Supreme Court: Obstruction requires knowledge of investigation
The U.S. Supreme Court held that to obtain a conviction for obstructing or impeding the administration of the Internal Revenue Code, the government was required to prove that the defendant knew of a pending tax-related proceeding or could reasonably foresee the commencement of such a proceeding.
Source: IRS Tax News – Supreme Court: Obstruction requires knowledge of investigation
Supreme Court: Obstruction requires knowledge of investigation
Governor Dayton’s Budget Proposal: Some Pro-Growth Provisions, but Misses the Mark on Others
Minnesota’s Governor Dayton recently released his budget proposal, including his proposed changes to the state’s tax system in the wake of federal tax code changes. The state has a $329 million surplus, and Governor Dayton plans to spend all but $123 million of it.
The Governor’s tax proposals are a bit of a mixed bag. The proposal includes some extraordinarily positive changes, including conforming to some crucial federal changes, but also rolls back some of the state’s positive tax changes from the last session.
On the corporate side, Governor Dayton’s proposal conforms to the new Section 179 rules. This is a pro-growth change for the state. The federal rules changed to raise the cap from $500,000 to $1,000,000 and slightly expands the businesses eligible for the deduction.
His proposal also moves the state’s tax base from its current Federal Taxable Income to Federal Adjusted Gross Income. This is not unique – many states use Federal AGI. This change, in turn, limits one of the negative features of the federal tax changes. If the state continued to use Federal Taxable Income as its tax base, the state would be conformed to the 20 percent pass-through deduction. Under Federal AGI, however, it is not. The deduction is a carveout with few benefits and de-coupling is sound tax policy.
Governor Dayton’s proposal also includes some changes to the individual income tax code. It creates a new personal and dependent credit for individuals making less than $140,000 and joint filers making less than $280,000. It also expands the Working Family Tax Credit. These targeted tax credits might be a missed opportunity for a state with the third highest top individual and corporate income tax rate in the country. Lowering rates could provide broad relief to taxpayers in the state – especially given that the top marginal rate kicks in at a relatively low income level.
The Governor’s proposal also rolls back a number of positive changes that passed last year. He repeals the automatic inflator for cigarette taxes, freezes the estate tax exemption level at $2.4 million instead of the scheduled $3 million, and also reinstates the automatic inflator in the business property tax. Before the repeal of the inflator, revenues were growing faster than we would expect as the inflator in the business property tax is growing faster than the Consumer Price Index.
Republicans in the House have expressed disapproval of the budget proposal, and the stage is likely set for another showdown over taxes.
Overall, Governor Dayton’s proposal has some good features, but misses the mark in many other areas. It capitalizes on some pro-growth provisions from the federal level, but also misses the opportunity to provide broader tax relief for the state.
Errata: This post has been edited to reflect that Governor Dayton’s proposal conforms only to Section 179 expensing rules, not all new expensing rules.
Facts and Figures 2018: How Does Your State Compare?
Download the 2018 Facts and Figures App
How do taxes in your state compare nationally? Facts and Figures, a resource we’ve provided to U.S. taxpayers and legislators since 1941, compares the 50 states on over 40 measures of taxing and spending.
Browse the PDF below or download the Facts and Figures app to explore data on state individual and corporate income taxes, sales taxes, excise taxes, property taxes, business tax climates, and more.
For visualizations and further analysis of this data, explore our weekly tax maps.
Source: Tax Policy – Facts and Figures 2018: How Does Your State Compare?
Phone scams and phishing featured in 2018’s Dirty Dozen tax scams
The IRS completed its annual list of the top tax scams for this filing season, with brazen phishing and phone scams still prominent on the list.
Source: IRS Tax News – Phone scams and phishing featured in 2018’s Dirty Dozen tax scams
Tax Reform Bill Will Increase the Trade Deficit. Good or Bad?
The Tax Cut and Jobs Act will boost investment, employment, and incomes in the United States. That’s the good.
And then there’s another outcome of the bill that may cause concern in some circles. The bill will temporarily increase the U.S. trade deficit and expand the current account deficit, which covers traded goods, services, and certain remittances and transfers, such as foreign aid. However, this should not be alarming, but instead be viewed as a positive sign that the world wants to invest in America.
The increase in the trade deficit will mirror the increased inflow of capital into the United States, which will speed the additional U.S. investment and capital formation triggered by the business tax reductions in the reform bill. This will hasten the improvements in U.S. labor productivity and wages generated by tax reform.
Faster-growing economies experience larger trade deficits (or smaller surpluses)
Faster growth of output and income in the United States, especially compared to unchanged growth rates abroad, will increase the U.S. trade deficit. Our spending on investment will rise quickly, and, as incomes increase over time, our spending on consumption will rise too. Some of these added outlays will be on imports. With no change in foreign incomes, exports will be largely unchanged. The trade deficit will increase, at least for a time. When a trade deficit is the result of increased growth, rather than a drop in buying by foreign customers, it is not a drag on the domestic economy.
Adding physical capital takes resources
Adding physical capital – plant, equipment, office space, commercial and residential buildings, agricultural structures, and transportation infrastructure – requires additional production of these assets. Investment will rise significantly during the build-out of the capital stock. Once the additional capital is formed, investment will decrease slightly, but remain above old levels to maintain the larger capital stock.
Some of the added construction and additional production of equipment will be made possible by a larger supply of labor. Additions to the labor force are possible, even at full employment, either through more people entering the work force or current workers taking on longer hours.
Beyond that, producing more capital would require diverting some resources into investment and away from production of consumption goods and services. To some extent, the lost consumption output will be made up by increasing imports during the build-out of the higher capital stock. Some of the desired equipment may be imported, along with additional consumption goods and services. The imports reduce the short-run sacrifice needed to bring about the additional investment. We should expect an increase in the trade deficit during this adjustment to a new capital stock.
Financing the expansion from higher saving and a capital inflow
These potential additions to the U.S. capital stock, and the increase in the federal budget deficit, must be funded through additional saving. Some of that added saving will be done by Americans. The higher returns on capital will cause people to save more, to buy more American stocks and bonds, and to invest more in their small businesses. The corporate and individual tax reductions on business income, and the faster depreciation permitted by expensing, will boost businesses’ saving directly by raising after-tax cash flow. A portion of the tax cuts on wages and salaries will be saved. However, these increases in domestic saving may not be large enough to cover the capital stock expansion and the increased federal borrowing to fund the deficit. For the remainder, we must look to international capital flows.
Global saving is enough to finance economic expansion
Global capital markets will have no trouble accommodating the expansion of the capital stock and the funding of the U.S. budget deficit following the Tax Cuts and Jobs Act. Global saving over the next decade will total about $250 trillion. An infinitesimally small portion of that world saving – about six-tenths of one percent – would be needed to fund the additional U.S. federal budget deficit. Even less would be needed if we look at total government borrowing, which is reduced by increases in state and local government surpluses that will naturally result from the base-broadening provisions in the federal tax bill and faster economic growth.
The redirection of global saving toward the United States will come from two sources. First, some U.S. saving that was flowing abroad will stay at home. U.S. residents (individuals and businesses) will buy more U.S. financial and physical assets and fewer foreign assets (lending more at home and less abroad). Second, foreign savers may increase their purchases of U.S. assets (lending more to the U.S.). Both shifts in behavior increase the net capital inflow into the United States.
The Economic Recovery Tax Act of 1981 illustrates this point. The law was phased in over three years and became a net tax cut toward the end of 1982. Between 1982 and 1984, economic growth accelerated. The annual federal budget deficit increased by about $100 billion. However, U.S. banks were more than able to finance the added deficit and additional private sector investment. U.S. banks reduced their annual lending abroad from about $120 billion in 1982 to about $20 billion in 1984. The lending stayed home instead of going to foreign projects. This redirection of bank lending was about as large as the change in the budget deficit. Later in the decade, some additional foreign capital flowed into the United States.
For every buyer there is a seller, and what flows out of the country must be equal in value to what flows in. As more U.S. saving and lending stays at home, and more foreign saving is lent to the United States, Americans receive more foreign exchange to spend on foreign goods and services. As foreigners seek to participate in the expanding U.S. capital formation, they must earn the dollars to buy the additional U.S. assets by selling us more of their output.
Any increase in the capital inflow coming to the United States will be matched by an equal increase in the U.S. current account deficits. Increased capital flows toward the United States mean an inpouring of foreign exchange seeking dollars. The dollar will rise until there is a corresponding increase in U.S. purchases of foreign goods and services to balance the capital inflow. The increased spending will be in part for investment goods to expand U.S. factories, and in part for consumption goods. These increased outlays will be over and above the rising levels of production in the United States, not a substitute or diversion away from U.S. production.
Economic gains will last as long as the tax cuts do; trade balance effects will be temporary
The capital inflow to assist in the additions to the capital stock will be temporary. There will be only a finite amount of additional capital to be built here. Once that capital has been funded, the capital inflow for that purpose will be complete, and international saving flows will return to normal, as will the level of the dollar and the current account (or trade) balance. In the short run, the capital inflow will boost the dollar and the current account deficit. In the medium run, foreigners will receive an increased stream of dividends and interest on their added U.S. assets, which will assist in reversing the capital flow, the rise in the dollar, and the current account increase. In the long run, U.S. savers will be earning more interest and dividends too, and the effects on the capital-flow will fade.
The temporary nature of the capital-flows can be best understood by noting that the new plant, equipment, and other structures must be paid for only once. After that, the added capital will pay its own way, earning enough to cover its maintenance or replacement.
As added capital is formed, American wages and employment will rise, and the total amount of saving done by Americans will rise. Over time, Americans will fund more of the expansion. As Americans add to their assets, some of the government bonds that may have been purchased by foreigners initially may be refinanced by Americans. Americans will increase their holdings of domestic or foreign stocks and bonds. In the long run, the holdings of domestic savers versus foreign investors will return to normal shares of the (larger) total stock of productive capital in the United States.
The Tax Cut and Jobs Act will boost investment and incomes in the United States, and make the country more competitive for production and employment. There will be a transitory rise in the trade deficit, but in the context of a stronger, faster-growing economy. The associated capital inflow will speed the expansion of U.S. industry and employment. Finally, the temporary increase in the trade deficit should not be misinterpreted as detrimental to the economy, a reason to rescind the tax reductions, or a reason to restrain trade.
Source: Tax Policy – Tax Reform Bill Will Increase the Trade Deficit. Good or Bad?