Monday, February 21, 2011
Earlier this month, Microsoft borrowed $2.25 billion in unsecured debt. What in the world possesses a company with $40 billion in cash and short-term securities to go out and borrow money?
Rock-bottom interest rates are one reason. But the bizarre, byzantine U.S. tax code seems to be another. ... [L]ike many purportedly cash-rich companies, Microsoft can't bring home much of its cash without writing a fat check to the IRS.
Politicians have been carping about the more than $2 trillion in cash sitting idle in corporate coffers even as unemployment remains high. But much of that cash isn't in the U.S.; it is abroad. And it isn't likely to come back home unless U.S. tax laws change.
David Zion, a tax and accounting analyst at Credit Suisse, estimates that the companies in the Standard & Poor's 500-stock index have "north of $1 trillion" in undistributed foreign earnings, or profits that have been parked overseas to avoid U.S. tax. ...
U.S. companies are taxed at up to 35% when they bring home the earnings generated through the operations of their overseas subsidiaries. They get a credit for any taxes paid to foreign governments—but, since the corporate-tax rate in the U.S. is one of the world's highest, most companies are in no rush to bring the money back onshore. By keeping those earnings abroad, U.S. companies can indefinitely defer their day of reckoning with the IRS.
That can put firms in the peculiar position of having tons of cash offshore that they might need but can't use at home without taking a tax hit.
The U.S. is the only major country that taxes foreign earnings of its own companies this way.
[I]n this case, it isn't just management that is making companies sit on too much cash. It is tax policy, too. Congress and the White House are discussing whether the U.S. should follow the rest of the world and stop taxing repatriated offshore earnings from companies that already have paid taxes to foreign governments. Some gnarly technical details will have to be worked out if the repatriation tax is to be reduced or eliminated.
Sunday, February 20, 2011
Thanks to a 1996 federal law aimed at preserving traditional marriage, thousands of same-sex couples in California, Nevada, and Washington state could get big tax bonuses on their federal returns starting this year. The bonuses are off-limits to heterosexual married couples—a sharp reminder of the "marriage penalty" that often dings two-earner couples. ...
All three states recognize domestic partnerships and also have what is known as community-property law. Community property refers to a system of ownership in nine states that usually attributes income and property acquired during marriage equally to both partners, regardless of who earned it. (The nine states are Arizona, California, Idaho, Louisiana, New Mexico, Nevada, Texas, Washington and Wisconsin.)
The three states also now apply community-property laws to registered domestic partners. So the IRS—which must follow state property laws—has ruled that these couples should figure their total community income and split it down the middle, starting in 2010.
That is where the benefit comes in. Although domestic partners must divide their income equally, the federal Defense of Marriage Act prevents the IRS from treating these couples as married joint filers. So for 2010 and after, each partner will claim half the community income but still file as single or head of household.
The result, in many cases, is a federal tax savings because a couple will avoid the marriage penalty that often raises taxes for two-earner heterosexual married couples.
Tuesday, February 15, 2011
President Obama has reached out to the business community with talk of lowering the corporate tax rate and improving the tax treatment of profits earned abroad by American companies. That would certainly be an important improvement in our tax system. Unfortunately, his desire to use the elimination of "loopholes" to avoid any loss of corporate tax revenue means that he cannot possibly go far enough in reducing corporate tax rates.
Tuesday, February 8, 2011
The new law applies a top federal death tax rate of 35% with a $5 million exemption for 2011 and 2012. But it also changed a federal credit for state death tax rates into a federal deduction. The credit allowed a dollar-for-dollar reduction in federal taxes for state levies as high as 16%. This meant that every dime from state tax collections came from Uncle Sam. It was essentially a free tax for states.
By contrast, the deduction merely reduces the amount of federal taxable income and thus sharply reduces the amount of state tax that can be written off federal taxes. Many states have estate taxes at the old 16% threshold which now means an effective 10 percentage point or more surcharge above the 35% federal rate. This surcharge is even higher in states that also have an inheritance tax, which is levied on the value of specific property bequeathed to heirs, in addition to the estate tax (which is levied on the value of the entire estate).
Our friends at the American Family Business Foundation have done the math on the interaction between the new federal rates and these state taxes, and you can consult the nearby chart to see your state's fee for the privilege of dying. No wonder the battle over death taxes has suddenly moved to state capitals, with Indiana, Nebraska, Ohio, Pennsylvania and even Rhode Island looking to repeal their state levies this year. ...
Proponents argue that the death tax has minimal incentive effects because people can't change their behavior after they die. But every day people make decisions to minimize their tax bills before they die. In other words, estate taxes don't redistribute income among taxpayers. They redistribute income among states.
The federal death tax will revert with a vengeance to 55% in 2013 unless Congress acts in the next two years. But in the meantime, states like Indiana and Ohio, and especially New Jersey, can help their economic recovery by eliminating their death taxes and inviting lost wealth to return.
O'REILLY: Do you deny that you are a man who wants to redistribute wealth.
O'REILLY: You deny that?
OBAMA: Absolutely. I didn't raise taxes once. I lowered taxes over the last two years.I lowered taxes for the last two years.”
- Americans for Tax Reform, Obama Makes Super False Tax Claim: “I didn’t raise taxes once”; In Pre-Super Bowl Interview, President Obama Fumbles His Record on Taxes
- PolitiFact.com, President Barack Obama Says He Didn't Raise Taxes Once
- Wall Street Journal editorial, 'I Didn't Raise Taxes Once': Refreshing the President's Memory
NY Times (The Conscience of a Liberal), Ideas Are Not The Same As Race, by Paul Krugman:
Every once in a while you get stories like this one, about the underrepresentation of conservatives in academics, that treat ideological divides as being somehow equivalent to racial differences. This is a really, really bad analogy.
And it’s not just the fact that you can choose your ideology, but not your race. Ideologies have a real effect on overall life outlook, which has a direct impact on job choices. ...
It’s particularly troubling to apply some test of equal representation when you’re looking at academics who do research on the very subjects that define the political divide. Biologists, physicists, and chemists are all predominantly liberal; does this reflect discrimination, or the tendency of people who actually know science to reject a political tendency that denies climate change and is broadly hostile to the theory of evolution?
Now, I don’t mean to say that political bias in the academy is absent, although it’s not consistent: I can well imagine that it’s hard to be a conservative in some social sciences, but in economics, the obvious bias in things like acceptance of papers at major journals is towards, not against, a doctrinaire free-market view. But the point is that doing head counts is a terrible way to assess that bias.
NY Times (Freakonomics), Should We Be Surprised at Political Bias in Academia?, by Stephen J. Dubner:
The lack of diversity isn’t actually “statistically impossible” in a self-selecting group. But that of course is the point. How can it be that an academic field is so politically homogeneous? What kind of biases does such homogeneity produce? What sort of ideas get crowded out? And how homogeneous are other disciplines?
I have to say that I was surprised at the overt political (leftward) bias exhibited by several prominent economists at the recent American Economics Association meetings, although my sample set was quite small.
It is interesting — and sobering — that two fields, psychology and economics, that we rely upon to describe and amend bias in the world are themselves so susceptible to bias within the ranks of their practitioners.
Taxes too high? Actually, as a share of the nation's economy, Uncle Sam's take this year will be the lowest since 1950, when the Korean War was just getting under way. And for the third straight year, American families and businesses will pay less in federal taxes than they did under former President George W. Bush, thanks to a weak economy and a growing number of tax breaks for the wealthy and poor alike.
Income tax payments this year will be nearly 13% lower than they were in 2008, the last full year of the Bush presidency. Corporate taxes will be lower by a third, according to projections by the nonpartisan Congressional Budget Office. ...
"The current state of the tax code is simply indefensible," says Sen. Kent Conrad, D-N.D., chairman of the Senate Budget Committee. "It is hemorrhaging revenue." ...
[I]n the third year of Obama's presidency, federal taxes are at historic lows. Tax receipts dropped sharply in 2009 as the economy sank into recession. They have since stabilized and are expected to grow by 3% this year. But federal tax revenues won't rebound to pre-recession levels until next year, according to CBO projections.
In the current budget year, federal tax receipts will be equal to 14.8% of the Gross Domestic Product, or GDP, the lowest level since Harry Truman was president. In Bush's last year in office, tax receipts were 17.5% of GDP, just below their 40-year average.
The lack of revenue, combined with big increases in spending, means the federal government will have to borrow 40 cents for every dollar it spends this year. The annual federal budget deficit is projected to reach a record $1.5 trillion.
(Hat Tip: Francine Lipman.) The article, however, omits the CBO's projection that, as the economy recovers, taxes (as a percentage of the economy) will surge to post-World War II highs (principally due to record individual income tax collections):
Saturday, February 5, 2011
Democrats now claim that the infamous 1099 business reporting mandate that the Senate repealed this week was an accident, as if they were as surprised as everyone else to learn that this destructive provision had crept by itself into law. The truth is that the 1099 rule emerged from the same core ideology as ObamaCare, and its overwhelming repudiation by Democrats may be an important inflection point in the health-care debate.
The 1099 rule is the first of the ballast to go over the side, and Democrats hope that such "improvements" will be enough to ride out the public storm. Then again, they also claimed that voters would learn to love ObamaCare once it had been stuffed through Congress, among many other misjudgments. The political history is revealing and instructive.
Less than a year ago, liberals couldn't see how anyone could possibly object to a rule requiring businesses to file 1099 tax forms with the IRS every time they spent more than $600 with a single vendor. Yes, this would result in a vast new paperwork and accounting burden for 30 million businesses and hit start-ups hardest, not to mention farms, charities and churches. But Democrats saw IRS surveillance of nearly all business-to-business transactions as merely an exercise in good government.
The point was to close the "tax gap," the largely mythological difference between the estimated taxes due under the business tax code and what the IRS actually collects. During the Bush years, Democrats and more than a few Republicans convinced themselves that businesses were cheating the government out of revenues through deliberate under-reporting and various tax shelters. ...
The 1099 ObamaCare footnote thus received no scrutiny at first because it was so mundane. Everyone in Washington agreed that corporations were stealing billions of dollars every year that rightfully belonged to Congress to spend. (The issue only blew up when the IRS's National Taxpayer Advocate Nina Olson, followed by the GOP and the business lobby, made it a priority last summer.) ...
[T]otal repeal sailed through the Senate on Wednesday, 81 to 17. The mystery is the 17 Democrats who continue to think this is a good idea ,,,
The larger political question is whether voters will be satisfied by this or that "improvement" to ObamaCare. The White House is trying to outflank public opposition with a controlled burn, but wildfires often move in surprising and unmanageable directions.
For a contrary view, see Linda Beale (Wayne State), More on Tax Information Reporting by Third Parties:
I’m more and more convinced that it is not the deficit that the Republicans hollering for “entitlement reform” care about–it is that they just simply want to destroy all of the things that the New Deal did to provide a safety net for ordinary people, while making sure that they reinstate brute-force capitalism like existed in the 1920s, back when Teddy Roosevelt made his famous statement about the corporate titans and malefactors of great wealth.
For rejoinders, see:
- Tax Lawyer's Blog, Senate Repeals Oppressive 1099 Law, Linda Beale Calls it a Conspiracy
- Tax Update Blog, Senate Votes to Repeal Health Care Bill's 1099 Expansion
Tuesday, February 1, 2011
Even as the United States suffers from a staggering unemployment crisis and vast income inequality, the nation's wealthiest families are sitting on huge piles of unproductive cash.
So with nothing remotely like a second stimulus bill in the cards, the best hope for goosing the economy, creating jobs and providing relief for the needy could lie in a Washington economist's ingenious scheme to get a chunk of that money put into circulation right now, in helpful ways.
Isabel Sawhill, a budget expert at the Brookings Institution, is pushing to temporarily double the tax deduction for charitable giving, a move that would serve as a powerful incentive for the rich to significantly increase -- or at least accelerate -- their contributions to nonprofit organizations.
(Hat Tip: Francine Lipman.)
A year ago, Congress had instructed the Internal Revenue Service to improve small businesses’ compliance with tax laws and created rules to make it more difficult for entrepreneurs to hide their income.
Now, rules requiring businesses to report to the IRS transactions with vendors may become collateral damage in a political fight over the health-care law. President Barack Obama in his State of the Union address on Jan. 25, backed an effort to “correct” the “unnecessary bookkeeping burden” before the rules take effect in 2012, forgoing an estimated $1.9 billion annually to pay for the overhaul of the health-care system.
The about-face is designed to appease congressional Republicans and business groups such as the U.S. Chamber of Commerce that have criticized the rules along with the broader health-care law. It also shows how difficult it is to take steps to close the tax gap among small businesses, which data show have lower tax payment rates than corporations and salaried workers. ...
The IRS estimates that about $345 billion in taxes owed are unpaid every year. Auditors recover about $55 billion of that, leaving $290 billion that goes uncollected, a figure known as the tax gap. The agency attributes $109 billion of the gap to underreported business income earned by individuals. The IRS estimates that this group also fails to pay about $39 billion in self-employment taxes. The figures are drawn from a study of 2001 tax returns and are likely higher today, according to the Congressional Research Service.
The IRS says small businesses are able to underreport their taxes because many business-to-business transactions aren’t reported independently to the government as wages and investment income are. By contrast, about 98% of salaried workers pay what they owe because their employers report their wages to the IRS. The Bush administration, in response to demands from Senate Finance Committee Chairman Max Baucus, a Montana Democrat, in 2008 proposed requiring businesses to report to the IRS when they pay vendors more than $600 for goods. Similar requirements exist for purchases of services.
The new estate law allows couples to do without trusts--if they trust each other.
Under the new law, just as under the old one, you can leave a citizen spouse or a charity an unlimited amount, without worrying about tax. But the new law makes two key changes. First, it raises each individual's lifetime exemption from federal estate and gift tax for transfers to nonspouse heirs to a hefty $5 million, from $3.5 million in 2009 and only $2 million in 2008. Second, it makes the exemption "portable" between spouses--meaning a surviving spouse can add any unused exemption of her just-deceased spouse to her own $5 million exemption. So a widow or widower can pass on as much as $10 million, untaxed, through either lifetime gifts or bequests.
Portability isn't automatic. To get it, the executor of the estate of the first spouse to die must file an estate tax return, even if no tax is due. Surviving spouses should get this return filed even if they have nowhere near $5 million of their own, because someday, who knows? Portability also isn't retroactive, so it's no help to those who lost spouses before 2011. Finally, it doesn't apply to the $5 million per person exemption from "generation-skipping" tax--the extra tax imposed on gifts to grandkids whose parents are still alive. That means the truly rich will want to use up their own $5 million exemptions, likely through gifts in the next two years.
The new estate law expires at the end of 2012. If Congress doesn't act before then, not only will portability lapse but the exemption amount will revert to $1 million and the estate tax rate will increase to 55% from the current 35%. Rapidan, Va. estate expert Howard M. Zaritsky insists this makes it risky to rely on portability when redoing estate plans. Others strongly disagree. "Portability is here to stay,'' Columbia Law professor Michael J. Graetz told estate-planning pros in January. Graetz, who wrote a book on the history of the estate tax, also predicts the $5 million tax-free amount won't be reduced. ...
Lawyers are now touting an idea they used to belittle: disclaimer trusts. You leave everything to your spouse outright, but give her the right to disclaim (turn down) all or part of the inheritance and have it go into a bypass trust, allowing her to make an informed decision based on her finances and the latest federal and state estate tax laws. ...
So what have attorneys had against disclaimer trusts? Disclaimers can be tricky; you can't, for example, disclaim assets you've already touched. But mostly, some lawyers haven't trusted surviving spouses to disclaim assets when they should. Now the new game in estate planning is an old-fashioned form of trust--between spouses.
Sunday, January 30, 2011
Try giving them perks and privileges (an extra vote?) in return, says 'Dilbert' creator Scott Adams.
The president was too polite to mention it during his State of the Union speech on Tuesday, but here's a quick summary of the problem: The U.S. is broke. The hole is too big to plug with cost cutting or economic growth alone. Rich people have money. No one else does. Rich people have enough clout to block higher taxes on themselves, and they will.
Likely outcome: Your next home will be the box that your laser printer came in. I hope that you kept it. ...
If we accept that the rich can be taxed at a different rate than everyone else, we can also imagine that there could be other differences in how the rich are taxed. ... I can think of five benefits that the country could offer to the rich in return for higher taxes: time, gratitude, incentives, shared pain and power.
Americans like to tax the rich. As a nation, we rely more on progressive taxes—and less on regressive ones—than any other developed country. We impose no broad-based consumption tax, standing firm against the global popularity of value-added levies. But we make ample use of corporate and individual income taxes—touchstones of progressive politics for more than a century. Our national penchant for progressive taxation has deep roots in American history. ...
It's one thing to say that American politicians have been taxing the rich for more than 200 years, but what were they trying to achieve? Were they seeking to redistribute wealth, to recast society along more egalitarian lines? Or were they simply trying to ensure that rich people paid their "fair share"? The answer, predictably, is both.
American political leaders have defended progressive taxation on narrower grounds, using it to remake the tax system, not society. No one made the case more succinctly than Rep. Cordell Hull, legislative father of the 1913 income tax. "I have no disposition to tax wealth unnecessarily or unjustly," he explained in his memoirs. "But I do believe that the wealth of the country should bear its just share of the burden of taxation and that it should not be permitted to shirk that duty."
Saturday, January 29, 2011
In his State of the Union address, President Obama called on Congress to enact tax reform. Republicans all applauded because to them tax reform is just another excuse to cut taxes. However, their response was muted when he said that any tax reform legislation must be paid for by getting rid of loopholes and cutting spending through the tax code.
No one denies that there are many aspects of the tax code desperately in need of reform. The problem is that Republicans refuse to talk about anything except further cutting tax rates. But the idea of tax reform has always meant much more than that. It also means getting rid of tax preferences that bias individual and business behavior in ways that may not be optimal for them or the economy. In other cases, tax preferences simply waste money subsidizing people and businesses for no reason except that they belong to some politically favored group.
A key goal of tax reform must be to rid the tax code of unjustified tax preferences. The goal, which Republicans used to believe in, should be to achieve tax neutrality. This basically means that people and businesses should make economic decisions based solely on the economics and not because the tax system in effect subsidizes them to do one thing rather than another. ...
Republicans claim they are for it, but they steadfastly refuse to name a single existing tax provision that is worth getting rid of; they are only for tax rate cuts and that is the sum total of their contribution to the tax reform debate. Their rationale, apparently, is that eliminating any tax loophole, no matter how egregious or unjustified, would constitute a tax increase; and they are against all tax increases, period.
The other factor in Republicans’ thinking is just cynical politics – they are for the sugar of rate cuts, but it is the sole responsibility of Democrats to come up with the medicine of actually reforming the tax code by proposing revenue offsets to pay for the rate cuts. Grover Norquist, president of Americans for Tax Reform and the man who, more than anyone else, lays down the Republican line on all tax issues, told me this when I asked him about coming up with offsets to pay for tax reform: “I recommend taking the corporate rate to 25%. The Dems can suggest tax hikes if they believe they need to ‘make up’ revenue. That is a bipartisan division of labor.”
The political trap is obvious. Any actual reform that would increase revenue will be relentlessly attacked by Republicans as a tax increase and they will quickly send out fundraising letters to whatever group or industry is affected, requesting campaign donations to prevent the Democrats from raising their taxes. No mention will be made by Republicans of the idea that the reforms would be coupled with tax rate reductions in a revenue-neutral manner that neither raises nor lowers net tax revenue in the aggregate. Unfortunately, this strategy will doom any hope of tax reform. No Democrat is going to put forward any revenue-raisers under these circumstances. ...
I am not holding my breath waiting for the first responsible Republican to do what Reagan, Kemp, Kasten and others did in the 1980s and put together a tax package that includes specific revenue raisers to pay for further rate cuts. And pie-in-the-sky reforms that would abolish every tax preference in exchange for a flat rate don’t count because there is not the slightest chance such a radical change will ever be enacted. The best we can hope for is incremental improvement along the lines of the Tax Reform Act of 1986, which was a truly bipartisan effort. But that’s not going to happen if Republicans insist on playing by Norquist’s rules.
- Bruce Bartlett, The Roots of Tax Reform, Part I (1960-1979), 129 Tax Notes (Dec. 20, 2010)
- Bruce Bartlett, The Roots of Tax Reform, Part I (1980-2011), 130 Tax Notes (Jan. 24, 2011)
Tuesday, January 25, 2011
Of course, the education race doesn't end with a high school diploma. To compete, higher education must be within reach of every American. That's why we've ended the unwarranted taxpayer subsidies that went to banks, and used the savings to make college affordable for millions of students. And this year, I ask Congress to go further, and make permanent our tuition tax credit — worth $10,000 for four years of college.
Over the years, a parade of lobbyists has rigged the tax code to benefit particular companies and industries. Those with accountants or lawyers to work the system can end up paying no taxes at all. But all the rest are hit with one of the highest corporate tax rates in the world. It makes no sense, and it has to change.
So tonight, I'm asking Democrats and Republicans to simplify the system. Get rid of the loopholes. Level the playing field. And use the savings to lower the corporate tax rate for the first time in 25 years — without adding to our deficit. ...
Now, I’ve heard rumors that a few of you have some concerns about the new health care law. So let me be the first to say that anything can be improved. If you have ideas about how to improve this law by making care better or more affordable, I am eager to work with you. We can start right now by correcting a flaw in the legislation that has placed an unnecessary bookkeeping burden on small businesses.
And if we truly care about our deficit, we simply cannot afford a permanent extension of the tax cuts for the wealthiest 2% of Americans. Before we take money away from our schools, or scholarships away from our students, we should ask millionaires to give up their tax break. ...
In fact, the best thing we could do on taxes for all Americans is to simplify the individual tax code. This will be a tough job, but members of both parties have expressed interest in doing this, and I am prepared to join them.
- Accounting Today, Obama Calls for Tax Reform
- Associated Press, Obama Calls for Overhaul of Corporate Taxes
- Bloomberg, Obama Backs Corporate Rate Cut Only If It Won't Affect Deficit
- Citizens for Tax Justice, Close Corporate Tax Loopholes — But Don’t Give the Revenue Back to Corporations as a Rate Cut
- Fornes, Obama’s Tax Reform: Corporate, Individual, Or Both?
- Huffington Post, Will Business Kill Tax Reform?
- PolitiFact, Obama Says U.S. Corporate Tax Rate Is Among World's Highest
- Start Making Sense (Dan Shaviro (NYU)), Corporate Tax Reform
- Start Making Sense (Dan Shaviro (NYU)), Tax Discussion in the State of the Union Address
- U.S. News & World Report, Both Parties Want to Take on Tax Reform
- Wall Street Journal, A Call to Overhaul Corporate Taxes
Monday, January 24, 2011
[A] recent U.S. district court case [was] won by the IRS against David Watson, a CPA in West Des Moines, Iowa. At issue: a common tax-cutting maneuver available to the owners of millions of closely held businesses.
The case, David E. Watson P.C. v. United States [No. 4:08-cv-442 (S.D. Iowa Dec. 23, 2010)], revolved around Mr. Watson's low pay as the sole owner and shareholder of a so-called S Corporation. ... According to the decision, the firm made profit distributions of $203,651 and $175,470 to Mr. Watson through his Sub-S for 2002 and 2003, respectively, the years in question.
Mr. Watson, who had a graduate degree in tax and 20 years' experience, received only $24,000 of salary for each of those years, far less than the $40,000 a year earned by recent graduates in accounting with no experience, according to one expert for the IRS.
The agency cried foul, saying his pay was far too low. Why object? Unlike profit distributions, all salary is subject to a 2.9% Medicare tax and some is subject to a 12.4% Social Security, or FICA, tax. ... By reporting low pay Mr. Watson didn't save any income taxes, but he did save nearly $20,000 in payroll taxes for the two years, the IRS said, pegging Mr. Watson's true pay at $91,044 for each year.
Judge Robert W. Pratt agreed, ruling that the CPA owed the extra tax plus interest and penalties.
Mr. Watson plans to appeal the decision. "The IRS can disallow a tax deduction for unreasonably high compensation, but the law doesn't give it the authority to raise pay in order to collect extra payroll taxes," he says. Independent tax expert Robert Willens in New York says this will be a hard argument to win. ...
Recent IRS statistics suggest why the agency might focus on Sub-S pay. Over the past decade and a half, when executive paychecks exploded, the salaries of Sub-S owners declined as a percentage of total income, from 52% in 1995 to 39% in 2007, according to the latest data available. (The remaining income is taxable to the owners as well, but doesn't incur payroll taxes.) During the same 12-year period, Sub-S income doubled, while salaries increased only 26%. The average pay for a Sub-S owner was recently was $38,400, according to Martin Sullivan, an expert with Tax Analysts, a nonprofit publisher near Washington.
What is a fair ratio of profits to pay? There isn't one answer, experts say. A company with substantial capital or assets, such as a manufacturer, often is able to justify lower pay than one selling personal services like a law or accounting firm. Says Mr. Willens: "I would tell a client that for personal services, 70% would be the absolute floor and might not get the job done," he says.
In Mr. Watson's case, his revised compensation came to only about 40% of his total return from the company. The upshot: Pay can vary—but it can't be too low.
- Tax Update Blog, WSJ Spotlights Area CPA S Corp Court Loss (Jan. 22, 2011)
- Tax Update Blog, Court Sets 'Reasonable' Comp for CPA S Corp Shareholder (Dec. 30, 2010)
- Tax Lawyer's Blog, S Corp Wages and Distributions: Basic Tax Planning (May 5, 2009)
- Tax Update Blog, John Edwards Shelter Targeted by IRS (Mar. 12, 2005)
- TaxProf Blog, WSJ Charges Kerry-Edwards with Tax Hypocrisy (July 14, 2004)
- Thinking Like, S Corps Help Owners Save on Taxes: John Edwards Saved $600k With His S Corp
Sunday, January 23, 2011
- Caplin & Drysdale Press Release
- Caplin & Drysdale's IRS Complaint
- Forbes, Lawyer Asks: Why Is National Hot Rod Association Tax-Exempt?
- Washington Examiner, If It Walks Like a Duck and Talks Like a Duck ....
Friday, January 21, 2011
- Champaign News-Gazette, Jimmy John's Founder Contemplates Moving Headquarters Out of Illinois
- Chicago Examiner, Jimmy John's Anounces May Move Headquarters From Illinois to Florida
- Chicagoist, How Fast Can Jimmy John's Leave Illinois?
- Conglomerate, State Budgets: Raise Taxes or Slash Spending (or Both)?
- Crain's Chicago Business, Jimmy John's Might Flee Illinois Over Higher Taxes
- NBC Chicago, Gourmet Sandwiches on the Go: Founder May Take His Free Smells Elsewhere
- Reason, Smells Like Goodbye: Jimmy John's Bails Out of Illinois?
- South Florida Business Journal, Jimmy John’s Founder May be Florida Bound
(Hat Tip: Andrew Morriss.)
Wednesday, January 19, 2011
(Hat Tip: Myreon Hodur.)
Swedish taxpayers looking to shield earnings from the country's tax authorities may have an unlikely tax haven at their disposal across the Atlantic: the United States.
While Sweden and the United States have a tax treaty obligating the tax agencies in both countries to exchange information with each other, the Swedish Tax Authority (Skatteverket) hasn't received any information from its US counterpart since 2005.
As a result, Swedish tax authorities have been unable to cross-check information about income earned in the United States for the last five years, leaving the door wide for companies and individuals based in Sweden to cheat on their Swedish taxes.
Sunday, January 16, 2011
- ABC News
- Associated Press
- Financial Times
- Globe and Mail
- New York Times
Saturday, January 15, 2011
A decision in May by the IRS that was hailed as a step toward equality for same-sex couples has instead become a headache for tens of thousands of gay and lesbian families in California. [IRS: California Registered Domestic Partners Can Split Income and Tax Withholding 50/50 Without Adverse Gift Tax Consequences]
Same-sex couples who are registered domestic partners — or who married during the brief legal window — are facing a new, more complicated tax status, one that has raised a litany of expensive concerns. Many of these families will now have to pay for professional help to file by April 15.
The issues involve an IRS decision that affects the three states with both community-property laws and same-sex marriage or registered domestic partnerships: California, Nevada and Washington.
Married heterosexual couples in those states have long had the option of filing their federal taxes separately and splitting their earned incomes (community property) on their tax returns. If one person makes more than the other, splitting can result in paying lower taxes by taking the higher earnings down a tax bracket or more.
After gay rights advocates fought for five years, the IRS decision let the same rules apply to legally partnered same-sex couples — an estimated 60,000 in California. ... But carrying out the change has proved challenging. ... Same-sex couples do not have the option of waiting for these issues to be resolved. The decision on income-splitting appears to be mandatory and immediate. “I do not believe taxpayers can choose whether to follow the income-splitting rule,” Patricia Cain, a law school professor at Santa Clara University and leading expert on same-sex tax law, recently wrote. ...
Confusing and costly tax returns are not the only fallout from the IRS change; the policy has set off a chain reaction of other concerns. In a report to Congress last week, the federal Taxpayer Advocate Service put the situation in its “most serious problems” category, saying the change could have many unintended consequences, like on student loan eligibility and tax credits for same-sex couples.
- Pat Cain (Santa Clara), Tax Victory or Not?:
The more we look at these complications in the details of how to apply the rules, the more obvious it is that it would be much easier for everyone, especially the IRS, if same-sex spouses and RDPs were entitled to the same rules as similarly-situated opposite-sex spouses. Some have argued that these tax complications are likely to play a pivotal role in leading us closer to true equality for same-sex couples.
I made that point myself a couple of nights ago at a community seminar on the new tax law. I was joined by three expert tax-return preparers, Karen Stogdill, Deb Kinney, and Chris Kollaja, who discussed a number of the complications. If you're interested, you might take a look at the webcast:
- Francine J. Lipman (Chapman) & Rebecca J. Kipper (J.D. 2012, Chapman), Just a Matter of Fairness: Tax Consequences of the Revised Community Property Treatment of California Registered Domestic Partners, 30 ABA Tax Section News Q. 16 (Winter 2011):
This paper describes the federal tax treatment of California registered domestic partners (RDPs) historically and prospectively. In May 2010 the federal government issued guidance that materially revised the government's prior position of ignoring state law property characterizations and determined that 'the federal tax treatment of community property should apply to California registered domestic partners.' The paper discusses the tax implications of this guidance on registered domestic partners in California and other community property states as well as for the 18,000 same-sex married couples in California. The guidance moves RDPs closer to tax equality with opposite sex married couples in California. Nevertheless, the guidance leaves many questions unanswered.
Friday, January 14, 2011
- Accounting Today, Geithner Mulls Corporate Tax Reform
- Bloomberg, Tax Reform Is in the Eye of the Beholder
- CNN, Corporate Tax Reform: Talk Grows Louder
- Financial Times, Geithner Starts Talks on Tax Overhaul
- The Fiscal Times, Corporate Tax Options — A Tangled Mess
- The Hill, Geithner to Meet With Corporate Finance Chiefs on Tax Reform
- Reuters, Big Companies Take Tax Gripes to Geithner
- Wall Street Journal, Talks on Corporate-Tax Revisions Set to Start
- Wall Street Pit, Tax Reform Questions for Geithner to Ask of Business Leaders
- Washington Post, Tax Pledge Hinders Obama's Plans to Overhaul Tax Code
Thursday, January 13, 2011
Many wealthy people got pitches from their estate planning lawyers last year encouraging them to make taxable gifts. It seemed like a good idea at the time. Lifetime gifts are an important estate-planning tool. Not only do they leave less for the government to tax later, but if the assets increase in value after you have passed them along, the appreciation is tax-free.
Even people in a position to shift substantial wealth to family tend to be reluctant to make gifts so large that they will incur gift tax. Still, for much of 2010, it seemed like a wise financial strategy to do just that. With both the gift tax and the estate tax automatically scheduled to increase to 55% in 2011, the 35% gift-tax rate on gifts of more than $1 million in 2010 looked like a bargain.
If, due to procrastination or lack of interest, you ignored what lawyers then dubbed a unique "opportunity," you avoided a quandary that’s consuming a lot of airtime this week at the Heckerling Institute on Estate Planning, the annual Super Bowl on the subject sponsored by University of Miami School of Law. The lawyers meeting here in Orlando are in the awkward position of trying to figure out what clients who followed their advice can now do to reverse those 2010 taxable gifts.
Their collective chagrin stems from the sweeping tax overhaul President Obama signed Dec. 17. Under this law the amount that anyone can transfer tax-free during life went up this year from $1 million to $5 million ($10 million for married couples). So by simply waiting until 2011 to make gifts, it might have been possible to avoid gift tax altogether.
Jubilation has broken out in the Midwest—or at least in Wisconsin and Indiana, now that Democrats in neighboring Illinois have rushed their tax increase into law.
Late Tuesday night, Democrats in the Illinois house and senate rammed through Governor Pat Quinn's 67% hike in the state income tax and a nearly 50% jump in the state corporate tax. The increase will add $1,400 to the average family's tax bill, and we doubt it will help job creation in a state that has lost 374,000 jobs since 2008.
New Wisconsin Governor Scott Walker immediately rolled out a press release inviting Illinois businesses to decamp to the Badger State, contrasting his agenda to reduce taxes and welcome business with the Illinois increase. Indiana Governor Mitch Daniels added: "We already had an edge on Illinois in terms of the cost of doing business, and this is going to make it significantly wider."
That's for sure. Small businesses will pay the new 5% income tax rate, up from 3%, and the effective corporate tax rate will rise to 9.5%, which, when combined with the federal rate of 35%, will make the Land of Lincoln one of the most expensive places in the world to conduct business.
- Bloomberg, Illinois's Record Income-Tax Increase Divides Businesses and Investors
- Christian Science Monitor, Why Illinois Lawmakers Passed 66% Income-Tax Hike
- CNN, Illinois Tax Hikes Will Hurt Companies
- L.A. Times, Illinois Gov. Pat Quinn Delighted With Whopping 66% Income Tax Hike
- New York Times, Questions Persisting as Illinois Raises Taxes
- Reuters, Illinois, a Kleptocracy in Action
- Tax Foundation, Illinois Approves Sharp Income Tax Increase, Third-Highest Corporate Tax Rate
- Tax Foundation, Illinois Tax Increases Will Undermine Job Growth and Economic Recovery
- Tax Update Blog, Illinois Jacks Up Income Tax; Still Broke
- Wall Street Journal, Illinois Braces for Tax Increases
- Wall Street Journal, Wisconsin 1, Illinois 0: With Springfield Raising Taxes Amidst its Fiscal Disaster, the New Republican Governor of the Badger State Is Telling Illinoisans, "Escape to Wisconsin"
If President Barack Obama and Congress ever decide to get serious about federal deficit reduction, there is a potential $1 trillion deficit reduction funding source that they have ignored. With annual federal budget deficits projected to average $1 trillion for the next decade, they should seriously consider this funding source, instead of assuming - contrary to fact - that radical cuts in federal discretionary spending programs can painlessly and equitably achieve meaningful deficit reduction. ...
Although we can cut some discretionary spending, we also can search for wasteful, duplicative or inefficient federal spending in another place most voters would never think of - the federal tax code. Subsidies totaling over $1 trillion, known as "tax expenditures" are woven throughout the federal tax code. These tax expenditures provide federal subsidies that are targeted to specific industries and activities. Some of these tax expenditures (e.g., the home mortgage interest deduction) are well known and considered by most Americans as entitlements. Many tax expenditures are hidden from public view, however, buried in the complex morass of the federal tax code.
Wednesday, January 12, 2011
[T]here's some good budget news to report for a change. Federal tax revenues are rising briskly again, which should allow progress against deficits if the politicians can control their spending appetites.
The CBO reported last week that federal tax receipts climbed in December by $18 billion, following somewhat smaller gains in the previous two months. For the first quarter of fiscal 2011, revenues have climbed by $44 billion, or nearly 9%, to $531 billion. Especially encouraging is that these revenue gains came predominantly from individual income taxes, which rose 23% in the first three months to $256 billion. ... We should add that the deficit declined only modestly in the first fiscal quarter because spending rose by $26 billion to $902 billion.
The taxman has never been a popular figure anywhere. But in the tiny Swiss village of Reconvilier, that functionary has assumed the even more detestable profile as the guy who'll waste your dog if you don't cough up what you owe.
Pierre-Alain Némitz said he's been overwhelmed by insults and threats since the Reconvilier municipal council he heads informed residents in late December they risked seeing their dogs killed if they don't pay the $48.50 annual tax the village levies per pooch.
Monday, January 10, 2011
- Monica Davey (New York Times), In Illinois, a Giant Deficit Leads to Talk of a Giant Tax Increase
- Esther Fung (Wall Street Journal), China Set to Tax Residential Real Estate
- Al Hunt (Bloomberg), Reagan Offers Obama Playbook on Fixing Tax Code
- John Harwood (New York Times), Changing Corporate Tax Is a Tricky Balancing Act
- Tom Herman (Wall Street Journal), Tax Changes for Teachers
- Jonah Lehrer (Wall Street Journal), How Uncertainty Cripples Us
- Laura Saunders (Wall Street Journal), IRS: No Charitable IRA Do-Over
- Laura Saunders (Wall Street Journal), Tax Changes For 2011: A Checklist
- Katie Thomas (New York Times), Political Heavy Hitters Take On College Bowls Over Taxes
Wednesday, January 5, 2011
The new Republicans in Congress have vowed to challenge Washington's role in American public education, and said they will seek to turn more power over to the states on many fronts. But one of their priorities is a new federal rule: to give parents in every state tax credits if their children are home-schooled.
Previous efforts in Congress to adopt a nationwide tax break have failed, and currently only three states -- Illinois, Louisiana and Minnesota -- allow some benefit for home schooling.
Will the idea succeed in the new Congress, given some conservatives' longtime opposition, on the grounds that the credits might open the door to more government regulation of education? How would such a system work? Is it a threat to public education, as its critics claim?
- Chester E. Finn Jr. (Hoover Instittuion), Yes, but Tests Are Necessary
- Susan B. Neuman (University of Michigan), A Scam Against Public Schools
- William A. Estrada (Home School Legal Defense Association), No Extra Rules Required
- Luis Huerta (Columbia Uiversity), Uniting Fiscal and Social Conservatism
- Neal P. McCluskey (Cato Institute), Unconstitutional Intrusion
- Rob Reich (Stanford University), More Oversight Is Needed
- Bruce Cooper (Forddham University), Respect for Religious and Family Rights
Tuesday, January 4, 2011
Billionaires Gates, Buffett and Zuckerberg will still give big. But what about ordinary donors?
For donors, a crucial question has always been how much to give to charity while alive and what to leave as charitable bequests in their wills or trusts. The economic crisis has caused many people to cut back on current charitable giving, perhaps figuring they could always make up for it with bequests. But changes in the federal estate tax system signed into law by President Obama on Dec. 17 may well lead some of those who had postponed charitable giving to cut back on future bequests too.
The new tax law raises the exemption from federal estate tax to $5 million a person ($10 million per couple) for deaths in 2011 and 2012. As a result, fewer families will even come close to paying the tax. That means that, except for the super wealthy, the tax benefits of giving through an estate plan have been wiped out. ...
[M]eanwhile, the possibility of converting a traditional IRA to a Roth IRA -- an option that became available in 2010 to all taxpayers, regardless of their income or filing status -- has given the charities some stiff competition for IRA nest eggs that account owners don’t expect to need.
Monday, January 3, 2011
U.S. Bank has filed a federal suit in Washington against the Federal Deposit Insurance Corp., alleging that the failed bank for which the FDIC was acting as receiver gave U.S. Bank bad tax advice that cost it millions in IRS penalties.
From 2005 to 2010, U.S. Bank acted as trustee for R-G Crown Mortgage Loan Trust and made regular payments to R-G Premier International Bank, a division of R-G Premier Bank of Puerto Rico, from the proceeds of recoveries from a portfolio of mortgage assets.
According to U.S. Bank’s complaint, filed on Dec. 28 in the U.S. District Court for the District of Columbia, R-G Premier directed the trust not to withhold taxes from its payments, saying that the distributions were not subject to withholding or income taxation based on the “portfolio interest” exemption under the IRS code.
But on Feb. 17, the trust received a notice from the IRS that it had failed to withhold 30% of the payments as required by law. The IRS told the trust that it owed tax liabilities of $860,000 for 2006 and $764,000 for 2007. ...
U.S. Bank has asked that a judge hold the FDIC liable for the tax penalties and other costs. The complaint also alleges that U.S. Bank is entitled to set-off against any amount owed to the FDIC as receiver “any and all amounts arising from or in any way related to any taxes, penalties or interest accrued upon any amounts previously distributed to premier. U.S. Bank is also seeking attorneys’ fees.
Dear President Obama:
Sorry to bother you. I know you are busy. But I have the sense that you could use a few words of advice. ... As a sometime adviser to Republicans, I’d like to offer a few guidelines to understanding their approach to economic policy. Follow these rules of thumb and your job will be a lot easier.
Think at the Margin. Republicans worry about the adverse incentive effects of high marginal tax rates. A marginal tax rate is the additional tax that a person pays on an extra dollar of income. ... From the standpoint of incentives, a tax cut is worthy of its name only if it increases the reward for earning additional income.
Stop Trying to Spread the Wealth. Ever since your famous exchange with Joe the Plumber, it has been clear that you believe that the redistribution of income is a crucial function of government. A long philosophical tradition supports your view. It includes John Rawls’s treatise A Theory of Justice, which concludes that the main goal of public policy should be to transfer resources to those at the bottom of the economic ladder.
Many Republicans, however, reject this view of the state. From their perspective, it is not the proper role of government to fix the income distribution in an attempt to achieve some utopian vision of fairness. They believe, instead, that in a free society, people make money when they produce goods and services that others value, and that, as a result, what they earn is rightfully theirs. This view also has a long intellectual tradition. The libertarian philosopher Robert Nozick has suggested revising the old leftist slogan “From each according to his ability, to each according to his needs” to “From each as they choose, to each as they are chosen.”
Spread Opportunity Instead. Despite their rejection of spreading the wealth, Republicans recognize that times are hard for the less fortunate. Their solution is not to adjust the slices of the economic pie, as if they had been doled out by careless cutting, but to expand the pie by providing greater opportunity for all. Since the mid-1970s, the gap between rich and poor has grown considerably. One of best analyses of this long-term trend is by the Harvard economics professors Claudia Goldin and Lawrence Katz in their book, The Race Between Education and Technology. The authors conclude that widening inequality is largely a symptom of the educational system’s failure to provide enough skilled workers to keep up with the ever increasing demand. Educational reform, therefore, should be a high priority.
Sunday, January 2, 2011
- Sam Anderson, The James Franco Project (New York Magazine)
- Anne Applebaum, The Worst of the Madness (The New York Review of Books)
- Tyler Cowen, The Inequality That Matters (The American Interest)
- William Deresiewicz, Solitude and Leadership (The American Scholar)
- Nicholas Eberstadt, The Demographic Future (Foreign Affairs)
- Adam Gopnik, Finest Hours (The New Yorker)
- Beth Kowitt, Inside the Secret World of Trader Joe’s (Fortune)
- Charlie LeDuff, Who Killed Aiyana Stanley-Jones (Mother Jones)
- Jonah Lehrer, The Truth Wears Off (The New Yorker)
- Michael Lewis, Beware of Greeks Bearing Bonds (Vanity Fair)
- Lawrence Rosen, Understanding Corruption (The American Interest)
- Hanna Rosin, The End of Men (The Atlantic)
- Darin Wolfe, To See for One’s Self (American Scientist)
Thursday, December 30, 2010
Rejecting an argument that the conduct of two former partners of the now-shuttered Jenkens & Gilchrist and three other non-law firm defendants lacked requisite willfulness, a federal judge has denied a motion to dismiss and put the case on track for a February trial.
Charged with conspiring to defraud the IRS, ex-partners Paul Daugerdas [right] and Donna Guerin are accused of helping clients generate some $4 billion in losses via bogus tax shelters that were never intended to be profit-making ventures. ... Meanwhile, the lawyers earned hefty fees for the firm by writing opinion letters that indicated the tax shelters were legitimate.
Wednesday, December 29, 2010
(Hat Tip: Ann Murphy.)
She graduated from Winona State University and later received her J.D. degree from Oral Roberts University and an LL.M. degree in tax law from the College of William and Mary's Marshall-Wythe School of Law. ...
From 1988 to 1993, Bachmann was a U.S. Treasury Department attorney in the US Federal Tax Court located in St. Paul. According to Bachmann, she represented the Internal Revenue Service "in hundreds of cases" (both civil and criminal) prosecuting people who underpaid or failed to pay their taxes. She left her government position to become a full-time mother. ...
Elected in 2006, Congresswoman Michele Bachmann is the first Republican woman to be elected to the U.S. House of Representatives from Minnesota. She served her first term from January 3, 2007, and January 3, 2009. Bachmann's third term will begin January 3, 2011.
At the White House on Dec. 15, business executives asked President Obama for a tax holiday that would help them tap more than $1 trillion of offshore earnings, much of it sitting in island tax havens.
The money -- including hundreds of billions in profits that U.S. companies attribute to overseas subsidiaries to avoid taxes -- is supposed to be taxed at up to 35% when it’s brought home, or “repatriated.” Executives including John T. Chambers of Cisco Systems Inc. say a tax break would return a flood of cash and boost the economy.
What nobody’s saying publicly is that U.S. multinationals are already finding legal ways to avoid that tax. Over the years, they’ve brought cash home, tax-free, employing strategies with nicknames worthy of 1970s conspiracy thrillers -- including “the Killer B” and “the Deadly D.”
Merck & Co Inc., the second-largest drugmaker in the U.S., last year brought more than $9 billion from abroad without paying any U.S. tax to help finance its acquisition of Schering- Plough Corp., securities filings show. Merck is also appealing a federal judge’s 2009 finding that Schering-Plough owed taxes on $690 million it had earlier brought home from overseas tax-free.
The largest drugmaker, Pfizer Inc., imported more than $30 billion from offshore in connection with its acquisition of Wyeth last year, while taking steps to minimize the tax hit on its publicly reported profit.
Disclosures in Switzerland and Delaware by Eli Lilly & Co. show the Indianapolis-based pharmaceutical company carried out many of the steps for a tax-free importation of foreign cash after its roughly $6 billion purchase of ImClone Systems Inc. in 2008.
“Sophisticated U.S. companies are routinely repatriating hundreds of billions of dollars in foreign earnings and paying trivially small U.S. taxes on those repatriations,” said Edward D. Kleinbard, a law professor at the University of Southern California in Los Angeles. “They devote enormous resources first to moving income to tax havens, and then to bringing those profits back to the U.S. at the lowest possible tax cost.”
With the exception of the Schering-Plough case, no authority has accused Merck or Pfizer or Lilly of paying less tax than they should have. While corporations have no obligation to pay any more than the legal minimum, “the question is what should that minimum be?” said Kleinbard, a former corporate tax attorney at Cleary Gottlieb Steen & Hamilton LLP and former chief of staff at the congressional Joint Committee on Taxation.
U.S. companies overall use various repatriation strategies to avoid about $25 billion a year in federal income taxes, he said.
Tuesday, December 28, 2010
House Seats Gained
House Seats Lost
New York (1)
South Carolina (1)
New Jersey (1)
Monday, December 27, 2010
Facing budget gaps and an aversion to new debt and taxes, states and local governments are slapping residents with an array of new fees—and some are applying them to nonprofits.
That marks a sharp departure from long-standing tax exemptions mandated by state law or adopted on the theory that churches, schools and charitable organizations work alongside governments to provide services to the community.
The issue is on display in Houston, where some flood-prone roads are in such disrepair that signs warn drivers, "Turn around, don't drown." Houston's taxpayers in November narrowly voted to adopt a "drainage fee" to raise at least $125 million a year toward the cost of improving roads and storm-water systems. The city will charge fees to property owners, and it won't grant exceptions to churches, schools and charities. ...
A number of groups—including schools, businesses, churches and senior citizens—are demanding exemptions. "We'll defeat this," says David Welch, of the Houston Area Pastor's Council, who plans to lobby state legislators in January. "This is really a tax. It is the first time that churches would not be exempt from property taxes," he says. ...
Some cities are charging religious groups property taxes on buildings no longer used for worship. Other localities are soliciting voluntary contributions. Albany, N.Y., recently passed an ordinance asking schools, hospitals and other nonprofits to contribute to city services. In Minneapolis, residents recently began paying a street-light fee that also applies to nonprofits, which in some places pay fees for elevator safety and fire inspection.
High taxes kill states. There can be no better evidence than the 2010 Census. The states that lost House seats -- because they're shrinking, relative to the nation -- had taxes 27% higher than the ones that gained seats.
Of the seven states that don't have a personal income tax, four (Texas, Florida, Nevada and Washington) account for eight of the 12 seats apportioned to the fastest-growing states.
New York and Ohio lost two more seats. Other losers -- down one each -- are Massachusetts, Missouri, Michigan, New Jersey, Pennsylvania, Illinois, Louisiana and Iowa. What do they all have in common? High taxes. ...
The states that lost seats ranked an average of 24th in taxes and had an average tax burden of $2,267 per capita. ... The states that gained seats ranked an average of 39th in taxes and had an average tax burden (weighted) of $1,788 -- 27% lower than the losing states. ...The trend is unmistakeable: The "losing" states drove out their high-income citizens (and middle-income jobs) with heavier tax burdens.
Sunday, December 26, 2010
Questions and answers on the new $10 million per couple federal estate tax break.
Wills, Trusts & Estates Prof Blog: Answers to Married Couples' Questions About New Estate Tax Law, by Gerry Beyer (Texas Tech):
- Does [portability] help me if my spouse died years ago?
- Does portability apply to lifetime gifts as well as assets that pass through an estate plan?
- Is portability automatic?
- Is the amount that's portable adjusted for inflation?
- Can I use my exemption instead to provide for children from a previous marriage?
- Is this a subject that should be covered in prenuptial agreements?
- Does portability also apply to the exemption from generation-skipping transfer tax?
- Do I still need a bypass trust?
- Is portability here to stay?
Wednesday, December 22, 2010
Despite the new and generous federal estate tax exemption of $5 million per estate and $10 million per couple, many less wealthy families still have to plan for estate taxes--state estate taxes that is. ...21 states and Washington, D.C., have state estate or inheritance taxes in place for 2011. ... Thirteen states and Washington, D.C., have estate taxes only. Typically, these taxes exempt $1 million or less per estate and carry a top rate of 16%. Six states levy only an inheritance tax, with the rate depending on the relationship of the heir to the deceased and the taxes kicking in, in some cases, on the first dollar of bequest. New Jersey and Maryland levy both estate and inheritance taxes.
[Population] growth tends to be stronger where taxes are lower. Seven of the nine states that do not levy an income tax grew faster than the national average. The other two, South Dakota and New Hampshire, had the fastest growth in their regions, the Midwest and New England. Altogether, 35% of the nation's total population growth occurred in these nine non-taxing states, which accounted for just 19% of total population at the beginning of the decade.
Wall Street Journal editorial, A Nation in Motion:
The Census reveals a people who are moving to pro-market red states.
The Census is in. There are now 308.74 million Americans, an increase of 27 million, or 9.7%, since 2000. ...
The Census figures also confirm that America is a nation in constant motion, with tens of millions hopping across state lines and changing residence since 2000. And more of them are moving into conservative, market-friendly red states than into progressive, public-sector heavy blue states.
In order the 10 states with the greatest population gains were Nevada, Arizona, Utah, Idaho, Texas, North Carolina, Georgia, Florida, Colorado and South Carolina. Their average population gain was 21%. In the fast-growing states, the average income tax rate is 4% versus 6.9% in the slowest growing states.
The average population gain of the bottom 10 states was 2%. They include most of the states now famous for fiscal distress: Michigan, Ohio, New York, Illinois. Michigan was the one state that actually had a net loss of population in the past decade. Particularly troubling is that three of America's traditionally high-octane states—California, New Jersey and New York—are in the population and economic doldrums.
Americans for Tax Reform, Lower Taxes, Less Government in States Gaining Congressional Seats:
An updated study by Americans for Tax Reform compared states gaining and losing Congressional seats in the decennial reapportionment process and found that states gaining seats had significantly lower taxes, less government spending, and were more likely to have “Right to Work” laws in place. Because reapportionment is based on population migration, this is further proof that fiscally conservative public policy spurs economic growth, creates jobs, and attracts population growth.
Ave. Top Personal Income Tax Rate
Per Capita State & Local Tax Burden
Tuesday, December 21, 2010
In the past five years, Sara Lee Corp., once a hodgepodge of consumer brands, has narrowed its focus to food. But its businesses, which range from Douwe Egberts coffee to Hillshire Farm deli meats, still have little in common, one reason the company has become a tempting takeover target. ... In recent weeks, it has been considering a sale of the company to Brazilian meat processor JBS SA, say people familiar with the matter. ...
Analysts have speculated for months that the company was primed for a break-up or sale. In November, Sara Lee said it would sell its North American bread business to Mexican baker Grupo Bimbo SAB for about $1 billion. The remaining businesses in its portfolio function mostly independently, and appear to offer few sales synergies. They include its highly profitable international coffee and North American processed meats businesses, as well as its international bread and dough and food-service units.
With more than half of its profit coming from overseas—much of it from the coffee business—Sara Lee has to import cash to fund the restructuring of its North American businesses and pay its dividend. In doing so, it incurs a substantial tax burden, wrote wrote Sanford Bernstein analyst Alexia Howard, in a note to investors last week.
If the company were to stay together, executives would need to find a way to boost margins and cash flow in North America, perhaps by buying another coffee business, Ms. Howard said. Her conclusion: breaking up the company could greatly boost Sara Lee's stock price. ... "We increasingly view Sara Lee as a company whose current portfolio and geographic focus is inefficient from a tax perspective, so something has to give," Ms. Howard wrote.
Driven by what many geologists consider the world's largest oil reserves, Iraq will probably be the world's biggest crude oil producer within a decade. ... [A]s Iraq's oil production rises, its economy could grow approximately six-fold over the coming decade—gross domestic product is currently $66 billion—and add a mind-boggling $300 billion in annual GDP. This means one of the largest economic reconstruction and development booms in history. ...
[T]he big picture for foreign companies is positive, as Iraq has a substantially more modern and liberal regulatory framework than almost any nearby country. Foreigners can own 100% of Iraqi companies, must pay only the 15% flat tax that the rest of the economy pays on profits, and may take 100% of those profits home when and how they please.
Monday, December 20, 2010
Now that Congress has actually managed to enact tax legislation, it may be time to consider some bigger issues. I hope that broad-based tax reform will be high on the list of both major parties.
Any meaningful reform will face intense lobbying from those who stand to lose. The tax deduction for charitable giving is a case in point. Although changes will be fought both by the givers and the receivers of tax-deductible donations, there is good reason to disregard their pleas. ... I suggest three principles to help guide the debate:
- The tax subsidy rate should be the same for everyone. This means that rather than being a deduction from income, the subsidy should take the form of a tax credit, so that if you contribute $1,000 and the subsidy rate is 15%, your taxes would be reduced by $150. (Ideally this credit should be “refundable,” so it is payable even if your tax bill is zero or negative.)
- In the interest of tax simplification, the tax credit should apply only to donations above a certain minimum. The minimum could be, say, 2% of AGI. That way, only large contributors need to bother keeping records.
- The tax credit rate should be kept low enough to prevent large distortions. If political considerations require that we maintain this subsidy, it might make sense to peg it to the capital gains tax rate, which is now 15%.
I think there is a bit more logic to current policy than Thaler does. Suppose you believe, as I do, that consumption is a better tax base than is income. Then, starting with a measurement of income, it makes sense to allow deductions for "non-consumed income"--specifically, saving such as IRA and 401k contributions and charitable giving.
Sunday, December 19, 2010
A tax lawyer dubbed “Lap Dance Lou” by one tabloid has been disbarred for promoting prostitution at his Manhattan strip club.
Louis Posner was disbarred because of his March guilty plea to promoting prostitution at the Hot Lap Dance Club, according to stories in the New York Post and the New York Daily News. A state appeals court rejected Posner’s suit to retain his license on Thursday, saying his disbarment was automatic because of the guilty plea.
- Forbes, AMT Patch Nicely Embroidered
- The Hill, Dems: Tax Cut Package Will Kill Social Security
- Huffington Post, Teddy Roosevelt: Estate Tax Champion, Republican Icon
- L.A. Times, And the Rich Get Richer
- New York Times editorial, The Tax Cut Deal
- NPR, Beyond The Tax Deal: Targeting The Code Itself
- Wall Street Journal, End Near for Best Energy Tax Deal
- Washington Examiner, The Bottom Line on Taxes for 2011
Saturday, December 18, 2010
Little attention was paid when two federal District Courts recently concluded that the new federal health care law was constitutional, but Monday’s ruling by a federal District Court Judge, Henry Hudson, in Commonwealth of Virginia v. Sebelius, was front page news because he held the insurance mandate at the center of the new law to be unconstitutional. The provision struck down by Judge Hudson imposes a tax penalty on individuals, other than those exempted by reason of religious beliefs or lack of suffi cient income, who fail to maintain a minimum level of health insurance coverage starting in 2014. There is good reason, though, to believe that, when the Supreme Court ultimately addresses the issues, its analysis may not follow Judge Hudson’s opinion. ...
Congress also can impose taxes on Americans, with almost no practical constraints. The Framers basically saw the remedy for Congress imposing foolish or overreaching taxes as our collective right to throw the rascals out at the next election, not for courts to decide which taxes are most appropriate. Here, the only penalty for not maintaining health care insurance is the imposition of a tax. The penalty tax will be collected on your Form 1040, like your other taxes, and it will be determined as a percentage of your income (with exemptions for low-income Americans and a cap for high-income ones). What is more, the nonpartisan budget staffs of Congress have estimated that individuals will pay some $4 billion per year in these penalty taxes. So why isn’t the penalty imposed for failure to comply with the individual mandate simply another tax?
Judge Hudson’s answer is dumbfounding: In his view, this tax is really a disguised form of regulation of commerce, citing a case (the Child Labor Tax Case) decided some 90 years ago, and one which the Supreme Court itself has said represents a line of reasoning that the Court has long since abandoned. The Internal Revenue Code is fi lled with tax provisions whose overriding purpose probably is to change behavior rather than collect revenues (for example, the disallowance of a deduction for bribing foreign offi cials, or tax penalties imposed on taxexempt foundations for self-dealing). Moreover, in this case there are substantial revenues that will be collected, yet Judge Hudson simply brushes aside as “incidental” the $4 billion in revenue that this tax will raise every year — an amount far greater than the taxes that are raised through other penalty provisions that unquestionably are taxes.
Judge Hudson makes much of the new tax’s label as a penalty, but it is clear that such labels carry little weight in constitutional analysis. The new law could just as easily have been described as a new universal tax measured by your income, with a proviso that you receive a dollar for dollar credit against the tax for the cost of private health insurance that you might obtain directly or through your employer.
The health care legislation has set American politics on edge. The law may be wise or foolish, but the remedy for those who believe the latter should lie squarely in the realm of the political process, not in resurrecting doctrines of constitutional interpretation wisely abandoned many decades ago.