TAX FOUNDATION OFFICER TESTIFIES AT JOINT ECONOMIC COMMITTEE HEARING ON BIDEN’S BUILD BACK BETTER AGENDA

By on October 10, 2021   /   Latest  

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Dr. William McBride, Tax Foundation Vice President of Federal Tax and Economic Policy, testified at the Joint Economic Committee hearing in Washington on October 6, 2021. His comments were entitled, “Building Back Better: Raising Revenue to Invest in Shared Prosperity.” He indicated there were three takeaways from the Foundations analysis of Pres. Biden’s plan: 

  • Corporate tax is not just paid by corporate shareholders: raising the corporate tax rate would reduce investment and productivity growth, ultimately leading to lower wages across the board.
  • Further increasing the progressivity of the tax code by raising individual income taxes for high-income earners comes with a cost: it will reduce incentives to work, save, and invest, broadly reducing employment opportunities throughout the economy.
  • The tax code is not an effective tool for social policy: optimal tax policy raises the amount of revenue needed while creating minimal economic costs, and other goals are better addressed through proper spending programs.

 After presenting the foundation’s analysis, McBride stated his conclusions: “The costs of the higher taxes should be weighed against the benefits, e.g., more tax revenue, improved public health, etc. Likewise, taxing income will reduce the generation of income. That means a smaller economy, less prosperity, and less opportunity. The economic costs can exceed the benefits in terms of tax revenue, and that is what we find with the House bill.” “The IRS can only do so much, and taxpayers are getting confused. The tax code is already excessively complex and the IRS is overwhelmed in its ability to administer and enforce the tax laws. There is a limit beyond which adding more complex provisions to the tax code no longer benefits taxpayers, the government, or the country as a whole. Rather than pushing the limit, we should seriously consider simplification.” Source: https://taxfoundation.org/build-back-better-revenue-joint-economic-committee-tax/

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FEDERAL JUDGE STRIKES DOWN ARPA’S TAX MANDATE

By on October 4, 2021   /   Latest  

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Federal Judge Gregory Van Tatenhove gave Kentucky and Tennessee an important legal victory when he ruled that the American Rescue Plan Act (ARPA)’s restrictions on state fiscal autonomy were unconstitutional and enjoined (blocked) the enforcement of those provisions against both states, according to the nonpartisan Washington-based Tax Foundation. The judge held that the ARPA provision, which limited states’ authority to cut taxes if they accepted their share of the $195.3 billion in state Fiscal Recovery Funds provided under the bill, was unduly coercive and therefore unconstitutional.

“In issuing a permanent injunction against the mandate, Judge Van Tatenhove focused exclusively on the coercion argument,” writes the foundation’s Jared Walczak  “The ruling acknowledges that the states ‘may very well be correct’ about the other three grounds but refrained from anticipating additional questions of constitutional law when, in the court’s opinion, answering only one would suffice.”

The judge noted that the federal government can offer conditioned funds to states, but this power comes with limits. The government can prohibit the direct use of ARPA funds to facilitate tax cuts if it so chooses, but difficulties arise when Congress goes beyond conditioning the direct use of the funds to putting broad limits on “indirect” use which implicates a wide range of state fiscal choices.

Kentucky and Tennessee cases show, that “refusing to accede to the conditions set out in the [law] is not a realistic option.”

The power to tax is central to state governmental authority, a principle that has been affirmed by the Supreme Court going all the way back to Gibbons v. Ogden (1824). However, Congress’s restriction of this crucial aspect of our system of fiscal federalism exceeded the powers afforded the federal government by the U.S. Constitution.

The foundation states that the law’s provision is simultaneously coercive and ambiguous, and are the most likely grounds for rulings against the Tax Mandate.

“The Kentucky and Tennessee case, like the Ohio one before it, only affects the states named as plaintiffs. In his opinion, the judge notes that the coercive elements are universally present, but he nonetheless restricts the scope of the injunction to the plaintiff states, declining to issue a nationwide injunction.”

The foundation concludes, “The process is far from over, but Friday’s ruling is a major development.”

“This is as important ruling and precedent,” said Jim Tobin, president of Taxpayers United of America. “The ruling cuts down the outrageous condition that prevented states from cutting taxes if they accepted Fiscal Recovery Funds.”

Source: https://taxfoundation.org/american-rescue-plan-tax-cuts-federal-judge/

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“BUILD BACK BETTER ACT” HARMFUL AND A MONEY-LOSER

By on September 28, 2021   /   Illinois, Latest  

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The tax provisions in the “Build Back Better Act” proposed in the House Ways and Means Committee would result in long-run GDP dropping by more than $2 for every $1 in new tax revenue, according to the nonpartisan Washington-based Tax Foundation.

“It is important to consider the economic impacts, which include reduced economic output, wages, and jobs,” writes the foundation’s Garrett Watson.

“We estimate that the Ways and Means tax plan would reduce long-run GDP by 0.98 percent, which in today’s dollars amounts to about $332 billion of lost output annually. We estimate the plan would in the long run raise about $152 billion annually in new tax revenue, conventionally estimated in today’s dollars, meaning for every $1 in revenue raised, economic output would fall by $2.18.”

According to the foundation, starting with a 0.09 percent drop in GDP in the first year (about $20 billion) and building to a 0.64 percent drop in GDP by 2031 (about $212 billion), the plan would result in a cumulative GDP loss of nearly $1.2 trillion from 2022 through 2031, as shown in the following Figure.

The Ways and Means tax plan reduces economic output by reducing the after-tax return to investment opportunities for firms and the incentive to work through higher tax rates on labor income. More than half of the plan’s economic impact is due to increasing the tax burden on corporations, which is the most economically costly way to raise revenue.

The report notes that even before accounting for a smaller economy, taxpayers earning less than $400,000 would see lower after-tax incomes due to higher corporate taxes and higher taxes levied on nicotine and cigarettes.

Overall, the plan would reduce average after-tax income per filer by $171 in 2031, on a conventional basis, and by $971 per filer in the long run on a dynamic basis. That is, the economic harm of the plan would reduce after-tax incomes by about $800 per filer on average each year.

The report concludes, “The economic harm caused by the tax increases would claw back some of the plan’s expanded tax credits aimed at low- and middle-income families. For those in the bottom 20 percent, it would reduce the average net benefit of the plan per filer from $341 to $233, a 30 percent reduction.”

Source: https://taxfoundation.org/house-tax-plan-impact/

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