Archive for the ‘individual’ Category

Hiatus

Friday, October 5th, 2012

This blog is on hiatus indefinitely.

Joint Committee Baselines and Tax Reform

Tuesday, August 2nd, 2011

With the ink not yet dry on the compromise debt-ceiling legislation, some of the principlas are arguing about a key provision that would determine how likely it is that the new Joint Select Committee on Deficit Reduction would address the scheduled expiration of the current individual rate structure, estate tax, and the preferential rates on capital gains and dividends, i.e. the Bush tax cuts.

At issue is a provision bargained for by House and Senate Republicans and widely marketed to skeptical conservatives wary of the deal, prior to the vote.   The provision aims to require the Joint Committee to use the benchmark of current law (rather than current policy) to score the legislation the Committee is required to vote on prior to November 23.

Under Section 301 of the debt-ceiling bill, deep, across-the-board, spending cuts go into effect, beginning in FY 2013, if Congress does not pass into law a proposal that would reduce the deficit by at least $1.2 trillion.  The question is how that $1.2 trillion is measured – - against what benchmark.

Recognizing that it would far too tempting for the Joint Committee to reach the $1.2 trillion figure by measuring from a current policy baseline that assumes low taxes into the future, Republican negotiators insisted that the Congressional Budget Office should be required to use current law in providing estimates for Joint Committee deliberations.  They specifically included a reference to Section 301(a) of the 1974 Budget Act in the debt-ceiling bill.

Now, White House economist Gene Sperling argues on the White House blog that the bargained-for language is not specific enough.   Despite the intent of Republican negotiators, Sperling claims that the Joint Committee can adopt any baseline it chooses by a majority vote.  The legislation may require CBO to provide an estimate based on current law, but the sequestration would not necessarily be triggered under his interpretation, if the Committee reaches the $1.2 trillion figure by some other measure.  Paul Ryan strongly disagrees.

Sperling’s interpretation is nonsensical and it would gut the deficit reducing purpose of the legislation, because there is no bipartisan consensus on any baseline other than current law.  For example, the current policy baseline used by the Administration assumes that taxes will go up on everyone earning over the $200/$250k threshold while the bulk of the Bush tax cuts will be extended.  If the Joint Committee were to use the Adminsitration’s baseline, ironically,  the Joint Committee would not be allowed to count the President’s preferred rate increases towards the $1.2 trillion.  

Would the Adminstration argue against the Joint Committee using its own policy baseline? and what basis does it have for supporting any other benchmark?  If there is no rationale for the baseline, then the whole Joint Committee exercise becomes nothing but smoke and mirrors.

Some Liberals Question Viability of $250k Tax Pledge

Wednesday, May 18th, 2011

The Wall Street Journal’s William McGurn discusses the recent dialogue between former Clinton official and tax expert William Galston and Reihan Salam, an advisor for the “pro market” think tank Economics 21 on the viability of President Obama’s famous pledge not to raise income taxes on families earning less than $250k in gross income.

Here are the articles McGurn cites:

Investors Rush to Lock In 0% Capital Gains Rate

Thursday, October 28th, 2010

On September 27th, President Obama signed the Small Business Jobs Act of 2010.  In addition to several other tax breaks described elsewhere in more detail, the bill created a three month window in which any individual or group of investors can purchase the stock of a C corporation (not an S corporation or LLC) with less than $50 million in assets and lock in a zero percent capital gains rate.  The stock must be acquired by the end of 2010 and held for five years.  Certain industries are off-limits and there are anti-abuse rules that must be adhered to.

Payson Peabody, Of Counsel with Dykema’s Washington, DC office and former House, Senate, and PricewaterhouseCoopers tax counsel, has written an article that describes this opportunity in more detail.  Interviewed last month by Emily Maltby in the Wall Street Journal, Mr. Peabody said, “I don’t think this provision will change investors’ behavior significantly,” because of the narrow time window to take advantage of the new provision.  But, he also noted that the Alternative Minimum Tax advantages of the new provision are significant.    If the provision is extended beyond its 12/31/2010 expiration date, it could have a much broader impact on small business investment.

Nevertheless, for those who are in a position to take advantage of the new law – - whether they are outside investors, debt holders with the ability to acquire common stock, or insiders with options that may be exercised – - the benefits could be substantial, given the projected increase in capital gains rates.

Third Rail Politics

Friday, August 20th, 2010

According to insiders interviewed by the Wall Street Journal, President Obama’s deficit commission has turned its attention to the entitlement programs that today constitute the lions share of federal spending in its efforts to bend the upward-trending cost curve facing the federal government in the next 20-30 years.

Unwilling to re-open the Medicare cost-curve debate, the panel evidently has been focusing on a range of options relating to Social Security.  Not coincidentally, the annual surplus generated by Social Security that the federal government has been “borrowing” from the Social Security trust fund has begun to dwindle, and it appears that Treasury will have to make good on its IOUs sooner than anticipated in order to pay current beneficiaries.  This will mean more borrowing from overseas, or more cuts elsewhere.

Reportedly, the heavy-weight seniors’ lobby AARP is being courted in secret for its endorsement of a number of politically explosive ideas, including:

  1. Raising the Social Security wage base.  Under present law, only the first $106k of wages are subject to the 12.4% levy shared by employee and employer.  Middle class wage earners in the $106k to $250k range would experience a very substantial tax increase.
  2. Raising the retirement age.  Former CBO Director Alice Rivlin says the panel is not considering 70 years old.  But, apparently, 68 and 69 are now possibilities.
  3. Means-testing benefits.  The “rich” would get less in Social Security benefits or, amounting to the same thing, they would get lower cost of living increases.

The secretive nature of the negotiations between AARP and the White House task force is troubling, particularly in light of the fact that AARP tends to represent current beneficiaries, not those paying into the system and hoping to receive benefits.  If they are to have any credibility, the task force’s recommendations must be endorsed by younger workers as well, but there are no organized groups of younger workers with AARP’s influence.

As a result, the promise of Social Security for younger wage earners is becoming increasingly threadbare.  This reality is likely to sink in when younger workers are asked to pay more for a smaller  benefit that is pushed further into an increasingly uncertain future.

In the past, proposing cuts to Social Security was the third rail of politics, but the White House appears to believe AARP can provide the insulation they need to grasp the rail without harm.   The only question is whether younger workers opposed to wage tax increases and benefit cuts will prove that assumption wrong.

Greenspan Calls for Total Repeal of Bush Tax Cuts

Saturday, August 7th, 2010

Citing the “most extraordinary financial crisis that I have ever seen or read about,” Former Fed Chairman Alan Greenspan is calling for complete repeal of the 2001 and 2003 individual and business tax rate cuts that he famously endorsed as Fed Chairman. Mr. Greenspan’s endorsement of the 2001 tax bill was critical to its success on Capitol Hill, and he says his position today is consistent with his former position in an era of surpluses. He opposed government surpluses as much as he opposes deficits.

Mr. Greenspan’s position is at odds with the majority of economists who say that raising taxes sharply at the beginning of 2011 would endanger the economy and risk a deeper recession.

To the extent that he retains credibility, Mr. Greenspan’s announcement is likely to bolster the resolve of President Obama to carry out his plan to raise income tax rates on joint filing individuals with more than $250,000 of gross income per year, and it may stifle dissent from economists, Republicans and some Democratic Senators who argue that raising the top rates, alone, would endanger the economy. Mr. Greenspan’s star has faded, however, and his critics say that he did not do enough to prevent the expansion of a dangerous credit bubble that threatened the global economy in 2008.

Even President Obama would extend the massive cuts for individuals earning under that threshold and he would extend his signature “Making Work Pay” tax benefit. These lower income cuts and outlays account for the vast majority of revenue raised, on paper, by the scheduled 2011 expiration of the cuts in Congressional Budget Office projections.

Mr. Greenspan is aware that allowing the 2011 expiration to take place would result in the largest income tax increase in U.S. history. And, it would immediately reduce the take home pay of every employee in America, because the rate changes would be reflected in income tax withholding tables in January.

Nevertheless, Mr. Greenspan says the ability of economists to predict the effect of tax changes on the economy is limited. The models have a “very poor record of forecasting.” He acknowledges that the strategy is “risky,” but he says “the choice of not doing it is far riskier.”

Dueling Economists Agree on Extending 2001 Tax Rate Cuts

Friday, July 30th, 2010

In an appearance on PBS, Moody’s Chief Economist Mark Zandi and Stanford Professor John Taylor disagree on just about everything, except that allowing the top income tax brackets to rise to 36% and 39.6%, respectively, in 2011 would be bad economic policy given the fragile state of the economy. Both agree that getting the economy moving is the best way to squelch concerns about deficits.

Build America Bonds: A Looking Glass On The Tax Extenders Bill

Thursday, July 22nd, 2010

The future of The American Jobs and Closing Tax Loopholes Act of 2010 (H.R  4213- a/k/a the “tax extenders bill”) remains highly uncertain.  Even so, an examination of the arguments for and against the bill’s provisions is a valuable exercise.  Many of these conflicting arguments are reflected in the wider debate over how to promote economic recovery while also assuring no recurrence of the world-wide financial crisis. 

Questions such as: Which monetary policies and investment structures to use? How they should be put into place, and what specific goals should be achieved?  animate the debate. Nevertheless, there is near universal agreement on the objective of re-establishing economic strength and stability while not rewarding the parties viewed as responsible (in whole or in part) for causing the economic collapse.  These contrasting positions exist in a microcosm in the debate over the The Build America Bonds program.

Some argue in favour of continuing and expanding a program that has successfully created government and government contracting jobs at a low cost and in a reasonable time-frame.  The Obama Administration cites a rise in state and local infrastructure development and job creation as being the direct results of the access to low cost financing that the bonds make possible for these governments http://www.whitehouse.gov/omb/budget/

Because these benefits are being delivered via a direct subsidy and not through a third party, others contend that 1) the cost savings to issuers is greater than the cost of the program to the federal government http://www.treas.gov/offices/economic-policy/4%202%2010%20BABs%20Savings%20Report%20FINAL.pdf and 2) tax compliance is higher for those benefiting from the subsidies: http://www.treas.gov/offices/tax-policy/library/greenbk10.pdf

An additional claim is that the program’s expansion of the taxable bond market serves to lower the pressure on the traditional municipal bond market and, thus, lowers interest costs for issuers of those securities http://www.treas.gov/offices/tax-policy/library/greenbk10.pdf

Opponents argue that the Build America Bonds Program, while portrayed as tax relief, is, in reality, a tremendous government spending program that imposes upon taxpayers nationwide the costs of excessive underwriting fees paid to the original instigators of the economic distress: Wall Street banks.   In addition, they argue that the subsidy provided to state and local governments is unnecessarily generous, and that it encourages excessive borrowing that could further impair state finances. Excessive borrowing by another major player in the U.S. economy, homeowners, played a major role in fueling the current crisis.

These positions are well represented in statements that Sen. Charles Grassley (R. IA) has made about the Bond program specificly and about the Tax Extenders Bill in general.

As the tax-writing committees struggle to develop tax policies that will create jobs in the near-term future while avoiding the mistakes of the recent past, debates like this one are likely to continue.

Tax Policy Future In Doubt

Thursday, July 1st, 2010

Until recently, it was widely assumed that Congress would never allow the estate tax to expire, and Congress would always find the money to patch the Alternative Minimum Tax and extend – - for one more year – - the 50 or so provisions set to expire on an annual basis.

But, now the estate tax has expired, and after the past two weeks, the extenders are on life support. If the House has its way, the power will go out on the business extenders, raising taxes on sensitive areas of the economy during a recession.

Even more troubling, Senior Democrats now are saying they want to wait for the report of a bipartisan commission – - one that is unlikely to reach consensus and make recommendations – - before acting to extend any of the 2001 and 2003 tax cuts.

As a practical matter, this could mean that Congress will wait until after the President makes his annual tax recommendations in early February, before taking action on these extensions. In the meantime, if Congress does not enact some temporary-stopgap measure, nearly every taxpayer will face a tax increase. This will be, by almost any measure, the largest tax increase in history.

Breaking a Promise to Joe

Tuesday, May 25th, 2010

 

During the 2008 campaign, the President and his allies went to great lengths to prove that Joe Wurzelbacher a/k/a Joe the Plumber, would not see an increase in his taxes, primarily because Joe didn’t earn more than $200,000. 

That was then.

The President says it’s a matter of fairness, and that the Joe’s of the world have been manipulating the tax code to taking advantage of a “loophole,” but now it seems highly likely that under a tax proposal the President has personally “air dropped” into fast moving tax legislation, Joe and millions like him would experience substantially higher federal taxes.

Under Section 413 of the House amendment to the so-called tax extended bill (H.R. 4213), the roughly 6 million service-oriented small businesses organized as S Corporations, limited liability companies, and limited partnerships would face substantially higher payroll tax liabilities.

Under present law, these businesses are required to pay their owner-employees no more and no less than the value of their services. This “reasonable compensation” paid to owners is deducted from the business’s gross income.  Owner-employees are required to pay Social Security and Medicare Tax on this portion of their income, and (as owners) they incur both the employee and employer side of the tax: 15.2% up to the Social Security wage base of $106,800 and 2.9% beyond that.

Very often, after the business has deducted all it’s expenses, including salaries paid to owners, from gross income, there is money left over. (After all, businesses are formed to make a profit.)

The amount that’s left over is divided up and distributed (on paper) to owners who report it as income on their federal tax returns.  Often these amounts are not paid out to owners, in fact.  They are re-invested in the business.

Under present law, this additional business income is not subject to payroll tax, because it doesn’t represent a payment for services. Payroll taxes only apply to compensation,  and, as a matter of fact, the IRS has fought countless court battles to make sure that business-owners don’t count too much income as salary. That way, business owners who don’t provide much in the way of services can’t cheat their way into higher Social Security benefits.

Now, the President says small business owners are cheating the other way.  They are under-reporting what their businesses should be paying them in salary in order to reduce their payroll tax liabilities, and there is some justification to the claim.  During the 2008 campaign, it came to light that John Edwards’ law practice arguably was paying him less than the value of his services.  He was the primary rain-maker of the business.

Nevertheless, the President’s solution is a Procrustean one.  Rather than require the IRS to sort the sheep from the goats and wolves, his bill would require millions of owner-employees to treat all (or nearly all) of their income from the business as compensation subject to employment tax.  He would treat everyone the same way, and, implicitly, he is arguing that all service providers who own this type of small business are cheating on their taxes:  a questionable assumption.

The President’s solution will also wreak havoc with the already stressed finances of American small business, and for a journeyman plumber like Joe, it would be an even bigger hit to his bottom line.  That’s because owner-employees who legitimately earn less than the Social Security threshold will be hit with a whopping 15.2 percentage point increase in tax.  

If their former top marginal rate was 25%, for example, they would experience a 61% rise in their marginal federal tax rate.  And, as we all know, it is the marginal rate that impacts the millions of decisions occuring every day to work a few more hours or sit at home and watch re-runs on cable.  

This can’t be good for the economy.

Postscript:  the language of Section 413 of the bill and the recently published Joint Committee on Taxation description is unclear on the applicability of the new rules to trade professions.  They are not specifically carved out, but they also are not specifically listed.  Arguably, trade professional firms such as plumbers, electricians, and heating and air conditioning firms could be covered under the broad catetories:  “consultants” or “engineers,” but the final determination will be left up to Treasury when it writes regulations implementing the new law.