(Click on the map to enlarge it.  Reposting policy ) This map presents top individual income tax rates in each state for 2014. Income taxes are a major, and often complicated, component of state revenues. Furthermore, unlike sales or excise taxes which individuals pay indirectly, income taxes are levied directly on individuals, meaning that income taxes figure especially prominently in any discussion of tax burdens and public policies.  Income taxes are structured in many different ways throughout the states. Some are flat systems with one rate for all income, others offer progressive systems taxing different levels of income at different rates, while some states have no income tax at all. These taxes also change: since 2013, five states (Kansas, North Carolina, North Dakota, Ohio, and Wisconsin) reduced income taxes and one state (Minnesota) increased income taxes. For the most up-to-date data available on current state tax rates and brackets, standard deductions, and per-filer personal exemptions for individuals filing singly, see our report here .

Lamenting the fact that Walgreens is considering moving its headquarters to Europe, Dan Smith (“Close Corporate Tax Loopholes” April 20, 2014 ) makes the claim that corporate profits earned and kept overseas are “not being taxed.” Mr. Smith demonstrates his lack of understanding of how U.S. corporations are taxed here and abroad. While it is undoubtedly true that corporations use tax planning techniques to minimize their taxes, they by no means escape taxation on foreign earned income. When a corporation earns income overseas, it has to pay the corporate income tax to the country in which it does business. IRS data shows that corporations earned more than $470 billion in profits overseas and paid more than $120 billion in taxes to foreign countries in 2010. A sum much larger than nothing. Most of these profits were earned and taxed in European countries like the United Kingdom, the Netherlands, and Luxembourg; not what I would call “tax havens.” Even more, the U.S.’s “worldwide” system of taxation requires that U.S. multinationals pay the U.S. corporate income tax on this income as well. When a corporation brings this income back to the United States, the IRS tacks on an additional charge to make sure all corporate income is taxed at our high 35 percent rate. The U.S. is one of the six countries in the developed world that still charges corporations a toll for wanting to bring investment back to their home country. These are important facts we need to understand if we are going to have an honest discussion about reforming our corporate tax system.

Inequality is a hot topic these days. Everyone seems to want to write about it. The launch of TheUpshot, the new project from the New York Times, included a story on the wealth of the middle class , the Times Sunday Review had a column on inequality and economic mobility , and Matt Yglesias can tell you “ everything you need to know ” about it. But in the discussion of the cause of all this inequality, it’s sometimes good to look beyond all the data and rely on economic intuition. From a Ball and Mankiw paper : “The fall in the capital stock affects factor prices: wages fall, harming workers, and the returns to capital rise, benefiting capital owners.” Mankiw and Ball are talking about the crowding out of capital caused by a deficit in this scenario, but the effects are the same. When the service price of capital goes up and investment goes down. When fewer people are willing to invest, two things happen. First, the capital stock (i.e. the amount of computers, factories, equipment) shrinks over time, which makes workers less productive and decreases future wages. Second, because there is less capital available the available capital is more valuable, which causes the return to capital to rise. The effect of this over time is that wage earners make less and capital owners make more. Our current tax code exacerbates this problem significantly through its non-neutral bias towards consumption over future consumption (i.e. saving). The evidence is fairly clear that America is a nation that likes to consume : 72 percent of our GDP is consumption. We are second on this measure behind only Greece at 75 percent. Meanwhile, our ratio of investment to GDP is second to last, just behind the United Kingdom, at 16 percent. Low levels of investment can have a lasting impact. Saving and investment drive an economy forward. There are many steps we can take to fix our predicament – improved K through 12 education, fewer barriers to starting businesses, etc. – but because taxes have a direct impact on the cost of capital and the amount of investment, tax reform may be the best place to start. In many respects, countries in the OECD have recognized the damage caused by taxes like the corporate income tax and have taken action to lower the tax burden on investment. Since 1980, the OECD average corporate tax rate has gone from around 50 percent to about 25 percent today . Today, the U.S. has the highest corporate tax rate in the OECD , the sixth highest capital gains tax rate, the ninth highest dividend tax rate, and the 25th worst cost recovery system . Additionally, the U.S. tax code double taxes investment, first at the corporate level and then the shareholder level, and has the most progressive tax code in the OECD . All these factors contribute to a high tax burden on investment in the U.S. It’s important for that to change. Reforms to improve the tax system and lower the cost of capital would mean good things for American workers. A cut in the corporate and top individual tax rate to 25 percent would grow the economy significantly and lead to large increases in wages and investment . If we takes steps to lower the cost of capital through full expensing or tax cuts, we will see two things happen. First, more people will decide to invest instead of spend, which will lead to a larger capital stock and higher wages. Second, because more capital is available, the existing capital will become less valuable than before, and returns to capital will shrink. The effect overtime is that as the cost of capital declines, wage earners will earn more and capital owners will earn less. What would that do to inequality?

Pete & Doug examine NTU’s study of tax complexity, “A Taxing Trend”, which found a $224 billion cost due to 6.1 billion hours lost to complying with the tax code; as well as IRS online monitoring, and what to look for next year. Plus, the Outrage of the Week!

Pete & Doug examine NTU’s study of tax complexity, “A Taxing Trend”, which found a $224 billion cost due to 6.1 billion hours lost to complying with the tax code; as well as IRS online monitoring, and what to look for next year. Plus, the Outrage of the Week!

Congressman Patrick Tiberi (R-OH), a House Ways and Means member, recently introduced a bill (H.R. 4457, “America’s Small Business Tax Relief Act of 2014”) that would restore Section 179 to 2013 levels and make the law permanent. In 2013, Section 179 allowed businesses to write-off the full cost of certain capital investments the year in which they were made. Each qualifying capital investment was limited to $500,000 and the total value of all Section 179 investments a business was allowed to deduct was limited to $2 million. After that point, the value of the deduction was phased-out by one dollar for every dollar that the business’s total write-offs exceeded $2 million. As of January 1 of this year, the amount businesses are allowed to expense under Section 179 was reduced to $25,000, with a $200,000 limitation. Congressman Tiberi’s law would restore the 2013 levels, adjust these levels for inflation each year, and make the changes retroactive for all of 2014. Raising the Section 179 expensing limits to 2013 levels and making them permanent is a positive move. An ideal tax code would allow all businesses of any size the unlimited ability to write off the full cost of a capital investment the year in which they were made . In addition, the uncertainty created by having a temporary tax law that needs to be renewed periodically reduces its effectiveness in promoting business investment and economic growth. In the absence of full expensing for all businesses, a permanent Section 179 is a second-best option.