Archive for August 19th, 2008

OTP – Clarifying the clarification …

August 19, 2008

OTP = Obama Tax Plan

Last week Forman & Goolsbee, Senator Obama’s key economic advisers “clarified” the candidate’s tax plan in a WSJ op-ed.

Obama web site:
www.barackobama.com/taxes

Article:
http://online.wsj.com/article_print/SB121867201724238901.html

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I may just be in the slow reading group, but Forman & Goolsbee’s “clarification” raised more questions than it provided answers.

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Consistent with their op-ed, the Barman web site says “The top two income tax brackets would return to  36% and 39.6%. All other tax brackets would remain as they are today. Obama would work with the Treasury Department to adjust the thresholds of these rates slightly to insure that no married couple making less than $250,000 (or single making less than $200,000) was affected by these changes.”

Currently, the 33% marginal tax bracket (which would go to 36% under Obama) starts at $200,300 for married couples filing jointly, $164,550 for individuals.  So, the “slight” threshold adjustments will need to be about 25% to get them to $250,000 and $200,000 respectively. Perhaps, that’s just a technical detail.  But, it  raises another question.

Since “all other tax brackets would remain as they are today”, families with taxable incomes between $164.550 and $200,000 will see their marginal tax rates drop  from 33% to 28%, or does Obama’s “simplified tax plan” introduce still one more marginal  tax bracket?

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With respect to capital gains (and dividends), Obama’s web site says ” Families with incomes below $250,000 will continue to pay the capital gains rates that they pay today. For those in the top two income tax brackets – likewise adjusted to affect only families over $250,000 – Obama will create a new top capital gains rate of 20 percent.”

Perhaps I’m just quibbling over details, but exactly how will this work?

For example, say a family has $300,000 AGI made up of $250,000 in wages and $50,000 in capital gains, and that they have  $51,000 in itemized deductions.  Their taxable income is $249,000.  According to Forman, Goolsbee, and the Obama web site, their marginal tax rate stays at 28% and their capital gains rate stays at 15%.

What if they  only  have $49,000 in itemized deductions? Then, their taxable income is $251,000.  Uh-oh. 

Their marginal tax rate jumps from 28% to 36% (the lower of the top two brackets under the Obama Plan), and, their capital gains rate goes to 20%.  But, what exactly does that mean? Does the 20% rate get applied to all $50,000 of their capital gains, or to just $1,000 of their capital gains — the excess over the $250,000 threshold?

For  Team Obama, this is probably a just another ” technical detail” to be brushed off.  For a taxpayer, it is a 33% difference in the amount of capital gains and dividend  taxes  paid.

Also, note that there is no mention is made regarding “individuals with incomes below $200,000”.  Is that just an oversight, or should one assume that for capital gains (and dividends), individuals are families of size one? 

Regardless, it looks to me like the old marriage penalty is creeping it’s way back into the tax code via the income triggering thresholds.  For tax purposes, married couples may find themselves paying higher dividend and capital gains taxes than their income-comparable single friends.   

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Finally, regarding the 12.4% additional payroll taxes on wages over $250,000 with the laughable provision that they’ll start in 10 years – so the next President will have to deal with it.

Currently, Social Security benefits are explicitly coupled (by formula) to employees’ taxed wages which, of course,  determine the employees fixed rate contributions to the Social Security Trust Fund.  Does Obama propose paying high-earners benefits linked to their added contributions, or does he propose redefining the Social Security program by completely de-coupling wages, contributions, and benefits ?

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Perhaps Forman and Goolsbee will be  clarifying their clarification.

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OTP – Tax Plan or Welfare Plan ?

August 19, 2008

Excerpted from the WSJ, “Obama’s Tax Plan Is Really a Welfare Plan”, By Peter Ferrara, August 19, 2008

Barack Obama’s tax plan … proposes to raise marginal rates for just about every federal tax … the top individual income tax rates … would be increased by 13% … the top rates on capital gains and dividends would rise by a third, to 20% …  a permanent federal estate tax, with a top rate of 45% …  a new payroll tax on employers to fund his health-insurance plan … several increases in the corporate income tax, including a new so-called windfall profits tax on oil companies.

(Obama)  also proposes a raft of tax credits that taxpayers can receive if they engage in various government-specified activities.

Moreover, the tax credits would mostly go to those who pay little or nothing in federal income taxes. His trick is to make the tax credits “refundable.” Thus, if the tax credit is for $1,000, but the taxpayer would otherwise only pay $200 in taxes, the government would write a check to the taxpayer for $800. If the taxpayer pays nothing in federal income taxes, the government would pay him the whole $1,000.

In effect, Mr. Obama is proposing to create or expand a slew of government spending programs that are disguised as tax credits. The spending on these programs is then subtracted from the total tax burden, in order to make the claim that his tax plan is a net tax cut overall.

Mr. Obama proposes … having the government pay out $500 to each worker and $1,000 to couples — reminiscent of George McGovern’s 1972 election proposal for the government to send a $1,000 check to everyone … he would provide a $4,000, fully refundable tax credit for college tuition expenses …. he would provide a 10% refundablecredit -to offset mortgage interest payments … and “a new refundable 50 percent health tax credit on employee premiums paid by employers.”

Currently existing tax credits would also become spending programs in the Obama tax program. The Savers Credit would be made fully refundable, and would be expanded … The Child and Dependent Care Tax Credit would be made refundable and expanded … The Earned Income Tax Credit i–  already refundable — .would be expanded 

In short, welfare spending is to be increased by paying more money out to low-income income tax filers.

The latest Congressional Budget Office data shows the bottom 40% of income earners already pays no income taxes. Indeed, they receive a net payment from the federal income tax system — meaning from the taxpayers — equal to 3.8% of all federal income taxes, because of the refundable tax credits under current law. The middle 20% of income earners, the true middle class, pays 4.4% of federal income taxes.

Overall, the bottom 60% of income earners pay less than 1% of federal income taxes on net. When “tax credits” primarily go to this group in the form of checks from the government (rather than a reduction in their tax burden) it is simply an abuse of the language to call the spending a tax cut.

Full article (definitely worth reading):
http://online.wsj.com/article_print/SB121910303529751345.html

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Note: Author fails to mention that a majority of voting age citizens won’t be paying any Federal income taxes under Obama

Nothing good is likely to happen when “a majority of voters discover that they can vote themselves largess out of the public treasury.” Commonly attributed to Alexander Tytler (whoever that is)

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Self-prop: We were all over this issue a couple of weeks ago.

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Most companies in the U.S. pay no taxes … Huh ?

August 19, 2008

Excerpted from Bloomberg, “Misleading on Taxes”,  Kevin Hassett, Aug. 18, 2008

Last week, the Government Accountability Office released a report … that led to an Associated Press story with the startling headline, “Most Companies in U.S. Avoid Federal Income Taxes’

House Speaker Nancy Pelosi piled on, arguing that the data revealed a fundamental unfairness in the U.S. system, and called for reform. “When two-thirds of corporations pay no taxes… American workers are forced to pay too much in taxes even as they cope with rising prices and falling wages.”

The problem is, the study showed no such thing.

First, while it is true that 60 percent to 70 percent of companies in the study paid no tax in a given year, there was a big qualification. The study focused on an Internal Revenue Service tax database that included millions and millions of companies. The vast majority of firms in the study were tiny mom- and-pop enterprises.

Why did the tiny mom-and-pop enterprises pay no taxes? Because they didn’t make any money! The study reported that was the reason about 80 percent of the firms in the sample avoided taxes in a given year. How terrible of them.

How can it be that so many small businesses made no money? Companies tended to have no profits because they had large deductions including wages. Hot dog vendors can pay themselves a wage, in which case they have no profits but pay wage taxes, or they can take their money in profits, in which case they pay profits tax. The data suggest they tend to do the former.

Most of them do this for a simple reason: we still have double taxation of dividends. If you are a hot dog vendor in the top tax bracket and you pay yourself $100, then you pay $35 in taxes. If you keep it as profit and then pay it to yourself as a dividend, you pay a $35 corporate tax, and then a 15 percent dividend tax on top of it. Why would anyone choose the latter? To do so would be to pay more taxes voluntarily.

For big corporations, the story is different. The study found that … almost no companies went through the sample period without paying taxes. 

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For full column:
http://bloomberg.com/apps/news?pid=20601039&sid=aJHKNW1lro9Y&refer=columnist_hassett

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Education – When schools fail our kids

August 19, 2008

 Excerpted from the Chicago Tribune,”When schools fail our kids “.
August 17, 2008

When schools fail …  their students are not the only ones who suffer. The rest of us pay the price: a less productive economy and more social ills.

Neither Obama nor McCain have done nearly enough to chart a path to better schools for all. Both have … taken refuge in vagueness.

On many points they display no real disagreement. Both endorse the federal No Child Left Behind Act; both favor spending money to help attract young people to teaching; both promise steps to make college more affordable. While each makes it clear No Child Left Behind needs changes, neither has spelled out in bold detail what he would do differently.

McCain deserves credit for being open to options that would weaken the bureaucracy of the public education industry. He wants to make it easier for people to enter teaching after spending years gaining knowledge in other fields.

McCain also favors expanding a voucher program available to low-income families in Washington, D.C.—the better to create real competition for public schools that lack enough incentive to steer kids toward better outcomes. These are the schools that lamely tolerate … the “soft bigotry of low expectations.”

The Obama campaign … says that funding vouchers … “is hardly a strategy to fix schools throughout this country.”

So where is Obama’s pathbreaking strategy? In his recent speech to the NEA, he endorsed “more accountability” and “higher standards.” No one is against those principles; the trouble is how to achieve them.

He suggests he knows the way by saying, “When our educators succeed, I will not just talk about how great they are. I will reward them for their greatness with better pay and more support.”

But how about when our educators fail? Is he willing to demand not only incentives for good teaching but penalties—reasonably prompt terminations included—for bad teaching? Would he, for example, amend No Child Left Behind to demand that school districts make it less cumbersome to get incompetents out of the classroom or the principal’s office?

He’s given no sign of it. That’s a particular shame because Obama won in the primaries without the support of either major teachers union. Given that he’s not beholden to them, he should be free to embrace remedies that previous Democratic nominees treated as untouchable.

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For full editorial:
http://www.chicagotribune.com/news/opinion/chi-0817edit1aug17,0,6811109.story

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