Next week, Nevada voters will cast their ballots and decide whether or not Nevada will institute a margin tax. The tax is a modified gross receipts tax (a type of tax only five other states have ) and is modeled after the Texas margin tax. Last March, I explained two big reasons why the Texas margin tax is the poster child for poor tax policy: it’s overly complicated and it’s not neutral. Both explanations are worth repeating here: Overly complicated tax calculations create compliance and administrative costs that are a loss to society. The calculation of a business’s margin tax liability is far from simple. Businesses subject to the tax must choose one of three bases . The definitions used in determining these tax bases are statutorily defined and different from definitions set by the federal government. Since calculations are so complicated, compliance and administrative costs are high . In a 2010 interim report of the House Committee on Ways and Means, one taxpayer…reported an increase from $400 to $2,500 in compliance costs after the margin tax was implemented. Economic resources wasted on complying with a complicated tax could be utilized more efficiently elsewhere in the economy. Taxes should be neutral, and the margin tax favors certain industries, practices, and business types by design. [The tax]…isn’t horizontally equitable , meaning that businesses that are similarly situated don’t face the same liability. For example , as described by the Texas Taxpayers and Research Association (TTARA):… ‘A company that hires its own employees may deduct salaries as compensation; however, a company engaged in the same line of business that chooses to use independent contractors to conduct its operations may not. Companies in the business of renting equipment may not deduct the cost of their equipment as cost of goods sold, while companies that sell that same equipment may.’…The tax treats businesses differently based on the industry in which they operate, how they are organized, and on minute operating and organizational details. Again, this implicitly favors certain activities over others—something the tax code shouldn’t do. More on Nevada here . More on Texas here . More on gross receipts taxes here . Follow Liz on Twitter @elizabeth_malm .
The National Association of Enrolled Agents recently released a warning that the Affordable Care Act Marketplace may complicate tax returns. The NAEA is an organization of tax professionals that are specially licensed through the Department of Treasury and can represent individuals directly to the IRS. According to the group, insurance subsidies could cause of some major problems on tax returns this year. Subsidies for the ACA were given to those who had estimated household incomes between 100 percent and 400 percent of the federal poverty level for their family size. They were: One person: household income between $11,490 and $45,960 Family of two: household income between $15,510 and $62,040 Family of four: household income between $23,550 and $94,200 The problem lies when actual income differs from previous estimates. If, for instance, a family got an unexpected bonus or raise, pushing them out of the household income range, the full amount of the subsidies would have to be repaid on their income tax return. This can be a substantial and unexpected change in tax liability. Earning $1 more can lead to an infinite marginal tax rate for disallowed taxpayers. While not all taxpayers will face this issue, it is a potential problem with the bill’s subsidy structure. As we have previously written , these subsidies are expected to become the largest refundable tax credit, as much as all other refundable tax credits combined. For those who did make more than expected this year, the extra income could be bittersweet. Follow Josh on Twitter
A new paper by French economists Emmanual Saez and Gabriel Zucman discusses a new technique for using tax returns to estimate top wealth shares. They find that wealth inequality has been increasing such that the top 1 percent now control about 40 percent of all household wealth, as the chart below illustrates. The authors attribute the rise of wealth inequality to all sorts of evils, including low taxes on the wealthy and financial deregulation. They also buy into the notion that the wealthy enjoy higher rates of return on their wealth, a theory without evidence that Thomas Piketty also has advanced. Like Piketty, Saez and Zucman call for higher, more progressive taxes on wealth, such as estate taxes. However, the authors fail to mention the role of market volatility , and particularly the role that central banks have in creating volatility. For instance, today the Central Bank of Japan announced a huge monetary stimulus that sent both Japanese and American stock markets to new highs. To test the role of market volatility alone, I ran an experiment using a simple excel spreadsheet. If you take 100 individuals and give them each a random rate of return every year for 100 years, it turns out that market volatility alone generates a tremendous amount of wealth inequality. The chart below shows what happens when this random rate of return is in the range of plus or minus 30 percent a year. Lest you think that is unrealistic, the S&P 500 rose 30 percent last year. That sort of volatility eventually generates a situation where the top 1 percent control about 40 percent of all wealth – the same wealth inequality now found in the U.S., according to the French economists. In contrast, if the range of the random rate of return is reduced to plus or minus 10 percent a year, the top 1 percent wealth share never exceeds 4 percent. These results are generated strictly by volatility, without assuming any privilege at all. In other words, this is a perfectly egalitarian society in that everyone has the same chance of winning. All it takes is randomly distributed rates of return and property rights, so people get to keep their wealth. Of course, the French economists’ solution is to take away the property rights, i.e. confiscate the wealth through taxation. However, a much more beneficial approach is to reduce volatility. That means getting the Federal Reserve under control, principally. The Fed’s loose and novel policy innovations over the last 15 years or so have almost certainly contributed to inequality, by blowing bubbles in the housing and stock markets. Policy makers should address that problem first, before wrecking the economy with higher tax rates. Follow William McBride on Twitter
Several tax battles will be fought not in the legislature, but on the ballot Nov. 4