The Japanese parliament has approved a 3.29 percent cut in the corporate tax rate from an effective rate of about 35 percent, according to Bloomberg . Prime Minister Shinzo Abe has previously announced plans to lower the tax rate to under 30 percent over the next five years. The corporate rate cut is part of a larger package that comprises the “Third Arrow” of Abenomics—the prime minister’s three part plan that includes (1) monetary easing, (2) fiscal spending, and now (3) structural reform. The package was introduced to provide a boost to Japan’s sluggish economy. The prime minister previously stated that a goal of the Third Arrow is that “Japan’s corporate tax rate will change into one that promotes growth” through increased investment and higher wages. Earlier this March, Abe listed other benefits of a corporate tax cut: “We aim to stem the flow of Japanese companies leaving the country and promote foreign companies investing here, and as a result, the economy will grow steadily and tax revenue will increase. Japan currently has a total statutory tax rate of 37 percent. In addition to being the second highest corporate tax rate in the industrialized world (behind only the United States), the Japanese tax rate is also one of the highest rates in the region. Both China and South Korea have corporate tax rates of about 25 percent, Singapore’s rate is 17 percent, and Hong Kong has a rate of 16.5 percent. The tax cut will put the United States’s corporate tax rate of 39.1 percent even further behind other developed countries.
Every year, the IRS adjusts more than 40 tax provisions for inflation. This is done to prevent what is called “bracket creep.” This is the phenomenon by which people are pushed into higher income tax brackets or have reduced value from credits or deductions due to inflation instead of an actual increase in real income. The IRS uses the Consumer Price Index (CPI) to adjust the value of the parameters. It does this by taking the tax parameter’s base value and multiplying it by the current year’s CPI and dividing it by the base year’s CPI. For example, the base value for the top of the 10 percent income tax bracket is $7,000 with a base year of 2002. This is multiplied by 2014’s CPI-U of 235.69 and divided by 2002’s value of 178.68. The result is $9,225 (after rounding). The CPI-U is not the only way to adjust tax parameters. Tax brackets could be adjusted in a number of ways including average wage growth (as Social Security brackets are currently adjusted) or the Chained CPI-U, which is another measure of inflation. The choice of adjustment, although an obscure public policy, is meaningful for taxpayers. It could mean higher or lower tax burdens over a long period of time. The difference can be demonstrated comparing how the income tax brackets are calculated under the CPI-U versus how they would be under the Chained CPI-U. The Difference Between the CPI-U and the Chained CPI-U The difference between the CPI-U and Chained CPI-U is in how each accounts for immediate changes in the behavior of consumers when they face higher prices. The CPI-U assumes that increases in price do not lead to substantial substitution effects. In other words, an increase in the price of chicken would not lead many people switching to another product—consumers would just face the high price level. It is calculated by taking a set of consumer goods in a base year and tracking their price changes year-to-year. The Chained CPI-U on the other hand better accounts for substitution effects. As a result, a price increase in chicken may not lead to an overall large increase in price levels because consumers may switch to lower-priced pork. Technically, this is done by varying the weights on specific goods each month to reflect shifts in consumer behavior. Looking at the index numbers show how the Chained-CPI grows at a slower rate compared to the CPI-U. In FY2001 they are both set to 100. As time goes on and prices increase, both measures grow. However, the CPI-U grows faster. In 2007, CPI-U has grown by 16.5 percent while the Chained CPI-U has grown by 14.4 percent. By August 2014, the CPI-U is 34 percent higher than it was in 2001 and the Chained CPI-U is only 30 percent higher. The difference has grown from 2 percent in 2007 to about 4 percent in 2014. As time goes on, the gap between the two measures would widen even further. How the Difference Affects Tax Bills Using the Chained CPI-U vs. the CPI-U has a significant effect on the amount an individual pays in taxes over time. Suppose an individual earns about $30,000 in 2003 and receives pay increases of $1,500 each year until 2015. At this point he earns $48,000. Also, each year the government adjusts the income tax parameters by the CPI-U (as it currently does). As expected, his tax bill increases as his income increases. In 2003, his tax bill would be $2,980 and grow to $5,231 by 2015 (Table 1, column 3). In 2004 (in this alternate universe), the taxpayer ends up paying $8.75 more. This does not seem like too much, but as time goes on, the difference in the tax bills increase. By 2015, the taxpayer ends up paying $168.75 more under tax brackets adjusted for the Chained CPI-U than under the CPI-U.Now suppose in an alternate universe, the government decided to adjust the tax brackets each year with the Chained CPI-U rather than the CPI-U. The taxpayer still earns the same amount of money each year. However, because the bracket adjustments are slightly smaller under the chained CPI-U, the taxpayer’s bill each year (after 2003) is slightly higher (Table 1, column 4). Over the entire period, he pays an additional $533.75 over what he would have paid under CPI-U adjustments. This Obscure Policy Matters Over a long period of time, different methods of adjustment can mean higher or lower tax bills without having to adjust tax rates at all. Using the Chained CPI-U, specifically, allows taxpayers’ income to move into higher brackets faster, leading to higher income tax bills over long periods of time. It isn’t rare that policymakers look to change how brackets are adjusted. Last year, Maine proposed using the Chained CPI-U rather than the typical CPI. This would have caused no immediate tax increase in Maine, but it would have meant higher income taxes in the long term. This also affects spending policies as well. Many benefits are adjusted each year for inflation to make sure they don’t lose their purchasing power. The choice between either CPI-U or Chained CPI-U (or other methods of adjustment) can affect how fast these spending policies grow. The President recently proposed moving to the Chained CPI-U for adjusting Social Security benefits. While the choice of bracket adjustment is a somewhat obscure policy, it does have a real effect on most taxpayers. more post like this here
On Monday the Premier of the State Council of the People’s Republic of China announced that the Chinese tax code lacked the complexity of an advanced industrialized nation. He has started a campaign with the title “Complicate China” to promote the advantages of a modern Western tax code. In an official statement on Monday, China’s leaders spoke of aligning their tax code with that of other advanced economies: “Now that China has become the second largest economy in the world, we must update our policies to reflect our economic success. The United States has an economy which is the envy of all nations and a tax code so complex that simple workers must use complicated software just to pay their taxes. China must forgo a simple tax code to show the industrial economies how advanced China has become.” The proposed tax plan includes a ten-bracket, inflation-adjusted individual income tax with a 12 category exemption scheme and a myriad of deductions and credits. Some of the more notable deductions include the disaster relief credit, the one-child credit, and the town-and-village bribery deduction. The individual income tax also includes an Alternative Minimum Tax (AMT) for anyone with a job and an additional (AMT) for anyone suspected of being a dissident. Chinese leaders were touting the AMT as a way of closing the plethora of loops holes created in the new income tax and reducing the amount of dissident activity in China. In a pamphlet from the Complicate China campaign titled “Alternative Minimum Taxes: Keeping China Busy,” it says, It is possible that individuals could take advantage of all the tax credits and deductions from the new income tax and would not have to pay any taxes. The AMT reduces this possibility by ensuring a minimal tax burden regardless of their well-intentioned actions. The addition of a second AMT for individuals suspected of dissident activity will more than double the time required to file taxes. The additional time requirement to fulfil tax duties will reduce the time available to plan and execute undesirable activities against the government. The plan included changes to business and corporate taxes as well. All business are allowed to deduct capital equipment with a Modified Alternative Depreciation (MAD), which requires 30 year depreciation on all capital expenditures based on a schedule determined by 2-million different categories. After being shown the new tax code, a Chinese farmer said through an interpreter, “I’ll be deducting my new shovel well after I’ve thrown it away. Well after my child has taken over the farm, he will be deduction this shovel as well.” The Complicate China campaign notes that the new depreciation system has some employment benefits. One study out of a leading Chinese university stated, ”[MAD] is such a complicated system that firms will need to hire one or two full-time accountants to track the deductions. It is estimated that half a million accountant jobs will be created over the next two years. It is likely that forgoing the tax deduction is more cost effective than attempting to depreciate capital expenditures.” The new plan also implements a Nevada inspired gross receipt tax. With a 50,000 category matrix, the tax promises to be the most onerous tax on businesses in history. Small businesses are scrambling to find accountants capable of working with the matrix. Several accounting firms have closed their doors and refused to speak with the mob of businessmen lined up outside their offices. A Chinese business association leader commented that, ”This gross receipts tax is more complicated than anything I’ve ever seen before. I’m advising my members to find the highest tax rate in the matrix and pay it to avoid the fines and penalties from being wrong.” Taxes applied to Multinational Enterprises (MNE) have some changes as well. The new plan seeks to implement a “Worldwide Trade Firm” (WTF) corporate income tax (CIT). The WTF-CIT taxes all income produced by Chinese subsidiaries in countries where more than 0.1% of the populace speaks any Chinese dialect. In addition, all businesses which are wholly or partially owned by any individual born in China, regardless of where the business is registered, the current citizenship of the owner, or the business activity takes place; is subject to the WTF-CIT. The new MNE tax rules also applies a payroll tax on all Chinese speakers employed by these businesses as well. A spokesman from an international accounting firm commented on the new MNE rules, “These rules are more punitive for individuals who had the misfortune of being born in China than it was meant to raise revenue. It seems as if Chinese officials are intentionally trying to ruin their economy. I hope these leaders are happy with themselves. WTF is right.” In a press conference on Tuesday, the architects of the new tax plan argued that they are the Gaudi of tax economists. They were quoted as saying, “You can complete a U.S. tax return in a couple of hours with tax software on a personal computer. We aim for an individual and a super computer to take at least one month to complete our new tax return. “This new tax plan only puts us on par with the U.S. federal and state tax rules, but we don’t plan to stop here. We have been studying individual states in the U.S., and there is a lot of room to improve. We will start our fact finding trip in the state of New York. We are hoping what we learn there will allow us to have the most complicated tax code in the industrialized world.” More posts like this one here. http://taxfoundation.org/article/april-fools-day
Researchers at Oxford’s Bodleian Library have uncovered ancient parchments detailing a tax code which scholars are characterizing as “overwhelmingly byzantine.” “When you look at a system like this, all you can do is marvel that it survived as long as it did,” observed Dr. Alp Arslan. “You look for equitable, broad-based systems, but this parchment tells a story of carve-outs and exemptions, sowing the seeds of its ultimate collapse.” Among the peculiarities identified in the parchments: Chariots intended for transportation purposes are subject to a half-solidus tax; those to be raced at the Hippodrome may qualify for community revitalization incentives Axes are only tax deductible if more than fifty percent of their use is against Ostrogoths Deductions for pet moving expenses curiously generous to bear keepers Head taxes only imposed for nights when the taxpayer’s head is firmly and unequivocally affixed independently (the so-called ” Procopian exemption “) High tariffs on fish, flesh, and fowl discourage ” selling to Byzantium ” ”I can’t make heads or other heads of this byzantine tax structure,” a perplexed John Laskaris, professor of economics and medieval vexilla at Oriel College, declared. “It’s all Greek to me.” More posts like this one here .
Nevada’s Senate Revenue & Economic Development Committee voted 4-3 this afternoon to approve S.B. 252, the Governor’s proposed BLF gross receipts tax. The tax would impose a sliding tax scale of 67 revenue ranges for each of 27 industry categories, a complex tax structure resulting in punitive taxes for some and very high marginal tax rates ( up to 13 million percent ). The vote was party-line, with all committee Republicans in favor and all committee Democrats opposed. The vote in the full Senate will require a two-thirds vote to pass. Voting Yes: Senator Michael Roberson (R), the Chairman of the committee, stated before the vote that it was time for senators to put aside partisanship and fear and instead lead and act. Senator Joe Hardy (R) said the state has an obligation to fund education, and that S.B. 252 is the best plan we have in this house at this time. Hardy also noted that he voted for a tax increase in 2003 and was elected. He analogized the BLF proposal to a tree, and said he wants to say he voted for something that will grow. Senator Greg Brower (R) said it was time for the legislature to lead, and that it shouldn’t do so by survey, poll, or e-mail counts. Brower said no member had any excuse for not knowing what’s in the bill, that there is no reason not to support this bill, and said he expected those voting no to get there. Senator Ben Kieckhefer (R) voted yes but did not speak on the bill. Voting No: Senator Aaron Ford (D), the Democratic Minority Leader and Ranking Member of the committee, said he is still hearing from business owners and said members of his caucus still have questions and he can’t make a recommendation to his colleagues yet. Senator Ruben Kihuen (D) said the decision to send the bill to the floor was premature, and that Nevada needs to take the time to talk to business owners and other Nevadans. Senator Pat Spearman (D) said she can’t be accused of timidity (Spearman has proposed an alternative gross receipts tax, with a single rate instead of the BLF’s convoluted structure). She also said she could not vote for a plan that continues the MBT payroll tax. Our report analyzing the significant structural problems with the BLF proposal is here . I also spoke with Nevada Public Radio on the topic, and you can listen to that interview here .