Effective Tax Rates, Tax Season, and FAA System Outage Updates
Tax Policy/News:
Jan 13: Effective tax rate for big corporations fell to 9% after TCJA
The average effective tax rate of profitable large corporations fell from 16% in 2014 to 9% in 2018 after the passage of the Tax Cuts and Jobs Act of 2017, according to a new government report.
The trend of large multinational corporations paying a relatively small percentage of taxes, no taxes at all, or receiving hefty tax refunds or tax losses that can be carried over to future years, actually predates the passage of the TCJA. The report, released Friday by the Government Accountability Office, noted that each year from 2014-18, approximately half of the large corporations and a quarter of profitable ones didn't owe federal taxes.
In the first year after the law went into effect, the effective tax rate for profitable corporations was 8.9%, a 40% drop from the prior year, and 34% of profitable corporations paid zero in taxes, a 25% increase from the previous year.
Changes to the way foreign income is recognized created tax liability from income that hadn't been previously taxed under U.S. law, but often at lower rates.
The report found that among profitable large corporations, on average, 25% had no tax liability.
Among profitable large corporations, the average effective tax rates varied between 2014 and 2018, with effective tax rates based on actual tax liability as high as 16% in 2014 and as low as 9% in 2018.
Tax rates based on corporations' financial reports followed similar trends.
Jan 12: House Republicans aim to abolish IRS, replace income tax
The new speaker of the House, Kevin McCarthy, R-California, agreed as part of a deal with conservatives in the Freedom Caucus to win the speakership to allow a vote on a bill that would abolish the Internal Revenue Service and institute a "Fair Tax" that would replace federal income taxes and other taxes with a national consumption tax administered by the states.
On Tuesday, Rep. Earl L. "Buddy" Carter, R-Georgia, introduced H.R. 25, The Fair Tax Act, to replace the current Tax Code with a national consumption tax known as the Fair Tax.
"President Biden adamantly opposes House Republicans' plans to force an unprecedented tax hike onto middle-class families in exchange for yet more tax welfare for the rich and big corporations," said White House deputy press secretary Andrew Bates.
The administration argues it would "Overwhelmingly shift the federal tax burden onto the American middle class and working people, while simultaneously causing prices to spike across the board." The Institute on Taxation and Economic Policy, a Washington, D.C., think tank, pointed out the origins of the Fair Tax date back decades to an IRS dispute with the Church of Scientology over whether the church qualified for tax-exempt status, which it ultimately won after years of legal battles.
The Fair Tax was first introduced in Congress in 1999 by former Georgia Congressman John Linder. In addition to eliminating all personal and corporate income taxes, the estate tax, gift taxes, and the payroll tax, the Fair Tax would also get rid of the IRS, repeal the current Tax Code, and replace it with a single national consumption tax.
"The idea behind the proposal seems to be that it would facilitate the abolition of the IRS because states already collect sales taxes and would be suited to collect additional sales tax for the federal government and remit the money to the U.S. Treasury," wrote ITEP federal policy director Steve Wamhoff.
Jan 11: Taxpayer Advocate sees IRS better positioned for tax season
Millions of e-filed individual returns were "Suspended" because they fell afoul of IRS processing filters and needed manual review by IRS employees before refunds could be released. As of mid-December 2022, the IRS had reduced those backlogs to 1 million original individual returns, 1.5 million original business returns, and 1.5 million amended returns.
Tax notices The IRS sent millions of notices to taxpayers last year, included 17 million math error notices, Automated Underreporter notices, notices requesting a taxpayer authenticate identity where IRS filters flagged a return as potentially fraudulent, correspondence examination notices, and some collection notices.
If the IRS did not process a taxpayer response, it may have taken adverse action against the taxpayer or not released the refund claimed on the tax return. Because tax professionals prepare the majority of tax returns and often call with complex account-specific questions, the IRS has a Practitioner Priority Service telephone line dedicated to handling their calls.
"The National Taxpayer Advocate plays a vital role in the nation's tax system, and the IRS will be carefully reviewing the annual report to Congress," the IRS said in a statement emailed to Accounting Today.
But Collins warned the improvements will not be immediate. "Staff increases come with growing pains," she wrote. "As new employees are added, they must be trained. For most jobs, the IRS does not maintain a separate cadre of instructors. Instead, experienced employees must be pulled off their regular caseloads to provide the initial training and act as on-the-job instructors. In the short run, that may mean that fewer employees are assisting taxpayers, particularly experienced employees who are likely to be the most effective trainers." She also noted that until additional fully trained employees are on board, taxpayer service will continue to be a zero-sum game.
Economic News/Policy:
Jan 13: Yellen tells Congress US expected to hit debt limit Thursday
Treasury Secretary Janet Yellen notified Congress on Friday that the U.S. is projected to reach its debt limit on Thursday and will then resort to "Extraordinary measures" to avoid default. In a letter to House and Senate leaders, Yellen said her actions will buy time until Congress can pass legislation that will either raise the nation's $31.4 trillion borrowing authority or suspend it again for a period of time.
“In the past, even threats that the U.S. government might fail to meet its obligations have caused real harms, including the only credit rating downgrade in the history of our nation in 2011,” she said. Yellen was referring to the debt ceiling impasse during Barack Obama's presidency when Republicans had also just won a House majority.
House Republican leaders liken the debt ceiling to a credit card limit and have said they would only raise the statutory ceiling if doing so also secures a spending overhaul. New House Speaker Kevin McCarthy told reporters in his first press conference that he had a "Very good conversation" with Biden about the coming debt ceiling debate.
McCarthy has floated the kind of budget-cap deal that was engineered in the last go around on the debt ceiling during the Trump administration, which would involve capping federal spending levels in return for the House votes needed to raise the debt limit.
Senate Majority Leader Chuck Schumer and new House Democratic leader Hakeem Jeffries said in a joint statement Friday that “a default forced by extreme MAGA Republicans could plunge the country into a deep recession and lead to even higher costs for America’s working families on everything from mortgages and car loans to credit card interest rates.”
They said the two parties worked together to increase the debt limit three times when Trump was president and Republicans had majorities in the House and Senate.
Jan 12: Inflation’s pace eased again. What does that mean for Fed’s interest rates?
The data sparked renewed calls for the Fed to slow interest rate hikes, which could cost 1.6 million people their jobs by the end of 2023, according to the Fed's own projections.
"This lower-than-expected headline CPI inflation print will not make the Fed change its view on the need to keep increasing interest rates in February and March of this year," Raymond James chief economist Eugenio Aleman wrote in a note, pointing to the core inflation figures.
Seema Shah, the chief global strategist at Principal Asset Management, said the data was "a little underwhelming" and added that the real test will come in the second quarter of 2023 when analysts will hope for inflation to fall below 4.5 percent annually.
The Fed wants to bring down annual inflation to its 2 percent target rate.
"Price stability is the bedrock of a healthy economy and provides the public with immeasurable benefits over time. But restoring price stability when inflation is high can require measures that are not popular in the short term as we raise interest rates to slow the economy," Powell said Tuesday.
Fed officials raised interest rates seven times last year. Last month, they voted to raise interest rates by 50 basis points, the smallest rate hike since June.
ICYMI:
Jan 11: Flights Resume After FAA System ‘Outage’ Causes Thousands of Delays
Air travel across the U.S. was plunged into chaos early Wednesday as a crucial FAA system failure left planes unable to take off, prompting President Biden to order an investigation into the meltdown. The NOTAM system, which warns pilots about flight hazards in real time, "Failed" on Wednesday, the FAA said in an advisory notice.
"Normal air traffic operations are resuming gradually across the United States following an overnight outage to the FAA's Notice to Air Missions system that provides safety information to flight crews," the FAA said in a statement issued a few minutes before 9 a.m. ET. "The ground stop has been lifted. The agency continues to look into the cause of the initial problem." Earlier, the FAA said it had "Ordered airlines to pause all domestic departures until 9 a.m. Eastern Time to allow the agency to validate the integrity of flight and safety information." "All flights currently in the sky are safe to land," the FAA later added.
"Pilots check the NOTAM system before they fly. A Notice to Air Missions alerts pilots about closed runways, equipment outages, and other potential hazards along a flight route or at a location that could affect the flight." At around 8:20 a.m., the FAA said departures were "Resuming at Newark Liberty and Atlanta Hartsfield-Jackson airports due to air traffic congestion in those areas," before the wider pause was lifted less than an hour later.
“The President has been briefed by the Secretary of Transportation this morning on the FAA system outage,” White House Press Secretary Karine Jean Pierre tweeted Wednesday morning. "There is no evidence of a cyberattack at this point, but the President directed DOT to conduct a full investigation into the causes. The FAA will provide regular updates." While the full extent of the disruption is not yet clear, flight tracking company FlightAware indicated that 4,314 flights were delayed within, into, or out of the United States as of Wednesday morning.
"Anyone one else stranded?" DJ Patil, the former chief data scientist of the United States, tweeted early Wednesday, later adding that his flight was "Officially canceled." "Gotta love when you book a 6 am flight trying to avoid travel delays, but due to a nationwide FAA system issue the flight is delayed anyway. Going to be a long day," another user wrote.
One person said their flight was "Stuck" on the tarmac at San Francisco International Airport for over an hour.
For Fun:
Jan 17: A New Frontier: NASA’s Webb Space Telescope Confirms Existence of Earth-Sized Rocky Exoplanet!
Researchers using NASA’s James Webb Space Telescope have formally embarked on a new frontier: Identifying and analyzing rocky exoplanets that orbit red dwarf stars. A team led by Kevin Stevenson and Jacob Lustig-Yaeger, both of the Johns Hopkins University Applied Physics Laboratory in Laurel, Maryland, confirmed that LHS 475 b not only exists, but it is a small, rocky planet that is almost exactly the same size as Earth. Before Webb, researchers typically targeted planets that are larger than Jupiter, which is 11 times wider than Earth. This will inevitably be the first of many discoveries Webb's data will help researchers make as they continue exploring planets elsewhere in our Milky Way galaxy.
The planet is rocky and almost precisely the same size as Earth, but whips around its star in only two days.
A team led by Kevin Stevenson and Jacob Lustig-Yaeger, both of the Johns Hopkins University Applied Physics Laboratory in Laurel, Maryland, confirmed that LHS 475 b not only exists, but it is a small, rocky planet that is almost exactly the same size as Earth.
Using NASA's James Webb Space Telescope, researchers confirmed an exoplanet, a planet that orbits another star, for the first time.
"These first observational results from an Earth-size, rocky planet open the door to many future possibilities for studying rocky planet atmospheres with Webb," agreed Mark Clampin, Astrophysics Division director at NASA Headquarters in Washington.
"The telescope is so sensitive that it can easily detect a range of molecules, but we can't yet make any definitive conclusions about the planet's atmosphere.
A light curve from NASA's James Webb Space Telescope's Near-Infrared Spectrograph shows the change in brightness from the LHS 475 star system over time as the planet transited the star on August 31, 2022.