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.
(Hat Tip: Elliott Manning.)
Should the government cut spending or raise taxes to deal with its long-term fiscal imbalance? As President Obama’s deficit commission rolls out its final report in the coming weeks, this issue will most likely divide the political right and left. But, in many ways, the question is the wrong one. The distinction between spending and taxation is often murky and sometimes meaningless.
Monday, November 22, 2010
The draft recommendations of the president's commission on deficit reduction call for closing popular tax deductions, higher gas taxes and other revenue raisers to drive tax collections up to 21% of GDP from the historical norm of about 18.5%. Another plan, proposed last week by commission member and former Congressional Budget Office director Alice Rivlin, would impose a 6.5% national sales tax on consumers.
The claim here, echoed by endless purveyors of conventional wisdom in Washington, is that these added revenues—potentially a half-trillion dollars a year—will be used to reduce the $8 trillion to $10 trillion deficits in the coming decade. If history is any guide, however, that won't happen. Instead, Congress will simply spend the money.
In the late 1980s, one of us, Richard Vedder, and Lowell Gallaway of Ohio University co-authored a often-cited research paper for the congressional Joint Economic Committee (known as the $1.58 study) that found that every new dollar of new taxes led to more than one dollar of new spending by Congress. Subsequent revisions of the study over the next decade found similar results.
We've updated the research. Using standard statistical analyses that introduce variables to control for business-cycle fluctuations, wars and inflation, we found that over the entire post World War II era through 2009 each dollar of new tax revenue was associated with $1.17 of new spending. Politicians spend the money as fast as it comes in—and a little bit more. ...
We're constantly told by politicos that tax increases must be put "on the table" to get congressional Democrats—who've already approved close to $1 trillion of new spending in violation of their own budget rules over the last two years—to agree to make cuts in the unsustainable entitlement programs like Medicare and Social Security.
Our research indicates this is a sucker play. After the 1990 and 1993 tax increases, federal spending continued to rise. The 1990 tax increase deal was enacted specifically to avoid automatic spending sequestrations that would have been required under the then-prevailing Gramm-Rudman budget rules....
The grand bargain so many in Washington yearn for—tax increases coupled with spending cuts—is a fool's errand. Our research confirms what the late economist Milton Friedman said of Congress many years ago: "Politicians will always spend every penny of tax raised and whatever else they can get away with."
Update: For a critical view, see Dan Shaviro (NYU).
I’m not sure who invented the term “deficit hawk,” but it seems an odd name for a creature too chicken to raise taxes. The bird is strange in color, too — in Republican red, Democratic blue or Blue Dog purple.
Most politicians refused to get specific about the federal budget until after the election, then stood around waiting for bipartisan groups to stick their necks out. We have now heard from the chairmen of President Obama’s bipartisan deficit reduction commission and the Bipartisan Policy Center, and the feathers are flying.
Both plans propose cuts in taxes on individual and corporate tax rates, counterbalanced by elimination of some big tax breaks. Both also propose taxing at least one liquid whose consumption we want to discourage: gasoline or sugary drinks. The Bipartisan Policy Center would also impose a 6.5% national sales tax. ...
Most critics on the right don’t like the proposed tax increases; most on the left argue that we shouldn’t obsess about the budget until we get the unemployment rate down and the economic growth rate back up. In other words, both plans to cut the deficit are hawkish, and the response to them largely represents hawks revealing their inner chickens.
Saturday, November 20, 2010
- Hawaii: 11% ($200,000 single/$400,000 married)
- Oregon: 11% ($250,000 single/$500,000 married)
- California: 10.3% ($1,000,000 single & married)
- Iowa: 8.98% ($64,755 single & married)
- New Jersey: 8.97% ($500,000 single & married)
- New York: 8.97% ($500,000 single & married)
- Vermont: 8.97% ($379,150 single & married)
- Maine: 8.5% ($19,750 single, $39,550 married)
- Washington, D.C.: 8.5% ($40,000 single & married)
- Minnesota: 7.85% ($74,780 single, $132,220 married)
Thursday, November 18, 2010
Crystal Cathedral, the Orange County mega-church that filed for bankruptcy last month, allowed its chief financial officer to skirt federal income taxes by paying the bulk of his salary in the form of a housing allowance, a benefit reserved under law for ministers.
The six-figure housing allowance paid to financial officer Fred Southard -– along with compensation to members of the church founder's family –- are among the expenses questioned by the U.S. trustee's office and the creditors' committee assessing the bankruptcy case. ...
The Crystal Cathedral has cited the weak economy and a 24% drop in donations in 2009 for its financial problems. More than 550 creditors are owed $50 million to $100 million, according to the initial bankruptcy filing last month.
According to court documents, longtime financial director Fred Southard received $132,019 out of his total $144,261 compensation in the form of a housing allowance last year. Southard has been the Crystal Cathedral's chief financial officer since 1978 and owns a home in Newport Beach valued at $2.3 million. ...
Southard told The Times on Wednesday that he was ordained as a minister by the Crystal Cathedral about 10 years ago and has taken the bulk of his compensation in the form of a housing allowance since then. "That's what ministers are allowed to do, and so it's to the individual's advantage to do that," he said. ...
[The U.S. trustee's office] suggested that Southard should not even receive the allowance. "There is no justification whatsoever for a housing allowance of this amount," according to the documents. "Mr. Southard has failed to explain why such a housing allowance is necessary or appropriate, given this debtor is in Chapter 11 and suffering financial difficulties."
- Orange County Register, Bankruptcy Official Objects to Crystal Cathedral Salaries
(Hat Tip: Bob Kamman.)
Tuesday, November 16, 2010
Need a quick three billion dollars, Uncle Sam? How about looking in your own pockets?
Deficit cutters struggling to make ends meet in Washington are eyeballing an unusual pot of potential revenue: back taxes owed to the government by federal employees themselves.
According to an IRS study last year, those employees and federal retirees owed a staggering $3.3 billion dollars in delinquent tax payments to the government. The federal agency with the largest back-tax bill? The US Postal Service, where hundreds of thousands of employees owed a total of more than $283 million, said the report. Also high on the list is the Department of Veterans Affairs, where employees had more than $156 million in back taxes. The biggest group, though, is retired military personnel. That group owed more than $1.5 billion dollars.
Monday, November 15, 2010
Experts on taxes, health care, entitlements, the military and other federal policies offer their ideas.
- Ryan Alexander (Taxpayers for Common Sense), Set Military Priorities
- Rosanne Altshuler (Rutgers), Cut Mortgage Interest Deductions
- Bruce Bartlett (The Fiscal Times), Tax Consumption, Not Savings
- Andrew G. Biggs (American Enterprise Institute), The Disability Insurance Monster
- Karen Davis (Commonwealth Fund), Save Money, Save the Health Care Law
- Chris Edwards (Cato Institute), Think Local on Schools and Buses
- Ted Gayer (Brookings Institution), Impose a Carbon Tax
- Robert Greenstein (Center on Budget & Policy Priorities), The Rich Should Pay Their Taxes
- Jonathan Gruber (MIT), End a Health Insurance Subsidy
- John Irons (Economic Policy Institute), Increase Taxes on Investment Income
- Maya MacGuineas (Committee for a Responsible Federal Budget), Put Off Retirement
- Ronald Marron (Urban-Brookings Tax Policy Center), Clean Up the Tax Code
- Michelle Mello (Harvard), Reform the Medical liability System
- John Podesta (Center for American Progress), A 'Risk Fee' for Big Banks
- Samuel L. Myers Jr. (Minnesota), Adjusting the Payroll Tax
- Grace-Marie Turner (Galen Institute), Allow Real Competition in Medicare
It has been more than two years since the financial and economic crash of 2008. Since then, many things have improved, and the U.S. economy is officially out of recession. But many Americans are still hurting. Unemployment remains high, and the housing market is far from settled. We invited economists and other astute financial observers from across the political spectrum to suggest what, if anything, the government should do to stimulate the economy.
- Bruce Bartlett (Fiscal Times), Don't Subsiidize Reserves; Tax Them
- John H. Cochrane (University of Chicago), Simulus: Neither Needed Nor Free
- Ayse Imrohoroglu (USC), Uncertainty Is Killing Confidence
- Alice H. Munnell (Boston College), To Create Jobs, End the Tax Cuts
- Robert Pollin (University of Massachusetts), Large Deficits Remain Essential
- Brad Schiller (University of Nevada-Reno), Tax Rebates Will Help Fill the Needs
- Joseph Stiglitz (Columbia University), Federal Spending Is a Necessity
- Mark Zandi (Moody's), Nail Down Some Deficit Remedies
Today, you’re in charge of the nation’s finances. Some of your options have more short-term savings and some have more long-term savings. When you have closed the budget gaps for both 2015 and 2030, you are done. Make your own plan, then share it online.
Below the fold are the 15 tax options:
Sunday, November 14, 2010
It's no secret that nobody enjoys paying taxes. The real question is how much of the bitter medicine we can tolerate—and what our society needs. This is especially clear when Congress debates changes in the tax code, like the current controversy over whether to renew the 2003 Bush tax cuts. Though both parties want to keep the cuts for households making less than $250,000 a year, Republicans want to retain the cuts for richer households, so that the wealthiest Americans also get to keep an extra 4% of their income.
The conservative argument is straightforward: The tax increase will make the rich feel poorer, which will lead to a reduction in consumption and investment. Given the fragility of the economic recovery, that's a dangerous possibility.
But will this happen? How do the wealthy actually respond to the redistribution of wealth? These questions are politically relevant, of course, but they also cut to the core of an ongoing debate about human nature. We typically see ourselves as selfish creatures, driven by our genes to maximize pleasure. We don't like taxes because they leave us with less to spend on ourselves.
In recent years, however, psychologists and neuroscientists have begun dismantling this view of human behavior. We may not be altruistic angels, but neither are we depraved primates. One of the most surprising findings is that people have a natural aversion to inequality. We tend to prefer a world in which wealth is more evenly distributed, even if it means we have to get by with less. ...
[S]cientists speculate that people have a natural dislike of inequality. In fact, our desire for equal outcomes is often more powerful (at least in the brain) then our desire for a little extra cash. It's not that money doesn't make us feel good—it's that sharing the wealth can make us feel even better. ...
For too long, our political conversation about taxes and wealth has been framed by a set of misguided assumptions. We've assumed that people always want to be wealthier than their peers, that higher taxes are an inevitable source of displeasure. But that's not the case. As the scientists note, culture and context play a decisive role, which is why different countries have such different tax structures, and why even America had a top marginal tax rate of 91% in 1960.
Though neuroscience can't speak to the merits of this public policy debate—economists continue to argue about the impact of taxes on the economy—it should remind us that our response to financial rewards and losses depends on a larger set of shifting beliefs. Do we believe that our riches are deserved? Is America still a land of opportunity? Those are the questions that matter.
President Obama hasn’t played his cards well on tax policy. He’s backed himself into a corner and allowed the Republicans to define the terms of the debate, missing the opportunity to help himself and the economy by putting forward a different tax strategy. ...
According to the Joint Committee on Taxation, the total tax increase would come to $227 billion in the event that Congress does not act at all and every expiring tax provision disappears. The table below shows that those with lower to middle incomes would suffer the largest tax increase in percentage terms.
Distributional Effects of Allowing All Expiring Tax Provisions to Expire, 2011 Increase in Federal Taxes Income Category Millions of Dollars Percent Less than $10,000 117 1.0 $10,000 - $20,000 3,721 19.9 $20,000 - $30,000 11,654 20.8 $30,000 - $40,000 12,869 14.1 $40,000 - $50,000 11,238 10.6 $50,000 - $75,000 26,705 9.2 $75,000 - $100,000 28,517 9.8 $100,000 - $200,000 62,309 10.6 $200,000 - $500,000 26,871 8.7 $500,000 - $1 million 10,620 8.3 $1 million and over 32,708 11.0 Total, all taxpayers 227,330 10.4 Source: Joint Committee on Taxation (July 30, 2010)
Republicans ... are guilty of being unserious about either the deficit or tax policy. Their mantra is that all the Bush tax cuts should simply be extended permanently, as if they are the greatest thing since sliced bread. But as I explained in a recent column, there is really no evidence that they did much of anything to raise economic growth. Moreover, the fact that they were always designed to expire makes Republican claims that Obama’s policies are the primary source of economic uncertainty ring hollow. If Republicans really wanted to give taxpayers certainty on what their taxes will be next year, they should have worked a lot harder to make all provisions of the Tax Code permanent, instead of so often making them temporary in order to disguise the budgetary cost of their initiatives.
Saturday, November 13, 2010
Well-heeled investors, beware: The auditors are coming.
An IRS unit set up to look at wealthy taxpayers and their complicated financial arrangements has started rigorous probes of some hedge-fund managers and other investors it suspects may be trying to evade taxes.
The reviews performed so far have been particularly harsh, say attorneys. Investors are being asked to turn over numerous hard-to-get documents in short order. These are "the audits from hell that your grandfather warned you about," says Charles P. Rettig, a partner at Hochman, Salkin, Rettig, Toscher & Perez in Beverly Hills, Calif.
The IRS unit, known as the Global High Wealth Industry Group, was set up last year. It began conducting audits earlier this year—but tax attorneys say the group is only recently getting up to speed. The unit is headed by Donna Hansberry, a longtime litigator for the tax agency who was formerly a senior legal adviser on the IRS commissioner's staff.
Wednesday, November 10, 2010
This study reflects the attitudes and behaviors of more than 800 respondents throughout the United States with household income greater than $200,000 and/or net worth (excluding the value of their residence) of at least $1,000,000. The average wealth of respondents was $10.7 million. Half of those who responded had a net worth between $3 million and $20 million. ...
[A]verage charitable giving by high net worth households decreased between 2007 and 2009. Average charitable giving dropped 34.9% from $83,034 in 2007 to $54,016 in 2009, after adjusting for inflation. ...
According to the 2010 study, a combined 67% of wealthy households would somewhat or dramatically decrease their charitable contributions if they received zero income tax deductions for their donations. Our earlier 2008 study found a lower percentage of wealthy households (47%) responded in this way,
Wealthy households also reported a shift in the amount they would leave to charity in their estate plan if the estate tax were repealed. A combined 43% of wealthy households would somewhat or dramatically increase the amount they leave to charity in an estate plan if the estate tax were repealed; compared to 36.1% in 2008.
Tuesday, November 9, 2010
[H]ow is it that Democrats ended up in such a fix over what to do about the expiring Bush-era tax cuts? That is what many Democrats are asking.
By dint of calculation and miscalculation, after mixed messages and missed signals, President Obama and Congressional Democratic leaders delayed debate until before the midterm elections. They dared Republicans to fight for extending the tax cuts for the rich and, in so doing, “hold hostage” those for the middle class. But it was Democrats who blinked as their ranks splintered in the heat of a worsening electoral climate, and they delayed any vote until after the elections.
Now, with the tax cuts due to expire Dec. 31, the debate finally commences next week in a lame-duck session, with Democrats weakened, Republicans emboldened by the election results and the tepid economy continuing to provide some argument against letting rates rise even for the highest income levels.
Sunday, November 7, 2010
Consider three courses that Congress might take:
- Do nothing and go back to the 2001 exemption and rates.
- Make the 2009 rates and exemption permanent, an approach that the Obama administration favors.
- Make the 2010 rules permanent, thereby eliminating the estate tax, as the Republican leadership would like to do. ...
What should Congress do? The most important step would be to end the uncertainty by legislating a permanent set of rules. If Congress doesn’t act, even middle-class households might soon be facing an estate tax. And of all the taxes in our system, the estate tax probably requires the most advance thought. (It is called “estate tax planning,” after all.) To avoid future showdowns in Congress, the exemption should be indexed for inflation if the estate tax remains.
But what about the tax rate? The proposed 45% rate is the lowest since 1932, but it still sounds high, almost confiscatory. Yet we must keep that $7 million exemption in mind. The Tax Policy Center estimates that in 2009, the average effective rate (taxes paid as a proportion of the entire estate) was 19.4% for all taxable estates. Even for estates above $20 million, the rate was only 22.4%.
We could lower the rate if we also lowered the exemption, but that would be a mistake. Dealing with the estate tax is a major nuisance, so it should apply to as few people as possible. With the $7 million exemption, only 3 estates in 1,000 would have to pay any tax. And those with estates that big could certainly afford a good lawyer to help them further increase the effective size of their exemption.
One might think that eliminating the tax — that is, continuing the 2010 rules — would end this reporting burden for everyone. In fact, the opposite is true. There are new filing provisions in 2010 for any estate with more than $1.3 million in unrealized capital gains. Previously, the original prices for assets in an estate weren’t important because the income tax bases were “stepped up” to current levels. Now, the IRS wants to know the original purchase prices, which you will have to enter on a form that the agency has not yet provided. ...
So let’s be serious. There are lots of ways to spend $250 billion. Trim the deficit, improve education, support the troops, or make sure heiresses like Paris Hilton have the proper attire for trips to St.-Tropez. At this time in our history, which of them seem prudent?
- Bloomberg, Washington State Rejects Income Tax on Wealthiest Residents
- Business Week, WA Workers Send Anti-Tax Message on Initiatives
- National Review, Voters Speak: No to Soak-the-Rich Schemes
- Seattle Post-Intelligencer, Voters Reject Income Tax on Wealthy
- Seattle Times, The Income Tax Goes Down
- Tax Lawyer's Blog, Daddy Gates’s Tax-the-Rich Measure Loses in Washington
- Tax Policy Blog, Washington Voters Again Reject State Income Tax
- Wall Street Journal editorial, Washingtonians Who Get It: Bill Gates Sr. Goes Down, 65%-35%
- Wall Street Journal, Why Washington’s Tax on the Rich Failed
- Washington Examiner, Defeat of Tax Hike Measure in Washington State Sends Strong Signal
Saturday, November 6, 2010
- AOL News, Nova Scotia Couple Gives Away $11.2M Lottery Win
- Forbes, Canadian Couple Donates Millions From Lottery Win
- NPR, Canadian Couple Wins $11 Million, Gives It Away
- Toronto Star, Couple Gives Away $11.2M in Lottery Winnings
(Hat Tip: Ann Murphy.)
Update: From Mary O'Keeffe (Union College):
Fortunately for this commendably generous Canadian couple, they do not live in the United States, which would apply a "No good deed goes unpunished" tax policy to a case like this one.
Canada does not include lottery winnings in taxable income. Canada also has a very different sort of tax preference for charitable donations. Donors apparently do not get to deduct the amounts donated, but they do get (nonrefundable) tax credits for the amounts they donate--and they can get credits for donating up to 75% of their income. The credit is computed at 15% for the first $200 of giving and 29% for subsequent amounts.
Since the top marginal rate is 29%, this means that taxpayers in the top tax bracket (over $127k in taxable income) get a benefit approximately equivalent to deducting it, but taxpayers in lower brackets get a tax benefit that is better than deducting it would have yielded. The bottom line--in general, Canada's policy towards generous donors with modest incomes is far more progressive than the United States tax policy.