Monday, January 3, 2011
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.
Friday, December 17, 2010
- Legislative Text
- Summary (3 pages)
- Summary (12 pages)
- Joint Committee on Taxation, Technical Explanation
- Joint Committee on Taxation, Revenue Estimate
- White House, Remarks at Signing Ceremony
- White House, Fact Sheet
- White House, Framework on Tax Cuts, Unemployment Insurance and Jobs
- White House, Interested Parties Memo on the Impact of the Tax Agreement
Press and blogosphere coverage:
- The Atlantic, Tax Cuts Put Progressives in a Tough Place
- CCH, Tax Briefing
- Forbes, After The Tax Deal: An Estate Plan Check-Up
- New York Times, It's Law: Obama Signs Compromise Tax Plan
- Tax Foundation, Experts Discuss Passage of Obama Tax Package
- Tax Policy Center, Distributional Analysis
- Tax Update Blog, Bush-Rate Extension Passes; What It Means
- Tax Vox Blog, Johnny Depp and the New Tax Law
- Tax Vox Blog, The Tax Deal May Be Bipartisan, But It Isn’t Stimulus and It Isn’t Smart
- Wall Street Journal, IRA Donors Catch a Break
- Wall Street Journal, Many Winners, a Few Losers
- Wall Street Journal, Obama Signs Tax Package Into Law
- Washington Post, For Obama, Signing Tax-Cut Bill Makes for a Good Day After a Bad Election
- Washington Post, Liberals Still Seething After Passage of Tax-Cut Deal
- Washington Post, Obama Signs Bill to Extend Bush-Era Tax Cuts for Two More Years
- Washington Post, What the New Tax Law Means for You
Thursday, December 16, 2010
- Bloomberg, Tax-Cut Vote in House Hinges on Estate-Tax Dispute (Ryan J. Donmoyer)
- Forbes, Tax Deal Trust Fund Loophole Could Save Billions For Rich (Janet Novack)
- Huffington Post, What's the Estate Tax Supposed to Do, Anyway? (Joseph J. Thorndike)
- National Journal, No Matter Who Wins, Estate Tax Is All but Dead (Kelsey Snell)
- NY Times, Billions in Giveways to a Tiny Group (Ian Shapiro, Yale, Political Science Department)
- NY Times, It's Not About Economic Equality (Roberton Williams, Tax Policy Center)
- NY Times, Freedom Is More Important (Kevin Hassett, American Enterprise Institute)
- NY Times, A Moral Problem (Russell Roberts, George Mason, Economics Department)
- WSJ, Does the Estate Tax Hurt Farmers and Family Businesses?
- WSJ, For Family-Run Small Businesses, Estate-Tax Uncertainty Adds Costs
Unless Congress acts very quickly, there will be blood as the accidental estate tax “holiday” slouches toward expiration on December 31. Tax “holidays,” during which a tax is temporarily suspended, are questionable tax policy at best. But they are truly disastrous in the case of a tax that is triggered only by death. Estates that might be exposed to the tax can channel the incidence of the taxable event into the window of the tax holiday, but only through homicide or suicide (or the practical equivalents of “pulling the plug” on life support devices).
That an estate tax holiday is a bad idea is obvious, but Congress in 2001 set the stage for exactly that, by enacting a largely symbolic one-year suspension of the federal estate tax to take effect in 2010. Everyone—on both sides of the aisle—expected that Congress would, at some point in the nine years between 2001 and 2010, come to its collective senses and revise the rules so that the tax holiday would never occur. But Congress just hasn’t managed to stop this train wreck from happening, once the course was set.
The failure to correct this situation has already cost billions in revenue, and has made estate planning absurdly difficult. But the worst aspect of this ill-conceived tax holiday is about to be upon us. The window is closing in two weeks, on December 31. If Congress does nothing, the estate tax will reemerge on January 1 with a $1,000,000 exemption and rates of up to 55%. If Congress does manage to enact the compromise reached last week between President Obama and Congressional Republicans, the new estate tax will contain a $5,000,000 exemption, and a tax rate of 35%.
Tuesday, December 14, 2010
In the late 1990s, there were typically fewer than a dozen tax provisions that had just a limited lease on life and needed to be renewed every year or so.
Today there are 141.
Now Congress, taking up a deal worked out between the Obama administration and Republican leaders, is poised to turn the whole personal income-tax system into something of a temporary structure. The plan embraces a broad range of provisions—an extension of Bush-era rates, a new estate-tax formula—but for only two years. A payroll-tax cut in the bill is for a single year.
This means that if the compromise passes largely intact, the U.S. will have no permanent regime governing levies on salaries, capital gains and dividends, the Social Security tax, as well as a slew of targeted breaks for families, students and other groups. This on top of dozens of corporate-tax provisions that already were subject to annual renewal.
The level of uncertainty, unusual for developed nations, complicates planning and discourages hiring and investment, many economists and corporate executives say. ...
The reasons the tax code has acquired an increasingly temporary cast have to do with deficits, a divided Congress and even the constitutional system. ...
Deficits tempt legislators to give tax provisions a temporary term to disguise their cost. For proponents of a new tax provision, the strategy is to get a foot in the door by passing it for a year or two, at a seemingly affordable cost, intending to renew it regularly.
Political division contributes because of the daunting task of mustering a filibuster-proof 60 votes in the Senate. ...
[Temporary tax provisions are] less likely in countries with parliamentary systems because these leave the government less subject to having its will thwarted by a large minority. "Very few countries have tax provisions that expire unless legislative action is taken," says Jeffrey Owens, head of tax at the OECD in Paris."
Monday, December 13, 2010
If the Obama-Republican tax deal passes, 2011 could turn into the best year yet to be rich, tax wise. The capital gains tax, a key rate for the very rich, will remain at its historically low 15%, while the top ordinary income tax rate will stay at 35%. The 2010 $800 per couple Making Work Pay credit, which wasn’t available to the better off, will be replaced by a Social Security tax cut that will save a two-high-earner couple $4,272 in 2011. Meanwhile, the estate and gift tax regime will become even friendlier to wealthy families.
Friendlier? How could wealth transfer taxes be any friendlier? After all, under the Bush tax cuts the estate tax disappeared in 2010 (for just one year) allowing families of billionaires who died this year, including Yankees owner George Steinbrenner and Metromedia founder John Kluge, to inherit free of federal estate taxes.
True enough. But for a family to benefit from that one year lapse, a (presumably) loved one had to actually die. For 2010, the amount a still breathing rich person can transfer to his kids or grandkids without owing taxes remains the same as a decade before: just $1 million.
By contrast, under the version of the Obama-Republican deal introduced late Thursday by Senate Majority leader Harry Reid, D-Nev., the exemptions from the gift tax, estate tax and generation skipping transfer tax (the tax imposed on gifts to grandkids if their parents are still alive) are “unified”–meaning they’ll all rise in tandem in 2011 to $5 million, from the $1 million or so they would have been next year after the Bush tax cuts expired.
“This is better than 2010, because you can avoid estate taxes and you don’t have to die to do it,’’ observes Columbia Law School Professor Michael Graetz, who was Deputy Assistant Treasury Secretary for Tax Policy during George H. W. Bush’s administration and is the author of books on both estate and income tax.
Moreover, rich folks with good estate planners will be able to transfer a lot more than $5 million per person, or $10 million per couple [through techniques like the GRAT]. ... With a $5 million gift and generation skipping tax exemption and no new restrictions on planning techniques, “an unbelievable amount of wealth can be shifted,’’ says Stephan R. Leimberg , a noted estate and trust lawyer who publishes a collection of e-mailed newsletters widely read by estate and tax planning pros. “You have just witnessed a great bank robbery,’’ Leimberg adds. “The doors of the Treasury have been thrown open. The Republicans have robbed the bank and the estate and gift tax (change) is the jewel of the robbery.” ...
Those "gift" bikes could turn out to be very expensive, because the IRS does not treat it as a "gift" but as a "taxable fringe benefit." ... Bottom line: some (many?) Ikea employees may wind up paying more in tax than this bike is worth to them.
This also gives me an excuse to blog Ikea's award-winning advertising campaign, You Will Always Find Me in the Kitchen at Parties:
Friday, December 10, 2010
- Bloomberg, Obama Directs Staff to Look at Options for U.S. Tax Overhaul
- The Hill, Obama Plans Debate Next Year on Tax Reform
- New York Times, Obama Weighs Tax Overhaul in Bid to Address Debt
- NPR, Obama: 2011 Will Bring Push To Overhaul Tax Code
- Politico, Obama Mulls Tax Reform as 2011 Priority
- Wall Street Journal, Obama Weighs Tax Overhaul
- WSJ Law Blog, Coming in 2011: A Tax-Code Overhaul?
- Associated Press
- Delaware News Journal
- Los Angeles Times
- New York Times
- Philadelphia Daily News
- Philadelphia Inquirer
Thursday, December 9, 2010
Of its estimated $900 billion-plus cost over two years, roughly $120 billion covers the high-end tax cuts and the estate tax cut, $450 billion covers Mr. Obama’s wish list and $360 billion covers the tax cut extensions both parties favored.
(Hat Tip: Greg Mankiw.)
Wednesday, December 8, 2010
Legislation taking shape in the U.S. Senate to extend expiring tax cuts would give heirs of wealthy people who died this year a choice of which estate-tax policy to apply, according to an aide close to the discussions.
Estate executors could choose to apply the rules in place this year, in which there is no federal estate tax, or the rules that would take effect next year imposing a 35% tax rate on estate wealth over $5 million.
The ability to elect either 2010 or 2011 rules would help certain heirs of those who died this year. Even though there is no estate tax, some assets inherited in 2010 face capital gains or other taxes because of a change in the way the value of those assets is calculated. ...
The legislation will also include rules starting in 2011 to make it easier for someone to transfer the full $5 million exemption to a surviving spouse, the aide said. That would allow married couples to shelter a full $10 million from the estate tax.
Over the first 18 months of his presidency, Barack Obama cut taxes — 25 different taxes, in fact — for 95% of taxpayers. Yet when queried by pollsters on whether the president had "increased taxes for most Americans, decreased taxes for most Americans, or … kept taxes the same," 44% of respondents said taxes went up, while 46% said taxes did not change. Now the president is making the same mistake again: cutting taxes in a way almost no one will notice and some may remember as a tax increase.
The one-year payroll tax holiday announced Monday will put very little money into people's paychecks, so the perception will be: "Tax cut? What tax cut?" ...
White House myopia on tax politics is truly stunning. It's true that some polls have found that a majority of Americans favor Obama's idea of letting the Bush tax cuts "sunset" for the very rich, but there remains a strong reflexive reaction against the idea of tax increases for anyone.
By choosing to engage in class warfare and drawing a $250,000-a-year line in the sand separating the rich from everyone else, the president fueled a simmering debate over what it means to be wealthy in a society in which everyone dreams of climbing the social and economic ladder. Those dreams help explain overwhelming opposition to "death" taxes that affect less than 0.6% of all estates. ... Obama should have packaged the deficit-reducing pay freeze with early agreement on preserving the Bush tax cuts for all taxpayers, while turning the $120-billion payroll tax cut into a check from the government.
- Bloomberg, Democrats Balk at Second-Lowest Rate for US Estate Tax in 80 Years
- Bloomberg, Obama Confronts Democrats' Pushback Over Deal on Tax Cuts
- Bloomberg, Obama’s Deal to Extend High-Earner Tax Cuts Unpopular in Poll
- Bloomberg, Obama Tax Deal Leaves Democratic Leaders With Tough Sales Job
- Bloomberg, Tax Cuts May Spur Economy, Limit Need to Extend Fed Purchases
- Boston Globe, Obama Chides Democrats, Calls Tax Deal Unavoidable
- CCH Special Briefing, Obama And GOP Compromise On Two-Year Extension Of Most Tax Cuts
- Center on Budget and Policy Priorities, Statement of Robert Greenstein
- Dan Shaviro, The Tax Cut Deal: Too Soon to Tell Who Really Won?
- Forbes, Estate Tax In Obama Deal: The Great Divider
- Forbes, How The Tax Compromise Might Affect Estate Planning
- Forbes, Obama Estate Tax Deal Would Chill Estate Planning
- Forbes, Obama-Republican Estate Tax Deal Draws Criticism: “The Deal Is Unacceptable”
- Greg Mankiw's Blog, The Tax Deal
- L.A. Times, Business Groups Generally Pleased With Tax Proposal
- Megan McArdle, A Good Deal for Democrats on Tax Cuts
- New York Times, Democrats Skeptical of Obama on New Tax Plan
- New York Times, For Obama, Tax Deal Is a Back-Door Stimulus Plan
- New York Times, Tax Package Will Aid Nearly All, Especially Highest Earners
- Politico, Obama's Tax Plan Could Squeak by With GOP Help
- Tax Policy Center, Compromise Agreement on Taxes
- Tax Policy Center, Distribution of the Tax Deal (Compared to 2009 Tax Law Continued)
- Tax Policy Center, Distribution of the Tax Deal (Compared to Expiration of Bush Tax Cuts)
- Tax Vox Blog, Obama-GOP Tax Deal: Winners and Losers
- Tax Vox Blog, Obama and the Republicans Reach an Odious Tax Deal
- USA Today, Liberals' Frustrations With Obama Boil Over After Deal
- USA Today, Who Benefits if Congress Passes the Tax Agreement
- Wall Street Journal, Obama Woos Wary Party on Tax Deal
- Wall Street Journal editorial, Obamanomics Takes a Holiday
- Wall Street Journal op-ed, The Bush Tax Cuts Never Went Far Enough
- Washington Post, Angry Democrats Rebel Against Obama's Tax-Cut Deal With Republicans
- Washington Post, Breaking Down the Tentative Tax Deal
GOP Excludes Build America Bonds From Tax Plan to Force States Into Bankruptcy to Crush Public Employee Unions
Congressional Republicans appear to be quietly but methodically executing a plan that would a) avoid a federal bailout of spendthrift states and b) cripple public employee unions by pushing cash-strapped states such as California and Illinois to declare bankruptcy. This may be the biggest political battle in Washington, my Capitol Hill sources tell me, of 2011.
That’s why the most intriguing aspect of President Barack Obama’s tax deal with Republicans is what the compromise fails to include — a provision to continue the Build America Bonds program. BABs now account for more than 20 percent of new debt sold by states and local governments thanks to a federal rebate equal to 35 percent of interest costs on the bonds. The subsidy program ends on Dec. 31. And my Reuters colleagues report that a GOP congressional aide said Republicans “have a very firm line on BABS — we are not going to allow them to be included.”
In short, the lack of a BAB program would make it harder for states to borrow to cover a $140 billion budgetary shortfall next year. ...
Some Republicans hope the shock of the newly revealed debt totals will grease the way towards explicitly permitting states to declare bankruptcy. Indeed, legislation amending federal bankruptcy law is currently being prepared by congressional Republicans. Local municipalities do declare bankruptcy from time to time, most famously California’s Orange County in 1994. But states can’t. Allowing them the same ability to renegotiate obligations could enable them to slash public employees’ lavish benefits, a big factor in their financial woes.
- Barron's, Munis Fall As Build America Bonds’ Extension Left Out Of Tax Cuts Plan
- L.A. Times, Muni Bond Market Roiled by Possible End of 'Build America' Program
- Wall Street Journal, Tax-Cut Deal Results in Turmoil for Bonds
Monday, December 6, 2010
Overlooked in the brawl over expiring Bush-era tax rates is what will happen to the death tax. Without action in the lame duck Congress, the estate tax will rise from the dead on January 1 with a vengeance, the rate climbing back to 55% from zero this year. The exemption amount will revert to a miserly $1 million, unindexed for inflation, so more middle class taxpayers will get hit year after year.
President Obama and Congressional Democrats don't think this is a high priority, but voters do. A November Gallup Poll found that Americans think that keeping the estate tax "from increasingly significantly" is "very important" by 56% to 17% "not too important." That's more than think it is a priority to extend current tax rates (50%), extend jobless benefits (48%), ratify the Start treaty (40%) or let openly gay men and women serve in the military (32%).
Liberals are content to let the rate revert to 55%, with some moderate Democrats arguing for a 45% rate. Republican Jon Kyl of Arizona and Democrat Blanche Lincoln of Arkansas are pushing a compromise that would lower the top rate to 35% with a $5 million deduction. That rate is still 35 percentage points too high for our liking, but we'll take it as an alternative to the greedy political confiscation of more than half of the wealth built by someone who has saved over a lifetime. An estate of $5 million isn't all that much for a successful and thrifty business person with some real estate to accumulate over 50 or 60 years. ...
At least 10 Senate Democrats have campaigned at one time or another for death tax repeal or relief. The next few days will determine whether they were telling the truth. The result will tell us if Congress is turning to a tax agenda rooted in growth and fairness, or sticking with the policy of government greed and envy that has defined the last four years.
Want to put Americans back to work? Help multinationals grow their U.S. operations.
The Labor Department reported on Friday that the U.S. unemployment rate is now 9.8%, as the economy added only 39,000 jobs in November. Since the start of the Great Recession, America has lost nearly 7.3 million private-sector jobs. Today's 108 million private-sector jobs are the same number America had in April 1999. And unemployment, Federal Reserve officials predicted last week, will likely remain at 9% through 2011. ...
Last month a Survey of Current Business report by the U.S. Bureau of Economic Analysis ... documented a dynamic group of companies that create high-paying American jobs based on significant capital investment and export prowess—precisely the kinds of jobs America desperately needs to build a sustainable recovery. ...
So which companies are these? Ones that "insource"—that is, the U.S. operations of multinational firms based abroad. Insourcing companies now employ more than twice the number of Americans they employed in 1987. ...
To boost the hiring prospects of insourcing companies (and of many others as well), policy makers should focus on three issues quite distinct from macroeconomic tools like quantitative easing and federal stimulus spending.
First, taxes. Insourcing CFOs reported to the Organization for International Investment that taxation is the single most important policy area that shapes their companies' investment decisions. In turn, their top concern is the U.S. corporate tax rate, which, at 35%, is one of the world's highest. America's high corporate tax rate inhibits hiring and investment in all U.S. firms, big and small alike. All the recent proposals by prominent deficit-reduction panels have recommended cutting the statutory rate and simplifying the corporate tax code. Policy makers should act on these proposals as quickly as possible to reduce the uncertainty that is inhibiting businesses' hiring and investment.
My advice to Barack Obama:
1. Let the Bush tax cuts expire.
2. Declare a payroll tax holiday for Tax Years 2011 and 2012, featuring cuts in the amount of payroll tax the federal government will correct.
Instruct the Treasury Department to collect less than the current amount of the payroll tax and/or give everyone who pays the payroll tax a tax refund.
Instruct the Treasury Department to issue new regulations justifying the payroll tax holiday.
Instruct the IRS not to prosecute employers who deduct only the amount required under the terms of the payroll tax holiday.
3. Tell the Congress that the payroll tax holiday will continue until Congress passes a tax reform bill to the President's liking.
4. Tell the Republicans that he is sick and tired of their misusing the political process to benefit rich people and that the best way out of the current economic mess is to put money in the hands of hard working Americans who need tax relief and are most likely to spend it. Note that the payroll tax holiday is as necessary to the country's economic recovery as FDR's bank holiday was during the Great Depression.
5. Insist that it is the President's duty to take bold action in times of economic emergency and berate the Republicans for playing games with the lives of ordinary citizens.
6. When members of Congress sue to declare the tax holiday unconstitutional:
(a) argue that they lack standing.
(b) argue that the holiday is justified by the new Treasury Department regulations.
(c) argue that the interpretation of the tax laws in the new regulations is committed to the President under Chevron.
(d) argue that the President, as chief executive officer, has the discretion to refuse to prosecute individuals in the interests of public policy. To interfere with the President's (non)prosecution power violates the Unitary Executive.
(e) Drag out the litigation until 2012, when it will be clear that the payroll tax holiday has helped improve the economy.
6. Rinse and Repeat.
The danger of Obama declaring a tax holiday (akin to FDR's bank holiday) is that some future Republican President will declare a tax holiday for corporations. Make no mistake: giving the President the power unilaterally to lower particular people's taxes gives the Chief Executive possibilities for all sorts of mischief.
(Hat Tip: Rick Hasen.)
Saturday, December 4, 2010
- The Economist, A Fun Fiscal Commission While It Lasted
- Fiscal Times, A New Bad Proposal: Lose Tax Breaks, Lower Tax Rates (Bruce Bartlett)
- Forbes, Limited Mortgage, Charitable Tax Breaks Preserved In Deficit Panel Proposal (Janet Novak)
- Huffington Post, Obama's Deficit Frankenstein (Richard Eskow)
- NY Times op-ed, A Tax Reform Vision (David Brooks)
- Start Making Sense, Two Perspectives on Tax Reform (Dan Shaviro (NYU))
- Tax Foundation, Deficit Commission Releases Tax Proposals (Mark Robyn)
- Tax Notes, Misunderstanding Tax Expenditures and Tax Rates, 129 Tax Notes 931 (Nov. 22, 2010) (Bruce Bartlett)
- TaxVox Blog, The Obama Deficit Panel’s Tax Reform Version 2.0 (Howard Gleckstein)
- U.S. News & World Report, Forget the Bush Tax Cuts; Reform the Tax Code (Brandon Greife)
- Washington Times, Taxing the Rich: The Simpson-Bowles Commission Gets It Right
Rather than tinker around the edges of the existing tax code, the Commission proposes fundamental and comprehensive tax reform that achieves these basic goals:
- Lower rates, broaden the base, and cut spending in the tax code
- Reduce the deficit
- Maintain or increase progressivity of the tax code
- Make America the best place to start a business and create jobs
RECOMMENDATION 2.1: ENACT FUNDAMENTAL TAX REFORM BY 2012 TO LOWER RATES, REDUCE DEFICITS, AND SIMPLIFY THE CODE. Eliminate all income tax expenditures, dedicate a portion of the additional revenue to deficit reduction, and use the remaining revenue to lower rates and add back necessary expenditures and credits.
RECOMMENDATION 2.2: ENACT CORPORATE REFORM TO LOWER RATES, CLOSE LOOPHOLES, AND MOVE TO A TERRITORIAL SYSTEM.
The National Commission on Fiscal Responsibility and Reform did not go far enough when it proposed the repeal of certain provisions of the mortgage interest deduction. The deduction for mortgage interest should be repealed in its entirety. ...
Your decisions on what to wear to work or whether to pay cash or credit are your personal choices. You don't get a tax deduction. That's why rent is not deductible, even though roughly one-third of Americans are renters -- which includes the majority of blacks and Latinos. Where you live is considered to be the result of a personal choice. The deduction for mortgage interest is a huge exception to the general rule, because what could be more personal than the decision to buy a home?
In order to benefit from the mortgage interest deduction, homeowners must itemize deductions and not take the standard deduction. President Bush's Tax Reform Commission documented that only 54% of those with mortgages benefit from the mortgage interest deduction. That means 46% of homeowners have paid for the benefit of the mortgage interest deduction when they bought their house but do not receive any tax benefits. ... We all have housing costs. Why should only some get a tax break?
See also Shades of the American Dream, 87 Wash. U.L. Rev. 329 (2010).
Friday, December 3, 2010
How does saving up to $550,000 in taxes on a $1 million payout from your family trust sound? It’s a real opportunity that has corporate trustees and beneficiaries scrambling to review trusts and devise distribution plans by year-end.
“This is an opportunistic time to think about getting money down generations,” says R. Hugh Magill, chief fiduciary officer at Northern Trust in Chicago, who worked with one family and their advisors to set up year-end distributions of $1 million each to four grandchildren, with potential tax savings of $2.2 million. “It’s an opportunity not without risk, due to the possibility of retroactive tax legislation,” he warns.
Thanks to Congress’ inaction on reviving the lapsed estate tax for 2010, there is a one-time opportunity for beneficiaries of certain trusts to get payouts before year-end and avoid big tax bills. That’s because the generation-skipping transfer tax (the “GST” tax), an extra tax on gifts made to grandkids and other “skip” benficiaries, lapsed for 2010 along with the estate tax. On Jan. 1, 2011, the GST tax is set to return with a 55% rate that applies to trusts that are not sheltered from GST tax by a GST exemption. So a $1 million payout from a non-exempt GST trust on Dec. 31 versus Jan. 1 could mean a tax savings of up to $550,000.
A series of tax relief measures is saving companies bailed out by the government billions of dollars at a time when concern over tax revenues has risen.
Although the Treasury Department first provided the tax guidance in the fall of 2008, the magnitude of the tax savings has become clearer in the past year. The tax relief drew new scrutiny last month after Wall Street bankers touted it to investors in the initial public offering of General Motors Corp.
The tax breaks, already known to apply at GM and Citigroup Inc., also are helping results at another company rescued by Uncle Sam, American International Group Inc., according to tax experts and people familiar with the companies.
The Treasury gave the same treatment to mortgage agencies Fannie Mae and Freddie Mac, but their ability to save taxes as a result is less certain, the same people said.
The tax treatment allows companies whose ownership changes to keep the right to use past losses and other deductions to offset future profits for as long as 20 years. Ordinarily, companies' ability to use such tax assets is curtailed when they are acquired, under a 1986 law aimed at curbing "trafficking" acquisitions arranged to capture tax shelters.
Some critics decry the actions at a time when the focus has turned from saving the economy to closing budget deficits. "The agencies are literally throwing gratuities at banks and other companies," said Christopher Whalen, a bank stock analyst at Institutional Risk Analytics.
Other tax experts, however, defend the government policy. George Yin, a tax law professor at University of Virginia Law school, said the actions are "perfectly defensible" because this doesn't represent the kind of trafficking in tax losses curtailed by the 1986 law. "The government isn't acquiring AIG because it wants to get some benefit from its losses," he noted.
Regal Entertainment Group, the largest U.S. cinema operator, declared an extraordinary dividend of $1.40 a share payable Dec. 30, the day before Bush-era tax cuts are set to expire.
The one-time dividend will cost about $215 million, David Ownby, chief financial officer, said today in an interview. The company’s largest shareholder, billionaire Philip Anschutz, stands to collect more than $100 million based on his controlling stake in the company.
The expiring Bush-era tax cuts, which included a reduction in the levy on dividends to 15 percent, were a factor in the decision, Ownby said.
Wednesday, December 1, 2010
The intellectual and political left argues that the failed $814 billion stimulus in 2009 wasn't big enough, and that spending control any time soon will derail the economy. But economic theory, history and statistical studies reveal that more taxes and spending are more likely to harm than help the economy. Those who demand spending control and oppose tax hikes hold the intellectual high ground. ...
Andrew Mountford of the University of London and Harald Uhlig of the University of Chicago conclude that the small initial spending multiplier turns negative by the start of the second year. In a new cross-national time series study, Ethan Ilzetzki of the London School of Economics and Enrique Mendoza and Carlos Vegh of the University of Maryland conclude that in open economies with flexible exchange rates, "a fiscal expansion leads to no significant output gains." My colleagues John Cogan and John Taylor, with Volker Wieland and Tobias Cwik, ... estimate the effect of the February 2009 stimulus at a puny 0.2% of GDP by now.
By contrast, the last two major tax cuts—President Reagan's in 1981-83 and President George W. Bush's in 2003—boosted growth. They lowered marginal tax rates and were longer lasting, both keys to success. In a survey of fiscal policy changes in the OECD over the past four decades, Harvard's Albert Alesina and Silvia Ardagna conclude that tax cuts have been far more likely to increase growth than has more spending. Former Obama adviser Christina Romer and David Romer of the University of California, Berkeley, estimate a tax-cut multiplier of 3.0, meaning $1 of lower taxes raises short-run output by $3. Messrs. Mountford and Uhlig show that substantial tax cuts had a far larger impact on output and employment than spending increases, with a multiplier up to 5.0.
Conversely, a tax increase is very damaging. Mr. Barro and Bain Capital's Charles Redlick estimate large negative effects of increased marginal tax rates on GDP. The best stimulus now is to stop the impending tax hikes. Mr. Alesina and Ms. Ardagna also conclude that spending cuts are more likely to reduce deficits and debt-to-GDP ratios, and less likely to cause recessions, than are tax increases. ...
The complexity of a dynamic market economy is not easily captured even by sophisticated modeling (an idea stressed by Friedrich Hayek and Robert Solow). But based on the best economic evidence, we should reject increased spending and increased taxes.
After meeting with Congressional leaders yesterday, Mr. Obama dispatched Mr. Geithner and budget director Jacob Lew to negotiate a deal. Yet the President is still holding out against even a temporary extension of the 2001 and 2003 tax rates. Republicans won 63 House seats running against those tax increases, but Mr. Obama still seems under the spell of the dead enders led by soon-to-be-former House Speaker Nancy Pelosi.
The magnitude of the looming tax increase ought to snap him out of this hypnosis. If the Democrats who still run Capitol Hill for another month fail to act, tens of millions of American households will see their paychecks shrink immediately in the New Year. ...
Republicans shouldn't be suckered into raising taxes on anyone, especially not on small business job creators. The U.S. corporate tax rate of 39% (a combination of state average and federal rates) is already about 15 percentage points above the international average, and for the first time in a generation the personal rate of 41% would rise above the average of our overseas rivals. That's all before the 3.8% surtax on investment income arrives in 2013, courtesy of ObamaCare.
Because most nations tax their companies at a business rate lower than the personal rate, the Tax Foundation says the Obama plan would mean that many Subchapter S corporations in the U.S. would pay "virtually the highest tax rates in the world on their business income." In other words, the after-tax rate of return on investment in the U.S. would fall relative to investing in Europe or Asia. This is an invitation to outsource more jobs. The U.S. should be cutting tax rates to become more competitive, as President Obama's deficit reduction commission and tax reform advisory panel have recommended. ...
Even in this lame duck liberal Congress, there is a bipartisan majority in both houses to prevent this tax increase. The only obstacles are a defeated, willful liberal minority that wants to extract one more pound of flesh from the private economy, and a President who still fails to comprehend that jobs and wealth are created outside of government and politics. If Democrats won't compromise this month, the first vote in the new Republican House in January should be to repeal the Obama-Pelosi-Schumer tax increase.
In 1943, [FDR] asked the IRS to find out how many people earned more than $67,000 [$847,000 in 2010 dollars]. The IRS reported that 2090 people fit the bill in 1941 and put together a list. A copy of the list ended up in the National Archives, which recently decided that enough time had elapsed to make the information public. ... Following is a list of the 10 taxpayers with the highest salaries, what they did to earn their money and how much of it they got to keep.
- SEC Complaint
- SEC Litigation Release
- SEC Press Release
- Blog of Legal Times
- Financial Times
- Going Concern
- New York Times DealBook
- Wall Street Journal
Tuesday, November 30, 2010
Ending the uncertainty over extending Bush-era tax cuts may rest on resolving a decade-long debate over death and taxes. ...
With Obama planning to meet with bipartisan congressional leaders at the White House tomorrow, three main factions have formed in the Senate, none of which has the 60 votes needed to advance an estate-tax proposal. One includes Republicans such as South Carolina’s Jim DeMint who favor permanent repeal. Another is led by Democrats including Majority Leader Harry Reid who support a top rate of 45% that would apply after a $3.5 million tax-free allowance. A third faction, led by Arizona Republican Jon Kyl and Arkansas Democrat Blanche Lincoln and embraced by Republican leader Mitch McConnell of Kentucky, backs setting the top rate at 35% after a $5 million exemption. Forging an agreement has proven more complicated than splitting the difference on the numbers because this has been cast as a moral issue.
Monday, November 29, 2010
As the need for new revenue deepens, cash-strapped cities may be increasingly likely to turn to colleges, as well as other nonprofit groups, to make payments in lieu of the taxes on the property they use for educational purposes. However, municipalities and local nonprofits should work to hammer out payment plans that are transparent and predictable, according to a new report by a research organization based in Cambridge, Mass.
The report, by the Lincoln Institute of Land Policy, acknowledges that such plans may not make sense for all communities, such as those in which nonprofit groups do not own large amounts of tax-exempt property. And the think tank suggests that state and local governments should consider alternatives to such compensation agreements, which are known as PILOTs, for payments in lieu of taxes. ...
Private colleges and other nonprofit organizations, such as hospitals, churches, and soup kitchens, are exempt from paying property tax in all 50 states. The forgone revenue from the property-tax exemption could total as much as $32-billion nationwide.
But as municipal budgets have been stretched thin, mayors and local politicians have called on colleges and other such groups to compensate cities and counties more for the services they use.
A survey by the Lincoln Institute found that PILOT programs have been used in 117 municipalities and 18 states since 2000.
Many of those agreements, however, appear to be haphazard, secretive, and calculated in an ad hoc manner, the authors found. Even within the same city, payments can vary significantly. Harvard University, for example, pays Boston nearly $2-million annually, while Boston College contributes less than $300,000 through the program.
What's more, payments in lieu of taxes typically generate relatively little revenue, as a share of overall municipal budgets, and often are not a reliable long-term source of funds. In the 2009 fiscal year, PILOT payments from tax-exempt nonprofits accounted for just 0.66 percent of Boston's total municipal budget. ...
There are alternatives to payments in lieu of taxes, the authors note, such as charging municipal-service fees to tax-exempt groups or levying special tariffs, such as tuition taxes, on groups that use nonprofit services. Such taxes and fees, however, are open to court challenges. Most recently, public officials in Pittsburgh backed away from creating what would have been the nation's first tuition tax after the city's largest nonprofit organizations, including Carnegie Mellon University and the University of Pittsburgh, agreed to make voluntary payments.
Sunday, November 28, 2010
Tax revenues as a share of GDP have averaged just under 19%, whether tax rates are cut or raised. Better to cut rates and get 19% of a larger pie.
Even amoebas learn by trial and error, but some economists and politicians do not. The Obama administration's budget projections claim that raising taxes on the top 2% of taxpayers, those individuals earning more than $200,000 and couples earning $250,000 or more, will increase revenues to the U.S. Treasury. The empirical evidence suggests otherwise. None of the personal income tax or capital gains tax increases enacted in the post-World War II period has raised the projected tax revenues.
Over the past six decades, tax revenues as a percentage of GDP have averaged just under 19% regardless of the top marginal personal income tax rate. The top marginal rate has been as high as 92% (1952-53) and as low as 28% (1988-90). This observation was first reported in an op-ed I wrote for this newspaper in March 1993. A wit later dubbed this "Hauser's Law."
Over this period there have been more than 30 major changes in the tax code including personal income tax rates, corporate tax rates, capital gains taxes, dividend taxes, investment tax credits, depreciation schedules, Social Security taxes, and the number of tax brackets among others. Yet during this period, federal government tax collections as a share of GDP have moved within a narrow band of just under 19% of GDP.
Why? Higher taxes discourage the "animal spirits" of entrepreneurship. When tax rates are raised, taxpayers are encouraged to shift, hide and underreport income. Taxpayers divert their effort from pro-growth productive investments to seeking tax shelters, tax havens and tax exempt investments. This behavior tends to dampen economic growth and job creation. Lower taxes increase the incentives to work, produce, save and invest, thereby encouraging capital formation and jobs. Taxpayers have less incentive to shelter and shift income.
Here are the data from American Thinker:
Given all the uncertainty, is your annual year-end tax-planning session worth the effort this year? Yes—in fact it is crucial, because it could be your last chance to take advantage of today's low rates.
- Capital Gains and Losses
- Stock Options and Restricted Shares
- Roth IRA Conversions
Saturday, November 27, 2010
A prime reason why we have a budget deficit problem in this country is because Republicans almost universally believe in a nonsensical idea called starve the beast (STB). By this theory, the one and only thing they need to do to be fiscally responsible is to cut taxes. They need not lift a finger to cut spending because it will magically come down. ...
Because of its obvious ridiculousness, one seldom hears conservatives say openly that tax cuts automatically reduce spending. But it still underpins the entire Republican budget strategy — tax cuts never have to be paid for, no meaningful spending cuts are ever put forward, earmarks and foreign aid are said to be the primary sources of budget deficits, and similar absurdities.
But there is a flip side to STB at work as well. If tax cuts starve the beast, then it logically follows that tax increases must feed the beast. This variation of STB was on full display in a Nov. 21 Wall Street Journal op-ed article by Wall Street Journal editorial writer and Republican operative Steve Moore, who founded the Club for Growth, which gives vast sums to Republican candidates, and Ohio University economist Richard Vedder.
The Moore-Vedder article argues strenuously that tax increases must never be considered no matter how big the deficit is. The reason, based on research Vedder has been updating since the 1980s, is that tax increases always feed the beast, leading to spending increases larger than the tax increase. Originally, he said that spending would rise $1.58 for every dollar of tax increase, leading to an increase in the deficit rather than a reduction. Vedder now says that spending only rises $1.17 for every dollar of tax increase.
By this logic, the tax increase enacted in 1993, which raised the top federal income tax rate to 39.6% from 31%, should have caused a massive increase in the federal budget deficit. In fact, it did not. Spending was 22.1% of GDP in 1992 and it fell every year of the Clinton administration, to 21.4% of GDP in 1993, 21% in 1994, 20.6% in 1995, 20.2% in 1996, 19.5% in 1997, 19.1% in 1998, 18.5% in 1999, and 18.2% in 2000. ...
Starve the beast is a crackpot theory, and its flip side that higher taxes invariably feed the beast is no better. They are just self-serving rationalizations for Republican budgetary irresponsibility.Note: A few years ago, I went into great detail explaining the origin and development of STB in an academic journal. My article is available online for those with an interest in the gory details. In July, I posted a bibliography of more recent academic research in The Fiscal Times √ë all of which shows no evidence whatsoever that tax cuts reduce spending. More recently, the International Monetary Fund has confirmed this conclusion in a September working paper.
Wednesday, November 24, 2010
Is Failure to Support Obama Administration's Foreign Policy Grounds to Deny Charity's Tax-Exempt Status?
- NY Times: Charitable Deduction Subsidizes Israeli Settlements, Contrary to U.S. Policy (July 7, 2010)
- Lawsuit: IRS Using Bob Jones University to Deny Tax-Exempt Status to Pro-Israel Charity (Aug. 26, 2010)
Z STREET, an organization devoted to pro-Israel public education, today filed in federal court its Opposition to the government’s effort to continue violating the US Constitution by discriminating against the organization because its views on Israel and the Middle East differ from those of this government. On August 25, 2010 Z STREET filed a Complaint in federal court charging the IRS with constitutional violations by subjecting Z STREET’s application for tax exemption to a discriminatory process.
- Jewish Policy Center Israel Advocacy and the IRS
- Weekly Standard, Z Street's Legal Battle Continues Against the IRS
- Z Street's Complaint (Oct. 24, 2010)
- Government's Motion to Dismiss (Nov. 1, 2010)
- Z Street's Memorandum in Opposition to Government's Motion to Dismiss (Nov. 22, 2010)
Update: Politico, IRS to Jewish Group: 'Does Your Organization Support the Existence of the Land of Israel?', by Ben Smith:
A conservative Pennsylvania Jewish group that has claimed the IRS is targeting pro-Israel groups introduced in federal court today a letter from an IRS agent to another, unnamed organization that tax experts said was likely outside the usual or appropriate scope of an IRS inquiry.
"Does your organization support the existence of the land of Israel?" IRS agent Tracy Dornette wrote the organization, according to this week's court filing, as part of its consideration of the organizations application for tax exempt status. "Describe your organization's religious belief sytem toward the land of Israel." ...
Several experts on non-profit tax law said the questions to the organization were unusual, at best, though they were also skeptical of the claim that the IRS is specifically targeting pro-Israel groups.
"The claims go far beyond what should be the IRS's role," said Paul Caron a University of Cincinnati law professor and the author of TaxProf Blog.
Ellen Aprill, a law professor at Loyola University in Los Angeles said the second question was "appropriate" in the context of an application seeking a tax exemption on religious grounds. "The first one is not the way I would want any of my agents to do it," she said.
Former I.R.S. Commissioner Sheldon Cohen said he was skeptical of Z Street's motives in its high-profile lawsuit, rather than pursuing its concerns in tax court. "They were hardly into the process when they screamed rape – nobody lifted the dress yet," he said, noting that 501(c)3 groups can't advocate for political positions. But he called the specific questions "unusual." "I've never seen that kind of inquiry," he said.