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When we consider the burden of a tax, we must distinguish between the burden as it is specified in the tax law and the true economic burden. Consider a simple example. Social Security payroll tax requires that employers and employees split the tax, each paying one-half of the total. But, the true economic incidence of the payroll tax is quite different. The employer has some ability to adjust the employee’s wage and pass the employer’s half of the tax on to the employee. In fact, the employee may bear the entire tax. Of course, the extent to which the employer can pass the tax on to the employee depends on the willingness of the employee to accept a lower wage and supply the same, or nearly the same, quantity of labor.

Average Effective Federal Tax Burdens ( 2013 ) Type of Tax Household Income Group Lowest 20% Second 20% Middle 20% Fourth 20% Top 20% Top 1% Individual Income -7.2%† -1.2%† 2.6% 6.1% 15.5% 23.6% Social Insurance 8.0% 7.8% 8.3% 9.0% 6.7% 2.4% Corporate Income 0.8% 0.8% 0.9% 1.2% 3.7% 7.7% Excise 1.7% 1.1% 0.9% 0.7% 0.4% 0.2% Overall 3.3% 8.4% 12.8% 17.0% 26.3% 34.0% † Negative income tax burdens result from refundable tax credits, which often exceed the income tax liabilities of low-income households. In such cases, individuals receive cash payments from the government through the IRS (for more detail, see ). • used the same primary source (a single-page report published by the Tax Policy Center) to determine a middle-class tax burden while ignoring the following data in the report: the top-earning 0.1% of taxpayers paid 10.7% of their income in corporate income taxes versus 0.6% for the middle-class.

• included the burden of employer payroll taxes in their calculation of a middle-class tax burden, although these taxes (like corporate income taxes) are not remitted by employees but by employers. • determined a middle-class tax burden by using adjusted gross income as the denominator for their calculation, even though the source they cite (the Tax Policy Center) states that adjusted gross income. • “The complexities of the U.S. Tax code make it practically impossible to determine Romney’s exact tax burden.” • Based upon simplifying estimates and CBO’s methodology for allocating the burden of corporate income taxes, Romney’s federal tax burden was 23.3%, which is about twice that of CBO’s 2009 estimate for middle-income Americans. • Based upon simplifying estimates and a wide range of academic opinions about the burden of corporate income taxes, Romney’s tax burden was 18.3% to 26.0%, which is 1.6 to 2.3 times higher than CBO’s 2009 estimate for middle-income Americans. • Determine regular tax liability Preliminary tax liability is then reduced by certain tax credits that decrease taxes on a dollar-for-dollar basis to determine a regular tax liability.

Some of the most commonly used tax credits are the child tax credit, education tax credit, and earned-income tax credit. Some tax credits are refundable, and low-income households with tax credits that exceed their income tax liabilities receive the difference as cash payments from the federal government. Many of these tax credits phase out for taxpayers with higher incomes and thus don’t benefit these individuals. * Social Security benefits are generally related to the amount of Social Security payroll taxes paid by workers over the course of their lifetimes. For workers who earned average wages and retired at the age of 65 in 1980, it took 2.8 years of receiving old-age benefits to recover the value of their payroll taxes (including interest). For workers who retired in 2003, it will take 17.4 years.

For workers who will retire in 2020, it will take 21.6 years. This assumes Social Security will have enough money to pay scheduled benefits for this entire period, which it is not projected to have. * Corporate income taxes are typically levied on “C corporations,” which are business entities that are fully separated by law from their owners’ personal finances. Most major and public corporations are structured in this manner. Business entities can also be structured in other ways, such as “S corporations,” partnerships, and sole proprietorships.

In these cases, tax law combines business incomes with owners’ personal incomes. These types of businesses are sometimes called “passthrough entities,” and they are subject to personal income taxes instead of corporate income taxes. When a business purchases a tangible asset such as a machine or structure, it is not incurring a cost.

Rather, the business is simply exchanging one asset—for example, cash—for another. The full purchase price of an asset is therefore usually not tax deductible in the year the asset is bought. Assets do, however, decline in value as they age or become outmoded. This decline in value (depreciation) is a cost.

Because assets gradually depreciate until they are worthless, the tax code permits firms gradually to deduct the full acquisition cost of an asset over a number of years. * Starting in 2014, the Affordable Care Act (a.k.a.

Obamacare) began providing refundable tax credits for individuals who purchase health insurance with incomes up to 400% of federal poverty guidelines (for example, $80,640 for a family of three in 2016, $97,200 for a family of four, or $113,760 for a family of five). Department of Health and Human Services has projected that 25 million people will be receiving these credits in 2019. In 2015, roughly 7.1 million people qualified for an average tax credit of $3,528 per year. * In 1986, the 99th Congress passed and Republican President Ronald Reagan signed a tax reform law that eliminated many tax preferences while reducing the top personal income tax bracket from 50% to 28% and reducing the top corporate income tax bracket from 46% to 34%. In the next year, the average effective federal tax rate for the top 20% of income earners increased by 2.0 percentage points, while the rates for all other income groups dropped by less than one percentage point. In the next five years, the tax rate for the top 20% stayed higher than before the law was enacted, while the rates for all other income groups stayed about the same or lower.

* The primary beneficiaries of tax preferences are sometimes not the individuals who claim them. For example, the exemption for interest earned on state and local government bonds primarily benefits the governments that issue the bonds instead of the investors who buy them. This is because governments can sell tax-exempt bonds with lower interest rates than comparable taxable bonds, and investors will still buy these bonds as long as their after-tax profits are equivalent or greater. Hence, this tax exemption allows governments to issue bonds at lower interest rates, which lowers their costs of financing. Per the Internal Revenue Service.

* During the U.S. Constitutional Convention, James Madison, who would later become known as the Father of the Constitution for his central role in its formation, stated that all civilized societies are “divided into different sects, factions, and interests,” and “where a majority are united by a common interest or passion, the rights of the minority are in danger.” He then listed some “unjust laws” that were due to majorities taking advantage of minorities, such as those that sanctioned slavery and those that imposed “a disproportion of taxes” on certain types of properties.

* The origins of the AMT can be traced to a January 1969 speech given by Treasury Secretary Joseph Barr, in which he stated that “there is going to be a taxpayer revolt over the income taxes in this country unless we move in this area.” Barr criticized the use of “loopholes and gimmicks” by the wealthy and pointed out that “in the year 1967, there were 155 tax returns in this country with incomes of over $200,000 a year and 21 returns with incomes over a million dollars for the year on which the ‘taxpayers’ paid the U.S. Government not 1 cent of income taxes.”.

• the taxes on Social Security benefits, which apply to single beneficiaries with incomes of more than $25,000 per year and couples with incomes of more than $32,000 per year. These taxes currently affect 36% of all Social Security benefits and are projected to affect more than 50% of these benefits by 2046. • the deduction for home mortgage interest, which is projected to fall in real terms from $1 million in 2016 to $550,000 by 2046.

• excise taxes. In this case, the lack of indexing generally decreases the burden of these taxes over time. • the following provisions of the 2010 Affordable Care Act (a.k.a. Obamacare): • a 0.9% Medicare payroll tax on earnings above $200,00 for singles and $250,00 for couples. • a 3.8% tax on income from investments imposed on singles with income above $200,00 and couples with income above $250,000. * In a 2012 commentary published in Rolling Stone, Jared Bernstein, a former economic advisor to President Obama and a senior fellow with the Center on Budget and Policy Priorities, wrote that “it is well within our means” to reduce the national debt by following the “broad outlines” of “current law.” He advocated that we take this path without revealing that under the law at that time, federal taxes would progressively consume a greater share of the U.S.

Economy due to bracket creep, rising to 21% higher than the average of the previous 40 years by 2025, 40% higher by 2045, and 56% higher by 2065. • “I just saw your report and there’s something I need to tell you. I see this stuff every day and there isn’t anything I can do about it.” • “Most of these documents are fraudulent and there’s absolutely no system here to catch it.” • “We don’t have the resources to follow up on much and we’re not allowed to flag problems.” • “We get applications from Mexico, Honduras, China, Japan, Bulgaria, all over the world. I guarantee 90% of them are phony. We see the same signatures hundreds of times. We see the same docs photocopied and attached to different applications. It’s the same person, same photo, same address.

I’ve seen the same birth certificate twelve times now in the past day.”. • The IRS had issued 9,909 ITINS to 9,522 people allegedly living at a single address in Tulsa, Oklahoma (more examples in footnote). • The IRS had mailed 23,994 ITIN refunds totaling $46,378,040 to a single address in Atlanta, Georgia (more examples in footnote). • The IRS had deposited 2,706 ITIN refunds totaling $7,319,518 into a single bank account (more examples in footnote).

• In 2010, the IRS had eliminated a process used to detect fraud in ITIN applications. • “The environment created by [IRS] management discourages tax examiners from identifying questionable ITIN applications.” • “The payment of federal funds through this tax benefit appears to provide an additional incentive for aliens to enter, reside, and work in the United States without authorization, which contradicts federal law and policy to remove such incentives.”. • higher marginal tax rates on workers mostly reduce their “incentive to work,” and this effect is stronger on those who are not already working than those who are working but considering working more. • the “efficiency loss from taxation increases as the marginal tax rate increases. That is, a one percentage point increase in a marginal tax rate from 40 percent to 41 percent creates a greater efficiency loss per dollar of additional tax revenue than a one percentage point increase in a marginal tax rate from 20 percent to 21 percent.” • higher “marginal tax rates may encourage taxpayers to seek compensation in the form of tax free fringe benefits rather than taxable compensation and to engage in other tax avoidance activities, including deductible expenses or deductible consumption, or even illegal tax evasion.

Such distortions in consumption represent an efficiency loss to the economy.” • higher marginal tax rates on investors and savers mostly reduce their incentive to invest and save, but there is much dispute over the strength of this effect, and a few studies have concluded that higher marginal tax rates encourage investing and saving. • “[M]ore saving implies more investment, a larger capital stock, and greater output and income.” • “If saving is reduced by its treatment under the income tax, future productivity and income is lost to society.” • “A small change in the growth of productivity can, over a long period, have a larger effect on GDP than most recessions do” because “the shortfall from a recession is generally temporary, whereas a change in the long-term rate of productivity growth reduces output by an ever-increasing amount.”. • excise taxes on items such as gasoline and wine, which are remitted by businesses but are primarily borne by retail customers in the form of higher prices. For example, retail consumers pay an average of 39 cents in federal and state excise taxes per gallon of gasoline, but these taxes do not appear on their purchase receipts. • employer payroll taxes, which are remitted by employers but are primarily borne by employees in the form of lower wages. For example, middle-income households lose about 4.2% of their income to federal payroll taxes on employers, but these taxes do not appear on employees’ paychecks or tax returns. • corporate income taxes, which are remitted by corporations but are primarily borne by stockholders and employees in the form of lower profits and wages.

For example, the top 1% of income earners lose about 7.7% of their income to federal corporate income taxes, but these taxes do not appear on their paychecks or tax returns. • a federal law that requires most hospitals with emergency departments to provide an “examination” and “stabilizing treatment” for anyone who comes to such a facility and requests care for an emergency medical condition or childbirth, regardless of their ability to pay and immigration status. • state and federal mandates that require health insurers to enroll all applicants regardless of preexisting conditions, thus increasing the cost of health insurance and forcing existing health insurance customers to subsidize the healthcare of those who do not purchase insurance until after contracting serious illnesses. • state mandates that require electric utility companies to obtain certain amounts of their electricity from alternative energy sources that are more expensive than traditional sources, thus increasing the cost of electricity. * Collectively, the tax cuts in these laws are known as the “Bush tax cuts.” The 2001 bill passed with 100% of Republicans voting for it and 90% of Democrats voting against it. The 2002 bill passed with 100% of Republicans and 95% of Democrats voting for it.

The 2003 bill passed with 99% of Republicans voting for it and 96% of Democrats voting against it. In order to avert Democratic filibusters in the Senate, Republicans used a procedural rule that required them to sunset many of the tax cuts at the end of 2010 (details in footnotes). * When Bush proposed tax cuts at the outset of his presidency Newsweek published a cover story that showed pictures of objects that people with various incomes could buy with money from the tax cuts. On the low end, Newsweek showed a bowl of pasta to signify “three weeks’ worth of groceries” or $168 that a family of four with a gross income of $20,000 would save on an annual basis.

On the high end, Newsweek showed a Lexus GS 430 to signify $47,114 that a married couple with an income of $1,000,000 would save on an annual basis. * About two weeks after taking office, Obama signed a law that more than doubled federal excise taxes on cigarettes, cigars, and other tobacco products. The bill passed with 99% of Democrats voting for it and 77% of Republicans voting against it. Per the Congressional Budget Office, “The effect of excise taxes, relative to income, is greatest for lower-income households, which tend to spend a greater proportion of their income on such goods as gasoline, alcohol, and tobacco, which are subject to excise taxes.”. • a 3.8% tax on income from investments (such as interest, dividends, and rent) imposed on singles with income above $200,00 and couples with income above $250,000. This began in 2013. • an added 0.9% Medicare payroll tax on earnings above $200,00 for singles and $250,00 for couples.

This began in 2013. • a 40% excise tax imposed on high-cost health insurance plans. This was initially due to begin in 2018, but a 2016 law pushed it out to 2020. • an annual fee imposed on health insurance providers.

This began in 2014. • an annual fee imposed on manufacturers and importers of pharmaceuticals. This began in 2011. • a 2.3% excise tax imposed on manufacturers and importers of certain medical devices. This began in 2013.

• “The complexity of the tax system partly results from tax expenditures [a.k.a. ] that are designed to affect behavior by taxing some endeavors more or less than others. Those tax expenditures include tax exemptions for some activities, deductions for various preferred items, and credits for undertaking certain actions.” • “Complexity also arises from efforts to achieve certain equity goals.” • “Policymakers are not concerned only with efficiency issues in designing a tax system, but are also concerned with establishing an ‘equitable’ tax code with respect to the distribution of the tax burden. Dates Average Annual Change in National Debt (Percentage Points of GDP) Bill Clinton with Democratic House and Senate 1/20/93 – 1/4/95 0.9 Bill Clinton with Republican House and Senate 1/4/95 – 1/19/01 -1.6 George W. Bush with Republican House and Senate 1/19/01 – 6/6/01, 11/12/02 – 1/4/07 0.8 George W. Bush with Republican House and Democratic Senate 6/6/01 – 11/12/02 2.3 George W. Bush with Democratic House and Senate 1/4/07 – 1/20/09 6.5 Barack Obama with Democratic House and Senate 1/20/09 – 1/5/11 9.3 Barack Obama with Republican House and Democratic Senate 1/5/11 – 1/6/15 1.9.

NOTES: • An Excel file containing the data and calculations is available. • Just Facts consulted with the U.S. Bureau of Economic Analysis (BEA) to determine how to calculate taxes from BEA’s extensive data.

This methodology: • includes social insurance taxes, which BEA classifies as a social insurance contributions. [Webpage: “Frequently Asked Questions: What Is Included in Personal Current Taxes?’ U.S.

Bureau of Economic Analysis, May 27, 2010.. “Taxes for social insurance programs, such as social security taxes and Medicare taxes, are not classified as personal current taxes; these types of taxes are classified as contributions for government social insurance.”] • includes estate and gift taxes, which BEA classifies as capital transfer receipts. [Webpage: “Frequently Asked Questions: What Is Included in Personal Current Taxes?’ U.S. Bureau of Economic Analysis, May 27, 2010..

“Estate and gift taxes, which are classified as capital transfers, are shown in NIPA (National Income and Product Account) table 5.11 and 5.11U.”] • excludes payments to the federal government from the Federal Reserve, which BEA classifies as a form of corporate income tax. [Report: “Concepts and Methods of the U.S. National Income and Product Accounts (Chapters 1–11 and 13).” U.S. Bureau of Economic Analysis, October, 2016.. Page 13-34: “Amounts paid to U.S. Treasury by Federal Reserve banks (line 24). Federal Reserve banks are included in the corporate sector of the NIPAs but are not included in Corporation Income Tax Returns.

Federal Reserve banks are required to turn over their profits (less operating expenses) to the U.S. Consequently, these payments, treated as taxes in the NIPAs, must be added to the IRS federal income taxes.”] • excludes taxes from the rest of the world. [Report: “Concepts and Methods of the U.S. National Income and Product Accounts (Chapters 1–11 and 13).” U.S. Bureau of Economic Analysis, October, 2016.. Page 2-6: “BEA includes most transactions between the U.S. Government and economic agents in Guam, American Samoa, the Northern Mariana Islands, Puerto Rico, and the U.S.

Virgin Islands in federal government receipts and expenditures. Thus, like private transactions (such as trade in goods and services), government transactions with these areas are treated as transactions with the rest of the world.”]. NOTES: • An Excel file containing the data and calculations is available. • Just Facts consulted with the U.S.

Bureau of Economic Analysis (BEA) to determine how to calculate taxes from BEA’s extensive data. This methodology: • includes social insurance taxes, which BEA classifies as a social insurance contributions.

[Webpage: “Frequently Asked Questions: What Is Included in Personal Current Taxes?’ U.S. Bureau of Economic Analysis, May 27, 2010.. “Taxes for social insurance programs, such as social security taxes and Medicare taxes, are not classified as personal current taxes; these types of taxes are classified as contributions for government social insurance.”] • includes estate and gift taxes, which BEA classifies as capital transfer receipts. [Webpage: “Frequently Asked Questions: What Is Included in Personal Current Taxes?’ U.S. Bureau of Economic Analysis, May 27, 2010.. “Estate and gift taxes, which are classified as capital transfers, are shown in NIPA (National Income and Product Account) table 5.11 and 5.11U.”] • excludes payments to the federal government from the Federal Reserve, which BEA classifies as a form of corporate income tax. [Report: “Concepts and Methods of the U.S.

National Income and Product Accounts (Chapters 1–11 and 13).” U.S. Bureau of Economic Analysis, October, 2016.. Page 13-34: “Amounts paid to U.S.

Treasury by Federal Reserve banks (line 24). Federal Reserve banks are included in the corporate sector of the NIPAs but are not included in Corporation Income Tax Returns. Federal Reserve banks are required to turn over their profits (less operating expenses) to the U.S. Consequently, these payments, treated as taxes in the NIPAs, must be added to the IRS federal income taxes.”] • excludes taxes from the rest of the world. [Report: “Concepts and Methods of the U.S. National Income and Product Accounts (Chapters 1–11 and 13).” U.S. Bureau of Economic Analysis, October, 2016..

Page 2-6: “BEA includes most transactions between the U.S. Government and economic agents in Guam, American Samoa, the Northern Mariana Islands, Puerto Rico, and the U.S.

Virgin Islands in federal government receipts and expenditures. Thus, like private transactions (such as trade in goods and services), government transactions with these areas are treated as transactions with the rest of the world.”]. NOTES: • An Excel file containing the data and calculations is available. • Just Facts consulted with the U.S.

Bureau of Economic Analysis (BEA) to determine how to calculate taxes from BEA’s extensive data. This methodology: • includes social insurance taxes, which BEA classifies as a social insurance contributions. [Webpage: “Frequently Asked Questions: What Is Included in Personal Current Taxes?’ U.S. Bureau of Economic Analysis, May 27, 2010.. “Taxes for social insurance programs, such as social security taxes and Medicare taxes, are not classified as personal current taxes; these types of taxes are classified as contributions for government social insurance.”] • includes estate and gift taxes, which BEA classifies as capital transfer receipts. [Webpage: “Frequently Asked Questions: What Is Included in Personal Current Taxes?’ U.S. Bureau of Economic Analysis, May 27, 2010..

“Estate and gift taxes, which are classified as capital transfers, are shown in NIPA (National Income and Product Account) table 5.11 and 5.11U.”] • excludes payments to the federal government from the Federal Reserve, which BEA classifies as a form of corporate income tax. [Report: “Concepts and Methods of the U.S. National Income and Product Accounts (Chapters 1–11 and 13).” U.S. Bureau of Economic Analysis, October, 2016.. Page 13-34: “Amounts paid to U.S. Treasury by Federal Reserve banks (line 24). Federal Reserve banks are included in the corporate sector of the NIPAs but are not included in Corporation Income Tax Returns.

Federal Reserve banks are required to turn over their profits (less operating expenses) to the U.S. Consequently, these payments, treated as taxes in the NIPAs, must be added to the IRS federal income taxes.”] • excludes taxes from the rest of the world. [Report: “Concepts and Methods of the U.S. National Income and Product Accounts (Chapters 1–11 and 13).” U.S. Bureau of Economic Analysis, October, 2016..

Page 2-6: “BEA includes most transactions between the U.S. Government and economic agents in Guam, American Samoa, the Northern Mariana Islands, Puerto Rico, and the U.S. Virgin Islands in federal government receipts and expenditures. Thus, like private transactions (such as trade in goods and services), government transactions with these areas are treated as transactions with the rest of the world.”]. NOTES: • An Excel file containing the data and calculations is available.

• Just Facts consulted with the U.S. Bureau of Economic Analysis (BEA) to determine how to calculate taxes from BEA’s extensive data. This methodology: • includes social insurance taxes, which BEA classifies as a social insurance contributions. [Webpage: “Frequently Asked Questions: What Is Included in Personal Current Taxes?’ U.S. Bureau of Economic Analysis, May 27, 2010.. “Taxes for social insurance programs, such as social security taxes and Medicare taxes, are not classified as personal current taxes; these types of taxes are classified as contributions for government social insurance.”] • includes estate and gift taxes, which BEA classifies as capital transfer receipts. [Webpage: “Frequently Asked Questions: What Is Included in Personal Current Taxes?’ U.S.

Bureau of Economic Analysis, May 27, 2010.. “Estate and gift taxes, which are classified as capital transfers, are shown in NIPA (National Income and Product Account) table 5.11 and 5.11U.”] • excludes payments to the federal government from the Federal Reserve, which BEA classifies as a form of corporate income tax. [Report: “Concepts and Methods of the U.S. National Income and Product Accounts (Chapters 1–11 and 13).” U.S.

Bureau of Economic Analysis, October, 2016.. Page 13-34: “Amounts paid to U.S. Treasury by Federal Reserve banks (line 24). Federal Reserve banks are included in the corporate sector of the NIPAs but are not included in Corporation Income Tax Returns. Federal Reserve banks are required to turn over their profits (less operating expenses) to the U.S.

Consequently, these payments, treated as taxes in the NIPAs, must be added to the IRS federal income taxes.”] • excludes taxes from the rest of the world. [Report: “Concepts and Methods of the U.S. National Income and Product Accounts (Chapters 1–11 and 13).” U.S. Bureau of Economic Analysis, October, 2016..

Page 2-6: “BEA includes most transactions between the U.S. Government and economic agents in Guam, American Samoa, the Northern Mariana Islands, Puerto Rico, and the U.S. Virgin Islands in federal government receipts and expenditures. Thus, like private transactions (such as trade in goods and services), government transactions with these areas are treated as transactions with the rest of the world.”]. Over the long term, the costs of federal borrowing will be borne by tomorrow’s workers and taxpayers.

Higher saving and investment in the nation’s capital stock—factories, equipment, and technology—increase the nation’s capacity to produce goods and services and generate higher income in the future. Increased economic capacity and rising incomes would allow future generations to more easily bear the burden of the federal government’s debt.

Persistent deficits and rising levels of debt, however, reduce funds available for private investment in the United States and abroad. Over time, lower productivity and GDP growth ultimately may reduce or slow the growth of the living standards of future generations. GAO’s long-term simulations show that absent policy actions aimed at deficit reduction, debt burdens of such magnitudes imply a substantial decline in national saving available to finance private investment in the nation’s capital stock. The fiscal paths simulated are ultimately unsustainable and would inevitably result in declining GDP and future living standards. Even before such effects, these debt paths would likely result in rising inflation, higher interest rates, and the unwillingness of foreign investors to invest in a weakening American economy.

Debt held by the public is the largest explicit liability of the federal government. However, the federal government undertakes a wide range of programs, responsibilities, and activities that may explicitly or implicitly expose it to future spending.

These “fiscal exposures” 2 vary widely as to source, extent of the government’s legal obligation, likelihood of occurrence, and magnitude. Given this variety, it is useful to think of fiscal exposures as a spectrum extending from explicit liabilities to the implicit promises embedded in current policy or public expectations. (See table 2.) For example, the current liability figures for the U.S. Government do not include the difference between scheduled and funded benefits in connection with the Social Security and Medicare programs. Fiscal exposures represent significant commitments that ultimately have to be addressed.

The burden of paying for these exposures may encumber future budgets and constrain fiscal flexibility. Not capturing the long-term costs of current decisions limits policymakers’ ability to control the government’s fiscal exposures at the time decisions are made. In addition, the lack of recognition of long-term fiscal exposures may make it difficult for policymakers and the public to adequately understand the government’s overall performance and true financial condition. NOTES: • An Excel file containing the data and calculations is available. • Just Facts consulted with the U.S.

Bureau of Economic Analysis (BEA) to determine how to calculate taxes from BEA’s extensive data. This methodology: • includes social insurance taxes, which BEA classifies as a social insurance contributions. [Webpage: “Frequently Asked Questions: What Is Included in Personal Current Taxes?’ U.S. Bureau of Economic Analysis, May 27, 2010..

“Taxes for social insurance programs, such as social security taxes and Medicare taxes, are not classified as personal current taxes; these types of taxes are classified as contributions for government social insurance.”] • includes estate and gift taxes, which BEA classifies as capital transfer receipts. [Webpage: “Frequently Asked Questions: What Is Included in Personal Current Taxes?’ U.S. Bureau of Economic Analysis, May 27, 2010.. “Estate and gift taxes, which are classified as capital transfers, are shown in NIPA (National Income and Product Account) table 5.11 and 5.11U.”] • excludes payments to the federal government from the Federal Reserve, which BEA classifies as a form of corporate income tax. [Report: “Concepts and Methods of the U.S. National Income and Product Accounts (Chapters 1–11 and 13).” U.S.

Bureau of Economic Analysis, October, 2016.. Page 13-34: “Amounts paid to U.S.

Treasury by Federal Reserve banks (line 24). Federal Reserve banks are included in the corporate sector of the NIPAs but are not included in Corporation Income Tax Returns. Federal Reserve banks are required to turn over their profits (less operating expenses) to the U.S. Consequently, these payments, treated as taxes in the NIPAs, must be added to the IRS federal income taxes.”] • excludes taxes from the rest of the world.

[Report: “Concepts and Methods of the U.S. National Income and Product Accounts (Chapters 1–11 and 13).” U.S. Bureau of Economic Analysis, October, 2016.. Page 2-6: “BEA includes most transactions between the U.S.

Government and economic agents in Guam, American Samoa, the Northern Mariana Islands, Puerto Rico, and the U.S. Virgin Islands in federal government receipts and expenditures. Thus, like private transactions (such as trade in goods and services), government transactions with these areas are treated as transactions with the rest of the world.”].

NOTES: • An Excel file containing the data and calculations is available. • Just Facts consulted with the U.S. Bureau of Economic Analysis (BEA) to determine how to calculate taxes from BEA’s extensive data.

This methodology: • includes social insurance taxes, which BEA classifies as a social insurance contributions. [Webpage: “Frequently Asked Questions: What Is Included in Personal Current Taxes?’ U.S. Bureau of Economic Analysis, May 27, 2010.. “Taxes for social insurance programs, such as social security taxes and Medicare taxes, are not classified as personal current taxes; these types of taxes are classified as contributions for government social insurance.”] • includes estate and gift taxes, which BEA classifies as capital transfer receipts.

[Webpage: “Frequently Asked Questions: What Is Included in Personal Current Taxes?’ U.S. Bureau of Economic Analysis, May 27, 2010.. “Estate and gift taxes, which are classified as capital transfers, are shown in NIPA (National Income and Product Account) table 5.11 and 5.11U.”] • excludes payments to the federal government from the Federal Reserve, which BEA classifies as a form of corporate income tax. [Report: “Concepts and Methods of the U.S. National Income and Product Accounts (Chapters 1–11 and 13).” U.S.

Bureau of Economic Analysis, October, 2016.. Page 13-34: “Amounts paid to U.S.

Treasury by Federal Reserve banks (line 24). Federal Reserve banks are included in the corporate sector of the NIPAs but are not included in Corporation Income Tax Returns. Federal Reserve banks are required to turn over their profits (less operating expenses) to the U.S. Consequently, these payments, treated as taxes in the NIPAs, must be added to the IRS federal income taxes.”] • excludes taxes from the rest of the world.

[Report: “Concepts and Methods of the U.S. National Income and Product Accounts (Chapters 1–11 and 13).” U.S. Bureau of Economic Analysis, October, 2016.. Page 2-6: “BEA includes most transactions between the U.S. Government and economic agents in Guam, American Samoa, the Northern Mariana Islands, Puerto Rico, and the U.S.

Virgin Islands in federal government receipts and expenditures. Thus, like private transactions (such as trade in goods and services), government transactions with these areas are treated as transactions with the rest of the world.”]. NOTES: • An Excel file containing the data and calculations is available. • Just Facts consulted with the U.S. Bureau of Economic Analysis (BEA) to determine how to calculate taxes from BEA’s extensive data. This methodology: • includes social insurance taxes, which BEA classifies as a social insurance contributions.

[Webpage: “Frequently Asked Questions: What Is Included in Personal Current Taxes?’ U.S. Bureau of Economic Analysis, May 27, 2010.. “Taxes for social insurance programs, such as social security taxes and Medicare taxes, are not classified as personal current taxes; these types of taxes are classified as contributions for government social insurance.”] • includes estate and gift taxes, which BEA classifies as capital transfer receipts. [Webpage: “Frequently Asked Questions: What Is Included in Personal Current Taxes?’ U.S. Bureau of Economic Analysis, May 27, 2010.. “Estate and gift taxes, which are classified as capital transfers, are shown in NIPA (National Income and Product Account) table 5.11 and 5.11U.”] • excludes payments to the federal government from the Federal Reserve, which BEA classifies as a form of corporate income tax.

[Report: “Concepts and Methods of the U.S. National Income and Product Accounts (Chapters 1–11 and 13).” U.S. Bureau of Economic Analysis, October, 2016.. Page 13-34: “Amounts paid to U.S. Treasury by Federal Reserve banks (line 24). Federal Reserve banks are included in the corporate sector of the NIPAs but are not included in Corporation Income Tax Returns.

Federal Reserve banks are required to turn over their profits (less operating expenses) to the U.S. Consequently, these payments, treated as taxes in the NIPAs, must be added to the IRS federal income taxes.”] • excludes taxes from the rest of the world. [Report: “Concepts and Methods of the U.S. National Income and Product Accounts (Chapters 1–11 and 13).” U.S. Bureau of Economic Analysis, October, 2016.. Page 2-6: “BEA includes most transactions between the U.S.

Government and economic agents in Guam, American Samoa, the Northern Mariana Islands, Puerto Rico, and the U.S. Virgin Islands in federal government receipts and expenditures.

Thus, like private transactions (such as trade in goods and services), government transactions with these areas are treated as transactions with the rest of the world.”]. NOTES: • An Excel file containing the data and calculations is available.

• Just Facts consulted with the U.S. Bureau of Economic Analysis (BEA) to determine how to calculate taxes from BEA’s extensive data. This methodology: • includes social insurance taxes, which BEA classifies as a social insurance contributions.

[Webpage: “Frequently Asked Questions: What Is Included in Personal Current Taxes?’ U.S. Bureau of Economic Analysis, May 27, 2010.. “Taxes for social insurance programs, such as social security taxes and Medicare taxes, are not classified as personal current taxes; these types of taxes are classified as contributions for government social insurance.”] • includes estate and gift taxes, which BEA classifies as capital transfer receipts. [Webpage: “Frequently Asked Questions: What Is Included in Personal Current Taxes?’ U.S. Bureau of Economic Analysis, May 27, 2010.. “Estate and gift taxes, which are classified as capital transfers, are shown in NIPA (National Income and Product Account) table 5.11 and 5.11U.”] • excludes payments to the federal government from the Federal Reserve, which BEA classifies as a form of corporate income tax. [Report: “Concepts and Methods of the U.S.

National Income and Product Accounts (Chapters 1–11 and 13).” U.S. Bureau of Economic Analysis, October, 2016.. Page 13-34: “Amounts paid to U.S. Treasury by Federal Reserve banks (line 24). Federal Reserve banks are included in the corporate sector of the NIPAs but are not included in Corporation Income Tax Returns.

Federal Reserve banks are required to turn over their profits (less operating expenses) to the U.S. Consequently, these payments, treated as taxes in the NIPAs, must be added to the IRS federal income taxes.”] • excludes taxes from the rest of the world.

[Report: “Concepts and Methods of the U.S. National Income and Product Accounts (Chapters 1–11 and 13).” U.S. Bureau of Economic Analysis, October, 2016..

Page 2-6: “BEA includes most transactions between the U.S. Government and economic agents in Guam, American Samoa, the Northern Mariana Islands, Puerto Rico, and the U.S. Virgin Islands in federal government receipts and expenditures. Thus, like private transactions (such as trade in goods and services), government transactions with these areas are treated as transactions with the rest of the world.”]. NOTES: • An Excel file containing the data and calculations is available. • Just Facts consulted with the U.S. Bureau of Economic Analysis (BEA) to determine how to calculate taxes from BEA’s extensive data.

This methodology: • includes social insurance taxes, which BEA classifies as a social insurance contributions. [Webpage: “Frequently Asked Questions: What Is Included in Personal Current Taxes?’ U.S.

Bureau of Economic Analysis, May 27, 2010.. “Taxes for social insurance programs, such as social security taxes and Medicare taxes, are not classified as personal current taxes; these types of taxes are classified as contributions for government social insurance.”] • includes estate and gift taxes, which BEA classifies as capital transfer receipts. [Webpage: “Frequently Asked Questions: What Is Included in Personal Current Taxes?’ U.S.

Bureau of Economic Analysis, May 27, 2010.. “Estate and gift taxes, which are classified as capital transfers, are shown in NIPA (National Income and Product Account) table 5.11 and 5.11U.”]. NOTES: • An Excel file containing the data and calculations is available. • Just Facts consulted with the U.S. Bureau of Economic Analysis (BEA) to determine how to calculate taxes from BEA’s extensive data. This methodology: • includes social insurance taxes, which BEA classifies as a social insurance contributions. [Webpage: “Frequently Asked Questions: What Is Included in Personal Current Taxes?’ U.S.

Bureau of Economic Analysis, May 27, 2010.. “Taxes for social insurance programs, such as social security taxes and Medicare taxes, are not classified as personal current taxes; these types of taxes are classified as contributions for government social insurance.”] • includes estate and gift taxes, which BEA classifies as capital transfer receipts.

[Webpage: “Frequently Asked Questions: What Is Included in Personal Current Taxes?’ U.S. Bureau of Economic Analysis, May 27, 2010.. “Estate and gift taxes, which are classified as capital transfers, are shown in NIPA (National Income and Product Account) table 5.11 and 5.11U.”]. NOTES: • An Excel file containing the data and calculations is available. • Just Facts consulted with the U.S. Bureau of Economic Analysis (BEA) to determine how to calculate taxes from BEA’s extensive data. This methodology: • includes social insurance taxes, which BEA classifies as a social insurance contributions.

[Webpage: “Frequently Asked Questions: What Is Included in Personal Current Taxes?’ U.S. Bureau of Economic Analysis, May 27, 2010.. “Taxes for social insurance programs, such as social security taxes and Medicare taxes, are not classified as personal current taxes; these types of taxes are classified as contributions for government social insurance.”] • includes estate and gift taxes, which BEA classifies as capital transfer receipts. [Webpage: “Frequently Asked Questions: What Is Included in Personal Current Taxes?’ U.S. Bureau of Economic Analysis, May 27, 2010.. “Estate and gift taxes, which are classified as capital transfers, are shown in NIPA (National Income and Product Account) table 5.11 and 5.11U.”].

NOTES: • An Excel file containing the data and calculations is available. • Just Facts consulted with the U.S.

Bureau of Economic Analysis (BEA) to determine how to calculate taxes from BEA’s extensive data. This methodology: • includes social insurance taxes, which BEA classifies as a social insurance contributions. [Webpage: “Frequently Asked Questions: What Is Included in Personal Current Taxes?’ U.S. Bureau of Economic Analysis, May 27, 2010.. “Taxes for social insurance programs, such as social security taxes and Medicare taxes, are not classified as personal current taxes; these types of taxes are classified as contributions for government social insurance.”] • includes estate and gift taxes, which BEA classifies as capital transfer receipts. [Webpage: “Frequently Asked Questions: What Is Included in Personal Current Taxes?’ U.S.

Bureau of Economic Analysis, May 27, 2010.. “Estate and gift taxes, which are classified as capital transfers, are shown in NIPA (National Income and Product Account) table 5.11 and 5.11U.”]. Economic incidence is concerned with how the burden of the tax is distributed among economic agents (producers, consumers, employees, and shareholders) as determined by market forces, not by the law.

It is one thing to specify in law that the sales tax be collected and paid by Wal-Mart, for example, but it is quite another to determine how Wal-Mart then passes some portion of the tax burden along to its customers, workers, and owner-shareholders, depending on the economic forces at work in each of these market contexts. Economic incidence is the pattern of tax burden as it is distributed by supply and demand forces in each of these markets. If the actual incidence of a tax is independent of its statutory assignment, what does determine the incidence? The answer: The incidence of a tax depends on the responsiveness of buyers and of sellers to a change in price.

When buyers respond to even a small increase in price by leaving the market and buying other things, they will not be willing to accept a price that is much higher than it was prior to the tax. Similarly, if sellers respond to a small reduction in what they receive by shifting their goods and resources to other markets, or by going out of business, they will not be willing to accept a much smaller payment, net of tax. The burden of a tax—its incidence—tends to fall more heavily on whichever side of the market has the least attractive options elsewhere—the side of the market that is less sensitive to price changes, in other words. When we consider the burden of a tax, we must distinguish between the burden as it is specified in the tax law and the true economic burden. Statutory incidence refers to tax incidence required by legal statutes.

Of course, it is not possible to specify true economic incidence in law, but that does not stop lawmakers from trying. Consider a simple example. Social Security payroll tax requires that employers and employees split the tax, each paying one-half of the total. Phantasy Star Zero Patch Italia. Hence, the statutory incidence of the tax is that half the tax falls on the employer and half falls on the employee. But, the true economic incidence of the payroll tax is quite different. The employer has some ability to adjust the employee’s wage and pass the employer’s half of the tax on to the employee. In fact, the employee may bear the entire tax.

Of course, the extent to which the employer can pass the tax on to the employee depends on the labor supply elasticity of the employee; that is, the willingness of the employee to accept a lower wage and supply the same, or nearly the same, quantity of labor. However, the ultimate cost of a tax or fee is not necessarily borne by the entity that writes the check to the government. The cost of the proposed fee would ultimately be borne to varying degrees by an institution’s customers, employees, and investors, but the precise incidence among those groups is uncertain. Customers would probably absorb some of the cost in the form of higher borrowing rates and other charges, although competition from financial institutions not subject to the fee would limit the extent to which the cost could be passed through to borrowers.

Employees might bear some of the cost by accepting some reduction in their compensation, including income from bonuses, if they did not have better employment opportunities available to them. Investors could bear some of the cost in the form of lower prices of their stock if the fee reduced the institution’s future profits. Pages 23–24: “CBO also assumed that the economic cost of excise taxes falls on households according to their consumption of taxed goods (such as tobacco and alcohol). Excise taxes on intermediate goods, which are paid by businesses, were attributed to households in proportion to their overall consumption. CBO assumed that each household spent the same amount on taxed goods as a similar household with comparable income is reported to spend in the Bureau of Labor Statistics’ Consumer Expenditure Survey.”. The burden of excise taxes is thought to fall on consumption and more heavily on individuals with lower incomes.

The tax is believed to be usually passed on by producers to consumers in the form of higher prices. Because consumption is a higher proportion of income for lower-income persons than upper-income individuals, excise taxes are usually considered regressive. However, the incidence of excise taxes in particular cases depends on the market conditions, and how consumers and producers respond to price changes. Further, some economists have argued that consideration of the incidence of excise taxes over an individual’s lifetime reduces their apparent regressivity. [U]nder these new laws, a combination of federal subsidies for individual insurance through the health benefit exchanges, penalties for being uninsured or not offering coverage, an excise tax on employer sponsored group health insurance cost, and anticipated competitive premiums from health benefit exchanges are expected to slow the rate of growth in the total cost of employer-sponsored group health insurance.

Most of this cost reduction is assumed to result in an increase in the share of employee compensation that will be provided in wages that will be subject to the Social Security payroll tax. NOTE: To summarize the above, because the cost of health insurance is part of employers’ cost of compensating employees, if the cost of health insurance is decreased, “most” of the cost savings will be redirected to other forms of employee compensation such as salary. This is because employee compensation is generally driven by laws of supply of demand (with the notable exception of minimum wage laws). Likewise, because employer payroll taxes are a direct outcome of employers paying employees, most of this cost is redirected from other forms of employee compensation. The incidence of the corporate income tax is uncertain. In the very short term, corporate shareholders are likely to bear most of the economic burden of the tax; but over the longer term, as capital markets adjust to bring the after-tax returns on different types of capital in line with each other, some portion of the economic burden of the tax is spread among owners of all types of capital. In addition, because the tax reduces capital investment in the United States, it reduces workers’ productivity and wages relative to what they otherwise would be, meaning that at least some portion of the economic burden of the tax over the longer term falls on workers.

That reduction in investment probably occurs in part through a reduction in U.S. Saving and in part through decisions to invest more savings outside the United States (relative to what would occur in the absence of the U.S. Corporate income tax); the larger the decline in saving or outflow of capital, the larger the share of the burden of the corporate income tax that is borne by workers. CBO recently reviewed several studies that use so-called general-equilibrium models of the economy to determine the long-term incidence of the corporate income tax. The results of those studies are sensitive to assumptions about the values of several key parameters, such as the ease with which capital can move between countries. Using assumptions that reflect the central tendency of published estimates of the key parameters yields an estimate that about 60 percent of the corporate income tax is borne by owners of capital and 40 percent is borne by workers. However, standard general-equilibrium models exclude important features of the corporate income tax system that tend to increase the share of the corporate tax borne by corporate shareholders or by capital owners in general.

9 For example, standard models generally assume that corporate profits represent the “normal” return on capital (that is, the return that could be obtained from making a risk-free investment). In fact, corporate profits partly represent returns on capital in excess of the normal return, for several reasons: Some corporations possess unique assets such as patents or trademarks; some choose riskier investments that have the potential to provide above-normal returns; and some produce goods or services that face little competition and thereby earn some degree of monopoly profits. Some estimates indicate that less than half of the corporate tax is a tax on the normal return on capital and that the remainder is a tax on such excess returns. 10 Taxes on excess returns are probably borne by the owners of the capital that produced those excess returns.

Standard models also generally fail to incorporate tax policies that affect corporate finances, such as the preferences afforded to corporate debt under the corporate income tax. Increases in the corporate tax will increase the subsidy afforded to domestic debt, increasing the relative return on debt-financed investment in the United States and drawing new investment from overseas, thus reducing the net amount of capital that flows out of the country. In addition, standard models generally do not account for corporate income taxes in other countries; those taxes also reduce the amount of capital that flows out of this country because of the U.S. Corporate income tax. Far less consensus exists about how to allocate corporate income taxes (and taxes on capital income generally). In this analysis, CBO allocated 75 percent of the burden of corporate income taxes to owners of capital in proportion to their income from interest, dividends, adjusted capital gains, and rents. The agency used capital gains scaled to their long-term historical level given the size of the economy and the tax rate that applies to them rather than actual capital gains so as to smooth out large year-to-year variations in the total amount of gains realized.

CBO allocated 25 percent of the burden of corporate income taxes to workers in proportion to their labor income. For this analysis, federal taxes include individual income taxes, payroll taxes, corporate income taxes, and excise taxes, which together accounted for 93 percent of all federal revenues in fiscal year 2013. Revenues from states’ deposits for unemployment insurance, estate and gift taxes, miscellaneous fees and fines, and net income earned by the Federal Reserve, which make up the remaining 7 percent, are not allocated to households in this analysis, mainly because it is uncertain how to attribute those revenues to particular households.

Before-tax income is market income plus government transfers. Market income consists of labor income, business income, capital gains (profits realized from the sale of assets), capital income excluding capital gains, income received in retirement for past services, and other sources of income. Government transfers are cash payments and in-kind benefits from social insurance and other government assistance programs. Those transfers include payments and benefits from federal, state, and local governments. Transfers as measured in this report do not equal total government spending on the transfer programs included in the analysis. The values of most transfers are based on amounts reported in the Census Bureau’s Current Population Survey. The values of transfers from Medicare, Medicaid, and the Children’s Health Insurance Program are based on the Census Bureau’s estimate of the government’s average cost of providing those benefits.

In addition, because some transfers go to recipients outside the scope of the survey data collected by the Census Bureau and because some recipients misreport the amount of transfer payments they receive, the total amount of government transfers observed in the data used here is less than the total amount the government spends through those transfer programs. See the appendix for more details.

For this analysis, federal taxes include individual income taxes, payroll taxes, corporate income taxes, and excise taxes, which together accounted for 93 percent of all federal revenues in fiscal year 2013. Revenues from states’ deposits for unemployment insurance, estate and gift taxes, miscellaneous fees and fines, and net income earned by the Federal Reserve, which make up the remaining 7 percent, are not allocated to households in this analysis, mainly because it is uncertain how to attribute those revenues to particular households. Before-tax income is market income plus government transfers. Market income consists of labor income, business income, capital gains (profits realized from the sale of assets), capital income excluding capital gains, income received in retirement for past services, and other sources of income. Government transfers are cash payments and in-kind benefits from social insurance and other government assistance programs.

Those transfers include payments and benefits from federal, state, and local governments. Transfers as measured in this report do not equal total government spending on the transfer programs included in the analysis. The values of most transfers are based on amounts reported in the Census Bureau’s Current Population Survey. The values of transfers from Medicare, Medicaid, and the Children’s Health Insurance Program are based on the Census Bureau’s estimate of the government’s average cost of providing those benefits. In addition, because some transfers go to recipients outside the scope of the survey data collected by the Census Bureau and because some recipients misreport the amount of transfer payments they receive, the total amount of government transfers observed in the data used here is less than the total amount the government spends through those transfer programs. See the appendix for more details. For this analysis, federal taxes include individual income taxes, payroll taxes, corporate income taxes, and excise taxes, which together accounted for 93 percent of all federal revenues in fiscal year 2013.

Revenues from states’ deposits for unemployment insurance, estate and gift taxes, miscellaneous fees and fines, and net income earned by the Federal Reserve, which make up the remaining 7 percent, are not allocated to households in this analysis, mainly because it is uncertain how to attribute those revenues to particular households. Before-tax income is market income plus government transfers. Market income consists of labor income, business income, capital gains (profits realized from the sale of assets), capital income excluding capital gains, income received in retirement for past services, and other sources of income. Government transfers are cash payments and in-kind benefits from social insurance and other government assistance programs. Those transfers include payments and benefits from federal, state, and local governments. Transfers as measured in this report do not equal total government spending on the transfer programs included in the analysis.

The values of most transfers are based on amounts reported in the Census Bureau’s Current Population Survey. The values of transfers from Medicare, Medicaid, and the Children’s Health Insurance Program are based on the Census Bureau’s estimate of the government’s average cost of providing those benefits. In addition, because some transfers go to recipients outside the scope of the survey data collected by the Census Bureau and because some recipients misreport the amount of transfer payments they receive, the total amount of government transfers observed in the data used here is less than the total amount the government spends through those transfer programs. See the appendix for more details.

The report in question, “Who Pays? A Distributional Analysis of the Tax Systems in All 50 States,” does not define “income” and refers readers to the organization’s website for more details about methodology.† This methodology document also does not define “income.”‡ However, the report cites figures for family incomes in the lowest quintile of income distribution that are far below the figures provided by CBO. For example, the report states that the lowest quintile of families in California had an average income of $13,200 in 2007, whereas CBO states that the lowest quintile of households nationwide had an average income of $23,900 that year.§ (Note that ITEP’s income figures for the lowest quintiles in most of the other states are significantly lower than in California). The CBO report adjusts for inflation and was published in 2012, while the ITEP report does not state it adjusts for inflation. Hence, in the most extreme scenario, this effectively lowers the CBO’s figure for the income of the lowest quintile from $23,900 to $21,630, which is still 64% higher than ITEP’s figure.#. Just Facts contacted ITEP via email on 8/27/2012 and asked what measure of income was used in its analysis. Just Facts then followed up with a phone call later that day.

ITEP failed to respond to both inquiries. Just Facts’ research on tax distribution for the ““ and ““ reveals how various organizations and individuals use narrow measures of income as the denominator to calculate effective tax burdens, which has the effect of artificially increasing tax rates, especially for lower- and middle-income households. For an article from Just Facts about the media’s uncritical use of ITEP’s defective tax analysis,. NOTES: • † Report: “Who Pays?

A Distributional Analysis of the Tax Systems in All 50 States, Third Edition.” By Carl Davis and others. Institute on Taxation & Economic Policy, November 2009. Microsoft Office 97 Standard Edition there.

• ‡ Webpage: “ITEP Tax Model Methodology.” Institute on Taxation & Economic Policy. Accessed August 26, 2012 at • § Dataset: “The Distribution of Household Income and Federal Taxes, 2008 and 2009.” Congressional Budget Office, July 10, 2012..

Tab 3: “Household Income” • # “CPI Inflation Calculator.” Bureau of Labor Statistics. Accessed August 26, 2012. “$23,900 in 2012 has the same buying power as $21,629.80 in 2007”. The burden of excise taxes is thought to fall on consumption and more heavily on individuals with lower incomes.

The tax is believed to be usually passed on by producers to consumers in the form of higher prices. And because consumption is a higher proportion of income for lower-income persons than upper-income individuals, excise taxes are usually considered regressive.

However, the incidence of excise taxes in particular cases depends on the market conditions, and how consumers and producers respond to price changes. Further, some economists have argued that consideration of the incidence of excise taxes over an individual’s lifetime reduces their apparent regressivity. For this analysis, federal taxes include individual income taxes, payroll taxes, corporate income taxes, and excise taxes, which together accounted for 93 percent of all federal revenues in fiscal year 2013. Revenues from states’ deposits for unemployment insurance, estate and gift taxes, miscellaneous fees and fines, and net income earned by the Federal Reserve, which make up the remaining 7 percent, are not allocated to households in this analysis, mainly because it is uncertain how to attribute those revenues to particular households. Before-tax income is market income plus government transfers. Market income consists of labor income, business income, capital gains (profits realized from the sale of assets), capital income excluding capital gains, income received in retirement for past services, and other sources of income.

Government transfers are cash payments and in-kind benefits from social insurance and other government assistance programs. Those transfers include payments and benefits from federal, state, and local governments.

Transfers as measured in this report do not equal total government spending on the transfer programs included in the analysis. The values of most transfers are based on amounts reported in the Census Bureau’s Current Population Survey. The values of transfers from Medicare, Medicaid, and the Children’s Health Insurance Program are based on the Census Bureau’s estimate of the government’s average cost of providing those benefits.

In addition, because some transfers go to recipients outside the scope of the survey data collected by the Census Bureau and because some recipients misreport the amount of transfer payments they receive, the total amount of government transfers observed in the data used here is less than the total amount the government spends through those transfer programs. See the appendix for more details. The purpose of an income qualifier is to reflect taxpayers’ ability to pay tax. In the initial versions of the tax model, the Tax Policy Center (TPC) used adjusted gross income (AGI) as the income qualifier because resource limitations prevented us from developing a more comprehensive measure of income. AGI, however, is a very narrow measure of income.

It excludes such items as untaxed social security and pension benefits, tax-exempt employee benefits, income earned within retirement accounts, and tax-exempt interest. NOTE: Instead of using taxable income for the denominator in in its calculation of tax rates, this report uses adjusted gross income,† which still undercounts income, though not as egregiously as taxable income. Per the Tax Policy Center, adjusted gross income is “a very narrow measure of income.

It excludes such items as untaxed social security and pension benefits, tax-exempt employee benefits, income earned within retirement accounts, and tax-exempt interest. Narrow measures of income understate taxpayers’ ability to pay taxes and overstate their” effective tax rates. In 2012, the Tax Policy Center began using a “broadened measure of income” that “is similar to the measures currently employed by Treasury, the Joint Committee of Taxation, and the Congressional Budget Office.”‡. Average federal tax rates generally rise with income.

18 In 2013, households in the bottom fifth of the distribution of before-tax income paid an estimated 3.3 percent of their before-tax income in federal taxes, households in the middle quintile paid 12.8 percent, and households in the top quintile paid 26.3 percent. Average tax rates within the top quintile continued to increase as income rose: Households in the top 1 percent of the before-tax income distribution had an average tax rate of 34.0 percent. Two income concepts are used in this article to classify tax returns as high income: the statutory concept of adjusted gross income (AGI), and the “expanded income” concept. 2 The expanded income concept uses items reported on tax returns to obtain a more comprehensive measure of income than AGI. Specifically, expanded income is AGI plus tax-exempt interest, nontaxable Social Security benefits, the foreign-earned income exclusion, and items of “tax preference” for alternative minimum tax (AMT) purposes less unreimbursed employee business expenses, moving expenses, investment interest expense to the extent it does not exceed investment income, and miscellaneous itemized deductions not subject to the 2-percent-of-AGI floor. There are also two tax concepts in this article used to classify returns as taxable or nontaxable: “U.S.

Income tax” and “worldwide income tax.” The first concept, U.S. Income tax, is total Federal income tax liability, which includes the AMT, less all credits against income tax and does not include payroll or self-employment taxes. To be considered taxable, a return had to have a positive income tax liability after accounting for all credits (including refundable credits). A nontaxable return, on the other hand, could either have a zero or negative income tax liability after accounting for all credits (including refundable credits).

Since the Federal income tax applies to worldwide income and allows a credit (subject to certain limits) for income taxes paid to foreign governments, a return could be classified as nontaxable under the U.S. Income tax concept even though income taxes had been paid to a foreign government. The second tax concept, worldwide income tax, addresses this circumstance by adding back the allowable foreign tax credit and foreign taxes paid on excluded foreign-earned income to U.S.

6, 7 The sum of these two items is believed to be a reasonable proxy for foreign taxes actually paid. [C]ertain income items from tax-preferred sources may be reduced because of their preferential treatment.

An example is interest from tax-exempt State and local Government bonds. The interest rate on tax-exempt bonds is generally lower than the interest rate on taxable bonds of the same maturity and risk, with the difference approximately equal to the tax rate of the typical investor in tax-exempt bonds. Thus, investors in tax-exempt bonds are effectively paying a tax, referred to as an “implicit tax,” and tax-exempt interest as reported is measured on an after-tax, rather than a pre-tax, basis.

Municipal bonds (or “munis” for short) are debt securities issued by states, cities, counties and other governmental entities to fund day-to-day obligations and to finance capital projects such as building schools, highways or sewer systems. By purchasing municipal bonds, you are in effect lending money to the bond issuer in exchange for a promise of regular interest payments, usually semi-annually, and the return of the original investment, or “principal.” A municipal bond’s maturity date (the date when the issuer of the bond repays the principal) may be years in the future. Short-term bonds mature in one to three years, while long-term bonds won’t mature for more than a decade.

Generally, the interest on municipal bonds is exempt from federal income tax. The interest may also be exempt from state and local taxes if you reside in the state where the bond is issued. Bond investors typically seek a steady stream of income payments and, compared to stock investors, may be more risk-averse and more focused on preserving, rather than increasing, wealth. Given the tax benefits, the interest rate for municipal bonds is usually lower than on taxable fixed-income securities such as corporate bonds. Another type of tax-exempt bond—qualified private activity bonds, or QPABs—is also issued by state and local governments. In contrast to governmental bonds, QPABs reduce the costs to the private sector of financing some projects that provide public benefits.

Although the issuance of QPABs can be advantageous to state and local finances—for example, by encouraging the private sector to undertake projects whose public benefits would otherwise either have gone unrealized or required government investment to bring about—states and localities are not responsible for the interest and principal payments on such bonds. Consequently, QPABs are not the focus of this testimony (although the findings of some studies cited later in this section apply to them as well as to governmental bonds). [C]ertain income items from tax-preferred sources may be reduced because of their preferential treatment.

An example is interest from tax-exempt State and local Government bonds. The interest rate on tax-exempt bonds is generally lower than the interest rate on taxable bonds of the same maturity and risk, with the difference approximately equal to the tax rate of the typical investor in tax-exempt bonds. Thus, investors in tax-exempt bonds are effectively paying a tax, referred to as an “implicit tax,” and tax-exempt interest as reported is measured on an after-tax, rather than a pre-tax, basis. A static analysis—one that focuses solely on who pays taxes to the government—would suggest that the tax exemption [on munis] is a major boon for rich investors. After all, those investors get to earn tax-free interest on the bonds. The flaw in this reasoning is the fact that the interest rate that investors receive on tax-exempt debt is much lower than they could receive on comparable investments. Investors compete among themselves to get the best after-tax returns on their investments.

This competition passes much of the benefit of tax exemption back to state and local governments in the form of lower interest rates, making it cheaper and easier to finance schools, roads, and other local projects. A United States citizen or resident alien generally is subject to the U.S. Individual income tax on his or her worldwide taxable income. 4 Taxable income equals the taxpayer’s total gross income less certain exclusions, exemptions, and deductions.

Graduated tax rates are then applied to a taxpayer’s taxable income to determine his or her individual income tax liability. A taxpayer may face additional liability if the alternative minimum tax applies. A taxpayer may reduce his or her income tax liability by any applicable tax credits.

Under the Internal Revenue Code of 1986 (the “Code”), gross income means “income from whatever source derived” except for certain items specifically exempt or excluded by statute. Sources of income include compensation for services, interest, dividends, capital gains, rents, royalties, alimony and separate maintenance payments, annuities, income from life insurance and endowment contracts (other than certain death benefits), pensions, gross profits from a trade or business, income in respect of a decedent, and income from S corporations, partnerships, 5 trusts or estates. 6 Statutory exclusions from gross income include death benefits payable under a life insurance contract, interest on certain State and local bonds, employer-provided health insurance, employer-provided pension contributions, and certain other employer-provided benefits.

5 In general, partnerships and S corporations ( i.e., corporations subject to the provisions of subchapter S of the Internal Revenue Code) are treated as pass-through entities for Federal income tax purposes. Thus, no Federal income tax is imposed at the entity level. Rather, income of such entities is passed through and taxed to the owners at the individual level. A business entity organized as a limited liability company (“LLC”) under applicable State law generally is treated as a partnership for Federal income tax purposes.

6 In general, estates and most trusts pay tax on income at the entity level, unless the income is distributed or required to be distributed under governing law or under the terms of the governing instrument. Such entities determine their tax liability using a special tax rate schedule and are subject to the alternative minimum tax. Certain trusts, however, do not pay Federal income tax at the trust level. For example, certain trusts that distribute all income currently to beneficiaries are treated as pass-through or conduit entities (similar to a partnership). Other trusts are treated as being owned by grantors in whole or in part for tax purposes; in such cases, the grantors are taxed on the income of the trust. Under present law, gross income does not include interest on State and local bonds.

State and local bonds are classified generally as either governmental bonds or private activity bonds. Governmental bonds are bonds whose proceeds are primarily used to finance governmental functions or which are repaid with governmental funds. Private activity bonds are bonds in which the State or local government serves as a conduit providing financing to nongovernmental persons (e.g., private businesses or individuals). The exclusion from income for State and local bonds does not apply to private activity bonds, unless the bonds are issued for certain permitted purposes (“qualified private activity bonds”) and other requirements are met. The tax base is further reduced by certain deductions. Taxpayers can take a standard deduction or they may itemize their deductions. The elderly and blind are allowed an additional standard deduction.

Itemized deductions are allowed for home mortgage interest payments, state and local income taxes, state and local property taxes, charitable contributions, medical expenses in excess of 7.5% of AGI, and a few other items. As a temporary measure in 2005, state and local sales taxes can be deducted as an alternative to state and local income taxes. To determine taxable income, an individual reduces AGI by any personal exemption deductions and either the applicable standard deduction or his or her itemized deductions.

Personal exemptions generally are allowed for the taxpayer, his or her spouse, and any dependents. For 2014, the amount deductible for each personal exemption is $3,950. This amount is indexed annually for inflation. Additionally, the personal exemption phase-out (“PEP”) reduces a taxpayer’s personal exemptions by two percent for each $2,500 ($1,250 for married filing separately), or fraction thereof, by which the taxpayer’s AGI exceeds $254,200 (single), $279,650 (head-of-household), $305,050 (married filing jointly) and $152,525 (married filing separately). 7 These threshold amounts are indexed for inflation. A taxpayer also may reduce AGI by the amount of the applicable standard deduction. The basic standard deduction varies depending upon a taxpayer’s filing status.

For 2014, the amount of the standard deduction is $6,200 for single individuals and married individuals filing separate returns, $9,100 for heads of households, and $12,400 for married individuals filing a joint return and surviving spouses. An additional standard deduction is allowed with respect to any individual who is elderly or blind. 8 The amounts of the basic standard deduction and the additional standard deductions are indexed annually for inflation. In lieu of taking the applicable standard deductions, an individual may elect to itemize deductions.

The deductions that may be itemized include State and local income taxes (or, in lieu of income, sales taxes), real property and certain personal property taxes, home mortgage interest, charitable contributions, certain investment interest, medical expenses (in excess of 10 percent of AGI, or 7.5 percent in the case of taxpayers above age 64), casualty and theft losses (in excess of 10 percent of AGI and in excess of $100 per loss), and certain miscellaneous expenses (in excess of two percent of AGI). Additionally, the total amount of itemized deductions allowed is reduced by $0.03 for each dollar of AGI in excess of $254,200 (single), $279,650 (head-of-household), $305,050 (married filing jointly) and $152,525 (married filing separately). 9 These threshold amounts are indexed for inflation. A few tax benefits disappear immediately once a taxpayer reaches a certain income level rather than gradually phasing out over a range of income.

Those “cliffs” can create very high effective marginal rates. For example, single taxpayers with income between $60,000 and $80,000 can deduct up to $2,000 of tuition from their income, but those with income above $80,000 cannot claim the deduction at all. Someone who earned an additional $1,000 that pushed income over that threshold would lose $2,000 in deductions, causing taxable income to rise by $3,000.

The taxpayer would face an effective marginal rate three times his or her statutory rate: for instance, a taxpayer in the 25 percent bracket would face an effective marginal rate of 75 percent. An individual may claim a tax credit for each qualifying child under the age of 17. The amount of the credit per child is $1,000. 11 The aggregate amount of child credits that may be claimed is phased out for individuals with income over certain threshold amounts. Specifically, the otherwise allowable child tax credit is reduced by $50 for each $1,000 (or fraction thereof) of modified adjusted gross income over $75,000 for single individuals or heads of households, $110,000 for married individuals filing joint returns, and $55,000 for married individuals filing separate returns. To the extent the child credit exceeds the taxpayer’s tax liability, the taxpayer is eligible for a refundable credit 12 (the additional child tax credit) equal to 15 percent of earned income in excess of $3,000.

A refundable earned income tax credit (“EITC”) is available to low-income workers who satisfy certain requirements. The amount of the EITC varies depending upon the taxpayer’s earned income and whether the taxpayer has one, two, more than two, or no qualifying children. In 2014, the maximum EITC is $6,143 for taxpayers with more than two qualifying children, $5,460 for taxpayers with two qualifying children, $3,305 for taxpayers with one qualifying child, and $496 for taxpayers with no qualifying children. The credit amount begins to phaseout at an income level of $23,260 for joint-filers with children, $17,830 for other taxpayers with children, $13,540 for joint-filers with no children and $8,110 for other taxpayers with no qualifying children. The phaseout percentages are 15.98 for taxpayers with one qualifying child, 17.68 for two or more qualifying children and 7.65 for no qualifying children. Social Security payroll tax requires that employers and employees split the tax, each paying one-half of the total. Hence, the statutory incidence of the tax is that half the tax falls on the employer and half falls on the employee.

But, the true economic incidence of the payroll tax is quite different. The employer has some ability to adjust the employee’s wage and pass the employer’s half of the tax on to the employee. In fact, the employee may bear the entire tax. Of course, the extent to which the employer can pass the tax on to the employee depends on the labor supply elasticity of the employee; that is, the willingness of the employee to accept a lower wage and supply the same, or nearly the same, quantity of labor.

Recent evidence in Gruber (1997), based on the Chilean payroll tax, for example, suggests that workers bear most of the burden of any increase in the tax rate. [U]nder these new laws, a combination of federal subsidies for individual insurance through the health benefit exchanges, penalties for being uninsured or not offering coverage, an excise tax on employer sponsored group health insurance cost, and anticipated competitive premiums from health benefit exchanges are expected to slow the rate of growth in the total cost of employer-sponsored group health insurance.

Most of this cost reduction is assumed to result in an increase in the share of employee compensation that will be provided in wages that will be subject to the Social Security payroll tax. NOTE: To summarize the above, because the cost of health insurance is part of employers’ cost of compensating employees, if the cost of health insurance is decreased, “most” of the cost savings will be redirected to other forms of employee compensation such as salary. This is because employee compensation is generally driven by laws of supply of demand (with the notable exception of minimum wage laws). Likewise, because employer payroll taxes are a direct outcome of employers paying employees, most of this cost is redirected from other forms of employee compensation. Much of the progressivity of the federal tax system derives from the largest source of revenues, the individual income tax, for which average tax rates rise with income. The next largest source of revenues, social insurance taxes, has average tax rates that vary little across most income groups—although the average rate is lower for higher-income households, because earnings above a certain threshold are not subject to the Social Security payroll tax and because earnings are a smaller portion of total income for that group.

The average social insurance tax rate is higher than the average individual income tax rate for all income quintiles except the highest one (see Figure 4-4). The impact of corporate taxes on households also rises with household income—with the largest effect by far on the top quintile (under the assumption that the corporate tax reduces after-tax returns on capital). By contrast, the average excise tax rate falls as income rises. The two largest sources of payroll taxes are those that are dedicated to Social Security and Part A of Medicare (the Hospital Insurance program). Much smaller amounts come from unemployment insurance taxes (most of which are imposed by states but produce amounts that are classified as federal revenues); employers’ and employees’ contributions to the Railroad Retirement System; and other contributions to federal retirement programs, mainly those made by federal employees (see Table 4-2). The premiums that Medicare enrollees pay for Part B (the Medical Insurance program) and Part D (prescription drug benefits) are voluntary payments and thus are not counted as tax revenues; rather, they are considered offsets to spending and appear on the spending side of the budget as offsetting receipts. Many people wonder how we figure their Social Security retirement benefit.

We base Social Security benefits on your lifetime earnings. We adjust or “index” your actual earnings to account for changes in average wages since the year the earnings were received. Then Social Security calculates your average indexed monthly earnings during the 35 years in which you earned the most.

We apply a formula to these earnings and arrive at your basic benefit, or “primary insurance amount.” This is how much you would receive at your full retirement age—65 or older, depending on your date of birth. Until recent years, Social Security beneficiaries received more, often far more, than the value of the Social Security taxes they paid. However, because Social Security payroll tax rates have increased over the years and the full retirement age (the age at which unreduced benefits are first payable) is being increased gradually, it is becoming more apparent that Social Security will be less of a good deal for many future retirees. For example, for workers who earned average wages and retired in 1980 at the age of 65, it took 2.8 years to recover the value of the retirement portion of the combined employee and employer shares of their Social Security taxes plus interest. For their counterparts who retired at the age of 65 in 2003, it will take 17.4 years. For those retiring in 2020, it will take 21.6 years.

Medicare consists of four distinct parts: • Part A (Hospital Insurance, or HI) covers inpatient hospital services, skilled nursing care, hospice care, and some home health services. The HI trust fund is mainly funded by a dedicated payroll tax of 2.9% of earnings, shared equally between employers and workers. • Part B (Supplementary Medical Insurance, or SMI) covers physician services, outpatient services, and some home health and preventive services. The SMI trust fund is funded through beneficiary premiums (set at 25% of estimated program costs for the aged) and general revenues (the remaining amount, approximately 75%). • Part C (Medicare Advantage, or MA) is a private plan option for beneficiaries that covers all Parts A and B services, except hospice. Individuals choosing to enroll in Part C must also enroll in Part B. Part C is funded through the HI and SMI trust funds.

• Part D covers outpatient prescription drug benefits. Funding is included in the SMI trust fund and is financed through beneficiary premiums, general revenues, and state transfer payments. Medicare was enacted in 1965 (P.L.

89-97) in response to the concern that only about half of the nation’s seniors had health insurance, and most of those had coverage only for inpatient hospital costs. The new program, which became effective July 1, 1966, included Part A coverage for hospital and post-hospital services and Part B coverage for doctors and other medical services. As is the case for the Social Security program, Part A is financed by payroll taxes levied on current workers and their employers; persons must pay into the system for 40 calendar quarters to become entitled to premium-free benefits.

Medicare Part B is voluntary, with a monthly premium required of beneficiaries who choose to enroll. For HI [Hospital Insurance, a.k.a. Medicare Part A], the primary source of financing is the payroll tax on covered earnings. Employers and employees each pay 1.45 percent of a worker’s wages, while self-employed workers pay 2.9 percent of their net earnings.

Starting in 2013, high-income workers pay an additional 0.9-percent tax on their earnings above an unindexed threshold ($200,000 for single taxpayers and $250,000 for married couples). Other HI revenue sources include a portion of the Federal income taxes that Social Security recipients with incomes above certain unindexed thresholds pay on their benefits, as well as interest paid from the general fund on the U.S. Treasury securities held in the HI trust fund. The employee portion of the HI tax is increased by an additional tax of 0.9 percent on wages received in excess of a specific threshold amount.

36 However, unlike the general 1.45 percent HI tax on wages, this additional tax is on the combined wages of the employee and the employee’s spouse, in the case of a joint return. The threshold amount is $250,000 in the case of a joint return, $125,000 in the case of a married individual filing a separate return, and $200,000 in any other case (unmarried individual, head of household or surviving spouse). “A business that is legally completely separate from its owners.

Most publicly-traded companies (and all major ones) fall under this classification. For United States tax purposes, C corporations are required to pay income taxes on their profits.

The advantage to a C corporate structure is the fact that, unlike S corporations, there is no limit to the number of shareholders. A disadvantage is the fact that, because a C corporation is taxed itself and its individual shareholders are taxed on dividends, it is subject to double taxation.”. Apart from taxes, corporations are a legally defined form of business organization, with ownership stakes represented by shares that may or may not be publicly traded. Shareholders’ liabilities are limited to their stake in the corporation. The Internal Revenue Code normally subjects corporate profits to the corporate income tax under its subchapter C; corporations subject to income tax are thus often referred to as “C corporations.” As explained more fully above, in the report’s section on the corporate income tax, the part of C corporation income generated by equity investment is subject to two layers of tax: the corporate income tax and the individual income tax.

In contrast, corporations that qualify as “S corporations” are not subject to the corporate income tax. Instead, their net profits are passed on a pro rata basis through to the individual shareholders who are taxed on the profits under the individual income tax.

Taxes aside, partnerships are like corporations in that they have multiple owners. In contrast to corporations, some partnerships convey a liability for debts that is not limited to partners’ contributions to the enterprise. Partnerships are also less likely than corporations to be publicly traded, although some forms of partnerships (“master limited partnerships”) are. Like S corporations, partnerships are not subject to the corporate income tax; partners are subject to their share of partnership earnings under the individual income tax. Limited liability companies (LLCs) have some of the characteristics of both partnerships and corporations. Under IRS “check the box” regulations, LLCs can elect to be taxed either as corporations or as partnerships.

Other specially defined business entities include real estate investment trusts (REITs), which are required to engage primarily in passive investment in real estate and securities. Qualifying REITs are permitted to deduct dividends they pay to shareholders, which effectively exempts REITs from the corporate income tax. Regulated investment companies (RICs), who invest primarily in securities and distribute most income, are also permitted to deduct dividends. The simplest forms of business organization are sole proprietorships. Sole proprietorships have only one owner; there is no legal distinction between the business and the business’s owner. For tax purposes, business profits earned by a sole proprietor are taxed to the owner under the individual income tax.

The corporate income tax does not apply. Businesses may be organized under a number of different legal forms. Owners of a business sometimes conduct their activities as sole proprietorships, which do not involve a legal entity separate from the owner. However, for a variety of business or other reasons, a business often is conducted through a separate legal entity. Common reasons to use a separate legal entity include the ability to pool the capital and other resources of multiple owners, the protection of limited liability accorded by State law to the owners of qualifying entities (but generally not to sole proprietors), and an improved ability to access capital markets for investment capital. The tax consequences of using a separate entity depend on the type of entity through which the business is conducted.

Partnerships, certain closely held corporations that elect to be taxed under subchapter S of the Code (referred to as “S corporations”), 6 and limited liability companies that are treated as partnerships are treated for Federal income tax purposes as passthrough entities whose owners take into account the income (whether or not distributed) or loss of the entity on their own tax returns. 8 Business entities also include specialized corporations which are not subject to entity level tax, or which are allowed a deduction for distributions to shareholders, under the Federal income tax rules. Federal tax rules applicable to these entities generally require that they distribute substantially all their income and require that they meet other specified limitations on activities, assets, and types of income, for example. These types of entities include regulated investment companies (RICs) (mutual funds in common parlance), real estate investment trusts (REITs), real estate mortgage investment conduits (REMICs), and cooperatives. In addition, some business activities are conducted through tax-exempt entities, whether as activities subject to unrelated business income tax (UBIT), or as permitted under the Federal tax rules relating to tax-exempt organizations.

Significant business activity is conducted through entities other than corporations. Such business entities include passthrough entities such as partnerships (including limited liability companies (“LLCs”)) and S corporations. For Federal income tax purposes, these passthrough entities generally are not subject to tax at the entity level. Rather, the owners − that is, partners or S corporation shareholders − are subject to tax on their shares of the entity’s income, gain, loss, deduction, and credit, whether or not distributed. 47 The tax treatment of passthrough entities differs from the generally applicable entity level tax on income of C corporations. In addition, noncorporate business income is generated by sole proprietorships and farms.

There are no limitations on the identity of a partner in a partnership under present law. Thus, a partner in a business conducted through a partnership (including an LLC taxable as a partnership) can generally be an individual, a corporation, or another partnership, for example. Permissible shareholders of S corporations are restricted to individuals (other than nonresident aliens), estates, certain trusts, and certain tax-exempt organizations, and may not exceed 100 in number (taking into account applicable attribution rules). However, the ultimate cost of a tax or fee is not necessarily borne by the entity that writes the check to the government. The cost of the proposed fee would ultimately be borne to varying degrees by an institution’s customers, employees, and investors, but the precise incidence among those groups is uncertain. Customers would probably absorb some of the cost in the form of higher borrowing rates and other charges, although competition from financial institutions not subject to the fee would limit the extent to which the cost could be passed through to borrowers. Employees might bear some of the cost by accepting some reduction in their compensation, including income from bonuses, if they did not have better employment opportunities available to them.

Investors could bear some of the cost in the form of lower prices of their stock if the fee reduced the institution’s future profits. The incidence of the corporate income tax is uncertain. In the very short term, corporate shareholders are likely to bear most of the economic burden of the tax; but over the longer term, as capital markets adjust to bring the after-tax returns on different types of capital in line with each other, some portion of the economic burden of the tax is spread among owners of all types of capital. In addition, because the tax reduces capital investment in the United States, it reduces workers’ productivity and wages relative to what they otherwise would be, meaning that at least some portion of the economic burden of the tax over the longer term falls on workers. That reduction in investment probably occurs in part through a reduction in U.S.

Saving and in part through decisions to invest more savings outside the United States (relative to what would occur in the absence of the U.S. Corporate income tax); the larger the decline in saving or outflow of capital, the larger the share of the burden of the corporate income tax that is borne by workers.

CBO recently reviewed several studies that use so-called general-equilibrium models of the economy to determine the long-term incidence of the corporate income tax. The results of those studies are sensitive to assumptions about the values of several key parameters, such as the ease with which capital can move between countries. Using assumptions that reflect the central tendency of published estimates of the key parameters yields an estimate that about 60 percent of the corporate income tax is borne by owners of capital and 40 percent is borne by workers. However, standard general-equilibrium models exclude important features of the corporate income tax system that tend to increase the share of the corporate tax borne by corporate shareholders or by capital owners in general. 9 For example, standard models generally assume that corporate profits represent the “normal” return on capital (that is, the return that could be obtained from making a risk-free investment).

In fact, corporate profits partly represent returns on capital in excess of the normal return, for several reasons: Some corporations possess unique assets such as patents or trademarks; some choose riskier investments that have the potential to provide above-normal returns; and some produce goods or services that face little competition and thereby earn some degree of monopoly profits. Some estimates indicate that less than half of the corporate tax is a tax on the normal return on capital and that the remainder is a tax on such excess returns. 10 Taxes on excess returns are probably borne by the owners of the capital that produced those excess returns. Standard models also generally fail to incorporate tax policies that affect corporate finances, such as the preferences afforded to corporate debt under the corporate income tax.

Increases in the corporate tax will increase the subsidy afforded to domestic debt, increasing the relative return on debt-financed investment in the United States and drawing new investment from overseas, thus reducing the net amount of capital that flows out of the country. In addition, standard models generally do not account for corporate income taxes in other countries; those taxes also reduce the amount of capital that flows out of this country because of the U.S. Corporate income tax. Far less consensus exists about how to allocate corporate income taxes (and taxes on capital income generally). In this analysis, CBO allocated 75 percent of the burden of corporate income taxes to owners of capital in proportion to their income from interest, dividends, adjusted capital gains, and rents.

The agency used capital gains scaled to their long-term historical level given the size of the economy and the tax rate that applies to them rather than actual capital gains so as to smooth out large year-to-year variations in the total amount of gains realized. CBO allocated 25 percent of the burden of corporate income taxes to workers in proportion to their labor income. In broad economic terms, the base of the corporate income tax is the return to equity capital. Wages are tax deductible, so labor’s contribution to corporate revenue is excluded from the corporate tax base. Income produced by corporate capital investment includes that produced by corporate investment of borrowed funds, and that produced by investment of equity, or funds provided by stockholders. Profits from debt-financed investment are paid out as interest, which is deductible.

Thus, the return to debt capital is excluded from the corporate tax base. Equity investments are financed by retained earnings and the sale of stock. The income equity investment generates is paid out as dividends and the capital gains that accrue as stock increases in value. Neither form of income is generally deductible. Thus, the base of the corporate income tax is the return to equity capital. When a business purchases a tangible asset such as a machine or structure, it is not incurring a cost. Rather, the business is simply exchanging one asset—for example, cash—for another.

The full purchase price of an asset is therefore usually not tax deductible in the year the asset is bought. Assets do, however, decline in value as they age or become outmoded. This decline in value (depreciation) is a cost. Because assets gradually depreciate until they are worthless, the tax code permits firms gradually to deduct the full acquisition cost of an asset over a number of years. The tax code contains a set of rules that govern the rate at which depreciation deductions can be claimed. The rules determine the tax depreciation rate by specifying a recovery period and a depreciation method for different types of assets.

An asset’s recovery period is the number of years over which deductions for the asset’s full cost must be spread. The applicable depreciation method determines how depreciation deductions are distributed among the different years of the recovery period. The slowest method is straight-line, in which equal deductions are taken each year. Declining balance methods, in which a fixed fraction of the cost less prior depreciation is deducted, cause larger shares to be taken in earlier years. Because of the time value of money, a tax deduction of a given dollar amount is worth more to a business the sooner it can be claimed. Further, the sooner a tax deduction can be claimed, the sooner the tax savings it generates can be invested and earn a return.

It follows that the tax rules governing when depreciation deductions can be claimed are quite important to businesses. If depreciation deductions can be claimed faster than an asset actually declines in value, a tax benefit exists; depreciation is said to be accelerated. If, on the other hand, depreciation deductions can be claimed more slowly than the corresponding asset actually depreciates, a tax penalty occurs.

Only if depreciation deductions are claimed at the rate an asset actually depreciates do taxes confer neither a tax benefit nor a tax penalty. Allowable deductions include ordinary and necessary business expenses, such as salaries, wages, contributions to profit-sharing and pension plans and other employee benefit programs, repairs, bad debts, taxes (other than Federal income taxes), contributions to charitable organizations (subject to an income limitation), advertising, interest expense, certain losses, selling expenses, and other expenses. Expenditures that produce benefits in future taxable years to a taxpayer’s business or income-producing activities (such as the purchase of plant and equipment) generally are capitalized and recovered over time through depreciation, amortization or depletion allowances. A net operating loss incurred in one taxable year typically may be carried back two years or carried forward 20 years and allowed as a deduction in another taxable year.

Deductions are also allowed for certain amounts despite the lack of a direct expenditure by the taxpayer. For example, a deduction is allowed for all or a portion of the amount of dividends received by a corporation from another corporation (provided certain ownership requirements are satisfied). Moreover, a deduction is allowed for a portion of the amount of income attributable to certain manufacturing activities. A corporation is subject to an alternative minimum tax which is payable, in addition to all other tax liabilities, to the extent that it exceeds the corporation’s regular income tax liability.

The tax is imposed at a flat rate of 20 percent on alternative minimum taxable income in excess of a $40,000 exemption amount. 31 Credits that are allowed to offset a corporation’s regular tax liability generally are not allowed to offset its minimum tax liability. If a corporation pays the alternative minimum tax, the amount of the tax paid is allowed as a credit against the regular tax in future years. Alternative minimum taxable income is the corporation’s taxable income increased by the corporation’s tax preference items and adjusted by determining the tax treatment of certain items in a manner that negates the deferral of income resulting from the regular tax treatment of those items.

Among the preferences and adjustments applicable to the corporate alternative minimum tax are accelerated depreciation on certain property, certain expenses and allowances related to oil and gas and mining exploration and development, certain amortization expenses related to pollution control facilities, net operating losses and certain tax-exempt interest income. In addition, corporate alternative minimum taxable income is increased by 75 percent of the amount by which the corporation’s “adjusted current earnings” exceeds its alternative minimum taxable income (determined without regard to this adjustment). Adjusted current earnings generally are determined with reference to the rules that apply in determining a corporation’s earnings and profits. Table 3 contains the marginal corporate tax rates faced by U.S.

Smaller firms face a progressive tax schedule. 22 The tax schedule was designed so that most firms face an effective tax rate of 35%. In order to increase the effective tax rate for larger firms, the statutory rate increases above 35% for two brackets: the 39% bracket for income between $100,000 and $335,000 and the 38% bracket for income between $15,000,000 and $18,333,333. Having these “bubble” rates, or higher marginal tax rates along part of the schedule, increases the effective tax rate for higher income corporations. Essentially, these higher “bubble” brackets serve to reduce any tax savings larger corporations would have incurred from having their first $75,000 in income taxed at lower rates.

A copyright; a literary, musical, or artistic composition; a letter; a memorandum; or similar property (such as drafts of speeches, recordings, transcripts, manuscripts, drawings, or photographs): a. Created by your personal efforts, b. Prepared or produced for you (in the case of a letter, memorandum, or similar property), or c.

Received from a person who created the property or for whom the property was prepared under circumstances (for example, by gift) entitling you to the basis of the person who created the property, or for whom it was prepared or produced. In general, gain or loss reflected in the value of an asset is not recognized for income tax purposes until a taxpayer disposes of the asset. On the sale or exchange of a capital asset, any gain generally is included in income. Any net capital gain of an individual is taxed at maximum rates lower than the rates applicable to ordinary income. Net capital gain is the excess of the net long-term capital gain for the taxable year over the net short-term capital loss for the year. Gain or loss is treated as long-term if the asset is held for more than one year. As was noted above, income earned from long-term capital gains and dividends is taxed at lower rates.

The maximum rate on long-term capital gains and dividends is 20%. This 20% rate applies to taxpayers in the 39.6% bracket (single filers with taxable income above $406,750; married filers with taxable income above $432,200). Taxpayers in the 25%, 28%, 33%, and 35% tax brackets face a 15% tax rate on long-term capital gains and dividends. The tax rate on capital gains and dividends is 0% for taxpayers in the 10% and 15% tax brackets.

Under current income tax law, a capital gain or loss can result from the sale or exchange of a capital asset. If the asset is sold for a higher price than its acquisition price, then the sale produces a capital gain. If the asset is sold for a lower price than its acquisition price, then the sale produces a capital loss. Under current law, capital assets held for more than 12 months are considered long-term assets, while assets held 12 months or less are considered short-term assets. Capital gains on short-term assets are taxed at regular income tax rates. The taxation of a corporation generally is separate and distinct from the taxation of its shareholders. A distribution by a corporation to one of its shareholders generally is taxable as a dividend to the shareholder to the extent of the corporation’s current or accumulated earnings and profits, and such a distribution is not a deductible expense of the corporation.

32 Thus, the amount of a corporate dividend generally is taxed twice: once when the income is earned by the corporation and again when the dividend is distributed to the shareholder. 33 Although subject to a second tax when distributed, shareholders in a corporation may benefit from deferral of this tax on undistributed corporate income (e.g., corporate income reinvested in the business). 32 A distribution in excess of the earnings and profits of a corporation generally is a tax-free return of capital to the shareholder to the extent of the shareholder’s adjusted basis (generally, cost) in the stock of the corporation; such distribution is a capital gain if in excess of basis. A distribution of property other than cash generally is treated as a taxable sale of such property by the corporation and is taken into account by the shareholder at the property’s fair market value. A distribution of common stock of the corporation generally is not a taxable event to either the corporation or the shareholder. A maximum rate applies to capital gains and dividends. For 2016, the maximum rate of tax on the adjusted net capital gain of an individual is 20 percent on any amount of gain that otherwise would be taxed at a 39.6-percent rate.

In addition, any adjusted net capital gain otherwise taxed at a 10- or 15-percent rate is taxed at a zero-percent rate. Adjusted net capital gain otherwise taxed at rates greater than 15 percent but less than 39.6 percent is taxed at a 15-percent rate. These rates apply for purposes of both the regular tax and the alternative minimum tax. Dividends are generally taxed at the same rate as capital gains. An additional tax is imposed on net investment income in the case of an individual, estate, or trust. 15 In the case of an individual, the tax is 3.8 percent of the lesser of net investment income or the excess of modified adjusted gross income 16 over the threshold amount.

The threshold amount is $250,000 in the case of a joint return or surviving spouse, $125,000 in the case of a married individual filing a separate return, and $200,000 in any other case. 17 Thus, for taxpayers with modified adjusted gross income in excess of this threshold, the rate on certain capital gains and dividends is 23.8 percent.

THEN your maximum capital gain rate is collectibles gain 28% eligible gain on qualified small business stock minus the section 1202 exclusion 28% unrecaptured section 1250 gain 25% other gain 1 and the regular tax rate that would apply is 39.6% 20% other gain 1 and the regular tax rate that would apply is 25%, 28%, 33%, or 35% 15% other gain 1 and the regular tax rate that would apply is 10% or 15% 0% 1 “Other gain” means any gain that is not collectibles gain, gain on small business stock, or unrecaptured section 1250 gain. Certificates of deposit and other deferred interest accounts. If you open any of these accounts, interest may be paid at fixed intervals of 1 year or less during the term of the account. You generally must include this interest in your income when you actually receive it or are entitled to receive it without paying a substantial penalty. The same is true for accounts that mature in 1 year or less and pay interest in a single payment at maturity. If interest is deferred for more than 1 year, see Original Issue Discount (OID), later.

Money borrowed to invest in certificate of deposit. The interest you pay on money borrowed from a bank or savings institution to meet the minimum deposit required for a certificate of deposit from the institution and the interest you earn on the certificate are two separate items.

You must report the total interest you earn on the certificate in your income. If you itemize deductions, you can deduct the interest you pay as investment interest, up to the amount of your net investment income. See Interest Expenses in chapter 3.