The State and Local Tax Deduction

Sahil Kapur notes that one of the big fighting points in the Camp bill is the elimination of the deduction for state and local taxes, which benefits people who live in states that have higher taxes than others, also known as "blue states" with Democratic leaning governments.  Yes, this is true.  Here is a map showing a distribution of the benefit of the deduction:

What Democrats should do, of course, is contrast this map with this one:

So the states that benefit from the deduction tend to be those that also pay more in federal taxes than they receive in federal spending.  Those with low state taxes, on the other hand, tend to need more help from the federal government.

Funny how that works, right?  

This is just another way of increasing the subsidies from rich states to poor states, in the name of "equity." 

The Camp Tax Reform Plan

I'll have a lot to say in the coming days and weeks about the Camp Tax Reform plan.  My focus will be on the provisions in the bill the media are not talking about, particularly corporate taxes and changes to the international tax rules.

But I do want to focus now on one thing I noticed in the revenue estimates for the bill, which we should pay attention to when we hear the rhetoric on what the effects of various aspects of the bill will be.

I was kind of shocked when I saw that the Joint Committee on Taxation estimated that one aspect of the bill - the repeal of the alternative minimum tax - would reduce projected federal tax liabilities by over $1.3 trillion for the period 2014 through 2023 (see page 4 of this table).  The projected reduction in revenues from cutting the regular tax rates is only $544 billion.  So the AMT number seems just tremendously high to me.

And sure enough, I did a little looking and found this report from the Tax Policy Center compiled last August showing that, after the amendments to the AMT made in 2012, the projected AMT over the same period would be $385 billion.  That's a huge difference!  So what accounts for this?

My guess is that this has something to do with how the JCT models the revenue effects of various proposals that interact with one another.  In this presentation on how they model revenue effects (page 19), the JCT states:

• Many tax bills make multiple changes to the tax code that interact with each other, such as

• Simultaneously changing tax rates and adding or eliminating deductions, or

• Adding a category of activity that is eligible for an expiring tax credit while extending the credit.

• A revenue table with separate estimates for each provision in such a bill accounts for interactions either by 

• Adding a separate line for interaction effects or

• Incorporating the interaction effect between the two provisions into the estimate of one of the provisions.

• Incorporating the interaction effects into the estimate of one of the provisions is referred to as "stacking" the interacted provision after the non-interacted provision 

• For example, for a bill that reduces tax rates and changes deductions, the estimate of the tax rate change may be "stacked first" (without the interaction effect) while the deduction estimates ("stacked after the rate change" would incorporate the interaction effect by being estimated after the rate change.

OK, I understand that.

But still, I can't possibly fathom how they get to such a huge effect for the AMT.  I mean, standing alone, the effect of repealing the AMT could be no higher than the $385 million current projection.  And think about the other changes they are proposing.  First, they are eliminating deductions.  Eliminating deductions reduces the difference between the AMT base and the regular taxable income base.  Stated differently, one effect of eliminating deductions is to reduce the AMT.  Thus, if you model the effect of eliminating deductions first, the effect of eliminating the AMT goes down.

The other major change is, of course, to the regular tax rates. Granted, reducing the regular tax rate will have the effect of increasing the AMT if no other changes are taken into account.  But the effect of reducing regular rates is shown at to be $544 billion over the ten year period.  Are you really telling me that the effect of changing the regular tax rates - absent any other changes - would be to reduce regular taxes by $544 billion, but increase the AMT by $950 billion?  That makes no sense at all.

So what is really going on here?  I think they're fudging the numbers.  I think that the Republicans don't want to show that the cuts in regular rates will reduce revenues by $1.5 trillion, so they are dumping a huge amount of the revenue effect into the obscure AMT line hoping nobody would notice.

Maybe I'm wrong, but somebody has to convince me otherwise.

The Camp Plan

Bits and pieces of the Camp plan are leaking out, a day ahead of its release.  What we know so far:

1. Two rate brackets of 10% and 25%, and
2. A surtax of 10% on "certain types of earned income" over $450,000.

"Certain types of earned income" means salaries. It doesn't include farmers or manufacturers or, presumably, businesses.  And it doesn't include income from investments.

This is a cut in the top rate of about one-third, give or take.  There is no indication yet what credits and deductions (tax expenditures) will be cut in order to make up for the lost revenue.  But there is some indication that the poorest taxpayers will be hit by cutting back on refundable credits.

That last part is really funny.  On Sunday I was watching a panel discussion with Forbes' Avik Roy, also of the Manhattan Institute, who was arguing that we shouldn't raise the minimum wage.  Instead we should strengthen the Earned Income Tax Credit.

Evidently, the Republicans in the House don't agree with him.

No mention is made of any changes in the treatment of capital gains.  And no mention is made of any change in corporate taxes.  I guess we'll just have to wait and see.

According to the Post, "the vast majority of taxpayers would see little change in the ultimate size of their tax bills..."

Translation:  the very rich will get a large tax cut.  The rest of us will get nothin'.

What They Really Mean by "Reform"

This post yesterday by Digby is illustrative.  A post by Charlie Savage discussing the new Justice Department guidelines regarding protecting journalists concludes:

The rules cover grand jury subpoenas used in criminal investigations. They exempt wiretap and search warrants obtained under the Foreign Intelligence Surveillance Act and “national security letters,” a kind of administrative subpoena used to obtain records about communications in terrorism and counterespionage investigations.

And then she cites Marcy Wheeler saying this:

Which makes these “new guidelines” worth approximately shit in any leak — that is,counterintelligence — investigation. 

Exasperated, Digby responds:

This is the stuff that drives you crazy.  They know they've gone too far and have to respond.  But they simply create some razzled dazzle "reform" that addresses a different issue and pretend that they've done something.  

And I think: you think this is bad, wait until you see how they want to "reform" the tax code!

Baucus Confirmed

This can only be good:

Baucus’s impending departure will set off a round of musical chairs among Senate committee chairmen. Sen. Ron Wyden (D-Ore.) is expected to assume control of the finance panel, a move that likely will lead to Sen. Mary L. Landrieu (D-La.) taking the top spot on the Senate Energy Committee.

GOP Legislation: The Art of Newspeak

I just came across a blurb that the Ways and Means Committee is marking up a bill called the Save American Workers Act of 2014.  The purpose of the bill is to amend the ACA to change the definition of "full-time worker" from a person working an average of 30 hours per week to one working an average of 40 hours per week.  The effect is to vastly reduce the number of employers subject to the employer mandate.

Here is a link to the Joint Committee on Taxation description of the bill.

How this is supposed to "save American workers" is not explained.

KPMG Violates Independence Rules

The SEC issued an order against KPMG last week for violating the auditor independence rules.

This topic has not been in the headlines.  "Auditor independence" is one of those arcane issues that most people ignore.  But it is fundamental to the smoothe operations of the securities markets, and the compromised independence of the auditors is a basic problem in the marketplace today.

An auditor is someone who job it is to inspect the books of account of a company and report on whether they are being properly maintained and whether the financial reports of the company are accurate.  There are, essentially, two kinds of auditors.  An internal auditor is someone who is hired by the management of the company and provides reports to management.  An external or independent auditor purportedly acts on behalf of the investors of the company and issues reports intended for those investors.  Since the enactment of the securities laws in the 1930s, all public companies are required to have an independent auditor undertake an audit to the companies and certify as to the accuracy of the financial statements of the company.  When the company issues its annual report that says its earnings were $5.00 per share in 2013, the independent auditor's job is to say "yep, that's accurate!"