid being involved in a transaction that might appear to be a form of tax evasion.</p>
<p>To protect the privacy of everyone involved, I am not disclosing the winner, the award or the foreign country.</p>
<h1>Caught off-guard</h1>
<p>Winning large prizes may sound like a good problem for prestigious people to have. But it can be costly if prize money propels someone into a higher tax bracket.</p>
<p>Consider the fate that would befall a jointly filing married scientist, earning, say, $100,000 in adjusted gross income, whose spouse doesn’t work outside the home. If she claimed the following typical itemized deductions – mortgage interest of $12,000, <a href="https://www.law.cornell.edu/uscode/text/26/164">state taxes equal to the $10,000 limit</a>, and $3,000 in charitable contribution deductions – the couple’s taxable income would be $75,000 and federal income tax liability would come to a little over $8,600.</p>
<p>If this scientist won the Nobel Prize, which currently comes with an approximately <a href="https://www.insidescience.org/news/getting-ready-2018-nobel-prizes">$1 million award</a>, and she didn’t take advantage of section 74 or change any other behavior related to taxes, the couple’s taxable income would jump to $1,075,000. And their federal tax liability would skyrocket to almost $340,000 – substantially reducing their windfall.</p>
<p>Awardees who itemize their taxes can reduce the amount of their suddenly enlarged taxable income by making tax-deductible contributions to charities. But there is a limit. </p>
<p>They can’t deduct <a href="https://www.law.cornell.edu/uscode/text/26/170">donations that exceed 60 percent</a> of their <a href="https://www.irs.gov/e-file-providers/definition-of-adjusted-gross-income">adjusted taxable income</a> in any single year.</p>
<p>That means prize winners who wish to donate the entire bundle could end up owing tax on money they have already given to charity. I think that this restriction can turn into trap for the unwary. It is also unwise as it can discourage high-profile gifts to charity – gifts that have the potential to inspire more generosity.</p>
<p>If that scientist gave the million bucks she won from the Nobel to charity, she could deduct only a total of $646,800 from her taxable income as charitable contributions. She would still have taxable income of $431,200 and federal income tax liability of a little over $100,000. She would have to find some way to pay that tax. To be clear, she could gradually take the charitable deductions not allowed the year she won the Nobel Prize by carrying it over on her taxes for five years.</p>
<p>But, assuming her adjusted gross income remained around $100,000 a year, she would be able to deduct only $60,000 a year, and her deductions would be at a lower tax rate. At the end of five years, she would still end up losing tens of thousands of dollars in deductions.</p>
<p>Alternatively, she could <a href="https://www.wealthmanagement.com/philanthropy/noble-use-nobel-prize">limit her charitable giving this year to $646,800</a>. She would have money left from the Nobel Prize award to enable her to pay her tax liability of about $100,000. She could deduct the rest of the prize money in future years, but only at the rate of $60,000 a year. </p>
<p>If, instead, she were to take advantage of section 74, and her adjusted gross income remained about $100,000 a year, her taxable income would continue to be about $75,000 –with about $8,622 in federal income tax liability. </p>
<figure class="align-right zoomable">
<a href="https://images.theconversation.com/files/268634/original/file-20190410-2921-1ajrxzf.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/268634/original/file-20190410-2921-1ajrxzf.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/268634/original/file-20190410-2921-1ajrxzf.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/268634/original/file-20190410-2921-1ajrxzf.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/268634/original/file-20190410-2921-1ajrxzf.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/268634/original/file-20190410-2921-1ajrxzf.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/268634/original/file-20190410-2921-1ajrxzf.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/268634/original/file-20190410-2921-1ajrxzf.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Marcelo Gleiser, a Dartmouth College professor of natural philosophy, physics and astronomy, and the 1019 Templeton Prize winner.</span>
<span class="attribution"><a class="source" href="https://www.flickr.com/photos/61838152@N06/10278095783">Fronteiras do Pensamento/Flickr</a>, <a class="license" href="http://creativecommons.org/licenses/by-sa/4.0/">CC BY-SA</a></span>
</figcaption>
</figure>
<p>The theoretical physicist <a href="https://physicstoday.scitation.org/do/10.1063/PT.6.4.20190409a/full/">Marcelo Gleiser</a> won the Templeton’s £1.1 million – currently about $1.4 million – award for 2019. He will now contend with those hypothetical accounting concerns in real life.</p>
<h2>Reasons to revise</h2>
<p>By this point, you are perhaps figuring that this Nobel Prize winner is surely pretty smart and maybe even a genius. Can’t bright people suss all this out on their own or with a good accountant? The answer is no.</p>
<p>The prize winners eligible for this tax break often aren’t rich. Like most Americans, they have no idea how <a href="https://www.pgcalc.com/support/knowledge-base/pg-calc-featured-articles/limitations-income-tax-charitable-deductions">large charitable gifts can affect tax bills</a>. And few people, even among tax professionals and the very richest Americans, are familiar with <a href="http://uscode.house.gov/view.xhtml?req=%28title:26%20section:74%20edition:prelim%29">section 74’s strictures</a>. </p>
<p>Congress revisited this provision not long ago. But the changes, which took effect in 2018, lightened the load only for <a href="https://www.sbnation.com/2016/10/11/13240164/olympic-taxes-barack-obama-medal-prizes">Olympic and Paralympic athletes</a> who earn less than $1 million a year. The special rules for athletes did not encourage charitable giving; it simply excluded the winnings from income. Congress made section 74 more complicated and inconsistent.</p>
<p>A key reason to further revamp Section 74 is the growing popularity among <a href="https://www.mckinsey.com/business-functions/strategy-and-corporate-finance/our-insights/using-prizes-to-spur-innovation">philanthropists</a> of adapting for-profit methods to identify innovative solutions to societal problems by holding <a href="https://www.xprize.org/">high-stakes competitions</a> such as the $5 million <a href="https://ai.xprize.org/prizes/artificial-intelligence">IBM Watson AI XPRIZE</a>, which aims to spur the development of technologies that “tackle the world’s grand challenges.” The people who win those contests should also have the option of having their prizes go directly to charity in order to avoid possible income tax on the awards.</p>
<p>I believe that people who dedicate their lives to solving the world’s most pressing problems deserve the same privileges as Nobel and Pulitzer Prize winners. If lawmakers agree, they should revise the tax code accordingly.</p><img src="https://counter.theconversation.com/content/105644/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Ellen P. Aprill has received funding from New York University and the Urban Institute.
She is a member of the American College of Tax Counsel and American Law Institute and serves on boards of the NYU Center on Philanthropy and Law and the American Tax Policy Institute.</span></em></p>Congress can fix this by updating the tax code.Ellen P. Aprill, Professor of Law; John E. Anderson Chair in Tax Law, Loyola Law School Los AngelesLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1007122018-09-18T10:48:38Z2018-09-18T10:48:38ZTrump should wage a war on waste instead of battling the world over trade<figure><img src="https://images.theconversation.com/files/236767/original/file-20180917-158213-63ervb.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Instead of fighting other countries, we should be fighting our overflowing landfills.</span> <span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/truck-working-landfill-birds-looking-food-169420184?src=tBJTZucNQ5HHgAxz1sDUug-1-14">Huguette Roe/shutterstock.com</a></span></figcaption></figure><p>President Donald Trump is fighting the wrong fight in his ongoing <a href="https://theconversation.com/us/topics/trade-wars-50746">trade war</a> with the rest of the world. </p>
<p>That’s because it’s premised on the old-school notion of the linear economy in which someone in another country, such as China, digs up raw materials and sends them to a factory, where they get turned into the finished product and shipped to the U.S. In exchange, <a href="https://www.washingtonpost.com/business/2018/08/03/trump-hates-trade-deficit-its-track-be-biggest-decade/?noredirect=on&utm_term=.83c540dd4382">money leaves the U.S. economy</a> and flows to the countries where the product was made – creating the <a href="https://www.nytimes.com/2018/03/05/us/politics/trade-deficit-tariffs-economists-trump.html">trade deficit Trump despises</a>.</p>
<p>And here’s the important bit. Americans use the product for a while, throw it away, and it ends up in a dump. And then we buy another import. </p>
<p>The long-term effect? Our money goes to a foreign economy, and Americans end up with piles of garbage. Then we pay <a href="https://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=2&ved=2ahUKEwi76bT9hLvdAhVyc98KHbDWB7sQFjABegQIBRAB&url=https%3A%2F%2Fwww.omicsonline.org%2Fopen-access%2Feffects-of-electronic-waste-on-developing-countries-2475-7675-1000128.php%3Faid%3D88750&usg=AOvVaw3M_1XDBboG9MhanJSttUSG">a foreign economy one more time to take the garbage off our hands</a>. China is one country that used to take a lot of our garbage, but <a href="https://www.sciencedirect.com/science/article/pii/S1364032115011855">India, Pakistan and Nigeria</a> are also big in this business. </p>
<p>A circular economy, by contrast, starts with the finished product, which can then be recycled domestically and reused, often at <a href="http://circularfoundation.org/sites/default/files/tce_report1_2012.pdf">a fraction of the cost of manufacturing them new elsewhere</a>. This <a href="http://circularfoundation.org/sites/default/files/tce_report1_2012.pdf">keeps the money at home</a>, which produces more domestic jobs and wealth. </p>
<p>As a researcher of corporate social responsibility, <a href="https://doi.org/10.1007/978-3-319-66023-3_178">I’ve been exploring</a> whether consumers are willing to buy more goods that have been remanufactured. My research suggests the answer is yes – if companies can figure how to produce more of them. And that’s where Trump and the federal government could play a big role. </p>
<h2>Companies leading the charge</h2>
<p>For now, companies and others in the American private sector are trying to lead the way, such as construction and mining equipment maker Caterpillar and automaker General Motors.</p>
<p>Caterpillar, for example, currently <a href="https://www.rit.edu/research/sites/rit.edu.research/files/research-magazines/RIT-Research-Magazine-Spring-Summer-2018.pdf">remanufactures 85 million tons</a> of material a year, while GM has 142 manufacturing and other facilities <a href="http://media.gm.com/media/us/en/gm/news.detail.html/content/Pages/news/us/en/2018/feb/0228-landfill-free.html">that don’t produce any garbage</a> by recycling, reusing or converting all waste to energy. GM also participates in a new <a href="https://pathway21.com/about-2/">online exchange</a> that has about 1,000 partner companies buying and selling their recycled waste as raw material. </p>
<p>The nonprofit sector has also been playing a role, both in terms of research and practical efforts. Since 1991, the <a href="https://www.rit.edu/gis/remanufacturing/">Center for Remanufacturing and Resource Recovery</a> at my own Rochester Institute of Technology in upstate New York, for example, has been working with organizations such as the U.S. Marines Corps and Staples to take advantage of circular economy principles. </p>
<p>The center helped the Marines <a href="https://www.rit.edu/research/sites/rit.edu.research/files/research-magazines/RIT-Research-Magazine-Spring-Summer-2018.pdf">remanufacture defective drive shafts</a> for light armored vehicles, which has saved the military force 78 percent versus the cost of buying them new. It also partnered with Staples to cut the use of non-recycled materials in office furniture by almost 90 percent while reducing the cost to the customer by over 40 percent. </p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/236766/original/file-20180917-158228-1acaf2r.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/236766/original/file-20180917-158228-1acaf2r.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/236766/original/file-20180917-158228-1acaf2r.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/236766/original/file-20180917-158228-1acaf2r.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/236766/original/file-20180917-158228-1acaf2r.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/236766/original/file-20180917-158228-1acaf2r.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/236766/original/file-20180917-158228-1acaf2r.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">The U.S. could reuse more of their plastics, like Kenya did when they sailed the first dhow boat made entirely of recycled plastic.</span>
<span class="attribution"><a class="source" href="http://pictures.reuters.com/C.aspx?VP3=SearchResult&VBID=2C0FCIB6AB2MS&SMLS=1&RW=1264&RH=744&POPUPPN=6&POPUPIID=2C0FQEQ5SKOCG">Reuters/Baz Ratner</a></span>
</figcaption>
</figure>
<h2>Benefits of circular logic</h2>
<p>The benefits can add up quickly. </p>
<p>General Motors, for example <a href="https://www.greenbiz.com/article/materials-matchmaking-how-gm-drives-1-billion-annual-revenue">boasts revenue and savings</a> of US$1 billion a year from its circular economy initiatives. </p>
<p>That’s just one company. Scaling up could yield over <a href="http://thebusinessleadership.academy/wp-content/uploads/2016/03/Circular_economy.pdf">$1 trillion a year</a> in savings globally – and that’s just in terms of mining and processing fewer raw materials. More broadly, were the European Union, for example, to replace all its imports with locally reused or recycled alternatives, it alone <a href="http://circularfoundation.org/sites/default/files/tce_report1_2012.pdf">could generate</a> $300 billion to $600 billion a year in savings, according to a 2012 report by the Ellen MacArthur Foundation, a U.K. charity focused on promoting the transition to a circular economy. </p>
<p>Remanufacturing in the U.S. is already responsible for <a href="https://www.rit.edu/gis/remanroadmap/docs/Technology%20roadmap%20for%20remanufacturing%20in%20the%20circular%20economy.pdf">180,000 jobs across sectors</a> as diverse as aerospace, consumer products, office furniture and retreaded tires. Given how much the <a href="https://www.bea.gov/data/intl-trade-investment/international-trade-goods-and-services">U.S. currently imports from abroad</a> – and that remanufacturing is still less than 2 percent of total manufacturing in the U.S. – there’s room to create hundreds of thousands more jobs. </p>
<h2>How Trump could help</h2>
<p>While there are many ways the U.S. government could marshal its tremendous resources behind this effort, there are two in particular I think would pay dividends. </p>
<p>Both revolve around a core problem in remanufacturing: Most things we currently make <a href="https://www.rit.edu/gis/remanroadmap/docs/Technology%20roadmap%20for%20remanufacturing%20in%20the%20circular%20economy.pdf">can’t be remanufactured</a>. That’s partly because of social barriers — customers may confuse remanufactured with used, which is a very different thing — and partly because they’re not made to be remanufactured.</p>
<p>Plastics in particular pose a significant problem to moving toward a circular economy. Globally, <a href="http://www.doi.org/10.1126/sciadv.1700782">we only recycle or reuse</a> about 9 percent of the plastic produced each year, with 79 percent going to landfills and 12 percent being burned. </p>
<p>Trump could support two ways to help solve this problem. Basically, with a carrot and a stick. The carrot involves setting a standard of design to ensure all products are made with future use in mind, as well as using his influence to encourage Americans to buy goods remanufactured in the U.S.</p>
<p>The stick is tax policy. Specifically, the government could tax products that can’t be converted into raw materials after they are used, as well as those that are made with less than a certain percentage of reused components – a minimum that would be set to gradually increase. Money raised through this tax could be used to support research into remanufacturing, community efforts to reach higher recycling and reuse targets, or other purposes.</p>
<h2>Remanufacturing for the win</h2>
<p>Some countries are already reducing their imports by going circular, putting the United States at risk of falling behind.</p>
<p>China, for one, <a href="https://doi.org/10.1111/jiec.12597">has been systematically expanding</a> its efforts in this area for over 20 years, while the <a href="https://doi.org/10.1111/jiec.12597">EU is beginning</a> to invest in a circular economy as well with a formal action plan, <a href="http://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX:52015DC0614">most recently revised in 2015</a>.</p>
<p>In an entirely circular economy, the U.S. would most likely still import stuff from abroad, such as steel from China. But that steel would wind up being <a href="https://www.greenbiz.com/article/materials-matchmaking-how-gm-drives-1-billion-annual-revenue">reused in American factories</a>, employing tax-paying American workers to manufacture new goods. </p>
<p>In other words, the more circular Americans make their economy, the fewer products they’ll wind up importing and the more things that could bear the “Made in the USA” label.</p><img src="https://counter.theconversation.com/content/100712/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Clyde Hull is a Professor of Management at the Saunders College of Business at RIT. He is also an associate faculty member of RIT’s Golisano Institute for Sustainabilty, which includes the Center for Remanufacturing and Resource Recovery. He is not involved in the Center’s operations.</span></em></p>Trump’s plan to slap $200 billion more in tariffs on Chinese goods is premised on yesterday’s waste-fueled economy. Tomorrow’s economy is ‘circular.’Clyde Eiríkur Hull, Professor of Management, Rochester Institute of TechnologyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/905222018-02-15T11:36:53Z2018-02-15T11:36:53ZCongress failed to fix tax woes for gig workers<figure><img src="https://images.theconversation.com/files/205761/original/file-20180209-51719-wnas1k.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Congress missed a chance to make it easier for workers who book gigs through big digital companies to do their taxes.
</span> <span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/tired-business-man-crumpled-paper-on-525102391">I MAKE PHOTO 17/Shutterstock.com</a></span></figcaption></figure><p>The <a href="https://www.congress.gov/115/crpt/hrpt466/CRPT-115hrpt466.pdf">bevy of changes</a> to the tax code will give <a href="http://www.taxpolicycenter.org/taxvox/tcja-would-cut-taxes-average-1600-2018-most-benefits-going-those-making-300000-plus">most taxpayers</a> at least some relief. But because Congress didn’t address a common loophole that creates headaches for people who <a href="https://www.recode.net/2017/5/25/15690106/gig-on-demand-economy-workers-doubling-uber">earn money from gigs</a> booked through companies like Uber, Etsy, TaskRabbit and Airbnb, most of these taxpayers will struggle to figure out their tax bills without receiving any tax information forms. </p>
<p>It didn’t have to be this way.</p>
<p>Congress knew it had a golden opportunity to ease this burden for millions of Americans but lawmakers didn’t bother. I’m certain about that because <a href="http://www.american.edu/kogod/research/upload/shortchanged.pdf">I’ve conducted extensive research</a> and <a href="https://taxpayeradvocate.irs.gov/Media/Default/Documents/PublicForums/Bruckner_statement-1.pdf">testified before IRS</a>
and <a href="https://smallbusiness.house.gov/uploadedfiles/5-24-16_bruckner_testimony_.pdf">congressional committees</a> on gig workers’ tax travails.</p>
<figure>
<iframe width="440" height="260" src="https://www.youtube.com/embed/G7sntVKxyAE?wmode=transparent&start=1122" frameborder="0" allowfullscreen=""></iframe>
<figcaption><span class="caption">The author testified about tax challenges during this 2016 hearing on the ‘sharing economy.’</span></figcaption>
</figure>
<h2>Missing paperwork</h2>
<p>To get a sense of how big this problem is I surveyed 518 self-employed taxpayers, 22 percent of whom whom earned money in the gig economy – meaning that they were making a living or supplementing their day jobs through companies that connect customers who need goods and services with people who can provide them via apps. </p>
<p>I found that many if not most of them had trouble dealing with their taxes. Some 43 percent didn’t know what they would owe the IRS for this income and were not setting aside enough money to pay their taxes. About 61 percent didn’t get any IRS reporting forms from the company through which they booked gigs, such as <a href="https://www.irs.gov/forms-pubs/about-form-1099-misc-miscellaneous-income">a 1099</a>. </p>
<p>Many first-time gig workers, being used to having their employers withhold taxes from their paychecks, may not realize they owe any tax on this income at all. Indeed, almost 47 percent of the people who took part in my study and earned money in the gig economy weren’t aware of the deductions or credits they could claim to lower their tax bill.</p>
<p>As a result, workers like these may wind up paying more in taxes than they should, when and if the IRS catches up with them.</p>
<p><iframe id="RRIGT" class="tc-infographic-datawrapper" src="https://datawrapper.dwcdn.net/RRIGT/2/" height="400px" width="100%" style="border: none" frameborder="0"></iframe></p>
<h2>High threshold</h2>
<p>Why don’t most of these taxpayers get 1099s?</p>
<p>Like all businesses, the companies, in what is sometimes called the “sharing economy,” must issue these forms to their independent contractors who earn at least US$600 in a single year. But the government doesn’t mandate this paperwork for earnings tied to payments made with credit or debit cards. For that income, <a href="https://smallbiztrends.com/2015/01/1099-contractors-paypal-credit-card.html">the threshold for mandatory 1099s</a> jumps from $600 to $20,000. In addition, these workers must have been paid for at least 200 transactions during the year.</p>
<p>Because most gig workers get paid with credit and debit cards or apps linked to those accounts, they get snared in this loophole. An overwhelming majority – 88 percent – of the ones I surveyed earned <a href="http://www.american.edu/kogod/research/upload/shortchanged.pdf">less than $15,000</a> from this kind of work. Other studies have found that at least 85 percent of gig workers make <a href="https://www.washingtonpost.com/news/business/wp/2017/07/03/side-hustles-are-the-new-norm-heres-how-much-they-really-pay/?utm_term=.f9753d5671f1">less than $500 per month</a>.</p>
<p>To be sure, some platform companies choose to embrace lower thresholds. For example, Lyft now has a policy to send all drivers who earn at least $600 from rides a 1099. </p>
<p>And a few states, including <a href="https://www.mass.gov/service-details/new-massachusetts-reporting-requirements-for-third-party-settlement-organizations">Massachussetts</a> and <a href="http://tax.vermont.gov/news/1099-k-information-reporting">Vermont</a>, have mandated this approach for all platforms. </p>
<p><div data-react-class="Tweet" data-react-props="{"tweetId":"961076886825816064"}"></div></p>
<p>But not all companies are moving in the right direction.</p>
<p>Until this year, Uber had always sent every driver a 1099. But the ride-share company recently told its drivers not to expect this paperwork unless they <a href="https://www.uber.com/drive/tax-information/faq-and-resources/">make more than $20,000</a> and have 200 transactions from trips booked through the company’s app. </p>
<p>And while this was always how companies like <a href="https://www.airbnb.com/help/article/414/should-i-expect-to-receive-a-tax-form-from-airbnb">Airbnb</a> and <a href="https://support.taskrabbit.com/hc/en-us/articles/207555983-Am-I-a-TaskRabbit-employee-">TaskRabbit</a> operated, it can create costly hassles for workers who may not be able to afford an accountant and struggle to comply with the IRS’ rules. </p>
<p>Anyone who doesn’t get forms indicating how much taxable income they earned <a href="https://www.cnbc.com/2018/01/17/gig-job-workers-had-better-beware-of-pay-as-you-go-tax-payments.html">risks underpaying</a>. <a href="https://www.irs.gov/newsroom/the-tax-gap">IRS data</a> show that 63 percent of the taxpayers who are not subject to withholding by their employers or don’t get 1099s misreport income, often unintentionally.</p>
<p>When quarterly or annual errors surface, unsuspecting delinquent taxpayers may incur penalties and owe interest. They also miss out on claiming the deductions and credits they may have otherwise been entitled to, which would have cut their tax bill. Often, taxpayers may not realize that they owe taxes on income for work that doesn’t generate any IRS paperwork. </p>
<p>That can prove costly. Although Americans who don’t pay their taxes can avoid punishment if they owe less than $1,000, the IRS charges as much as 4 percent in <a href="https://www.thebalance.com/estimated-taxes-and-the-estimated-tax-penalty-3193117">interest every quarter</a> on the amount others underpay as a penalty.</p>
<p>The gig economy’s growth may help explain why the number of penalties the IRS levied between 2007 and 2016 spiked from 7.5 million to <a href="https://www.usatoday.com/story/money/2017/08/14/irs-penalizes-more-earners-mistakes-underpayment-estimated-tax-filings/565185001/">nearly 10 million</a> without a big crackdown.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/204619/original/file-20180202-162093-17wu8gp.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/204619/original/file-20180202-162093-17wu8gp.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/204619/original/file-20180202-162093-17wu8gp.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/204619/original/file-20180202-162093-17wu8gp.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/204619/original/file-20180202-162093-17wu8gp.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/204619/original/file-20180202-162093-17wu8gp.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/204619/original/file-20180202-162093-17wu8gp.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/204619/original/file-20180202-162093-17wu8gp.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">When gig workers don’t get a 1099, they run the risk of misunderstanding what they owe the IRS.</span>
<span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/taxes-stock-photo-1099misc-high-quality-406904218?src=jRtgZJ1SD1MeYRNYVKRFnw-1-1">ShutterstockProfessional/Shutterstock.com</a></span>
</figcaption>
</figure>
<h2>Missed opportunity</h2>
<p>After testifying at that 2016 hearing, I worked with congressional staff to address some of these problems. Among other things, a <a href="https://www.congress.gov/bill/115th-congress/house-bill/3717/text">bipartisan bill</a> we developed would require businesses – including platforms like Uber, Airbnb and Etsy – to issue 1099s to all independent contractors who earn at least $1,500 in a calendar year through their apps and websites – regardless of how they are paid.</p>
<p>I initially <a href="https://smallbusiness.house.gov/calendar/eventsingle.aspx?EventID=400301">got the impression</a> <a href="https://www.congress.gov/bill/115th-congress/house-bill/3717/text#toc-HA7651D8F55E946CA8F8C950D3E7FD1A9">that Congress would solve</a> this problem with the new tax law. Among other things, Sen. <a href="https://www.congress.gov/bill/115th-congress/senate-bill/1549">John Thune</a>, a South Dakota Republican, pushed for an across-the-board $1,000 reporting threshold for 1099s.</p>
<p>However, Thune’s fix was bundled with other changes that created procedural problems in the Senate. That kept the 1099 reporting changes out of the new tax law. </p>
<p><div data-react-class="Tweet" data-react-props="{"tweetId":"930972151976427520"}"></div></p>
<p>To be sure, the new tax law does make some changes that benefit independent contractors. </p>
<p>Along with lower tax rates, the new <a href="https://www.marketplace.org/2017/12/21/your-money/tax-bill-2017/not-everyone-going-get-same-pass-through-benefits-tax-bill">pass-through deduction</a> could help many low-income and middle-class self-employed service providers, including those in the gig economy earning money by driving cars and running errands. They may be able to deduct up to 20 percent of their business income if they earn less than $157,500 (or $315,000 for married couples).</p>
<p>But Congress could have made simple changes that would have eased the compliance burdens for gig workers, something the IRS’ own <a href="https://taxpayeradvocate.irs.gov/Media/Default/Documents/2017-ARC/ARC17_Volume1_MSP_14_SharingEconomy.pdf">taxpayer advocate</a> has said should be a high priority.</p>
<p>By neglecting to do so, lawmakers let this problem fester.</p><img src="https://counter.theconversation.com/content/90522/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Caroline Bruckner received funding from Boston College Center for Retirement Research to study how the tax compliance challenges of the gig economy could impact Social Security. </span></em></p>Companies like Uber and Etsy don’t have to tell most of the people working with them how much they’ve earned. With the federal government so behind the curve, some states are changing their rules.Caroline Bruckner, Executive in Residence, Department of Accounting and Taxation, American University Kogod School of BusinessLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/895122018-02-01T11:39:08Z2018-02-01T11:39:08ZCharity and taxes: 4 questions answered<figure><img src="https://images.theconversation.com/files/203479/original/file-20180125-100923-5s2l0y.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">About 1 in 20 taxpayers may fill out this part of their returns beginning with the 2018 tax year.
</span> <span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/taxes-focus-on-tax-form-line-184904708?src=g3Txu-dDJU_p-qKMgFIiJA-1-0">Sean Locke Photography/Shutterstock.com</a></span></figcaption></figure><p><em>Editor’s note: Patrick Rooney, associate dean for academic affairs and research at Indiana University Lilly Family School of Philanthropy, weighs in on why Americans who have lost incentives to give to charity through the new tax law may donate less from now on. The answers are based partly on questions he fielded from fundraising consultant and blogger <a href="https://michaelrosensays.wordpress.com/">Michael Rosen</a>.</em> </p>
<h2>1. What will affect giving the most?</h2>
<p>The biggest change is indirect: By roughly doubling the standard deduction, the tax code changes make giving to charity less of a bargain.</p>
<p>Only Americans who itemize their tax returns are eligible for the <a href="https://theconversation.com/why-congress-should-let-everyone-deduct-charitable-gifts-from-their-taxes-78323">charitable deduction</a>, a dollar-for-dollar reduction in their taxable income that lowers what they owe the IRS. </p>
<p>Researchers like me believe that the share of taxpayers who can take advantage of this tax break will <a href="https://theconversation.com/the-pall-that-the-tax-law-is-casting-over-charities-89440">plummet to about 5 percent</a> from roughly 30 percent.</p>
<p>That will make a big difference because most people who can take advantage of this tax break do. More than <a href="http://generosityforlife.org/wp-content/uploads/2017/10/Overall-Giving-10.5.17-jb-CJC.pdf">55 percent of U.S. households</a> said they made charitable gifts in 2014. But for those who itemize, my colleagues and I found that 82.4 reported having taken advantage of the charitable deduction. </p>
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<figcaption><span class="caption">Stacy Palmer, an editor with The Chronicle of Philanthropy, explains in a PBS NewsHour interview why nonprofits fear that the new tax law will depress charitable giving.</span></figcaption>
</figure>
<p>This hypothetical example shows how this could play out: Pharmacist “Josephine Doe” paid a 25 percent marginal tax rate on her US$100,000 income as a joint filer (under the old tax law). Because her family itemized, her $100 annual donation to a local animal shelter only cost $75, while Uncle Sam basically paid the rest through a tax break. </p>
<p>Under the new law, her family will take the standard deduction, making her charitable contribution no longer tax deductible. Giving $100 will cost $100.</p>
<p>We anticipate that the tax code changes will lead Americans and U.S. companies to donate roughly <a href="https://theconversation.com/the-pall-that-the-tax-law-is-casting-over-charities-89440">$21 billion</a> less per year to charity based on changes in the tax incentives.</p>
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<h2>2. Will economic growth make up the difference?</h2>
<p>Economic growth is unambiguously good for philanthropy because it tends to lead to more money in people’s pockets. Economists, including <a href="https://doi.org/10.1016/j.econlet.2010.10.016">John List</a> at the University of Chicago, have found that people give more when they have more money to give.</p>
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<p>But it’s hard to estimate how the changes in the tax law will affect growth, and we know that the changes will affect households differently based on their sources of income, number of children, the size of their mortgage and how high their state and local taxes are.</p>
<p>The University of Pennsylvania economists responsible for what’s known as the <a href="http://budgetmodel.wharton.upenn.edu/issues/2017/12/18/the-tax-cuts-and-jobs-act-reported-by-conference-committee-121517-preliminary-static-and-dynamic-effects-on-the-budget-and-the-economy">Penn Wharton model</a> and others forecast that the new law will boost growth by relatively small amounts – as little as <a href="https://www.morningstar.com/news/dow-jones/TDJNDN_201801259064/the-tax-law-just-one-month-old-is-roaring-through-us-companies.html">0.1 percentage point</a> – per year over the next decade, following a slightly larger boost in 2018.</p>
<p>In January, after mulling the tax law’s likely ramifications, the <a href="https://www.reuters.com/article/us-imf-economy-outlook/imf-raises-global-growth-forecast-sees-trump-tax-boost-idUSKBN1FB1TK">International Monetary Fund</a> raised its 2018 forecast for U.S. growth to 2.7 percent rate from a prior 2.3 projection.</p>
<p>Given the uncertainty about the impact of the new tax law on growth and the uneven effects anticipated, my colleagues and I have not factored a growth dividend from the tax law into our expectations.</p>
<h2>3. Won’t taxpayers give some of the money they save on taxes to charity?</h2>
<p>The average individual taxpayer will get a <a href="http://www.taxpolicycenter.org/taxvox/tcja-would-cut-taxes-average-1600-2018-most-benefits-going-those-making-300000-plus">$1,600 tax cut</a> in 2018, and a 1.6 percent after-tax income boost in 2019. </p>
<p>Typically, itemizing donors give about <a href="https://doi.org/10.1257/jep.25.2.157">3 percent of their income</a> to charity, and, as I noted earlier, people usually give more when they have more. But the tax changes’ effects will vary widely.</p>
<p>About <a href="http://www.taxpolicycenter.org/taxvox">80 percent</a> of households will initially get a tax cut, while 5 percent will face a tax increase, according to the <a href="http://www.taxpolicycenter.org/taxvox/tcja-would-cut-taxes-average-1600-2018-most-benefits-going-those-making-300000-plus">Tax Policy Center</a>. The rest will see their lot unchanged.</p>
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<p>The federal government has gotten rid of <a href="https://www.cnbc.com/2017/12/20/families-will-feel-the-pain-of-losing-this-tax-break.html">personal exemptions</a>, which will cause many Americans to pay <a href="https://www.jct.gov/publications.html?func=startdown&id=5054">higher tax bills</a>. Many families will <a href="https://www.investopedia.com/taxes/how-gop-tax-bill-affects-you/">lose more through that change</a> than <a href="http://www.christianitytoday.com/news/2017/december/big-families-gop-tax-reform-bill-child-tax-credit.html">they will gain</a> from taking the bigger standard deduction.</p>
<p>Plus, the millions whose <a href="https://www.curbed.com/2017/12/20/16797590/tax-bill-salt-real-estate-mortgage">state, local and property taxes or mortgage interest</a> payments exceed the maximum level for which deductibility is now allowed will have less after-tax income. They will surely consider giving less.</p>
<p>But since many of the tax code’s changes are temporary, even fewer Americans will probably be paying a smaller federal income tax bill than they would have without the new law by 2027.</p>
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<p>It’s a different story for companies, which will benefit tremendously as their top marginal rate declines from 35 percent to 21 percent. </p>
<p>Businesses, like people, give for many reasons, including tax incentives, so there’s no reason to expect corporate giving to decline in proportion with this <a href="https://www.thebalance.com/corporate-income-tax-definition-history-effective-rate-3306024">tax cut</a>.</p>
<p>Indeed, some corporations may actually make a point of donating more. However, based on past patterns, I expect corporate giving to decline by $1 billion a year in response to the tax rate cuts – not adjusting for possible growth.</p>
<h2>4. How will taxpayers react?</h2>
<p>Tax policies may not affect how some people give at all – especially <a href="https://theconversation.com/why-it-can-make-sense-to-believe-in-the-kindness-of-strangers-86271">extreme altruists</a> or <a href="https://www.oddee.com/item_99238.aspx">misers</a>. But the <a href="https://finance.yahoo.com/news/complete-guide-2018-tax-changes-115200441.html">new law</a> will probably affect most typical donors.</p>
<p>Seeing what happens may take years, however.</p>
<p>Because Congress passed the law in December, some <a href="https://www.cnbc.com/2017/11/28/boost-your-charitable-giving-this-year-in-case-the-gop-tax-bill-becomes-law.html">Americans front-loaded</a> their giving for 2018 and beyond. They wanted to itemize their deductions in 2017 for the next year or more if they expected to lose their tax break. </p>
<p><a href="http://www.nber.org/papers/w3273.pdf">That’s what happened in the mid-1980s</a>, the last time that Congress passed a sweeping tax package. Anticipating cuts, some households and businesses gave more to charity than they usually did beforehand. </p>
<p>Giving by the rich spiked, <a href="https://www.ntanet.org/NTJ/45/3/ntj-v45n03p267-90-effects-tax-reform-charitable.pdf">then declined</a> once those changes took effect. </p>
<p>There’s another sign that giving is bunching up: a spike in the number of <a href="https://theconversation.com/donor-advised-funds-charities-with-benefits-74516">donor-advised funds</a>, privately managed accounts that operate in many ways like personal foundations. Itemizers may deduct what they put in these accounts from their taxable income right away, even if they don’t give it to a charity for years.</p>
<p>Taxpayers who otherwise won’t be able to itemize can do so by stowing, say, the money they plan to give away over the next few years in one of these accounts in a single year and allocating those funds over the next several years to their favorite nonprofits. </p>
<p>Indeed, Schwab Charitable, a leading provider of this philanthropic service, says that the number of accounts it opened <a href="https://www.businesswire.com/news/home/20180123005666/en/Schwab-Charitable-Reports-Record-Grants-2017-Unique">spiked 91 percent</a> in the second half of 2017 due to stock gains and tax concerns. </p>
<p>Employees of some of these financial institutions told me that they were working 20-hour days in the last two weeks of December to keep up with new clients who wanted to open donor-advised fund accounts before the tax rules changed to front-load some of their giving. </p>
<figure class="align-right zoomable">
<a href="https://images.theconversation.com/files/203481/original/file-20180125-100896-1k20xay.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/203481/original/file-20180125-100896-1k20xay.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/203481/original/file-20180125-100896-1k20xay.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=399&fit=crop&dpr=1 600w, https://images.theconversation.com/files/203481/original/file-20180125-100896-1k20xay.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=399&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/203481/original/file-20180125-100896-1k20xay.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=399&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/203481/original/file-20180125-100896-1k20xay.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=501&fit=crop&dpr=1 754w, https://images.theconversation.com/files/203481/original/file-20180125-100896-1k20xay.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=501&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/203481/original/file-20180125-100896-1k20xay.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=501&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Only the very richest Americans leave behind estates that are subject to an inheritance tax.</span>
<span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/man-suit-showing-where-testator-must-197605481?src=BkhVsbdFgJp0xphLXFU1Fg-1-29">nito/Shutterstock.com</a></span>
</figcaption>
</figure>
<p>Finally, the new law changes rules governing the estate tax, a levy on inheritance, by <a href="http://money.cnn.com/2018/01/09/pf/taxes/estate-tax/index.html">doubling exemption levels</a>. For the next decade, estates left by deceased individuals worth $11 million or less will pay no taxes for the next decade, along with those left behind by couples who possessed up to $22 million. An unchanged <a href="https://www.law.com/thelegalintelligencer/sites/thelegalintelligencer/2018/01/09/the-impact-of-tax-cuts-and-jobs-act-of-2017-on-estate-planning/?slreturn=20180024074515">40 percent marginal rate</a> applies to fortunes that are bigger than than the cutoffs.</p>
<p>The Joint Committee on Taxation, a congressional committee charged with estimating the <a href="https://www.jct.gov/publications.html?func=startdown&id=5060">impact of fiscal legislation</a>, estimates that <a href="https://www.forbes.com/sites/ashleaebeling/2017/12/21/final-tax-bill-includes-huge-estate-tax-win-for-the-rich-the-22-4-million-exemption/#6fe888e61d54">1,800 estates will pay</a> the estate tax in 2018, a steep drop from the approximately 5,000 estates it says would have had to pay it without the new tax law. I expect this change to reduce the incentive for wealthy Americans to bequeath money to charity, sparking a roughly $7 billion annual decline in giving through bequests.</p><img src="https://counter.theconversation.com/content/89512/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Patrick Rooney and his employer, the Indiana University Lilly Family School of Philanthropy, receive funding from many foundations and charities. Similarly, Rooney and other Lilly School faculty and staff members are affiliated with legal and advisory boards for many charities.</span></em></p>The lost incentives to give are likely to make a bigger difference than the small uptick in economic growth expected from the new law.Patrick Rooney, Executive Associate Dean for Academic Programs, Professor of Economics and Philanthropic Studies, IUPUILicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/896772018-01-08T03:58:17Z2018-01-08T03:58:17ZWhy states may get away with creative income tax maneuvers<figure><img src="https://images.theconversation.com/files/201026/original/file-20180105-26169-1r17m2k.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">New York Gov. Andrew Cuomo vows he will fight to protect his state from fallout from the new tax law.</span> <span class="attribution"><a class="source" href="http://www.apimages.com/metadata/Index/State-of-the-State-Cuomo/67246e55677e4081ad9fff951b4d5650/2/0">AP Photo/Hans Pennink</a></span></figcaption></figure><p>Fearing that the new tax law will make it harder for them to raise enough revenue for public schools and other vital services, high-tax states such as <a href="https://www.bloomberg.com/news/articles/2018-01-05/new-jersey-s-murphy-joins-tax-fight-as-cohn-hints-at-pushback">California, New Jersey and New York</a> are wasting no time in <a href="https://taxfoundation.org/state-strategies-preserve-state-and-local-tax-deduction/">fighting back</a>. </p>
<p>Other states are likely to follow suit as the benefits of these actions become clear, setting the stage for a bitter legal dispute over federal and state taxation.</p>
<p>As a tax law professor who researches the <a href="https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2943713">interactions between federal and state tax systems</a>, I believe these initiatives are likely to succeed in softening the impact of the new tax law on residents of high-tax states. </p>
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<h2>Bypass the SALT</h2>
<p>At issue is a new <a href="http://money.cnn.com/2017/12/20/pf/salt-deductions-new-tax-plan/index.html">US$10,000 cap</a> on the amount of money Americans may deduct on their federal income tax returns for what they pay in state and local taxes.</p>
<p>What’s more, because the new law <a href="https://www.bustle.com/p/does-the-tax-bill-eliminate-the-personal-exemption-the-change-will-hit-families-most-7651167">rolls all personal exemptions</a> into an enlarged standard deduction, millions of households will stop itemizing on their returns. Consequently, the number of taxpayers claiming the “SALT” deduction is likely to fall by <a href="http://www.taxpolicycenter.org/publications/distributional-analysis-tax-cuts-and-jobs-act-passed-senate/full">around two-thirds</a>.</p>
<p><a href="https://theconversation.com/the-gop-tax-plan-state-and-local-taxes-deductions-and-you-88526">This SALT constraint</a> will take the <a href="https://taxfoundation.org/state-and-local-tax-deduction-primer/">biggest toll</a> on residents of states where residents are most reliant on the current deduction. New York, New Jersey, Connecticut and California top that list.</p>
<p>As a result, experts predict that voters in those states will become <a href="https://www.cbpp.org/blog/house-tax-bills-changes-to-state-and-local-tax-deductions-would-hurt-states">more resistant to existing taxes and more apt to oppose future increases</a>. That could be particularly problematic for states – like Illinois and New Jersey – with <a href="https://www.bloomberg.com/graphics/2017-state-pension-funding-ratios/">severely underfunded pension plans</a>. </p>
<p>The new limitations on the SALT deduction may even make it harder for high-tax states to <a href="https://www.nytimes.com/2017/12/04/business/economy/tax-bill-new-york.html">attract talented, high-earning and mobile workers</a>, leading to less dynamic state and local economies. </p>
<h2>Two switcheroos</h2>
<p>Two main strategies to bypass this constraint are taking shape.</p>
<p>First, New York is considering a proposal to shift some of its revenue-raising from personal income taxes to <a href="https://www.fa-mag.com/news/state-governments-are-already-gaming-the-republican-tax-overhaul-36477.html">payroll taxes</a>. The reason it would want to do that is because payroll taxes charged to employers – unlike personal income taxes – remain fully deductible under the new federal tax law.</p>
<p>Second, <a href="http://sd24.senate.ca.gov/news/2018-01-04-senate-leader-de-leon-introduces-legislation-protect-california-taxpayers">California</a> and <a href="http://www.northjersey.com/story/news/new-jersey/2018/01/05/charity-workaround-new-federal-cap-could-save-new-jersey-residents-money-new-federal-cap-tax-deducti/1006589001/">New Jersey</a>, as well as New York, are considering plans to grant tax credits to taxpayers who donate to state-affiliated institutions, such as public schools, hospitals and parks.</p>
<p>These donations would be voluntary, and the resulting credits could be used to offset state and local income and property tax liabilities.</p>
<p>This is feasible because the tax overhaul left the <a href="https://theconversation.com/the-pall-that-the-tax-law-is-casting-over-charities-89440">charitable contribution deduction intact</a> and the <a href="https://turbotax.intuit.com/tax-tips/charitable-contributions/are-contributions-to-school-district-programs-tax-deductible/L6YhGgwPA">IRS has already indicated</a> that donations to state charitable credit programs should be treated for federal tax purposes as charitable contributions rather than state and local tax payments.</p>
<p>Anyone who hits the US$10,000 SALT cap could benefit from programs of this sort. Those taxpayers could replace some or all of their nondeductible state tax payments with deductible charitable contributions.</p>
<p>Not only would these initiatives alleviate the added federal burden for some taxpayers, they could make it easier for state and local governments to raise revenue in the future because residents could pay for public schools and other services with tax-deductible dollars. </p>
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<h2>Payroll please</h2>
<p>Here’s how the payroll tax change, which New York Gov. Andrew Cuomo mentioned his <a href="https://www.newsday.com/news/region-state/cuomo-payroll-tax-1.15794578">State of the State speech</a>, would work.</p>
<p>Let’s say your employer pays you $100,000 a year and you pay $5,000 in state personal income taxes, leaving $95,000 before federal taxes and other charges.</p>
<p>What if instead your employer paid you $95,000 in wages and also paid a $5,000 payroll tax to the state? Your employer would be no worse off, with its out-of-pocket cost still totaling $100,000, and the new tax law preserves an employer’s ability to deduct payroll taxes from their own tax bills. </p>
<p>And you generally would be no worse off either, as you would still have $95,000 before dealing with your federal tax bill. </p>
<p>Indeed, you would most likely fare better financially once federal taxes are factored in. The federal government would tax you on $95,000, whereas you would be taxed on the full $100,000 if the state did not adopt the payroll tax workaround and if you could not claim a SALT deduction.</p>
<p>That would be the case if you claim the standard deduction – as <a href="http://thehill.com/opinion/finance/366773-nonprofits-are-the-unintended-victims-of-new-tax-bill">at least nine-tenths of taxpayers</a> will – or if you hit the $10,000 SALT cap based on property taxes alone. Depending on your federal tax bracket, the savings could increase your after-tax income by anywhere from 0.6 percent to 3.1 percent. </p>
<p>States adopting this approach do not need to repeal their personal income taxes entirely. Their income taxes still would apply to earnings from sources other than wages, such as investment or self-employment income. But they would not tax workers on wages that already have been subject to an employer-side payroll tax.</p>
<p>Implementing this change would be relatively straightforward in states like Illinois, Massachusetts and Pennsylvania, which have <a href="https://www.thebalance.com/which-states-have-a-flat-income-tax-rate-3193306">flat personal income tax rates</a>. It would be somewhat more complicated to pull this off in states such as <a href="https://www.tax.ny.gov/pdf/current_forms/it/it201i_tax_rate_schedule.pdf">New York</a> and <a href="https://www.ftb.ca.gov/forms/2017-California-Tax-Rates-and-Exemptions.shtml">California</a>, which have highly progressive rate structures.</p>
<p>But this can almost certainly be done through a <a href="https://medium.com/whatever-source-derived/implementing-a-state-level-payroll-tax-in-response-to-the-rollback-of-salt-9ca712e30cf3">system of refundable credits</a>, and the potential savings for state residents would be dramatic. In New York, for example, an average household might <a href="https://medium.com/whatever-source-derived/implementing-a-state-level-payroll-tax-in-response-to-the-rollback-of-salt-9ca712e30cf3">save around $1,200 per year</a> on its federal taxes.</p>
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<a href="https://images.theconversation.com/files/201022/original/file-20180105-26157-1xgq3ab.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/201022/original/file-20180105-26157-1xgq3ab.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/201022/original/file-20180105-26157-1xgq3ab.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/201022/original/file-20180105-26157-1xgq3ab.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/201022/original/file-20180105-26157-1xgq3ab.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/201022/original/file-20180105-26157-1xgq3ab.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/201022/original/file-20180105-26157-1xgq3ab.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/201022/original/file-20180105-26157-1xgq3ab.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Senate Minority Leader Chuck Schumer of New York and House Minority Leader Nancy Pelosi of California, like every single Democratic lawmaker, opposed the tax law – partly due to its impact on high-tax states.</span>
<span class="attribution"><a class="source" href="http://www.apimages.com/metadata/Index/Congress-Taxes/93f341e8cc7c428fad3b91f069658f7c/14/0">AP Photo/Andrew Harnik</a></span>
</figcaption>
</figure>
<h2>Charity begins at home</h2>
<p>And here’s how the charitable credit idea would work: Say your state offers you a 90-cent credit against state taxes for every dollar you give to an in-state university or local community college. The IRS determined in a <a href="https://www.irs.gov/pub/irs-wd/1105010.pdf">memo in 2011</a> addressing a similar program in Missouri that the full $1 donation would be a deductible charitable contribution, notwithstanding the state tax credit you get in return.</p>
<p>For someone in the 37 percent federal income tax bracket, this means their $1 donation would generate 90 cents in state tax benefits and 37 cents in federal tax benefits. That’s a $1.27 after-tax return on a $1 investment.</p>
<p><a href="https://www.edchoice.org/school-choice/school-choice-in-america/">More than a dozen states</a> already have implemented tax credit programs like this to finance <a href="https://theconversation.com/tax-credits-school-choice-and-neovouchers-what-you-need-to-know-74808">private school vouchers</a>. Nothing would stop them from extending these programs to finance state universities, community colleges, K-12 public schools, hospitals, parks and more.</p>
<p>Indeed, California Senate President <a href="http://www.washingtonexaminer.com/california-state-senate-leader-introduces-workaround-for-tax-laws-salt-limit/article/2645026">Kevin de León already has introduced</a> a bill along these lines. New York’s Gov. Cuomo has expressed interest in the idea too, as has New Jersey Gov.-elect <a href="https://www.bloomberg.com/news/articles/2018-01-05/new-jersey-s-murphy-joins-tax-fight-as-cohn-hints-at-pushback">Phil Murphy</a>.</p>
<h2>Lingering questions</h2>
<p>The payroll tax idea would work best for the majority of workers who earn wage income and who will claim the standard deduction under the new federal tax law. The charitable contribution credit, in contrast, would be more likely to benefit higher-income households who continue to itemize deductions for federal purposes.</p>
<p>States can adopt both because the two approaches are not mutually exclusive. </p>
<p>Theoretically, the IRS could challenge either approach. But a well-designed state plan should hold up in court. With respect to the payroll tax workaround, Congress has explicitly said that taxes paid by employers should remain deductible, and nothing requires states to tax the wage income of their residents.</p>
<p><a href="https://www.bankrate.com/finance/taxes/state-with-no-income-tax-better-or-worse-1.aspx">Seven states</a> already have no state income tax, and two more have income taxes that exclude wages. There is <a href="https://medium.com/whatever-source-derived/state-payroll-tax-shift-stands-on-solid-legal-ground-fe769d8ab309">no legal obstacle</a> preventing additional states from reducing their reliance on income tax revenue and shifting toward employer-side payroll taxes.</p>
<p>The IRS of course could revoke its 2011 memo that blessed the charitable arrangements already out there. But decades of judicial precedent, which the agency on its own can’t undo, supported that memo. Moreover, with similar <a href="https://www.usnews.com/news/politics/articles/2017-08-11/school-choice-program-raises-questions-about-accountability">tax credit programs</a> that finance private school vouchers popular among the Republican Party’s base, GOP lawmakers may resist moves to end such credit arrangements.</p>
<p>How many states will ultimately adopt proposals along these lines? It’s too soon to say, but for now, it looks like states that choose to fight back against the SALT rollback will have the upper hand.</p><img src="https://counter.theconversation.com/content/89677/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Daniel Hemel has provided advice, on a volunteer basis, to state officials in California, Illinois, Maryland, and New York who have inquired about potential responses to the new tax law.</span></em></p>New York, California and other high-tax states are angling to use the charitable deduction and state payroll taxes as workarounds to shield both their residents and their revenue.Daniel Hemel, Assistant Professor of Law, University of ChicagoLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/894272017-12-21T11:20:27Z2017-12-21T11:20:27ZWill Americans finally start fighting back against tax cuts for the rich?<p>The <a href="http://maristpoll.marist.edu/1212-majority-views-tax-bill-as-adding-financial-injury-potus-favors-wealthy-say-americans/">60 percent of Americans</a> who believe that the <a href="https://www.bloomberg.com/news/articles/2017-12-20/senate-sends-gop-s-1-5-trillion-tax-cut-to-house-for-final-vote">GOP tax package</a> will mostly <a href="https://apnews.com/c59140758e824054a9c26c1eb5b02e5e/AP-FACT-CHECK:-Trump's-truth-warp-on-taxes;-Dems-drift,-too">help the wealthiest</a> among us are right, according to an analysis by the Tax Policy Center.</p>
<p>But will widespread disapproval translate into political costs or electoral losses for Republicans? Will Americans decide they are finally fed up with over half a century of <a href="https://www.cbpp.org/research/poverty-and-inequality/a-guide-to-statistics-on-historical-trends-in-income-inequality">soaring economic inequality</a> and <a href="https://graphics8.nytimes.com/news/business/0915taxesandeconomy.pdf">declining tax rates on the rich</a> as income and wealth for everyone else but the wealthiest stagnate?</p>
<p>My students and I have spent this semester reviewing the history of tax reform. It gives us several reasons to be skeptical that voters will punish politicians for the tax plan.</p>
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<h2>Polling poorly</h2>
<p>The tax bill may cost taxpayers up to <a href="http://www.crfb.org/blogs/final-tax-bill-could-end-costing-22-trillion">US$2.2 trillion</a>, according to the Committee for a Responsible Federal Budget, and the Joint Committee on Taxation estimates it will only <a href="https://www.jct.gov/publications.html?func=startdown&id=5050">modestly enhance</a> economic growth.</p>
<p>So it should be no big surprise that <a href="http://maristpoll.marist.edu/1212-majority-views-tax-bill-as-adding-financial-injury-potus-favors-wealthy-say-americans/">poll</a> after <a href="http://thehill.com/policy/finance/365684-poll-24-percent-of-americans-think-gop-tax-plan-is-a-good-idea">poll</a> has shown that voters strongly disapprove of this Republican initiative. It is even <a href="https://www.cnbc.com/2017/12/18/nearly-half-of-americans-oppose-gop-tax-bill-monmouth-poll-says.html">notably less popular</a> than the last major revision of the tax code – which Congress passed and President Ronald Reagan signed into law three decades ago.</p>
<p>In fact, this is the <a href="https://fivethirtyeight.com/features/will-passing-the-tax-bill-help-the-gop-in-2018-probably-not/">least popular</a> tax cut in at least a generation.</p>
<p>Only 26 percent of Americans approved of the tax overhaul legislation passed by the House and the Senate, according to a <a href="https://www.monmouth.edu/polling-institute/reports/MonmouthPoll_US_121817/">Monmouth University</a> poll taken about a week before both chambers approved a compromise version.</p>
<p>When <a href="http://www.people-press.org/2017/04/14/top-frustrations-with-tax-system-sense-that-corporations-wealthy-dont-pay-fair-share/">Pew</a> asked Americans what bothers them the most about taxes, the top two answers were that corporations and the wealthy don’t pay their fair share. Nevertheless, tax rates on the rich keep going down, not up.</p>
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<h2>Homer’s tax cut</h2>
<p>Much of the academic research about why Americans tolerate tax cuts for the rich revolves around versions of the “wishful thinking hypothesis.” </p>
<p>The less charitable version of the hypothesis is that Americans are ignorant. For example, in a paper that references the buffoonish cartoon dad from “The Simpsons” TV show, political scientist Larry Bartels tries to explain widespread public support for the Bush tax cuts of 2001 and 2003, which also primarily benefited higher-income Americans. In “<a href="http://web.mit.edu/berinsky/www/homer.pdf">Homer Gets a Tax Cut</a>,” he finds that Americans were ill-informed and simply did not make connections between tax policy and inequality.</p>
<p>As Bartels argues, “Notwithstanding the vastness of the stakes, public thinking about this issue seems to have been remarkably superficial.”</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/200267/original/file-20171220-4957-1wjsugh.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/200267/original/file-20171220-4957-1wjsugh.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/200267/original/file-20171220-4957-1wjsugh.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/200267/original/file-20171220-4957-1wjsugh.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/200267/original/file-20171220-4957-1wjsugh.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/200267/original/file-20171220-4957-1wjsugh.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/200267/original/file-20171220-4957-1wjsugh.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/200267/original/file-20171220-4957-1wjsugh.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Visitors to the Universal Studios Hollywood amusement park can board The Simpsons virtual-reality roller-coaster ride. Homer is the bald father figure shown here.</span>
<span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/los-angeles-hollywood-usa-july-16-530484742?src=eLr3n5BUnNlxJELulSobWQ-1-30">Pack-Shot/Shutterstock.com</a></span>
</figcaption>
</figure>
<p>Sociologist <a href="https://www.nytimes.com/2017/12/18/opinion/republicans-tax-cuts-rich.html?_r=0">Isaac Martin</a> recently wrote in the New York Times op-ed section that American ignorance about tax policy isn’t all our fault. His essay describes a decadeslong grassroots campaign begun by banker and philanthropist Andrew Mellon, who served as treasury secretary after World War I, to convince the public that tax cuts for the rich pay for themselves through economic growth – a claim mainstream economists have <a href="http://www.crfb.org/papers/tax-cuts-dont-pay-themselves">debunked</a>.</p>
<p>Martin argues that the public needs to re-engage in the tax debate and “reclaim their own populist roots.”</p>
<h2>Wishful thinking</h2>
<p>The more charitable version of the wishful thinking hypothesis is that Americans aren’t necessarily ignorant or easily fooled. They are just overly optimistic about their own financial future.</p>
<p>One reason why Americans don’t fight very hard against tax cuts for the rich is that they believe that someday they too might be rich. A <a href="http://thehill.com/polls/237987-the-hill-poll-voters-say-wealth-is-now-an-impossible-dream">2012 poll</a> by The Hill found that 37 percent of voters think they can become wealthy in the course of their lives, and they may not be far off. <a href="http://journals.plos.org/plosone/article?id=10.1371/journal.pone.0116370">Longitudinal income data</a> reveal that 36.4 percent of Americans will likely experience at least one year in the top 5 percent of the income distribution between the ages of 25 and 60 – with an 11.1 percent chance of being in the top one percent.</p>
<p>However, their chances of reaching the top percentiles and staying there are much lower. Only 3 percent of Americans reach the top 1 percent and <a href="http://journals.plos.org/plosone/article?id=10.1371/journal.pone.0116370">remain that rich</a> for three or more years.</p>
<p><a href="http://journals.sagepub.com/doi/abs/10.1177/1745691614562005">Studies</a> also <a href="http://www.sciencedirect.com/science/article/pii/S0022103115000062">show</a> that Americans overestimate economic upward mobility and underestimate the extent of downward mobility. Psychologists Shai Davidai and Thomas Gilovich, the authors of one of the studies, argue that a belief in the system’s fairness and the rewards of hard work may make it possible to accept inequality as a “side effect of a well-functioning economic system that offers more equality of opportunity than equality of outcome.”</p>
<p>Every version of the “wishful thinking hypothesis” posits that Americans fail to grasp fundamental truths about tax policy, the economy and their own self-interest – whether they are being superficial, misinformed, misled or overly optimistic.</p>
<h2>Equal sacrifice</h2>
<p>Political scientists Kenneth Scheve and David Stasavage offer an alternative hypothesis in their book “<a href="https://press.princeton.edu/titles/10674.html">Taxing the Rich: A History of Fiscal Fairness in the United States and Europe</a>. ”</p>
<p>Surveying the history of U.S. and European taxation, they find that political support for taxing the rich is the strongest when people believe that higher taxes compensate for some other benefit or sacrifice government imposes on others.</p>
<p>For example, several countries raised taxes on the rich during WWI and WWII. This “<a href="https://web.stanford.edu/group/scheve-research/cgi-bin/wordpress/wp-content/uploads/2013/08/ScheveStasavage_IO_2010.pdf">conscription of wealth</a>” compensated for the military conscription of the middle and lower classes to fight the wars and helped offset the benefits of wartime profiteering by the rich.</p>
<p>As Scheve and Stasavage explain, history shows that high inequality isn’t enough to trigger tax increases for the rich. They argue that “the rich are taxed when people believe not just that inequality is high but also that it is fundamentally unfair because the deck is stacked in favor of the rich, and the government did the stacking.”</p>
<p>The military draft is a clear-cut example of mandatory unequal sacrifice on the part of middle and lower-income people. Few of the involuntary recruits who <a href="https://www.uncpress.org/book/9780807855621/rich-mans-war-poor-mans-fight/">fought in World War I</a>, for example, were wealthy. Today’s environment of political favors for the rich and growing income and wealth inequality is far less clear-cut.</p>
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<p>While both the “wishful thinking” and “compensatory” hypotheses may help explain the public’s historical ambivalence about tax cuts for the rich, one point the research underscores is that opinions on taxation are formed not just by self-interest or the distribution of “winners” and “losers” but by moral judgments of fairness and procedural justice.</p>
<p>Most <a href="http://www.cnn.com/2017/12/19/politics/cnn-poll-tax-bill-opposition-grows/index.html">Americans may disapprove</a> of this tax plan now, but the coming years will show whether they acquiesce or decide they’ve finally had enough of tax cuts for the rich.</p><img src="https://counter.theconversation.com/content/89427/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Stephanie Leiser does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Historically, wishful thinking has blunted pushback.Stephanie Leiser, Lecturer in Public Policy, University of MichiganLicensed as Creative Commons – attribution, no derivatives.